Registration Statement for Securities of a Real Estate Company — Form S-11 Filing Table of Contents
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As filed with the Securities and Exchange Commission on
January 25, 2008
Registration
No. 333-
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form S-11
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
Hines Real Estate Investment
Trust, Inc.
(Exact name of registrant as
specified in governing instruments)
2800 Post Oak Boulevard
Suite 5000
Houston, Texas
77056-6118
(888) 220-6121 (Address, including zip
code, and
telephone number, including, area code,
of principal executive offices)
Charles M. Baughn
2800 Post Oak Boulevard
Suite 5000 Houston, Texas77056-6118
(888) 220-6121 (Name and address, including
zip code,
and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the
public: as soon as practicable after this
registration statement becomes effective.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. o
Proposed Maximum
Proposed Maximum
Amount of
Title of Each Class of
Amount to be
Offering
Aggregate
Registration
Securities to be Registered
Registered(1)
Price per Security
Offering Price(1)
Fee
Common Stock, par value $.001 per share
$
$3,500,000,000
$137,550
(1)
Represents an indeterminate number of shares to be offered by
the registrant at prices to be determined by the registrant from
time to time, with an aggregate offering amount of
$3,500,000,000. Includes an indeterminate number of shares to be
issued under the registrant’s dividend reinvestment plan
with an aggregate offering amount of $500,000,000.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION,
DATED
PROSPECTUS
Hines Real Estate Investment
Trust, Inc.
Up to $3,500,000,000 in Common
Shares Offered to the Public
We are a Maryland corporation sponsored by Hines Interests
Limited Partnership, or Hines, a fully integrated global real
estate investment and management firm that has acquired,
developed, owned, operated and sold real estate for over
50 years. We invest primarily in institutional-quality
office properties located throughout the United States. In
addition, we have invested or may invest in other real estate
investments including, but not limited to, properties outside of
the United States, non-office properties, loans and ground
leases. As of September 30, 2007, we had direct and
indirect interests in 37 office properties located throughout
the United States, one mixed-use office and retail complex in
Toronto, Canada and one industrial property in Rio de Janeiro,
Brazil. We have elected to be taxed as a real estate investment
trust for U.S. federal income tax purposes.
Through our affiliated Dealer Manager, Hines Real Estate
Securities, Inc., we are offering up to $3,000,000,000 in our
common shares to the public on a best efforts basis. We are also
offering up to $500,000,000 in our common shares to be issued
pursuant to our dividend reinvestment plan. We will initially
offer shares to the public at a price of
$ . Our board of directors may
change this price from time to time during the offering. Shares
sold under our dividend reinvestment plan will initially be sold
for $ . Our board of directors may
likewise change this price from time to time. You must initially
invest at least $2,500. This offering will terminate on or
before ,
2010, unless extended by our board of directors.
We encourage you to carefully review the complete discussion
of risk factors beginning on page 10 before purchasing our
common shares. This investment involves a high degree of risk.
You should purchase these securities only if you can afford the
complete loss of your investment. Significant risks relating to
your investment in our common shares include:
•
The amount of dividends we may pay, if any, is uncertain. Due to
the risks involved in the ownership of real estate, there is no
guarantee of any return on your investment in Hines REIT, and
you may lose money.
•
There is currently no public market for our common shares, and
we currently do not intend to list our shares on a stock
exchange or to include them for quotation on a national
securities market. Therefore, it will likely be difficult for
you to sell your shares, and if you are able to sell your
shares, you will likely sell them at a substantial discount.
•
There are restrictions and limitations on your ability to have
all or any portion of your shares redeemed under our share
redemption program.
•
We have not identified any specific assets to acquire or
investments to make with all of the proceeds of this offering.
You will not have the opportunity to review the assets we will
acquire or the investments we will make with the proceeds from
this offering prior to your investment.
•
We rely on affiliates of Hines for our day-to-day operations and
the selection of real estate investments. We pay substantial
fees to these affiliates for these services. These affiliates
are subject to conflicts of interest as a result of this and
other relationships they have with us and other programs
sponsored by Hines. We also compete with affiliates of Hines for
tenants and investment opportunities, and some of those
affiliates will have priority with respect to many of those
investment opportunities.
•
We are Hines’ only publicly-offered investment program and
one of Hines’ first REITs. Because Hines’ other
programs and investments have been conducted through
privately-held entities not subject to either the up-front
commissions, fees or expenses associated with this offering or
to all of the laws and regulations we are subject to, you should
not assume that the prior performance of Hines will be
indicative of our future results.
Proceeds to Us,
Price to the Public
Selling Commission
Dealer Manager Fee
Before Expenses
Per Share
$
$
$
$
Maximum Offering
$
3,000,000,000
$
210,000,000
$
66,000,000
$
2,724,000,000
Dividend Reinvestment Plan
$
500,000,000
$
—
$
—
$
500,000,000
Neither the Securities and Exchange Commission nor any state
securities commission or other regulatory body has approved or
disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a
criminal offense. THE ATTORNEY GENERAL OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The use of projections or forecasts in this offering is
prohibited. Any representations to the contrary and any
predictions, written or oral, as to the amount or certainty of
any present or future cash benefit or tax consequence that may
flow from an investment in the common shares is not
permitted.
The common shares we are offering are suitable only as a
long-term investment for persons of adequate financial means.
There currently is no public market for our common shares, and
we currently do not intend to list our shares on a stock
exchange or on a national market. Therefore, it will likely be
difficult for you to sell your shares and, if you are able to
sell your shares, you will likely sell them at a substantial
discount. You should not buy these shares if you need to sell
them immediately, will need to sell them quickly in the future
or cannot bear the loss of your entire investment.
In consideration of these factors, we have established
suitability standards for all persons who may purchase shares
from us in this offering. Investors with investment discretion
over assets of an employee benefit plan covered under ERISA
should carefully review the information entitled “ERISA
Considerations.” These suitability standards require that a
purchaser of shares have either:
•
a minimum annual gross income of at least $70,000 and a minimum
net worth (excluding the value of the purchaser’s home,
home furnishings and automobiles) of at least $70,000; or
•
a minimum net worth (excluding the value of the purchaser’s
home, home furnishings and automobiles) of at least $250,000.
Several states have established suitability standards different
from those we have established. Shares will be sold only to
investors in these states who meet the special suitability
standards set forth below.
New Hampshire — Investors must have either
(i) a net worth of at least $250,000 or (ii) a minimum
annual gross income of at least $60,000 and a minimum net worth
of at least $125,000.
Iowa, Kentucky, Michigan, Missouri, Ohio and
Pennsylvania — In addition to our suitability
requirements and the state-specific suitability requirements set
forth above, investors must have a liquid net worth of at least
10 times their investment in our shares.
Kansas — In addition, the Office of the
Securities Commission of the State of Kansas recommends that
Kansas investors not invest, in the aggregate, more than 10% of
their liquid net worth in this and similar direct participation
investments. Liquid net worth is defined as “that portion
of net worth which consists of cash, cash equivalents and
readily marketable securities.”
For purposes of determining suitability of an investor, net
worth in all cases shall be calculated excluding the value of an
investor’s home, furnishings and automobiles.
In the case of sales to fiduciary accounts (such as an IRA,
Keogh Plan, or pension or profit-sharing plan), these
suitability standards must be met by the beneficiary, the
fiduciary account or by the donor or grantor who directly or
indirectly supplies the funds for the purchase of the shares if
the donor or grantor is the fiduciary. These suitability
standards are intended to help ensure that, given the long-term
nature of an investment in our common shares, our investment
objectives and the relative illiquidity of our shares, our
shares are an appropriate investment for those of you desiring
to become shareholders. Each participating broker-dealer must
make every reasonable effort to determine that the purchase of
common shares is a suitable and appropriate investment for each
shareholder based on information provided by the shareholder in
the subscription agreement or otherwise. Each participating
broker-dealer is required to maintain records of the information
used to determine that an investment in common shares is
suitable and appropriate for each shareholder for a period of
six years.
In the case of gifts to minors, the suitability standards must
be met by the custodian account or by the donor.
Subject to the restrictions imposed by state law, we will sell
our common shares only to investors who initially invest at
least $2,500. This initial minimum purchase requirement applies
to all potential investors, including tax-exempt entities. A
tax-exempt entity is generally any entity that is exempt from
federal income taxation, including:
•
a pension, profit-sharing, retirement or other employee benefit
plan that satisfies the requirements for qualification under
Section 401(a), 414(d) or 414(e) of the Internal Revenue
Code of 1986, as amended (the “Code”);
a pension, profit-sharing, retirement or other employee benefit
plan that meets the requirements of Section 457 of the Code;
•
trusts that are otherwise exempt under Section 501(a) of
the Code;
•
a voluntary employees’ beneficiary association under
Section 501(c)(9) of the Code; or
•
an IRA that meets the requirements of Section 408 or
Section 408A of the Code.
The term “plan” includes plans subject to Title I
of ERISA, other employee benefit plans and IRAs subject to the
prohibited transaction provisions of Section 4975 of the
Code, governmental or church plans that are exempt from ERISA
and Section 4975 of the Code, but that may be subject to
state law requirements, or other employee benefit plans.
In order to satisfy the initial minimum purchase requirements
for retirement plans, unless otherwise prohibited by state law,
a husband and wife may jointly contribute funds from their
separate IRAs. You should note that an investment in our common
shares will not, in itself, create a retirement plan and that,
in order to create a retirement plan, you must comply with all
applicable provisions of the Code. Except in Maine, Minnesota,
Nebraska and Washington (where any subsequent subscriptions by
investors must be made in increments of at least $1,000),
investors who have satisfied the initial minimum purchase
requirement may make additional purchases through this or future
offerings in increments of at least five shares, except for
purchases made pursuant to our dividend reinvestment plan which
may be in increments of less than five shares.
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information inconsistent with that contained in this prospectus.
We are offering to sell, and seeking offers to buy, our common
shares only in jurisdictions where such offers and sales are
permitted.
The following questions and answers about this offering
highlight material information regarding us and this offering
that is not otherwise addressed in the “Prospectus
Summary” section of this prospectus. You should read this
entire prospectus, including the section entitled “Risk
Factors,” before deciding to purchase any of the common
shares offered by this prospectus.
Q:
What is Hines Real Estate Investment Trust, Inc., or Hines
REIT?
A:
Hines REIT is a real estate investment trust, or
“REIT,” that has invested and intends to continue to
invest primarily in institutional-quality office properties
located in the United States. In addition, we have invested and
may invest in other real estate investments including, but not
limited to, properties located outside of the United States,
non-office properties, loans and ground leases.
We commenced operations in November 2004. As of
September 30, 2007, we had raised approximately
$1.5 billion of gross proceeds through public offerings of
our common shares. We invest the net offering proceeds into our
real estate investments, and, as of September 30, 2007,
owned interests in 37 institutional-quality office properties
throughout the United States, one mixed-use office and retail
complex in Toronto, Canada and one industrial property in Rio de
Janeiro, Brazil.
We are externally managed by our advisor, Hines Advisors Limited
Partnership (our “Advisor”), which is responsible for
identifying our investment opportunities and managing our
day-to-day operations. Our advisor is an affiliate of our
sponsor, Hines Interests Limited Partnership (“Hines”).
Q:
Who is Hines Interests Limited Partnership?
A:
Hines is a fully integrated global real estate investment and
management firm and, with its predecessor, has been investing in
real estate and providing acquisition, development, financing,
property management, leasing and disposition services for over
50 years. Hines provides investment management services to
numerous investors and partners including pension plans,
domestic and foreign institutional investors, high net worth
individuals and retail investors. Hines is owned and controlled
by Gerald D. Hines and his son Jeffrey C. Hines. As of
December 31, 2006, Hines and its affiliates had ownership
interests in a real estate portfolio of approximately 160
projects, valued at approximately $16.0 billion. Please see
“Management — Hines and our Property Management
and Leasing Agreements — The Hines Organization”
for more information regarding Hines.
Q:
What competitive advantages does Hines REIT achieve through
its relationship with Hines and its affiliates?
A:
We believe our relationship with Hines and its affiliates
provides us the following benefits:
•
Global Presence — Our relationship with Hines
and its affiliates as our sponsor, advisor and property manager
allows us to have access to an organization that has
extraordinary depth and breadth around the world with
approximately 3,150 employees located in 67 cities
across the United States and 15 foreign countries. This provides
us a significant competitive advantage in drawing upon the
experiences resulting from the vast and varied real estate
cycles and strategies that varied economies and markets
experience.
•
Local Market Expertise — Hines’ global
platform is built from the ground up based on Hines’
philosophy that real estate is essentially a local business.
Hines provides us access to a team of real estate professionals
who live and work in individual major markets around the world.
These regional and local teams are fully integrated to provide a
full range of real estate investment and management services
including sourcing investment opportunities, acquisitions,
development, re-development, financing, property management,
leasing, asset management, disposition, accounting and financial
reporting.
•
Centralized Resources — Hines’
headquarters in Houston, Texas provides the regional and local
teams with a group of approximately 342 personnel who
specialize in areas such as capital markets, corporate finance,
construction, engineering, operations, marketing, human
resources, cash management, risk management, tax and internal
audit. These experienced personnel provide a repository of
knowledge,
experience and expertise and an important control point for
preserving performance standards and maintaining operating
consistency for the entire organization.
•
Tenure of Personnel — Hines has one of the most
experienced executive management teams in the real estate
industry with an average tenure within the organization of
29 years. This executive team provides stability to the
organization and provides experience through numerous real
estate cycles during such time frame. This impressive record of
tenure is attributable to a professional culture of quality and
integrity and long-term compensation plans that align personal
wealth creation with real estate and investor performance and
value creation.
•
Long-Term Track Record — Hines has more than
50 years of experience in creating and successfully
managing capital and real estate investments for numerous
third-party investors. As stated above, Hines and its affiliates
currently have approximately 3,150 employees located in
regional and local offices in 67 cities in the United
States and in 15 foreign countries around the world. Since
inception in 1957, Hines, its predecessor and their respective
affiliates have acquired or developed more than 700 real estate
projects representing approximately 229 million square feet.
Please see “Risk Factors — Potential Conflicts of
Interest Risks” and “Conflicts of Interest” for a
discussion of certain risks and potential disadvantages of our
relationship with Hines.
Q:
What is a real estate investment trust, or REIT?
A:
In general, a REIT is an entity that:
•
pays distributions to investors of at least 90% of its annual
ordinary taxable income;
•
avoids the “double taxation” treatment of income that
generally results from investments in a corporation because a
REIT is not generally subject to federal corporate income taxes
on its taxable income to the extent it currently distributes
such income and provided certain income tax requirements are
satisfied relating to, among other things, the nature of its
income, assets, and share ownership; and
•
combines the capital of many investors to acquire or provide
financing for a diversified portfolio of real estate assets
under professional management.
Q:
How do you structure the ownership and operation of your
assets?
A:
We own substantially all of our assets and conduct our
operations through an operating partnership called Hines REIT
Properties, L.P. We are the sole general partner of Hines REIT
Properties, L.P., and as described in more detail below, Hines
or its affiliates own limited partner interests and a profits
interest in Hines REIT Properties, L.P. To avoid confusion, in
this prospectus:
•
we refer to Hines REIT Properties, L.P. as the “Operating
Partnership” and partnership interests and the profits
interest in the Operating Partnership, respectively, as
“OP Units” and the “Participation
Interest;”
•
we refer to Hines REIT and the Operating Partnership and their
direct and indirect wholly-owned subsidiaries, collectively, as
the “Company;” and
•
the use of “we,”“our,”“us” or
similar pronouns in this prospectus refers to Hines REIT or the
Company as required by the context in which such pronoun is used.
Q:
What are the risks involved in an investment in your
shares?
A:
An investment in our common shares is subject to significant
risks. Below is a summary of certain of these risks. A more
detailed list and description of the risks are contained in the
“Risk Factors” and “Conflicts of Interest”
sections of this prospectus. You should carefully read and
consider all of these risks, and the other risks described in
this prospectus, prior to investing in our common shares.
•
The amount of dividends we may pay, if any, is uncertain. Due to
the risks involved in the ownership of real estate, there is no
guarantee of any return on your investment in Hines REIT, and
you may lose money.
There is currently no public market for our common shares, and
we currently do not intend to list our shares on a stock
exchange or include them for quotation on a national securities
market. Therefore, it will likely be difficult for you to sell
your shares and, if you are able to sell your shares, you will
likely sell them at a substantial discount.
•
Your ability to have your shares redeemed is limited under our
share redemption program, and if you are able to have your
shares redeemed, it may be at a price that is less than the
price you paid for the shares and the then-current market value
of the shares.
•
We have not identified any specific assets to acquire or
investments to make with all of the proceeds from this offering.
You will not have the opportunity to review the assets we will
acquire or the investments we will make with the proceeds from
this offering prior to your investment.
•
We rely on affiliates of Hines for our day-to-day operations and
the selection of real estate investments. We pay substantial
fees to these affiliates for these services and the fees may
increase during the offering. These affiliates are subject to
conflicts of interest as a result of this and other
relationships they have with us and other programs sponsored by
Hines.
•
We are Hines’ only publicly-offered investment program and
one of Hines’ first REITs. Because Hines’ other
programs and investments have been conducted through
privately-held entities not subject to either the up-front
commissions, fees or expenses associated with this offering or
all of the laws and regulations we are subject to, you should
not assume that the prior performance of Hines will be
indicative of our future results.
•
We compete with affiliates of Hines for real estate investment
opportunities. Some of these affiliates have preferential rights
to accept or reject certain investment opportunities in advance
of our right to accept or reject such opportunities. Many of the
preferential rights we have to accept or reject investment
opportunities are subordinate to the preferential rights of at
least one affiliate of Hines.
•
We compete with other entities affiliated with Hines for tenants.
•
Hines may face a conflict of interest when determining whether
we should dispose of any property we own which is managed by
Hines because Hines may lose fees associated with the management
of the property.
•
We are a general partner in Hines US Core Office Fund LP
(the “Core Fund”); therefore, we could be responsible
for all of its liabilities.
•
Our ability to redeem all or a portion of our investment in the
Core Fund is subject to significant restrictions, and we may
never be able to redeem all or any portion of our investment in
the Core Fund.
•
In our initial quarters of operations, dividends we paid to our
shareholders were partially funded with advances or borrowings
from our Advisor. We may use similar advances, borrowings,
deferrals or waivers of fees from our Advisor or others in the
future to fund dividends to our shareholders. We cannot assure
you that in the future we will be able to achieve cash flows
necessary to repay such advances or borrowings and pay dividends
at our historical per-share amounts, or to maintain dividends at
any particular level, if at all.
•
Real estate investments are subject to a high degree of risk
because of general economic or local market conditions, changes
in supply or demand, terrorist attacks, competing properties in
an area, changes in interest rates, inflationary impact on
operating expenses and changes in tax, real estate,
environmental or zoning laws and regulations.
•
Our inability to acquire suitable investments, or locate
suitable investments in a timely manner, will impact our ability
to meet our investment objectives and may affect the amount of
dividends we may pay.
Hines REIT’s interest in the Operating Partnership will be
diluted by the Participation Interest in the Operating
Partnership held by HALP Associates Limited Partnership, and
your interest in Hines REIT will be diluted if we issue
additional shares.
•
Hines’ ability to cause the Operating Partnership to
purchase the Participation Interest and any OP Units it or
its affiliates hold in connection with the termination of our
Advisory Agreement may deter us from terminating our Advisory
Agreement.
•
You will not have the benefit of an independent due diligence
review in connection with this offering, and the fees we pay in
connection with this offering were not determined on an
arm’s-length basis.
•
We use debt, which will put us at risk of losing the assets
securing such debt should we be unable to make debt service
payments.
•
If we lose our REIT tax status, we will be subject to increased
taxes and/or
penalties, which will reduce the amount of cash we have
available to pay dividends to our shareholders.
•
In order to maintain our status as a REIT, we may have to incur
additional debt to pay the required dividends to our
shareholders.
•
The price of our shares may be adjusted periodically to reflect
changes in the net asset value of our assets as well as changes
in fees and expenses and therefore future adjustments may result
in an offering price lower than the price you paid for your
shares.
Q:
Why should I invest in real estate?
A:
Allocating some portion of your investment portfolio to real
estate may provide you with portfolio diversification, reduction
of overall risk, a hedge against inflation, and attractive
risk-adjusted returns. For these reasons, real estate has been
embraced as a major asset class for purposes of asset
allocations within investment portfolios. According to a survey
prepared by the Pension Real Estate Association in February 2007
(the “PREA Survey”), of institutional investors such
as public and private plan sponsors, endowments, foundations and
other pension funds surveyed that held more than $2 trillion in
assets at the time of the survey, real estate equity investments
accounted for approximately 6.9% of these institutional
investors’ total investment portfolios. This represented an
increase from the average allocations to real estate equity
investments in prior years, which approximated 6.0% of total
investment portfolios in the previous survey. We believe that
individual investors can also benefit by adding a real estate
component to their investment portfolio. You and your financial
advisor, investment advisor or financial planner should
determine whether investing in real estate would benefit your
investment portfolio.
Q:
Why should I invest in office real estate?
A:
Institutional investors have historically allocated a
substantial portion of the real estate component of their
investment portfolio to office real estate in an effort to
obtain income, portfolio diversification and capital
appreciation. We believe that investing in office real estate
has the potential to provide both institutional and individual
investors a combination of the following:
•
Income. Investing in income producing office
real estate, whether directly or through traded or non-traded
REITs or other ownership structures, has historically provided
an attractive and stable source of income to investors.
•
Portfolio Diversification. Because the
performance of investments in office real estate have
historically had a low correlation to non-REIT stocks and a
negative correlation to bonds, investing in office real estate
may provide investors an opportunity to earn better
risk-adjusted returns in their investment portfolios over the
long term.
•
Capital Appreciation. Office real estate
investments have, over the long term, historically provided
moderate capital appreciation and have served as a hedge against
inflation for many investors. We believe that adding an office
real estate component to an investor’s portfolio may
enhance the investor’s overall portfolio return.
invest in a diversified portfolio of office properties;
•
pay regular cash dividends;
•
achieve appreciation of our assets over the long term; and
•
remain qualified as a REIT for federal income tax purposes.
Q:
What percentage of the gross proceeds from this offering will
you invest in real estate?
A:
Assuming that we sell all the shares offered in this offering,
including all shares we are offering under our dividend
reinvestment plan, we expect to use approximately
90-92% of
the gross proceeds to make real estate investments. We will use
the balance of the gross proceeds to pay sales commissions,
dealer manager fees, acquisition fees and to pay third-party
acquisition expenses related to those investments. Please see
“Estimated Uses of Proceeds.”
Q:
Do you have conflicts of interest?
A:
Yes, Hines owns and/or manages many real estate investments and
real estate ventures. Hines and its affiliates are not
prohibited from engaging in future business activities that may
be similar to our operations. Conflicts of interest exist among
us, Hines and its affiliates, principally due to the following:
•
Hines and its affiliates are general partners and sponsors of
other real estate investment programs with similar
and/or
non-similar investment objectives. Hines or an affiliate of
Hines owes certain legal, fiduciary and financial obligations to
both us and these other programs. Because of this and
Hines’ other business activities, Hines and other entities
affiliated with it may have conflicts of interest with us:
•
in allocating the time of Hines’ employees and other Hines
resources among our operations and the operations of other
entities;
•
competing with other Hines-affiliated entities for investment
opportunities, some of which have priority rights over us to
such opportunities, and some of which may result in higher
compensation being paid to Hines, its affiliates and certain of
its employees (including our directors and officers) than if
such opportunities were allocated to us; and
•
competing with other properties owned or managed by Hines for
tenant leasing opportunities.
•
We may buy assets from or sell assets to Hines affiliates,
including properties developed by Hines, subject to the approval
of a majority of our independent directors. Hines and its
affiliates, including our officers and directors, may make
significant profits from these transactions.
•
Hines, the Advisor and other Hines affiliates will receive
substantial fees from us, which have not been negotiated at
arm’s-length, which may not be conditioned upon our
financial performance and which could be increased or decreased
during or after this offering.
Please see “Risk Factors — Potential Conflicts of
Interest Risks” and “Conflicts of Interest” for a
discussion of these and other conflicts of interest.
Q:
Do you pay fees to your sponsor?
A:
Yes, we pay fees to Hines and affiliates of Hines for services
relating to this offering, our property acquisitions, our
financings, the conduct of our day-to-day activities and the
management of our properties, which could be increased or
decreased during or after this offering. Please see
“Prospectus Summary — Management Compensation,
Expense Reimbursements and Operating Partnership Participation
Interest” below for more information about these fees.
How would you describe your acquisition and operations
process?
A:
We generally seek to follow the process used by Hines for many
years, which is the following:
Accordingly, we expect to primarily invest in institutional
quality office properties that we believe have some of the
following attributes:
•
Preferred Location. We believe that location
often has the single greatest impact on an asset’s
long-term income-producing potential and that assets located in
the preferred submarkets in metropolitan areas and situated at
preferred locations within such submarkets have the potential to
be long-term assets.
•
Premium Buildings. We will seek to acquire
assets that generally have design and physical attributes (e.g.,
quality construction and materials, systems, floorplates, etc.)
that are more attractive to a user than those of inferior
properties.
•
Quality Tenancy. We will seek to acquire
assets that typically attract tenants with better credit who
require larger blocks of space because these larger tenants
generally require longer term leases in order to accommodate
their current and future space needs without undergoing
disruptive and costly relocations.
We believe that following an acquisition, the additional
component of proactive property management and leasing is the
fourth critical element necessary to achieve attractive
long-term investment returns for investors. Actively
anticipating and quickly responding to tenant comfort and
cleaning needs are examples of areas where proactive property
management may make the difference in a tenant’s occupancy
experience, increasing its desire to remain a tenant and thereby
providing a higher tenant retention rate, which over the long
term may result in better financial performance of the property.
This percentage shows the effective ownership of the Operating
Partnership in the properties listed. On September 30,2007, Hines REIT owned a 97.8% interest in the Operating
Partnership as its sole general partner. Affiliates of Hines
owned the remaining 2.2% interest in the Operating Partnership.
As of September 30, 2007, we owned interests in the 23 Core
Fund investments through our interest in the Core Fund, in which
we owned an approximate 32.0% non-managing general partner
interest as of September 30, 2007. The Core Fund does not
own 100% of these buildings; its ownership interest in its
buildings ranges from 40.6% to 85.9%. In addition, we owned a
50% interest in Cargo Center Dutra II through a joint
venture with an affiliate of Hines.
Q:
Why do you invest in the Core Fund?
A:
The Core Fund has preferential rights to invest in high quality
Class A office properties. We make investments in the Core
Fund to provide Hines REIT the opportunity to invest with a
number of institutional investors in the Core Fund into such a
portfolio. Our investment in the Core Fund allows us to own an
indirect interest in a diversified portfolio of Class A
office buildings located in markets such as New York City,
Washington D.C., Atlanta, Houston, Chicago, Los Angeles,
Richmond, Sacramento, San Francisco, San Diego,
Charlotte, Phoenix and Seattle. Since the amount of capital
required to acquire these types of buildings is substantial, we
believe it would take us a significant amount of time, if ever,
to be in a position to prudently acquire these types of
buildings on our own. We believe that owning an indirect
interest in the buildings owned by the Core Fund, together with
the properties we acquire directly, will result in a more
diversified and stable portfolio of real estate investments for
our shareholders.
Q:
What investment or ownership interests does Hines or any of
its affiliates have in the Company?
A:
Hines or its affiliates have the following investments and
ownership interests in the Company:
•
an investment of $10,000 for common shares of Hines REIT by
Hines REIT Investor L.P., an affiliate of Hines;
•
an investment of $10,200,000 in limited partnership interests of
the Operating Partnership by an affiliate of Hines, Hines 2005
VS I LP; and
•
an interest in the Operating Partnership, which is adjusted
monthly in a manner intended to approximate the economic
equivalent of the reinvestment by Hines of approximately
one-half of what would otherwise be cash payments of acquisition
fees and asset management fees. As of September 30, 2007,
this participation interest in the Operating Partnership
represented approximately $22.8 million in reinvestment by
Hines. Please see “The Operating Partnership —
The Participation Interest” for a description of this
interest.
Q:
What kind of offering is this?
A:
We are offering a maximum of $3,000,000,000 in our common shares
to the public on a “best efforts” basis through Hines
Real Estate Securities, Inc., an affiliate of Hines (the
“Dealer Manager”), at an initial price of
$ per share. We are also offering
up to $500,000,000 in our common shares to be issued pursuant to
our dividend reinvestment plan at an initial price of
$ per share to those shareholders
who elect to participate in such plan as described in this
prospectus. Our board of directors may change the offering price
of our shares, as well as the price for shares issued under our
dividend reinvestment plan.
Q:
Who can buy shares?
A:
You can generally buy shares pursuant to this prospectus if you
have either:
•
a minimum annual gross income of at least $70,000 and a minimum
net worth (not including home, furnishings and personal
automobiles) of at least $70,000; or
•
a minimum net worth (not including home, furnishings and
personal automobiles) of at least $250,000.
However, these minimum levels may vary from state to state, so
you should carefully read the suitability requirements explained
in the “Suitability Standards” section of this
prospectus.
Yes. You must initially invest at least $2,500. Thereafter,
subject to restrictions imposed by state law, you may purchase
additional shares in whole or fractional share increments
subject to a minimum for each additional purchase of $50. You
should carefully read the minimum investment requirements
explained in the “Suitability Standards” section of
this prospectus.
Q:
How do I subscribe for shares?
A:
If you choose to purchase common shares in this offering, you
will need to contact your registered broker-dealer or investment
advisor and fill out a subscription agreement substantially in
the form (or similar to the form) attached to this prospectus as
Appendix A for a certain investment amount and pay for the
shares at the time you subscribe.
Q:
If I buy shares, will I receive dividends and, if so, how
often?
A:
With the authorization of our board of directors, we declare
distributions to our shareholders as of daily record dates and
aggregate and pay such distributions quarterly. From the date we
commenced business operations through June 30, 2006, we
declared distributions equal to $0.00164384 per share, per day.
From July 1, 2006 through January 31, 2008, we
declared distributions equal to $0.00170959 per share, per day.
Please see “Description of Capital Stock —
Distribution Objectives.”
Q:
Are dividends I receive taxable?
A:
Yes and no. Generally, dividends that you receive will be
considered ordinary income to the extent they are from current
or accumulated earnings and profits for tax purposes. Because we
anticipate that our dividends will exceed our taxable income, we
expect a portion of your dividends will be considered return of
capital for tax purposes. These amounts will not be subject to
tax immediately but will instead reduce the tax basis of your
investment. This in effect defers a portion of your tax until
your shares are sold or the Company is liquidated, at which time
you will be taxed at capital gains rates on any gains. However,
because each investor’s tax implications are different, we
suggest you consult with your tax advisor. You and your tax
advisor should also review the section of this prospectus
entitled “Material Tax Considerations.”
Q:
Do you have a dividend reinvestment plan?
A:
Yes, our dividend reinvestment plan allows shareholders to
reinvest dividends for additional shares at a price currently
set at $ per share. The terms of
this plan may, however, be amended or terminated by our board in
its discretion upon at least 10 days’ notice.
Q:
How can I have my shares redeemed?
A:
We provide a share redemption program under which we may redeem
shares, provided that the number of shares we may redeem under
the program during any calendar year may not exceed, as of the
date we commit to any redemption, 10% of our shares outstanding
as of the same date in the prior calendar year. Please see
“Risk Factors — Investment Risks — Your
ability to have your shares redeemed is limited under our share
redemption plan, and if you are able to have your shares
redeemed, it may be at a price that is less than the price you
paid for the shares and the then-current market value of the
shares.”
Q:
What is your current share redemption price?
A:
Shares are currently redeemed at a price of
$ per share. Our board of
directors may change this redemption price from time to time and
may otherwise amend, suspend or terminate our share redemption
program at any time upon at least 30 days’ notice.
Q:
What potential exit strategies may occur?
A:
We may consider and execute exit strategies at both the asset
level and portfolio level. These exit strategies may consist of
any of the following:
a listing of our shares on a national exchange or for quotation
on a national securities market.
Our board of directors will approve any such exit strategy only
if it is deemed to be in the best interests of our shareholders.
Q:
Why have you not set a finite date for a liquidity event?
A:
Due to the uncertainties of market conditions in the future, we
believe setting finite dates for possible, but uncertain,
liquidity events may result in actions that are not necessarily
in the best interests or within the expectations of our
shareholders. Therefore, we believe it is more appropriate to
allow us and our board of directors the flexibility to consider
multiple options and not be obligated to execute a particular
liquidity event by a set date.
Q:
How long will this offering last?
A:
We currently expect that this offering will terminate
on ,
2010 (which is two years after the effective date of this
prospectus). We reserve the right to terminate or extend this
offering at any time.
Q:
Will I be notified of how my investment is doing?
A:
Yes, you will receive or have access to periodic updates on the
performance of your investment, including:
•
four quarterly dividend statements;
•
periodic prospectus supplements;
•
an annual report;
•
an annual Internal Revenue Service
Form 1099-DIV,
if required; and
•
three quarterly financial reports.
We will provide this information to you via one or more of the
following methods:
to the extent requested, U.S. mail or other courier; or
•
facsimile.
Q:
When will I get my detailed tax information?
A:
We expect that we will send you your
Form 1099-DIV
tax information by January 31 of each year.
Q:
Who is your transfer agent?
A:
Our transfer agent is Trust Company of America, Inc.
Q:
Who can help answer my questions?
A:
If you have more questions about this offering or if you would
like additional copies of this prospectus, you should contact
your registered selling representative or:
This prospectus summary highlights material information
regarding our business and this offering that is not otherwise
addressed in the “Questions and Answers about this
Offering” section of this prospectus. You should read and
consider this entire prospectus, including the section entitled
“Risk Factors,” before deciding to purchase any common
shares offered by this prospectus. We include a glossary of some
of the terms used in this prospectus beginning on
page 171.
Hines REIT, a Maryland corporation, was formed on August 5,2003 primarily for the purpose of engaging in the business of
investing in and owning interests in real estate. We have
invested and intend to continue to invest primarily in
institutional-quality office properties located throughout the
United States. As of September 30, 2007, we owned interests
in 37 institutional-quality office properties throughout the
United States, one mixed-use office and retail complex in
Toronto, Canada and one industrial property in Rio de Janeiro,
Brazil. We have invested or may invest in other real estate
investments, including additional properties located outside of
the United States, non-office properties, loans and ground
leases. Please see “Investment Objectives and Policies with
Respect to Certain Activities — Acquisition and
Investment Policies” for a more detailed description of our
acquisition and investment policies and procedures.
We have qualified and intend to continue to operate as a REIT
for U.S. federal income tax purposes. Among other
requirements, REITs are required to distribute at least 90% of
their annual ordinary taxable income.
Our office is located at 2800 Post Oak Boulevard,
Suite 5000, Houston, Texas
77056-6118.
Our telephone number is 1-888-220-6121. Our web site is
www.HinesREIT.com.
We operate under the direction of our board of directors, which
has a fiduciary duty to act in the best interest of our
shareholders. Our board of directors approves each investment
recommended by our Advisor and oversees our operations. We
currently have five directors, three of whom are independent
directors. Our directors are elected annually by our
shareholders. Our three independent directors serve on the
conflicts committee of our board of directors, and this
committee is required to review and approve all matters the
board believes may involve a conflict of interest between us and
Hines or its affiliates.
Our Advisor, who manages our day-to-day operations, is an
affiliate of Hines. The Advisor is responsible for identifying
potential investments, acquiring real estate investments,
structuring and negotiating financings, asset and portfolio
management, executing asset dispositions, financial reporting,
public reporting and other regulatory compliance, investor
relations and other administrative functions. The Advisor may
contract with other Hines entities to perform these functions.
Hines is responsible for the day-to-day operation and management
of our real estate properties. Services provided or managed by
Hines may include tenant relations, tenant marketing and
leasing, lease negotiation and administration, tenant
construction, property maintenance and repairs, property
refurbishment and renovation, energy management, security, risk
management, parking management, financial budgeting and
accounting.
Our Advisor and its affiliates will receive substantial fees in
connection with this offering and our operations, which could be
increased or decreased during or after this offering. The
following table sets forth the type and, to the extent possible,
estimates of all fees, compensation, income, expense
reimbursements, interests and other payments by the Company
payable directly to Hines and its affiliates in connection with
this offering and our operations. For purposes of this table,
except as noted, we have assumed no volume discounts or waived
commissions as discussed in the “Plan of Distribution.”
Estimated Maximum
(Based on $3,500,000,000
Type and Recipient
Description and Method of Computation
in Shares)(1)
Organizational and Offering Activities(2)
Selling Commissions — the Dealer Manager
Up to 7.0% of gross offering proceeds, excluding proceeds from
our dividend reinvestment plan; all selling commissions will be
reallowed to participating broker-dealers. If you are party to
an agreement with a licensed broker dealer, investment advisor
or bank trust department pursuant to which you pay a fee based
on assets under management such as a “wrap fee”,
“commission replacement fee”, or similar fee, we will
waive selling commissions and dealer manager fees and sell
shares to you at an aggregate 9.2% discount.
$210,000,000(3)
Dealer Manager Fee — the Dealer Manager
Up to 2.2% of gross offering proceeds, excluding proceeds from
our dividend reinvestment plan, all or a portion of which may be
reallowed to selected participating broker-dealers. If you are
party to an agreement with a licensed broker dealer, investment
advisor or bank trust department pursuant to which you pay a fee
based on assets under management such as a “wrap fee”,
“commission replacement fee”, or similar fee, we will
waive dealer manager fees and the selling commissions and sell
shares to you at an aggregate 9.2% discount.
$66,000,000(4)
No Reimbursement of Organization and Offering Expenses
All organization and offering expenses will be paid by an
affiliate of Hines.(5)
With respect to each real estate investment made after the
commencement of this offering up to an aggregate of
$2,000,000,000 in real estate investments, 2.5% of (i) the
purchase price of real estate investments acquired directly by
us, including any debt attributable to such investments, or (ii)
when we make an investment indirectly through another entity,
such investment’s pro rata share of the gross asset value
of real estate investments held by that entity. With respect to
each real estate investment made thereafter, the fee will be
equal to 0.50% of the amounts set forth in (i) and (ii), as
applicable.
$55,771,000(7)
Participation Interest in the Operating Partnership —
HALP Associates Limited Partnership
A profits interest in the Operating Partnership which increases
over time in a manner intended to approximate (i) an additional
0.50% cash acquisition fee as calculated above and (ii) the
automatic reinvestment of such cash back into the Operating
Partnership.
Not determinable at this time(8)
Debt Financing Fee — the Advisor
1.0% of the amount obtained under any property loan or made
available to us under any other debt financing. In no event
will the debt financing fee be paid more than once in respect of
the same debt.
Not determinable at this time. (9)
Operational Activities
Asset Management Fee — the Advisor
0.0625% per month of the net equity capital we have invested in
real estate investments at the end of each month.
Not determinable at this time(10)
Participation Interest in the Operating Partnership —
HALP Associates Limited Partnership
A profits interest in the Operating Partnership which increases
over time in a manner intended to approximate (i) a 0.0625% per
month cash asset management fee as calculated above and (ii) the
automatic reinvestment of such cash back into the Operating
Partnership.(8)
Not determinable at this time(10)
Expense Reimbursements in connection with our
administration — the Advisor
Reimbursement of actual expenses incurred on an ongoing
basis.(11)
The lesser of (i) 2.5% of annual gross revenues received from
the property, or (ii) the amount of management fees recoverable
from tenants under their leases, subject to a minimum of 1.0% of
annual gross revenues in the case of single-tenant
properties.(12)
Not determinable at this time
Leasing Fee — Hines
1.5% of gross revenues payable over the term of each executed
lease, including any amendment, renewal, extension, expansion or
similar event if Hines is our primary leasing agent.(12)
Not determinable at this time
Tenant Construction Management Fees — Hines
Amount payable by the tenant under its lease or, if payable by
the landlord, direct costs incurred by Hines if the related
services are provided by off-site employees.(13)
Not determinable at this time
Re-development Construction Management Fees — Hines
2.5% of total project costs relating to the re-development, plus
direct costs incurred by Hines in connection with providing the
related services.
Not determinable at this time
Expense Reimbursements — Hines
Reimbursement of actual expenses incurred in connection with the
management and operation of our properties.(14)
Not determinable at this time
Disposition and Liquidation
Disposition Fee
No disposition fee will be paid to the Advisor or its affiliates
in connection with disposition of our investments.(15)
Not applicable
Incentive Fee
No incentive fee will be paid to the Advisor or its affiliates
in connection with the sale of assets, liquidation or listing of
our shares.
Not applicable
(1)
Assumes we sell the maximum of $3,000,000,000 in shares in our
primary offering and issue $500,000,000 in shares under our
dividend reinvestment plan pursuant to this offering.
(2)
The total compensation related to our organizational and
offering activities, which includes selling commissions and the
dealer manager fee (but does not include our organization and
offering expenses, because those expenses are being paid by an
affiliate and not by us), will not exceed 15% of the proceeds
raised in this offering. See footnote 5 below.
(3)
Commissions may be reduced for volume or other discounts or
waived as further described in the “Plan of
Distribution” section of this prospectus; however, for
purposes of calculating the estimated maximum selling
commissions in this table, we have not assumed any such
discounts or waivers. Further, the Dealer Manager will not
receive selling commissions for shares issued pursuant to our
dividend reinvestment plan.
The dealer manager fees may be reduced for volume or other
discounts or waived as further described in the “Plan of
Distribution” section of this prospectus; however, for
purposes of calculating the estimated maximum dealer manager
fees in this table, we have not assumed any such discounts or
waivers. Further, the Dealer Manager will not receive the dealer
manager fee for shares issued pursuant to our dividend
reinvestment plan.
(5)
An affiliate of Hines will pay for all organization and offering
expenses, other than selling commissions and the dealer manager
fee, whether incurred by us directly or through the Advisor, the
Dealer Manager and/or their affiliates, which expenses are
expected to consist of, among other expenses, actual legal,
accounting, printing, marketing, filing fees, transfer agent
costs and other accountable offering-related expenses.
Organization and offering expenses may also include, but are not
limited to: (i) amounts to reimburse the Advisor for all
marketing related costs and expenses such as salaries and direct
expenses of our Advisor’s employees or employees of the
Advisor’s affiliates in connection with registering and
marketing of our shares, including but not limited to, salaries
related to broker-dealer accounting and compliance functions;
(ii) salaries, certain other compensation and direct
expenses of employees of our Dealer Manager while preparing for
the offering and marketing of our shares and in connection with
their wholesaling activities; (iii) travel and
entertainment expenses associated with the offering and
marketing of our shares; (iv) facilities and technology
costs, insurance expenses and other costs and expenses
associated with the offering and to facilitate the marketing of
our shares; (v) costs and expenses of conducting
educational conferences and seminars; (vi) costs and
expenses of attending broker-dealer sponsored conferences;
(vii) payment or reimbursement of due diligence expenses;
and (viii) any other compensation or reimbursements payable
to participating broker-dealers (other than selling commissions
and any reallowance of dealer manager fees), regardless of
whether such participating broker-dealers otherwise receive
commissions. We will have no liability for such expenses.
(6)
The acquisition fees and acquisition expenses incurred in
connection with the purchase of real estate investments will not
exceed an amount equal to 6.0% of the contract purchase price of
the investment unless a majority of our directors (including a
majority of our independent directors) not otherwise interested
in the transaction approve such fees and expenses in excess of
this limit. Tenant construction management fees and
re-development construction management fees will be included in
the definition of acquisition fees or acquisition expenses for
this purpose to the extent that they are paid in connection with
the acquisition, development or redevelopment of a property. If
any such fees are paid in connection with a portion of a leased
property at the request of a tenant or in conjunction with a new
lease or lease renewal, such fees will be treated as ongoing
operating costs of the property, similar to leasing commissions.
(7)
For purposes of calculating the estimated maximum acquisition
fees in this table, we have assumed that we will not use debt
when making real estate investments. In the event we raise the
maximum $3,500,000,000 pursuant to this offering and all of our
real estate investments are 50% leveraged at the time we acquire
them, the total acquisition fees payable will be $71,811,000.
Some of these fees may be payable out of the proceeds of such
borrowings.
(8)
Because the Participation Interest is a profits interest, any
value of such interest would be ultimately realized only if the
Operating Partnership has adequate gain or profit to allocate to
the holder of the Participation Interest. Please see “TheOperating Partnership — The ParticipationInterest” for more details about this interest. The
component of the increase in the Participation Interest
attributable to investment activities will be included in the
definition of acquisition fees and will therefore be included in
the 6.0% limitation calculation described above in footnote 6.
In addition, the component of the increase in the Participation
Interest attributable to operational activities will be included
in the definition of operating expenses and will therefore be
included in the 2%/25% operating expense limitation described
below in footnote 11.
(9)
Actual amounts are dependent upon the amount of any debt
incurred in connection with our acquisitions and otherwise and
therefore cannot be determined at the present time. In the event
we raise the maximum $3,500,000,000 pursuant to this offering
and all of our real estate investments are 50% leveraged, the
total debt financing fees payable will be $31,811,000.
In connection with both the asset management fee and the
corresponding increase in the Participation Interest, the
percentage itself on an annual basis would equal 0.75%, or 1.5%
on a combined basis. However, because each of the cash fee and
the Participation Interest increase is calculated monthly, and
the net equity capital we have invested in real estate
investments may change on a monthly basis, we cannot accurately
determine or calculate the amount or the value (in either
dollars or percentage) of either of these items on an annual
basis.
(11)
The Advisor will reimburse us for any amounts by which operating
expenses exceed the greater of (i) 2.0% of our invested
assets or (ii) 25% of our net income, unless our
independent directors determine that such excess was justified.
To the extent operating expenses exceed these limitations, they
may not be deferred and paid in subsequent periods. Operating
expenses include generally all expenses paid or incurred by us
as determined by accounting principles generally accepted in the
United States, or U.S. GAAP, except certain expenses identified
in our charter. The expenses identified by our charter as
excluded from operating expenses include: (i) expenses of
raising capital such as organizational and offering expenses,
legal, audit, accounting, underwriting, brokerage, listing,
registration and other fees, printing and such other expenses
and taxes incurred in connection with the issuance,
distribution, transfer, registration and stock exchange listing
of our shares; (ii) interest payments, taxes and non-cash
expenditures such as depreciation, amortization and bad debt
reserves; (iii) amounts paid as partnership distributions
of the Operating Partnership; and (iv) all fees and
expenses associated or paid in connection with the acquisition,
disposition and ownership of assets (such as real estate
commissions, acquisition fees and expenses, costs of
foreclosure, insurance premiums, legal services, maintenance,
repair or improvement of property, etc.). Please see
“Management — The Advisor and the Advisory
Agreement — Reimbursements by the Advisor” for a
detailed description of these expenses.
(12)
Property management fees and leasing fees for international
acquisitions may differ from our typical property management
fees and leasing fees due to differences in international
markets, but in all events the fees shall be paid in compliance
with our charter and shall be approved by our independent
directors.
(13)
These fees relate to construction management services for
improvements and build-out to tenant space.
(14)
Included in reimbursement of actual expenses incurred by Hines
are the costs of personnel and overhead expenses related to such
personnel who are located in Hines central and regional offices,
to the extent to which such costs and expenses relate to or
support Hines’ performance of its duties. Periodically, an
affiliate of Hines may be retained to provide ancillary services
for a property which are not covered by a property management
agreement and are generally provided by third parties. These
services are provided at market terms and are generally not
material to the management of the property.
(15)
The Company will not pay a real estate commission to Hines or an
affiliate of Hines upon the sale of properties, unless such
payment is approved by our independent directors.
In addition, we pay our independent directors certain fees,
reimburse independent directors for out-of-pocket expenses
incurred in connection with attendance at board or committee
meetings and award independent directors common shares under our
Employee and Director Incentive Share Plan. Please see
“Management — Compensation of Directors.” We
will not pay any fees or compensation to the Core Fund, its
general partner or advisor. All fees and compensation paid to
the Core Fund, its general partner or its advisor will be paid
or borne solely by limited partners in the Core Fund.
For a more complete description of all of the fees,
compensation, income, expense reimbursements, interests,
distributions and other payments payable to Hines and its
affiliates, please see the “Management Compensation,
Expense Reimbursements and Operating Partnership Participation
Interest” section of this prospectus. Subject to
limitations in our charter, the fees, compensation, income,
expense reimbursements, interests and other payments payable to
Hines and its affiliates may increase or decrease during this
offering or future offerings from those described above if such
revision is approved by our independent directors.
In order to qualify as a REIT for federal income tax purposes,
we must distribute at least 90% of our taxable income (excluding
capital gains) to our shareholders. We intend to continue to
make regular quarterly distributions to holders of our common
shares at least at the level required to maintain our REIT
status unless our results of operations, our general financial
condition, general economic conditions or other factors inhibit
us from doing so. Distributions are authorized at the discretion
of our board of directors, which is directed, in substantial
part, by its obligation to cause us to comply with the REIT
requirements of the Internal Revenue Code.
With the authorization of our board of directors, we declare
distributions to our shareholders as of daily record dates and
aggregate and pay such distributions quarterly. From the date we
commenced business operations through June 30, 2006, our
board of directors authorized and we declared distributions
equal to $0.00164384 per share, per day. From July 1, 2006
through January 31, 2008, our board of directors authorized
and we declared distributions equal to $0.00170959 per share,
per day. Please see “Description of Capital
Stock — Distribution Objectives.”
You may participate in our dividend reinvestment plan, pursuant
to which you may have your dividends reinvested in additional
whole or fractional common shares at an initial price of
$ per share. If you
participate in the dividend reinvestment plan and are subject to
federal income taxation, you may incur a tax liability for
dividends allocated to you even though you have elected not to
receive the dividends in cash but rather to have the dividends
withheld and reinvested in common shares. As a result, you may
have a tax liability without receiving cash dividends to pay
such liability and would have to rely solely on sources of funds
other than our dividends in order to pay your taxes. A majority
of our board of directors may change the per-share purchase
price or otherwise amend or terminate the dividend reinvestment
plan for any reason at any time upon 10 days’ prior
notice to plan participants. Please see the “Description of
Capital Stock — Dividend Reinvestment Plan”
section of this prospectus for further explanation of our
dividend reinvestment plan, a complete copy of which is included
as Appendix B to this prospectus.
An investment in our common shares should be made as a long-term
investment which is consistent with our acquisition and
investment policies and strategies. We offer a share redemption
program that may allow shareholders to have their shares
redeemed subject to certain limitations and restrictions
discussed more fully in the “Description of Capital
Stock — Share Redemption Program” portion of
this prospectus. No fees will be paid to Hines in connection
with any redemptions. Our board of directors may terminate,
suspend or amend the share redemption program upon
30 days’ written notice without shareholder approval.
After you have held your shares for a minimum of one year, our
share redemption program will provide you with the ability to
have all or a portion of your shares redeemed, subject to
certain restrictions and limitations. We initially intend to
allow redemptions of our shares on a monthly basis to the extent
we have sufficient available cash to do so, however, our board
of directors may determine from time to time to adjust the
timing of redemptions to a quarterly basis upon
30 days’ notice. During any calendar year, the number
of shares we may redeem under the program may not exceed, as of
the date we commit to any redemption, 10% of our shares
outstanding as of the same date in the prior calendar year. We
may, but are not required to, utilize all sources of cash flow
not otherwise dedicated to a particular use to meet the
redemption needs, including proceeds from our dividend
reinvestment plan, securities offerings, operating cash flow not
intended for dividends, borrowings and capital transactions such
as asset sales or financings.
Shares will be redeemed at a price of
$ per share beginning on the
effective date of this offering. Our board of directors may
adjust the per share redemption price from time to time upon
30 days’ notice based on the then-current estimated
net asset value of our real estate portfolio at the time of the
adjustment and such other factors as it deems appropriate,
including the then-current offering price of our shares (if
any), our then-current dividend reinvestment plan price and
general market conditions. You may withdraw your request to have
your shares redeemed in accordance with the terms of the
program. In addition, we may waive the one-year holding period
requirement and the annual limitation in connection with
redemption requests made after the death or disability of a
shareholder. As a result of these restrictions, you should not
assume that you will be able to have all or a portion of your
shares redeemed. Please see “Description of Capital
Stock — Share Redemption Program” for
further explanation of our share redemption program.
You should carefully read and consider the risks described
below, together with all other information in this prospectus,
before you decide to buy our common shares. We encourage you to
keep these risks in mind when you read this prospectus and
evaluate an investment in us. If certain of the following risks
actually occur, our results of operations and ability to pay
dividends would likely suffer materially or could be eliminated
entirely. As a result, the value of our common shares may
decline, and you could lose all or part of the money you paid to
buy our common shares.
There is no public market for our common shares, and we do not
expect one to develop. We currently have no plans to list our
shares on a national securities exchange or over-the-counter
market, or to include our shares for quotation on any national
securities market. Additionally, our charter contains
restrictions on the ownership and transfer of our shares, and
these restrictions may inhibit your ability to sell your shares.
We have a share redemption program, but it is limited in terms
of the amount of shares that may be redeemed annually. Our board
of directors may also limit, suspend or terminate our share
redemption program upon 30 days’ written notice. It
may be difficult for you to sell your shares promptly or at all.
If you are able to sell your shares, you may only be able to
sell them at a substantial discount from the price you paid.
This may be the result, in part, of the fact that the amount of
funds available for investment are reduced by funds used to pay
selling commissions, the dealer manager fee and acquisition fees
in connection with our public offerings. Unless our aggregate
investments increase in value to compensate for these up-front
fees and expenses, which may not occur, it is unlikely that you
will be able to sell your shares, whether pursuant to our share
redemption program or otherwise, without incurring a substantial
loss. We cannot assure you that your shares will ever appreciate
in value to equal the price you paid for your shares. Thus,
prospective shareholders should consider our common shares as
illiquid and a long-term investment, and you must be prepared to
hold your shares for an indefinite length of time. Please see
“Description of Capital Stock — Restrictions on
Transfer” herein for a more complete discussion on certain
restrictions regarding your ability to transfer your shares.
Even though our share redemption program may provide you with a
limited opportunity to have your shares redeemed after you have
held them for a period of one year, you should understand that
our share redemption program contains significant restrictions
and limitations. We expect to redeem shares to the extent our
board determines we have sufficient available cash to do so
subject to the annual limitation on the number of shares we can
redeem set forth in our share redemption program. Please see
“Description of Capital Stock — Share
Redemption Program.” Further, if at any time all
tendered shares are not redeemed, shares will be redeemed on a
pro rata basis. We may, but are not required to, utilize all
sources of cash flow not otherwise dedicated to a particular use
to meet the redemption needs, including proceeds from our
dividend reinvestment plan, securities offerings, operating cash
flow not intended for dividends, borrowings and capital
transactions such as asset sales or financings. Our board of
directors reserves the right to amend, suspend or terminate the
share redemption program at any time in its discretion upon
30 days’ written notice. Shares are currently redeemed
at a price of $ per share.
However, our board of directors may change the redemption price
from time to time upon 30 days’ written notice based
on the then-current estimated net asset value of our real estate
portfolio at the time of the adjustment and such other factors
as it deems appropriate, including the then-current offering
price of our shares (if any), our then-current dividend
reinvestment plan price and general market conditions. The
methodology used in determining the redemption price is subject
to a number of limitations and to a number of assumptions and
estimates which may or may not be accurate or complete. The
redemption price may not be indicative of the price our
shareholders would receive if our shares were actively
traded or if we were liquidated. Therefore, in making a decision
to purchase common shares, you should not assume that you will
be able to sell all or any portion of your shares back to us
pursuant to our share redemption program or at a price that
reflects the then-current market value of the shares.
By owning our shares, shareholders will be subjected to
significant risks associated with owning and operating real
estate. The performance of your investment in Hines REIT will be
subject to such risks, including:
•
changes in the general economic climate;
•
changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
•
changes in interest rates and the availability of financing;
•
changes in property level operating expenses due to inflation or
otherwise; and
•
changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
Please see the section of this prospectus entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Quantitative and
Qualitative Disclosures About Market Risk” for additional
information on interest rate risks. If our assets decrease in
value, the value of your investment will likewise decrease, and
you could lose some or all of your investment.
Because the Advisor and our Dealer Manager are affiliates of
Hines, you will not have the benefit of an independent due
diligence review and investigation of the type normally
performed by an unaffiliated, independent underwriter in
connection with a securities offering.
While a majority of our independent directors may remove our
Advisor upon 60 days’ written notice, our independent
directors cannot unilaterally remove the managing general
partner of the Core Fund, which is also an affiliate of Hines.
We have substantial investments in the Core Fund and may invest
a portion of the proceeds from this offering in the Core Fund.
Because of our current Core Fund investments and because our
ability to remove the managing general partner of the Core Fund
is limited, it is likely that an affiliate of Hines will
maintain a substantial degree of control over a significant
percentage of our investments despite the removal of our Advisor
by our independent directors. Any additional investments by us
in the Core Fund will contribute to this risk. Please see
“Our Real Estate Investments — Description of the
Non-Managing General Partner Interest and Certain Provisions of
the Core Fund Partnership Agreement — Summary of
Certain Provisions of the Core Fund Partnership
Agreement” for a description of the procedures for removing
the managing general partner of the Core Fund. In addition, our
ability to redeem any investment we hold in the Core Fund is
limited. Please see “— Business and Real Estate
Risks — Our ability to redeem all or a portion of our
investment in the Core Fund is subject to significant
restrictions” for more information regarding our ability to
redeem any investments in the Core Fund.
The compensation paid to our Advisor, Dealer Manager and
Property Manager for services they provide us was not determined
on an arm’s-length basis. All service agreements, contracts
or arrangements between or
among Hines and its affiliates, including the Advisor and us,
were not negotiated at arm’s-length. Such agreements
include the Advisory Agreement, the Dealer Manager Agreement,
and the Property Management and Leasing Agreement. We cannot
assure you that a third party unaffiliated with Hines would not
be able and willing to provide such services to us at a lower
price.
Subject to limitations in our charter, the fees, compensation,
income, expense reimbursements, interests and other payments
payable to Hines, the Advisor and their affiliates may increase
or decrease during this offering or future offerings from those
described in “Management Compensation, Expense
Reimbursements and Operating Partnership,” if such increase
or decrease is approved by our independent directors.
We may pay the Advisor a debt financing fee equal to 1.0% of the
amount obtained under any property loan or made available under
any other debt financing obtained by us. With respect to a line
of credit obtained by us, we will pay the debt financing fee on
the aggregate amount available to us under the line of credit,
irrespective of whether any amounts are drawn down under such
line of credit. Because of this, the Advisor will have a
conflict in determining when to obtain a line of credit and the
amount to be made available thereunder.
Our board of directors and the Advisor have broad discretion
when identifying, evaluating and making investments with the
proceeds of this offering, and we have not definitively
identified investments that we will make with all of the
proceeds of this offering. We are therefore generally unable to
provide you with information to evaluate our potential
investments with the proceeds of this offering prior to your
purchase of our shares. Regarding our investments other than
those we currently hold or have committed to make, you will not
have the opportunity to evaluate the transaction terms or other
financial or operational data concerning such investments.
Further, we may not have the opportunity to evaluate
and/or
approve properties acquired or other investments made by
entities in which we invest, such as the Core Fund. You will
likewise have no opportunity to evaluate future transactions
completed and properties acquired by the Core Fund. You must
rely on our board of directors and the Advisor to evaluate our
investment opportunities, and we are subject to the risk that
our board
and/or the
Advisor may not be able to achieve our objectives, will make
unwise decisions or will make decisions that are not in our best
interest because of conflicts of interest. We may be subject to
similar risks in relation to investments made by entities in
which we acquire an interest but do not control, such as the
Core Fund. Please see the risks discussed under
“— Potential Conflicts of Interest Risks”
below.
Our common shares are being offered on a “best
efforts” basis and no individual, firm or corporation has
agreed to purchase any of our common shares in this offering.
Additionally, no minimum amount must be raised prior to the
release of proceeds to the Company and no proceeds will be
placed in escrow. Funds paid by an investor will be immediately
available for use by the Company upon our acceptance of a
subscription agreement. We are subject to the risk that fewer
than all of the shares we are offering will be sold. If we are
only able to sell a limited number of shares, we will make fewer
investments, resulting in less diversification in terms of the
number and types of investments we own and the geographic
regions in which our investments are located.
We incur certain fixed operating expenses in connection with our
operations, such as costs incurred to secure insurance for our
directors and officers, regardless of our size. To the extent we
sell fewer than the maximum number of shares offered by this
prospectus, these expenses will represent a greater percentage
of our gross income and, correspondingly, will have a greater
proportionate adverse impact on our ability to pay dividends to
you.
The acquisition fees payable to the Advisor and its affiliates
decrease after our first $2,000,000,000 in real estate
investments made after the commencement of this offering. If
receive less than $2,000,000,000 in subscriptions in this
offering, the acquisition fees payable to the Advisor will only
be payable at the higher rate and the corresponding aggregate
percentage of net proceeds will be higher than the percentage
presented in the “Estimated Use of Proceeds” table.
The
offering price of our common shares may not be indicative of the
price at which our shares would trade if they were actively
traded.
Our board of directors determined the selling price of our
common shares based upon a number of factors, and there are no
established criteria for valuing issued or outstanding shares.
Please see “Plan of Distribution.” Therefore, our
offering price may not be indicative of either the price at
which our shares would trade if they were listed on an exchange
or actively traded by brokers or of the proceeds that a
shareholder would receive if we were liquidated or dissolved.
The price of our shares may be adjusted periodically to reflect
changes in the net asset value of our assets as well as changes
in fees and expenses and therefore future adjustments may result
in an offering price lower than the price you paid for your
shares.
Discounts and fee waivers will be available through certain
financial advisers and broker-dealers under the circumstances
described in “Plan of Distribution,” and you should
ask your financial advisor
and/or
broker-dealer about the ability to receive such discounts or fee
waivers. Accordingly, the aggregate selling commissions and
dealer manager fees presented in the “Estimated Use of
Proceeds” table will vary depending on the total amount of
subscriptions to which discounts and fee waivers apply. If you
purchase our shares at a discount, you will receive a higher
percentage return on your investment than investors who do not
purchase shares at such discount. With respect to shares
purchased pursuant to our dividend reinvestment plan, you cannot
receive a discount greater than 5% of the then-current price of
our shares, regardless of whether you have received a greater
discount on shares purchased in this or prior offerings due to
the volume of your purchases or otherwise. Accordingly, if you
qualify for the discounts and fee waivers described in
“Plan of Distribution,” you may be able to receive a
lower price on subsequent purchases in this offering than you
would receive if you participate in our dividend reinvestment
plan and have your dividends reinvested at the price offered
thereunder.
Hines REIT owned a 97.8% general partner interest in the
Operating Partnership as of September 30, 2007. HALP
Associates Limited Partnership owns a Participation Interest in
the Operating Partnership, which was issued as consideration for
an obligation by Hines and its affiliates to perform future
services in connection with our real estate operations. This
interest in the Operating Partnership, as well as the number of
shares into which it may be converted, increases on a monthly
basis. As of September 30, 2007, the percentage interest in
the Operating Partnership attributable to the Participation
Interest was 1.5%, and such interest was convertible into
approximately 2.3 million common shares, subject to the
fulfillment of certain conditions. The Participation Interest
will increase to the extent leverage is used because the use of
leverage will allow us to acquire more assets. Please see
“The Operating Partnership — The ParticipationInterest” for a summary of this interest. Each increase in
this interest will dilute your indirect investment in the
Operating Partnership and, accordingly, reduce the amount of
dividends that would otherwise be payable to you in the future.
Please see “The Operating Partnership —
Hypothetical Impact of the Participation Interest.”
Additionally, shareholders do not have preemptive rights to
acquire any shares issued by us in the future. Therefore,
investors purchasing our common shares in this offering may
experience dilution of their equity investment if we:
•
sell shares in this offering or sell additional shares in the
future, including those issued pursuant to the dividend
reinvestment plan and shares issued to our officers and
directors or employees of the Advisor and its affiliates under
our Employee and Director Incentive Share Plan;
•
sell securities that are convertible into shares, such as
interests in the Operating Partnership;
•
issue shares in a private offering;
•
issue common shares to the Advisor or affiliates in exchange for
any cash fees they may agree to defer;
•
issue common shares upon the exercise of options granted to our
independent directors, or employees of the Company or the
Advisor; or
•
issue shares to sellers of properties acquired by us in
connection with an exchange of partnership units from the
Operating Partnership.
In the event of a merger in which we are not the surviving
entity, and pursuant to which our Advisory Agreement is
terminated under certain circumstances, Hines and its affiliates
may require the Operating Partnership to purchase all or a
portion of the Participation Interest and any interest in the
Operating Partnership, or OP Units, that they hold at any
time thereafter for cash, or our shares, as determined by the
seller. Please see “Management — The Advisor and
the Advisory Agreement — Removal of the Advisor.”
The Participation Interest increases on a monthly basis and as
the percentage interest in the Operating Partnership
attributable to this interest increases, these rights may deter
transactions that could result in a merger in which we are not
the survivor. This deterrence may limit the opportunity for
shareholders to receive a premium for their common shares that
might otherwise exist if an investor attempted to acquire us
through a merger.
A component of the Participation Interest is intended to
approximate an increased interest in the Operating Partnership
based on a percentage of the cost of our investments or
acquisitions. Because the interest in the Operating Partnership
represented by the Participation Interest increases with each
acquisition we make, if we frequently sell assets and reinvest
the proceeds of such dispositions, the Participation Interest
would increase at a faster rate than it would if we acquired
assets and held them for an extended period. Likewise, if we
frequently sell assets and reinvest the proceeds of such
dispositions, our Advisor will earn additional cash acquisition
fees.
Under our Advisory Agreement, if the Company is not advised by
an entity affiliated with Hines, Hines or its affiliates may
cause the Operating Partnership to purchase some or all of the
Participation Interest or OP Units then held by such
entities. Please see “Management — The Advisor
and the Advisory Agreement — Removal of the
Advisor.” The purchase price will be based on the net asset
value of the Operating Partnership and payable in cash, or our
shares, as determined by the seller. If the termination of the
Advisory Agreement would result in the Company not being advised
by an affiliate of Hines, and if the amount necessary to
purchase Hines’ interest in the Operating Partnership is
substantial, these rights could discourage or deter us from
terminating the Advisory Agreement under circumstances in which
we would otherwise do so.
We may issue, without shareholder approval, preferred shares or
a class or series of common shares with rights that could
adversely affect the holders of the common shares issued in this
offering. Upon the affirmative vote of a majority of our
directors (including, in the case of preferred shares, a
majority of our independent directors), our charter authorizes
our board of directors (without any further action by our
shareholders) to issue preferred shares or common shares in one
or more class or series, and to fix the voting rights (subject
to certain limitations), liquidation preferences, dividend
rates, conversion rights, redemption rights and terms, including
sinking fund provisions, and certain other rights and
preferences with respect to such class or series of shares. In
addition, a majority of our independent directors must approve
the issuance of preferred shares. If we ever create and issue
preferred shares with a dividend preference over common shares,
payment of any dividend preferences of outstanding preferred
shares would reduce the amount of funds available for the
payment of dividends on the common shares. Further, holders of
preferred shares are normally entitled to receive a preference
payment in the event we liquidate, dissolve or wind up before
any payment is made to the common shareholders, likely reducing
the amount common shareholders would otherwise receive upon such
an occurrence. We could also designate and issue shares in a
class or series of common shares with similar rights. In
addition, under certain circumstances, the issuance of preferred
shares or a separate class or series of common shares may render
more difficult or tend to discourage:
•
a merger, offer or proxy contest;
•
the assumption of control by a holder of a large block of our
securities; and/or
We are not, and the Core Fund is not, registered as an
“investment company” under the Investment Company Act
of 1940 (the “Investment Company Act”). Investment
companies subject to this act are required to comply with a
variety of substantive requirements such as requirements
relating to:
•
limitations on the capital structure of the entity;
•
restrictions on certain investments;
•
prohibitions on transactions with affiliated entities; and
public reporting disclosures, record keeping, voting procedures,
proxy disclosure and similar corporate governance rules and
regulations.
Many of these requirements are intended to provide benefits or
protections to security holders of investment companies. Because
we do not expect to be subject to these requirements, you will
not be entitled to these benefits or protections.
In order to operate in a manner to avoid being required to
register as an investment company we may be unable to sell
assets we would otherwise want to sell or we may need to sell
assets we would otherwise wish to retain. In addition, we may
also have to forgo opportunities to acquire interests in
companies or entities that we would otherwise want to acquire.
The operations of the Core Fund may likewise be limited in order
for the Core Fund to avoid being required to register as an
investment company.
We do not expect to operate as an “investment company”
under the Investment Company Act. However, the analysis relating
to whether a company qualifies as an investment company can
involve technical and complex rules and regulations. If we own
assets that qualify as “investment securities” as such
term is defined under this Act and the value of such assets
exceeds 40% of the value of our total assets, we could be deemed
to be an investment company. It is possible that many of our
interests in real estate may be held through other entities, and
some or all of these interests in other entities could be deemed
to be investment securities.
If we held investment securities and the value of these
securities exceeded 40% of the value of our total assets we may
be required to register as an investment company. Investment
companies are subject to a variety of substantial requirements
that could significantly impact our operations. Please see
“— We are not registered as an investment company
under the Investment Company Act and therefore we will not be
subject to the requirements imposed on an investment company by
such Act. Similarly, the Core Fund is not registered as an
investment company.” The costs and expenses we would incur
to register and operate as an investment company, as well as the
limitations placed on our operations, could have a material
adverse impact on our operations and your investment return.
We have received an opinion from our counsel, Greenberg Traurig,
LLP that is based on certain assumptions and representations and
taking into consideration our current assets and the percentage
which could be deemed “investment securities,” we are
not currently an investment company.
If we were required to register as an investment company, but
failed to do so, we would be prohibited from engaging in our
business, criminal and civil actions could be brought against
us, some of our contracts might be unenforceable unless a court
were to direct enforcement, and a court could appoint a receiver
to take control of us and liquidate our business.
Our investment in the Core Fund is subject to the risks
described in this risk factor as the Core Fund will need to
operate in a manner to avoid qualifying as an investment company
as well. If the Core Fund is required to register as an
investment company, the extra costs and expenses and limitations
on operations resulting from such as described above could
adversely impact the Core Fund’s operations, which would
indirectly reduce your investment return, and that registration
also could adversely affect our status as an investment company.
Our charter provides that no holder of shares, other than Hines,
affiliates of Hines or any other person to whom our board of
directors grants an exemption, may directly or indirectly own
more than 9.9% in value of the aggregate of our outstanding
shares or more than 9.9% of the number or value, whichever is
more restricive, of the outstanding shares of any class or
series of our outstanding securities. This ownership limit may
deter tender offers for our common shares, which offers may be
attractive to our shareholders, and thus
may limit the opportunity for shareholders to receive a premium
for their common shares that might otherwise exist if an
investor attempted to assemble a block of common shares in
excess of 9.9% in value of the aggregate of our outstanding
shares, whichever is more restrictive, or 9.9% in number or
value of the outstanding common shares or otherwise to effect a
change of control in us. Please see the “Description of
Capital Stock — Restrictions on Transfer” section
of this prospectus for additional information regarding the
restrictions on transfer of our common shares.
Provisions of the Maryland General Corporation Law prohibit
business combinations, unless prior approval of the board of
directors is obtained before the person seeking the combination
became an interested shareholder, with:
•
any person who beneficially owns 10% or more of the voting power
of our outstanding shares (an “interested
shareholder”);
•
any of our affiliates who, at any time within the two year
period prior to the date in question, was the beneficial owner
of 10% or more of the voting power of our outstanding shares
(also an “interested shareholder”); or
•
an affiliate of an interested shareholder.
These prohibitions are intended to prevent a change of control
by interested shareholders who do not have the support of our
board of directors. Because our charter contains limitations on
ownership of 9.9% or more of our common shares by a shareholder
other than Hines or an affiliate of Hines, we opted out of the
business combinations statute in our charter. Therefore, we will
not be afforded the protections of this statute and,
accordingly, there is no guarantee that the ownership
limitations in our charter will provide the same measure of
protection as the business combinations statute and prevent an
undesired change of control by an interested shareholder.
may not have sufficient available funds to make distributions;
•
expects to acquire additional properties in the future which, if
unsuccessful, could affect our ability to pay dividends to our
shareholders;
•
is subject to risks as a result of joint ownership of real
estate with Hines and other Hines programs or third parties;
•
intends to use borrowings to partially fund acquisitions, which
may result in foreclosures and unexpected debt-service
requirements and indirectly negatively affect our ability to pay
dividends to our shareholders;
•
is also dependent upon Hines and its key employees for its
success;
•
also operates in a competitive business with competitors who
have significant financial resources and operational flexibility;
•
may not have funding or capital resources for future tenant
improvements;
•
depends on its tenants for its revenue and relies on certain
significant tenants;
is subject to risks associated with terrorism, uninsured losses
and high insurance costs;
•
will be affected by general economic and regulatory factors it
cannot control or predict;
•
will make illiquid investments and be subject to general
economic and regulatory factors, including environmental laws,
which it cannot control or predict; and
•
will be subject to property taxes and operating expenses that
may increase.
To the extent the operations and ability of the Core Fund, or
any other entity through which we indirectly invest in real
estate, to make distributions is adversely affected by any of
these risks, our operations and ability to pay dividends to you
will be adversely affected.
We are Hines’ only publicly-offered investment program and
one of Hines’ first REITs. Hines’ previous programs
and investments were conducted through privately-held entities
not subject to either the up-front commissions, fees and
expenses associated with this offering or all of the laws and
regulations that govern us, including reporting requirements
under the federal securities laws and tax and other regulations
applicable to REITs. A significant portion of Hines’ other
programs and investments also involve development projects.
Although we are not prohibited from participating in development
projects, we currently have no plans to do so. This is also the
first program sponsored by Hines with investment objectives
permitting the making and purchasing of mortgage loans and
participations in mortgage loans, and Hines does not have
experience making such investments.
The past performance of other programs sponsored by Hines may
not be indicative of our future results, and we may not be able
to successfully operate our business and implement our
investment strategy, which may be different in a number of
respects from the operations previously conducted by Hines. You
should not rely on the past performance of other programs or
investments sponsored by Hines to predict or as an indication of
our future performance.
In the event that we have a concentration of properties in a
particular geographic area, our operating results and ability to
make distributions are likely to be impacted by economic changes
affecting the real estate markets in that area. Your investment
will be subject to greater risk to the extent that we lack a
geographically diversified portfolio of properties. For example,
as of September 30, 2007, approximately 14% of our
portfolio consists of properties located in Chicago, 14% of our
portfolio consists of properties located in Los Angeles, and 14%
of our portfolio consists of properties located in Seattle.
Consequently, our financial condition and ability to make
distributions could be materially and adversely affected by any
significant adverse developments in those markets.
As of the date of this prospectus we have not identified
specific properties we will purchase with all of the proceeds of
this offering. Because we are conducting this offering on a
“best efforts” basis over several months, our ability
to locate and commit to purchase specific properties will be
partially dependent on our ability to raise sufficient funds for
such acquisitions. We may be substantially delayed in making
investments due to delays in the sale of our common shares,
delays in negotiating or obtaining the necessary purchase
documentation, delays in locating suitable investments or other
factors. We expect to invest proceeds we receive from this
offering in short-term, highly-liquid investments until we use
such funds in our operations. We expect that the income we earn
on these temporary investments will not be substantial.
Therefore, delays in investing proceeds we raise from this
offering could impact our ability to generate cash flow for
distributions.
In the past several years, the commercial real estate market has
experienced a substantial influx of capital from investors. This
substantial flow of capital, combined with significant
competition for real estate, may have resulted in inflated
purchase prices for such assets. We and the Core Fund have
recently purchased assets, and to the extent either of us
purchases real estate in the future in such an environment, we
are subject to the risks that the value of our assets may not
appreciate or may decrease significantly below the amount we
paid for such assets if the real estate market ceases to attract
the same level of capital investment in the future as it has
recently attracted, or if the number of companies seeking to
acquire such assets decreases. If any of these circumstances
occur or the values of our investments are otherwise negatively
affected, the value of your investment may be lower.
In
our initial quarters of operations, dividends we paid to our
shareholders were partially funded withadvances or
borrowings from our Advisor. We may use similar advances,
borrowings, deferrals or waivers of fees from our Advisor or
affiliates, or other sources in the future to fund dividends to
our shareholders. We cannot assure you that in the future
we will be able to achieve cash flows necessary to repay such
advances or borrowings and pay dividends at our historical
per-share amounts, or to maintain dividends at any particular
level, if at all.
We cannot assure you that we will be able to continue paying
dividends to our shareholders at our historical per-share
amounts, or that the dividends we pay will not decrease or be
eliminated in the future. In our initial quarters of operations,
the distributions we received from the Core Fund and our net
cash flow provided by or used in operating activities (before
the payments of cash acquisition fees to our Advisor, which we
fund with net offering proceeds) were insufficient to fund our
distributions to shareholders and minority interests. As a
result, our Advisor advanced funds to us to enable us to
partially fund our dividends, and our Advisor deferred, and in
some cases forgave, the reimbursement of such advances. As of
September 30, 2007, other than with respect to amounts
previously forgiven, we have reimbursed our Advisor for these
advances. Our Advisor is under no obligation to advance funds to
us in the future or to defer or waive fees in order to support
our dividends. Please see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Financial Condition, Liquidity and
Capital Resources — Uses of Funds —
Distributions.”
If our Advisor or its affiliates were to refuse to advance funds
to cover our expenses or to defer or waive fees in the future,
our ability to pay dividends to our shareholders could be
adversely affected, and we may be unable to pay dividends to our
shareholders, or such dividends could decrease significantly. In
addition, our Advisor, banks or other financing sources may make
loans or advances to us in order to allow us to pay future
dividends to our shareholders. The ultimate repayment of this
liability could adversely impact our ability to pay dividends in
future periods as well as potentially adversely impact the value
of your investment. In addition, our Advisor or affiliates could
choose to receive shares of our common stock or interests in the
operating partnership in lieu of cash fees to which they are
entitled, and the issuance of such securities may dilute your
interest in Hines REIT.
In order to maintain our qualification as a REIT, we are
required to distribute to our shareholders at least 90% of our
annual ordinary taxable income. In addition, we will be subject
to a 4% nondeductible excise tax on the amount, if any, by which
certain dividends paid (or deemed paid) by us with respect to
any calendar year are less than the sum of (i) 85% of our
ordinary income for that year, (ii) 95% of our capital gain
net income for that year and (iii) 100% of our
undistributed taxable income from prior years.
We expect our income, if any, to consist almost solely of our
share of the Operating Partnership’s income, and the cash
available for the payment of dividends by us to our shareholders
will consist of our share of cash distributions made by the
Operating Partnership. As the general partner of the Operating
Partnership, we will
determine the amount of any distributions made by the Operating
Partnership. However, we must consider a number of factors in
making such distributions, including:
•
the amount of the cash available for distribution;
•
the impact of such distribution on other partners of the
Operating Partnership;
•
the Operating Partnership’s financial condition;
•
the Operating Partnership’s capital expenditure
requirements and reserves therefor; and
•
the annual distribution requirements contained in the Code
necessary to qualify and maintain our qualification as a REIT.
Differences in timing between the actual receipt of income and
actual payment of deductible expenses and the inclusion of such
income and deduction of such expenses when determining our
taxable income, as well as the effect of nondeductible capital
expenditures, the creation of reserves, the use of cash to
purchase shares under our share redemption program or required
debt amortization payments, could result in our having taxable
income that exceeds cash available for distribution.
In view of the foregoing, we may be unable to meet the REIT
minimum distribution requirements
and/or avoid
the 4% excise tax described above. In certain cases, we may
decide to borrow funds in order to meet the REIT minimum
distribution
and/or avoid
the 4% excise tax even if our management believes that the then
prevailing market conditions generally are not favorable for
such borrowings or that such borrowings would not be advisable
in the absence of such tax considerations.
We expect to acquire interests in additional properties in the
future with the proceeds of this offering. We also expect that
the Core Fund will acquire properties in the future. The
acquisition of properties, or interests in properties by us or
the Core Fund, will subject us to risks associated with owning
and/or
managing new properties, including tenant retention and tenant
defaults of lease obligations. Specific examples of risks that
could relate to acquisitions include:
•
risks that investments will fail to perform in accordance with
our expectations because of conditions or liabilities we did not
know about at the time of acquisition;
•
risks that projections or estimates we made with respect to the
performance of the investments, the costs of operating or
improving the properties or the effect of the economy or capital
markets on the investments will prove inaccurate; and
•
general investment risks associated with any real estate
investment.
We have invested in properties and assets jointly with other
Hines programs and with other third parties. We may also
purchase or develop properties in joint ventures or
partnerships, co-tenancies or other co-ownership arrangements
with Hines affiliates, the sellers of the properties, developers
or similar persons. Joint ownership of properties, under certain
circumstances, may involve risks not otherwise present with
other methods of owing real estate. Examples of these risks
include:
•
the possibility that our partners or co-investors might become
insolvent or bankrupt;
•
that such partners or co-investors might have economic or other
business interests or goals that are inconsistent with our
business interests or goals, including inconsistent goals
relating to the sale of properties held in the joint venture or
the timing of the termination and liquidation of the venture;
the possibility that we may incur liabilities as the result of
actions taken by our partner or co-investor; or
•
that such partners or co-investors may be in a position to take
actions contrary to our instructions or requests or contrary to
our policies or objectives, including our policy with respect to
qualifying and maintaining our qualification as a REIT.
Actions by a co-venturer, co-tenant or partner may result in
subjecting the assets of the joint venture to unexpected
liabilities. Under joint venture arrangements, neither
co-venturer may have the power to control the venture, and under
certain circumstances, an impasse could result and this impasse
could have an adverse impact on the operations and profitability
of the joint venture.
If we have a right of first refusal or buy/sell right to buy out
a co-venturer or partner, we may be unable to finance such a
buy-out if it becomes exercisable or we are required to purchase
such interest at a time when it would not otherwise be in our
best interest to do so. If our interest is subject to a buy/sell
right, we may not have sufficient cash, available borrowing
capacity or other capital resources to allow us to elect to
purchase an interest of a co-venturer subject to the buy/sell
right, in which case we may be forced to sell our interest as
the result of the exercise of such right when we would otherwise
prefer to keep our interest. Finally, we may not be able to sell
our interest in a joint venture if we desire to exit the venture
for any reason or if our interest is likewise subject to a right
of first refusal of our co-venturer or partner, our ability to
sell such interest may be adversely impacted by such right.
Joint ownership arrangements with Hines affiliates may also
entail conflicts of interest. Please see “Conflicts of
Interest — Joint Venture Conflicts of Interest”
for a description of these risks.
The Core Fund is not obligated to redeem the interests of any of
its investors, including us, prior to 2008. Please see “Our
Real Estate Investments — Description of the
Non-Managing General Partner Interest and Certain Provisions of
the Core Fund Partnership Agreement — Summary of
Certain Provisions of the Core Fund Partnership
Agreement.” Additionally, after the Core Fund begins
redeeming interests, it will only redeem up to 10% of its
outstanding interests during any calendar year and the managing
general partner of the Core Fund may limit redemptions as a
result of certain tax and other regulatory considerations. We
may not be able to exit the Core Fund or liquidate all or a
portion of our interest in the Core Fund. Please see the risk
factor captioned “— If the Core Fund is forced to
sell its assets to satisfy mandatory redemption requirements,
our investments in the Core Fund may be materially adversely
affected” below.
The Core Fund owns several buildings together with certain
independent pension plans and funds (the “Institutional
Co-Investors”) that are advised by General Motors
Investment Management Corporation (the “Institutional
Co-Investor Advisor”). Each entity formed to hold these
buildings is required to redeem the interests held by the
Institutional Co-Investors in such entity at dates ranging from
August 19, 2012 to October 2, 2018. Please see
“Our Real Estate Investments — Certain Rights of
the Institutional Co-Investors and the Institutional Co-Investor
Advisor — Redemption Right” for a summary of
these rights. Additionally, the Institutional Co-Investor
Advisor is entitled to co-investment rights for real estate
assets in which the Core Fund invests. For each asset in which
Institutional Co-Investors acquire interests pursuant to the
Institutional Co-Investor Advisor’s co-investment rights,
the Core Fund will establish a three-year period ending no later
than the twelfth anniversary of the date the asset is acquired
during which the entity through which those Institutional
Co-Investors co-invest in such asset will redeem such
Institutional Co-Investors’ interests in such entity,
unless the Institutional Co-Investors elect to extend such
period. The Institutional Co-Investor Advisor also has certain
buy/sell rights in entities in which the Institutional
Co-Investors have co-invested with the Core Fund. Additionally,
certain other investors in the Core Fund have rights to seek a
redemption of their interest in the Core Fund under certain
circumstances.
We cannot assure you that the Core Fund will have capital
available on favorable terms or at all to fund the redemption of
the Institutional Co-Investors’ interest under these
circumstances. If the Core Fund is not able to raise additional
capital to meet such mandatory redemption requirements, the Core
Fund may be required to sell assets that it would otherwise
elect to retain or sell assets or otherwise raise capital on
less than favorable terms or at a time when it would not
otherwise do so. If the Core Fund is forced to sell any of its
assets under such circumstances, the disposition of such assets
could materially adversely impact the Core Fund’s
operations and ability to make distributions to us and,
consequently, our investment in the Core Fund.
In some joint ventures or other investments we may make, if the
entity in which we invest is a limited partnership, we may
acquire all or a portion of our interest in such partnership as
a general partner. As a general partner, we could be liable for
all the liabilities of such partnership. Additionally, we may
acquire a general partner interest in the form of a non-managing
general partner interest. For example, our interest in the Core
Fund is in the form of a non-managing general partner interest.
As a non-managing general partner, we are potentially liable for
all liabilities of the partnership without having the same
rights of management or control over the operation of the
partnership as the managing general partner. Therefore, we may
be held responsible for all of the liabilities of an entity in
which we do not have full management rights or control, and our
liability may far exceed the amount or value of investment we
initially made or then had in the partnership.
In order to maintain our qualification as a REIT, we are
required to distribute to our shareholders at least 90% of our
annual ordinary taxable income. This requirement limits our
ability to retain income or cash flow from operations to finance
the acquisition of new investments. We will explore acquisition
opportunities from time to time with the intention of expanding
our operations and increasing our profitability. We anticipate
that we will use debt and equity financing for such acquisitions
because of our inability to retain significant earnings.
Consequently, if we cannot obtain debt or equity financing on
acceptable terms, our ability to acquire new investments and
expand our operations will be adversely affected.
We intend to rely in part on borrowings under our credit
facilities and other external sources of financing to fund the
costs of new investments, capital expenditures and other items.
Accordingly, we are subject to the risk that our cash flow will
not be sufficient to cover required debt service payments.
If we cannot meet our required debt obligations, the property or
properties subject to indebtedness could be foreclosed upon by,
or otherwise transferred to, our lender, with a consequent loss
of income and asset value to the Company. For tax purposes, a
foreclosure of any of our properties would be treated as a sale
of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding
balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on
foreclosure, but we may not receive any cash proceeds.
Additionally, we may be required to refinance our debt subject
to “lump sum” or “balloon” payment
maturities on terms less favorable than the original loan or at
a time we would otherwise prefer to not refinance such debt. A
refinancing on such terms or at such times could increase our
debt service payments, which would decrease the amount of cash
we would have available for operations, new investments and
dividend payments.
Use of derivative instruments for hedging purposes may present
significant risks, including the risk of loss of the amounts
invested. Defaults by the other party to a hedging transaction
can result in losses in the hedging transaction. Hedging
activities also involve the risk of an imperfect correlation
between the hedging instrument and the asset being hedged, which
could result in losses both on the hedging transaction and on
the asset being hedged. Use of hedging activities generally may
not prevent significant losses and could increase the loss to
our company. Further, hedging transactions may reduce cash
available for distribution to our shareholders.
Our ability to achieve our investment objectives and to pay
dividends is dependent upon the performance of Hines and its
affiliates as well as key employees of Hines in the discovery
and acquisition of investments, the selection of tenants, the
determination of any financing arrangements, the management of
our assets and operation of our day-to-day activities. Our board
of directors and our Advisor have broad discretion when
identifying, evaluating and making investments with the proceeds
of this offering. You will have no opportunity to evaluate the
terms of transactions or other economic or financial data
concerning our investments that are not described in this
prospectus. We will rely on the management ability of Hines and
the oversight of our board of directors as well as the
management of any entities or ventures in which we invest. If
Hines (or any of its key employees) suffers or is distracted by
adverse financial or operational problems in connection with its
operations unrelated to us, the ability of Hines and its
affiliates to allocate time
and/or
resources to our operations may be adversely affected. If Hines
is unable to allocate sufficient resources to oversee and
perform our operations for any reason, our results of operations
would be adversely impacted. Please see
“— Potential Conflicts of Interest
Risks — Employees of the Advisor and Hines will face
conflicts of interest relating to time management and allocation
of resources and investment opportunities.” The Core Fund
is also managed by an affiliate of Hines. Its performance and
success is also dependent on Hines and the Core Fund is likewise
subject to these risks.
Numerous real estate companies that operate in the markets in
which we operate or may operate in the future will compete with
us in acquiring office and other properties and obtaining
creditworthy tenants to occupy such properties. Such competition
could adversely affect our business. There are numerous real
estate companies, real estate investment trusts and
U.S. institutional and foreign investors that will compete
with us in seeking investments and tenants for properties. Many
of these entities have significant financial and other
resources, including operating experience, allowing them to
compete effectively with us. In addition, our ability to charge
premium rental rates to tenants may be negatively impacted. This
increased competition may increase our costs of acquisitions or
lower our occupancy rates and the rent we may charge tenants.
We expect that rental income from real property will, directly
or indirectly, constitute substantially all of our income. The
inability of a single major tenant or a number of smaller
tenants to meet their rental obligations would adversely affect
our income. Please see “Our Real Estate Investments”
for information about tenants at some of our larger properties.
Therefore, our financial success is indirectly dependent on the
success of the businesses operated by the tenants in our
properties or in the properties securing mortgages we may own.
Tenants may have the right to terminate their leases upon the
occurrence of certain customary events of default and, in other
circumstances, may not renew their leases or, because of market
conditions, may be able to renew their leases on terms that are
less favorable to us than the terms of the current leases. The
weakening
of the financial condition of a significant tenant or a number
of smaller tenants and vacancies caused by defaults of tenants
or the expiration of leases, may adversely affect our operations.
Some of our properties may be leased to a single or significant
tenant and, accordingly, may be suited to the particular or
unique needs of such tenant. We may have difficulty replacing
such a tenant if the floor plan of the vacant space limits the
types of businesses that can use the space without major
renovation. In addition, the resale value of the property could
be diminished because the market value of a particular property
will depend principally upon the value of the leases of such
property.
The bankruptcy or insolvency of a significant tenant or a number
of smaller tenants may have an adverse impact on our income and
our ability to pay dividends. Generally, under bankruptcy law, a
debtor tenant has 120 days to exercise the option of
assuming or rejecting the obligations under any unexpired lease
for nonresidential real property, which period may be extended
once by the bankruptcy court. If the tenant assumes its lease,
the tenant must cure all defaults under the lease and may be
required to provide adequate assurance of its future performance
under the lease. If the tenant rejects the lease, we will have a
claim against the tenant’s bankruptcy estate. Although rent
owing for the period between filing for bankruptcy and rejection
of the lease may be afforded administrative expense priority and
paid in full, pre-bankruptcy arrears and amounts owing under the
remaining term of the lease will be afforded general unsecured
claim status (absent collateral securing the claim). Moreover,
amounts owing under the remaining term of the lease will be
capped. Other than equity and subordinated claims, general
unsecured claims are the last claims paid in a bankruptcy and
therefore funds may not be available to pay such claims in full.
Economic conditions may significantly affect office building
occupancy or rental rates. Occupancy and rental rates in the
markets in which we operate, in turn, may have a material
adverse impact on our cash flows, operating results and carrying
value of investment property. The risks that may affect
conditions in these markets include the following:
•
Changes in the national, regional and local economic climates;
•
Local conditions, such as an oversupply of office space or a
reduction in demand for office space in the area;
•
A future economic downturn which simultaneously effects more
than one of our geographical markets; and
•
Increased operating costs, if these costs cannot be passed
through to tenants.
National, regional and local economic climates may be adversely
affected should population or job growth slow. To the extent
either of these conditions occurs in the markets in which we
operate, market rents will likely be affected. We could also
face challenges related to adequately managing and maintaining
our properties, should we experience increased operating costs.
As a result, we may experience a loss of rental revenues, which
may adversely affect our results of operations and our ability
to satisfy our financial obligations and to pay distributions to
our shareholders.
We attempt to ensure that all of our properties are adequately
insured to cover casualty losses. However, there are types of
losses, generally catastrophic in nature, which are uninsurable,
are not economically insurable or are only insurable subject to
limitations. Examples of such catastrophic events include acts
of war or terrorism, earthquakes, floods, hurricanes and
pollution or environmental matters.
We may not have adequate coverage in the event we or our
buildings suffer casualty losses. If we do not have adequate
insurance coverage, the value of our assets will be reduced as
the result of, and to the extent of,
We may not be able either to obtain certain desirable types of
insurance coverage, such as terrorism insurance, or to obtain
such coverage at a reasonable cost in the future, and this risk
may inhibit our ability to finance or refinance debt secured by
our properties. Additionally, we could default under debt or
other agreements if the cost
and/or
availability of certain types of insurance make it impractical
or impossible to comply with covenants relating to the insurance
we are required to maintain under such agreements. In such
instances, we may be required to self-insure against certain
losses or seek other forms of financial assurance.
Terrorist attacks may negatively affect our operations and your
investment in our shares. Such attacks or armed conflicts may
directly impact the value of our properties through damage,
destruction, loss or increased security costs. Hines has
historically owned and managed office properties, generally in
major metropolitan or suburban areas. We have also invested and
expect that we will continue to invest in such properties. For
example, the Core Fund owns interests in properties located in
New York City and Washington, D.C. We and the Core Fund
also own buildings in the central business districts of other
major metropolitan cities. Insurance risks associated with
potential acts of terrorism against office and other properties
in major metropolitan areas could sharply increase the premiums
we pay for coverage against property and casualty claims.
Additionally, mortgage lenders in some cases have begun to
insist that specific coverage against terrorism be purchased by
commercial owners as a condition for providing loans. We may not
be able to obtain insurance against the risk of terrorism
because it may not be available or may not be available on terms
that are economically feasible. We intend to obtain terrorism
insurance, but the terrorism insurance that we obtain may not be
sufficient to cover loss for damages to our properties as a
result of terrorist attacks. In addition, certain losses
resulting from these types of events are uninsurable and others
may not be covered by our terrorism insurance. Terrorism
insurance may not be available at a reasonable price or at all.
The consequences of any armed conflict are unpredictable, and we
may not be able to foresee events that could have an adverse
effect on our business or your investment. More generally, any
of these events could result in increased volatility in, or
damage to, the United States and worldwide financial markets and
economy. They also could result in a continuation of the current
economic uncertainty in the United States or abroad. Our
revenues will be dependent upon payment of rent by tenants,
which may be particularly vulnerable to uncertainty in the local
economy. Adverse economic conditions could affect the ability of
our tenants to pay rent, which could have a material adverse
effect on our operating results and financial condition, as well
as our ability to pay dividends to our shareholders.
One of the risks of investing in real estate is the possibility
that our properties will not generate income sufficient to meet
operating expenses or will generate income and capital
appreciation, if any, at rates lower than those anticipated or
available through investments in comparable real estate or other
investments. A significant number of the properties in which we
own an interest and expect to acquire are office buildings
located in major metropolitan or suburban areas. Please see the
“Our Real Estate Investments” section of this
prospectus. These types of properties, and the tenants that
lease space in such properties, may be impacted to a greater
extent by a national economic slowdown or disruption when
compared to other types of properties
such as residential and retail properties. The following factors
may affect income from such properties, our ability to sell
properties and yields from investments in properties and are
generally outside of our control:
•
conditions in financial markets and general economic conditions;
•
terrorist attacks and international instability;
•
natural disasters and acts of God;
•
over-building;
•
adverse national, state or local changes in applicable tax,
environmental or zoning laws; and
•
a taking of any of our properties by eminent domain.
The commercial real estate debt markets have recently
experienced volatility as a result of certain factors including
the tightening of underwriting standards by lenders and credit
rating agencies and the significant inventory of unsold
collateralized mortgage backed securities in the market. This is
resulting in lenders decreasing the availability of debt
financing as well as increasing the cost of debt financing. As
our existing debt is either fixed rate debt or floating rate
debt with a fixed spread over LIBOR, we do not believe that our
current portfolio is materially impacted by the current debt
market environment. However, should the overall availability of
debt decrease
and/or the
cost of borrowings increase, either by increases in the index
rates or by increases in lender spreads, we will need to include
such factors in the economics of future acquisitions. This may
result in future acquisitions generating lower overall economic
returns and potentially reducing cash flow available for
distribution to our shareholders.
In addition, the state of debt markets could have an impact on
the overall amount of capital investing in real estate which may
result in price or value decreases of real estate assets.
Although this may benefit us for future acquisitions, it could
negatively impact the current value of our existing assets.
Equity real estate investments are relatively illiquid. We will
have a limited ability to vary our portfolio in response to
changes in economic or other conditions. We will also have a
limited ability to sell assets in order to fund working capital
and similar capital needs such as share redemptions. We expect
to generally hold a property for the long term. When we sell any
of our properties, we may not realize a gain on such sale or the
amount of our taxable gain could exceed the cash proceeds we
receive from such sale. We may not distribute any proceeds from
the sale of properties to our shareholders; for example, we may
use such proceeds to:
•
purchase additional properties;
•
repay debt;
•
buy out interests of any co-venturers or other partners in any
joint venture in which we are a party;
•
purchase shares under our share redemption program;
•
create working capital reserves; or
•
make repairs, maintenance, tenant improvements or other capital
improvements or expenditures to our other properties.
Our ability to sell our properties may also be limited by our
need to avoid a 100% penalty tax that is imposed on gain
recognized by a REIT from the sale of property characterized as
dealer property. In order to avoid such characterization and to
take advantage of certain safe harbors under the Code, we may
determine to hold our properties for a minimum period of time,
generally four years.
Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or
operator of real property may be liable for the cost of removal
or remediation of hazardous or toxic substances on such
property. Such laws often impose liability whether or not the
owner or operator knew of, or was responsible for, the presence
of such hazardous or toxic substances.
While we invest primarily in institutional-quality office
properties, we may also invest in properties historically used
for industrial, manufacturing and commercial purposes. Some of
these properties are more likely to contain, or may have
contained, underground storage tanks for the storage of
petroleum products and other hazardous or toxic substances. All
of these operations create a potential for the release of
petroleum products or other hazardous or toxic substances.
Leasing properties to tenants that engage in industrial,
manufacturing, and commercial activities will cause us to be
subject to increased risk of liabilities under environmental
laws and regulations. The presence of hazardous or toxic
substances, or the failure to properly remediate these
substances, may adversely affect our ability to sell, rent or
pledge such property as collateral for future borrowings.
Environmental laws also may impose restrictions on the manner in
which properties may be used or businesses may be operated, and
these restrictions may require expenditures. Such laws may be
amended so as to require compliance with stringent standards
which could require us to make unexpected, substantial
expenditures. Environmental laws provide for sanctions in the
event of noncompliance and may be enforced by governmental
agencies or, in certain circumstances, by private parties. We
may be potentially liable for such costs in connection with the
acquisition and ownership of our properties in the United
States. In addition, we may invest in properties located in
countries that have adopted laws or observe environmental
management standards that are less stringent than those
generally followed in the United States, which may pose a
greater risk that releases of hazardous or toxic substances have
occurred to the environment. The cost of defending against
claims of liability, of compliance with environmental regulatory
requirements or of remediating any contaminated property could
be substantial and require a material portion of our cash flow.
Our properties are subject to real and personal property taxes
that may increase as property tax rates change and as the
properties are assessed or reassessed by taxing authorities. We
anticipate that most of our leases will generally provide that
the property taxes, or increases therein, are charged to the
lessees as an expense related to the properties that they
occupy. As the owner of the properties, however, we are
ultimately responsible for payment of the taxes to the
government. If property taxes increase, our tenants may be
unable to make the required tax payments, ultimately requiring
us to pay the taxes. In addition, we will generally be
responsible for property taxes related to any vacant space. If
we purchase residential properties, the leases for such
properties typically will not allow us to pass through real
estate taxes and other taxes to residents of such properties.
Consequently, any tax increases may adversely affect our results
of operations at such properties.
Our properties are generally expected to be subject to the
Americans with Disabilities Act of 1990 (the “ADA”).
Under the ADA, all places of public accommodation are required
to comply with federal requirements related to access and use by
disabled persons. The ADA has separate compliance requirements
for “public accommodations” and “commercial
facilities” that generally require that buildings and
services be made accessible and available to people with
disabilities. The ADA’s requirements could require removal
of access barriers and could result in the imposition of
injunctive relief, monetary penalties or, in some cases, an
award of damages. We attempt to acquire properties that comply
with the ADA or place the burden on the seller or other
third-party, such as a tenant, to ensure compliance with the
ADA. However, we cannot assure you that we will be able to
acquire properties or allocate responsibilities in this manner.
If we cannot, our
If we do not establish sufficient reserves for working capital
to supply necessary funds for capital improvements or similar
expenses, we may be required to defer necessary or desirable
improvements to our properties. If we defer such improvements,
the applicable properties may decline in value, it may be more
difficult for us to attract or retain tenants to such properties
or the amount of rent we can charge at such properties may
decrease.
We own a mixed-use office and retail complex in Toronto, Canada
and have an indirect interest in an industrial property in Rio
de Janeiro, Brazil. We may purchase additional properties
located outside the United States and may make or purchase loans
or participations in loans secured by property located outside
the United States. These investments may be affected by factors
peculiar to the laws and business practices of the jurisdictions
in which the properties are located. These laws and business
practices may expose us to risks that are different from and in
addition to those commonly found in the United States. Foreign
investments pose the following risks:
•
the burden of complying with a wide variety of foreign laws,
including:
•
changing governmental rules and policies, including changes in
land use and zoning laws, more stringent environmental laws or
changes in such laws; and
•
existing or new laws relating to the foreign ownership of real
property or loans and laws restricting the ability of foreign
persons or companies to remove profits earned from activities
within the country to the person’s or company’s
country of origin;
•
the potential for expropriation;
•
possible currency transfer restrictions;
•
imposition of adverse or confiscatory taxes;
•
changes in real estate and other tax rates and changes in other
operating expenses in particular countries;
•
possible challenges to the anticipated tax treatment of the
structures that allow us to acquire and hold investments;
•
adverse market conditions caused by terrorism, civil unrest and
changes in national or local governmental or economic conditions;
•
the willingness of domestic or foreign lenders to make loans in
certain countries and changes in the availability, cost and
terms of loan funds resulting from varying national economic
policies;
•
general political and economic instability in certain regions;
•
the potential difficulty of enforcing obligations in other
countries; and
•
Hines’ limited experience and expertise in foreign
countries relative to its experience and expertise in the United
States.
Our investments outside the United States may be subject to
foreign currency risk due to potential fluctuations in exchange
rates between foreign currencies and the U.S. dollar. As a
result, changes in exchange
rates of any such foreign currency to U.S. dollars may
affect our revenues, operating margins and distributions and may
also affect the book value of our assets and the amount of
shareholders’ equity.
Changes in foreign currency exchange rates used to value a
REIT’s foreign assets may be considered changes in the
value of the REIT’s assets. These changes may adversely
affect our status as a REIT. Further, bank accounts in foreign
currency which are not considered cash or cash equivalents may
adversely affect our status as a REIT.
We own properties with retail components and we may acquire more
retail properties in the future. As with our office properties,
we are subject to the risk that tenants may be unable to make
their lease payments or may decline to extend a lease upon its
expiration. A lease termination by a tenant that occupies a
large area of a retail center (commonly referred to as an anchor
tenant) could impact leases of other tenants. Other tenants may
be entitled to modify the terms of their existing leases in the
event of a lease termination by an anchor tenant, or the closure
of the business of an anchor tenant that leaves its space vacant
even if the anchor tenant continues to pay rent. Any such
modifications or conditions could be unfavorable to us as the
property owner and could decrease rents or expense recoveries.
Additionally, major tenant closures may result in decreased
customer traffic, which could lead to decreased sales at other
stores. In the event of default by a tenant or anchor store, we
may experience delays and costs in enforcing our rights as
landlord to recover amounts due to us under the terms of our
agreements with those parties.
If we make or invest in loans, we will be at risk of defaults by
the borrowers on those loans. These defaults may be caused by
many conditions beyond our control, including interest rate
levels and local and other economic conditions affecting real
estate values. With respect to loans secured by real property,
we will not know whether the values of the properties securing
the loans will remain at the levels existing on the dates of
origination of the loans. If the values of the underlying
properties drop, our risk will increase because of the lower
value of the security associated with such loans.
If we invest in fixed-rate, long-term loans and interest rates
rise, the loans could yield a return that is lower than
then-current market rates. If interest rates decrease, we will
be adversely affected to the extent that loans are prepaid,
because we may not be able to make new loans at the previously
higher interest rate. If we invest in variable interest rate
loans, if interest rates decrease, our revenues will likewise
decrease. Finally, if interest rates increase, the value of
loans we own at such time would decrease which would lower the
proceeds we would receive in the event we sell such assets.
If there are defaults under our loans secured by real property,
we may not be able to repossess and sell the underlying
properties quickly. The resulting time delay could reduce the
value of our investment in the defaulted loans. An action to
foreclose on a property securing a loan is regulated by state
statutes and rules and is subject to many of the delays and
expenses of other lawsuits if the defendant raises defenses or
counterclaims. In the event of default by a borrower, these
restrictions, among other things, may impede our ability to
foreclose on or sell the secured property or to obtain proceeds
sufficient to repay all amounts due to us on the loan.
We may make or invest in mezzanine loans that generally take the
form of subordinated loans secured by second mortgages on the
underlying real property or loans secured by a pledge of the
ownership interests of an entity that directly or indirectly
owns real property. These types of investments involve a higher
degree of risk than long-term senior mortgage loans secured by
real property because the investment may become unsecured as a
result of foreclosure by the senior lender. In the event of a
bankruptcy of the entity providing the pledge of its ownership
interests as security, we may not have full recourse to the
assets of such entity, or the assets of the entity may not be
sufficient to satisfy our mezzanine loan. If a borrower defaults
on our mezzanine loan or debt senior to our mezzanine loan, or
in the event of a borrower bankruptcy, our mezzanine loan will
be satisfied only after the senior debt. As a result, we may not
recover some or all of our investment. In addition, mezzanine
loans may have higher loan-to-value ratios than traditional
mortgage loans, resulting in less equity in the real property
and increasing our risk of loss of principal.
Except as otherwise provided in our organizational documents,
our investment policies and the methods of implementing our
investment objectives and policies may be altered by a majority
of our directors, including a majority of our independent
directors, without the approval of our shareholders. Please see
“Investment Objectives and Policies with Respect to Certain
Activities.” We may invest in different property types
and/or use
different structures to make such investments than we have
historically. Please see “— We will be subject to
risks as the result of joint ownership of real estate with other
Hines programs or third parties” and “Investment
Objectives and Policies with Respect to Certain
Activities — Joint Venture Investments.” As a
result, the nature of your investment could change indirectly
without your consent and become subject to risks not described
in this prospectus.
Hines has existing programs with investment objectives and
strategies similar to ours. Because we compete with these
entities for investment opportunities, Hines faces conflicts of
interest in allocating investment opportunities between us and
these other entities. We have limited rights to specific
investment opportunities located by Hines. Some of these
entities have a priority right over other Hines entities,
including us, to accept investment opportunities that meet
certain defined investment criteria. For example, the Core Fund
and other entities sponsored by Hines have the right to accept
or reject investments in office properties located in the United
States before we have the right to accept such opportunities.
Because we and other Hines entities intend to invest primarily
in such properties and rely on Hines to present us with
investment opportunities, these rights will reduce our
investment opportunities. Please see “Conflicts of
Interest — Competitive Activities of Hines and its
Affiliates” for a description of some of these entities and
priority rights. We therefore may not be able to accept, or we
may only invest indirectly with or through another Hines
affiliated-entity in, certain investments we otherwise would
make directly. To the extent we invest in opportunities with
another entity affiliated with Hines, we may not have the
control over such investment we would otherwise have if we owned
all of or otherwise controlled such assets. Please see
“— Business and Real Estate Risks — We
will be subject to risks as the result of joint ownership of
real estate with other Hines programs or third parties”
above.
Other than the rights described in the “Conflicts of
Interest — Investment Opportunity Allocation
Procedure” section of this prospectus, we do not have
rights to specific investment opportunities located by Hines. In
addition, our right to participate in the allocation process
described in such section will terminate
once we have fully invested the proceeds of this offering or if
we are no longer advised by an affiliate of Hines. For
investment opportunities not covered by the allocation procedure
described herein, Hines will decide in its discretion, subject
to any priority rights it grants or has granted to other
Hines-managed or otherwise affiliated programs, how to allocate
such opportunities among us, Hines and other programs or
entities sponsored or managed by or otherwise affiliated with
Hines. Because we do not have a right to accept or reject any
investment opportunities before Hines or one or more Hines
affiliates have the right to accept such opportunities, and are
otherwise subject to Hines’ discretion as to the investment
opportunities we will receive, we may not be able to review
and/or
invest in opportunities which we would otherwise pursue if we
were the only program sponsored by Hines or had a priority right
in regard to such investments. We are subject to the risk that,
as a result of the conflicts of interest between Hines, us and
other entities or programs sponsored or managed by or affiliated
with Hines, and the priority rights Hines has granted or may in
the future grant to any such other entities or programs, we may
not be offered favorable investment opportunities located by
Hines when it would otherwise be in our best interest to accept
such investment opportunities, and our results of operations and
ability to pay dividends may be adversely impacted thereby.
Hines and its affiliates are not prohibited from engaging,
directly or indirectly, in any other business or from possessing
interests in any other business venture or ventures, including
businesses and ventures involved in the acquisition,
development, ownership, management, leasing or sale of real
estate projects. Hines or its affiliates own
and/or
manage properties in most if not all geographical areas in which
we own or expect to acquire interests in real estate assets.
Therefore, our properties compete for tenants with other
properties owned
and/or
managed by Hines and its affiliates. Hines may face conflicts of
interest when evaluating tenant opportunities for our properties
and other properties owned
and/or
managed by Hines and its affiliates and these conflicts of
interest may have a negative impact on our ability to attract
and retain tenants. Please see “Conflicts of
Interest — Competitive Activities of Our Officers and
Directors, the Advisor and Other Hines Affiliates” for a
description of these conflicts of interest.
We do not have employees. Pursuant to a contract with Hines, the
Advisor relies on employees of Hines and its affiliates to
manage and operate our business. Hines is not restricted from
acquiring, developing, operating, managing, leasing or selling
real estate through entities other than us and Hines will
continue to be actively involved in real estate operations and
activities other than our operations and activities. Hines
currently controls
and/or
operates other entities that own properties in many of the
markets in which we will seek to invest. Hines spends a material
amount of time managing these properties and other assets
unrelated to our business. Our business may suffer as a result
because we lack the ability to manage it without the time and
attention of Hines’ employees. We encourage you to read the
“Conflicts of Interest” section of this prospectus for
a further discussion of these topics.
Hines and its affiliates are general partners and sponsors of
other real estate programs having investment objectives and
legal and financial obligations similar to ours. Because Hines
and its affiliates have interests in other real estate programs
and also engage in other business activities, they may have
conflicts of interest in allocating their time and resources
among our business and these other activities. Our officers and
directors, as well as those of the Advisor, own equity interests
in entities affiliated with Hines from which we may buy
properties. These individuals may make substantial profits in
connection with such transactions, which could result in
conflicts of interest. Likewise, such individuals could make
substantial profits as the result of investment opportunities
allocated to entities affiliated with Hines other than us. As a
result of these interests, they could pursue transactions that
may not be in our best interest. Also, if Hines suffers
financial or operational problems as the result of any of its
activities, whether or not related to our business, its ability
to operate our business could be adversely impacted. During
times of intense activity in other programs and ventures, they
may devote less time and resources to our business than is
necessary or desirable.
We have acquired, and may in the future acquire, properties from
Hines and affiliates of Hines. Likewise, the Core Fund has
acquired, and may in the future acquire, properties from Hines
and affiliates of Hines. We may acquire properties Hines
currently owns or hereafter acquires from third parties. Hines
may also develop properties and then sell the completed
properties to us. Similarly, we may provide development loans to
Hines in connection with these developments. Hines, its
affiliates and its employees (including our officers and
directors) may make substantial profits in connection with such
transactions. We must follow certain procedures when purchasing
assets from Hines and its affiliates. Please see
“Investment Objectives and Policies With Respect to Certain
Activities — Acquisition and Investment
Policies — Affiliate Transaction Policy” below.
Hines may owe fiduciary
and/or other
duties to the selling entity in these transactions and conflicts
of interest between us and the selling entities could exist in
such transactions. Because we are relying on Hines, these
conflicts could result in transactions based on terms that are
less favorable to us than we would receive from a third party.
We expect that Hines will manage most, if not all, of the
properties we acquire directly as well as most, if not all, of
the properties we acquire an indirect interest in as a result of
investments in Hines affiliated entities, such as the Core Fund.
Because Hines receives significant fees for managing these
properties, it may face a conflict of interest when determining
whether we should sell properties under circumstances where
Hines would no longer manage the property after the transaction.
As a result of this conflict of interest, we may not dispose of
properties when it would be in our best interests to do so.
Hines and the Advisor manage our day-to-day operations and
properties pursuant to property management agreements and an
advisory agreement. These agreements were not negotiated at
arm’s length and certain fees payable by us under such
agreements are paid regardless of our performance.
Hines and its affiliates may be in a conflict of interest
position as to matters relating to these agreements. Examples
include the computation of fees and reimbursements under such
agreements, the enforcement, renewal
and/or
termination of the agreements and the priority of payments to
third parties as opposed to amounts paid to affiliates of Hines.
These fees may be higher than fees charged by third parties in
an arm’s-length transaction as a result of these conflicts.
Certain of our officers and directors are also officers and
directors of the Advisor and other entities controlled by Hines
such as the managing general partner of the Core Fund. Some of
these entities may compete with us for investment and leasing
opportunities. These personnel owe fiduciary duties to these
other entities and their security holders and these duties may
from time to time conflict with the fiduciary duties such
individuals owe to us and our shareholders. For example,
conflicts of interest adversely affecting our investment
decisions could arise in decisions or activities related to:
•
the allocation of new investments among us and other entities
operated by Hines;
•
the allocation of time and resources among us and other entities
operated by Hines;
•
the timing and terms of the investment in or sale of an asset;
our relationship with Hines in the management of our properties.
These conflicts of interest may also be impacted by the fact
that such individuals may have compensation structures tied to
the performance of such other entities controlled by Hines and
these compensation structures may potentially provide for
greater remuneration in the event an investment opportunity is
presented to a Hines affiliate rather than us.
Generally, we are obligated under our charter and the bylaws to
indemnify our officers and directors against certain liabilities
incurred in connection with their services. We have also
executed indemnification agreements with each officer and
director and agreed to indemnify them for any such liabilities
that they incur. These indemnification agreements, as well as
the indemnification provisions in our charter and bylaws, could
limit our ability and the ability of our shareholders to
effectively take action against our officers and directors
arising from their service to us. In addition, there could be a
potential reduction in dividends resulting from our payment of
premiums associated with insurance or payments of a defense,
settlement or claim. You should read the section of this
prospectus under the caption “Management —
Limited Liability and Indemnification of Directors, Officers,
Employees and Other Agents” for more information about the
indemnification of our officers and directors.
Persons holding OP Units have the right to vote on certain
amendments to the Agreement of Limited Partnership of the
Operating Partnership, as well as on certain other matters.
Persons holding such voting rights may exercise them in a manner
that conflicts with the interests of our shareholders. As
general partner of the Operating Partnership, we will be
obligated to act in a manner that is in the best interest of all
partners of the Operating Partnership. Circumstances may arise
in the future when the interests of limited partners in the
Operating Partnership may conflict with the interests of our
shareholders.
We believe we qualify as a REIT under the
Code. A REIT generally is not taxed at the
corporate level on income it currently distributes to its
shareholders. Qualification as a REIT involves the application
of highly technical and complex rules for which there are only
limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not
entirely within our control may affect our ability to continue
to qualify as a REIT. In addition, new legislation, regulations,
administrative interpretations or court decisions could
significantly change the tax laws with respect to qualification
as a REIT or the federal income tax consequences of such
qualification.
Investments in foreign real property may be subject to foreign
currency gains and losses. Foreign currency gains may not be
qualifying income for purposes of the REIT income requirements.
To reduce the risk of foreign currency gains adversely affecting
our REIT qualification, we may be required to defer the
repatriation of cash from foreign jurisdictions or to employ
other structures that could affect the timing, character or
amount of income we receive from our foreign investments. No
assurance can be given that we will be able to manage our
foreign currency gains in a manner that enables us to qualify as
a REIT or to avoid U.S. federal and other taxes on our
income as a result of foreign currency gains.
If we were to fail to qualify as a REIT in any taxable year:
•
we would not be allowed to deduct our dividends to our
shareholders when computing our taxable income;
•
we would be subject to federal income tax (including any
applicable alternative minimum tax) on our taxable income at
regular corporate rates;
we would be disqualified from being taxed as a REIT for the four
taxable years following the year during which qualification was
lost, unless entitled to relief under certain statutory
provisions;
•
our cash available for distribution would be reduced and we
would have less cash to distribute to our shareholders; and
•
we might be required to borrow additional funds or sell some of
our assets in order to pay corporate tax obligations we may
incur as a result of our disqualification.
We encourage you to read the “Material Tax
Considerations” section of this prospectus for further
discussion of the tax issues related to this offering.
We structured the Operating Partnership so that it would be
classified as a partnership for federal income tax purposes. In
this regard, the Code generally classifies “publicly traded
partnerships” (as defined in Section 7704 of the Code)
as associations taxable as corporations (rather than as
partnerships), unless substantially all of their taxable income
consists of specified types of passive income. In order to
minimize the risk that the Code would classify the Operating
Partnership as a “publicly traded partnership” for tax
purposes, we placed certain restrictions on the transfer
and/or
redemption of partnership units in the Operating Partnership.
Please see “— If we fail to qualify as a REIT,
our operations and ability to pay dividends to our shareholders
would be adversely impacted” above. In addition, the
imposition of a corporate tax on the Operating Partnership would
reduce our amount of cash available for distribution to you.
These topics are discussed in greater detail in the
“Material Tax Considerations — Tax Aspects of the
Operating Partnership” section of this prospectus.
Neither ordinary nor capital gain dividend distributions with
respect to our common shares nor gain from the sale of common
shares should generally constitute unrelated business taxable
income to a tax-exempt investor. However, there are certain
exceptions to this rule. In particular:
•
part of the income and gain recognized by certain qualified
employee pension trusts with respect to our common shares may be
treated as unrelated business taxable income if our stock is
predominately held by qualified employee pension trusts, we are
required to rely on a special look through rule for purposes of
meeting one of the REIT stock ownership tests, and we are not
operated in such a manner as to otherwise avoid treatment of
such income or gain as unrelated business taxable income;
•
part of the income and gain recognized by a tax exempt investor
with respect to our common shares would constitute unrelated
business taxable income if such investor incurs debt in order to
acquire the common shares; and
•
part or all of the income or gain recognized with respect to our
common shares by social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and
qualified group legal services plans which are exempt from
federal income taxation under Sections 501(c)(7), (9),
(17), or (20) of the Code may be treated as unrelated
business taxable income.
We encourage you to read the “Material Tax
Considerations — Taxation of Tax Exempt Entities”
section of this prospectus for further discussion of this issue
if you are a tax-exempt investor.
If you participate in the dividend reinvestment plan, you will
be required to take into account, in computing your taxable
income, ordinary and capital gain dividend distributions
allocable to shares you own, even though you receive no cash
because such dividends
and/or
distributions are reinvested. In addition, the
difference between the public offering price of our shares and
the amount paid for shares purchased pursuant to our dividend
reinvestment plan may be deemed to be taxable as income to
participants in the plan.
A foreign person disposing of a U.S. real property
interest, including shares of a U.S. corporation whose
assets consist principally of U.S. real property interests,
is generally subject to a tax, known as FIRPTA tax, on the gain
recognized on the disposition. Such FIRPTA tax does not apply,
however, to the disposition of stock in a REIT if the REIT is
“domestically controlled.” A REIT is
“domestically controlled” if less than 50% of the
REIT’s capital stock, by value, has been owned directly or
indirectly by persons who are not qualifying U.S. persons
during a continuous five-year period ending on the date of
disposition or, if shorter, during the entire period of the
REIT’s existence.
We cannot assure you that we will qualify as a
“domestically controlled” REIT. If we were to fail to
so qualify, gain realized by foreign investors on a sale of our
common shares would be subject to FIRPTA tax, unless our common
shares were traded on an established securities market and the
foreign investor did not at any time during a specified testing
period directly or indirectly own more than 5% of the value of
our outstanding common shares. We encourage you to read the
“Material Tax Considerations — Taxation of
Foreign Investors — Sales of Shares” section of
this prospectus for a further discussion of this issue.
Even if we qualify and maintain our status as a REIT, we may be
subject to federal income taxes or state taxes. For example, if
we have net income from a “prohibited transaction,”
such income will be subject to a 100% tax. We may not be able to
make sufficient distributions to avoid paying federal income tax
and/or the
4% excise tax that generally applies to income retained by a
REIT. We may also decide to retain income we earn from the sale
or other disposition of our property and pay income tax directly
on such income. In that event, our shareholders would be treated
as if they earned that income and paid the tax on it directly.
However, shareholders that are tax-exempt, such as charities or
qualified pension plans, would have no benefit from their deemed
payment of such tax liability. We may also be subject to state
and local taxes on our income or property, either directly or at
the level of the Operating Partnership or at the level of the
other companies through which we indirectly own our assets.
Even if we maintain our status as a REIT, entities through which
we hold investments in assets located outside the United States
will, in most cases, be subject to income taxation by
jurisdictions in which such assets are located. Our cash
available for distribution to our shareholders will be reduced
by any such foreign income taxes.
Under recently enacted tax legislation, the tax rate applicable
to qualifying corporate dividends received by individuals prior
to 2009 has been reduced to a maximum rate of 15%. This special
tax rate is generally not applicable to dividends paid by a
REIT, unless such dividends represent earnings on which the REIT
itself has been taxed. As a result, dividends (other than
capital gain dividends) paid by us to individual investors will
generally be subject to the tax rates that are otherwise
applicable to ordinary income which currently are as high as
35%. This law change may make an investment in our common shares
comparatively less attractive relative to an investment in the
shares of other corporate entities which pay dividends that are
not formed as REITs.
Statements included in this prospectus which are not historical
facts (including any statements concerning investment
objectives, economic updates, other plans and objectives of
management for future operations or economic performance, or
assumptions or forecasts related thereto) are forward-looking
statements. These statements are only predictions. We caution
that forward-looking statements are not guarantees. Actual
events or our investments and results of operations could differ
materially from those expressed or implied in the
forward-looking statements. Forward-looking statements are
typically identified by the use of terms such as
“may,”“should,”“expect,”“could,”“intend,”“plan,”“anticipate,”“estimate,”“believe,”“continue,”“predict,”“potential” or the negative of such terms and other
comparable terminology.
The forward-looking statements included herein are based on our
current expectations, plans, estimates, assumptions and beliefs
that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market
conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which
are beyond our control. Any of the assumptions underlying the
forward-looking statements could be inaccurate. You are
cautioned not to place undue reliance on any forward-looking
statements included in this prospectus. All forward-looking
statements are made as of the date of this prospectus and the
risk exists that actual results will differ materially from the
expectations expressed in this prospectus and this risk will
increase with the passage of time. In light of the significant
uncertainties inherent in the forward-looking statements
included in this prospectus, including, without limitation, the
risks set forth in the “Risk Factors” section, the
inclusion of such forward-looking statements should not be
regarded as a representation by us or any other person that the
objectives and plans set forth in this prospectus will be
achieved. All subsequent written and oral forward-looking
statements attributable to us or to persons acting on our behalf
are expressly qualified in their entirety by reference to these
risks and uncertainties. Each forward-looking statement speaks
only as of the date of the particular statement, and we
undertake no obligation to publicly update or revise any
forward-looking statements.
The table on the following page sets forth information about how
we intend to use the proceeds raised in this offering and
assumes we sell:
•
the maximum $3,000,000,000 in shares pursuant to this offering
and issue all of the $500,000,000 in shares under our dividend
reinvestment plan;
•
the maximum $3,000,000,000 in shares pursuant to this offering
but issue no shares under our dividend reinvestment
plan; and
•
the maximum $3,000,000,000 in shares pursuant to this offering
and issue all of the $500,000,000 in shares under our dividend
reinvestment plan, whereby $750,000,000 (i.e., 25%), of the
$3,000,000,000 in shares sold pursuant to this offering are sold
to investors who are party to an agreement with a licensed
broker dealer, investment advisor or bank trust department
pursuant to which the investor pays a fee based on assets under
management such as a “wrap fee”, “commission
replacement fee”, or similar fee. In such instances,
selling commissions and dealer manager fees are waived.
We have not given effect to any other special sales or volume
discounts which could also reduce the selling commissions and
dealer manager fees.
This is a “best efforts” offering, without a minimum
offering. Please see “Risk Factors — Investment
Risks — This offering is being conducted on a
“best efforts” basis, and the risk that we will not be
able to accomplish our business objectives will increase if only
a small number of shares are purchased in this offering”
and “— If we are only able to sell a small number
of shares in this offering, our fixed operating expenses such as
general and administrative expense (as a percentage of gross
income) would be higher than if we are able to sell a greater
number of shares.”
Many of the amounts set forth below represent our
management’s best estimate since such amounts cannot be
precisely calculated at this time. Therefore, these amounts may
not accurately reflect the actual receipt or application of the
offering proceeds.
Assuming we raise the maximum offering proceeds pursuant to this
offering, including proceeds from the sale of all of the shares
offered under our dividend reinvestment plan, we expect that
approximately
90-92% of
the money you invest will be used to make real estate
investments. The balance will be used to pay selling
commissions, the dealer manager fee, acquisition fees paid to
our Advisor for investing the net offering proceeds and to pay
third party acquisition expenses related to those investments.
We have not identified the investments we will make with all of
the proceeds of this offering. We will rely on our Advisor and
our board of directors to identify and evaluate our future
investments. Please see “Risk Factors —
Investment Risks — You will not have the opportunity
to evaluate the investments we will make with the proceeds of
this offering before you purchase our shares, and we may not
have the opportunity to evaluate or approve investments made by
entities in which we invest, such as the Core Fund.”
Maximum Offering
Maximum Offering
Maximum Offering
$3,500,000,000 in
$3,000,000,000 in
$3,500,000,000 in
Shares(1)
Shares(2)
Shares(3)
Amount
Percentage
Amount
Percentage
Amount
Percentage
GROSS PROCEEDS
$
3,500,000,000
100
%
$
3,000,000,000
100
%
$
3,500,000,000
100
%
Less Expenses:
Selling Commissions(4)
$
210,000,000
6.0
%
$
210,000,000
7.0
%
$
157,500,000
4.5
%
Dealer Manager Fees(5)
$
66,000,000
1.9
%
$
66,000,000
2.2
%
$
49,500,000
1.4
%
Organization & Offering Costs(6)
$
0
0
%
$
0
0
%
$
0
0
%
Total Expenses
$
276,000,000
7.9
%
$
276,000,000
9.2
%
$
207,000,000
5.9
%
NET PROCEEDS AVAILABLE FOR INVESTMENT
$
3,224,000,000
92.1
%
$
2,724,000,000
90.8
%
$
3,293,000,000
94.1
%
Less:
Acquisition Fees on Investments(7)(8)
$
55,771,000
1.6
%
$
53,294,000
1.8
%
$
56,114,000
1.6
%
Third-party Acquisition Expenses(8)(9)
$
14,000,000
0.4
%
$
12,000,000
0.4
%
$
14,000,000
0.4
%
Working Capital Reserve
$
—
—
%
$
—
—
%
$
—
—
%
REMAINING PROCEEDS AVAILABLE FOR INVESTMENT
$
3,154,229,000
90.1
%
$
2,658,706,000
88.6
%
$
3,222,886,000
92.1
%
(1)
Assumes we sell the maximum of $3,000,000,000 in our common
shares and issue $500,000,000 in our common shares under our
dividend reinvestment plan pursuant to this offering.
(2)
Assumes we sell the maximum $3,000,000,000 in our common shares
pursuant to this offering but issue no shares under our dividend
reinvestment plan.
(3)
Assumes we sell the maximum of $3,000,000,000 in our common
shares and issue $500,000,000 in our common shares under our
dividend reinvestment plan pursuant to this offering, whereby
25% of the $3,000,000,000 in shares sold pursuant to this
offering are sold to investors who are party to an agreement
with a licensed broker dealer, investment advisor or bank trust
department pursuant to which the investor pays a fee based on
assets under management such as a “wrap fee”,
“commission replacement fee”, or similar fee. In such
instances, selling commissions and dealer manager fees are
waived.
(4)
We will pay the Dealer Manager sales commissions of up to 7.0%
for sales of our common shares, except for sales of shares
pursuant to our dividend reinvestment plan. All of these
commissions will be reallowed to participating broker-dealers.
The commission may be reduced for volume discounts or waived as
further described in the “Plan of Distribution”
section of this prospectus; however, for purposes of the first
and
second columns in this table we have not assumed any such
discounts. As specified in footnote 3 above, the third column in
this table reflects the waiver of selling commissions with
respect to 25% of the shares sold pursuant to this offering.
(5)
We will pay the Dealer Manager a dealer manager fee of up to
2.2% of gross offering proceeds for common shares sold to the
public, all or a portion of which may be reallowed to
participating broker-dealers as marketing fees, in part to cover
fees and costs associated with conferences sponsored by
participating broker-dealers and to defray other
distribution-related costs and expenses of participating
broker-dealers. We will not pay the dealer manager fee for
shares issued pursuant to our dividend reinvestment plan and
certain other purchases as described in the “Plan of
Distribution” section of this prospectus. As specified in
footnote 3 above, the third column in this table reflects the
waiver of dealer manager fees with respect to 25% of the shares
sold pursuant to this offering.
(6)
An affiliate of Hines will pay for all organization and offering
expenses, other than selling commissions and the dealer manager
fee, whether incurred by us directly or through the Advisor, the
Dealer Manager and/or their affiliates, which expenses are
expected to consist of, among other expenses, actual legal,
accounting, printing, marketing, filing fees, transfer agent
costs and other accountable offering-related expenses. We will
have no liability for such expenses.
(7)
With respect to each real estate investment made after the
commencement of this offering up to an aggregate of
$2,000,000,000 in real estate investments, we will pay the an
acquisition fee of 2.5% of (i) the purchase price of real
estate investments acquired directly by us, including any debt
attributable to such investments, or (ii) when we make an
investment indirectly through another entity, such
investment’s pro rata share of the gross asset value of
real estate investments held by that entity. With respect to
each real estate investment made thereafter, the fee will be
equal to 0.50% of the amounts set forth in (i) and (ii), as
applicable. For purposes of this table we have assumed that we
will not use debt when making real estate investments. In the
event we raise the maximum $3,500,000,000 pursuant to this
offering and all of our real estate investments are 50%
leveraged at the time we acquire them, the total acquisition
fees payable will be $71,811,000 or approximately 2.1% of gross
proceeds. Some of these fees may be payable out of the proceeds
of such borrowings.
(8)
The acquisition fees and acquisition expenses incurred in
connection with the purchase of real estate investments will not
exceed an amount equal to 6.0% of the contract purchase price of
the investment unless a majority of our directors (including a
majority of our independent directors) not otherwise interested
in the transaction approve such fees and expenses in excess of
this limit.
(9)
Acquisition expenses include customary third-party acquisition
costs which are typically included in the gross purchase price
of the real estate investments we acquire or are paid by us in
connection with such acquisitions. These third-party acquisition
costs include legal, accounting, consulting, travel, appraisals,
engineering, due diligence, option payments, title insurance and
other costs and expenses relating to potential acquisitions
regardless of whether the property is actually acquired. For
purposes of this table, we have assumed that we will not use
debt when making real estate investments.
We will pay the Advisor 1.0% of the amount obtained under any
property loan or made available to us under any other debt
financing. Actual amounts are dependent upon the amount of any
debt incurred in connection with our acquisitions and otherwise
and therefore cannot be determined at the present time. In the
event we raise the maximum $3,500,000,000 pursuant to this
offering and all of our real estate investments are 50%
leveraged, the total debt financing fees payable will be
$31,811,000. Debt financing fees are expected to be payable out
of the proceeds of such borrowings.
The fees, compensation, income, expense reimbursements,
interests and other payments described above payable to Hines,
the Advisor and other Hines affiliates may increase or decrease
during or after this offering, if such increase or decrease is
approved by our independent directors.
We operate under the direction of our board of directors. Our
board is ultimately responsible for the management and control
of our business and operations. We have no employees and have
retained the Advisor to manage our day-to-day operations,
including the identification and acquisition of our properties,
subject to the board’s supervision. We have retained Hines
or an affiliate of Hines to perform property management for our
properties. We have retained the Dealer Manager to manage
activities relating to the offering of our shares.
Other than our independent directors, each of our officers and
directors is affiliated with Hines and subject to conflicts of
interest. Please see “Conflicts of Interest” and
“Risk Factors — Potential Conflicts of Interest
Risks.” As described below, because of the inherent
conflicts of interest existing as the result of these
relationships, our independent directors will monitor the
performance of all Hines affiliates performing services for us,
and these board members have a fiduciary duty to act in the best
interests of our shareholders in connection with our
relationships with Hines affiliates. However, we cannot assure
you that our independent directors will be successful in
eliminating, or decreasing the impact of the risks resulting
from, the conflicts of interest we face with Hines and its
affiliates. Indeed, our independent directors will not monitor
or approve all decisions made by Hines that impact us, such as
the allocation of investment opportunities.
The following sets forth information about our directors and
executive officers:
Name
Age
Position and Office with Hines REIT
Jeffrey C. Hines
52
Chairman of the Board of Directors
C. Hastings Johnson
58
Director
George A. Davis
68
Independent Director
Thomas A. Hassard
56
Independent Director
Stanley D. Levy
43
Independent Director
Charles M. Baughn
52
Chief Executive Officer
Charles N. Hazen
46
President and Chief Operating Officer
Sherri W. Schugart
41
Chief Financial Officer
Frank R. Apollo
40
Chief Accounting Officer, Treasurer and Secretary
Jeffrey C. Hines. Mr. Hines currently
serves as the Chairman of our board of directors and as Chairman
of the board of managers of our Advisor. Mr. Hines is also
a member of the management board of the Core Fund. He is also
the co-owner and President of the general partner of Hines and
is a member of Hines’ Executive Committee. Mr. Hines
is responsible for overseeing all firm policies and procedures
as well as day-to-day operations. He became President in 1990
and has overseen a major expansion of the firm’s personnel,
financial resources, domestic and foreign market penetration,
products and services. He has been a major participant in the
development of the Hines domestic and international acquisition
program and currently oversees a portfolio of approximately 160
projects valued at approximately $16.0 billion.
Mr. Hines graduated from Williams College with a B.A. in
Economics and received his M.B.A. from the Harvard Graduate
School of Business.
C. Hastings Johnson. Mr. Johnson
currently serves as a member of our board of directors and as a
member of the board of managers of our Advisor. Mr. Johnson
is also a member of the management board of the Core Fund. He is
also an Executive Vice President and Chief Financial Officer of
the general partner of Hines and is responsible for the
financial policies, equity financing and the joint venture
relationships of Hines. He is also a member of Hines’
Executive Committee. Mr. Johnson became Chief Financial
Officer of Hines in 1992, and prior to that, he led the
development or redevelopment of numerous projects and initiated
the Hines acquisition program. Total debt and equity capital
committed to equity projects sponsored by Hines during
Mr. Johnson’s tenure as Chief Financial Officer has
exceeded $28 billion. Mr. Johnson graduated from
the Georgia Institute of Technology with a B.S. in Industrial
Engineering and received his M.B.A. from the Harvard Graduate
School of Business.
George A. Davis. Mr. Davis, an
independent director, is the founder and sole owner of Advisor
Real Estate Investment Ltd., a real estate consulting company
unaffiliated with our Advisor. Prior to founding Advisor Real
Estate Investment Ltd. in April 1999, he served as the Chief
Real Estate Investment Officer for the New York State
Teacher’s Retirement System (“NYSTRS”) reporting
directly to the Executive Director of the system. In addition,
Mr. Davis also served as a member of the Investment
Committee, which ultimately determined the real estate
investment strategy undertaken by NYSTRS. Mr. Davis
graduated from Dartmouth College with a B.A. in Biology.
Thomas A. Hassard. Mr. Hassard, an
independent director, served as the Managing Director for Real
Estate Investments for the Virginia Retirement System for almost
20 years before recently retiring. His responsibilities
included managing the real estate investments of the system,
monitoring performance and reporting to the system’s
investment advisory committee and board of trustees.
Mr. Hassard graduated from Western New England College with
a B.S. in Business Administration.
Stanley D. Levy. Mr. Levy, an independent
director, currently serves as Chief Operating Officer of The
Morgan Group, Inc., a national multi-family real estate firm
with offices in Houston, San Diego and Orlando.
Mr. Levy joined The Morgan Group in 2001. His
responsibilities include arranging debt and equity financing,
managing the property acquisition and disposition process, and
oversight of all financial aspects of the firm and its projects.
Prior to joining The Morgan Group, Mr. Levy spent
15 years with JPMorgan Chase, most recently, as Managing
Director of Real Estate and Lodging Investment Banking for the
Southern Region. In this capacity, he managed client activities
in a variety of investment banking and financing transactions.
Mr. Levy graduated with honors from the University of Texas
with a B.B.A. in Finance.
Charles M. Baughn. Mr. Baughn serves as
our Chief Executive Officer and the Chief Executive Officer of
our Advisor. He is also an Executive Vice President and
CEO — Capital Markets Group of the general
partner of Hines, responsible for overseeing Hines’ capital
markets group, which raises, places and manages equity and debt
for Hines projects, a member of Hines’ Executive Committee
and the Chief Executive Officer and a director of our Dealer
Manager. Mr. Baughn is also a member of the management
board of the Core Fund. Mr. Baughn joined Hines in 1984.
During his tenure at Hines, he has contributed to the
development or redevelopment of over nine million square feet of
office and special use facilities in the southwestern United
States. He graduated from the New York State College of Ceramics
at Alfred University with a B.A. and received his M.B.A. from
the University of Colorado. Mr. Baughn holds Series 7,
24 and 63 securities licenses.
Charles N. Hazen. Mr. Hazen serves as our
President and Chief Operating Officer and the President and
Chief Operating Officer of the Advisor. He is also a Senior Vice
President of the general partner of Hines, the President and a
member of the management board of the Core Fund and a director
of our Dealer Manager. Mr. Hazen joined Hines in 1989.
During his tenure at Hines, Mr. Hazen has contributed to
the development, management and financing of retail and office
properties in the U.S. valued at approximately
$9.0 billion and managed Hines Corporate Properties, a
$700 million fund that developed and acquired single-tenant
office buildings in the U.S. Mr. Hazen graduated from
the University of Kentucky with a B.S. in Finance and received
his J.D. from the University of Kentucky.
Sherri W. Schugart. Ms. Schugart serves
as our Chief Financial Officer and the Chief Financial Officer
of both our Advisor and the Core Fund. She is also a Senior Vice
President of the general partner of Hines and serves as a
director of our Dealer Manager. Ms. Schugart joined Hines
in 1995. As a Senior Vice President in Hines’ Capital
Markets group, Ms. Schugart has been responsible for
arranging more than $8.0 billion in equity and debt for
Hines’ private investment funds. She was also previously
the controller for several of Hines’ investment funds and
portfolios. Prior to joining Hines, Ms. Schugart spent
eight years with Arthur Andersen, where she managed both public
and private clients in the real estate, construction, finance
and banking industries. She graduated from Southwest Texas State
University with a B.B.A. in Accounting and is a certified public
accountant.
Frank R. Apollo. Mr. Apollo serves as our
Chief Accounting Officer, Treasurer, and Secretary and the Chief
Accounting Officer, Treasurer and Secretary of our Advisor. He
is also the Chief Accounting Officer of the Core Fund, a Vice
President of the general partner of Hines and the Vice
President, Treasurer, and Secretary of our Dealer Manager.
Mr. Apollo joined Hines in 1993. He has served as the Vice
President and Corporate Controller responsible for the
accounting and control functions for Hines’ international
operations. He was also previously the Vice President and
Regional Controller for Hines’ European Region and, prior
to that, was the director of Hines’ Internal Audit
Department. Before joining Hines, Mr. Apollo was an audit
manager with Arthur Andersen. He graduated from the University
of Texas with a B.B.A. in Accounting, is a certified public
accountant and holds Series 28 and 63 securities licenses.
As required by the Statement of Policy Regarding Real Estate
Investment Trusts of the North American Securities
Administration Association (the “NASAA Guidelines”),
our board of directors reviewed and unanimously ratified our
charter and adopted our bylaws. Our charter and bylaws allow for
a board of directors with no fewer than three directors and no
more than ten directors, of which a majority must be independent
directors. We currently have five directors, three of whom are
independent directors. Directors are elected annually by our
shareholders, and there is no limit on the number of times a
director may be elected to office. Each director serves until
the next annual meeting of shareholders or (if longer) until his
or her successor has been duly elected and qualifies.
Although the number of directors may be increased or decreased,
subject to the limits of our charter, a decrease may not have
the effect of shortening the term of any incumbent director. Any
director may resign at any time and may be removed with or
without cause by the shareholders upon the affirmative vote of
at least a majority of all votes entitled to be cast at a
meeting called for the purpose of the proposed removal. A
vacancy created by the death, removal or resignation of a
director may be filled by a majority vote of the remaining
directors, or by a vote of shareholders as permitted by the
Maryland General Corporation Law. If a vacancy is created by an
increase in the number of directors, the vacancy will be filled
by the board or by the affirmative vote of the holders of the
outstanding common shares. Where possible, independent directors
must nominate replacements for vacancies required to be filled
by independent directors.
Our board of directors has determined that each of our
independent directors is independent within the meaning of the
applicable (i) provisions set forth in our charter, and
(ii) requirements set forth in the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and the
applicable SEC rules, and (iii) although our shares are not
listed on the New York Stock Exchange (the “NYSE”),
independence rules set forth in the NYSE Listed Company Manual.
Our board applied the NYSE rules governing independence as part
of its policy of maintaining strong corporate governance
practices.
An “independent director” is defined under our charter
and means a person who is not, and within the last two years has
not been, directly or indirectly associated with Hines or the
Advisor by virtue of:
•
ownership of an interest in Hines, the Advisor or their
affiliates;
•
employment by Hines or the Advisor or their affiliates;
•
service as an officer, trust manager or director of Hines or the
Advisor or their affiliates;
•
performance of services for us, other than as a director;
•
service as a director, trust manager or trustee of more than
three real estate investment trusts advised by the Advisor or
organized by Hines; or
•
maintenance of a material business or professional relationship
with Hines, the Advisor or any of their affiliates.
An independent director cannot be associated with us, Hines or
the Advisor as set forth above either directly or indirectly. An
indirect relationship includes circumstances in which a
director’s spouse, parents, children, siblings, mothers- or
fathers-in-law,
sons- or
daughters-in-law
or brothers- or
sisters-in-law,
is or has
been associated with us, Hines, the Advisor, or their
affiliates. A business or professional relationship is
considered material if the gross revenue derived by the director
from the Advisor or Hines and their affiliates exceeds five
percent of either the director’s annual gross revenue
during either of the last two years or the director’s net
worth on a fair market value basis. Independent directors may
not accept, directly or indirectly, any consulting, advisory or
other compensatory fee from us or any of our subsidiaries, other
than in their capacity as members of our board of directors or
any committee thereof.
To be considered independent under the NYSE rules, the board of
directors must determine that a director does not have a
material relationship with us
and/or our
consolidated subsidiaries (either directly or as a partner,
shareholder or officer of an organization that has a
relationship with any of those entities, including Hines and its
affiliates). Under the NYSE rules, a director will not be
independent if, within the last three years:
•
the director was employed by us or Hines;
•
an immediate family member of the director was employed by us or
Hines as an executive officer;
•
the director, or an immediate family member of the director,
received more than $100,000 during any
12-month
period in direct compensation from us or Hines, other than
director and committee fees and pension or other forms of
deferred compensation for prior service (provided such
compensation is not contingent in any way on continued service);
•
the director was affiliated with or employed by a present or
former internal or external auditor of us or Hines;
•
an immediate family member of the director was affiliated with
or employed in a professional capacity by a present or former
internal or external auditor of us or Hines;
•
a Company executive officer serves on our compensation committee
or the board of directors of a company which employed the
director, or which employed an immediate family member of the
director, as an executive officer; or
•
the director was an executive officer or an employee (or an
immediate family member of the director was an executive
officer) of a company that makes payments to, or receives
payments from, us or Hines for property or services in an amount
which, in any single fiscal year, exceeded the greater of
$1,000,000 or 2% of such other company’s consolidated gross
revenues.
Our directors are accountable to us and our shareholders as
fiduciaries. Generally speaking, this means that our directors
must perform their duties in good faith and in a manner each
director believes to be in the best interest of us and our
shareholders. Our directors are not required to devote all or
any specific amount of their time to our business. Our directors
are only required to devote the time to our business as their
duties require. We anticipate that our directors will meet at
least quarterly or more frequently if necessary. In the exercise
of their fiduciary responsibilities, we anticipate that our
directors will rely heavily on the Advisor. Therefore, our
directors will be dependent on the Advisor and information they
receive from the Advisor in order to adequately perform their
duties, including their obligation to oversee and evaluate the
Advisor and its affiliates. Please see “Risk
Factors — Business and Real Estate Risks —
Our success will be dependent on the performance of Hines as
well as key employees of Hines” and “Risk
Factors — Potential Conflicts of Interest Risks.”
In addition to the investment policies set forth in our charter
and bylaws, our board of directors has approved written policies
on investments and borrowing for us as described in this
prospectus. The directors may establish further written policies
on investments and borrowings and will monitor our
administrative procedures, investment operations and performance
to ensure that the policies are fulfilled and are in the best
interest of the shareholders. We will follow the policies on
investments and borrowings set forth in this prospectus unless
and until they are modified by our board of directors following,
if applicable, requirements set forth in our charter and bylaws.
Our independent directors are responsible for reviewing our fees
and expenses on at least an annual basis and with sufficient
frequency to determine that the expenses incurred are in the
best interest of our shareholders. Our independent directors may
determine from time to time during or after this offering to
increase or decrease the fees and expenses payable to Hines, the
Advisor and other Hines affiliates. The independent directors
will also be responsible for reviewing the performance of the
Advisor and determining that the compensation to be paid to the
Advisor is reasonable in relation to the nature and quality of
services performed and our investment performance and that the
provisions of the Advisory Agreement are being carried out.
Specifically, the independent directors will consider factors
such as:
•
our net assets and net income;
•
the amount of the fees paid to the Advisor in relation to the
size, composition and performance of our investments;
•
the success of the Advisor in generating appropriate investment
opportunities;
•
rates charged to other REITs, especially REITs of similar
structure and other investors by advisors performing similar
services;
•
additional revenues realized by the Advisor and its affiliates
through their relationship with us, whether we pay them or they
are paid by others with whom we do business;
•
the quality and extent of service and advice furnished by the
Advisor;
•
the performance of our investment portfolio;
•
the quality of our portfolio relative to the investments
generated by the Advisor for its own account; and
•
other factors related to managing a public company, such as
shareholder services and support, compliance with securities
laws, including Sarbanes-Oxley and other factors typical of a
public company.
Our directors and their affiliates may not vote or consent to
the voting of shares they now own or hereafter acquire on
matters submitted to the shareholders regarding either the
removal of the Advisor, any director and any of their
affiliates, or any transaction between us and the Advisor, any
director or any of their affiliates.
Our full board of directors generally considers all major
decisions concerning our business. Our bylaws provide that our
board may establish such committees as the board believes
appropriate. The four standing committees of our board of
directors are: the audit committee, the conflicts committee, the
nominating and corporate governance committee and the
compensation committee so that these important areas can be
addressed in more depth than may be possible at a full board
meeting and to also ensure that these areas are addressed by
non-interested members of the board. The board of directors
adopted a written charter for each of these committees. A copy
of each charter is available on our website, www.HinesREIT.com.
Our independent directors, Messrs. Davis, Hassard and Levy,
each serve on all of these committees. Mr. Davis serves as
chairman of the conflicts committee. Mr. Levy serves as
chairman of the audit committee. Mr. Hassard serves as
chairman of the nominating and corporate governance and
compensation committees.
Members of the audit committee are appointed by our board of
directors to serve one-year terms or until their successors are
duly elected and qualify, or until their earlier death,
retirement, resignation or removal. The audit committee reviews
the functions of our management and independent auditors
pertaining to our financial statements and performs such other
duties and functions deemed appropriate by the board. The audit
committee is ultimately responsible for the selection,
evaluation and replacement of our independent auditors. Our
board of directors has determined that each member of our audit
committee is independent within the meaning of the applicable
requirements set forth in or promulgated under the Exchange Act,
as well as in the
rules of the NYSE. In addition, our board of directors has
determined that Stanley D. Levy is an “audit committee
financial expert” within the meaning of applicable rules
promulgated by the Securities and Exchange Commission. Unless
otherwise determined by the board of directors, no member of the
committee may serve as a member of the audit committee of more
than two other public companies.
Members of the conflicts committee are appointed by our board of
directors to serve one-year terms or until their successors are
duly elected and qualify or until their earlier death,
resignation, retirement or removal. The primary purpose of the
conflicts committee is to review specific matters that the board
believes may involve conflicts of interest and to determine if
the resolution of the conflict of interest is fair and
reasonable to us and our shareholders. However, we cannot assure
you that this committee will successfully eliminate the
conflicts of interest that will exist between us and Hines, or
reduce the risks related thereto.
The conflicts committee reviews and approves specific matters
that the board of directors believes may involve conflicts of
interest to determine whether the resolution of the conflict of
interest is fair and reasonable to us and our shareholders. The
conflicts committee is responsible for reviewing and approving
the terms of all transactions between us and Hines or its
affiliates or any member of our board of directors, including
(when applicable) the economic, structural and other terms of
all acquisitions and dispositions and the annual renewal of the
Advisory Agreement between us and the Advisor. The conflicts
committee is responsible for reviewing the Advisor’s
performance and the fees and expenses paid by us to the Advisor
and any of its affiliates. The review of such fees and expenses
is required to be performed with sufficient frequency, but at
least annually, to determine that the expenses incurred are in
the best interest of our shareholders. For further discussion,
please see the “Investment Objectives and Policies with
Respect to Certain Activities — Affiliate Transaction
Policy” section of this prospectus. The conflicts committee
is also responsible for reviewing Hines’ performance as
property manager of our directly owned properties.
Members of the compensation committee are appointed by our board
of directors to serve one-year terms or until their successors
are duly elected and qualify or until their earlier death,
retirement, resignation or removal. The committee meets as
called by the chairman of the committee, but not less frequently
than annually. The primary purpose of the compensation committee
is to oversee our compensation programs, including our Employee
and Director Incentive Share Plan. The committee reviews the
compensation and benefits paid by us to our directors and, in
the event we hire employees, the compensation paid to our
executive officers as well as any employment, severance and
termination agreements or arrangements made with any executive
officer and, if desired by our board of directors, produces an
annual report to be included in our annual proxy statement.
Members of the nominating and corporate governance committee are
appointed by our board of directors to serve one-year terms or
until their successors are duly elected and qualify or until
their earlier death, retirement, resignation or removal. This
committee:
•
assists our board of directors in identifying individuals
qualified to become members of our board of directors;
•
recommends candidates to our board of directors to fill
vacancies on the board;
•
recommends committee assignments for directors to the full board;
•
periodically assesses the performance of our board of directors;
•
reviews and recommends appropriate corporate governance policies
and procedures to our board of directors; and
reviews and monitors our Code of Business Conduct and Ethics for
Senior Officers and Directors, and any other corporate
governance policies and procedures we may have from time to time.
During 2007, our compensation committee consisted of
Messrs. Davis, Levy and Hassard, our three independent
directors. None of our executive officers served as a director
or member of the compensation committee of an entity whose
executive officers included a member of our compensation
committee.
Our compensation committee designs our director compensation
with the goals of attracting and retaining highly qualified
individuals to serve as independent directors and to fairly
compensate them for their time and efforts. Because of our
unique attributes as a REIT, service as an independent director
on our board requires a substantial time commitment as well as
broad expertise in the fields of real estate and real estate
investment. The compensation committee balances these
considerations with the principles that our director
compensation program should be transparent and should align
directors’ interests with those of our shareholders.
The following table sets forth information regarding
compensation of our directors during 2006.
2006 Director
Compensation
Change in
Pension Value
and Non-
Qualified
Fees Earned
Non-Equity
Deferred
or Paid
Stock
Option
Incentive Plan
Compensation
All Other
Total
Name
in Cash
Awards(1)
Awards
Compensation
Earnings
Compensation
Compensation
C. Abbott Davis
$
64,000
1,000 shares
—
—
—
—
$
73,180
Thomas A. Hassard
$
61,500
1,000 shares
—
—
—
—
$
70,680
Stanley D. Levy
$
62,500
1,000 shares
—
—
—
—
$
71,680
Jeffery C. Hines and C. Hastings Johnson(2)
—
—
—
—
—
—
—
(1)
Each of Messrs. Davis, Hassard and Levy received 1,000
restricted shares under our incentive plan upon his election to
our board of directors in each of 2004, 2005 and 2006.
(2)
Messrs. Hines and Johnson, who are employees of Hines,
receive no additional compensation for serving as Hines REIT
directors.
We pay our independent directors an annual fee of $30,000, and a
fee of $2,000 for each meeting of the board (or any committee
thereof) attended in person. Pursuant to our Employee and
Director Incentive Share Plan, in lieu of receiving his or her
annual fee in cash, an independent director is entitled to
receive the annual fee in the form of our common shares or a
combination of common shares and cash. If a committee meeting is
held on the same day as a meeting of the board, each independent
director will receive $1,000 for each committee meeting attended
in person on such day, subject to a maximum of $2,000 for all
committee meetings attended in person on such day. We will also
pay our independent directors a fee of $500 for each board or
committee meeting attended via teleconference lasting one hour
or less and $1,000 for board or committee meetings attended via
teleconference lasting more than one hour.
We pay the following annual retainers to the Chairpersons of our
board committees:
•
$7,500 to the Chairperson of our conflicts committee;
•
$6,000 to the Chairperson of our audit committee;
•
$3,000 to the Chairperson of our compensation committee; and
•
$3,000 to the Chairperson of our nominating and corporate
governance committee.
Under the terms of our Employee and Director Incentive Share
Plan, each independent director elected or reelected to the
board (whether through a shareholder meeting or by directors to
fill a vacancy on the board) is granted 1,000 restricted shares
on or about the date of election or reelection. These restricted
shares will fully vest if the independent director completes the
term or partial term for which he or she was elected.
Messrs. Davis, Hassard and Levy each received 1,000
restricted shares under our incentive plan upon his election to
our board of directors in each of 2004, 2005 and 2006.
All directors are reimbursed for reasonable out-of-pocket
expenses incurred in connection with attendance at board or
committee meetings.
We adopted our Employee and Director Incentive Share Plan to:
•
furnish incentives to individuals chosen to receive share-based
awards because they are considered capable of improving our
operations and increasing profits;
•
encourage selected persons to accept or continue employment with
the Advisor; and
•
increase the interest of our officers and our independent
directors in our welfare through their participation in the
growth in the value of our common shares.
The Employee and Director Incentive Share Plan provides for the
grant of awards to our full-time employees (in the event we ever
have employees), full-time employees of our Advisor, full-time
employees of entities that provide services to us, certain of
our independent directors, directors of the Advisor or of
entities that provide services to us, certain of our consultants
and certain consultants to the Advisor or to entities that
provide services to us. Such awards may consist of nonqualified
stock options, incentive stock options, restricted shares, share
appreciation rights, and dividend equivalent rights.
The total number of common shares reserved for issuance under
the Employee and Director Incentive Share Plan is equal to 0.5%
of our outstanding shares on a fully diluted basis at any time,
not to exceed 10,000,000 shares. Our compensation committee
has adopted a policy that prohibits awards of shares of common
stock under the Employee and Director Incentive Share Plan
except for issuances to our independent directors as
compensation for serving as such. This policy may be revised or
terminated at any time that our compensation committee believes
that such action would be in the best interests of our
shareholders.
Options entitle the holder to purchase common shares for a
specified exercise price during a specified period. Under the
Employee and Director Incentive Share Plan, we may grant options
that are intended to be incentive stock options within the
meaning of section 422 of the Code (“incentive stock
options”) or options that are not incentive stock options
(“nonqualified stock options”). Incentive stock
options and nonqualified stock options will generally have an
exercise price that is not less than 100% of the fair market
value of the common shares underlying the option on the date of
grant and will expire, with certain exceptions, 10 years
after such date.
Restricted share awards entitle the recipient to common shares
from us under terms that provide for vesting over a specified
period of time. Such awards would typically be forfeited with
respect to the unvested shares upon the termination of the
recipient’s employment or other relationship with us.
Restricted shares may not, in general, be sold or otherwise
transferred until restrictions are removed and the shares have
vested. Holders of restricted shares may receive cash dividends
prior to the time that the restrictions on the restricted shares
have lapsed. Any dividends payable in common shares shall be
subject to the same restrictions as the underlying restricted
shares.
Share appreciation rights entitle the recipient to receive from
us at the time of exercise an amount in cash (or in some cases,
common shares) equal to the excess of the fair market value of
the common shares underlying the share appreciation right on the
date of exercise over the price specified at the time of grant,
which cannot be less than the fair market value of the common
shares on the grant date.
Dividend equivalent rights entitle the recipient to receive, for
a specified period, a payment equal to the quarterly dividend
declared and paid by us on one common share. Dividend equivalent
rights are forfeited to us upon the termination of the
recipient’s employment or other relationship with us.
As indicated above, each individual who is elected or re-elected
to the board as an independent director (whether through
shareholder meeting or by directors to fill a vacancy on the
board) will be granted 1,000 restricted shares on or about the
date of election or re-election. These restricted shares will
fully vest if the independent director completes the term or
partial term for which he or she was elected. In addition to the
shares described above, on July 9, 2007, we awarded 1,000
additional restricted shares to each of our independent
directors pursuant to the Employee and Director Incentive Share
Plan.
The Maryland General Corporation Law allows directors and
officers to be indemnified against judgments, penalties, fines,
settlements and expenses actually incurred in a proceeding
unless the following can be established:
•
an act or omission of the director or officer was material to
the cause of action adjudicated in the proceeding, and was
committed in bad faith or was the result of active and
deliberate dishonesty;
•
the director or officer actually received an improper personal
benefit in money, property or services; or
•
with respect to any criminal proceeding, the director or officer
had reasonable cause to believe his act or omission was unlawful.
Indemnification could reduce the legal remedies available to us
and our shareholders against the indemnified individuals. We
also maintain a directors and officers liability insurance
policy.
An indemnification provision does not reduce the exposure of our
directors and officers to liability under federal or state
securities laws, nor does it limit our shareholders’
ability to obtain injunctive relief or other equitable remedies
for a violation of a director’s or an officer’s duties
to us or our shareholders, although the equitable remedies may
not be an effective remedy in some circumstances.
In spite of the above provisions of the Maryland General
Corporation Law, the charter and bylaws of Hines REIT provide
that our directors and officers will be indemnified by us for
losses arising from our operations only if all of the following
conditions are met:
•
the indemnified person determined, in good faith, that the
course of conduct which caused the loss or liability was in our
best interests;
•
the indemnified person was acting on our behalf or performing
services for us;
•
in the case of non-independent directors and officers, the
liability or loss was not the result of negligence or misconduct
by the party seeking indemnification;
•
in the case of independent directors, the liability or loss was
not the result of gross negligence or willful misconduct by the
party seeking indemnification; and
•
the indemnification or agreement to hold harmless is recoverable
only out of our net assets and not from our shareholders.
The Advisor and its affiliates will also be subject to the
limitations on indemnification to which the non-independent
directors and officers are subject, as described above.
The general effect to investors of any arrangement under which
any of our directors or officers are insured or indemnified
against liability is a potential reduction in dividends
resulting from our payment of premiums associated with insurance
or payments of a defense, settlement or claim. In addition,
indemnification and provisions providing for the limitation of
liability could reduce the legal remedies available to Company
and our shareholders against our officers and directors.
The Securities and Exchange Commission takes the position that
indemnification against liabilities arising under the Securities
Act is against public policy and unenforceable. Indemnification
of our directors, officers, Hines or its affiliates will not be
allowed for liabilities arising from or out of a violation of
state or federal securities laws, unless one or more of the
following conditions are met:
•
there has been a successful adjudication on the merits of each
count involving alleged securities law violations;
•
such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction; or
•
a court of competent jurisdiction approves a settlement of the
claims against the indemnitee and finds that indemnification of
the settlement and the related costs should be made, and the
court considering the request for indemnification has been
advised of the position of the Securities and Exchange
Commission and of the published position of any state securities
regulatory authority in which the securities were offered or
sold as to indemnification for violations of securities laws.
Our charter and bylaws provide that the advancement of funds to
our directors and officers for legal expenses and other costs
incurred as a result of any legal action for which
indemnification is being sought is permissible only if all of
the following conditions are satisfied:
•
the legal action relates to acts or omissions with respect to
the performance of duties or services on behalf of the Company;
•
the legal action is initiated by a third party who is not a
shareholder or the legal action is initiated by a shareholder
acting in his or her capacity as such and a court of competent
jurisdiction specifically approves such advancement; and
•
the party seeking advancement undertakes to repay the advanced
funds to the Company, together with the applicable legal rate of
interest thereon, in cases in which such party is found not to
be entitled to indemnification.
The Operating Partnership has agreed to indemnify and hold
harmless the Advisor and Hines and their affiliates performing
services for us from specific claims and liabilities arising out
of the performance of their obligations under the Advisory
Agreement and our Property Management and Leasing Agreements,
subject to the limitations contained in such agreements. Please
see ‘‘— The Advisor and the Advisory
Agreement — Indemnification” and the
“— Hines and our Property Management and Leasing
Agreements — Our Property Management and Leasing
Agreements — Indemnification” sections below. The
Operating Partnership must also indemnify Hines REIT and its
directors, officers and employees in Hines REIT’s capacity
as its general partner. Please see “The OperatingPartnership — Indemnity.”
We have entered into indemnification agreements with our
officers and directors. These agreements provide our officers
and directors with a contractual right to indemnification to
substantially the same extent they enjoy mandatory
indemnification under our charter and bylaws.
The following chart illustrates our general structure and our
management relationship with Hines and its affiliates as of
September 30, 2007:
Our Advisor is an affiliate of Hines. Its address is 2800 Post
Oak Boulevard, Suite 5000, Houston, Texas
77056-6118.
All of our day-to-day operations are managed and performed by
the Advisor and its affiliates. Certain of our directors and
executive officers are also managers and executive officers of
the Advisor. The following table sets forth information
regarding the officers and managers of our Advisor, or our
Advisor’s general partner. The biography of each of these
officers and managers is set forth above.
Name
Age
Position and Office with the General Partner of the
Advisor
We do not have any employees. We entered into an Advisory
Agreement with our Advisor. Pursuant to this agreement, which
was unanimously approved by our board of directors, including
our independent directors, we appointed the Advisor to manage,
operate, direct and supervise our operations. In connection with
managing our operations, the Advisor will face conflicts of
interest. Please see “Risk Factors — Potential
Conflicts of Interest Risks.” Therefore, the Advisor and
its affiliates will perform our day-to-day operational
and administrative services. The Advisor is subject to the
supervision of our board of directors and provides only the
services that are delegated to it. Our independent directors are
responsible for reviewing the performance of the Advisor and
determining that the compensation to be paid to the Advisor is
reasonable in relation to the nature and quality of services
performed and that our investment objectives and the provisions
of the Advisory Agreement are being carried out. The
Advisor’s duties under the Advisory Agreement include, but
are not limited to, the following:
Offering
Services
•
the development of this offering, including the determination of
its specific terms;
•
along with our Dealer Manager, the approval of the participating
broker dealers and negotiation of the related selling agreements;
•
preparation and approval of all marketing materials to be used
by our Dealer Manager or others relating to this offering;
•
along with our Dealer Manager, the negotiation and coordination
with our transfer agent of the receipt, collection, processing
and acceptance of subscription agreements, commissions, and
other administrative support functions; and
•
all other services related to this offering, whether performed
and incurred by the Advisor or its affiliates.
Acquisition
Services
•
serve as our investment and financial advisor and provide
relevant market research and economic and statistical data in
connection with our assets and investment objectives and
policies;
•
subject to our investment objectives and policies:
(i) locate, analyze and select potential investments;
(ii) structure and negotiate the terms and conditions of
investment transactions; (iii) acquire assets on our
behalf; and (iv) arrange for financing related to
acquisitions of assets;
•
perform due diligence on prospective investments and create
summarized due diligence reports;
•
prepare reports regarding prospective investments which include
recommendations and supporting documentation necessary for our
board of directors to evaluate the proposed investments; and
•
negotiate and execute approved investments and other
transactions.
Asset
Management Services
•
investigate, select, and, on our behalf, engage and conduct
business with such persons as the Advisor deems necessary to the
proper performance of its obligations under the Advisory
Agreement, including but not limited to consultants,
accountants, lenders, technical advisors, attorneys, brokers,
underwriters, corporate fiduciaries, escrow agents,
depositaries, custodians, agents for collection, insurers,
insurance agents, developers, construction companies and any and
all persons acting in any other capacity deemed by the Advisor
necessary or desirable for the performance of any of the
foregoing services;
•
negotiate and service our debt facilities and other financings;
•
monitor and evaluate the performance of our investments; provide
daily management services to the Company and perform and
supervise the various management and operational functions
related to the Company’s investments;
•
coordinate with Hines on its duties under the Property
Management and Leasing Agreement and assist in obtaining all
necessary approvals of major property transactions as governed
by such agreement;
•
coordinate and manage relationships between the Company and any
joint venture partners;
consult with our officers and board of directors and provide
assistance with the evaluation and approval of potential
property dispositions, sales or refinancings;
•
provide or arrange for administrative services and items, legal
and other services, office space, office furnishings, personnel
and other overhead items necessary and incidental to the
Company’s business and operations;
•
provide financial and operational planning services and
investment portfolio management functions;
•
maintain accounting data and any other information requested
concerning the activities of the Company as shall be required to
prepare and to file all periodic financial reports and returns
required to be filed with the Securities and Exchange Commission
and any other regulatory agency, including annual financial
statements;
•
perform all reporting, record keeping, internal controls and
similar matters in a manner to allow the Company to comply with
applicable laws, including the Sarbanes-Oxley Act; and
•
perform tax and compliance services, cash management services
and risk management services.
Shareholder
Services
•
manage communications with our shareholders, including answering
phone calls, preparing and sending written and electronic
reports and other communications; and
•
establish technology infrastructure to assist in providing
shareholder support and service.
The current term of the Advisory Agreement ends in June 2008,
and the Advisory Agreement may be renewed for an unlimited
number of successive one-year periods upon the mutual consent of
the parties. Renewals of the agreement must be approved by a
majority of our independent directors. Additionally, the
Advisory Agreement may be terminated:
•
immediately by us (i) in the event the Advisor commits
fraud, criminal conduct, willful misconduct or negligent breach
of fiduciary duty by the Advisor, (ii) upon the bankruptcy
of the Advisor or its involvement in similar insolvency
proceedings or (iii) in the event of a material breach of
the Advisory Agreement by the Advisor, which remains uncured
after 10 days’ written notice;
•
without cause by a majority of our independent directors or by
the Advisor upon 60 days’ written notice; or
•
immediately by the Advisor upon our bankruptcy or involvement in
similar insolvency proceedings or any material breach of the
Advisory Agreement by us, which remains uncured after
10 days’ written notice.
For more information regarding a decision by our board of
directors to terminate (or elect not to renew) the Advisory
Agreement, please see “— Removal of the
Advisor,”“The Operating Partnership —
Repurchase of OP Units
and/or the
Participation Interest held by Hines and its Affiliates if Hines
or its Affiliates Cease to be Our Advisor” and “Risk
Factors — Investment Risks — Hines’
ability to cause the Operating Partnership to purchase the
Participation Interest and any OP Units it and its
affiliates hold in connection with the termination of the
Advisory Agreement may deter us from terminating the Advisory
Agreement.” In the event that a new advisor is retained,
the Advisor will cooperate with us and our board of directors in
effecting an orderly transition of the advisory functions. The
board of directors (including a majority of our independent
directors) will approve a successor advisor only upon a
determination that the new advisor possesses sufficient
qualifications to perform the advisory functions for us and that
the compensation to be received by the new advisor pursuant to
the new advisory agreement is justified. The Advisory Agreement
also provides that in the event the Advisory Agreement is
terminated, we will promptly change our name and cease doing
business under or using the name “Hines” (or any
derivative thereof), upon the written request of Hines.
The Advisor and its affiliates will receive certain compensation
and be reimbursed for certain expenses and receive certain other
payments in connection with services provided to us. The
compensation, expense reimbursements and other payments payable
to the Advisor and its affiliates may increase or decrease
during or after this offering. Please see “Management
Compensation, Expense Reimbursements and Operating Partnership
Participation Interest” for a description of these matters.
In the event the Advisory Agreement is terminated, the Advisor
will be paid all earned, accrued and unpaid compensation and
expense reimbursements within 30 days. Please see
“— Removal of the Advisor” and “The
Operating Partnership — Repurchase of OP Units
and/or the
Participation Interest held by Hines and its affiliates if Hines
or its Affiliates Cease to be Our Advisor” for information
regarding additional payments the Company may be required to
make to our Advisor and other affiliates of Hines in connection
with the termination of the Advisory Agreement.
An affiliate of Hines will pay for all organization and offering
expenses other than selling commissions and dealer manager fees
and will reimburse us, the Advisor, the Dealer Manager and our
affiliates in connection with the organization and offering
expenses incurred by any of us. Organization and offering
expenses, for which an affiliate of Hines will pay, are expected
to consist of the actual legal, accounting, printing, marketing,
filing fees, transfer agent costs and other accountable
offering-related expenses, other than selling commissions and
the dealer manager fee and may also include, but are not limited
to: (1) amounts to reimburse the Advisor for all marketing
related costs and expenses such as salaries and direct expenses
of our Advisor’s employees or employees of the
Advisor’s affiliates in connection with registering and to
facilitate the marketing of our shares, including but not
limited to, salaries related to broker-dealer accounting and
compliance functions; (2) salaries, certain other
compensation and direct expenses of employees of our Dealer
Manager while preparing for the offering and marketing of our
shares and in connection with their wholesaling activities,
(3) travel and entertainment expenses related to the
offering and marketing of our shares; (4) facilities and
technology costs, insurance expenses and other costs and
expenses associated with the offering and marketing of our
shares; (5) costs and expenses of conducting educational
conferences and seminars; (6) costs and expenses of
attending broker-dealer sponsored conferences; (7) payment
or reimbursement of due diligence expenses; and (8) any
other compensation or reimbursements payable to participating
broker-dealers (other than selling commissions and any
reallowance of dealer manager fees), regardless of whether such
participating broker-dealers otherwise receive commissions.
We will reimburse the Advisor for all of the costs it incurs in
connection with the other services it provides to us, including,
but not limited to:
•
acquisition expenses incurred in connection with the selection
and acquisition of assets including such expenses incurred
related to assets pursued or considered but not ultimately
acquired by us;
•
the actual out-of-pocket cost of goods and services used by the
Company and obtained from entities not affiliated with the
Advisor, including brokerage fees paid in connection with the
purchase and sale of our assets;
•
taxes and assessments on income or assets and taxes as an
expense of doing business and any other taxes otherwise imposed
on the Company and its business or income;
•
out-of-pocket costs associated with insurance required in
connection with the business of the Company or by our officers
and directors;
•
all out-of-pocket expenses in connection with payments to our
board of directors and meetings of our board of directors and
shareholders;
•
personnel and related employment direct costs and overhead of
the Advisor and its affiliates in performing shareholder
services such as (1) managing communications with
shareholders, including answering phone calls, preparing and
sending written and electronic reports and other communications,
and (2) establishing reasonable technology infrastructure
to assist in providing shareholder support and service;
out-of-pocket expenses of maintaining communications with
shareholders, including the cost of preparation, printing, and
mailing annual reports and other shareholder reports, proxy
statements and other reports required by governmental entities;
•
audit, accounting and legal fees, and other fees for
professional services relating to the operations of the Company
and all such fees incurred at the request of, or on behalf of,
our independent directors or any committee of our board of
directors;
•
out-of-pocket costs for the Company to comply with all
applicable laws, regulation and ordinances; and
•
all other out-of-pocket costs necessary for the operation of the
Company and its assets incurred by the Advisor in performing its
duties under the Advisory Agreement.
Except as provided above, the expenses and payments subject to
reimbursement by the Company do not include personnel and
related direct employment or overhead costs of the Advisor or
its affiliates, unless such costs are approved by a majority of
our independent directors. For example, our independent
directors have approved reimbursement for personnel and overhead
costs of the Advisor in providing in-house legal services to the
Company. If (1) we request that the Advisor perform
services that are outside of the scope of the Advisory Agreement
or (2) there are changes to the regulatory environment in
which the Advisor or Company operates that would increase
significantly the level of services performed by the Advisor,
such that the costs and expenses borne by the Advisor for which
it is not entitled to separate reimbursement for personnel and
related employment direct costs and overhead under the Advisory
Agreement would increase significantly, such services will be
separately compensated at rates and in amounts as are agreed to
by the Advisor and our independent directors, subject to the
limitations contained in our charter.
The Advisor must reimburse us quarterly for any amounts by which
Operating Expenses (as defined below) exceed, in any four
consecutive fiscal quarters, the greater of (i) 2% of our
average invested assets, which consists of the average book
value of our real estate properties, both equity interests in
and loans secured by real estate, before reserves for
depreciation or bad debts or other similar non-cash reserves, or
(ii) 25% of our net income, which is defined as our total
revenues applicable to any given period, less the expenses
applicable to such period (excluding additions to depreciation,
bad debt or similar non-cash reserves), unless our independent
directors determine that such excess was justified.
Operating Expenses is defined as generally including all
expenses paid or incurred by us as determined by U.S. GAAP,
except certain expenses identified in our charter which include:
•
expenses of raising capital such as organizational and offering
expenses, legal, audit, accounting, underwriting, brokerage,
listing, registration and other fees, printing and other such
expenses and taxes incurred in connection with the issuance,
distribution, transfer, registration and stock exchange listing
of our shares;
•
interest payments, taxes and non-cash expenditures such as
depreciation, amortization and bad debt reserves;
•
amounts paid as partnership distributions by our Operating
Partnership; and
•
all fees and expenses associated or paid in connection with the
acquisition, disposition and ownership of assets (such as real
estate commissions, acquisition fees, costs of foreclosure,
insurance premiums, legal services, maintenance, repair or
improvement of property, etc.).
The Advisor must reimburse the excess expenses to us within
60 days after the end of each fiscal quarter unless the
independent directors determine that the excess expenses were
justified based on unusual and nonrecurring factors which they
deem sufficient. Within 60 days after the end of any of our
fiscal quarters for which total operating expenses for the
12 months then ended exceed the limitation but were
nevertheless paid, we will send to our shareholders a written
disclosure, together with an explanation of the factors the
independent directors considered in arriving at the conclusion
that the excess expenses were justified.
Our independent directors must review from time to time but at
least annually the performance of, and compensation paid to, the
Advisor. Specifically, the independent directors must consider
factors such as:
•
our net assets and net income;
•
the amount of the fees paid to the Advisor in relation to the
size, composition and performance of our investments;
•
the success of the Advisor in generating appropriate investment
opportunities;
•
rates charged to other REITs, especially REITs of similar
structure and other investors by advisors performing similar
services;
•
additional revenues realized by the Advisor and its affiliates
through their relationship with us, whether we pay them or they
are paid by others with whom we do business;
•
the quality and extent of service and advice furnished by the
Advisor;
•
the performance of our investment portfolio;
•
the quality of our portfolio relative to the investments
generated by the Advisor for its own account; and
•
other factors related to managing a public company, such as
shareholder services and support, compliance with securities
laws, including Sarbanes-Oxley and other factors typical of a
public company.
The Advisor has the right to assign the Advisory Agreement to an
affiliate of Hines subject to approval by our independent
directors. We cannot assign the Advisory Agreement without the
consent of the Advisor.
The Operating Partnership has agreed to indemnify and hold
harmless the Advisor and its affiliates, including their
respective officers, directors, partners and employees, from all
liability, claims, damages or losses arising in the performance
of their duties hereunder, and related expenses, including
reasonable attorneys’ fees, to the extent such liability,
claim, damage or loss and related expense is not fully
reimbursed by insurance, subject to any limitations imposed by
the laws of the State of Texas or contained in our charter or
the partnership agreement of the Operating Partnership, provided
that: (i) the Advisor and its affiliates have determined
that the cause of conduct which caused the loss or liability was
in our best interests, (ii) the Advisor and its affiliates
were acting on behalf of or performing services for us, and
(iii) the indemnified claim was not the result of
negligence, misconduct, or fraud of the Advisor or resulted from
a breach of the agreement by the Advisor.
Any indemnification made to the Advisor may be made only out of
our net assets and not from our shareholders. The Advisor will
indemnify and hold us harmless from contract or other liability,
claims, damages, taxes or losses and related expenses, including
attorneys’ fees, to the extent that such liability, claim,
damage, tax or loss and related expense is not fully reimbursed
by insurance and is incurred by reason of the Advisor’s bad
faith, fraud, willful misconduct or reckless disregard of its
duties, but the Advisor shall not be held responsible for any
action of our board of directors in following or declining to
follow any advice or recommendation given by the Advisor.
In the event the Advisory Agreement expires without the consent
of the Advisor, or is terminated for any reason other than by
the Advisor, any partner in the Operating Partnership affiliated
with Hines may require that the Operating Partnership acquire
all or a portion of the Participation Interest or any
OP Units held by any such holder. The purchase price for
the Participation Interest will equal the amount that would be
distributed to the holder assuming all the Operating
Partnership’s assets were sold for their then-current fair
market value and the proceeds were distributed in an orderly
liquidation of the Operating Partnership. The purchase price for
any OP Units will also be based on the then-current net
asset value of the assets of the
Operating Partnership. In such event, the purchase price is
required to be paid in cash or common shares, at the option of
the holder. Please see “Risk Factors — Investment
Risks — The redemption of interests in the Operating
Partnership held by Hines and its affiliates (including the
Participation Interest) as required in our Advisory Agreement
may discourage a takeover attempt if our Advisory Agreement
would be terminated in connection therewith.” The Operating
Partnership must purchase any such interests within
120 days after the applicable holder gives the Operating
Partnership written notice of its desire to sell all or a
portion of the OP Units or Participation Interest (as
applicable) held by such holder.
Hines or an affiliate of Hines manages our properties, as well
as all of the properties owned by the Core Fund. We expect that
Hines or an affiliate of Hines will manage most of the
properties we and the Core Fund acquire in the future.
Hines is a fully integrated real estate investment and
management firm which, with its predecessor, has been investing
in real estate assets and providing acquisition, development,
financing, property management, leasing or disposition services
for over 50 years. The predecessor to Hines was founded by
Gerald D. Hines in 1957 and Hines is currently owned by Gerald
D. Hines and his son Jeffrey C. Hines. Hines’ investment
partners have primarily consisted of large domestic and foreign
institutional investors and high net worth individuals. Hines
has worked with notable architects such as Philip Johnson; Cesar
Pelli; I. M. Pei; Skidmore, Owings and Merrill and
Frank Gehry, in the history of its operations. Please see
the “Hines Timeline” included as Appendix D for
additional information about the history of Hines.
Hines is headquartered in Houston and currently has regional
offices located in New York, Chicago, Atlanta, Houston,
San Francisco and London. Each regional office operates as
an independent business unit headed by an executive vice
president who manages the day-to-day business of such region and
participates in its financial results. All of these executive
vice presidents, whose average tenure at Hines is 29 years,
serve on the Hines Executive Committee which directs the
strategy and management of Hines.
Hines’ central resources are located in Houston and these
resources support the acquisition, development, financing,
property management, leasing and disposition activities of all
of the Hines regional offices. Hines’ central resources
include employees with experience in capital markets and
finance, accounting and audit, marketing, human resources, risk
management, property management, leasing, asset management,
project design and construction, operations and engineering.
These resource groups are an important control point for
maintaining performance standards and operating consistency for
the entire firm. Please see “Risk Factors —
Business and Real Estate Risks — Our success will be
dependent on the performance of Hines as well as key employees
of Hines.”
From inception through December 31, 2006, Hines, its
predecessor and their respective affiliates have acquired or
developed more than 700 real estate projects representing
approximately 229 million square feet. In connection with
these projects, Hines has employed many real estate investment
strategies, including acquisitions, development, redevelopment
and repositioning in the United States and internationally. As
of December 31, 2006, the portfolio of Hines and its
affiliates consisted of approximately 160 projects valued at
approximately $16.0 billion. This portfolio is owned by
Hines, its affiliates and numerous third-party investors,
including pension plans, domestic and foreign institutional
investors, high net worth individuals and retail investors.
Included in this portfolio are approximately 129 properties
managed by Hines, representing approximately 50.8 million
square feet. In addition, Hines manages a portfolio of
approximately 129 properties with about 56.9 million square
feet owned by third parties in which Hines has no ownership
interest. The total square feet Hines manages is approximately
107.7 million square feet located in 67 cities in the
United States and 15 foreign countries.
The following table sets forth the history of the number of
square feet under Hines’ management:
Commercial
Real Estate Managed by Hines and its Affiliates
The following chart sets forth the Hines organizational
structure and the number of people working in each region, the
international offices and the central office as of
December 31, 2006:
The following is information about the executive officers of the
general partner of Hines and members of its Executive Committee:
Number of
Years with
Name
Age
Hines
Position
Gerald D. Hines
81
50
Chairman of the Board
Jeffrey C. Hines
52
25
President and Chief Executive Officer
C. Hastings Johnson
58
29
Vice Chairman and Chief Financial Officer
Charles M. Baughn
52
22
Executive Vice President and
CEO — Capital Markets Group
James C. Buie, Jr.
54
27
Executive Vice President and
CEO — West Region and Asia Pacific
Kenneth W. Hubbard
64
33
Executive Vice President and
CEO — East Region
Christopher D. Hughes
45
21
Executive Vice President and
CEO — East Region
E. Staman Ogilvie
57
33
Executive Vice President and
CEO — Eurasia Region
C. Kevin Shannahan
51
24
Executive Vice President and
CEO — Midwest, Southeast Region and South America
Mark A. Cover
47
23
Executive Vice President and
CEO — Southwest Region and
Mexico/Central America
Michael J.G. Topham
59
31
Executive Vice President and
CEO — Hines Europe and Middle East/North Africa
Jeffrey C. Hines and C. Hastings Johnson are on our board of
directors and Charles M. Baughn is our Chief Executive
Officer. Their biographies are included above with the rest of
our management.
Gerald D. Hines. Mr. Hines is the
co-owner and Chairman of the Board of the general partner of
Hines, and is responsible for directing all firm policy and
procedures as well as participating in major new business
ventures and cultivating new and existing investor relations. He
is also Chairman of the firm’s Executive Committee. He
oversees a portfolio of approximately 160 projects valued at
approximately $16.0 billion and has expanded the scope of
Hines by moving into foreign markets, introducing new product
lines, initiating acquisition programs and developing major new
sources of equity and debt financings. He graduated from Purdue
University with a B.S. in Mechanical Engineering and received an
Honorary Doctorate of Engineering from Purdue.
James C. Buie, Jr. Mr. Buie is an Executive
Vice President of the general partner of Hines responsible for
all development, operations and transactions in the West Region
of the United States and in the Asia Pacific, representing a
cumulative total of approximately 27 million square feet of
real estate. He is also a member of Hines’ Executive
Committee. He graduated from the University of Virginia with a
B.A. in Economics and received his M.B.A. from Stanford
University.
Kenneth W. Hubbard. Mr. Hubbard is an
Executive Vice President of the general partner of Hines
responsible for all development, operations and transactions in
the East Region of the United States, representing a cumulative
total of more than 36 million square feet of real estate.
He is also a member of Hines’ Executive Committee. He
graduated from Duke University with a B.A. in History and
received his J. D. from Georgetown Law School.
Christopher D. Hughes. Mr. Hughes is an
Executive Vice President of the general partner of Hines,
responsible for all development, operations and transactions in
the East Region of the United States. He is also
a member of the Capital Markets Group having raised
approximately $10.8 billion in committed equity since 2001.
He is responsible for structuring commingled funds and raising
equity capital for Hines projects globally. Mr. Hughes was a
development officer in the Washington, DC office, where he
contributed to the development and acquisition of more than
3.6 million square feet of office space. He graduated from
Southern Methodist University with a B.A. in History.
Mr. Hughes is a registered representative of Hines Real
Estate Securities, Inc., an affiliate of Hines that is
registered as a broker dealer, and holds a Series 22 license.
E. Staman Ogilvie. Mr. Ogilvie is an
Executive Vice President of the general partner of Hines
responsible for all development, operations and transactions. He
is Chief Executive of Hines’ Eurasia Region which
encompasses Russia and the Former Soviet Union, Central and
Eastern Europe, Turkey and India. He is a member of the Hines
Executive Committee and former co-head of Hines’ Southwest
Region. Mr. Ogilvie has been responsible for the
development, acquisition, and management of more than
29 million square feet of commercial real estate as well as
several thousand acres of planned community development. He also
has extensive experience in strategic planning and finance. He
graduated from Washington and Lee University with a B. S. in
Business Administration and received his M.B.A. from the Harvard
Graduate School of Business.
C. Kevin Shannahan. Mr. Shannahan is
an Executive Vice President of the general partner of Hines
responsible for all development, operations and transactions in
the Midwest and Southeast Regions of the United States and
in South America, representing a cumulative total of more than
55 million square feet of real estate and 5,000 acres
of land development. He is also a member of Hines’
Executive Committee. He graduated from Cornell University
with a B.S. in Mechanical Engineering and received his M.B.A.
from the Harvard Graduate School of Business.
Mark A. Cover. Mr. Cover is an Executive
Vice President of the general partner of Hines responsible for
all development, operations and transactions in the Southwest
Region of the United States, Mexico and Central America
representing a total of more than 20 million square feet of
real estate. He is also a member of Hines’ Executive
Committee. He graduated from Bob Jones University with a B. S in
Accounting and is a Certificated Public Accountant (retired).
Michael J.G. Topham. Mr. Topham is an
Executive Vice President of the general partner of Hines
responsible for all development, acquisitions, operations and
real estate services in Europe and the United Kingdom, including
the establishment of offices in seven countries. He is also a
member of Hines’ Executive Committee. He was responsible
for the establishment and management of the U.S. Midwest
Region in 1985 and the development, acquisition and operations
of approximately 15 million square feet in that region.
Between 1977 and 1984, he was also responsible as project
officer of major buildings in Houston, Denver, and Minneapolis.
He graduated from Exeter University with a B.A. in Economics and
received his M.B.A. from the University of California at
Berkeley.
Hines’
Real Estate Personnel and Structure
Hines is one of the largest and most experienced privately owned
real estate investment, acquisition, development and management
companies in the world. Hines and its affiliates currently have
approximately
3,150 employees who work out of Hines’ offices located
in 67 cities in the United States and in 15 foreign
countries, as shown in the map below.
Hines believes that it has mitigated many of the risks inherent
in real estate investments by hiring, training and retaining
what it believes to be highly-qualified management personnel and
by rewarding these employees with performance-based
compensation. Hines believes that the stability of its
organization and its ability to retain its employees is
demonstrated by the longevity of their tenure at Hines, as shown
in the table below. Hines maintains what it believes are high
performance and professional standards and rewards its personnel
for their achievements. Typically, incentive compensation is
provided to senior officers, as well as other key employees, in
the form of profit sharing programs tied to Hines’
profitability related to each project, investment fund,
geographic region, or the firm as a whole. In addition, for
assets or groups of assets within the scope of their
responsibilities, Hines’ senior officers typically hold
equity investments (by way of participation in the interests
held by Hines and its affiliates) in properties acquired or
developed by Hines, its affiliates and investment partners.
Hines believes this performance-based compensation provides
better alignment of interests between Hines’ employees,
Hines and its investors, while providing Hines’ employees
with long-term incentives. However, there is no guarantee that
Hines will be able to retain these employees in the future. The
loss of a number of key employees could adversely impact our
performance. Please see “Risk Factors — Business
and Real Estate Risks — Our success will be dependent
on the performance of Hines and its affiliates as well as key
employees of Hines.”
Hines has employed a decentralized structure and built an
international organization with professionals located in major
office markets because it believes that knowledge of local
market economics and demographic conditions is essential to the
success of any real estate asset. Having real estate
professionals living and working in most major markets where
Hines invests allows Hines to monitor current local
conditions and transactions and build relationships with local
tenants, brokers and real estate owners. Hines believes that
this decentralized structure allows them to better identify
potential investment opportunities, perform more effective
research of local markets and manage, lease and operate each
real estate asset. However, Hines’ decentralized structure
may or may not have a positive impact on our performance.
Hines’
Leasing and Property Management
Hines and its affiliates have extensive experience in providing
responsive and professional property management and leasing
services. Property management and leasing services provided by
Hines include the following:
•
Tenant relations;
•
Energy management;
•
Preventive maintenance;
•
Security;
•
Vendor contracting;
•
Parking management;
•
Marketing plans;
•
Broker relations;
•
Tenant prospecting; and
•
Lease negotiation.
Hines believes that providing these services in a high quality
and professional manner is integral to tenant satisfaction and
retention.
Hines has been repeatedly recognized as an industry leader in
property management and leasing. In 2001, 2002 and 2003, the
U.S. Environmental Protection Agency (“EPA”)
named Hines as “Energy Star” Partner of the year. An
Energy Star label is a designation by the EPA for buildings that
it believes show excellence in energy performance, reduced
operating costs and environmental leadership. In 2004, the EPA
recognized Hines with its Sustained Excellence Award in
recognition of the firm’s continued leadership in superior
energy management. Hines has owned or managed 114 buildings,
with more than 66 million square feet, which have received
an “Energy Star” label. Hines has 80 of these
buildings, with approximately 54 million square feet, under
current management. We had an interest in 43 of these buildings,
which had been awarded the “Energy Star” label, as of
August, 2007. Hines has received more than 75 awards for
buildings it has owned
and/or
managed from the Building Owners and Managers Association
including “Building of the Year,”“New
Construction of the Year,”“Commercial Recycler of the
Year” and “Renovated Building of the Year” in
local, regional, national and international competitions.
Hines believes that real estate is essentially a local business
and that it is often a competitive advantage for Hines to have
real estate professionals living and working in the local
markets in which Hines and its affiliates own properties. This
allows Hines’ real estate professionals to obtain local
market knowledge and expertise and to maintain significant local
relationships. As a result, Hines may have access to off-market
acquisitions involving properties that are not yet being
generally marketed for sale, which can alleviate competitive
bidding and potentially higher costs for properties in certain
cases. In addition, in part, as a result of Hines’ strong
local presence in the markets it serves and its corporate
culture, we believe Hines has a strong track record in
attracting and retaining tenants.
Hines believes that tenant retention is a critical component of
profitable building operations and results in lower volatility.
Tenant loss can reduce operating income by decreasing rental
revenue and operating expense recoveries and by exposing the
property to market-driven rental concessions that may be
required to attract
replacement tenants. In addition, a property with high tenant
turn-over may incur costs of leasing brokerage commissions and
construction costs of tenant improvements required by new
occupants of the vacant space.
Hines attempts to manage tenant occupancy proactively by
anticipating and meeting tenant needs. In addition, Hines
attempts to maintain productive relationships with leasing
brokers in most major markets in the U.S. and currently
maintains ongoing direct relationships with approximately 2,000
tenants as the manager of buildings for its own account and as a
third-party manager. Hines also has a substantial number of
relationships with corporate and financial users of office space
as well as with law firms, accounting and consulting firms in
multiple locations throughout the United States and,
increasingly, in a range of global locations.
The following table reflects the average leasing levels of
buildings managed by Hines over the past 10 years, as
compared to the national average of U.S. office buildings
as reported by the National Council of Real Estate Investment
Fiduciaries (NCREIF):
The Operating Partnership has entered into a property management
and leasing agreement with Hines, or affiliates of Hines, for
each of the properties we own directly, under substantially the
same terms as contained in our form of Property Management and
Leasing Agreement summarized below, which was unanimously
approved by our board of directors, including the independent
directors. We expect to enter into similar agreements in
connection with properties we will acquire and own directly in
the future. Pursuant to these agreements, we have appointed and
expect to appoint Hines to provide services in connection with
the rental, leasing, operation and management of most, if not
all, of our properties under the terms provided in the
form Property Management and Leasing Agreement. To the
extent we own interests in properties indirectly through
entities or joint ventures, the Property Management and Leasing
Agreements in place for properties owned by such entities or
joint ventures, including agreements with Hines, may differ in
material respects from our form agreement. The Core Fund has
retained Hines to manage the properties it has acquired to date,
and we expect the Core Fund will enter into similar agreements
for properties it acquires in the future.
Hines may subcontract part or all of the required property
management and leasing services but will remain ultimately
responsible for services set forth in the Property Management
and Leasing Agreement. Hines may form additional property
management companies as necessary to manage the properties we
acquire and may approve of the change of management of a
property from one manager to another. Also, we may retain a
third-party to perform certain property management and leasing
functions. For example, we currently retain third party leasing
agents at some of our properties.
Many of the services to be performed by Hines as property
manager are summarized below. This summary is provided to
illustrate the material functions that Hines will perform for us
as our property manager, and it is not intended to include all
of the services that may be provided to us by Hines or by third
parties. Under each Property Management and Leasing Agreement,
Hines, either directly or indirectly by engaging an affiliate or
a third party, may:
•
manage, operate and maintain each premises in a manner normally
associated with the management and operation of a quality
building;
•
prepare and submit to us a proposed operating budget, capital
budget, marketing program and leasing guidelines for each
property for the management, leasing, and operation of each
property for the forthcoming calendar year;
•
collect all rents and other charges;
•
perform construction management services in connection with the
construction of leasehold improvements or redevelopment;
•
be primarily responsible for the leasing activities of each
property or supervise any third party we retain directly to
provide such leasing activities; and
•
enter into various agreements with sub-contractors for the
operational activities of each property.
Compensation
under the Property Management and Leasing Agreement
For properties we acquire and own directly, we pay Hines a
management fee equal to the lesser of (i) 2.5% of the
annual gross revenues received from the property or
(ii) the amount of property management fees recoverable
from tenants of the property under their leases, subject to a
minimum of 1% of the annual gross revenues in the case of
single-tenant properties. If we retain Hines as our primary
leasing agent, we will pay Hines a leasing fee of 1.5% of gross
rentals payable over the term of each executed lease including
any lease amendment, renewal, extension, expansion or similar
event. Leasing fees are payable regardless of whether an outside
broker was used in connection with the transaction. Leasing fees
are paid 50% at the time the lease or amendment is executed and
the balance on the earlier of when the tenant takes occupancy
subject to such lease or amendment or the date the tenant
commences the payment of rent; or with respect to a renewal,
extension, expansion or similar term - the date such term
begins. If the property manager provides construction management
services for leasehold improvements, we pay the property manager
the amount payable by the tenant under its lease or, if payable
by the landlord, direct costs incurred by the property manager
for services provided by off-site employees. If the property
manager provides re-development construction management
services, the property manager is paid 2.5% of total project
costs relating to the redevelopment, plus direct costs incurred
by Hines in connection with providing the related services.
Property management fees and leasing fees for international
acquisitions may differ from our typical property management
fees and leasing fees due to differences in international
markets, but in all events the fees shall be paid in compliance
with our charter and shall be approved by our independent
directors.
We also generally reimburse Hines for its operating costs
incurred in providing property management and leasing services.
Included in this reimbursement of operating costs are the cost
of personnel and overhead expenses related to such personnel who
are located in Hines’ headquarters and regional offices, to
the extent the same relate to or support the performance of
Hines’s duties under the management agreement. Examples of
such support include risk management, regional and central
accounting, cash and systems management, human resources and
payroll, technology and internal audit.
Term of
the Property Management and Leasing Agreement
The Operating Partnership is party to a separate Property
Management and Leasing Agreement for each property we own
directly, each with an initial term of ten years from the date
of each agreement. Thereafter, the term of each agreement will
continue from year to year unless written notice of termination
is given at least 90 days prior to any anniversary of the
commencement of the term of the agreement. A majority of our
independent directors must approve the continuance of the
agreement.
Either Hines or we may terminate an agreement upon
30 days’ prior written notice in the event that
(i) we sell the property to a third-party that is
unaffiliated with us in a bona fide transaction, (ii) the
property is substantially destroyed or condemned, where such
destruction cannot be restored within one year after the
casualty, or (iii) an affiliate of Hines is no longer our
advisor. In addition, we may terminate the applicable Property
Management and Leasing Agreement if Hines commits a material
breach and such breach continues for 30 days after written
notice from us (plus, with respect to breaches which Hines
commences diligent efforts to cure within such period, but which
cannot reasonably be cured within 30 days, such additional
period not to exceed 90 days as is reasonably necessary to
cure such breach).
Every year, Hines will complete and deliver to us a written
performance review, the scope and substance of which will be
agreed to by Hines and us prior to the delivery of the first
such performance review of the management of each property
subject to a Property Management and Leasing Agreement. If we
identify any material operating or performance deficiencies that
are within the reasonable control of Hines after reviewing the
performance review, we may give Hines written notice of such
deficiencies. Hines will then have the later of 30 days, or
such time as is reasonably necessary, to cure the deficiencies
we identified. If such deficiencies are not corrected within
this time period, we then may give Hines notice of our desire to
terminate the applicable Property Management and Leasing
Agreement. If Hines does not cure such deficiencies within
30 days of the second notice, and provide written notice to
us that such deficiencies have been cured, we may then terminate
the applicable Property Management and Leasing Agreement.
Indemnification
The Operating Partnership has agreed to indemnify, defend and
hold harmless Hines and its officers, agents and employees from
and against any and all causes of action, claims, losses, costs,
expenses, liabilities, damages or injuries (including legal fees
and disbursements) that such officers, agents and employees may
directly or indirectly sustain, suffer or incur arising from or
in connection with the Property Management and Leasing Agreement
or the property, unless the same results from (i) the
negligence or misconduct of such officer, agent or employee
acting within the scope of their office, employment, or agency,
or (ii) the breach of this agreement by Hines. The Company
shall assume on behalf of such officer, agent and employee the
defense of any action at law or in equity which may be brought
against such officer, agent or employee based upon a claim for
which indemnification is applicable.
Hines Real Estate Securities, Inc., our Dealer Manager, was
formed in June 2003. It is registered under applicable federal
and state securities laws and is qualified to do business as a
securities broker-dealer throughout the United States. The
Dealer Manager was formed to provide the marketing function for
the distribution and sale of our common shares and for offerings
by other Hines-sponsored programs. The Dealer Manager is a
member firm of the Financial Industry Regulatory Authority.
The following table sets forth information with respect to the
directors, officers and the key employees of the Dealer Manager
who are involved in the sales of the REIT:
Name
Age
Position and Office with the Dealer Manager
Charles M. Baughn
52
Director and Chief Executive Officer
Charles N. Hazen
46
Director
Christopher D. Hughes
45
Director
Sherri W. Schugart
41
Director
Robert F. Muller, Jr.
45
Director and President — Retail Distribution
Frank R. Apollo
40
Vice President, Treasurer and Secretary
J. Mark Earley
44
Director of REIT Distribution
Julie B. Nickell
39
Chief Operating Officer
S. William Lehew
50
Divisional Director
Dugan Fife
32
Divisional Director
Please see “— Our Officers and Directors”
for the biographies of Messrs. Baughn, Hazen, Hughes and
Apollo and Ms. Schugart.
Robert F. Muller, Jr. Mr. Muller
joined the Dealer Manager in June of 2003 and is the President
and a director of the Dealer Manager. Prior to joining the
Dealer Manager, he was National Director of Sales for Morgan
Stanley’s Investment Management Group, which oversaw the
distribution of investment management products. Mr. Muller
also served as Executive Director for Van Kampen Investments. He
is a graduate of the University of Texas at Austin with a B.B.A.
in Accounting and is a general securities principal.
J. Mark Earley. Mr. Earley joined
the Dealer Manager in September of 2003. He is responsible for
overseeing share distribution nationally for the Dealer Manager.
Prior to joining the Dealer Manager, he was a Managing Director
for Morgan Stanley from April 2002 to September 2003. In
addition, he was responsible for seeking sales and revenue
growth within a region of 65 branches and approximately 1,600
financial advisors. Prior to joining Morgan Stanley,
Mr. Earley was the Western Regional Sales Manager for
BlackRock Funds from January 2001 to March 2002. He graduated
from Stephen F. Austin State University with a B.B.A. in General
Business and holds a Texas Real Estate Brokers License and
Series 7, 24 and 63 securities licenses.
Julie B. Nickell. Ms. Nickell joined the
Dealer Manager in 2003 and is the Chief Operating Officer of the
Dealer Manager. Ms. Nickell previously worked for Hines
from 1994 to 1999. From 1999 until she joined the Dealer Manager
in the 2003, Ms. Nickell served in the risk consulting
practice of a national accounting firm. She graduated from the
University of Louisiana at Monroe with a B.B.A. in Accounting.
She is a certified public accountant, certified internal
auditor, and holds Series 7, 24 and 63 securities licenses.
S. William Lehew. Mr. Lehew joined
the Dealer Manager in April of 2004 and is responsible for
overseeing share distribution for the Eastern Division of the
Dealer Manager. Prior to his promotion to Divisional Director,
he was a Regional Sales Director for the Dealer Manager covering
the states of North Carolina, South Carolina, Virginia,
Maryland, West Virginia and Washington, D.C. Before joining
the Dealer Manager, Mr. Lehew served as a Regional Vice
President for Seligman Advisors, with responsibility for
wholesaling managed money and mutual funds. Prior to that,
Mr. Lehew worked for Van Kampen Investments as a Vice
President responsible for wholesaling mutual funds. He has been
in the securities business since 1986. He is a graduate of the
Citadel with a B.A. in political science and holds
Series 7, 24 and 63 securities licenses.
Dugan Fife. Mr. Fife joined the Dealer
Manager in June of 2004 and is responsible for overseeing share
distribution for the Western Division of the Dealer Manager.
Prior to his promotion to Divisional Director, he was a Regional
Sales Director for the Dealer Manager covering the states of
Michigan, Indiana and Kentucky. Before joining the Dealer
Manager, Mr. Fife served as a Regional Vice President for
Scudder/Deutsche Bank, with responsibility for wholesaling
variable annuities. Prior to that, Mr. Fife worked for Sun
Life/MFSLF Securities as a Vice President responsible for
wholesaling variable, fixed and indexed annuities. He has been
in the securities business since 1997. He is a graduate of the
University of Michigan with a B.A. in organizational studies and
holds Series 7, 24 and 63 securities licenses.
Our Advisor and its affiliates will receive substantial fees in
connection with this offering and our operations, which could be
increased or decreased during or after this offering. The
following table sets forth the type and, to the extent possible,
estimates of all fees, compensation, income, expense
reimbursements, interests and other payments payable to Hines or
affiliates of Hines in connection with this offering and our
operations. For purposes of this table, except as noted, we have
assumed no volume discounts or waived commissions as discussed
in the “Plan of Distribution.”
Estimated Maximum
(Based on $3,500,000,000
Type and Recipient
Description and Method of Computation
in Shares)(1)
Organizational and Offering Activities(2)
Selling Commissions — the Dealer Manager
Up to 7.0% of gross offering proceeds, excluding proceeds from
our dividend reinvestment plan; all selling commissions will be
reallowed to participating broker-dealers. If you are party to
an agreement with a licensed broker dealer, investment advisor
or bank trust department pursuant to which you pay a fee based
on assets under management such as a “wrap fee”,
“commission replacement fee”, or similar fee, we will
waive selling commissions and dealer manager fees and sell
shares to you at an aggregate 9.2% discount.
$210,000,000(3)
Dealer Manager Fee — the Dealer Manager
Up to 2.2% of gross offering proceeds, excluding proceeds from
our dividend reinvestment plan, all or a portion of which may be
reallowed to selected participating broker-dealers. If you are
party to an agreement with a licensed broker dealer, investment
advisor or bank trust department pursuant to which you pay a fee
based on assets under management such as a “wrap fee”,
“commission replacement fee”, or similar fee, we will
waive dealer manager fees and the selling commissions and sell
shares to you at an aggregate 9.2% discount.
$66,000,000(4)
No Reimbursement of Organization and Offering Expenses
All organization and offering expenses will be paid by an
affiliate of Hines.(5)
With respect to each real estate investment made after the
commencement of this offering up to an aggregate of
$2,000,000,000 in real estate investments, 2.5% of (i) the
purchase price of real estate investments acquired directly by
us, including any debt attributable to such investments, or (ii)
when we make an investment indirectly through another entity,
such investment’s pro rata share of the gross asset value
of real estate investments held by that entity. With respect to
each real estate investment made thereafter, the fee will be
equal to 0.50% of the amounts set forth in (i) and (ii), as
applicable.
$55,771,000(7)
Participation Interest in the Operating Partnership —
HALP Associates Limited Partnership
A profits interest in the Operating Partnership which increases
over time in a manner intended to approximate (i) an additional
0.50% cash acquisition fee as calculated above and (ii) the
automatic reinvestment of such cash back into the Operating
Partnership.
Not determinable at this time(8)
Debt Financing Fee — the Advisor
1.0% of the amount obtained under any property loan or made
available to us under any other debt financing. In no event
will the debt financing fee be paid more than once in respect of
the same debt.
Not determinable at this time. (9)
Operational Activities
Asset Management Fee — the Advisor
0.0625% per month of the net equity capital we have invested in
real estate investments at the end of each month.
Not determinable at this time(10)
Participation Interest in the Operating Partnership —
HALP Associates Limited Partnership
A profits interest in the Operating Partnership which increases
over time in a manner intended to approximate (i) a 0.0625% per
month cash asset management fee as calculated above and (ii) the
automatic reinvestment of such cash back into the Operating
Partnership.(8)
Not determinable at this time(10)
Expense Reimbursements in connection with our
administration — the Advisor
Reimbursement of actual expenses incurred on an ongoing
basis.(11)
Not determinable at this time
Property Management Fee — Hines
The lesser of (i) 2.5% of annual gross revenues received from
the property, or (ii) the amount of management fees recoverable
from tenants under their leases, subject to a minimum of 1.0% of
annual gross revenues in the case of single-tenant
properties.(12)
1.5% of gross revenues payable over the term of each executed
lease, including any amendment, renewal, extension, expansion or
similar event if Hines is our primary leasing agent.(12)
Not determinable at this time
Tenant Construction Management Fees — Hines
Amount payable by the tenant under its lease or, if payable by
the landlord, direct costs incurred by Hines if the related
services are provided by off-site employees.(13)
Not determinable at this time
Re-development Construction Management Fees — Hines
2.5% of total project costs relating to the re- development,
plus direct costs incurred by Hines in connection with providing
the related services.
Not determinable at this time
Expense Reimbursements — Hines
Reimbursement of actual expenses incurred in connection with the
management and operation of our properties.(14)
Not determinable at this time
Disposition and Liquidation
Disposition Fee
No disposition fee will be paid to the Advisor or its affiliates
in connection with disposition of our investments.(15)
Not applicable
Incentive Fee
No incentive fee will be paid to the Advisor or its affiliates
in connection with the sale of assets, liquidation or listing of
our shares.
Not applicable
(1)
Assumes we sell the maximum of $3,000,000,000 in shares in our
primary offering and issue $500,000,000 in shares under our
dividend reinvestment plan pursuant to this offering.
(2)
The total compensation related to our organizational and
offering activities, which includes selling commissions and the
dealer manager fee (but does not include our organization and
offering expenses, because those expenses are being paid by an
affiliate and not by us), will not exceed 15% of the proceeds
raised in this offering. See footnote 5 below.
(3)
Commissions may be reduced for volume or other discounts or
waived as further described in the “Plan of
Distribution” section of this prospectus; however, for
purposes of calculating the estimated maximum selling
commissions in this table, we have not assumed any such
discounts or waivers. Further, the Dealer Manager will not
receive selling commissions for shares issued pursuant to our
dividend reinvestment plan.
(4)
The dealer manager fees may be reduced for volume or other
discounts or waived as further described in the “Plan of
Distribution” section of this prospectus; however, for
purposes of calculating the estimated maximum dealer manager
fees in this table, we have not assumed any such discounts or
waivers. Further, the Dealer Manager will not receive the dealer
manager fee for shares issued pursuant to our dividend
reinvestment plan.
(5)
An affiliate of Hines will pay for all organization and offering
expenses, other than selling commissions and the dealer manager
fee, whether incurred by us directly or through the Advisor, the
Dealer Manager and/or their affiliates, which expenses are
expected to consist of, among other expenses, actual legal,
accounting, printing, marketing, filing fees, transfer agent
costs and other accountable offering-related expenses.
Organization and offering expenses may also include, but are not
limited to: (i) amounts to reimburse the Advisor for all
marketing related costs and expenses such as salaries and direct
expenses of our Advisor’s employees or employees of the
Advisor’s affiliates in connection with registering and
marketing of our shares, including but not limited to, salaries
related to broker-dealer accounting and compliance functions;
(ii) salaries, certain other compensation and direct
expenses of employees of our Dealer Manager while preparing for
the offering and marketing of our shares and in connection with
their wholesaling activities; (iii) travel and
entertainment expenses associated with the offering and
marketing of our shares; (iv) facilities and technology
costs, insurance expenses and other costs and expenses
associated with the offering and to facilitate the marketing of
our shares; (v) costs and expenses of conducting
educational conferences and seminars; (vi) costs and
expenses of attending broker-dealer sponsored conferences;
(vii) payment or reimbursement of due diligence expenses;
and (viii) any other compensation or reimbursements payable
to participating broker-dealers (other than selling commissions
and any reallowance of dealer manager fees), regardless of
whether such participating broker-dealers otherwise receive
commissions. We will have no liability for such expenses.
(6)
The acquisition fees and acquisition expenses incurred in
connection with the purchase of real estate investments will not
exceed an amount equal to 6.0% of the contract purchase price of
the investment unless a majority of our directors (including a
majority of our independent directors) not otherwise interested
in the transaction approve such fees and expenses in excess of
this limit. Tenant construction management fees and
re-development construction management fees will be included in
the definition of acquisition fees or acquisition expenses for
this purpose to the extent that they are paid in connection with
the acquisition, development or redevelopment of a property. If
any such fees are paid in connection with a portion of a leased
property at the request of a tenant or in conjunction with a new
lease or lease renewal, such fees will be treated as ongoing
operating costs of the property, similar to leasing commissions.
(7)
For purposes of calculating the estimated maximum acquisition
fees in this table, we have assumed that we will not use debt
when making real estate investments. In the event we raise the
maximum $3,500,000,000 pursuant to this offering and all of our
real estate investments are 50% leveraged at the time we acquire
them, the total acquisition fees payable will be $71,811,000.
Some of these fees may be payable out of the proceeds of such
borrowings.
(8)
Because the Participation Interest is a profits interest, any
value of such interest would be ultimately realized only if the
Operating Partnership has adequate gain or profit to allocate to
the holder of the Participation Interest. Please see “TheOperating Partnership — The ParticipationInterest” for more details about this interest. The
component of the increase in the Participation Interest
attributable to investment activities will be included in the
definition of acquisition fees and will therefore be included in
the 6.0% limitation calculation described above in footnote 6.
In addition, the component of the increase in the Participation
Interest attributable to operational activities will be included
in the definition of operating expenses and will therefore be
included in the 2%/25% operating expense limitation described
below in footnote 11.
(9)
Actual amounts are dependent upon the amount of any debt
incurred in connection with our acquisitions and otherwise and
therefore cannot be determined at the present time. In the event
we raise the maximum $3,500,000,000 pursuant to this offering
and all of our real estate investments are 50% leveraged, the
total debt financing fees payable will be $31,811,000.
(10)
In connection with both the asset management fee and the
corresponding increase in the Participation Interest, the
percentage itself on an annual basis would equal 0.75%, or 1.5%
on a combined basis. However, because each of the cash fee and
the Participation Interest increase is calculated monthly, and
the net equity capital we have invested in real estate
investments may change on a monthly basis, we cannot accurately
determine or calculate the amount or the value (in either
dollars or percentage) of either of these items on an annual
basis.
(11)
The Advisor will reimburse us for any amounts by which operating
expenses exceed the greater of (i) 2.0% of our invested
assets or (ii) 25% of our net income, unless our
independent directors determine that such excess was justified.
To the extent operating expenses exceed these limitations, they
may not be deferred and paid in subsequent periods. Operating
expenses include generally all expenses paid or incurred by us
as determined by accounting principles generally accepted in the
United States, or U.S. GAAP, except certain expenses identified
in our charter. The expenses identified by our charter as
excluded from operating expenses include: (i) expenses of
raising capital such as organizational and offering expenses,
legal, audit, accounting, underwriting, brokerage, listing,
registration and other fees, printing and such other expenses
and taxes incurred in connection with the issuance,
distribution, transfer, registration and stock exchange listing
of our shares; (ii) interest payments, taxes and non-cash
expenditures such as depreciation, amortization and bad debt
reserves; (iii) amounts paid as partnership distributions
of the Operating Partnership; and (iv) all fees and
expenses associated or paid in connection with the acquisition,
disposition and ownership of assets (such as real estate
commissions, acquisition fees and expenses, costs of
foreclosure, insurance premiums, legal services, maintenance,
repair or improvement of property, etc.). Please see
“Management — The Advisor and the Advisory
Agreement — Reimbursements by the Advisor” for a
detailed description of these expenses.
(12)
Property management fees and leasing fees for international
acquisitions may differ from our typical property management
fees and leasing fees due to differences in international
markets, but in all events the fees shall be paid in compliance
with our charter and shall be approved by our independent
directors.
(13)
These fees relate to construction management services for
improvements and build-out to tenant space.
(14)
Included in reimbursement of actual expenses incurred by Hines
are the costs of personnel and overhead expenses related to such
personnel who are located in Hines central and regional offices,
to the extent to which such costs and expenses relate to or
support Hines’ performance of its duties. Periodically, an
affiliate of Hines may be retained to provide ancillary services
for a property which are not covered by a property management
agreement and are generally provided by third parties. These
services are provided at market terms and are generally not
material to the management of the property.
(15)
The Company will not pay a real estate commission to Hines or an
affiliate of Hines upon the sale of properties, unless such
payment is approved by our independent directors.
In addition, we pay our independent directors certain fees,
reimburse independent directors for out-of-pocket expenses
incurred in connection with attendance at board or committee
meetings and award independent directors common shares under our
Employee and Director Incentive Share Plan. Please see
“Management — Compensation of Directors.” We
will not pay fees or compensation to the Core Fund, its general
partner or advisor. All fees and compensation paid to the Core
Fund, its general partner or its advisor will be paid or borne
solely by limited partners in the Core Fund.
Subject to limitations in our charter, the fees, compensation,
income, expense reimbursements, interests and other payments
payable to Hines and its affiliates may increase or decrease
during this offering or future offerings from those described
above if such revision is approved by our independent directors.
We were formed for the purpose of acquiring real estate
investments. As of September 30, 2007, we owned interests
in 37 office properties located throughout the United States,
one mixed-use office and retail complex in Toronto, Canada and
one industrial property in Rio de Janeiro, Brazil. These
properties contain, in the aggregate, approximately
20.6 million square feet of leasable space.
Although we own a non-managing general partner interest in the
Core Fund and are involved in
and/or
supervise the management of the Core Fund, we do not control the
Core Fund’s operations and its results of operations are
not consolidated in our financial statements. We are providing
selected combined operating data for all of the properties in
which we own an interest to give investors additional
information about our portfolio-wide operational position. As we
do not control the Core Fund’s operations, the Core
Fund’s operating data and the operating data of the
combined portfolio of all properties in which we own an interest
are not attributable to our oversight and management. Similarly,
although we have consent rights with respect to certain actions
that the joint venture that owns the industrial property in
Brazil may take, we do not control the joint venture, and the
operating data of the joint venture and the industrial property
are not attributable to our oversight and management.
The tables on the following pages provide summary information
regarding the 39 properties in which we owned an interest as of
September 30, 2007. Each of our significant investments is
briefly discussed after the table.
New York Life Insurance; Countrywide Home Loans; Pacific Health
Advantage
Wells Fargo Center
Sacramento, CA
05/2007; (5
)
502,365
93
%
21.92
%
Wells Fargo
525 B Street
San Diego, CA
08/2005; $
116.3
447,159
92
%
27.47
%
Golden Eagle Insurance; Elsevier; US Navy HR
The KPMG Building
San Francisco, CA
09/2004; $
148.0
379,328
100
%
27.47
%
KPMG; Paul Hastings; UPS Freight Services
101 Second Street
San Francisco, CA
09/2004; $
157.0
388,370
100
%
27.47
%
Thelen Reid; Ziff Davis Media
720 Olive Way
Seattle, WA
01/2006; $
83.7
300,710
93
%
21.92
%
Community Health Plan of Washington
1200
19th Street
Washington, D.C.
08/2003; $
69.4
235,404
11
%
12.98
%
(4)
Warner Center
Woodland Hills, CA
10/2006; $
311.0
808,274
97
%
21.92
%
Health Net of California, Inc.; NetZero, Inc.
Total for Core Fund Properties
12,421,804
92
%
Cargo Center Dutra II
Rio de Janeiro
07/2007; $
53.7(3
)
693,115
88
%
50
%
DHL Exel; Schio; Rapidão Cometa
Total for Other Indirectly-Owned Properties
693,115
88
%
Total for All Properties
20,555,143
92
%
(1)
This percentage shows the effective ownership of the Operating
Partnership in the properties listed. On September 30,2007, Hines REIT owned a 97.8% interest in the Operating
Partnership as its sole general partner. Affiliates of Hines
owned the remaining 2.2% interest in the Operating Partnership.
We own interests in all of the properties other than those
identified above as being owned 100% by us through our interest
in the Core Fund, in which we owned an approximate 32.0%
non-managing general partner interest as of September 30,2007. The Core Fund does not own 100% of these buildings; its
ownership interest in its buildings ranges from 40.6% to 85.9%.
In addition, we own a 50% interest in Cargo Center Dutra II
through a joint venture with an affiliate of Hines.
(2)
This amount was translated from the $250.0 million CAD
acquisition cost as of the date of acquisition.
(3)
This amount was translated from the $103.7 million BRL
acquisition cost as of the date of acquisition.
(4)
No tenant leases more than 10% of the property’s rentable
area.
(5)
These properties were purchased as part of portfolio that
included 6 properties for a purchase price of
$490.2 million.
The following table provides a summary of the market
concentration of our portfolio based on our pro-rata share of
the purchase price in each of the properties in which we owned
an interest as of September 30, 2007.
Market
Market
Concentration:
Concentration:
Indirectly-
Market
Directly-Owned
Owned
Concentration:
City
Properties
Properties(1)
All Properties(2)
Chicago, Illinois
14
%
10
%
14
%
Seattle, Washington
20
%
3
%
14
%
Los Angeles, California
16
%
7
%
14
%
Toronto, Canada
12
%
—
8
%
Sacramento, California
6
%
10
%
8
%
Miami, Florida
9
%
—
6
%
San Francisco, California
3
%
15
%
6
%
Emeryville, California
8
%
—
6
%
New York, New York
5
%
19
%
6
%
Minneapolis, Minnesota
5
%
—
3
%
Richmond, Virginia
—
8
%
3
%
Charlotte, North Carolina
—
7
%
3
%
Atlanta, Georgia
—
7
%
3
%
Houston, Texas
—
6
%
2
%
San Diego, California
—
5
%
1
%
Dallas, Texas
2
%
—
1
%
Washington, D.C.
—
1
%
1
%
Rio de Janeiro, Brazil
—
2
%
1
%
(1)
These amounts represent the Core Fund’s pro-rata share of
the Core Fund and our Brazilian joint venture based on their
effective ownership in each of the properties as of
September 30, 2007.
(2)
These amounts represent our pro-rata share based on our
effective ownership in each of the properties as of
September 30, 2007.
The following table provides a summary of the industry
concentration of the tenants of the properties in which we owned
interests based on our pro-rata share of their leased square
footage as of September 30, 2007:
Industry
Industry
Concentration:
Concentration:
Indirectly-
Industry
Directly-Owned
Owned
Concentration:
Industry
Properties
Properties(1)
All Properties(2)
Finance and Insurance
19
%
29
%
21
%
Information
18
%
5
%
15
%
Legal
7
%
33
%
14
%
Manufacturing
12
%
2
%
9
%
Government
9
%
2
%
7
%
Health Care
7
%
1
%
5
%
Professional Services
4
%
6
%
5
%
Other
5
%
6
%
5
%
Construction
4
%
1
%
3
%
Transportation and Warehousing
1
%
1
%
3
%
Wholesale Trade
5
%
—
3
%
Other Services
4
%
1
%
3
%
Oil & Gas/Energy
—
7
%
2
%
Hospitality
2
%
1
%
2
%
Arts, Entertainment and Recreation
3
%
—
2
%
Accounting
—
5
%
1
%
(1)
These amounts represent the pro-rata share of the Core Fund and
our Brazilian joint venture based on their effective ownership
in each of the properties as of September 30, 2007.
(2)
These amounts represent our pro-rata share based on our
effective ownership in each of the properties as of
September 30, 2007.
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from
September 30, 2007 through December 31, 2007 and for
each of the years ending December 31, 2008 through
December 31, 2016 and thereafter for the properties we
owned directly as of September 30, 2007. The table shows
the approximate leasable square feet represented by the
applicable lease expirations:
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from
September 30, 2007 through December 31, 2007 and for
each of the years ending December 31, 2008 through
December 31, 2016 and thereafter for the properties in
which we had an indirect interest as of September 30, 2007.
The table shows the approximate leasable square feet represented
by the applicable lease expirations:
Gross Leasable Area
Number of
Approximate
Percent of Total
Year
Leases
Square Feet
Leasable Area
Vacant
—
1,050,035
8.1
%
2007
46
416,442
3.2
%
2008
100
681,559
5.2
%
2009
119
1,090,325
8.4
%
2010
92
919,453
7.1
%
2011
86
1,196,989
9.2
%
2012
78
1,061,375
8.2
%
2013
44
1,524,042
11.7
%
2014
29
540,666
4.2
%
2015
21
1,924,995
14.8
%
2016
19
351,124
2.7
%
Thereafter
43
2,265,512
17.2
%
All
Properties
The following table lists our pro-rata share of the scheduled
lease expirations for the period from September 30, 2007
through December 31, 2007 and for each of the years ending
December 31, 2008 through December 31, 2016 and
thereafter for al of the properties in which we owned an
interest as of September 30, 2007. The table shows the
approximate leasable square feet represented by the applicable
lease expirations:
Leasable Area
Number of
Approximate
Percent of Total
Year
Leases
Square Feet(1)
Leasable Area(1)
Vacant
—
1,567,056
7.7
%
2007
94
558,293
2.7
%
2008
176
1,271,440
6.2
%
2009
194
1,875,204
9.2
%
2010
179
1,576,816
7.7
%
2011
148
1,774,378
8.7
%
2012
119
2,091,675
10.3
%
2013
58
2,600,647
12.8
%
2014
50
860,123
4.2
%
2015
31
2,090,287
10.3
%
2016
28
626,653
3.1
%
Thereafter
57
3,472,953
17.1
%
(1)
These amounts represent our pro-rata share based on our
effective ownership in each of the properties as of
September 30, 2007.
These properties will be subject to competition from similar
properties within their market areas and their economic
performance could be affected by changes in local economic
conditions. In evaluating these properties for acquisition, we
considered a variety of factors including location,
functionality and design, price per square foot, replacement
cost, the credit worthiness of tenants, length of lease terms,
market fundamentals and the in-place rental rates compared to
market rates.
Airport
Corporate Center
Airport Corporate Center, a portfolio of properties located in
the Miami Airport submarket of Miami, Florida, consists of 11
buildings and a 5.46-acre land tract. A subsidiary of Norwegian
Cruise Lines leases 190,790 square feet, or approximately
19% of the properties’ rentable area, through January 2009
and thereafter has the right to renew for two five-year terms.
The remaining lease space of Airport Corporate Center is leased
to 106 tenants, none of which leases more than 10% of the
property’s rentable area.
The following table shows the weighted average occupancy rate,
expressed as a percentage of rentable square feet, and the
average effective annual gross rent per leased square foot, for
the property during the past five years ended December 31:
Average Effective
Weighted
Annual Gross
Average
Rent per Leased
Year
Occupancy
Sq. Ft.(1)
2002
75.9
%
$
17.14
2003
78.4
%
$
14.99
2004
82.0
%
$
17.29
2005
89.9
%
$
17.95
2006
92.4
%
$
18.76
(1)
Average effective annual gross rent per leased square foot for
each year is calculated by dividing such year’s
accrual-basis total rent revenue (excluding operating expense
recoveries in excess of each tenant’s base year component)
by the weighted average square footage under lease during such
year.
We currently have no plans for material renovations or other
capital improvements at the property, and we believe the
property is suitable for its intended purpose and adequately
covered by insurance. The cost of Airport Corporate Center
(excluding the cost attributable to land) is being depreciated
for tax purposes over a
40-year
period on a straight-line basis.
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from
September 30, 2007 through December 31, 2007 and for
each of the years ending December 31, 2008 through
2016 for Airport Corporate Center. The table shows the
approximate leasable square feet represented by the applicable
lease expirations and is based on information available as of
September 30, 2007:
Gross Leasable Area
Number of
Approximate
Percent of Total
Year
Leases
Square Feet
Leasable Area
2007
10
66,454
6.6
%
2008
19
172,443
17.2
%
2009
26
126,682
12.6
%
2010
25
95,625
9.5
%
2011
14
108,080
10.8
%
2012
8
79,717
7.9
%
2013
2
28,724
2.9
%
2014
—
—
—
2015
—
—
—
2016
—
—
—
321
North Clark
321 North Clark, an office property located in the central
business district in Chicago, Illinois, consists of a 35-story
office building and a parking structure that were constructed in
1987. The American Bar Association leases 225,555 square
feet, or approximately 25% of the property’s rentable area,
under a lease that expires in June 2019 and provides an option
to renew for one ten-year term. The lease also provides a
termination option effective in June 2014 and contraction
options in June 2011 and June 2016, subject to certain
penalties. Foley & Lardner LLP, a legal firm, leases
211,546 square feet, or approximately 24% of the
property’s rentable area, under a lease that expires in
April 2018 and provides options to renew for two five-year
terms. The lease also provides contraction options effective in
April 2010 and April 2013, subject to certain penalties. Mesirow
Financial, a diversified financial services firm, leases
185,442 square feet, or approximately 21% of the
property’s rentable area, under a lease that expires in
December 2009 and provides an option to renew for one additional
five year term. The remaining lease space of 321 North Clark is
leased to 23 tenants, none of which leases more than 10% of the
property’s rentable area.
The following table shows the weighted average occupancy rate,
expressed as a percentage of rentable square feet, and the
average effective annual gross rent per leased square foot, for
the property during the past five years ended December 31:
Average Effective
Weighted
Annual Gross
Average
Rent per Leased
Year
Occupancy
Sq. Ft.(1)
2002
80.3
%
$
19.29
2003
50.0
%
$
16.35
2004
67.9
%
$
17.94
2005
85.3
%
$
19.85
2006
91.5
%
$
20.29
(1)
Average effective annual gross rent per leased square foot for
each year is calculated by dividing such year’s cash-basis
total rent revenue (excluding operating expense recoveries in
excess of each tenant’s base year component), by the
weighted average square footage under lease during such year.
We currently have no plans for material renovations or other
capital improvements at the property, and we believe the
property is suitable for its intended purpose and adequately
covered by insurance. The cost of 321 North Clark (excluding the
cost attributable to land) is being depreciated for tax purposes
over a
40-year
period on a straight-line basis.
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from
September 30, 2007 through December 31, 2007 and for
each of the years ending December 31, 2008 through 2016 for
321 North Clark. The table shows the approximate leasable square
feet represented by the applicable lease expirations and is
based on information available as of September 30, 2007:
Gross Leasable Area
Number of
Approximate
Percent of Total
Year
Leases
Square Feet
Leasable Area
2007
1
2,781
0.3
%
2008
2
16,612
1.9
%
2009
9
240,326
27.4
%
2010
1
48,097
5.5
%
2011
5
21,472
2.5
%
2012
1
22,493
2.6
%
2013
—
—
—
2014
—
—
—
2015
2
30,039
3.4
%
2016
—
—
—
Watergate
Tower IV
Watergate Tower IV, a 16-story office building located at 2100
Powell Street in Emeryville, California (a submarket of the East
Bay), consists of 344,433 square feet of rentable area and
is 100% leased. Oracle Corporation, a software application
company, leases 298,089 square feet or approximately 87% of
the building’s rentable area, under a lease that expires in
2013 and provides an option to renew for one additional
five-year term. Novartis AG, a pharmaceutical company, leases
46,344 square feet or approximately 13% of the
building’s rentable area, under a lease that expires in
2013. The following table shows the weighted average occupancy
rate, expressed as a percentage of rentable square feet, and the
average effective annual gross rent per leased square foot, for
the property during the past five years ended December 31:
Average Effective
Weighted
Annual Gross
Average
Rent per Leased
Year
Occupancy
Sq. Ft.(1)
2002
100.0
%
$
32.47
2003
100.0
%
$
33.07
2004
100.0
%
$
33.65
2005
100.0
%
$
34.27
2006
100.0
%
$
34.30
(1)
Average effective annual gross rent per leased square foot for
each year is calculated by dividing such year’s
accrual-basis total rent revenue (excluding operating expense
recoveries in excess of each tenant’s base year component),
by the weighted average square footage under lease during such
year.
We currently have no plans for material renovations or other
capital improvements at the property and believe the property is
suitable for its intended purpose and adequately covered by
insurance. The cost of Watergate Tower IV (excluding the
cost attributable to land) will be depreciated for tax purposes
over a
40-year
period on a straight-line basis.
Atrium
on Bay
Atrium on Bay, a mixed-use office and retail complex located in
the Downtown North submarket of the central business district of
Toronto, Canada, is comprised of three office towers, a
two-story retail mall, and a two-story parking garage, and was
constructed in 1984. The buildings consist of
1,079,870 square feet of rentable area and are 86% leased
to a variety of office and retail tenants. The Canadian Imperial
Bank of
Commerce, a financial institution, leases 372,733 square
feet, or approximately 35% of the rentable area, through leases
that expire in 2011, 2013 and 2016. The balance of the complex
is leased to 93 tenants, none of which leases more than 10% of
the rentable area of the complex.
The following table shows the weighted average occupancy rate,
expressed as a percentage of rentable square feet, and the
average effective annual gross rent per leased square foot, for
the property during the past five years ended December 31:
Average Effective
Weighted
Annual Gross
Average
Rent per Leased
Year
Occupancy
Sq. Ft.(1)
2002
89.2
%
$
30.19
2003
90.9
%
$
29.73
2004
88.3
%
$
29.88
2005
85.4
%
$
32.46
2006
83.6
%
$
34.22
(1)
Average effective annual gross rent per leased square foot for
each year is calculated by dividing such year’s
accrual-basis total rent revenue (including operating expense
recoveries), by the weighted average square footage under lease
during such year.
We currently have no plans for material renovations or other
capital improvements at the property and believe the property is
suitable for its intended purpose and adequately covered by
insurance. The cost of Atrium on Bay (excluding the cost
attributable to land) is being depreciated for tax purposes over
a 40-year
period on a straight-line basis.
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from
September 30, 2007 through December 31, 2007 and for
each of the years ending December 31, 2008 through 2016 for
Atrium on Bay. The table shows the approximate leasable square
feet represented by the applicable lease expirations and is
based on information available as of September 30, 2007:
Gross Leasable Area
Number of
Approximate
Percent of Total
Year
Leases
Square Feet
Leasable Area
2007
11
30,883
2.9
%
2008
13
105,339
9.9
%
2009
13
91,935
8.6
%
2010
15
21,718
2.0
%
2011
11
49,091
4.6
%
2012
7
59,880
5.6
%
2013
4
188,176
17.6
%
2014
7
104,276
9.8
%
2015
6
34,276
3.2
%
2016
7
227,918
21.4
%
One
Wilshire
One Wilshire, an office property in Los Angeles, California,
consists of a thirty-story office building constructed in 1966
and renovated in 1992. The property contains 664,248 square
feet of rentable area and is 99% leased. CRG West LLC, a data
center and property management company, leases
171,529 square feet or approximately 26% of the
building’s rentable area, under a lease that expires in
June 2017. Musick, Peeler & Garrett LLP, a national
law firm, leases 106,475 square feet or approximately 16%
of the building’s rentable area, under a lease that expires
in October 2018 and contains options to renew for two additional
five-year periods. Verizon Communications, Inc., a broadband and
telecommunications company, leases 77,898 square
feet or approximately 12% of the building’s rentable area,
under seven leases that expire in various years through 2013.
One of the leases expires in July 2012 and contains an option to
renew for one additional five-year period and another lease
expires in August 2013 and contains options to renew for two
additional five-year periods. The remaining lease space is
leased to 30 tenants, none of which leases more than 10% of the
building’s rentable area.
The following table shows the weighted average occupancy rate,
expressed as a percentage of rentable square feet, and the
average effective annual gross rent per leased square foot, for
One Wilshire during the past five years ended December 31:
Average Effective
Weighted Average
Annual Gross Rent per
Year
Occupancy
Leased Sq. Ft.(1)
2002
92.8
%
$
21.81
2003
92.5
%
$
22.68
2004
92.8
%
$
22.16
2005
97.7
%
$
21.94
2006
97.3
%
$
21.79
(1)
Average effective annual gross rent per leased square foot for
each year is calculated by dividing such year’s
accrual-basis total rent revenue (including operating expense
recoveries) by the weighted average square footage under lease
during such year.
We currently have no plans for material renovations or other
capital improvements at the property and believe the property is
suitable for its intended purpose and adequately covered by
insurance. The cost of One Wilshire (excluding the cost
attributable to land) is being depreciated for tax purposes over
a 40-year
period on a straight-line basis.
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from
September 30, 2007 through December 31, 2007 and for
each of the years ending December 31, 2008 through 2016 for
One Wilshire. The table shows the approximate leasable square
feet represented by the applicable lease expirations and is
based on information available as of September 30, 2007:
Gross Leasable Area
Number of
Approximate
Percent of Total
Year
Leases
Square Feet
Leasable Area
2007
7
8,616
1.3
%
2008
9
66,512
10.2
%
2009
6
21,469
3.3
%
2010
10
36,022
5.5
%
2011
10
88,755
13.6
%
2012
5
82,735
12.7
%
2013
3
34,225
5.2
%
2014
3
16,645
2.5
%
2015
—
—
—
2016
—
—
—
Recent
Significant Investments
Chase
Tower
On November 16, 2007, we acquired JPMorgan Chase Tower
(“Chase Tower”), a 55-story office building located in
the uptown submarket of Dallas, Texas. The seller, 2200 Ross
L.P. is not affiliated with us or our affiliates. Chase Tower
was constructed in 1987 and consists of 1,296,407 square
feet of rentable area that is approximately 92% leased. JP
Morgan Chase, a financial services firm, leases
210,707 square feet or
approximately 16% of the building’s rentable area, under a
lease that expires in September 2022. Locke Lord
Bissell & Liddell LLP, a law firm, leases
207,833 square feet or approximately 16% of the
building’s rentable area, under a lease that expires in
December 2015. Deloitte & Touche LLP, a public
accounting firm, leases 154,476 square feet or
approximately 12% of the building’s rentable area, under a
lease that expires in June 2012. Fulbright & Jaworski,
a law firm, leases 146,064 square feet or approximately 11%
of the building’s rentable area, under a lease that expires
in December 2016. The remaining lease space is leased to 31
tenants, none of which leases more than 10% of the
building’s rentable area.
The contract purchase price for Chase Tower was approximately
$289.6 million, exclusive of transaction costs, financing
fees and working capital reserves.
The following table shows the weighted average occupancy rate,
expressed as a percentage of rentable square feet, and the
average effective annual gross rent per leased square foot, for
Chase Tower during the past five years ended December 31:
Average Effective
Weighted Average
Annual Gross Rent per
Year
Occupancy
Leased Sq. Ft.(1)
2002
89.7
%
$
27.33
2003
84.2
%
$
27.06
2004
80.8
%
$
26.01
2005
77.7
%
$
25.35
2006
80.1
%
$
24.52
(1)
Average effective annual gross rent per leased square foot for
each year is calculated by dividing such year’s
accrual-basis total rent revenue (including operating expense
recoveries) by the weighted average square footage under lease
during such year.
We currently have no plans for material renovations or other
capital improvements at the property and believe the property is
suitable for its intended purpose and adequately covered by
insurance. The cost of Chase Tower (excluding the cost
attributable to land) is being depreciated for tax purposes over
a 40-year
period on a straight-line basis.
The following table lists, on an aggregate basis, all of the
scheduled lease expirations for the period from the date of
acquisition (November 16, 2007) through
December 31, 2007 and for each of the years ending
December 31, 2008 through 2016 for Chase Tower. The table
shows the approximate leasable square feet represented by the
applicable lease expirations and is based on information
available as of September 30, 2007:
On December 17, 2007, we entered into a contract with
Newkirk Segair L.P. to acquire the Raytheon/DirecTV Buildings, a
complex consisting of two office buildings located in the South
Bay submarket of El Segundo, California. The seller is not
affiliated with us or its affiliates. The Raytheon/DirecTV
Buildings were constructed in 1976 and consist of
550,579 square feet of rentable area that are 100% leased
to two tenants. Raytheon Company, a defense and aerospace
systems supplier, leases 345,377 square feet or
approximately 63% of the buildings’ rentable area, under a
lease that expires in December 2018. DirecTV, a satellite
television provider, leases 205,202 square feet or
approximately 37% of the buildings’ rentable area, under a
lease that expires in December 2013.
The contract purchase price for the Raytheon/DirecTV Buildings
is expected to be approximately $120.0 million, exclusive
of transaction costs, financing fees and working capital
reserves. We expect to fund the acquisition using proceeds from
our current public offering and the assumption of an existing
mortgage loan. In connection with the acquisition of this
property, we expect to pay our Advisor approximately $600,000 in
cash acquisition fees. Likewise, the interest in the Operating
Partnership represented by the Participation Interest will
increase as a result of the acquisition.
We expect the closing of this acquisition to occur during
January 2008. There is no guarantee that this acquisition will
be consummated and if we elect not to close the acquisition of
the Raytheon/DirecTV Buildings, we could forfeit our
$10.0 million earnest money deposit.
In connection with the acquisition of Airport Corporate Center,
a wholly-owned subsidiary of the Operating Partnership assumed a
mortgage agreement with Wells Fargo Bank, N.A., as trustee for
the registered holders of certain commercial mortgage
pass-through certificates, in the aggregate principal amount of
$91.0 million. The loan bears interest at a fixed rate of
4.775% per annum, matures and becomes payable on March 11,2009 and is secured by a mortgage, assignment of leases and
other customary loan documents encumbering Airport Corporate
Center. The mortgage agreement contains customary events of
default, with corresponding grace periods, including, without
limitation, payment defaults, cross-defaults to other agreements
and bankruptcy-related defaults, and customary covenants,
including limitations on the incurrence of debt and granting of
liens and the maintenance of certain financial ratios. The
Operating Partnership has executed a customary recourse
carve-out guaranty of certain obligations under the mortgage
agreement and the other loan documents.
Debt
Secured by Atrium on Bay
We borrowed $190.0 million CAD (approximately
$163.9 million USD as of February 26, 2007) under
a mortgage loan with Capmark Finance, Inc. (“Capmark”)
in connection with our acquisition of Atrium on Bay. This loan
bears interest at an effective fixed rate of 5.33%, has a
10-year term
and is secured by Atrium on Bay. The loan documents contain
customary events of default with corresponding grace periods,
including, without limitation, payment defaults, cross-defaults
to other agreements and bankruptcy-related defaults, and
customary covenants, including limitations on the incurrence of
debt and granting of liens. This loan is not recourse to Hines
REIT.
Debt
Secured by 321 North Clark
In connection with our acquisition of 321 North Clark, we
entered into a term loan agreement with KeyBank to provide
bridge financing in the principal amount of $165.0 million.
On August 2, 2006, we repaid
the loan in full with proceeds from a credit facility we entered
into with HSH Nordbank, which is discussed below.
Debt
Secured by One Wilshire
The Operating Partnership and a subsidiary of the Operating
Partnership that owns One Wilshire borrowed $159.5 million
from The Prudential Insurance Company of America pursuant to a
deed of trust and security agreement and a promissory note.
Pursuant to the loan documents executed in connection with this
loan, it is secured by a mortgage and related security interests
in One Wilshire. The loan documents also include assignments of
rent, leases and permits for the benefit of the lender. The loan
matures on November 1, 2012 and bears interest at a fixed
annual rate of 5.98%. Interest payments are due monthly,
beginning on December 1, 2007 through maturity. The loan
may be repaid in full prior to maturity, subject to a prepayment
premium. The lender may exercise its rights under the loan
documents, including the right of foreclosure and the right to
accelerate payment of the entire balance of the loan (including
fees and the prepayment premium) upon events of default. The
loan documents include customary events of default with
corresponding grace periods, including, without limitation,
payment defaults, cross-defaults to other agreements and
bankruptcy-related defaults. The subsidiary of the Operating
Partnership agreed to indemnify the Lender for all environmental
liabilities with respect to One Wilshire. A default under this
indemnity is included among the events of default under the loan
documents.
On December 20, 2007, a subsidiary of the Operating
Partnership entered into a credit agreement with Metropolitan
Life Insurance Company, which provides a secured credit facility
to the borrower and certain of its subsidiaries in the maximum
principal amount of $750.0 million, subject to certain
borrowing limitations (the “Met Life Credit
Facility”). Borrowings under the Met Life Credit Facility
may be drawn at any time until December 20, 2009, subject
to the approval of Metropolitan Life Insurance Company. Such
borrowings will be interest-only loans and will have terms of
five to ten years. Each loan will contain a prepayment lockout
period of two years and thereafter, prepayment will be permitted
subject to certain fees.
The Met Life Credit Facility also contains other customary
events of default, some with corresponding cure periods,
including, without limitation, payment defaults, cross-defaults
to other agreements evidencing indebtedness and
bankruptcy-related defaults, and customary covenants, including
limitations on the incurrence of debt and granting of liens and
the maintenance of minimum loan-to-value and debt service
coverage ratios.
On December 20, 2007, subsidiaries of the Operating
Partnership borrowed approximately $205.0 million under the
Met Life Credit Facility to repay amounts owed under the
Operating Partnership’s existing revolving credit facility
with KeyBank. This initial borrowing under the Met Life Credit
Facility is secured by mortgages or deeds of trust and related
assignments and security interests on two properties: JP Morgan
Chase Tower in Dallas, Texas and the Minneapolis Office/Flex
Portfolio, a collection of office/flex buildings in Minneapolis,
Minnesota. The subsidiaries of the Operating Partnership that
own such properties are the borrowers named in the loan
documents reflecting the initial $205.0 million borrowing.
As substitute security for borrowings under the Met Life Credit
Facility, the Operating Partnership may, at its election and
subject to certain conditions and fees, pledge newly acquired
properties. The initial $205.0 million borrowing has a term
of five years and bears interest at 5.70%. At its option,
Metropolitan Life Insurance Company may accelerate the repayment
of the initial borrowing upon an event of default.
We have a credit agreement with HSH Nordbank AG, New York Branch
(“HSH Nordbank”) providing for a secured credit
facility in the maximum principal amount of $500.0 million
(the “HSH Facility”), subject
HSH Nordbank — Citymark, 321 North Clark, 1900 and
2000 Alameda
8/1/2006
8/1/2016
5.8575
%(1)
$
185,000
HSH Nordbank — 3400 Data Drive, Watergate Tower IV
1/23/2007
1/12/2017
5.2505
%(2)
98,000
HSH Nordbank — Daytona and Laguna Buildings
5/2/2007
5/2/2017
5.3550
%(3)
119,000
HSH Nordbank — 3 Huntington Quadrangle
7/19/2007
7/19/2017
5.9800
%(4)
48,000
HSH Nordbank — Seattle Design Center / 5th and
Bell
8/14/2007
8/14/2017
6.0300
%(5)
70,000
TOTAL
$
520,000
(1)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.8575%.
(2)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.2505%.
(3)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.355%.
(4)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.98%.
(5)
Borrowings under the HSH Credit Facility that closed after
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.45%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 6.03%.
Loans under the HSH Facility may be prepaid in whole or in part,
subject to the payment of certain prepayment fees and breakage
costs. The Operating Partnership provides customary non-recourse
carve-out guarantees under the HSH Facility and limited
guarantees with respect to the payment and performance of
(i) certain tenant improvement and leasing commission
obligations in the event the properties securing the loan fail
to meet certain occupancy requirements and (ii) certain
major capital repairs with respect to the properties securing
the loans.
The HSH Facility provides that an event of default will exist if
a change in majority ownership or control occurs for the Advisor
or Hines, or if the Advisor no longer provides advisory services
or manages the day-to-day operations of Hines REIT. The HSH
Facility also contains other customary events of default, some
with corresponding cure periods, including, without limitation,
payment defaults, cross-defaults to other agreements evidencing
indebtedness and bankruptcy-related defaults, and customary
covenants, including limitations on the incurrence of debt and
granting of liens and the maintenance of certain financial
ratios.
We have a revolving credit facility with KeyBank, as
administrative agent for itself and various other lenders, with
maximum aggregate borrowing capacity of up to
$250.0 million. We established this facility to repay
certain bridge financing incurred in connection with certain of
our acquisitions and to provide a source of funds for future
real estate investments and to fund our general working capital
needs. From October 1,
2007 to November 9, 2007, we repaid all amounts outstanding
under our revolving credit facility with KeyBank. No new
borrowings were made under the KeyBank facility during that
period.
The credit facility has a maturity date of October 31,2009, which is subject to extension at our election for two
successive periods of one year each, subject to specified
conditions. We may increase the amount of the facility to a
maximum of $350.0 million upon written notice prior to
May 8, 2008, subject to KeyBank’s ability to syndicate
the additional amount. The facility allows, at our election, for
borrowing at a variable rate or a LIBOR-based rate plus a spread
ranging from 125 to 200 basis points based on prescribed
leverage ratios. The weighted-average interest rate on
outstanding borrowings was 6.32% as of September 30, 2007.
In addition to customary covenants and events of default, the
credit facility provides that it shall be an event of default
under the agreement if our Advisor ceases to be controlled by
Hines or if Hines ceases to be majority-owned and controlled,
directly or indirectly, by Jeffrey C. Hines or certain members
of his family. The loan is secured by a pledge of the Operating
Partnership’s equity interests in entities that directly or
indirectly hold real property assets, including our interest in
the Core Fund, subject to certain limitations and exceptions. We
have entered into a subordination agreement with Hines and our
Advisor, which provides that the rights of Hines and the Advisor
to be reimbursed by us for certain expenses are subordinate to
our obligations under the credit agreement.
The Core Fund is an investment vehicle organized in August 2003
by Hines to invest in existing office properties in the United
States. The third-party investors in the Core Fund other than us
are, and Hines expects that future third-party investors in the
Core Fund will continue to be, primarily U.S. and foreign
institutional investors and high net worth individuals. Under
the terms of the organizational documents of the Core Fund,
Hines and its affiliates are required to maintain, directly or
indirectly, the greater of $25.0 million or 1.0% of the
equity capital of the Core Fund. As of September 30, 2007,
we had invested a total of approximately $395.5 million and
owned a 32.0% non-managing general partner interest in the Core
Fund.
Please see “Our Real Estate Investments —
Overview” for a description of the properties in which we
own an interest through the Core Fund.
Hines formed the Core Fund as an investment vehicle to acquire
“core” office buildings in the United States that
Hines believes are desirable long-term “core”
holdings. The Core Fund generally targets office properties
located in a central business districts or suburban locations.
The Core Fund may acquire a mixed-use property, so long as at
least 70% of the projected net operating income from the
property is attributable to office components. In any case,
property acquired by the Core Fund cannot have a material hotel
or lodging component or involve raw land, unless the fund has a
reasonable plan for disposing of such components within
12 months after making the investment. The Core Fund has
raised capital primarily from U.S. and foreign
institutional investors and high net worth individuals. As long
as we are a non-managing general partner of the Core Fund, the
Core Fund must provide us written notice of any capital call
issued by the Core Fund. We have the right to increase our
non-managing general partner interest in an amount up to 40% of
such capital call. We have no assurance that the Core Fund will
raise significant capital after the date of this prospectus or
that our board of directors will approve any additional
investments in the Core Fund.
The Core Fund periodically adjusts the per unit price at which
investors acquire partnership interests. Investors in the Core
Fund generally make capital commitments, which are called at
times when the Core Fund needs capital, such as to acquire
properties, pay for significant capital improvements or repay
debt. If we exercise our right to participate in Core Fund
capital calls, we may acquire additional non-managing general
partner interests at a per unit price that may be higher or
lower than the per unit price paid by other investors
contributing capital at an earlier or later time.
In the event that an affiliate of Hines is no longer our
advisor, our right to acquire up to 40% of the partnership units
sold by the Core Fund will terminate. Except as described in
this prospectus, we are not obligated to fund any future capital
calls; however, once we contractually commit to make an
investment, we will be obligated to contribute capital in
accordance with the terms of such commitment. We have invested,
We are involved in
and/or
supervise the management of the Core Fund. Hines US Core Office
Capital LLC, the managing general partner and an affiliate of
Hines, remains solely responsible for the day-to-day operations
of the Core Fund. We, as non-managing general partner, are a
general partner for the purposes of the Delaware Revised Uniform
Limited Partnership Act, and our approval is required before the
Core Fund may take certain actions, including but not limited to:
•
selling investments to Hines or any affiliate of Hines or
acquiring investments from Hines or any affiliate of Hines;
•
merging or consolidating the Core Fund with any affiliate of
Hines;
•
removing and appointing any property manager or approving
renewals, amendments or modifications to any Property Management
and Leasing Agreement; and
•
removing and appointing any advisor to the Core Fund that is an
affiliate of Hines, and approving renewals, amendments or
modifications to any advisory agreement between the Core Fund or
any operating company of the Core Fund and any advisor that is
an affiliate of Hines.
For all decisions involving transactions with Hines, any action
we take as non-managing general partner would need to be
approved by a majority of our independent directors in
accordance with our conflict of interest procedures. Please see
“Conflicts of Interest — Certain Conflict
Resolution Procedures.”
We may sell or otherwise transfer our non-managing general
partner interest in the Core Fund subject to restrictions
intended to comply with applicable securities laws, to prevent a
termination of the Core Fund, and to enable the Core Fund to:
•
avoid investment company status under the Investment Company Act;
•
maintain its status as a partnership for U.S. federal
income tax purposes;
•
avoid being treated as a “publicly traded
partnership”; and
•
avoid any or all of its assets being considered “plan
assets” or subject to the provisions of ERISA.
However, if we sell or otherwise transfer any non-managing
general partner interest in the Core Fund, such transferee will
be considered to be a limited partner and the transferred
interest will become a limited partner interest.
Set forth below is a summary of the material terms of the Core
Fund partnership agreement relating to our investment in the
Core Fund.
Management
Board
The managing general partner of the Core Fund is subject to the
oversight of a management board which, as of the date of this
prospectus, had five members. The members of the management
board were designated by the managing general partner. The
approval of the management board is required for funding new
investments, incurring indebtedness, new offerings of equity
interests in the Core Fund, acquisitions and dispositions of
investments, mergers, combinations, or consolidations involving
any entity through which the Core Fund invests in properties,
transfers or exchanges of properties or other assets, amendments
and restatement of the constituent documents of an entity
through which the Core Fund invests in properties,
annual budgets and certain other major decisions. Decisions of
the management board will require the approval of a majority of
its members.
Members of the management board will not receive any
compensation for serving in such capacity. The current members
of the management board are as follows:
Name
Position
Managing General Partner designees:
Jeffrey C. Hines
President, Hines
C. Hastings Johnson
Executive Vice President and Chief Financial Officer, Hines
Charles M. Baughn
Executive Vice President, Hines
Charles N. Hazen
Senior Vice President, Hines and President, Core Fund
Edmund A. Donaldson
Vice President, Hines and Senior Investment Officer, Core Fund
Advisory
Committee
The Core Fund has an advisory committee composed of
representatives of certain investors in the Core Fund or
entities in which the Core Fund has an interest selected from
time to time by the managing general partner. No member of the
advisory committee is or will be an affiliate of Hines. The
advisory committee’s approval is required for:
•
certain matters involving potential affiliated transactions
between Hines and the managing general partner, Hines or their
affiliates;
•
the selection of appraisers by the managing general
partner; and
•
in-kind distributions of publicly-traded securities.
Any action by the advisory committee requires the vote of
members who account for at least a majority of the aggregate
equity interests in the Core Fund held by the investors
represented on the advisory committee. Members of the advisory
committee will be reimbursed by the Core Fund for their
reasonable out-of-pocket expenses but will not receive
compensation for serving on the advisory committee.
Removal
of the Managing General Partner
The managing general partner will be subject to removal without
cause at any time with the approval of the holders of not less
than 75% in interest of limited partners of the Core Fund and of
certain designated investors in entities in which the Core Fund
has an interest (such limited partners and such other investors,
collectively, “Fund Investors”), other than a
Fund Investor that is an affiliate of Hines. For purposes
of such a vote, we will not be considered an affiliate of Hines
and will vote any interest we hold in the Core Fund as directed
by our independent directors. We are entitled to call a meeting
of Fund Investors to consider removing the managing general
partner which, on a potential conflict of interest event, could
be called solely by our independent directors. In the event of
such removal, all partnership interests held by the managing
general partner and its affiliates, including the participation
interest held in the Core Fund, will be repurchased by the
issuance of a note from the Core Fund. Any such note will have a
term of not more than three years, bear interest at the prime
rate and be in a principal amount equal to the aggregate value
of such units and participation interests valued at the
then-current per unit net asset value.
The managing general partner will also be subject to removal
upon the vote of at least a
majority-in-interest
of Fund Investors (not affiliated with Hines) at any time
on the grounds that it has committed willful malfeasance in the
performance of its duties or has committed gross negligence,
willful misconduct or fraud that has a material adverse effect
on the Core Fund. For purposes of such a vote, we will not be
considered an affiliate of Hines and will vote any interest we
hold in the Core Fund as directed by the independent members of
our board of directors. We are entitled to call a meeting of
Fund Investors to consider removing the managing general
partner which, on a potential conflict of interest event, could
be called solely by our independent directors.
Upon any removal of the managing general partner, holders of a
majority-in-interest
in the Core Fund (not affiliated with Hines) will elect a
successor managing general partner. The successor managing
general partner will be entitled to appoint members of the
management board to replace those appointed by the removed
managing general partner.
We cannot be removed as the non-managing general partner of the
Core Fund, except as may be required under applicable law.
Affiliate
Transactions
The Core Fund advisory committee must approve all affiliate
transactions which are on terms less favorable to the Core Fund
than those that would be obtained from an unaffiliated third
party, except that transactions specifically contemplated by the
Core Fund partnership agreement or certain agreements entered
into in connection therewith do not need to be approved by such
committee. Additionally, we must approve certain affiliate
transactions as the non-managing general partner of the Core
Fund, as described above. All such transactions must be approved
by our independent directors. Although the other investors in
the Core Fund may pay fees to the Core Fund in connection with
their investments, we do not pay such fees.
Distributions
The Core Fund distributes cash available for distribution on at
least a quarterly basis to the holder of any profits interest
and to all partners in respect to their percentage interests.
The Core Fund will not make any distributions in kind without
the approval of the holders of at least a
majority-in-interest
in the Core Fund, except for distributions of publicly-traded
securities made with the approval of the advisory committee and
us, as non-managing general partner.
Liquidity
and Redemption Rights
Beginning one year after acquisition of an interest in the Core
Fund, a partner may request redemption of all or a portion of
such interest at a price equal to the interest’s value
based on the net asset value of the Core Fund’s assets. In
such event, the Core Fund will attempt to redeem up to 10% of
its outstanding interests during any calendar year; provided
that the managing general partner may limit redemptions as the
result of certain tax and regulatory considerations. To exercise
a redemption right, a partner must request that the Core Fund
redeem a specific number of units at any time within the last
45 days of any calendar year after the holding period
described above. Subject to specified limitations, the managing
general partner will be required to use its reasonable best
efforts to redeem the units specified on or before the last day
of the following calendar year. The Core Fund may use unused
capital commitments, proceeds from asset sales, indebtedness or
other sources to fund any such redemption. Please see “Risk
Factors — Business and Real Estate Risks —
We will be subject to risks as the result of joint ownership of
real estate with other Hines programs or third parties,”
and “Risk Factors — Business and Real Estate
Risks — If the Core Fund is forced to sell its assets
in order to satisfy mandatory redemption requirements, our
investment in the Core Fund may be materially adversely
affected.”
Liquidation
The holders of a
majority-in-interest
of Fund Investors (including us, but not including the
managing general partner or other partners affiliated with
Hines) may vote to liquidate the Core Fund. Upon this event, the
Core Fund must be liquidated within two years of such vote.
Liability
and Indemnification
We will not be liable to the Core Fund or its partners for any
act or omission on its part except for any liability arising out
of our gross negligence, recklessness, willful misconduct or bad
faith, knowing violation of law or material breach of the Core
Fund partnership agreement. We shall be indemnified by the Core
Fund to the fullest extent permitted by law for any damages
arising in connection with acts or omissions taken by us in
respect of the affairs of the Core Fund and its subsidiaries,
unless such act or omission constitutes gross negligence,
recklessness, willful misconduct or bad faith, knowing violation
of law or material breach of the Core Fund partnership agreement.
The Institutional Co-Investor Advisor has the right, but not the
obligation, on behalf of one or more funds it advises, to
co-invest with the Core Fund in connection with each investment
made by the Core Fund in an amount equal to at least 20% of the
total equity capital to be invested in such investment. The
Institutional Co-Investor Advisor also has the right, but not
the obligation, on behalf of one or more funds it advises, to
co-invest with third-party investors in an amount equal to at
least 50% of the co-investment capital sought by the Core Fund
from third-party investors for a prospective investment, except
in certain cases set forth in the Core Fund Partnership
Agreement.
The Core Fund is required to redeem or acquire any interest its
Institutional Co-Investors may have in any investment within
three years of the investment, at net asset value, unless the
Institutional Co-Investor Advisor elects to extend this period.
This period may be extended by the Institutional Co-Investor.
The Institutional Co-Investor Advisor, on one hand, and the Core
Fund, on the other hand, have the right to initiate at any time
the purchase and sale of an investment in the Core Fund or
interests therein.
Certain limited partnerships established by Ideenkapital
Financial Engineering AG (“IKFE”) and affiliated
entities under the laws of Germany own interests in
Hines-Sumisei US Core Office Properties LP (“US Core
Properties”), a subsidiary of the Core Fund through which
it owns a majority of its investments and through which it
expects to acquire all future investments. Each such entity
(individually known as an “IK Fund” and collectively
the “IK Funds”) has the right to require US Core
Properties to redeem, at current value as of the date of
redemption, all or a portion of its interest in US Core
Properties as of the dates listed below.
The Core Fund is obligated to provide US Core Properties with
sufficient funds to fulfill US Core Properties’ obligations
in respect of the IK Fund redemption rights described above, to
the extent sufficient funds are not otherwise available to US
Core Properties.
IKFE, the sponsor of the IK Funds, has been granted an exclusive
right to raise equity capital from retail investors in Germany
for US Core Properties, and it is contemplated that it will
organize follow-on funds to the existing IK Funds that would
subscribe to interests in US Core Properties with corresponding
priority redemption rights. US Core Properties has also agreed
to provide information about US Core Properties, the properties
in which it has an interest, and the Core Fund to IKFE for use
by IKFE in raising such equity capital, and to indemnify IKFE
and its affiliates and their respective directors, officers,
agents, and employees, to the extent any such person suffers
losses due to material misstatements or omissions in the
information provided to IKFE.
On July 2, 2007, we acquired a 50% interest in Cargo Center
Dutra II (“CCDII”), an industrial property
located in Rio de Janeiro, Brazil, through a joint venture with
an affiliate of Hines, Hines CalPERS Brazil II fund.
Designed by architect Gilberto Buffara, CCDII is comprised of
four distinctive buildings totaling 693,000 rentable square
feet. The buildings were completed between 2001 and 2007 and
have separate and secured entrances. CCDII is 97% leased to
multinational tenants including DHL and Unilever, as well as
leading Brazilian logistics providers.
The following table shows the number and percentage of our
outstanding common shares that were owned as of
September 30, 2007 by:
•
persons known to us to beneficially own more than 5% of our
common shares;
•
each director and executive officer; and
•
all directors and executive officers as a group.
Common Shares(2)
Beneficially Owned
Number of
Percentage
Name of Beneficial Owner(1)
Position
Common Shares
of Class
Jeffrey C. Hines
Chairman of the Board
3,450,245.7
2.31
%(3)
C. Hastings Johnson
Director
12,788.8
*
George A. Davis
Director
10,757.0
*
Thomas A. Hassard
Director
5,176.8
*
Stanley D. Levy
Director
9,446.6
*
Charles M. Baughn
Chief Executive Officer
12,747.0
*
Charles N. Hazen
President and Chief Operating Officer
6,390.0
*
Sherri W. Schugart
Chief Financial Officer
3,812.6
*
Frank R. Apollo
Chief Accounting Officer, Treasurer and Secretary
5,593.4
*
All directors and executive officers as a group
3,516,958.0
2.36
%
*
Less than 1%
(1)
The address of each person listed is
c/o Hines
REIT, 2800 Post Oak Boulevard, Suite 5000, Houston, Texas
77056-6618.
(2)
For purposes of this table, “beneficial ownership” is
determined in accordance with
Rule 13d-3
under the Exchange Act, pursuant to which a person is deemed to
have “beneficial ownership” of shares of our stock
that the person has the right to acquire within 60 days.
For purposes of computing the percentage of outstanding shares
of the Company’s stock held by each person or group of
persons named in the table, any shares that such person or
persons have the right to acquire within 60 days of
March 31, 2007 are deemed to be outstanding, but are not
deemed to be outstanding for the purpose of computing the
percentage ownership of any other persons.
(3)
Includes (i) 1,000 common shares owned directly by Hines
REIT Investor, L.P., (ii) 1,106,957.0 OP Units in the
Operating Partnership held by Hines Real Estate Holdings Limited
Partnership and (iii) 2,342,288.74 OP Units, which is the
number of OP Units that would represent the percentage interest
in the Operating Partnership evidenced by the participation
interest in such entity held by HALP Associates Limited
Partnership as of September 30, 2007. Limited partners in
the Operating Partnership may request repurchase of their OP
Units for cash or, at our option, common shares on a one-for-one
basis, beginning one year after such OP Units were issued. The
holder of the participation interest has the right, subject to
certain limitations, to demand the repurchase of the
participation interest for cash or, at our option, OP Units.
Potential conflicts of interest exist among us, Hines, the
Advisor and other affiliates of Hines, in relation to our
existing agreements and how we will operate. Currently, three of
our five directors are independent directors. Our independent
directors will act on our behalf in all situations in which a
conflict of interest may arise and have a fiduciary duty to act
in the best interests of our shareholders. However, we cannot
assure you that our independent directors will be able to
eliminate these conflicts of interest, or reduce the risks
related thereto.
Hines and its affiliates, including the Advisor, are not
prohibited from engaging, directly or indirectly, in any other
business or from possessing interests in any other business
venture or ventures, including businesses and ventures involved
in the acquisition, development, ownership, management, leasing
or sale of real estate projects. Hines owns interests in, and
manages, many other real estate ventures which have investment
objectives similar to our objectives. Hines may organize
and/or
manage similar programs and ventures in the future.
Additionally, Hines, its affiliates and its employees (including
our officers and some of our directors) may make substantial
profits as the result of investment opportunities allocated to
current or future entities affiliated with Hines other than us.
Such individuals may therefore face conflicts of interest when
allocating investment opportunities among Hines affiliates.
Please see “Risk Factors — Potential Conflicts of
Interests — Employees of the Advisor and Hines will
face conflicts of interest relating to time management and
allocation of resources and investment opportunities.”
Some of the real estate ventures currently operated by Hines
have priority rights with respect to certain types of investment
opportunities. Below is a description of some of these programs:
•
The Core Fund acquires existing office properties in the United
States that Hines believes are desirable long-term
“core” holdings. The Core Fund generally targets
office properties located in central business districts or
desirable suburban locations. The Core Fund may acquire a
mixed-use property (i.e., a part of the value of the property is
attributable to non-office components) so long as at least 70%
of the projected net operating income from the property is
attributable to office components. In any case, property
acquired by the Core Fund cannot have a material hotel or
lodging component or involve raw land, unless the fund has a
reasonable plan for disposing of such components within
12 months after making the investment.
•
Hines U.S. Office Value Added Fund II, L.P. (the
“Hines Value Added Fund”) acquires existing office
properties, or mixed-use properties (i.e., a part of the value
of the property is attributable to non-office components, so
long as at least 70% of the projected net operating income from
the property is attributable to office components) in the United
States where Hines believes it can create value through
re-leasing or redevelopment activities, or because the property
is located in a market subject to temporary capital or pricing
inefficiencies (a “value add asset”).
•
National Office Partners Limited Partnership (“NOP”)
acquires and develops office properties in the United States,
including core and value-add assets.
Set forth below is a description of the priority investment
rights and investment allocation process currently applicable to
us and the Hines sponsored real estate ventures for the types of
properties described below. While these are the current
procedures for allocating Hines’ investment opportunities
for the types of properties described below, Hines may sponsor
additional real estate funds or other ventures in the future
and, in connection with the creation of such funds or ventures,
Hines may revise this allocation procedure. The result of such a
revision to the allocation procedure may be to increase the
number of parties who have the right to participate in
investment opportunities sourced by Hines, thereby reducing the
number of investment
opportunities available to us. Although a change in this
allocation may increase the number of entities which participate
with us in an investment allocation process, as long as we have
capital available for investment and are actively seeking new
investments, Hines will not grant rights to new real estate
funds, ventures or investors that are superior to our rights to
such opportunities. However, Hines may grant rights to new real
estate funds, ventures or programs that are equal to our rights,
and investment opportunities sourced by Hines will be allocated
between us and any such fund, venture or investor on a rotating
basis. In addition, Hines may grant priority investment
allocation rights to any successor funds or programs that have
comparable investment strategies to those funds or ventures
described in the section entitled “— Description
of Certain Other Hines Ventures” above.
Type of Property
Allocation Procedure
An existing office property located in the United States that
Hines determines in its discretion is a “core asset”
If the office property is not located in Arizona, Colorado,
Nevada, Utah, Hawaii, New Mexico, southern California (Los
Angeles and San Diego) or northern and central Texas
(Dallas and Austin), then the investment opportunity will be
presented to NOP and the Core Fund. If NOP and the Core Fund
elect to not acquire the property, then we will have the right
to acquire the property if we so choose. In the event both NOP
and the Core Fund wish to pursue investment opportunities, such
opportunities will be allocated between the two entities on a
rotating basis. If the office property is located in Arizona,
Colorado, Nevada, Utah, Hawaii, New Mexico, southern California
(Los Angeles and San Diego) or northern and central Texas
(Dallas and Austin), then the Core Fund will have the first
right to acquire the property. If the Core Fund elects to not
acquire the property, the investment opportunity will be
presented to us and NOP. In the event both we and NOP wish to
pursue investment opportunities, such opportunities will be
allocated between us and NOP on a rotating basis.
An existing office property located in the United States that
Hines determines in its discretion is a “value add
asset”
If the office property is not located in Arizona, Colorado,
Nevada, Utah, Hawaii, New Mexico, southern California (Los
Angeles and San Diego) or northern and central Texas
(Dallas and Austin), then the investment opportunity will be
presented to NOP and the Hines Value Added Fund. If NOP and the
Hines Value Added Fund elect to not acquire the property, then
we will have the right to acquire the property if we so choose.
In the event both NOP and the Hines Value Added Fund wish to
pursue investment opportunities, such opportunities will be
allocated between the two entities on a rotating basis.
If the office property is located in Arizona, Colorado, Nevada,
Utah, Hawaii, New Mexico, southern California (Los Angeles and
San Diego) or northern and central Texas (Dallas and
Austin), then the Hines Value Added Fund will have the first
right to acquire the property. If the Hines Value Added Fund
elects to not acquire the property, the investment opportunity
will be presented to us and NOP. In the event both we and NOP
wish to pursue investment opportunities, such opportunities will
be allocated between us and NOP on a rotating basis.
Our right to participate in the investment allocation process
described in this section will terminate once we have fully
invested the proceeds of this offering or if we are no longer
advised by an affiliate of Hines, and this right and process may
be amended sooner with the approval of our independent
directors. Please see “Risk Factors — Potential
Conflicts of Interest Risks — We compete with
affiliates of Hines for real estate investment opportunities.
Some of these affiliates have preferential rights to accept or
reject certain investment opportunities in advance of our right
to accept or reject such opportunities. Many of the preferential
rights we have to accept or reject investment opportunities are
subordinate to the preferential rights of at least one affiliate
of Hines.”
Except as described above, we have no specific rights to invest
in any other investment opportunities identified by, sourced by
or participated in by Hines or affiliates of Hines including,
but not limited to, international, development and non-office
investment opportunities. Our Advisor is obligated by our
advisory agreement to locate investment opportunities to offer
to us and our Advisor has access to the Hines organization to
locate such opportunities. However, Hines’ ability to offer
some investment opportunities to us is limited by contractual
obligations Hines has, or may have in the future, to other real
estate programs sponsored by Hines not summarized above.
If the Core Fund accepts an investment opportunity, we will
participate in that investment indirectly through our investment
in the Core Fund. Additionally, as long as we are a non-managing
general partner of the Core Fund, the Core Fund must provide us
written notice of any capital call issued by the Core Fund. We
have the right to increase our non-managing general partner
interest in an amount up to 40% of any future capital calls made
by the Core Fund. In the event that an affiliate of Hines is no
longer our advisor, our right to acquire up to this additional
interest in the Core Fund will terminate. If we exercise this
40% right or otherwise make a capital commitment, we will be
bound to contribute capital in accordance with the terms of such
commitment. We have no assurance that our board of directors
will approve other investments in the Core Fund. This right to
participate in future Core Fund capital calls may be amended or
terminated with the approval of our independent directors.
While the investment strategies of some of the investment
vehicles described above are different, the decision of how any
potential investment should be characterized may, in many cases,
be a matter of subjective judgment which will be made by
Hines’ investment allocation committee. This committee
currently consists of the following four individuals: Jeffrey C.
Hines, C. Hastings Johnson, Charles M. Baughn and Thomas D.
Owens. If an investment opportunity is determined to fall within
the priority rights of more than one investment fund or program,
and more than one fund expresses an interest in pursuing such
opportunity, the investment will be allocated between such funds
on a rotating basis. Additionally, certain types of investment
opportunities, which may include core assets, may not enter the
allocation process because of special or unique circumstances
related to the asset or the seller of the asset that in the
judgment of the investment allocation committee do not fall
within the priority rights of any investor. In these cases, the
investment may be made by a Hines-sponsored fund or program
without us having an opportunity to make such investment.
Our officers and some of our directors, the officers and
directors of the Advisor and employees of Hines will not devote
their efforts full-time to our operations or the management of
our properties, but may devote a material amount of their time
to the management of the business of other property-owning
entities controlled or operated by Hines, but otherwise
unaffiliated with us. In some cases, these entities own
properties which are located in the same geographical area as,
and directly compete with, our properties. Members of our
management also conduct the operations of the Core Fund.
Circumstances may arise when the interests of third party
investors in the Core Fund may differ from our interests and our
management will face conflicts of interest when dealing with
such circumstances. Likewise, our management face conflicts of
interest when allocating time and resources between our
operations and the operations of the Core Fund.
In allocating employees and services among, and in soliciting
business for, properties owned by other entities affiliated with
Hines, Hines may face conflicts of interest including the fact
that Hines, its affiliates,
and its employees, including our officers and some of our
directors, may receive greater compensation from other
investment opportunities than they could from investment
opportunities allocated to us. We may also compete with other
entities affiliated with Hines for tenants and Hines may face
conflicts of interest in seeking tenants for our properties
while seeking tenants for properties owned or managed by other
Hines affiliates. The Advisor also may be in a conflict of
interest position upon a potential sale of our properties as
well as in locating new tenants for available space
and/or
negotiating with current tenants to renew expiring leases.
Please see “Risk Factors — Potential Conflicts of
Interest Risks.”
We pay Hines and its affiliates substantial fees in relation to
this offering and our operations, which could be increased or
decreased during or after this offering. Please see
“Management Compensation, Expense Reimbursements and
Operating Partnership Participation Interest.” We expect to
purchase properties in which Hines, its affiliates and its
employees (including our officers and directors) directly or
indirectly have an interest. We may also purchase properties
developed by Hines and provide development loans in connection
with such developments. On April 24, 2006, we acquired 321
North Clark for approximately $247.3 million, excluding
transaction costs, financing fees and working capital reserves.
The seller, 321 North Clark Realty LLC, was a joint venture
between an affiliate of Hines and an institution advised by JP
Morgan Chase. The Hines affiliate owned a 5% equity interest in
the seller and controlled its day-to-day operations. Through its
affiliate, Hines received a promoted share of approximately
$8.2 million of the proceeds from the sale based on the
return achieved in connection with the closing in addition to
its 5% share of net sale proceeds. The promoted share Hines
received did not affect the purchase price for
$247.3 million and was reviewed and approved by the
conflicts committee of our board of directors. Our acquisition
of 321 North Clark was, and any other such transactions will be,
consummated in accordance with the conflict of interest policies
set forth in this prospectus or otherwise in effect at that
time. Please see “— Certain Conflict Resolution
Procedures” below. The Core Fund may also acquire
properties from entities affiliated with Hines. For example, the
Shell Buildings and Three First National Plaza were acquired by
the Core Fund from sellers affiliated with Hines. Please see
“Our Real Estate Investments — Purpose and
Structure of the Core Fund.” Hines, its affiliates and its
employees (including our officers and some of our directors) may
make substantial profits in connection with such transactions.
We have invested and may continue to invest in properties and
assets jointly with other Hines’ programs, such as the Core
Fund, as well as third parties. We may acquire, develop or
otherwise invest in properties and assets through corporations,
limited liability companies, joint ventures or partnerships,
co-tenancies or other co-ownership arrangements with Hines,
Hines affiliates or third parties. For example, we acquired
Cargo Center Dutra II, an industrial property located in Rio de
Janeiro, Brazil, through a joint venture with another affiliate
of Hines. Joint ownership of properties, under certain
circumstances, may involve conflicts of interest. Examples of
these conflicts include:
•
such partners or co-investors might have economic or other
business interests or goals that are inconsistent with our
business interests or goals, including goals relating to the
financing, management, operation, leasing or sale of properties
held in the joint venture or the timing of the termination and
liquidation of the venture;
•
such partners or co-investors may be in a position to take
action contrary to our instructions, requests, policies or
objectives, including our policy with respect to maintaining our
qualification as a REIT;
•
under joint venture or other co-investment arrangements, neither
co-venturer may have the power to control the venture and, under
certain circumstances, an impasse could result and this impasse
could have an adverse impact on the joint venture, which could
adversely impact the operations and profitability of the joint
venture
and/or the
amount and timing of distributions we receive from such joint
venture; and
under joint venture or other co-investment arrangements, each
venture partner may have a buy/sell right and, as the result of
the exercise of such a right by a co-venturer, we may be forced
to sell our interest, or buy a co-venturer’s interest, at a
time when it would not otherwise be in our best interest to do
so. Please see “Risk Factors — Business and Real
Estate Risks — We will be subject to risks as the
result of joint ownership of real estate with Hines programs or
third parties.”
Because our Dealer Manager is an affiliate of Hines, you will
not have the benefit of an independent due diligence review and
investigation of the type normally performed by an unaffiliated,
independent underwriter in connection with an offering of
securities. Please see “Risk Factors — Investment
Risks — You will not have the benefit of an
independent due diligence review in connection with this
offering.”
Hines manages many of the properties we own, as well as all of
the Core Fund’s properties. We expect that Hines will
manage most, if not all, future properties acquired by us or the
Core Fund.
All agreements, contracts or arrangements between or among Hines
and its affiliates, including the Advisor, and us were not
negotiated at arm’s-length. Such agreements include the
Advisory Agreement, the Dealer Manager Agreement, the Property
Management and Leasing Agreement, our charter, and the Operating
Partnership’s partnership agreement. The policies with
respect to conflicts of interest described herein were designed
to lessen the effect of potential conflicts that arise from such
relationships. However, we cannot assure you that these policies
will eliminate the conflicts of interest or reduce the risks
related thereto. The conflicts committee of our board of
directors must also approve all conflict-of-interest and related
party transactions. Please see the “Investment Objectives
and Policies with Respect to Certain Activities —
Acquisition and Investment Policies — Affiliate
Transaction Policy” section of this prospectus.
Hines REIT, the Operating Partnership, the Dealer Manager, the
Advisor, Hines and their affiliates may be represented by the
same legal counsel and may retain the same accountants and other
experts. In this regard, Greenberg Traurig, LLP represents Hines
REIT and is providing services to certain of its affiliates
including the Operating Partnership, the Dealer Manager and the
Advisor. No counsel, underwriter, or other person has been
retained to represent potential investors in connection with
this offering.
We, our Advisor and its affiliates will also potentially be in
conflict of interest positions as to various other matters in
our day-to-day operations, including matters related to the:
•
computation of compensation, expense reimbursements, interests,
distributions, and other payments under the Operating
Partnership’s partnership agreement, our charter, the
Advisory Agreement, the Property Management and Leasing
Agreements and the Dealer Manager Agreement;
•
enforcement or termination of the Operating Partnership’s
partnership agreement, our charter, the Advisory Agreement, the
Property Management and Leasing Agreements and the Dealer
Manager Agreement;
•
order and priority in which we pay the obligations of the
Operating Partnership, including amounts guaranteed by or due to
the Advisor, Hines or its affiliates;
•
order and priority in which we pay amounts owed to third parties
as opposed to amounts owed to Hines or the Advisor;
•
determination of whether to sell properties and acquire
additional properties (as to which acquisitions, the Advisor
might receive additional fees and as to which sales, the Advisor
might lose fees, such as property management fees);
timing, amount and manner in which we finance or refinance any
indebtedness (as to which arrangements, the Advisor might
receive additional fees); and
•
extent to which we repay or refinance the indebtedness which is
recourse to Hines, if any, prior to nonrecourse indebtedness and
the terms of any such refinancing, if applicable.
In order to reduce the effect on the Company of certain
potential conflicts of interest, the Advisory Agreement and our
charter contain a number of restrictions relating to
transactions we enter into with Hines and its affiliates. These
restrictions include, among others, the following:
•
Except as otherwise described in this prospectus, we will not
accept goods or services from Hines or its affiliates unless a
majority of our directors, including a majority of our
independent directors, not otherwise interested in the
transaction approve such transactions as fair and reasonable to
us and on terms and conditions not less favorable to us than
those available from unaffiliated third parties for comparable
goods or services.
•
We will not purchase or lease a property in which Hines or its
affiliates has an interest without a determination by a majority
of our directors, including a majority of our independent
directors, not otherwise interested in the transaction that the
transaction is competitive and commercially reasonable to us and
at a price no greater than the cost of the property to Hines or
its affiliates, unless there is substantial justification for
any amount that exceeds such cost and such excess amount is
determined to be reasonable and appropriate disclosure is made
with respect to the transaction. In all cases where assets are
acquired from Hines or one of its affiliates, the fair market
value of such assets will be determined by an independent expert
selected by our independent directors. In no event will we
acquire any property from Hines or its affiliates at a price
that exceeds the appraised value of the property; provided that
in the case of a development, redevelopment or refurbishment
project that we agree to acquire prior to completion of the
project, the appraised value will be based upon the completed
value of the project as determined at the time the agreement to
purchase the property is entered into. We will not sell or lease
a property to Hines or its affiliates or to our directors unless
a majority of our directors, including a majority of the
directors not otherwise interested in the transaction, determine
the transaction is fair and reasonable to us. Even following
these procedures, Hines, its affiliates and employees (including
our officers and directors) may make substantial profits in
connection with acquisition of properties from Hines-affiliated
entities.
•
We will not enter into joint ventures with affiliates of Hines,
such as acquiring interests in the Core Fund, unless a majority
of our independent directors approves such transaction as being
fair and reasonable to us and determines that our investment is
on terms substantially similar to the terms of third parties
making comparable investments.
•
We will not make any loan to Hines, its affiliates or our
directors, except in the case of loans to our subsidiaries and
mortgage loans in which an independent expert has appraised the
underlying property. Any loans to us by Hines, its affiliates or
our directors must be approved by a majority of our directors,
including a majority of the directors not otherwise interested
in the transaction, as fair, competitive and commercially
reasonable, and on terms no less favorable to us than comparable
loans between unaffiliated parties.
•
Hines and its affiliates will be entitled to reimbursement, at
cost, for actual expenses incurred by them on behalf of us or
joint ventures in which we are a joint venture partner, subject
to the limitation on reimbursement of operating expenses to the
extent that they exceed the greater of 2% of our average
invested assets or 25% of our net income, as described in the
“Management — The Advisor and the Advisory
Agreement — Reimbursements by the Advisor”
section of this prospectus.
Despite these restrictions, conflicts of interest may be
detrimental to your investment.
The following is a discussion of our current objectives and
policies with respect to investments, borrowing, affiliate
transactions, equity capital and certain other activities. All
of these objectives and policies have been established in our
governance documents or by our management and may be amended or
revised from time to time (and at any time) by our management or
board of directors, except for policies contained in our
charter, which may only be modified with a vote or the approval
of our shareholders. We cannot assure you that our policies or
investment objectives will be attained or that the value of our
common shares will not decrease.
Decisions relating to our investments will be made by our
Advisor, subject to approval by our board of directors. Please
see “Management — Our Officers and
Directors” and “Management — Hines and Our
Property Management and Leasing Agreements — The Hines
Organization — General” for a description of the
background and experience of our directors and executive
officers.
invest in a diversified portfolio of office properties;
•
pay regular cash dividends;
•
achieve appreciation of our assets over the long term; and
•
remain qualified as a real estate investment trust, or
“REIT,” for federal income tax purposes.
We cannot assure you that we will attain these objectives. We
also cannot change our primary investment objectives without the
approval of our shareholders.
We invest primarily in institutional-quality office properties
located throughout the United States. We believe that there is
an ongoing opportunity to create stable cash returns and
attractive total returns by employing a strategy of investing
primarily in a diversified portfolio of office properties over
the long term. We believe that this strategy can help create
stable cash flow and capital appreciation potential if the
office portfolio is well-selected and well-diversified in number
and location of properties, and the office properties are
consistently well-managed. These types of properties are
generally located in central business districts or suburban
markets of major metropolitan cities. Our principal targeted
assets are office properties that have quality construction,
desirable locations and quality tenants. We intend to continue
to invest in a geographically diverse portfolio in order to
reduce the risk of reliance on a particular market, a particular
property
and/or a
particular tenant. In addition, we invest in other real estate
investments including, but not limited to, properties outside of
the United States, non-office properties, loans and ground
leases.
We also own Atrium on Bay, a mixed-use office and retail complex
in Toronto, Canada and have an indirect interest in an
industrial property in Rio de Janeiro, Brazil. We believe there
are also significant opportunities for real estate investments
that currently exist in other markets outside of the United
States. Some of this real estate is located in developed markets
such as the United Kingdom, Germany and France, while other real
estate investment opportunities are located in emerging or
maturing markets such as Brazil, Mexico, Russia and China. We
believe that investing in international properties that meet our
investment policies and objectives could provide additional
diversification and enhanced investment returns to our real
estate portfolio.
We may continue to invest in real estate directly by owning 100%
of such assets or indirectly by owning less than 100% of such
assets through investments with other investors or joint venture
partners, including other Hines-affiliated entities, such as the
Core Fund. We anticipate that we will fund our future
acquisitions primarily with proceeds raised in this offering and
potential follow-on offerings, as well as with proceeds from
debt financings. All of our investment decisions are subject to
the approval of a majority of our board of directors, and
specifically a majority of our independent directors if an
investment involves a transaction with Hines or any of its
affiliates.
We will seek to invest in properties that will satisfy the
primary objectives of preserving invested capital and providing
cash dividends to our shareholders. However, because a
significant factor in the valuation of income-producing real
property is its potential for future appreciation, we anticipate
that some properties we acquire may have both the potential for
growth in value and for providing cash dividends to our
shareholders. We intend to invest in a portfolio of properties
which is diversified by location, lease expirations and tenant
industries. Even if we are able to achieve this diversification
objective, we expect that it may take a long time to achieve.
Please see “Risk Factors — Investment
Risks — This offering is being conducted on a
“best efforts” basis, and the risk that we will not be
able to accomplish our business objectives will increase if only
a small number of our shares are purchased in this
offering.”
We have bought and expect to buy additional assets with the
proceeds of this offering that we believe have some of the
following attributes:
Preferred Location. We believe that location
often has the single greatest impact on an asset’s
long-term income-producing potential and that assets located in
the preferred submarkets in metropolitan areas and situated at
preferred locations within such submarkets have the potential to
be long-term assets.
Premium Buildings. We will seek to acquire
assets that generally have design and physical attributes (e.g.,
quality construction and materials, systems, floorplates, etc.)
that are more attractive to a user than those of inferior
properties. Such assets over the long term may attract and
retain a greater number of desirable tenants in the marketplace.
Quality Tenancy. We will seek to acquire
assets that typically attract tenants with better credit who
require larger blocks of space because these larger tenants
generally require longer term leases in order to accommodate
their current and future space needs without undergoing
disruptive and costly relocations. Such tenants may make
significant tenant improvements to their spaces, and thus may be
more likely to renew their leases prior to expiration.
We believe that following an acquisition, the additional
component of proactive property management and leasing is the
fourth critical element necessary to achieve attractive
long-term investment returns for investors. Actively
anticipating and quickly responding to tenant comfort and
cleaning needs are examples of areas where proactive property
management may make the difference in a tenant’s occupancy
experience, increasing its desire to remain a tenant and thereby
providing a higher tenant retention rate, which over the long
term may result in better financial performance of the property.
However, our Advisor may not be able to locate properties with
all, or a significant number, of these attributes and even if
the Advisor is able to locate properties with these attributes,
the properties may still perform poorly. Please see “Risk
Factors — Business and Real Estate Risks” and
“Risk Factors — Potential Conflicts of Interest
Risks.”
Although we are not limited as to the form our investments may
take, our investments in real estate will generally take the
form of holding fee title or long-term ground leases in the
properties we acquire, owning interests in investment vehicles
sponsored by Hines or acquiring interests in joint ventures or
similar entities that own and operate real estate. We expect to
continue to acquire such interests through the Operating
Partnership. Please see “The Operating Partnership.”
The Operating Partnership may hold real estate indirectly by
acquiring interests in properties through limited liability
companies and limited partnerships, or through investments in
joint ventures, partnerships, co-tenancies or other co-ownership
arrangements with other owners of properties, affiliates of
Hines or other persons. Please see “Risk Factors
— Business and Real Estate Risks — We will
be subject to risks as the result of joint ownership of real
estate with other Hines programs or third parties.” We may
hold our investments in joint ventures or other entities in the
form of equity securities, debt or general partner interests.
Please see “— Joint Venture Investments”
below. If we invest in a partnership as a general partner, we
may acquire non-managing general partner interests, as in the
case with our non-managing general partner interest in the Core
Fund. Please see “Risk Factors — Business and
Real
Estate Risks — If we invest in a limited partnership
as a general partner, we could be responsible for all
liabilities of such partnership.”
We are not limited as to the geographic area where we may
conduct our operations. We are not specifically limited in the
number or size of properties we may acquire, or on the
percentage of net proceeds of this offering that we may invest
in a single property. The number and mix of properties we
acquire will depend upon real estate and market conditions and
other circumstances existing at the time we are acquiring our
properties and the amount of proceeds we raise in this offering.
In seeking investment opportunities for us, our Advisor will
consider relevant real estate and financial factors including
the creditworthiness of major tenants, the leases and other
agreements affecting the property, the location of the property,
its income-producing capacity, its prospects for long-term
appreciation and liquidity and tax considerations. In this
regard, our Advisor will have substantial discretion with
respect to the selection of specific investments, subject to
board approval. In determining whether to purchase a particular
property, we may obtain an option on such property. The amount
paid for an option, if any, is normally surrendered if the
property is not purchased and may or may not be credited against
the purchase price if the property is purchased.
Our obligation to close the purchase of any investment will
generally be conditioned upon the delivery and verification of
certain documents from the seller or developer, including, where
available and appropriate:
•
plans, specifications and surveys;
•
environmental reports;
•
evidence of marketable title, subject to such liens and
encumbrances as are acceptable to the Advisor, as well as title
and other insurance policies; and
•
financial information relating to the property, including the
recent operating histories of properties that have operating
histories.
We may invest in properties which have been developed, are being
developed or are to be developed by Hines or a Hines affiliate.
We may acquire a property that has been developed by Hines or a
Hines affiliate and we may contract to acquire a property under
development, or to be developed, by Hines or a Hines affiliate
at a pre-determined purchase price. All such transactions or
investments will be approved by a majority of our independent
directors as described in “Conflicts of
Interest — Certain Conflict Resolution
Procedures” and generally may not be acquired by us for a
value, at the time the transaction was entered into, in excess
of the appraised fair market value of such investment. Subject
to this limitation, Hines, its affiliates and its employees
(including our officers and directors) may make substantial
profits in connection with any such development investment and
our cost to acquire the property may be in excess of the cost
that would have been incurred by us if we had developed the
property. Please see “Risk Factors — Business and
Real Estate Risks — We will be subject to risks as the
result of joint ownership of real estate with other Hines
programs or third parties” and “Conflicts of
Interest — Joint Venture Conflicts of Interest”
such as our interest.
According to Prudential Real Estate Investors, approximately
two-thirds of global real estate available for investment is
located outside of the United States. Some of this real estate
is located in developed markets such as the United Kingdom,
Germany and France. These real estate markets are well-developed
and have been integrated into the global capital markets for
some time. Other real estate investments are located in maturing
markets in countries that either have less advanced capital
markets or are surrounded by emerging or higher risk markets. We
believe examples of maturing markets include Russia and China.
Finally, there are other potential real estate opportunities in
emerging markets such as Brazil and Mexico. Although these
markets have a higher degree of market risk, they also offer
higher potential returns.
We have recently expanded our portfolio to include two
international properties. We acquired Atrium on Bay, a mixed-use
office and retail complex in Toronto, Canada and a 50% interest,
through a joint venture with an affiliate of Hines, in Cargo
Center Dutra II, an industrial property in Rio de Janeiro,
Brazil.
We believe that international properties may play a more
important role in well-diversified real estate portfolios in the
future and that a meaningful allocation to international
properties that meet our investment policies and objectives
could be an effective tool we could use to create a
well-diversified portfolio. International investment
diversification may involve diversity in regard to property
types as well as market types. Additionally, we believe that
acquiring international properties during periods in which
investors are spending significant capital to acquire properties
in the United States may allow us to more successfully make
investments that are accretive to our cash flow available for
distributions.
However, international investments involve unique risks. In
addition to risks associated with real estate investments
generally, regardless of location, country-specific risks and
currency risks add an additional layer of factors that must be
considered when investing in
non-U.S. real
estate. We believe that having access to Hines’
international organization, with regional offices in 15 foreign
countries and real estate professionals living and working full
time in these international markets, will be a valuable resource
to us when considering international opportunities. As of
December 31, 2006, Hines had offices in the United Kingdom,
France, Spain, Mexico, Poland, Germany, Brazil, Italy,
Argentina, China, Canada, Russia, Panama, Luxembourg and India.
Hines has acquired, developed, or redeveloped over 35 projects
outside of the United States in the 10 year period ended
December 31, 2006 with an aggregate cost of approximately
$3.6 billion. A majority of these projects are located in
maturing or emerging markets. Our Advisor has access to
Hines’ international organization, and we expect to
consider interests in
non-U.S. markets
as the size of our portfolio increases, including opportunities
in maturing or emerging markets. However, we cannot assure
investors that we will be able to successfully manage the
various risks associated with, and unique to, investing in
foreign markets.
We have entered into, and may continue to enter into joint
ventures with third parties or Hines affiliates, such as our
interest in the Core Fund and the joint venture that owns Cargo
Center Dutra II. We may also enter into joint ventures,
partnerships, co-tenancies and other co-ownership arrangements
or participations with real estate developers, owners and other
affiliated or non-affiliated third parties for the purpose of
owning
and/or
operating real properties. Our investment may be in the form of
equity or debt. In determining whether to invest in a particular
joint venture, the Advisor will evaluate the real property that
such joint venture owns or is being formed to own under the same
criteria described elsewhere in this prospectus for the
selection of our real estate property investments.
We will enter into joint ventures with Hines affiliates for the
acquisition of properties only if:
•
a majority of our directors, including a majority of our
independent directors not otherwise interested in the
transaction, approve the transaction as being fair and
reasonable to us; and
•
the investment by us and other third-party investors making
comparable investments in the joint venture are on substantially
the same terms and conditions.
Our entering into joint ventures with other Hines affiliates
will result in certain conflicts of interest. Please see
“Conflicts of Interest — Joint Venture Conflicts
of Interest” and “Conflicts of Interest —
Competitive Activities of our Officers and Directors, the
Advisor and Other Hines Affiliates.” Please also see
“Risk Factors — Business and Real Estate
Risks — We will be subject to risks as the result of
joint ownership of real estate with other Hines programs or
third parties” and “Risk Factors — Business
and Real Estate Risks — If the Core Fund is forced to
sell its assets in order to satisfy mandatory redemption
requirements, our investments in the Core Fund may be materially
adversely affected.” Management may determine that
increasing our indirect investment in the Core Fund or investing
in another Hines affiliates will provide benefits to our
investors because it will allow us to diversify our portfolio of
properties at a faster rate than we could obtain by investing
directly, which may reduce risks to investors in the Company.
Likewise, such investments may provide us with access to real
estate investments with benefits not available to us for direct
investments, or are otherwise in the best interest of our
shareholders. We do not expect that we will incur additional
costs of any significance associated with increasing our
indirect investments made through the Core Fund compared to
acquiring interests in real estate directly.
We have not established safeguards we will apply to, or be
required in, our potential joint ventures. Particular safeguards
we will require in joint ventures will be determined on a
case-by-case
basis after our management
and/or board
of directors consider all facts they feel are relevant, such as
the nature and attributes of our other potential joint venture
partners, the proposed structure of the joint venture, the
nature of the operations, liabilities
and/or
assets the joint venture may conduct
and/or own,
and the proportion of the size of our interest when compared to
the interests owned by other parties. We expect to consider
specific safeguards to address potential consequences relating
to:
•
The management of the joint venture, such as obtaining certain
approval rights in joint ventures we do not control or providing
for procedures to address decisions in the event of an impasse
if we share control of the joint venture.
•
Our ability to exit a joint venture, such as requiring buy/sell
rights, redemption rights or forced liquidation under certain
circumstances.
•
Our ability to control transfers of interests held by other
parties in the joint venture, such as requiring consent, right
of first refusal or forced redemption rights in connection with
transfers.
We may incur indebtedness in the form of bank borrowings,
purchase money obligations to the sellers of properties and
publicly or privately placed debt instruments or financing from
institutional investors or other lenders. Our indebtedness may
be unsecured or may be secured by mortgages or other interests
in our properties, or may be limited to the particular property
to which the indebtedness relates. We may use borrowing proceeds
to finance acquisitions of new properties, make payments to our
Advisor, to pay for capital improvements, repairs or tenant
buildouts, to refinance existing indebtedness, to pay dividends,
to fund redemptions of our shares or to provide working capital.
The form of our indebtedness may be long-term or short-term debt
or in the form of a revolving credit facility. Please see
“Our Real Estate Investments” for a description of our
current debt.
We expect that once we have fully invested the proceeds of this
offering and other potential follow-on offerings, our debt
financing, or the debt financing of entities in which we invest,
will be in the range of approximately 40%-60% of the aggregate
value of our real estate investments. Financing for future
acquisitions and investments may be obtained at the time an
asset is acquired or an investment is made or at such later time
as determined to be appropriate. In addition, debt financing may
be used from time to time for property improvements, lease
inducements, tenant improvements and other working capital
needs. Additionally, the amount of debt placed on an individual
property, or the amount of debt incurred by an individual entity
in which we invest, may be less than 40% or more than 60% of the
value of such property or the value of the assets owned by such
entity, depending on market conditions and other factors. Our
aggregate borrowings, secured and unsecured, must be reasonable
in relation to our net assets and must be reviewed by our board
of directors at least quarterly. Our charter limits our
borrowing to 300% of our net assets (equivalent to 75% of the
cost of our assets) unless any excess borrowing is approved by a
majority of our independent directors and is disclosed to our
shareholders in our next quarterly report along with
justification for the excess. Notwithstanding the above,
depending on market conditions and other factors, we may choose
not to place debt on our portfolio or our assets and may choose
not to borrow to finance our operations or to acquire properties.
We had debt financing in an amount equal to approximately 47% of
the estimated value of our direct and indirect real estate
investments as of September 30, 2007, consisting primarily
of outstanding loans under our revolving credit facility and
secured mortgage financings. The Core Fund, in which we have
invested, had
debt financing in an amount equal to approximately 46% of the
estimated value of its real estate investments as of
September 30, 2007, consisting primarily of secured
mortgage financings.
Our financing strategy and policies do not eliminate or reduce
the risks inherent in using leverage to purchase properties.
Please see “Risk Factors — Business and Real
Estate Risks — Our use of borrowings to partially fund
acquisitions and improvements on properties could result in
foreclosures and unexpected debt service expenses upon
refinancing, both of which could have an adverse impact on our
operations and cash flow.”
By operating on a leveraged basis, we will have more funds
available for investment in properties. We believe the prudent
use of favorably-priced debt may allow us to make more
investments than would otherwise be possible, resulting in a
more diversified portfolio. To the extent that we do not obtain
mortgage loans on our properties, our ability to acquire
additional properties may be restricted. Lenders may have
recourse to assets not securing the repayment of the
indebtedness.
We will refinance properties during the term of a loan only in
limited circumstances, such as when a decline in interest rates
makes it beneficial to prepay an existing mortgage, when an
existing mortgage matures or if an attractive investment becomes
available and the proceeds from the refinancing can be used to
purchase such investment. The benefits of the refinancing may
include increased cash flow resulting from reduced debt service
requirements, increased distributions resulting from proceeds of
the refinancing, if any, and increased property ownership if
some refinancing proceeds are reinvested in real estate.
It is our policy generally not to enter into interest rate swap
or cap transactions, hedging arrangements or similar
transactions for speculative purposes. However, because we are
exposed to the effects of interest rate changes, for example as
a result of variable interest rate debt we may hold, we have
entered into and may in the future enter into interest rate
swaps and caps, or similar hedging or derivative transactions or
arrangements, in order to manage or mitigate our interest rate
risk on variable rate debt.
We may borrow amounts from Hines or its affiliates only if such
loan is approved by a majority of our directors, including a
majority of our independent directors not otherwise interested
in the transaction, as fair, competitive, commercially
reasonable and no less favorable to us than comparable loans
between unaffiliated parties under the circumstances.
Except as set forth in our charter regarding debt limits, we may
reevaluate and change our debt policy in the future without a
shareholder vote. Factors that we would consider when
reevaluating or changing our debt policy include then-current
economic conditions, the relative cost of debt and equity
capital, any acquisition opportunities, the ability of our
properties to generate sufficient cash flow to cover debt
service requirements and other similar factors. Further, we may
increase or decrease our ratio of debt to book value in
connection with any change of our borrowing policies.
We generally intend to hold each property we acquire for an
extended period, and we have no present intention to sell any of
our properties or other real estate investments. However, we may
sell a property at any time if, in our judgment, the sale of the
property is in the best interests of our shareholders.
Additionally, ventures in which we have an interest may be
forced to sell assets to satisfy mandatory redemptions of other
investors. Please see “Risk Factors — Business
and Real Estate Risks — If the Core Fund is forced to
sell its assets in order to satisfy mandatory redemption
requirements, our investment in the Core Fund may be materially
adversely affected.” We may sell properties to fund
redemptions under our share redemption program.
The determination of whether a particular property should be
sold or otherwise disposed of will generally be made after
consideration of relevant factors, including prevailing economic
conditions, other investment opportunities and considerations
specific to the condition, value and financial performance of
the property. In connection with our sales of properties, we may
lend the purchaser all or a portion of the purchase price. In
these instances, our taxable income may exceed the cash received
in the sale.
We may sell assets to third parties or to affiliates of Hines.
All transactions with affiliates of Hines will be completed in
accordance with our conflict of interest policies. Please see
“Conflicts of Interest — Certain Conflict
Resolution Procedures.”
Our charter places numerous limitations on us with respect to
the manner in which we may invest our funds, most of which are
required by various provisions of the NASAA Guidelines. These
limitations cannot be changed unless our charter is amended,
which requires the approval of our shareholders. Unless our
charter is amended, we may not:
•
Invest in equity securities unless a majority of our directors,
including a majority of our independent directors, not otherwise
interested in the transaction approve such investment as being
fair, competitive and commercially reasonable.
•
Invest in commodities or commodity futures contracts, except for
futures contracts when used solely for the purpose of hedging in
connection with our ordinary business of investing in real
estate assets and mortgages.
•
Invest in real estate contracts of sale, otherwise known as land
sale contracts, unless the contract is in recordable form and is
appropriately recorded in the chain of title.
•
Make or invest in mortgage loans unless an appraisal is obtained
concerning the underlying property, except for those mortgage
loans insured or guaranteed by a government or government
agency. In cases where a majority of our independent directors
determines, and in all cases in which the transaction is with
any of our directors or Hines and its affiliates, we will obtain
an appraisal from an independent appraiser.
•
Make or invest in mortgage loans, including construction loans,
on any one property if the aggregate amount of all mortgage
loans on such property would exceed an amount equal to 85% of
the appraised value of such property, as determined by an
appraisal, unless substantial justification exists for exceeding
such limit because of the presence of other loan underwriting
criteria.
•
Make or invest in mortgage loans that are subordinate to any
mortgage or equity interest of any of our directors, Hines or
their respective affiliates.
•
Invest in junior debt secured by a mortgage on real property
which is subordinate to the lien or other senior debt except
where the amount of such junior debt plus any senior debt does
not exceed 90% of the appraised value of such property, if after
giving effect thereto, the value of all such mortgage loans
would not then exceed 25% of our net assets, which means our
total assets less our total liabilities.
•
Make investments in unimproved property or indebtedness secured
by a deed of trust or mortgage loans on unimproved property in
excess of 10% of our total assets.
•
Issue equity securities on a deferred payment basis or other
similar arrangement.
•
Issue debt securities in the absence of adequate cash flow to
cover debt service.
•
Issue equity securities which are non-voting or assessable.
•
Issue “redeemable securities,” as defined in
Section 2(a)(32) of the Investment Company Act.
•
When applicable, grant warrants or options to purchase shares to
Hines or its affiliates or to officers or directors affiliated
with Hines except on the same terms as the options or warrants
that are sold to the general public. Further, the amount of the
options or warrants cannot exceed an amount equal to 10% of
outstanding shares on the date of grant of the warrants and
options.
•
Engage in securities trading, as compared with real estate
activities, or engage in the business of loan underwriting or
the agency distribution of securities issued by other persons.
•
Lend money to our directors, or to Hines or its affiliates,
except for certain mortgage loans described above.
If we become an investment company, we might be required to
revise some of these policies to comply with the Investment
Company Act. This would require us to incur the expense and
delay of holding a shareholder meeting to vote on proposals for
such changes.
While we intend to emphasize equity real estate investments, we
may invest in first or second mortgages or other real
estate-related investments that do not conflict with the
maintenance of our REIT status. Such financings may or may not
be insured or guaranteed by the Federal Housing Administration,
the Veterans Administration or another third-party. We may also
invest in participating or convertible mortgages if our
directors conclude that we and our shareholders may benefit from
the cash flow or any appreciation in the value of the subject
property. Investments in such mortgages are similar to equity
participation.
We may make or invest in mezzanine loans that generally take the
form of subordinated loans secured by second mortgages on the
underlying real property or loans secured by a pledge of the
ownership interests of an entity that directly or indirectly
owns real property. An investment in a mezzanine loan generally
involves a lower degree of risk than an equity investment in an
entity that owns real property because the mezzanine loan
investment is generally secured by the ownership interests in
the property-owning entity and, as a result, is senior to the
equity.
Although generally a lower-risk investment than an investment in
equity, a mezzanine loan involves a higher degree of risk
relative to a long-term senior mortgage loan secured by the real
property underlying the mezzanine loan because the mezzanine
loan may become unsecured as a result of foreclosure by the
senior lender. If a borrower defaults on our mezzanine loan or
debt senior to our loan, or in the event of a borrower
bankruptcy, our mezzanine loan will be satisfied only after the
senior mortgage loan. Further, mezzanine loans usually have
higher loan-to-value ratios than traditional senior mortgage
loans, increasing the risk of loss of principal. If we invest in
mezzanine loans, we expect that we will generally charge higher
interest rates than we would in connection with traditional
mortgage loans and that we will receive a portion of our return
during the duration of the loan, with the balance payable upon
maturity.
Subject to limitations contained in our organizational and
governance documents, we may issue, or cause to be issued,
shares in Hines REIT or OP Units in the Operating
Partnership in any manner (and on such terms and for such
consideration) in exchange for real estate or interests in real
estate. Existing shareholders have no preemptive rights to
purchase such shares in any offering, and any such issuance of
our shares or OP Units might result in dilution of a
shareholder’s investment.
Our board of directors has established a conflicts committee,
which will review and approve all matters the board believes may
involve a conflict of interest. This committee is composed
solely of independent directors. Please see
“Management — Committees of the Board of
Directors — Conflicts Committee.” The conflicts
committee of our board of directors will approve all
transactions between us and Hines and its affiliates. Please see
“Conflicts of Interest — Certain Conflict
Resolution Procedures.”
We intend to operate in such a manner that we will not be
subject to regulation under the Investment Company Act. The
Advisor will continually review our investment activity to
attempt to ensure that we do not come within the application of
the Investment Company Act. Among other things, the Advisor will
attempt to monitor the proportion of our portfolio that is
placed in various investments so that we do not come within the
definition of an “investment company” under the act.
If at any time the character of our investments could cause us
to be deemed an investment company for purposes of the
Investment Company Act, we will take all
necessary actions to attempt to ensure that we are not deemed to
be an “investment company.” Please see “Risk
Factors — Investment Risks — We are not
registered as an investment company under the Investment Company
Act, and therefore we will not be subject to the requirements
imposed on an investment company by such act. Similarly, the
Core Fund is not registered as an investment company.”
Please also see “Risk Factors — Investment
Risks — If Hines REIT, the Operating Partnership or
the Core Fund is required to register as an investment company
under the Investment Company Act, the additional expenses and
operational limitations associated with such registration may
reduce your investment return.”
We do not intend to:
•
underwrite securities of other issuers; or
•
actively trade in loans or other investments.
Subject to the restrictions we must follow in order to qualify
to be taxed as a REIT, we may make investments other than as
previously described, although we do not currently intend to do
so. We have authority to purchase or otherwise reacquire our
common shares or any of our other securities. We have no present
intention of repurchasing any of our common shares except
pursuant to our share redemption program, and we would only take
such action in conformity with applicable federal and state laws
and the requirements for qualifying as a REIT under the Code.
Our charter requires our independent directors to review our
investment policies at least annually to determine that the
policies we are following are in the best interests of our
shareholders. Each determination and the basis therefor is
required to be set forth in the applicable meeting minutes. The
methods of implementing our investment policies also may vary as
new investment techniques are developed. The methods of
implementing our investment objectives and policies, except as
otherwise provided in our organizational documents, may be
altered by a majority of our directors, including a majority of
our independent directors, without the approval of our
shareholders. Our primary investment objectives themselves and
other investment policies and limitations specifically set forth
in our charter, however, may only be amended by a vote of the
shareholders holding a majority of our outstanding shares.
The following selected consolidated and combined financial data
are qualified by reference to and should be read in conjunction
with our Consolidated Financial Statements and Notes thereto and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” below.
Organizational and offering expenses, net of reversal(2)
$
5,115
$
3,123
$
5,760
$
(6,630
)
$
14,771
$
—
General and administrative expenses, net(3)
$
2,989
$
2,040
$
2,819
$
494
$
618
$
—
Equity in earnings (losses) of unconsolidated entities
$
(6,922
)
$
(1,839
)
$
(3,291
)
$
(831
)
$
68
$
—
Net loss before income taxes and (income) loss allocated to
minority interests
$
(48,985
)
$
(27,878
)
$
(38,919
)
$
(2,392
)
$
(16,549
)
$
(20
)
(Income) loss allocated to minority interests
$
(680
)
$
409
$
429
$
635
$
6,541
$
—
Net loss
$
(50,245
)
$
(27,469
)
$
(38,490
)
$
(1,757
)
$
(10,008
)
$
(20
)
Basic and diluted loss per common share
$
(0.43
)
$
(0.66
)
$
(0.79
)
$
(0.16
)
$
(60.40
)
$
(20.43
)
Distributions authorized per common share(4)
$
0.46
$
0.45
$
0.61
$
0.60
$
0.06
$
—
Weighted average common shares outstanding — basic and
diluted
116,037
41,333
48,468
11,061
166
1
Balance Sheet Data:
Total investment property
$
1,760,984
$
531,666
$
798,329
$
143,577
$
—
$
—
Investment in unconsolidated entities
$
369,249
$
207,884
$
307,553
$
118,575
$
28,182
$
—
Total assets
$
2,301,190
$
855,240
$
1,213,662
$
297,334
$
30,112
$
394
Long-term obligations
$
946,920
$
333,163
$
498,989
$
77,922
$
409
$
—
Note: Except as described below, the differences in operating
and balance sheet data between periods are primarily the result
of increases in the number of properties in which we held an
interest.
Based on actual gross proceeds raised in the initial offering,
we were not obligated to reimburse the Advisor for certain
organizational and offering costs that were previously accrued
by us. Accruals of these costs were reversed in our financial
statements during the year ended December 31, 2005. See
further discussion in Note 2 to our consolidated financial
statements for the years ended December 31, 2006 and 2005
included in this prospectus.
(3)
During the year ended December 31, 2005, the Advisor
forgave amounts previously advanced to us for certain
corporate-level general and administrative expenses. See further
discussion in Note 6 to our consolidated financial
statements for the years ended December 31, 2006, 2005 and
2004 included in this prospectus.
(4)
The Company paid its first distributions in January 2005.
We commenced real estate operations on November 23,2004. Therefore, we do not have meaningful active operations to
discuss for the year ended December 31, 2004. You should
read the following discussion and analysis together with our
consolidated financial statements and notes thereto included in
this prospectus. The following information contains
forward-looking statements, which are subject to risks and
uncertainties. Should one or more of these risks or
uncertainties materialize, actual results may differ materially
from those expressed or implied by the forward-looking
statements. Please see “Special Note Regarding
Forward-Looking Statements” above for a description of
these risks and uncertainties.
We were formed by our sponsor, Hines, in August 2003 for the
purpose of investing in and owning interests in real estate. We
commenced operations on November 23, 2004. We have invested
and intend to continue to make real estate investments that will
satisfy our primary investment objectives of preserving invested
capital, paying regular cash distributions and achieving modest
capital appreciation of our assets over the long term. We make
investments directly through entities wholly-owned by the
Operating Partnership or indirectly by owning interests in
entities not wholly-owned by the Operating Partnership such as
the Core Fund. As of September 30, 2007, we had direct and
indirect interests in 37 office properties located throughout
the United States, one mixed-use office and retail property in
Toronto, Ontario, and one industrial property in Rio de Janeiro,
Brazil. In addition, we have and may make other real estate
investments including, but not limited to, properties outside of
the United States, non-office properties, mortgage loans and
ground leases. Our principal targeted assets are office
properties that have quality construction, desirable locations
and quality tenants. We intend to invest in properties which
will be diversified by location, lease expirations and tenant
industries.
In order to provide capital for these investments, we sold
shares to the public through our initial public offering (the
“Initial Offering”), which commenced on June 18,2004 and terminated on June 18, 2006, and we continue to
sell common shares through our follow-on public offering of a
maximum of $2.2 billion in common shares (the “Current
Offering”), which commenced on June 19, 2006 and will
terminate on or before June 19, 2008.
The following table provides summary information regarding the
properties in which we owned interests as of September 30,2007:
Direct
Investments
Leasable
Percent
Our Effective
Property
City
Square Feet
Leased
Ownership(1)
321 North Clark
Chicago, Illinois
885,664
99
%
100
%
Citymark
Dallas, Texas
220,079
100
%
100
%
Watergate Tower IV
Emeryville, California
344,433
100
%
100
%
One Wilshire
Los Angeles, California
664,248
99
%
100
%
3 Huntington Quadrangle
Melville, New York
407,731
88
%
100
%
Airport Corporate Center
Miami, Florida
1,018,793
89
%
100
%
Minneapolis Office/Flex Portfolio
Minneapolis, Minnesota
766,240
86
%
100
%
3400 Data Drive
Rancho Cordova, California
149,703
100
%
100
%
Daytona Buildings
Redmond, Washington
250,515
99
%
100
%
Laguna Buildings
Redmond, Washington
464,701
100
%
100
%
1515 S Street
Sacramento, California
348,881
100
%
100
%
1900 and 2000 Alameda
San Mateo, California
253,377
94
%
100
%
Seattle Design Center
Seattle, Washington
390,684
88
%
100
%
5th and Bell
Seattle, Washington
197,135
98
%
100
%
Atrium on Bay
Toronto, Ontario
1,078,040
85
%
100
%
Total for Directly-Owned Properties
7,440,224
93
%
Indirect Investments
Joint Venture
Cargo Center Dutra II
Rio de Janeiro, Brazil
693,115
88
%
50
%
Core Fund Investments
One Atlantic Center
Atlanta, Georgia
1,100,312
82
%
27.47
%
The Carillon Building
Charlotte, North Carolina
470,726
100
%
27.47
%
Charlotte Plaza
Charlotte, North Carolina
625,026
98
%
27.47
%
Three First National Plaza
Chicago, Illinois
1,419,978
93
%
21.97
%
333 West Wacker
Chicago, Illinois
845,206
85
%
21.92
%
One Shell Plaza
Houston, Texas
1,228,160
99
%
13.73
%
Two Shell Plaza
Houston, Texas
566,960
95
%
13.73
%
425 Lexington Avenue
New York, New York
700,034
100
%
12.98
%
499 Park Avenue
New York, New York
288,722
100
%
12.98
%
600 Lexington Avenue
New York, New York
282,409
100
%
12.98
%
Riverfront Plaza
Richmond, Virginia
950,025
100
%
27.47
%
Johnson Ranch Corporate Center
Roseville, California
179,990
72
%
21.92
%
Roseville Corporate Center
Roseville, California
111,418
96
%
21.92
%
Summit at Douglas Ridge
Roseville, California
185,128
82
%
21.92
%
Olympus Corporate Center
Roseville, California
191,494
86
%
21.92
%
Douglas Corporate Center
Roseville, California
214,606
86
%
21.92
%
Wells Fargo Center
Sacramento, California
502,365
93
%
21.92
%
525 B Street
San Diego, California
447,159
92
%
27.47
%
The KPMG Building
San Francisco, California
379,328
100
%
27.47
%
101 Second Street
San Francisco, California
388,370
100
%
27.47
%
720 Olive Way
Seattle, Washington
300,710
93
%
21.92
%
1200 19th Street
Washington, D.C.
235,404
11
%
12.98
%
Warner Center
Woodland Hills, California
808,274
97
%
21.92
%
Total for Core Fund Properties
12,421,804
92
%
Total for All Properties
20,555,143
92
%
(1)
This percentage shows the effective ownership of the Operating
Partnership in the properties listed. On September 30,2007, Hines REIT owned a 97.8% interest in the Operating
Partnership as its sole general partner. Affiliates of Hines
owned the remaining 2.2% interest in the Operating Partnership.
As of
September 30, 2007, we owned interests in the 23 Core Fund
investments through our interest in the Core Fund, in which we
owned an approximate 32.0% non-managing general partner interest
as of September 30, 2007. The Core Fund does not own 100%
of these buildings; its ownership interest in its buildings
ranges from 40.6% to 85.9%. In addition, we owned a 50% interest
in Cargo Center Dutra II through a joint venture with an
affiliate of Hines.
As of September 30, 2007, we had primarily invested in
institutional-quality office properties in the United States.
These types of properties continue to attract significant
capital, and competition to acquire such assets remains intense.
However, we intend to continue to pursue institutional-quality
office properties as well as other real estate investments that
we believe will satisfy our long-term primary objectives of
preserving invested capital and achieving modest capital
appreciation over the long term, in addition to providing
regular cash distributions to our shareholders.
We expect to continue to focus primarily on investments in
institutional-quality office properties located in the United
States (whether as direct investments or as indirect investments
through the Core Fund or otherwise). However, we have expanded
our focus to include other real estate investments such as our
investment in Toronto, Ontario and our recent international
joint venture investment in Rio de Janeiro, Brazil. In the
future, our investments may include additional investments
outside of the United States, investments in non-office
properties, non-core or development investments, various types
of loans, ground leases and investments in joint ventures.
Each of our critical accounting policies involves the use of
estimates that require management to make assumptions that are
subjective in nature. Management relies on its experience,
collects historical and current market data, and analyzes these
assumptions in order to arrive at what it believes to be
reasonable estimates. Under different conditions or assumptions,
materially different amounts could be reported related to the
accounting policies described below. In addition, application of
these accounting policies involves the exercise of judgments
regarding assumptions as to future uncertainties. Actual results
could materially differ from these estimates.
Basis
of Presentation
Our consolidated financial statements included in this
prospectus include the accounts of Hines REIT, the Operating
Partnership (over which Hines REIT exercises financial and
operating control) and the Operating Partnership’s
wholly-owned subsidiaries, as well as the related amounts of
minority interest. All intercompany balances and transactions
have been eliminated in consolidation.
We evaluate the need to consolidate joint ventures based on
standards set forth in Financial Accounting Standards Board
(“FASB”) Interpretation No. 46R, Consolidation
of Variable Interest Entities (“FIN 46R”) and
American Institute of Certified Public Accountants’
Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures
(“SOP 78-9”),
as amended by Emerging Issues Task Force Issue
No. 04-5,
Investor’s Accounting for an Investment in a Limited
Partnership When the Investor Is the Sole General Partner and
the Limited Partners Have Certain Rights. In accordance with
this accounting literature, we will consolidate joint ventures
that are determined to be variable interest entities for which
we are the primary beneficiary. We will also consolidate joint
ventures that are not determined to be variable interest
entities, but for which we exercise control over major operating
decisions through substantive participation rights, such as
approval of budgets, selection of property managers, asset
management, investment activity and changes in financing.
On June 28, 2007, we invested $28.9 million into HCB
River II, LLC, a joint venture we created with HCB
Interests II LP (“HCB”). HCB is an investment
vehicle organized by Hines and the California Public
Employees’ Retirement System. The joint venture is in the
form of a Delaware limited liability company governed by an
Amended and Restated Limited Liability Company Agreement. We and
HCB each own a 50% interest in the joint venture. HCB is
responsible for managing the day-to-day operations of the joint
venture, however, we have various approval rights and must
approve certain major decisions related to the joint
venture. On July 2, 2007, the joint venture acquired Cargo
Center Dutra II, an industrial property located in Rio de
Janeiro, Brazil for $103.7 million Brazilian real
($53.7 million USD as of July 2, 2007). We own a 50%
interest in Cargo Center Dutra II as a result of its
investment in the joint venture.
We concluded that the joint venture does not meet the definition
of a variable interest entity under FIN 46R. Further, as
neither we nor HCB has a controlling interest in the joint
venture or any special or disproportionate voting or
participation rights, consolidation is not required under
SOP 78-9.
Therefore, we account for our interest in the joint venture as
an equity method investment
Investment
Property
Real estate assets we own directly are stated at cost less
accumulated depreciation. Depreciation is computed using the
straight-line method. The estimated useful lives for computing
depreciation are generally 10 years for furniture and
fixtures,
15-20 years
for electrical and mechanical installations and 40 years
for buildings. Major replacements that extend the useful life of
the assets are capitalized. Maintenance and repair costs are
expensed as incurred.
Real estate assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of
the individual property may not be recoverable. In such an
event, a comparison will be made of the current and projected
operating cash flows of each property on an undiscounted basis
to the carrying amount of such property. Such carrying amount
would be adjusted, if necessary, to estimated fair values to
reflect impairment in the value of the asset. At
September 30, 2007, management believes no such impairment
has occurred.
Acquisitions of properties are accounted for utilizing the
purchase method and, accordingly, the results of operations of
acquired properties are included in the Company’s results
of operations from their respective dates of acquisition.
Estimates of future cash flows and other valuation techniques
that the Company believes are similar to those used by
independent appraisers are used to allocate the purchase price
of acquired property between land, buildings and improvements,
equipment and identifiable intangible assets and liabilities
such as amounts related to in-place leases, acquired above- and
below-market leases, tenant relationships, asset retirement
obligations and mortgage notes payable. Initial valuations are
subject to change until such information is finalized, no later
than 12 months from the acquisition date.
The estimated fair value of acquired in-place leases are the
costs we would have incurred to lease the properties to the
occupancy level of the properties at the date of acquisition.
Such estimates include the fair value of leasing commissions,
legal costs and other direct costs that would be incurred to
lease the properties to such occupancy levels. Additionally, we
evaluate the time period over which such occupancy levels would
be achieved and includes an estimate of the net market-based
rental revenues and net operating costs (primarily consisting of
real estate taxes, insurance and utilities) that would be
incurred during the
lease-up
period. Acquired in-place leases as of the date of acquisition
are amortized over the remaining lease terms.
Acquired above-and below-market lease values are recorded based
on the present value (using an interest rate that reflects the
risks associated with the lease acquired) of the difference
between the contractual amounts to be paid pursuant to the
in-place leases and management’s estimate of fair market
value lease rates for the corresponding in-place leases. The
capitalized above- and below-market lease values are amortized
as adjustments to rental revenue over the remaining
non-cancelable terms of the respective leases. Should a tenant
terminate its lease, the unamortized portion of the in-place
lease value is charged to amortization expense and the
unamortized portion of out-of-market lease value is charged to
rental revenue.
Acquired above- and below-market ground lease values are
recorded based on the difference between the present value
(using an interest rate that reflects the risks associated with
the lease acquired) of the contractual amounts to be paid
pursuant to the ground leases and management’s estimate of
fair market value of land under the ground leases. The
capitalized above- and below-market lease values are amortized
as adjustments to ground lease expense over the lease term.
Management estimates the fair value of assumed mortgage notes
payable based upon indications of current market pricing for
similar types of debt with similar maturities. Assumed mortgage
notes payable are
initially recorded at their estimated fair value as of the
assumption date, and the difference between such estimated fair
value and the note’s outstanding principal balance is
amortized over the life of the mortgage note payable.
Deferred
Leasing Costs
Direct leasing costs, primarily consisting of third-party
leasing commissions and tenant inducements, are capitalized and
amortized over the life of the related lease. Tenant inducement
amortization is recorded as an offset to rental revenue and the
amortization of other direct leasing costs is recorded in
amortization expense.
We consider a number of different factors to evaluate whether it
or the lessee is the owner of the tenant improvements for
accounting purposes. These factors include: 1) whether the
lease stipulates how and on what a tenant improvement allowance
may be spent; 2) whether the tenant or landlord retains
legal title to the improvements; 3) the uniqueness of the
improvements; 4) the expected economic life of the tenant
improvements relative to the term of the lease; and 5) who
constructs or directs the construction of the improvements.
The determination of who owns the tenant improvements for
accounting purposes is subject to significant judgment. In
making that determination, we consider all of the above factors.
No one factor is determinative.
Tenant inducement amortization was approximately
$1.4 million and $429,000 for the nine months ended
September 30, 2007 and 2006, respectively, and was recorded
as an offset to rental revenue. In addition, we recorded
approximately $468,000 and $60,000 as amortization expense
related to other direct leasing costs for the nine months ended
September 30, 2007 and 2006, respectively.
Tenant inducement amortization was approximately $493,000 and
$155,000 for the three months ended September 30, 2007 and
2006, respectively, and was recorded as an offset to rental
revenue. In addition, we recorded approximately $188,000 and
$33,000 as amortization expense related to other direct leasing
costs for the three months ended September 30, 2007 and
2006, respectively.
Organizational
and Offering Costs
Certain organizational and offering costs related to our public
offerings have been paid by our Advisor on our behalf.
Initial
Offering
Certain organizational and offering costs associated with the
Initial Offering were paid by the Advisor on our behalf.
Pursuant to the Advisory Agreement among Hines REIT, the
Operating Partnership and the Advisor during the Initial
Offering, we were obligated to reimburse the Advisor in an
amount equal to the lesser of actual organizational and offering
costs incurred related to the Initial Offering or 3.0% of the
gross proceeds raised from the Initial Offering.
As of December 31, 2006, 2005 and 2004, the Advisor had
incurred on behalf of the Company organizational and offering
costs related to the Initial Offering of approximately
$43.3 million, $36.8 million and $24.0 million,
respectively (of which approximately $23.0 million,
$20.4 million, and $14.8 million as of
December 31, 2006, 2005 and 2004, respectively, relates to
the Advisor or its affiliates). These amounts include
approximately $24.2 million, $21.3 million and
$14.8 million as of December 31, 2006, 2005 and 2004,
respectively, of organizational and internal offering costs, and
approximately $19.1 million, $15.5 million and
$9.2 million as of December 31, 2006, 2005 and 2004,
respectively, of third-party offering costs, such as legal and
accounting fees and printing costs.
As described above, our obligation to reimburse the Advisor for
organizational and offering costs related to the Initial
Offering was limited by the amount of gross proceeds raised from
the sale of our common shares in the Initial Offering. Amounts
of organizational and offering costs recorded in our financial
statements in periods prior to the quarter ended June 30,2006 were based on estimates of gross proceeds to be raised
through the end of the Initial Offering period. Such estimates
were based on highly subjective factors
including the number of retail broker-dealers signing selling
agreements with our Dealer Manager, anticipated market share
penetration in the retail broker-dealer network and the Dealer
Manager’s best estimate of the growth rate in sales.
Based on actual gross proceeds raised in the Initial Offering,
the total amount of organizational and offering costs for which
the Company was obligated to reimburse the Advisor related to
the Initial Offering was $16.0 million. As a result of
amounts recorded in prior periods, during the six months ended
June 30, 2006, organizational and internal offering costs
related to the Initial Offering totaling $1.0 million
incurred by the Advisor were expensed and included in the
accompanying condensed consolidated statement of operations and
third-party offering costs related to the Initial Offering of
$2.0 million were offset against additional paid-in
capital. During the six months ended June 30, 2006,
organizational and internal offering costs related to the
Initial Offering totaling $1.9 million and third-party
offering costs related to the Initial Offering of
$1.5 million were incurred by the Advisor but were not
recorded in the consolidated condensed financial statements
because we were not obligated to reimburse the Advisor for these
costs.
Current
Offering
We commenced the Current Offering on June 19, 2006. Certain
organizational and offering costs associated with the Current
Offering have been paid by the Advisor on our behalf. Pursuant
to the terms of the Advisory Agreement, we are obligated to
reimburse the Advisor in an amount equal to the amount of actual
organizational and offering costs incurred, so long as such
costs, together with selling commissions and dealer manager
fees, do not exceed 15% of gross proceeds from the Current
Offering. As of September 30, 2007 and December 31,2006, the Advisor had incurred on our behalf organizational and
offering costs in connection with the Current Offering of
$24.6 million and $12.6 million, respectively (of
which $9.6 million and $4.7 million, respectively,
relates to the Advisor or its affiliates).
The Advisor incurred $5.1 million and $2.1 million of
internal offering costs, which have been expensed in the
accompanying condensed consolidated statements of operations for
the nine months ended September 30, 2007 and 2006,
respectively. In addition, $6.9 million and
$5.0 million of third-party offering costs have been offset
against net proceeds of the Current Offering within additional
paid-in capital for the nine months ended September 30,2007 and 2006, respectively.
The Advisor incurred approximately $1.6 million and
$1.5 million of internal offering costs, which have been
expensed in the accompanying condensed consolidated statements
of operations for the three months ended September 30, 2007
and 2006, respectively. In addition, $2.3 million and
$2.0 million of third-party offering costs have been offset
against net proceeds of the Current Offering within additional
paid-in capital for the three months ended September 30,2007 and 2006, respectively.
Revenue
Recognition and Valuation of Receivables
We recognize rental revenue on a straight-line basis over the
life of the lease including rent holidays, if any. Straight-line
rent receivable in the amount of $9.2 million and
$3.4 million as of September 30, 2007 and
December 31, 2006, respectively, consisted of the
difference between the tenants’ rents calculated on a
straight-line basis from the date of acquisition or lease
commencement over the remaining terms of the related leases and
the tenants’ actual rents due under the lease agreements
and is included in tenant and other receivables in the
accompanying condensed consolidated balance sheets. Revenues
associated with tenant reimbursements are recognized in the
period in which the expenses are incurred based upon the tenant
lease provision. Revenues relating to lease termination fees are
recognized at the time that a tenant’s right to occupy the
space is terminated and when the Company has satisfied all
obligations under the agreement.
We commence revenue recognition on its leases based on a number
of factors. In most cases, revenue recognition under a lease
begins when the lessee takes possession of or controls the
physical use of the leased asset. The determination of who is
the owner of the tenant improvements for accounting purposes
determines the nature of the leased asset and when revenue
recognition under a lease begins. If we are the owner of the
tenant improvements for accounting purposes, then the leased
asset is the finished space and revenue recognition begins when
the lessee takes possession of the finished space, typically
when the improvements
are substantially complete. If we conclude the lessee is the
owner of the tenant improvements for accounting purposes, then
the leased asset is the unimproved space and any tenant
improvement allowances funded under the lease are treated as
lease incentives which reduce revenue recognized over the term
of the lease. In these circumstances, we begin revenue
recognition when the lessee takes possession of the unimproved
space to construct their own improvements.
Derivative
Instruments
We have entered into interest rate swap transactions as economic
hedges against the variability of future interest rates on
certain variable interest rate debt. To date, we have not
designated any such contracts as cash flow hedges for accounting
purposes. The interest rate swaps have been recorded at their
estimated fair value in the accompanying condensed consolidated
balance sheets as of September 30, 2007 and
December 31, 2006. Any changes in the fair value of the
interest rate swaps have been recorded in the accompanying
condensed consolidated statement of operations for the three and
nine months ended September 30, 2007.
We will mark the interest rate swaps to their estimated fair
value as of each balance sheet date, and the changes in fair
value will be reflected in our condensed consolidated statements
of operations.
On February 8, 2007, we entered into a foreign currency
contract related to the acquisition of Atrium on Bay, an office
property located in Toronto, Ontario. The contract was entered
into as an economic hedge against the variability of the foreign
currency exchange rate related to our equity investment and was
settled at the close of this acquisition on February 26,2007. The gain that resulted upon settlement was recorded in
loss on derivative instruments, net, in the accompanying
condensed consolidated statement of operations for the nine
months ended September 30, 2007.
Treatment
of Management Compensation, Expense Reimbursements and Operating
Partnership Participation Interest
We outsource management of our operations to the Advisor and
certain other affiliates of Hines. Fees related to these
services are accounted for based on the nature of the service
and the relevant accounting literature. Fees for services
performed that represent period costs of the Company are
expensed as incurred. Such fees include acquisition fees and
asset management fees paid to the Advisor and property
management fees paid to Hines. In addition to cash payments for
acquisition fees and asset management fees paid to the Advisor,
an affiliate of the Advisor has received a participation
interest, which represents a profits interest in the Operating
Partnership related to these services. As the percentage
interest of the participation interest is adjusted, the value
attributable to such adjustment is charged against earnings, and
the participation interest will be recorded as a liability until
it is repurchased for cash or converted into common shares of
the Company. The conversion and redemption features of the
participation interest are accounted for in accordance with the
guidance in Emerging Issues Task Force (“EITF”)
publication
95-7,
Implementation Issues Related to the Treatment of Minority
Interests in Certain Real Estate Investment Trusts.
Redemptions for cash will be accounted for as a reduction to the
liability discussed above to the extent of such liability, with
any additional amounts recorded as a reduction to equity.
Conversions into common shares of the Company will be recorded
as an increase to the outstanding common shares and additional
paid-in capital accounts and a corresponding reduction in the
liability discussed above. Redemptions and conversions of the
participation interest will result in a corresponding reduction
in the percentage attributable to the participation interest and
will have no impact on the calculation of subsequent increases
in the participation interest.
Hines may perform construction management services for us for
both re-development activities and tenant construction. These
fees are considered incremental to the construction effort and
will be capitalized as incurred in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 67,
Accounting for Costs and Initial Rental Operations of Real
Estate Projects. These costs will be capitalized to the
associated real estate project as incurred. Costs related to
tenant construction will be depreciated over the estimated
useful life. Costs related to redevelopment activities will be
depreciated over the estimated useful life of the associated
project. Leasing activities are generally performed by Hines on
our behalf. Leasing fees are capitalized and amortized over the
life of the related lease in accordance with the provisions of
SFAS No. 91,
We elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code beginning with our taxable year
ended December 31, 2004. In addition, we hold an investment
in the Core Fund, which has invested in properties through a
structure that includes entities that have elected to be taxed
as REITs. In order to qualify as a REIT, an entity must meet
certain organizational and operational requirements, including a
requirement to distribute at least 90% of its annual ordinary
taxable income to shareholders. REITs are generally not subject
to federal income tax on taxable income that they distribute to
their shareholders. It is our intention to adhere to these
requirements and maintain our REIT status, as well as to ensure
that the applicable entities in the Core Fund structure also
maintain their REIT status. As such, no provision for
U.S. federal income taxes has been included in the
accompanying consolidated financial statements. As a REIT and
indirectly through our investment in the Core Fund, we still may
be subject to certain state, local and foreign taxes on our
income and property and to federal income and excise taxes on
our undistributed taxable income. In addition, we are and will
indirectly be required to pay federal and state income tax on
the net taxable income, if any, from the activities conducted
through the taxable REIT subsidiary of the Core Fund.
During 2006, the State of Texas enacted new tax legislation that
restructures the state business tax in Texas by replacing the
taxable capital and earned surplus components of the
then-current franchise tax with a new “margin tax,”
which for financial reporting purposes is considered an income
tax under SFAS 109, Accounting for Income Taxes.
This legislation had an immaterial impact on our financial
statements.
Due to the acquisition of Atrium on Bay, an office property
located in Toronto, Ontario, we have recorded a provision for
Canadian income taxes of approximately $236,000 and $552,000,
respectively, for the three and nine months ended
September 30, 2007 in accordance with Canadian tax laws and
regulations.
In June 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in tax positions. FIN 48 requires companies
to recognize uncertain tax positions in the financial statements
if management believes it is more likely than not that the
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. We
have reviewed our current tax positions and believe our
positions will be sustained on examination. The adoption of the
provisions of FIN 48 on January 1, 2007 did not have a
material impact on our financial statements.
As of September 30, 2007, we had no significant temporary
differences, tax credits, or net operating loss carry-forwards.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
U.S. GAAP and expands disclosures about fair value
measurements. The statement does not require new fair value
measurements, but is applied to the extent other accounting
pronouncements require or permit fair value measurements. The
statement emphasizes fair value as a market-based measurement
which should be determined based on assumptions market
participants would use in pricing an asset or liability. We will
be required to disclose the extent to which fair value is used
to measure assets and liabilities, the inputs used to develop
the measurements, and the effect of certain of the measurements
on earnings (or changes in net assets) for the period.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. We do not anticipate the adoption
of this statement will have a material impact on our financial
position, results of operations or cash flows.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 expands opportunities to
use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and
certain other items at fair value.
This Statement is effective for fiscal years beginning after
November 15, 2007. We have not decided if we will early
adopt SFAS No. 159 or if we will choose to measure any
eligible financial assets and liabilities at fair value.
Our principal cash requirements are for property acquisitions,
property-level operating expenses, capital improvements, debt
service, organizational and offering expenses, corporate-level
general and administrative expenses and distributions. We have
three primary sources of capital for meeting our cash
requirements:
•
proceeds from our public offerings, including our dividend
reinvestment plan;
•
debt financings, including secured or unsecured
facilities; and
•
cash flow generated by our real estate investments and
operations.
For the nine months ended September 30, 2007, our cash
needs for acquisitions have been met primarily by proceeds from
our public equity offerings and debt financing while our
operating cash needs have been met through cash flow generated
by our properties and investments. We believe that our current
capital resources and cash flow from operations are sufficient
to meet our liquidity needs for the foreseeable future.
We raised significant funds from the Current Offering during the
first nine months of 2007 (see discussion below), and we expect
to continue to raise significant funds from the Current Offering
and other potential follow-on offerings. We intend to continue
making real estate investments with these funds and funds
available to us under our credit facilities and other permanent
debt. We also intend to continue to pay distributions to our
shareholders on a quarterly basis. As noted above, we are
currently looking for investment opportunities in an intensely
competitive environment, and acquisitions in such an environment
may put downward pressure on our distribution payments as a
result of potentially lower yields on new investments.
Additionally, we have experienced, and expect to continue to
experience, delays between raising capital and acquiring real
estate investments. We temporarily invest unused proceeds from
our public offering in investments that typically yield lower
returns when compared to our real estate investments. We may
need to use short-term borrowings or advances from affiliates in
order to maintain our current per-share distribution levels in
future periods. However, we will continue to make investment and
financing decisions, and decisions regarding distribution
payments, with a long-term view. We will also continually
monitor our cash flow and market conditions when making such
decisions. In this environment, we may decide to lower our
per-share distribution amount rather than take actions we
believe may compromise our long-term objectives.
Our direct investments in real estate assets generate cash flow
in the form of rental revenues, which are reduced by debt
service, direct leasing costs and property-level operating
expenses. Property-level operating expenses consist primarily of
salaries and wages of property management personnel, utilities,
cleaning, insurance, security and building maintenance costs,
property management and leasing fees, and property taxes.
Additionally, we have incurred corporate-level debt service,
general and administrative expenses, asset management and
acquisition fees. Results of operations are not directly
comparable for the three and nine months ended
September 30, 2007 and 2006 as a result of our acquisition
activity.
During the year ended December 31, 2006 and 2005, net cash
flow provided by (used in) operating activities was
$7.7 million and ($1.8) million, respectively. The
increase compared to the corresponding prior year period was
primarily attributable to:
•
a full year of operations for each of 1900 and 2000 Alameda,
Citymark and 1515 S Street, which were acquired in
June, August and November 2005, respectively; and
•
cash flow from Airport Corporate Center, 321 North Clark, 3400
Data Drive, Watergate Tower IV and the Daytona Buildings
all of which were acquired in 2006.
As mentioned above, we did not commence real estate operations
until November 23, 2004. For the year ended
December 31, 2004, cash flow used in operating activities
was approximately ($1.2) million.
Net cash flow provided by operating activities was
$15.8 million and $4.2 million for the nine months
ended September 30, 2007 and 2006, respectively. Our
operating net cash flows are primarily the result of the net
loss for the period offset by non-cash components of our net
loss such as depreciation and amortization, equity in losses of
the Core Fund, accrued costs of our Current Offering, loss on
derivative instruments, and changes in other asset and liability
accounts.
During the year ended December 31, 2006, we had cash
outflows totaling $586.8 million related to the acquisition
of five office properties and their related lease intangibles.
During the year ended December 31, 2005, we had cash
outflows totaling $153.0 million related to the acquisition
of three office properties and their related lease intangibles,
excluding amounts financed.
During the years ended December 31, 2006, 2005 and 2004, we
made capital contributions to the Core Fund totaling
$209.3 million, $99.9 million and $28.4 million,
respectively. As of December 31, 2006, we had invested
approximately $337.6 million in the Core Fund representing
an approximate 34.0% non-managing general partner interest
compared to the approximate 26.2% and 12.5% interest we owned at
December 31, 2005 and 2004, respectively. During the years
ended December 31, 2006 and 2005, we received distributions
related to our interest in the Core Fund of approximately
$14.8 million and $5.3 million, respectively. The
increase in distributions related to the additional investments
we made in the Core Fund during 2006 as well as the increased
cash flow at the Core Fund resulting from the five properties it
acquired since December 31, 2005.
During the year ended December 31, 2006, we had increases
in restricted cash of approximately $2.5 million related to
certain escrows required by our mortgage agreement for Airport
Corporate Center.
During the years ended December 31, 2006 and 2005, we had
increases in other assets of $8.9 million and
$5.0 million, respectively, primarily as a result of
deposits paid on investment properties that were acquired
subsequent to the applicable year end.
During the nine months ended September 30, 2007, we made
payments of $909.3 million related to our acquisition of
seven properties and $86.9 million related to our
additional investment in the Core Fund and our unconsolidated
joint venture in Brazil. During the nine months ended
September 30, 2006, we made payments of $310.7 million
related to our acquisitions of two properties and
$102.4 million related to our additional investments in the
Core Fund.
During the nine months ended September 30, 2007 and 2006,
we received distributions related to our interest in the Core
Fund of approximately $17.9 million and $10.0 million,
respectively. The increase in distributions is attributable to
our interest in the Core fund following additional capital
contributions we made to the Core Fund since September 30,2006, as well as the increased cash flow of the Core Fund
resulting from the additional properties it has acquired since
September 30, 2006. The Core Fund owned interests in 23
properties as of September 30, 2007, up from 13 properties
as of September 30, 2006.
During the nine months ended September 30, 2007 and 2006,
we had increases in restricted cash of approximately
$3.5 million and $4.3 million, respectively, related
to certain escrows required by our mortgage agreements.
During the nine months ended September 30, 2007, we had
cash outflows of $3.0 million, net of receipts, for master
leases entered into in connection with our acquisitions.
The following table summarizes the activity from our offerings
for the years ended December 31, 2006, 2005 and 2004 and
the nine months ended September 30, 2007 (in millions):
Amounts include $2.1 million of gross proceeds relating to
approximately 223,000 shares issued under our dividend
reinvestment plan.
(b)
Amounts include $13.5 million of gross proceeds relating to
approximately 1.4 million shares issued under our dividend
reinvestment plan.
(c)
Amounts include $24.8 million of gross proceeds relating to
approximately 2.5 million shares issued under the
Company’s dividend reinvestment plan.
As of December 31, 2006, approximately
$1,726.6 million in common shares remained available for
sale pursuant to this offering, exclusive of approximately
$190.7 million in common shares available under our
dividend reinvestment plan. As of September 30, 2007,
$1,030.6 million in common shares remained available for
sale pursuant to our Current Offering, exclusive of
$165.8 million in common shares available under our
dividend reinvestment plan. From October 1 through
November 9, 2007, we received gross offering proceeds of
approximately $59.6 million from the sale of
5.7 million common shares, including approximately
$12.6 million relating to 1.3 million shares sold
under our dividend reinvestment plan. As of November 9,2007, $983.5 million in common shares remained available
for sale to the public pursuant to the Current Offering,
exclusive of $153.2 million in common shares available
under our dividend reinvestment plan.
Payment
of Offering and Other Costs and Expenses
In addition to making investments in accordance with our
investment objectives, we use our capital resources to pay our
Dealer Manager and our Advisor for services they provide to us
during the various phases of our organization and operations.
During the offering stage, we pay the Dealer Manager selling
commissions and dealer manager fees, and we reimburse the
Advisor for organizational and offering costs.
For the years ended December 31, 2006, 2005 and 2004, we
paid the Dealer Manager selling commissions of approximately
$34.0 million, $10.5 million, and $987,000,
respectively, and we paid dealer manager fees of approximately
$13.4 million, $3.7 million, and $259,000,
respectively. For the nine months ended September 30, 2007
and 2006, we paid the Dealer Manager selling commissions of
$46.8 million and $20.2 million, respectively, and we
paid dealer manager fees of $15.3 million and
$8.2 million, respectively. All such selling commissions
and a portion of such dealer manager fees were reallowed by HRES
to participating broker dealers for their services in selling
our shares.
During the years ended December 31, 2006, 2005 and 2004,
the Advisor incurred organizational and internal offering costs
related to our initial public offering totaling approximately
$3.0 million, $6.5 million, and $10.9 million,
respectively, and third-party offering costs of approximately
$3.6 million, $6.3 million, and $6.7 million,
respectively. During the years ended December 31, 2006 and
2005, we made payments totaling $10.0 million and
$6.0 million, respectively, to our Advisor for the
reimbursement of organizational and offering costs from our
initial public offering. During the nine months ended
September 30, 2006, the Advisor incurred organizational and
internal offering costs related to the Initial Offering totaling
$3.0 million and
third-party offering costs of $3.6 million. During the nine
months ended September 30, 2006, we made payments totaling
$10.0 million to our Advisor for the reimbursement of
previously incurred Initial Offering organizational and offering
costs. No such payments were made to our Advisor during the year
ended December 31, 2004. No such costs were incurred or
paid during the nine months ended September 30, 2007
because the Initial Offering had concluded.
During the years ended December 31, 2006 and 2005, the
Advisor incurred organizational and internal offering costs
related to this offering totaling approximately
$4.7 million and $256,000 and third-party offering costs of
approximately $6.4 million and $1.2 million,
respectively. We made payments totaling $7.5 million to our
Advisor for reimbursement of these costs for the year ended
December 31, 2006. The amount of organizational and
offering costs, commissions and dealer manager fees we paid
during the year ended December 31, 2006 increased, as
compared to such periods in 2005 and 2004, as a result of an
increase in capital raised through public offerings during 2006.
During the nine months ended September 30, 2007 and 2006,
the Advisor incurred organizational and internal offering costs
related to the Current Offering totaling approximately
$5.1 million and $2.1 million, respectively, and
third-party offering costs of approximately $6.9 million
and $3.9 million, respectively. During the nine months
ended September 30, 2007 we made payments totaling
$15.4 million for reimbursement of Current Offering
organizational and offering costs, of which $15.1 million
were made to our Advisor. During the nine months ended
September 30, 2006, we made payments of $1.3 million
to our Advisor for reimbursement of Current Offering
organizational and offering costs.
See “Critical Accounting Policies —
Organizational and Offering Costs” above for additional
information.
Debt
Financings
We use debt financing from time to time for acquisitions and
investments as well as for property improvements, tenant
improvements, leasing commissions and other working capital
needs. We may obtain financing at the time an asset is acquired
or an investment is made or at such later time as determined to
be appropriate, depending on market conditions and other factors.
Subject to market conditions and other factors we may consider,
we expect that our debt financing will generally be in the range
of approximately 40 — 60% of management’s
estimate of the aggregate value of our real estate investments.
The amount of debt we place on an individual property, or the
amount of debt incurred by an individual entity in which we
invest, however, may be less than 40% or more than 60% of the
value of such property or the value of the assets owed by such
entity, depending on market conditions and other factors. In
addition, depending on market conditions and other factors, we
may choose not to use debt financing for our operations or to
acquire properties. Our charter limits our borrowing to 300% of
our net assets (equivalent to 75% of the cost of our assets)
unless any excess borrowing is approved by a majority of our
independent directors and is disclosed to our shareholders in
our next quarterly report. As of September 30, 2007 and
December 31, 2006, our debt financing was approximately 47%
and 53%, respectively, of the aggregate value of our real estate
investments (including our pro rata share of the Core
Fund’s real estate assets and related debt).
The following table includes all of our outstanding notes
payable as of September 30, 2007 and December 31, 2006
(in thousands, except interest rates):
Principal
Principal
Outstanding at
Outstanding at
Date
September 30,
December 31,
Description
Entered Into
Maturity Date
Interest Rate
2007
2006
Key Bank National Association — Revolving Credit
Facility
9/9/2005
10/31/2009
Variable
(1)
$
66,000
$
162,000
SECURED MORTGAGE DEBT
Wells Fargo Bank, N.A. — Airport Corporate Center
1/31/2006
3/11/2009
4.775
%
89,836
(6)
89,233
Metropolitan Life Insurance Company —
1515 S. Street
4/18/2006
5/1/2011
5.680
%
45,000
45,000
Capmark Finance, Inc. — Atrium on Bay
2/26/2007
2/26/2017
5.330
%
191,539
(4)
—
HSH POOLED MORTGAGE FACILITY
HSH Nordbank — Citymark, 321 North Clark, 1900 and
2000 Alameda
8/1/2006
8/1/2016
5.8575
%(2)
185,000
185,000
HSH Nordbank — 3400 Data Drive, Watergate Tower IV
1/23/2007
1/12/2017
5.2505
%(3)
98,000
—
HSH Nordbank — Daytona and Laguna Buildings
5/2/2007
5/2/2017
5.3550
%(5)
119,000
—
HSH Nordbank — 3 Huntington Quadrangle
7/19/2007
7/19/2017
5.9800
%(7)
48,000
—
HSH Nordbank — Seattle Design Center /
5th and
Bell
8/14/2007
8/14/2017
6.0300
%(8)
70,000
—
$
912,375
$
481,233
(1)
The revolving credit facility with KeyBank National Association
(“KeyBank”) provides a maximum aggregate borrowing
capacity of $250.0 million, which may be increased to
$350.0 million upon our election. Borrowings under the
revolving credit facility are at variable interest rates based
on LIBOR plus 125 to 200 basis points based on prescribed
leverage ratios. The weighted average interest rate on
outstanding borrowings under this facility was 6.32% and 6.73%
as of September 30, 2007 and December 31, 2006,
respectively.
(2)
Borrowings under the pooled mortgage facility with HSH Nordbank
(“HSH Credit Facility”) that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.8575%.
(3)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.2505%.
(4)
This amount was translated to U.S. dollars at a rate of $1.0081
as of September 30, 2007. The mortgage agreement provided
for a principal amount of $190.0 million Canadian dollars
(“CAD”).
(5)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, we entered into an interest
rate swap agreement which effectively fixed the interest rate of
this borrowing at 5.355%.
(6)
This mortgage is an interest-only loan in the principal amount
of $91.0 million, which we assumed in connection with our
acquisition of Airport Corporate Center. At the time of
acquisition, the fair value of this
mortgage was estimated to be $88.5 million, resulting in a
premium of $2.5 million. The premium is being amortized
over the term of the mortgage.
(7)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 5.98%.
(8)
Borrowings under the HSH Credit Facility that closed after
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.45%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 6.03%.
As of September 30, 2007, we have complied with all
covenants stipulated by the debt financings referenced above.
Advances
from Affiliates
Certain costs and expenses associated with our organization and
public offerings have been paid by our Advisor on our behalf.
See “Financial Condition, Liquidity and Capital
Resources — Payment of Offering Costs and Other
Expenses” above for a discussion of these advances and our
repayment of the same.
Our Advisor has also advanced funds to us to allow us to pay
certain of our corporate-level operating expenses. During the
year ended December 31, 2004, our Advisor advanced to or
made payments on our behalf totaling $1.0 million. During
the year ended December 31, 2005, our Advisor advanced to
or made payments on our behalf totaling $2.2 million.
During that period, our Advisor forgave approximately
$1.7 million of amounts previously advanced to us to pay
these expenses and we made repayments totaling $375,000. As of
December 31, 2005 (after taking into account our
Advisor’s forgiveness referred to above), we owed our
Advisor approximately $1.0 million for these advances. For
the year ended December 31, 2006, our Advisor had advanced
to us or made payments on our behalf totaling $1.6 million
and we made repayments totaling $2.7 million. During the
nine months ended September 30, 2006, our Advisor had
advanced to us or made payments on our behalf totaling
approximately $1.7 million for certain expenses incurred in
connection with the Company’s administration and ongoing
operations. We did not receive any advances from our Advisor
after June 30, 2006, and as of December 31, 2006, we
had repaid our Advisor all amounts related to these advances.
To the extent that our operating expenses in any four
consecutive fiscal quarters exceed the greater of 2% of average
invested assets or 25% of Net Income (as defined in our
charter), our Advisor is required to reimburse us the amount by
which the total operating expenses paid or incurred exceed the
greater of the 2% or 25% threshold, unless our independent
directors determine that such excess was justified. For the four
quarters ended September 30, 2007, we did not exceed this
limitation.
Distributions
In order to meet the requirements for being treated as a REIT
under the Internal Revenue Code of 1986 and to pay regular cash
distributions to our shareholders, which is one of our
investment objectives, we have and intend to continue to declare
distributions to shareholders (as authorized by our board of
directors) as of daily record dates and aggregate and pay such
distributions quarterly.
From January 1, 2006 through June 30, 2006, we
declared distributions (as authorized by our board of directors)
equal to $0.00164384 per share, per day. From July 1, 2006
through September 30, 2007, we declared distributions equal
to $0.00170959 per share, per day. Additionally, we have
declared distributions equal to $0.00170959 per share, per day
through December 31, 2007. The distributions declared were
authorized and set by our board of directors at a level the
board believed to be appropriate based upon the board’s
evaluation of our assets, historical and projected levels of
cash flow and results of operations, additional capital and debt
anticipated to be raised or incurred and invested in the future,
the historical and projected timing between receiving offering
proceeds and investing such proceeds in real estate investments,
and general market conditions and trends.
Aggregate distributions declared to our shareholders and
minority interests related to the nine months ended
September 30, 2007 were $55.5 million. Our two primary
sources of funding for our distributions are cash flows from
operating activities and distributions from the Core Fund. When
analyzing the amount of cash flow available to pay
distributions, we also consider the impact of certain other
factors, including our practice of financing acquisition fees
and other acquisition-related cash flows, which reduce cash
flows from operating activities in our statements of cash flows.
The following table summarizes the primary sources and other
factors we considered in our analysis of cash flows available to
fund distributions to shareholders and minority interests
(amounts are in thousands for the nine months ended
September 30, 2007 and are approximate):
Cash flow from operating activities
$
15,778
Distributions from the Core Fund(1)
$
19,503
Cash acquisition fees(2)
$
6,705
Acquisition-related items(3)
$
7,277
Master lease rent receipts(4)
$
3,919
(1)
Cash distributions earned during the nine months ended
September 30, 2007 related to our investment in the Core
Fund.
(2)
In accordance with GAAP, acquisition fees paid to our Advisor
reduce cash flows from operating activities in our condensed
consolidated statements of cash flows. However, we fund such
payments with offering proceeds and related acquisition
indebtedness as such payments are transaction costs associated
with our acquisitions of real estate investments. As a
(2) result, we considered the payment of acquisition fees
in our analysis of cash flow available to pay distributions.
(3)
Acquisition-related items include cash payments to settle net
liabilities assumed upon acquisition of properties. In
accordance with GAAP, these payments reduce cash flows from
operating activities in our condensed consolidated statements of
cash flows. However, these payments are related to the
acquisition, as opposed to the operations, of these properties,
and we fund such payments with offering proceeds and
acquisition-related indebtedness. As a result, we considered the
payment of these items in our analysis of cash flow available to
pay distributions. For the nine months ended September 30,2007, these amounts consisted primarily of the settlement of
liabilities assumed upon the acquisition of our properties.
(4)
Master lease rent receipts include rent payments received
related to master leases entered into in conjunction with
previous asset acquisitions. In accordance with GAAP, these
payments are recorded in cash flows from investing activities in
our condensed consolidated statement of cash flows. However, we
consider these cash receipts in our analysis of cash flow
available to pay distributions.
Additionally, we typically use cash flows from financing
activities such as offering proceeds or borrowings, rather than
operating cash flows, to pay for deferred leasing costs, such as
tenant incentive payments, leasing commissions and tenant
improvements as we consider these costs to be additional capital
investments in our properties. For the nine months ended
September 30, 2007, we paid $6.3 million for deferred
leasing costs, which were reflected as a reduction of cash flows
from operating activities in our condensed consolidated
financial statements included elsewhere in this prospectus.
As noted above in “— General”, we are
currently making real estate investments in a competitive
environment. Significant U.S. and foreign investment
capital continues to flow into real estate capital markets,
creating competition for acquisitions, including high-quality
office properties. This competition may cause downward pressure
on rates of return from our future real estate investments, and
consequently, could cause downward pressure on the future
distributions payable to our shareholders.
To the extent our distributions exceed our tax-basis earnings
and profits, a portion of these distributions will constitute a
return of capital for federal income tax purposes. Approximately
23% of our distributions declared during the year ended
December 31, 2006 were taxable to shareholders as ordinary
taxable income and the remaining portion was treated as return
of capital. We expect that a portion of distributions paid in
future years will also constitute a return of capital for
federal income tax purposes, primarily as a result of non-cash
depreciation deductions.
We commenced our initial public offering in June 2004; however,
we did not receive and accept the minimum offering proceeds of
$10.0 million until November 23, 2004. Our
$28.4 million investment in the Core Fund was our only real
estate investment as of December 31, 2004.
During the year ended December 31, 2005, we invested
$99.9 million in the Core Fund and acquired direct
interests in three office properties in June 2005, August 2005
and November 2005 with an aggregate acquisition cost of
approximately $154.2 million. Accordingly, our results of
operations for the year ended December 31, 2005 consisted
primarily of organizational and offering expenses, general and
administrative expenses and equity in earnings of the Core Fund.
As of December 31, 2005, the Core Fund owned interests in
ten office properties with an aggregate acquisition cost of
approximately $1,691.1 million.
During the year ended December 31, 2006, we acquired direct
interests in five additional office properties with an aggregate
acquisition cost of approximately $680.8 million and
invested an additional $209.3 million in the Core Fund. In
addition, the Core Fund acquired interests in five additional
office properties with an aggregate acquisition cost of
approximately $1,200.2 million during this period. As a
result of the significant new investments made during the year
ended December 31, 2006, as well as operating our direct
properties owned on December 31, 2005 for the entire
period, our results of operations for the years ended
December 31, 2006 and 2005 are not directly comparable. As
discussed below, increases in operating revenues and expenses as
well as distributions from the Core Fund as discussed below are
primarily attributable to our direct and indirect real estate
acquisitions after December 31, 2005, in addition to the
operation of existing properties for the full period.
We owned 15 office properties directly, 23 office properties
indirectly through our investment in the Core Fund, and one
industrial property in Rio de Janeiro, Brazil indirectly through
our investment in the joint venture as of September 30,2007. By comparison, we owned five office properties directly
and 13 office properties indirectly through our investment in
the Core Fund as of September 30, 2006. As a result of the
significant new investments made between September 30, 2006
and September 30, 2007, as well as the number of our direct
properties owned for the three and nine month periods then
ended, our results of operations for the three months ended
September 30, 2007 and 2006 are not directly comparable.
Our results of operations are also not indicative of what we
expect our results of operations will be in future periods as we
expect that our operating revenues and expenses will continue to
increase as a result of (i) owning the real estate
investments we recently acquired for an entire period, and
(ii) our future real estate investments, which we expect to
be substantial.
Direct
Investments
As discussed above, our initial direct property investments were
made in June 2005, August 2005, and November 2005. Therefore, we
had no rental revenue or expenses related to these properties
for the year ended December 31, 2004 and only limited
rental revenues and expenses related to these properties for the
year ended December 31, 2005.
Rental revenues for the years ended December 31, 2006 and
2005 were approximately $61.4 million and
$6.0 million, respectively. Property-level expenses,
property taxes and property management fees for the years ended
December 31, 2006 and 2005 were approximately
$28.7 million and $3.0 million, respectively.
Depreciation and amortization expense for the years ended
December 31, 2006 and 2005 was approximately
$22.5 million and $3.3 million, respectively.
Total revenues for the nine months ended September 30, 2007
and 2006 were $117.6 million and $43.6 million,
respectively. Property-level expenses, property taxes and
property management fees for the nine months ended
September 30, 2007 and 2006 were $51.7 million and
$20.1 million, respectively. Depreciation and amortization
expense for the nine months ended September 30, 2007 and
2006 was $44.8 million and $15.3 million, respectively.
Total revenues for the three months ended September 30,2007 and 2006 were $49.7 million and $18.7 million,
respectively. Property-level expenses, property taxes and
property management fees for the three months ended
September 30, 2007 and 2006 were $22.5 million and
$8.7 million, respectively. Depreciation and amortization
expense for the three months ended September 30, 2007 and
2006 was $20.2 million and $6.5 million, respectively.
Our
Interest in the Core Fund
As of December 31, 2004, we had invested a total of
approximately $28.4 million and owned a 12.51% non-managing
general partner interest in the Core Fund. Our equity in
earnings related to our investment in the Core Fund for the
period from November 23, 2004 through December 31,2004 was approximately $68,000. For the year ended
December 31, 2004, the Core Fund had net income of
approximately $5.9 million on revenues of approximately
$145.4 million. The Core Fund’s net income for the
year ended December 31, 2004 included approximately
$43.6 million of non-cash depreciation and amortization
expenses. The distribution we earned from the Core Fund during
the year ended December 31, 2004 was approximately $247,000.
As of December 31, 2005, we had invested a total of
approximately $128.2 million and owned an approximate 26.2%
non-managing general partner interest in the Core Fund. Our
equity in losses related to our investment in the Core Fund for
the year ended December 31, 2005 was approximately
$831,000. For the year ended December 31, 2005, the Core
Fund had a net loss of approximately $3.1 million on
revenues of approximately $200.7 million. The Core
Fund’s net loss for the year ended December 31, 2005
included approximately $58.2 million of non-cash
depreciation and amortization expenses. The distributions we
earned from the Core Fund during the year ended
December 31, 2005 totaled approximately $8.6 million.
As of December 31, 2006, we had invested a total of
approximately $337.6 million and owned a 34.0% non-managing
general partner interest in the Core Fund. Our equity in losses
related to our investment in the Core Fund for the year ended
December 31, 2006 was approximately $3.3 million. For
the year ended December 31, 2006, the Core Fund had a net
loss of approximately $9.9 million on revenues of
approximately $279.9 million. The Core Fund’s net loss
for the year ended December 31, 2006 included approximately
$87.7 million of non-cash depreciation and amortization
expenses. The distributions we earned from the Core Fund during
the year ended December 31, 2006 totaled approximately
$17.1 million.
As of September 30, 2007, we had invested a total of
approximately $395.5 million and owned a 32.0% non-managing
general partner interest in the Core Fund, compared to
$230.6 million invested as of September 30, 2006,
representing a 31.5% interest.
Our equity in losses related to our investment in the Core Fund
for the nine months ended September 30, 2007 and 2006 was
approximately $6.9 million and $1.8 million,
respectively. For the nine months ended September 30, 2007
and 2006, the Core Fund had net losses of approximately
$21.0 million and $5.9 million, respectively, on
revenues of $310.2 million and $192.8 million,
respectively. The Core Fund’s net losses for the nine
months ended September 30, 2007 and 2006 included
$131.8 million and $59.3 million, respectively, of
non-cash depreciation and amortization expenses.
Our equity in losses related to our investment in the Core Fund
for the three months ended September 30, 2007 and 2006 was
approximately $5.0 million and $926,000, respectively. For
the three months ended September 30, 2007 and 2006, the
Core Fund had net losses of approximately $15.4 million and
$2.9 million, respectively, on revenues of
$109.0 million and $72.2 million, respectively. The
Core Fund’s net losses for the three months ended
September 30, 2007 and 2006 included $63.6 million and
$23.1 million, respectively, of non-cash depreciation and
amortization expenses.
Asset
Management and Acquisition Fees
Asset management fees earned by our advisor for the years ended
December 31, 2006, 2005 and 2004 were approximately
$6.3 million, $1.7 million, and $42,000, respectively.
Increases in asset management fees reflect the fact that we had
a larger portfolio of assets under management in each respective
year. Acquisition fees for the years ended December 31,2006, 2005, and 2004 were approximately $11.2 million,
$3.5 million,
and $776,000, respectively. Increases compared to the prior
years are attributable to an increase in investment activity
during each respective year.
Asset management fees earned by our advisor for the nine months
ended September 30, 2007 and 2006 were approximately
$11.3 million and $4.2 million, respectively. The
increase in asset management fees reflects the fact that we have
a larger portfolio of assets under management. Acquisition fees
for the nine months ended September 30, 2007 and 2006 were
$10.7 million and $6.3 million, respectively.
Asset management fees earned by our advisor for the three months
ended September 30, 2007 and 2006 were approximately
$4.8 million and $1.8 million, respectively. The
increase in asset management fees reflects the fact that we have
a larger portfolio of assets under management. Acquisition fees
for the three months ended September 30, 2007 and 2006 were
$6.1 million and $1.1 million, respectively.
These amounts include both the cash portion of the fees payable
to our Advisor as well as the corresponding increase in the
Participation Interest. See “Note 6 —
Related Party Transactions” in our unaudited condensed
consolidated financial statements included elsewhere in this
prospectus for a description of the Participation Interest.
General,
Administrative and Other Expenses
General and administrative expenses for the years ended
December 31, 2006, 2005 and 2004 were approximately
$2.8 million, $2.2 million, and $618,000,
respectively. These costs include legal and accounting fees,
insurance costs, costs and expenses associated with our board of
directors and other administrative expenses. Certain of these
costs are variable and may increase in the future as we continue
to raise capital and make additional real estate investments. In
addition, as discussed above, our Advisor forgave approximately
$1.7 million of advances to us to cover certain
corporate-level general and administrative expenses during the
year ended December 31, 2005. The increases in general and
administrative expenses during the years ended December 31,2006 and 2005 were primarily due to increased costs of
shareholder communications and audit fees as the Company’s
activities and shareholder base continue to grow. Additionally,
general and administrative expenses for the year ended
December 31, 2004 included
start-up
costs of approximately $430,000 that were not incurred in
subsequent years.
General and administrative expenses were approximately
$3.0 million and $2.0 million, respectively, for the
nine months ended September 30, 2007 and 2006 and
approximately $839,000 and $514,000, respectively, for the three
months ended September 30, 2007 and 2006. These costs
include legal and accounting fees, insurance costs, costs and
expenses associated with our board of directors and other
administrative expenses. Certain of these costs are variable and
may increase in the future as we continue to raise capital and
make additional real estate investments. The increases in
general and administrative expenses during the periods are
primarily due to increased costs of shareholder communications
and audit fees as the Company’s activities and shareholder
base continue to grow.
Loss
on Derivative Instruments
We entered into interest rate swap contracts with HSH Nordbank
in June 2006, December 2006, February 2007 and June 2007.
The loss on derivative instruments recorded in our condensed
consolidated statements of operations for the three and nine
months ended September 30, 2007 is the result of the
following (additional details provided below):
•
the decrease in the fair value of the interest rate swaps during
the period resulted in losses of $21.3 million and
$5.6 million for the three and nine months ended
September 30, 2007, respectively;
•
transaction fees incurred upon entering into the swaps of
approximately $0 and $731,000 for the three and nine months
ended September 30, 2007, respectively; and
a gain of approximately $939,000 for the nine months ended
September 30, 2007 resulting from the settlement of a
foreign currency contract in February 2007. There were no
similar transactions during the three months ended
September 30, 2007.
We recorded a loss of $7.8 million and $6.4 million,
respectively, on an interest rate swap for the three and nine
months ended September 30, 2006. This loss resulted from
the decrease in the fair value of an interest rate swap and was
net of fees of approximately $552,000 incurred upon entering
into the swap transaction.
We have not designated our foreign currency contract or any of
our interest rate swap contracts as cash flow hedges for
accounting purposes. The interest rate swap contracts have been
recorded at their estimated fair value in the condensed
consolidated balance sheets as of September 30, 2007 and
December 31, 2006.
Gain
on Foreign Currency Transactions
During the nine months ended September 30, 2007, certain of
our subsidiaries which own Atrium on Bay, our property located
in Toronto, Ontario, had transactions denominated in currencies
other than their functional currency (CAD). In these instances,
non-monetary assets and liabilities are reflected at the
historical exchange rate, monetary assets and liabilities are
remeasured into the functional currency at the exchange rate in
effect at the end of the period, and income statement accounts
are remeasured at the average exchange rate for the period. We
recorded a gain of approximately $134,000 in the accompanying
condensed consolidated statement of operations for the nine
months ended September 30, 2007 as a result of such foreign
currency transactions.
Interest
Expense
Interest expense for the years ended December 31, 2006 and
2005 was approximately $18.3 million and $2.4 million,
respectively. Interest expense was $32.0 million and
$12.7 million, respectively, for the nine months ended
September 30, 2007 and 2006 and $12.1 million and
$4.9 million, respectively, for the three months ended
September 30, 2007 and 2006. The increases in interest
expense during the periods are primarily due to increased
borrowings used to fund our acquisitions of directly-owned
properties and our investments in the Core Fund during 2006. No
interest expense was incurred during the year ended
December 31, 2004.
Interest
Income
Interest income was $4.2 million and $585,000,
respectively, for the nine months ended September 30, 2007
and 2006 and $1.3 million and $351,000, respectively, for
the three months ended September 30, 2007 and 2006. The
increases in interest income are primarily due to increased cash
we held in short-term investments during delays between raising
capital and acquiring real estate investments.
Income
/ Loss Allocated to Minority Interests
As of December 31, 2006, 2005, and 2004, Hines REIT owned a
97.38%, 94.24%, and 64.29% interest in the Operating
Partnership, respectively, and affiliates of Hines owned the
remaining 2.62%, 5.76%, and 35.71% interests, respectively. We
allocated losses of approximately $429,000, $635,000, and
$6.5 million to the holders of these minority interests for
the years ended December 31, 2006, 2005, and 2004,
respectively.
As of September 30, 2007 and 2006, Hines REIT owned a 97.8%
and a 96.8% interest, respectively, in the Operating
Partnership, and affiliates of Hines owned the remaining 2.2%
and 3.2% interests, respectively. We allocated income of
approximately $680,000 to minority interests for the nine months
ended September 30, 2007 and losses of $409,000 to minority
interests for the nine months ended September 30, 2006. In
addition, we allocated income of approximately $286,000 to
minority interests for the three months ended September 30,2007 and losses of $155,000 to minority interests for the three
months ended September 30, 2006.
We have entered into agreements with the Advisor, Dealer Manager
and Hines or its affiliates, whereby we pay certain fees and
reimbursements to these entities, including acquisition fees,
selling commissions, dealer manager fees, asset and property
management fees, construction management fees, reimbursement of
organizational and offering costs, and reimbursement of certain
operating costs, as described previously.
As of September 30, 2007 and December 31, 2006, we had
no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or
capital resources.
The following table lists our known contractual obligations as
of December 31, 2006. Specifically included are our
obligations under long-term debt agreements, operating lease
agreements and outstanding purchase obligations (in thousands):
Payments Due by Period
Less than
More than
Contractual Obligation
1 Year
1-3 Years
3-5 Years
5 Years
Notes payable(1)
$
—
$
253,000
$
45,000
$
185,000
Interest payments under outstanding notes payable(2)
28,632
142,936
70,081
234,667
Obligation to purchase the Laguna Buildings
118,000
—
—
—
Obligation to purchase Atrium on Bay
215,600
—
—
—
Derivative Instruments
5,000
10,291
10,291
25,873
Total Contractual Obligations
$
367,232
$
406,227
$
125,372
$
445,540
(1)
Notes payable includes amounts outstanding under our revolving
credit facility, mortgage agreements related to Airport
Corporate Center and 1515 S Street, and our HSH
Facility.
(2)
As of December 31, 2006 the amount outstanding under our
revolving credit facility was $162.0 million and the
weighted average rate on outstanding loans was 6.73%. No
scheduled principal payments are required until the maturity
date of October 31, 2009
On October 25, 2007, a subsidiary of the Operating
Partnership borrowed $159.5 million from The Prudential
Insurance Company of America pursuant to a Deed of Trust and
Security Agreement dated October 25, 2007 and a Promissory
Note dated October 25, 2007. The Loan is secured by a
mortgage and related security interests in One Wilshire, an
office property located in Los Angeles, California that the
Company acquired on August 1, 2007. The subsidiary of the
Operating Partnership that directly owns One Wilshire is the
borrower under the Loan Documents. The Loan matures on
November 1, 2012 and bears interest at a fixed annual rate
of 5.98%. Interest payments are due monthly, beginning on
December 1, 2007 through maturity.
KeyBank
Activity
From October 1, 2007 to November 9, 2007, we repaid
all amounts outstanding under our revolving credit facility with
KeyBank. No new borrowings were made under the KeyBank facility
during that period.
In October 2007, in accordance with our share redemption plan,
we redeemed approximately 636,000 common shares and made
corresponding payments totaling $6.2 million to
shareholders who had requested these redemptions. The shares
redeemed were cancelled and will have the status of authorized,
but unissued shares.
Market risk includes risks relating to changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. We are exposed to both interest rate risk and
foreign currency exchange rate risk.
The commercial real estate debt markets are currently
experiencing volatility as a result of certain factors including
the tightening of underwriting standards by lenders and credit
rating agencies and the significant inventory of unsold
Collateralized Mortgage Backed Securities in the market. This is
resulting in lenders decreasing the availability of debt
financing as well as increasing the cost of debt financing. As
our existing debt is either fixed rate debt or floating rate
debt with a fixed spread over LIBOR, we do not believe that our
current portfolio is materially impacted by the current debt
market environment. However, should the overall availability of
debt decrease
and/or the
cost of borrowings increase, either by increases in the index
rates or by increases in lender spreads, we will need to include
such factors in the economics of future acquisitions. This may
result in future acquisitions generating lower overall economic
returns and potentially reducing future cash flow available for
distribution.
In addition, the state of the debt markets could have an impact
on the overall amount of capital investing in real estate which
may result in price or value decreases of real estate assets.
Although this may benefit us for future acquisitions, it could
negatively impact the current value of our existing assets.
We are also exposed to the effects of interest rate changes
primarily through variable-rate debt, which we use to maintain
liquidity and fund expansion of our real estate investment
portfolio and operations. Our interest rate risk management
objectives are to monitor and manage the impact of interest rate
changes on earnings and cash flows, and to use derivative
financial instruments such as interest rate swaps and caps in
order to mitigate our interest rate risk on variable rate debt.
We do not enter into derivative or interest rate transactions
for speculative purposes. Please see “Debt Financings”
above for more information concerning the Company’s
outstanding debt.
As of September 30, 2007, we had $520.0 million of
debt outstanding under our HSH Credit Facility, which is a
variable-rate pooled mortgage facility. However, as a result of
the interest rate swap agreements entered into with HSH
Nordbank, these borrowings effectively bear interest at fixed
rates.
Our total variable-rate debt outstanding as of
September 30, 2007 consisted of $66.0 million in
borrowings under our revolving credit facility with KeyBank.
This debt is subject to a variable rate through its maturity
date on October 31, 2009. An increase in the variable
interest rate would increase our interest payable on debt
outstanding under the Revolving Credit Facility and therefore
decrease our cash flows available for distribution to
shareholders. Based on our variable rate debt outstanding as of
September 30, 2007, a 1% change in interest rates would
result in a change in interest expense of approximately $660,000
per year.
We are exposed to foreign currency exchange rate variations
resulting from the remeasurement and translation of the
financial statements of our subsidiaries located in Toronto,
Ontario. As of September 30, 2007 and for the nine months
then ended, we recorded a gain on foreign currency transactions
of approximately $134,000 in our condensed consolidated
statement of operations and approximately $10.6 million of
accumulated other comprehensive income included in our condensed
consolidated statement of shareholders’ equity related to
our Toronto subsidiaries. Based on the Company’s current
operational strategies, management does not believe that
variations in the foreign currency exchange rates pose a
significant risk to our consolidated results of operations or
financial position.
We were formed as a corporation under the laws of the State of
Maryland. The rights of our shareholders are governed by
Maryland law as well as our charter and bylaws. The following
summary of the terms of our common shares is a summary of all
material provisions concerning our common shares and you should
refer to the Maryland General Corporation Law and our charter
and bylaws for a full description. The following summary is
qualified in its entirety by the more detailed information
contained in our charter and bylaws. Copies of our charter and
bylaws are incorporated by reference as exhibits to the
registration statement of which this prospectus is a part. You
can obtain copies of our charter and bylaws and every other
exhibit to our registration statement. Please see “Where
You Can Find More Information” below.
Our charter authorizes us to issue up to 1,500,000,000 common
shares, $0.001 par value per share, and 500,000,000
preferred shares, $0.001 par value per share. As of the
date of this prospectus, we had no preferred shares issued and
outstanding. Our board of directors may amend our charter to
increase or decrease the amount of our authorized shares without
any action by our shareholders.
Our charter and bylaws contain certain provisions that could
make it more difficult to acquire control of the Company by
means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to negotiate
first with our board of directors. The Company believes that
these provisions increase the likelihood that any such proposals
initially will be on more attractive terms than would be the
case in their absence and will facilitate negotiations which may
result in improvement of the terms of an initial offer.
Subject to any preferential rights of any other class or series
of shares and to the provisions of our charter regarding the
restriction on the transfer of our common shares, the holders of
common shares are entitled to such dividends as may be
authorized from time to time by our board of directors and
declared by us out of legally available funds and, upon
liquidation, are entitled to receive all assets available for
distribution to our shareholders. Upon issuance for full payment
in accordance with the terms of this offering, all common shares
issued in the offering will be fully paid and non-assessable.
Holders of common shares will not have preemptive rights, which
means that they will not have an automatic option to purchase
any new shares that we issue. We currently have only one class
of common shares, which have equal dividend, distribution,
liquidation and other rights.
Subject to the limitations described in our charter, our board
of directors, without any action by our shareholders, may
classify or reclassify any of our unissued common shares into
one or more classes or series by setting or changing the
preferences, conversion, restrictions or other rights.
We will not issue certificates for our shares. Shares will be
held in “uncertificated” form, which will eliminate
the physical handling and safekeeping responsibilities inherent
in owning transferable stock certificates and eliminate the need
to return a duly executed stock certificate to effect a
transfer. Trust Company of America, Inc. acts as our
registrar and as the transfer agent for our shares. A transfer
of your shares can be effected simply by mailing to
Trust Company of America, Inc. a transfer and assignment
form, which we will provide to you upon written request. A
transfer fee of $50.00 is charged by our transfer agent in order
to implement any such transfer of your shares.
Upon the affirmative vote of a majority of our directors, our
charter authorizes our board of directors to issue one or more
classes or series of preferred shares without shareholder
approval and our charter provides that the issuance of preferred
shares must also be approved by a majority of our independent
directors who do not have an interest in the transaction and who
have access, at our expense, to our legal counsel or to
independent legal counsel. Further, our charter authorizes the
board to fix the voting rights, liquidation preferences,
dividend rates, conversion rights, redemption rights and terms,
including sinking fund provisions,
and certain other rights and preferences with respect to such
preferred shares. Because our board of directors has the power
to establish the preferences and rights of each class or series
of preferred shares, it may afford the holders of any series or
class of preferred shares preferences, powers, and rights senior
to the rights of holders of common shares. However, the voting
rights per preferred share of any series or class of preferred
shares sold in a private offering may not exceed voting rights
which bear the same relationship to the voting rights of common
shares as the consideration paid to the Company for each
privately-held preferred share bears to the book value of each
outstanding common share. In addition, a majority of our
independent directors must approve the issuance of preferred
shares to our Advisor or one of its affiliates. If we ever
created and issued preferred shares with a dividend preference
over our common shares, payment of any dividend preferences of
outstanding preferred shares would reduce the amount of funds
available for the payment of dividends on the common shares.
Further, holders of preferred shares are normally entitled to
receive a preference payment in the event we liquidate, dissolve
or wind up before any payment is made to the common
shareholders, likely reducing the amount common shareholders
would otherwise receive upon such an occurrence.
Under certain circumstances, the issuance of preferred shares
may delay, prevent, render more difficult or tend to discourage:
•
a merger, offer or proxy contest;
•
the assumption of control by a holder of a large block of our
securities; or
•
the removal of incumbent management.
Our board of directors, without shareholder approval, may issue
preferred shares with voting and conversion rights that could
adversely affect the holders of common shares, subject to the
limits described above. We currently have no preferred shares
issued and outstanding. Our board of directors has no present
plans to issue preferred shares, but may do so at any time in
the future without shareholder approval.
Each shareholder is entitled at each meeting of shareholders to
one vote per share owned by such shareholder on all matters
submitted to a vote of shareholders, including the election of
directors. There is no cumulative voting in the election of our
board of directors, which means that the holders of a majority
of our outstanding common shares can elect all of the directors
then standing for election and the holders of the remaining
common shares will not be able to elect any directors.
An annual meeting of our shareholders will be held each year, at
least 30 days after delivery of our annual report. Special
meetings of shareholders may be called only upon the request of
a majority of our directors, a majority of our independent
directors, our chief executive officer, our president or upon
the written request of shareholders holding at least 10% of the
common shares entitled to vote at such meeting. The presence,
either in person or by proxy, of 50% of our outstanding shares
entitled to vote constitutes a quorum. Generally, the
affirmative vote of a majority of all votes cast at a meeting at
which a quorum is present is necessary to take shareholder
action authorized by our charter, except that a majority of the
votes represented in person or by proxy at a meeting at which a
quorum is present is sufficient to elect a director.
Under the Maryland General Corporation Law and our charter,
shareholders are generally entitled to vote at a duly held
meeting at which a quorum is present on:
•
amendments to our charter and the election of directors (except
as otherwise provided in our charter or under the Maryland
General Corporation Law);
•
our liquidation or dissolution;
•
a merger, consolidation or sale or other disposition of
substantially all of our assets; and
No such action can be taken by our board of directors without a
vote of our shareholders holding at least a majority of our
outstanding shares or, in the case of director elections, a
majority of our outstanding shares present in person or by proxy
at a meeting at which a quorum is present. Shareholders are not
entitled to exercise any of the rights of an objecting
shareholder provided for in Title 3, Subtitle 2 of the
Maryland General Corporation Law unless our board of directors
determines that such rights shall apply with respect to all or
any classes or series of shares, to a particular transaction or
all transactions occurring after the date of such determination
in connection with which shareholders would otherwise be
entitled to exercise such rights.
Shareholders are entitled to receive a copy of our shareholder
list upon request. The list provided by us will include each
shareholder’s name, address and telephone number, if
available, and number of shares owned by each shareholder and
will be sent within ten days of the receipt by us of the
request. A shareholder requesting a list will be required to pay
reasonable costs of postage and duplication. We have the right
to request that a requesting shareholder represent to us that
the list will not be used to pursue commercial interests.
Shareholders are also entitled to access, upon request and on
the terms described above, to the comparable records of the
Operating Partnership.
In addition to the foregoing, shareholders have rights under
Rule 14a-7
under the Exchange Act, which provides that, upon the request of
shareholders and the payment of the expenses of the
distribution, we are required to distribute specific materials
to our shareholders in the context of the solicitation of
proxies for voting on matters presented to our shareholders or,
at our option, provide requesting shareholders with a copy of
the list of shareholders so that the requesting shareholders may
make the distribution of proxies themselves.
five or fewer individuals (as defined in the Code to include
certain tax exempt organizations and trusts) may not own,
directly or indirectly, more than 50% in value of our
outstanding shares during the last half of a taxable
year; and
•
100 or more persons must beneficially own our shares during at
least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year.
You should read the “Material Tax Considerations”
section of this prospectus for further discussion of this topic.
We may prohibit certain acquisitions and transfers of shares so
as to ensure our continued qualification as a REIT under the
Code. However, we cannot assure you that this prohibition will
be effective. Because we believe it is essential for us to
qualify as a REIT, our charter provides (subject to certain
exceptions) that no shareholder other than Hines or its
affiliates may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than (i) 9.9% of
the value (as determined in good faith by our board of
directors) of the aggregate of our outstanding shares or
(ii) more than 9.9% in value or number of shares, whichever
is more restrictive, of the aggregate number of shares of any
class or series. Our board of directors may waive this ownership
limit if evidence satisfactory to our directors and our tax
counsel is presented that such ownership will not then or in the
future jeopardize our status as a REIT. Also, these restrictions
on transferability and ownership will not apply if our directors
determine, with the approval of our shareholders as required by
our charter, that it is no longer in our best interests to
continue to qualify as a REIT.
Additionally, the transfer or issuance of our shares or any
security convertible into our shares will be transferred to a
charitable trust or will be null and void, and the intended
transferee will acquire no rights to our shares (unless the
transfer is approved by our board of directors based upon
receipt of information that such transfer would not violate the
provisions of the Code for qualification as a REIT), if such
transfer or issuance:
•
creates a direct or indirect ownership of our shares in excess
of the 9.9% ownership limit described above;
•
with respect to transfers only, results in our shares being
owned by fewer than 100 persons;
results in us being “closely held” within the meaning
of Section 856(h) of the Code;
•
results in us owning, directly or indirectly, more than 9.9% of
the ownership interests in any tenant or subtenant; or
•
results in our disqualification as a REIT.
Our charter provides that any shares proposed to be transferred
pursuant to a transfer which, if consummated, would violate
these restrictions on transfer, will be deemed to be transferred
to a trust to be held for the exclusive benefit of a charitable
beneficiary. To avoid confusion, these shares will be referred
to in this prospectus as “Excess Securities.” Excess
Securities will remain issued and outstanding shares and will be
entitled to the same rights and privileges as all other shares
of the same class or series. The trustee of the beneficial
trust, as record holder of the Excess Securities, will be
entitled to receive all dividends and distributions authorized
by the board of directors on such securities for the benefit of
the charitable beneficiary. Our charter further entitles the
trustee of the beneficial trust to vote all Excess Securities.
The trustee of the beneficial trust may select a transferee to
whom the securities may be sold as long as such sale does not
violate the 9.9% ownership limit or the other restrictions on
transfer. Upon sale of the Excess Securities, the intended
transferee (the transferee of the Excess Securities whose
ownership would violate the 9.9% ownership limit or the other
restrictions on transfer) will receive from the trustee of the
beneficial trust the lesser of such sale proceeds, or the price
per share the intended transferee paid for the Excess Securities
(or, in the case of a gift or devise to the intended transferee,
the price per share equal to the market value per share on the
date of the transfer to the intended transferee). The trustee of
the beneficial trust will distribute to the charitable
beneficiary any amount the trustee receives in excess of the
amount to be paid to the intended transferee.
Any person who (i) acquires or attempts to acquire shares
in violation of the foregoing ownership restriction, transfers
or receives shares subject to such limitations or would have
owned shares that resulted in a transfer to a charitable trust
is required to give immediate written notice to us of such
event, or (ii) proposed or attempted any of the
transactions in clause (i) is required to give us
15 days’ written notice prior to such transaction. In
both cases, such persons must provide to us such other
information as we may request in order to determine the effect,
if any, of such transfer on our status as a REIT. The foregoing
restrictions will continue to apply until our board of directors
determines it is no longer in our best interest to continue to
qualify as a REIT, and there is an affirmative vote of the
majority of shares entitled to vote on such matter at a regular
or special meeting of our shareholders.
The ownership restriction does not apply to an offeror who, in
accordance with applicable federal and state securities laws,
makes a cash tender offer, where at least 85% of the outstanding
shares are duly tendered and accepted pursuant to the cash
tender offer. The ownership restriction also does not apply to
the underwriter in a public offering of shares or to a person or
persons so exempted from the ownership limit by our board of
directors based upon appropriate assurances that our
qualification as a REIT is not jeopardized. Any person who owns
5.0% or more of the outstanding shares during any taxable year
will be asked to deliver a statement or affidavit setting forth
the number of shares beneficially owned, directly or indirectly.
In addition, we have the right to purchase any Excess Securities
at the lesser of the price per share paid in the transfer that
created the Excess Securities or the current market price until
the Excess Securities are sold by the trustee of the beneficial
trust. An intended transferee must pay, upon demand, to the
trustee of the beneficial trust (for the benefit of the
beneficial trust) the amount of any dividend or distribution we
pay to an intended transferee on Excess Securities prior to our
discovery that such Excess Securities have been transferred in
violation of the provisions of the charter.
We receive cash flow from our investments in real estate which
we expect will allow us to pay dividends to our shareholders. We
intend to authorize and calculate dividends on a daily basis and
aggregate and pay them on a quarterly basis. If our board of
directors has authorized and we have declared dividends,
investors are entitled to earn distributions immediately upon
purchasing our shares. Because all of our operations are
performed indirectly through the Operating Partnership, our
ability to pay dividends depends on the Operating
Partnership’s ability to pay distributions to its partners,
including Hines REIT. Dividends are paid to our shareholders as
of record dates selected by our board of directors. We expect to
pay dividends unless our results of operations, our general
financial condition, general economic conditions or other
factors inhibit us from doing so. Dividends are authorized at
the discretion of our board of directors, which will be
directed, in substantial part, by its obligation to cause us to
comply with the REIT requirements of the Code. Our ability to
pay dividends may be affected by a number of factors, including:
•
our Advisor’s ability to identify and execute investment
opportunities at a pace consistent with capital we raise;
•
our operating and interest expenses;
•
the ability of tenants to meet their obligations under the
leases associated with our properties;
•
amount of distributions or dividends received by us from our
indirect real estate investments such as the Core Fund;
•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates when renewing
or replacing current leases;
•
capital expenditures and reserves therefor;
•
leasing commissions and tenant inducements for leasing space;
•
the issuance of additional shares; and
•
financings and refinancings.
We must distribute to our shareholders at least 90% of our
annual ordinary taxable income in order to continue to meet the
requirements for being treated as a REIT under the Code. This
requirement is described in greater detail in the “Material
Tax Considerations — Requirements for Qualification as
a REIT — Operational Requirements — Annual
Distribution Requirement” section of this prospectus. Our
directors may authorize dividends in excess of this percentage
as they deem appropriate. Differences in timing between the
receipt of income and the payment of expenses, and the effect of
required debt payments, among other things, could require us to
borrow funds from third parties on a short-term basis, issue new
securities or sell assets to meet the distribution requirements
that are necessary to achieve the tax benefits associated with
qualifying as a REIT. These methods of obtaining funding could
affect future distributions by increasing operating costs. We
refer you to the “Risk Factors — Business and
Real Estate Risks — We may need to incur borrowings
that would otherwise not be incurred to meet REIT minimum
distribution requirements” and “Material Tax
Considerations — Requirements for Qualification as a
REIT” sections in this prospectus.
Our shares are currently not listed on a national securities
exchange or included for quotation on a national securities
market, and we currently do not intend to list our shares. In
order to provide our shareholders with some liquidity, we have a
share redemption program. Shareholders who have held their
shares for at least one year may receive the benefit of limited
liquidity by presenting for redemption all or a portion of their
shares to us in accordance with the procedures outlined herein.
At that time, we may, subject to the conditions and limitations
described below, redeem the shares presented for redemption for
cash to the extent that we have sufficient funds available to us
to fund such redemption. We will not pay the Advisor or its
affiliates any fees to complete any transactions under our share
redemption program.
To the extent our board of directors determines that we have
sufficient available cash for redemptions, we initially intend
to redeem shares on a monthly basis; however, our board of
directors may determine from time to time to adjust the timing
of redemptions to a quarterly basis upon 30 days’
notice. We intend to redeem shares subject to the limitation
that, during any calendar year, the number of shares we may
redeem under the program may not exceed, as of the date of any
such redemption, 10% of our shares outstanding as of the same
date in the prior calendar year. We may, but are not required
to, use available cash flow not otherwise dedicated to a
particular use to meet these redemption needs, including cash
proceeds generated from the dividend reinvestment plan,
securities offerings, operating cash flow not intended for
dividends, borrowings and capital transactions such as asset
sales or refinancings.
Shares may be redeemed at a price of
$ per share effective upon the
commencement of this offering. The redemption price was
determined by our board of directors. Our board’s
determination of the redemption price was subjective and was
primarily based on the estimated per-share net asset value of
the Company as determined by our management. Our management
estimated the per-share net asset value of the Company using
appraised values of our real estate assets as of March 31,2008, which were determined by independent third party
appraisers, as well as estimates of the values of our other
assets and liabilities as of December 31, 2007, and then
making various adjustments and estimates in order to account for
our operations and other factors occurring or expected to occur
between December 31, 2007 and the anticipated commencement
of this offering. In addition, our board of directors also
considered our historical and anticipated results of operations
and financial condition, our current and anticipated
distribution payments, yields and offering prices of other real
estate companies we deem to be substantially similar to us, our
current and anticipated capital and debt structure, and our
management’s and Advisor’s recommendations and
assessment of our prospects and expected execution of our
investment and operating strategies.
Both our real estate appraisals and the methodology utilized by
our management in estimating our per-share net asset value were
based on a number of assumptions and estimates which may not be
accurate or complete. No liquidity discounts or discounts
relating to the fact that we are currently externally managed
were applied to our estimated per-share valuation, and no
attempt was made to value Hines REIT as an enterprise. Likewise,
the valuation was not reduced by potential selling commissions
or other costs of sale, which would impact proceeds in the case
of a liquidation. The redemption price may not be indicative of
the price our shareholders could receive if they sold our
shares, if our shares were actively traded or if we were
liquidated.
Our board of directors may adjust the per share redemption price
from time to time upon 30 days’ written notice based
on the then-current estimated net asset value of our real estate
portfolio at the time of the adjustment, and such other factors
as it deems appropriate, including the then-current offering
price of our shares (if any), our then-current dividend
reinvestment plan price and general market conditions. At any
time we are engaged in an offering of shares, the per share
price for shares purchased under our redemption program will
always be equal to or lower than the applicable per share
offering price. Real estate values fluctuate, which in the
future may result in an increase or decrease in the value of our
real estate investments. Thus, future adjustments to the
offering price of our shares could result in a higher or lower
redemption price. The members of our board of directors must, in
accordance with their fiduciary duties, act in a manner they
believe is in the best interests of our shareholders when making
any decision to adjust the redemption price offered under our
share redemption program. Our board of directors will announce
any price adjustment and the time period of its effectiveness as
a part of our regular communications with shareholders. Please
see “Reports to Shareholders.”
We will redeem shares presented for cash to the extent we have
sufficient available cash flow to do so. Our board of directors
may terminate, suspend or amend the share redemption program at
any time upon 30 days’ written notice without
shareholder approval if our directors believe such action is in
our and our shareholders’ best interests, or if they
determine the funds otherwise available to fund our share
redemption program are needed for other purposes. In the event
of a redemption request after the death or disability (as
defined in the Code) of a shareholder, we may waive the one-year
holding period requirement as well as the annual limitation on
the number of shares that will be redeemed as summarized above.
In addition, in the event a shareholder is having all his shares
redeemed, the one-year holding requirement will be waived for
shares purchased under our dividend reinvestment plan.
All requests for redemption must be made in writing and received
by us at least five business days prior to the end of the month.
You may also withdraw your request to have your shares redeemed.
Withdrawal requests must also be made in writing and received by
us at least five business days prior to the end of the
month. We cannot guarantee that we will have sufficient
available cash flow to accommodate all requests made in any
month. If the percentage of our shares subject to redemption
requests exceeds the then available cash flow, each
shareholder’s redemption request will be reduced on a pro
rata basis. In addition, if we do not have sufficient available
funds at the time redemption is requested, you can withdraw your
request for redemption or request in writing that we honor it at
such time in a successive month, if any, when we have sufficient
funds to do so. Such pending requests will generally be honored
on a pro-rata basis with any new redemption requests we receive
in the applicable period.
Commitments by us to repurchase shares will be communicated
either telephonically or in writing to each shareholder who
submitted a request at or promptly (no more than five business
days) after the fifth business day following the end of each
quarter. We will redeem the shares subject to these commitments,
and pay the redemption price associated therewith, within three
business days following the delivery of such commitments. You
will not relinquish your shares until we redeem them. Please see
“Risk Factors — Investment Risks — Your
ability to have your shares redeemed is limited under our share
redemption program, and if you are able to have your shares
redeemed, it may be at a price that is less than the price you
paid for the shares and the then-current market value of the
shares” and “Risk Factors — Investment
Risks — There is currently no public market for our
common shares, and we do not intend to list the shares on a
stock exchange. Therefore, it will likely be difficult for you
to sell your shares and, if you are able to sell your shares,
you will likely sell them at a substantial discount.”
The shares we redeem under our share redemption program will be
cancelled and will have the status of authorized but unissued
shares. We will not resell such shares to the public unless such
sales are first registered with the Securities and Exchange
Commission under the Securities Act and under appropriate state
securities laws or are exempt under such laws. We will terminate
our share redemption program in the event that our shares ever
become listed on a national securities exchange or included for
quotation on a national securities market, or in the event a
secondary market for our common shares develops.
Our charter contains various limitations on our ability to
participate in
Roll-up
Transactions. In connection with any proposed transaction
considered a
“Roll-up
Transaction” involving us and the issuance of securities of
an entity (a
“Roll-up
Entity”) that would be created or would survive after the
successful completion of the
Roll-up
Transaction, an appraisal of all our properties must be obtained
from a competent independent appraiser. The properties must be
appraised on a consistent basis, and the appraisal shall be
based on the evaluation of all relevant information and shall
indicate the value of the properties as of a date immediately
prior to the announcement of the proposed
Roll-up
Transaction. The appraisal shall assume an orderly liquidation
of our properties over a
12-month
period. The terms of the engagement of the independent appraiser
must clearly state that the engagement is for our benefit and
that of our shareholders. A summary of the appraisal, indicating
all material assumptions underlying the appraisal, shall be
included in a report to our shareholders in connection with any
proposed
Roll-up
Transaction. If the appraisal will be included in a prospectus
used to offer the securities of a
Roll-up
Entity, the appraisal will be filed as an exhibit to the
registration statement with the Securities and Exchange
Commission and with any state where such securities are
registered.
A
“Roll-up
Transaction” is a transaction involving the acquisition,
merger, conversion or consolidation, directly or indirectly, of
us and the issuance of securities of a
Roll-up
Entity. This term does not include:
•
a transaction involving our securities that have been listed on
a national securities exchange or included for quotation on a
national market system for at least 12 months; or
•
a transaction involving our conversion into a limited liability
company, trust, or association form if, as a consequence of the
transaction, there will be no significant adverse change in any
of the following: our shareholder voting rights; the term of our
existence; compensation to our Advisor or our sponsor; or our
investment objectives.
In connection with a proposed
Roll-up
Transaction, the person sponsoring the
Roll-up
Transaction must offer to our shareholders who vote
“no” on the proposal the choice of:
•
accepting the securities of the
Roll-up
Entity offered in the proposed
Roll-up
Transaction; or
•
one of the following:
•
remaining as shareholders and preserving their interests on the
same terms and conditions as existed previously; or
•
receiving cash in an amount equal to the shareholder’s pro
rata share of the appraised value of our net assets.
We are prohibited from participating in any proposed
Roll-up
Transaction:
•
that would result in our shareholders having democracy rights in
a Roll-up
Entity that are less than those provided in our charter and
described elsewhere in this prospectus, including rights with
respect to the election and removal of directors, annual
reports, annual and special meetings, amendment of our charter
and our dissolution;
•
that includes provisions that would operate to materially impede
or frustrate the accumulation of shares by any purchaser of the
securities of the
Roll-up
Entity, except to the minimum extent necessary to preserve the
tax status of the
Roll-up
Entity, or which would limit the ability of an investor to
exercise the voting rights of its securities of the
Roll-up
Entity on the basis of the number of shares held by that
investor;
•
in which investor’s rights to access of records of the
Roll-up
Entity will be less than those provided in the section of this
prospectus entitled “Description of Capital
Stock”; or
•
in which any of the costs of the
Roll-up
Transaction would be borne by us if the
Roll-up
Transaction is not approved by our shareholders.
Both the Maryland General Corporation Law and our charter
provide that our shareholders are not liable personally or
individually in any manner whatsoever for any debt, act,
omission or obligation incurred by us or our board of directors.
The Maryland General Corporation Law provides that our
shareholders are under no obligation to us or our creditors with
respect to their shares other than the obligation to pay to us
the full amount of the consideration for which their shares were
issued.
We currently have a dividend reinvestment plan available that
allows you to have dividends otherwise payable to you invested
in additional common shares. During this offering, you may
purchase common shares under our dividend reinvestment plan for
an initial price of $ per share.
Our board of directors may change the price per share for shares
issued under the plan upon 10 days’ notice based on
the consideration of numerous factors, including the
then-current offering price of our shares to the public (if
any). No sales commissions or dealer manager fees will be paid
in connection with shares purchased pursuant to our dividend
reinvestment plan. A copy of our dividend reinvestment plan as
currently in effect is included as Appendix B to this
prospectus.
Investors participating in our dividend reinvestment plan may
purchase fractional shares. If sufficient common shares are not
available for issuance under our dividend reinvestment plan, we
will remit excess dividends in cash to the participants. If you
elect to participate in the dividend reinvestment plan, you must
agree that, if at any time you fail to meet the applicable
investor suitability standards or cannot make the other investor
representations or warranties set forth in the then current
prospectus, the subscription agreement or our charter relating
to such investment, you will promptly notify us in writing of
that fact.
Shareholders purchasing common shares pursuant to the dividend
reinvestment plan will have the same rights and will be treated
in the same manner as if such common shares were purchased
pursuant to this offering.
Following the reinvestment, we will send each participant a
written confirmation showing the amount of the dividend
reinvested in our shares, the number of common shares owned
prior to the reinvestment, and the total amount of common shares
owned after the dividend reinvestment. We have the discretion
not to provide a dividend reinvestment plan, and a majority of
our board of directors may amend or terminate our dividend
reinvestment plan for any reason at any time upon
10 days’ prior notice to the participants. Your
participation in the plan will also be terminated to the extent
that a reinvestment of your dividends in our common shares would
cause the percentage ownership limitation contained in our
charter to be exceeded. Otherwise, unless you terminate your
participation in our dividend reinvestment plan in writing, your
participation will continue even if the shares to be issued
under the plan are registered in a future registration or the
price of our dividend reinvestment plan shares is changed. You
may terminate your participation in the dividend reinvestment
plan at any time by providing us with 10 days’ written
notice. A withdrawal from participation in the dividend
reinvestment plan will be effective only with respect to
dividends paid more than 30 days after receipt of written
notice. Generally, a transfer of common shares will terminate
the shareholder’s participation in the dividend
reinvestment plan as of the first day of the quarter in which
the transfer is effective.
If you participate in our dividend reinvestment plan and are
subject to federal income taxation, you will incur a tax
liability for dividends allocated to you even though you have
elected not to receive the dividends in cash, but rather to have
the dividends withheld and reinvested in our common shares.
Specifically, you will be treated as if you have received the
dividend from us in cash and then applied such dividend to the
purchase of additional common shares. You will be taxed on the
amount of such dividend as ordinary income to the extent such
dividend is from current or accumulated earnings and profits,
unless we have designated all or a portion of the dividend as a
capital gain dividend. In addition, the difference between the
public offering price of our shares and the amount paid for
shares purchased pursuant to our dividend reinvestment plan may
be deemed to be taxable as income to participants in the plan.
Please see “Risk Factors — Tax Risks —
Investors may realize taxable income without receiving cash
dividends.”
The Maryland General Corporation Law prohibits certain business
combinations between a Maryland corporation and an interested
shareholder or the interested shareholder’s affiliate for
five years after the most recent date on which the shareholder
becomes an interested shareholder. These provisions of the
Maryland General Corporation Law will not apply, however, to
business combinations that are approved or exempted by the board
of directors of the corporation prior to the time that the
interested shareholder becomes an interested shareholder. As
permitted by the Maryland General Corporation Law,
Section 5.9 of our charter provides that the business
combination provisions of Maryland law do not apply to us.
With some exceptions, Maryland law provides that control shares
of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding “control shares”:
•
owned by the acquiring person;
•
owned by officers; and
•
owned by employees who are also directors.
“Control shares”mean voting shares which, if
aggregated with all other voting shares owned by an acquiring
person or shares on which the acquiring person can exercise or
direct the exercise of voting power,
would entitle the acquiring person to exercise voting power in
electing directors within one of the following ranges of voting
power:
•
one-tenth or more but less than one-third;
•
one-third or more but less than a majority; or
•
a majority or more of all voting power.
Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained
shareholder approval. A control share acquisition occurs when,
subject to some exceptions, a person directly or indirectly
acquires ownership or the power to direct the exercise of voting
power (except solely by virtue of a revocable proxy) of issued
and outstanding control shares. A person who has made or
proposes to make a control share acquisition, upon satisfaction
of some specific conditions, including an undertaking to pay
expenses, may compel our board of directors to call a special
meeting of our shareholders to be held within 50 days of a
demand to consider the voting rights of the control shares. If
no request for a meeting is made, we may present the question at
any shareholders’ meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then, subject to some conditions and
limitations, we may redeem any or all of the control shares
(except those for which voting rights have been previously been
approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of such
shares are considered and not approved. If voting rights for
control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes
of such appraisal rights may not be less than the highest price
per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if we are
a party to the transaction or to acquisitions approved or
exempted by our charter or bylaws.
As permitted by Maryland General Corporation Law,
Section 5.10 of our charter contains a provision exempting
from the control share acquisition statute any and all
acquisitions by any person of our shares.
We are offering up to $3,500,000,000 in shares of our common
stock pursuant to this prospectus through Hines Real Estate
Securities, Inc., our Dealer Manager, a registered broker-dealer
organized in June 2003 and affiliated with Hines. For additional
information about our Dealer Manager, please see
“Management — The Dealer Manager.” We are
offering up to $3,000,000,000 in shares to the public and up to
$500,000,000 in shares pursuant to our dividend reinvestment
plan. All investors must meet the suitability standards
discussed in the section of this prospectus entitled
“Suitability Standards.” Of the $3,500,000,000 in
shares being offered pursuant to this prospectus, we are
currently offering:
•
shares to the public at a price of $ per share;
•
shares to the public at a price of $ per share,
if the purchaser is party to an agreement with a licensed broker
dealer, investment advisor or bank trust department pursuant to
which the purchaser pays a fee based on assets under management
such as a “wrap fee”, “commission replacement
fee”, or similar fee, in which event we will waive dealer
manager fees and the selling commissions and sell shares to you
at an aggregate 9.2% discount; and
•
shares for issuance pursuant to our dividend reinvestment plan
at a price of $ per share.
Please see “— Underwriting Terms” and
“— Volume Discounts” for a description of
the conditions to which the other discounts and fee waivers
available to purchasers in this offering are subject. The
determination of these prices by our board of directors was
primarily based on (i) the estimated per-share net asset
value of Hines REIT as determined by our management, plus (ii),
in the case of our offering price, the commission and dealer
manager fee. Our management estimated the per-share net asset
value of Hines REIT using appraised values of our real estate
assets as of March 31, 2008, which were determined by
independent third party appraisers, as well as estimates of the
values of our other assets and liabilities as of
December 31, 2007, and then making various adjustments and
estimates in order to account for our operations and other
factors occurring or expected to occur between December 31,2007 and the anticipated commencement of this offering. In
addition, our board of directors also considered our historical
and anticipated results of operations and financial condition,
our current and anticipated distribution payments, yields and
offering prices of other real estate companies we deem to be
substantially similar to us, our current and anticipated capital
and debt structure, and our management’s and Advisor’s
recommendations and assessments of our prospects and expected
execution of our investment and operating strategies.
Both our real estate appraisals and the methodology utilized by
our management in estimating our per-share net asset value were
based on a number of assumptions and estimates that may not be
accurate or complete. No liquidity discounts or discounts
relating to the fact that we are externally managed were applied
to our estimated per-share valuation and no attempt was made to
value Hines REIT as an enterprise. Likewise, the valuation was
not reduced by potential selling commissions or other costs of
sale, which would impact proceeds in the case of a liquidation.
The offering price may not be indicative of the price our
shareholders would receive if they sold our shares, if our
shares were actively traded or if we were liquidated. Moreover,
since certain fees and costs associated with this offering were
added to the estimated per-share net asset value of Hines REIT
in connection with setting the new offering price of our shares,
the proceeds received from a liquidation of our assets would
likely be substantially less than the offering price of our
shares. Please see “Risk Factors — Investment
Risks — The offering price of our common shares maynot be indicative of the price at which our shares would tradeif they were actively traded.” Our offering price may
change from time to time.
Our board of directors may in its discretion from time to time
change the offering price of our common shares and, therefore,
the number of shares being offered in this offering. In such
event, we expect that our board of directors would consider,
among others, the factors described above. Real estate values
fluctuate and fees may fluctuate which in the future may result
in an increase or decrease in the price of our common shares.
Thus, future adjustments to the offering price of our shares
could result in a higher or lower offering price. The members of
our board of directors must, in accordance with their fiduciary
duties, act in a manner which they believe is in the best
interests of our shareholders when making any decision to adjust
the offering price of our common shares.
Any adjustments to the offering price will be made through a
supplement or an amendment to this prospectus or a
post-effective amendment to the registration statement of which
this prospectus is a part. Our board of directors may change the
offering price from time to time in its sole discretion, and we
expect that our board of directors will change the offering
price at least once a year following the commencement of this
offering. Additionally, we cannot assure you that our offering
price will increase in the future or that our offering price
will not decrease during this offering, or in connection with
any future offering of our shares. Please see “Risk
Factors — Investment Risks — Hines
REIT’s interest in the Operating Partnership will be
diluted by the Participation Interest in the Operating
Partnership held by HALP Associates Limited Partnership, and
your interest in Hines REIT may be diluted if we issue
additional shares.”
This offering commenced
on ,
2008. We reserve the right to terminate this offering at any
time or extend the termination to the extent we can under
applicable law.
We have not retained an underwriter in connection with this
offering. Our common shares are being offered on a “best
efforts” basis, which means that no underwriter,
broker-dealer or other person will be obligated to purchase any
shares. Please see “Risk Factors — Investment
Risks — This offering is being conducted on a
“best efforts” basis, and the risk that we will not be
able to accomplish our business objectives will increase if only
a small number of our shares are purchased in this
offering.” We will pay the Dealer Manager selling
commissions of up to 7.0% of the gross offering proceeds of
shares sold to the public, all of
which will be reallowed to participating broker dealers. We will
not pay selling commissions on shares issued and sold pursuant
to our dividend reinvestment plan. Further, as described below,
selling commissions may be reduced or waived in connection with
volume or other discounts or other fee arrangements.
The Dealer Manager has entered into selected dealer agreements
with certain other broker-dealers who are members of the
Financial Industry Regulatory Authority (“FINRA”) to
authorize them to sell our shares. Upon the sale of shares by
such participating broker-dealers, the Dealer Manager will
reallow its commissions to such participating broker-dealers.
The Dealer Manager will also receive a dealer manager fee of up
to 2.2% of gross offering proceeds we raise from the sale of
shares to the public as compensation for managing and
coordinating the offering, working with participating
broker-dealers and providing sales and marketing assistance. We
will not pay dealer manager fees on shares issued and sold
pursuant to our dividend reinvestment plan. Further, as
described below, dealer manager fees may be reduced or waived in
connection with volume or other discounts or other fee
arrangements. The Dealer Manager, in its sole discretion, may
reallow all or a portion of the dealer manager fee to
participating broker-dealers as marketing fees, in part to cover
fees and costs associated with conferences sponsored by
participating broker-dealers and to defray other
distribution-related costs and expenses of participating
broker-dealers. The marketing fees may be reallowed and paid to
any particular participating broker-dealer based upon prior or
projected volume of sales, the amount of marketing assistance
and level of marketing support provided by such participating
broker-dealer in the past and the anticipated level of marketing
support to be provided in this offering.
Other than these fees, we will not pay any other fees to any
professional or other person in connection with the distribution
of the shares in this offering.
We have agreed to indemnify participating broker-dealers, the
Dealer Manager and our Advisor against material misstatements
and omissions contained in this prospectus, as well as other
potential liabilities arising in connection with this offering,
including liabilities arising under the Securities Act, subject
to certain conditions. The Dealer Manager will also indemnify
participating broker-dealers against such liabilities, and under
certain circumstances, our sponsor
and/or our
Advisor may agree to indemnify participating broker-dealers
against such liabilities.
We entered into a selected dealer agreement with the Dealer
Manager, the Advisor and Ameriprise Financial Services, Inc.
(“Ameriprise”), pursuant to which Ameriprise was
appointed as a soliciting dealer in our current public offering.
Subject to certain limitations set forth in the agreement, we,
the Dealer Manager and the Advisor, jointly and severally,
agreed to indemnify Ameriprise against losses, liability,
claims, damages and expenses caused by certain untrue or alleged
untrue statements, or omissions or alleged omissions of material
fact made in connection with the offering, certain filings with
the Securities and Exchange Commission or certain other public
statements, or the breach by us, the Dealer Manager or the
Advisor or any employee or agent acting on their behalf, of any
of the representations, warranties, covenants, terms and
conditions of the agreement. In addition, Hines separately
agreed to provide a limited indemnification to Ameriprise for
these losses on a joint and several basis with the other
entities, and we separately agreed to indemnify and reimburse
Hines under certain circumstances for any amounts Hines is
required to pay pursuant to this indemnification. Please see
“Conflicts of Interest.”
The following table shows the estimated maximum compensation
payable to the Dealer Manager and participating broker-dealers
in connection with this offering.
Assumes the sale of the maximum offering of up to $3,500,000,000
of shares of common stock, including shares sold under our
dividend reinvestment plan.
(2)
For purposes of this table, we have assumed no volume discounts
or waived commissions as discussed elsewhere in this “Plan
of Distribution.” We will not pay commissions for sales of
shares pursuant to our dividend reinvestment plan.
(3)
For purposes of this table, we have assumed no waived dealer
manager fees as discussed elsewhere in this “Plan of
Distribution.” We will not pay a dealer manager fee for
sales of shares pursuant to our dividend reinvestment plan.
Additional amounts may be paid by an affiliate of Hines to the
Dealer Manager, its employees and to participating
broker-dealers for expenses related to this offering which may
include, but are not limited to: (i) salaries, certain
other compensation and direct expenses of employees of our
Dealer Manager while preparing for the offering and marketing of
our shares and in connection with their wholesaling activities,
including travel and entertainment expenses associated with the
offering and marketing of our shares; (ii) costs and
expenses of conducting educational conferences and seminars or
of attending broker-dealer sponsored conferences;
(iii) travel and other expenses of participating
broker-dealers in connection with the offering and marketing of
our shares and (iv) payment or reimbursement of marketing
and similar expenses, all of the foregoing to be paid by an
affiliate of Hines. We estimate that such expenses will
approximate $25,741,000 and would be considered underwriting
compensation under applicable NASD Conduct Rules applicable to
participating broker-dealers who are members of FINRA.
In accordance with applicable NASD Conduct Rules, in no event
will total underwriting compensation payable to FINRA members
(including, but not limited to, selling commissions, the dealer
manager fee, expense reimbursements to our wholesalers and
participating broker-dealers and their registered
representatives, all compensation payable to wholesalers of the
Dealer Manager and transaction-based compensation payable to
other registered representatives of the Dealer Manager who are
directly responsible for the solicitation, marketing,
distribution or sale of our shares, other than a registered
representative whose functions are clerical or administerial)
exceed 10% of maximum gross offering proceeds, except for any
additional amounts equal to up to 0.5% of gross offering
proceeds which may be paid in connection with bona fide due
diligence activities.
In addition to the underwriting compensation described above, an
affiliate of Hines will pay for all organization and offering
expenses, other than selling commissions and dealer manager
fees, whether incurred by us directly or through the Advisor,
the Dealer Manager and/or their affiliates, which expenses are
expected to consist of, among other expenses, actual legal,
accounting, printing, filing fees, transfer agent costs, costs
and expenses of the Advisor related to educational conferences
and seminars conducted by Hines, costs and expenses of the
Advisor related to attending broker-dealer sponsored conferences
and other accountable offering-related expenses. We will have
no liability for such expenses.
In the event that an investor:
•
has a contract for investment advisory and related brokerage
services which includes a fee based on the amount of assets
under management or a “wrap” fee feature;
•
has a contract for a “commission replacement” account,
which is an account in which securities are held for a fee only;
•
has engaged the services of a registered investment adviser with
whom the investor has agreed to pay compensation for investment
advisory services or other financial or investment advice;
•
is investing in a bank trust account with respect to which the
investor has delegated the decision-making authority for
investments made in the account to a bank trust department for a
fee; or
•
has any other type of account which requires the investor to pay
fees based on assets under management (and the investor’s
financial or investment advisor agrees to the waiver of
commissions payable in connection with this offering),
we will sell shares to or for the account of such investor at a
9.2% discount, or $ per share,
reflecting the fact that selling commissions and the dealer
manager fee will not be paid in connection with such purchases.
The net proceeds we receive from the sale of shares will not be
affected by such sales of shares made net of selling commissions
and the dealer manager fee.
We may sell shares to retirement plans of participating
broker-dealers, to participating broker-dealers themselves (and
their employees), to IRAs and qualified plans of their
registered representatives or to any one of their registered
representatives in their individual capacities (and to each of
their spouses, parents and minor children) at a 7.0% discount,
or $ per share, reflecting that
selling commissions will not be paid in connection with such
transactions. The net proceeds we receive will not be affected
by such sales of shares made net of commissions.
Our directors and officers, as well as affiliates of Hines and
their directors, officers and employees (and their spouses,
parents and minor children) and entities owned substantially by
such individuals, may purchase shares in this offering at a 9.2%
discount, or $ per share,
reflecting the fact that no selling commissions or dealer
manager fees will be paid in connection with any such sales. The
net offering proceeds we receive will not be affected by such
sales of shares at a discount. Hines and its affiliates will be
expected to hold their shares purchased as shareholders for
investment and not with a view towards distribution.
In addition, Hines, the Dealer Manager or one of their
affiliates may form one or more foreign-based entities for the
purpose of raising capital from foreign investors to invest in
our shares. Sales of our shares to any such foreign entity may
be at a 9.2% discount, or $ per
share, reflecting the fact that no selling commissions or dealer
manager fees will be paid in connection with any such
transactions. The net offering proceeds we receive will not be
affected by such sales of shares at a discount.
Shares sold at the discounts described above are identical in
all respects to shares sold without such discounts, with equal
dividend, distribution, liquidation and other rights.
We are offering, and participating broker-dealers and their
registered representatives will be responsible for implementing,
volume discounts to qualifying purchasers (as defined below) who
purchase $250,000 or more in shares from the same participating
broker-dealer, whether in a single purchase or as the result of
multiple purchases. Any reduction in the amount of the selling
commissions as a result of volume discounts received may be
credited to the qualifying purchasers in the form of the
issuance of additional shares.
The volume discounts operate as follows:
Amount of
Net Offering
Commission
Price per Share
Commission
Proceeds
Amount of Shares Purchased
Percentage
to the Investor
Paid per Share
per Share(1)
Up to $249,999
7.0
%
$
$
$
$250,000 to $499,999
6.0
%
$
$
$
$500,000 to $749,999
5.0
%
$
$
$
$750,000 to $999,999
4.0
%
$
$
$
$1,000,000 to $1,249,999
3.0
%
$
$
$
$1,250,000 to $1,499,999
2.0
%
$
$
$
$1,500,000 and over
1.5
%
$
$
$
(1)
Before payment of the Dealer Manager fee.
For example, if you purchase $800,000 in shares, the selling
commissions on such shares will be reduced to 4.0%, in which
event you will
receive shares
instead
of shares,
the number of shares you would have received if you had paid
$ per share. The net offering
proceeds we receive from the sale of shares are not affected by
volume discounts.
If you qualify for a particular volume discount as the result of
multiple purchases of our shares, you will receive the benefit
of the applicable volume discount for the individual purchase
which qualified you for the volume discount, but you will not be
entitled to the benefit for prior purchases. Additionally, once
you qualify for a volume discount, you will receive the benefit
for subsequent purchases. For this purpose, if you purchased
shares issued and sold in our prior offerings, you will receive
the benefit of such share purchases in connection with
qualifying for volume discounts in this offering.
As set forth below, a “qualifying purchaser” may
combine purchases by other persons for the purpose of qualifying
for a volume discount, and for determining commissions payable
to participating broker-dealers. You must request that your
share purchases be combined for this purpose by designating such
on your subscription agreement. For the purposes of such volume
discounts, the term “qualifying purchaser” includes:
•
an individual, his or her spouse and their children under the
age of 21 who purchase the common shares for his, her or their
own accounts; a corporation, partnership, association,
joint-stock company, trust fund or any organized group of
persons, whether incorporated or not;
•
an employees’ trust, pension, profit-sharing or other
employee benefit plan qualified under Section 401(a) of the
Code;
•
all commingled trust funds maintained by a given bank;
•
Subscriptions obtained by certain participating broker-dealers,
as discussed below.
Any request to combine purchases of our shares will be subject
to our verification that such purchases were made by a
“qualifying purchaser.”
In addition, the Dealer Manager may, in its sole discretion,
allow participating broker-dealers to combine subscriptions of
multiple purchasers as part of a combined order for purposes of
determining the commissions payable to the Dealer Manager and
the participating broker-dealer. In order for a participating
broker-dealer to combine subscriptions for the purposes of
qualifying for discounts or fee waivers, the Dealer Manager and
such participating broker-dealer must agree on acceptable
procedures relating to the combination of subscriptions for this
purpose. In all events, in order to qualify, any such combined
order of subscriptions must be from the same participating
broker-dealer.
In order to encourage purchases of our shares in excess of
$10 million, the Dealer Manager may, in its sole
discretion, (i) agree with a participating broker-dealer to
reduce sales commissions with respect to shares purchased by
qualifying purchasers to as low as
$ per share; and (ii) agree
with qualifying purchasers to reduce the dealer manager fee with
respect to such shares to as low as
$ per share, reflecting a
reduction in selling commissions from 7.0% to 1.5% and an
additional reduction of 2.2% due to the Dealer Manager’s
waiver of its fee. Therefore, a qualifying purchaser acquiring
in excess of $10 million could pay as little as
$ per share. The net offering
proceeds we receive will not be affected by any reduction of
selling commissions or any such waiver of the dealer manager fee.
Accordingly, your ability to receive a discount or fee waiver
based on combining orders or otherwise may depend on the
financial advisor or broker-dealer through which you purchase
your shares, so you should check before purchasing shares.
Requests to combine subscriptions as a part of a combined order
for the purpose of qualifying for discounts or fee waivers must
be made in writing by the participating broker-dealer, and any
resulting reduction in selling commissions or the dealer manager
fee will be pro rated among the separate subscribers. As with
discounts provided to other purchasers, the net proceeds we
receive from the sale of shares will not be affected by
discounts provided as a result of a combined order.
Regardless of any reduction in any commissions for any reason,
any other fees based upon gross proceeds of the offering will be
calculated as though the purchaser paid
$ per share. An investor
qualifying for a discount will receive a higher percentage
return on his or her investment than investors who do not
qualify for such discount. With respect to shares purchased
pursuant to our dividend reinvestment plan, you cannot receive a
discount greater than 5% of the then-current price of our
shares, regardless of whether you have
received a greater discount on shares purchased in this or prior
offerings due to the volume of your purchases or otherwise.
Accordingly, if you qualify for the discounts and fee waivers
described above, you may be able to receive a lower price on
subsequent purchases in this offering than you would receive if
you participate in our dividend reinvestment plan and have your
dividends reinvested at the price offered thereunder.
Discounts and fee waivers will be available through certain
financial advisers and broker-dealers under the circumstances
described above, and you should ask your financial advisor
and/or
broker-dealer about the ability to receive such discounts or fee
waivers.
We and participating broker-dealers selling shares on our behalf
are required to make every reasonable effort to determine
whether a purchase of our shares is suitable for you. The
participating broker-dealers shall transmit promptly to us the
completed subscription documentation and any supporting
documentation we may reasonably require.
The Dealer Manager and participating broker-dealers are required
to deliver to you a copy of this prospectus and any amendments
or supplements. We plan to make this prospectus and the
appendices available electronically to the Dealer Manager and
the participating broker-dealers, as well as to provide them
paper copies, on our website at www.HinesREIT. Any prospectus,
amendments and supplements, as well as any quarterly reports,
annual reports, proxy statements or other reports required to be
made available to you will be posted on our website at
www.HinesREIT.com.
Sales of our shares are completed upon the receipt and
acceptance by us of subscriptions. We have the unconditional
right to accept or reject your subscription within 20 days
after our receipt of a fully completed copy of the subscription
agreement and payment for the number of shares for which you
subscribed. If we accept your subscription, our transfer agent
will mail you a confirmation. No sale of our shares may be
completed until at least five business days after the date you
receive this prospectus. If for any reason we reject your
subscription, we will return your funds and your subscription
agreement, without interest or deduction, within 20 days
after our receipt of the same.
To purchase shares pursuant to this offering, you must deliver a
completed subscription agreement, in substantially the form that
accompanies this prospectus, prior to the termination of this
offering. You should pay for your shares by check payable to
“Hines Real Estate Investment Trust, Inc.” or
“Hines REIT,” or as otherwise instructed by your
participating broker-dealer. Subscriptions will be effective
only upon our acceptance. We may, for any reason, accept or
reject any subscription agreement, in whole or in part. You may
not terminate or withdraw a subscription or purchase obligation
after you have delivered a subscription agreement evidencing
such obligation to us.
We intend to admit shareholders daily as subscriptions for
shares are accepted by us in good order. Upon your being
admitted as a shareholder, we will use your subscription
proceeds to make real estate investments and pay fees and
expenses as described in this prospectus. Please see
“Estimated Use of Proceeds.”
The general form of subscription agreement that investors will
use to subscribe for the purchase of shares in this offering is
included as Appendix A to this prospectus. The subscription
agreement requires all investors subscribing for shares to make
the following certifications or representations:
•
your tax identification number set forth in the subscription
agreement is accurate and you are not subject to backup
withholding;
•
you are a U.S. person;
•
a copy of this prospectus was delivered or made available to you;
you meet the minimum income, net worth and any other applicable
suitability standards established for you, as described in the
“Suitability Standards” section of this prospectus;
•
you are purchasing the shares for your own account; and
•
you acknowledge that there is no public market for the shares
and, thus, your investment in shares is not liquid.
The above certifications and representations are included in the
subscription agreement in order to help satisfy the
responsibility of participating broker-dealers and the Dealer
Manager to make every reasonable effort to determine that the
purchase of our shares is a suitable and appropriate investment
for you and that appropriate income tax reporting information is
obtained. We will not sell any shares to you unless you are able
to make the above certifications and representations by
executing the subscription agreement. By executing the
subscription agreement, you will not, however, be waiving any
rights you may have under the federal securities laws.
In addition, investors who are California residents will be
required to make certain additional certifications or
representations that the sale, transfer or assignment of their
shares will be made only with the prior written consent of the
Commissioner of the Department of Corporations of the State of
California, or as otherwise permitted by the Commissioner’s
rules.
Each participating broker-dealer who sells shares on our behalf
has the responsibility to make every reasonable effort to
determine that the purchase of shares in this offering is a
suitable and appropriate investment for each investor purchasing
our shares through such participating broker-dealer based on
information provided by the prospective investor regarding,
among other things, each prospective investor’s financial
situation and investment objectives. In making this
determination, participating broker-dealers may rely on, among
other things, relevant information provided by the prospective
investors. Each prospective investor should be aware that
participating broker-dealers are responsible for determining
suitability and will be relying on the information provided by
prospective investors in making this determination. In making
this determination, participating broker-dealers have a
responsibility to ascertain that each prospective investor:
•
meets the minimum income and net worth standards set forth under
the “Suitability Standards” section of this prospectus;
•
can reasonably benefit from an investment in our shares based on
the prospective investor’s investment objectives and
overall portfolio structure;
•
is able to bear the economic risk of the investment based on the
prospective investor’s net worth and overall financial
situation; and
•
has apparent understanding of:
•
the fundamental risks of an investment in the shares;
•
the risk that the prospective investor may lose his or her
entire investment;
•
the lack of liquidity of the shares;
•
the restrictions on transferability of the shares; and
•
the tax consequences of an investment in the shares.
Participating broker-dealers are required to make the
determinations set forth above based upon information relating
to each prospective investor concerning his age, investment
objectives, investment experience, income, net worth, financial
situation and other investments of the prospective investor, as
well as other pertinent factors. Each participating
broker-dealer is required to maintain records of the information
used to determine that an investment in shares is suitable and
appropriate for an investor. These records are required to be
maintained for a period of at least six years.
In order to purchase shares in this offering, you initially must
invest at least $2,500. Please see “Suitability
Standards.” Except in Maine, Minnesota, Nebraska and
Washington (where any subsequent subscriptions by investors must
be made in increments of at least $1,000), investors who have
satisfied the initial minimum purchase requirement may make
additional purchases in increments of at least five shares,
except for purchases made pursuant to our dividend reinvestment
plan which may be in increments of less than five shares.
This offering will terminate at the time all shares being
offered pursuant to this prospectus have been sold or the
offering is terminated prior thereto and the unsold shares are
withdrawn from registration, but in no event later
than ,
2010 (two years after the initial effective date of this
prospectus), unless we announce an extension of the offering in
a supplement or amendment to this prospectus.
We conduct substantially all of our operations through the
Operating Partnership. The following is a summary of the
material provisions of the Agreement of Limited Partnership of
the Operating Partnership. We refer to the Operating
Partnership’s Agreement of Limited Partnership as the
“Partnership Agreement.”
The Operating Partnership was formed in August, 2003 to hold our
assets. It will allow the Company to operate as what is
generally referred to as an “Umbrella Partnership Real
Estate Investment Trust,” or an “UPREIT,” which
structure is utilized generally to provide for the acquisition
of real property from owners who desire to defer taxable gain
that would otherwise be recognized by them upon the disposition
of their property. These owners may also desire to achieve
diversity in their investment and other benefits afforded to
owners of stock in a REIT. For purposes of satisfying the asset
and income tests for qualification as a REIT for tax purposes,
the REIT’s proportionate share of the assets and income of
an UPREIT, such as the Operating Partnership, will be deemed to
be assets and income of the REIT.
A property owner may contribute property to an UPREIT in
exchange for limited partnership units on a tax-free basis. In
addition, the Operating Partnership is structured to make
distributions with respect to OP Units that will be
equivalent to the dividends made to holders of our common
shares. Finally, a limited partner in the Operating Partnership
may later exchange his or her limited partner interests in the
Operating Partnership for cash or shares of our common stock, at
our election, in a taxable transaction.
The Partnership Agreement contains provisions which would allow,
under certain circumstances, other entities, including other
programs, to merge into or cause the exchange or conversion of
their interests for limited partner interests in the Operating
Partnership. In the event of such a merger, exchange or
conversion, the Operating Partnership may issue additional
OP Units which would be entitled to the same exchange
rights as other holders of OP Units of the Operating
Partnership. As a result, any such merger, exchange or
conversion could ultimately result in the issuance of a
substantial number of our common shares, thereby diluting the
percentage ownership interest of other shareholders. We may also
create separate classes or series of OP Units having
privileges, variations and designations as we may determine in
our sole and absolute discretion.
We hold substantially all of our assets through the Operating
Partnership. We are the sole general partner of the Operating
Partnership and, as of September 30, 2007, we owned a 97.8%
ownership interest in the Operating Partnership, and Hines 2005
VS I LP, an affiliate of Hines, owned a 0.7% ownership interest
in the Operating Partnership. Finally, HALP Associates Limited
Partnership owned the Participation Interest in the Operating
Partnership. As of September 30, 2007, the percentage
interest attributable to the Participation Interest represented
a 1.5% ownership interest. Please see
‘‘— The Participation Interest” below.
As the sole
The Operating Partnership is organized as a Delaware limited
partnership. The purposes of the Operating Partnership are to
engage in any lawful business activities in which a partnership
formed under Delaware law may engage or participate, with its
primary objectives and purposes being, either as a partner in a
partnership or joint venture or otherwise, to purchase, own,
maintain, mortgage, encumber, equip, manage, lease, finance,
operate, dispose of or otherwise deal with real property,
interests in real property or mortgages secured by real property
on our behalf. The Operating Partnership may also be a partner
(general or limited) in partnerships (general or limited), a
venturer in joint ventures, a shareholder in corporations, a
member in limited liability companies or an investor in any
other type of business entity created to accomplish all or any
of the foregoing. The Operating Partnership’s purposes may
be accomplished by taking any action which is not prohibited
under the Delaware Revised Uniform Limited Partnership Act.
The Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable us to
satisfy the requirements for being classified as a REIT for tax
purposes, avoid any federal income or excise tax liability and
ensure that the Operating Partnership will not be classified as
a “publicly traded partnership” for purposes of
Section 7704 of the Code, which classification could result
in the Operating Partnership being taxed as a corporation,
rather than as a partnership. Please see “Material Tax
Considerations — Tax Aspects of the Operating
Partnership.” The Partnership Agreement provides that the
Operating Partnership will distribute cash flow from operations
to its partners in accordance with their relative percentage
interests, on at least a quarterly basis, in amounts determined
by us. Please see “— Distributions” below.
Distributions will be made such that a holder of one
OP Unit in the Operating Partnership will receive an amount
of annual cash flow distributions from the Operating Partnership
equal to the amount of annual dividends paid to the holder of
one of our common shares.
The Partnership Agreement provides that, subject to compliance
with the provisions of Sections 704(b) and 704(c) of the
Code and corresponding Treasury Regulations:
•
income from operations is allocated first to the holder of the
Participation Interest until it has been allocated income in an
amount equal to distributions made to such holder, and then to
the remaining partners of the Operating Partnership in
proportion to the number of units held by each of them;
•
gain from the sale or other disposition of property is generally
allocated in such a manner as to cause the capital account
balances of the holder of the Participation Interest and the
holders of the OP Units to be in proportion to their
respective percentage interests; and
•
all losses are generally allocated in such a manner as to cause
the capital account balances of the holder of the Participation
Interest and the holders of the OP Units to be in
proportion to their respective percentage interests.
Upon the liquidation of the Operating Partnership, after payment
of debts and obligations, any remaining assets of the Operating
Partnership will be distributed to partners with positive
capital accounts in accordance with their respective positive
capital account balances. If the holder of the Participation
Interest were to have a negative balance in its capital account
following a liquidation, it would be obligated to contribute
cash to the Operating Partnership equal to such negative balance
for distribution to other partners, if any, having positive
balances in such capital accounts.
In addition to the administrative and operating costs and
expenses incurred by the Operating Partnership in acquiring and
operating real properties, the Operating Partnership will pay
all of our administrative costs and expenses. Such expenses will
include:
•
all expenses relating to the continuity of our existence;
The consent of limited partners holding 67% of the aggregate
percentage interest held by all limited partners is required to
approve certain amendments to the Partnership Agreement,
including amendments that modify:
•
the allocation of profits, losses, or distributions among
partners;
•
any provision relating to the issuance and conversion of
OP Units; and
•
any provision relating to the transfer of OP Units.
Additionally, the written consent of the general partner and any
partner adversely affected is required to amend the Partnership
Agreement if the amendment would enlarge the obligation of such
partner to make capital contributions to the Operating
Partnership. The written consent of all the partners is required
to amend these amendment limitations.
We may not transfer our interest in the Operating Partnership
without the consent of partners holding over 50% of the
aggregate percentage interest held by all partners in the
Operating Partnership unless:
•
the transfer of such interest is to an entity which is, directly
or indirectly, controlled by (i) Hines,
and/or
(ii) Jeffrey C. Hines
and/or
Gerald D. Hines, or in the event of the death or disability of
Jeffrey C. Hines
and/or
Gerald D. Hines, the heirs, legal representatives or estates of
either or both of them or to an entity that is, directly or
indirectly, wholly-owned by us
and/or
Jeffrey C. Hines
and/or
Gerald D. Hines, or in the event of the death or disability of
Jeffrey C. Hines
and/or
Gerald D. Hines, the heirs, legal representatives or estates of
either or both of them; or
•
the transfer of such interest is pursuant to or in connection
with a change in the outstanding common shares of the Company by
reason of any share dividend, split, recapitalization, merger,
consolidation, combination, exchange of shares or other similar
corporate change and either (i) the shares dividend, split,
recapitalization, merger, consolidation, combination, exchange
of shares or other similar corporate change has been approved by
the consent of a
majority-in-interest
of the limited partners of the Operating Partnership, or
(ii) an appropriate adjustment to the number of
OP Units held by each Partner has been made in accordance
with the Partnership Agreement.
When the consent of partners is required to approve certain
actions, such as amendments to the Partnership Agreement or a
transfer of our interests in the Operating Partnership as
referenced above, each partner’s consent rights (including
the holder of the Participation Interest) are based on such
partner’s percentage interest of the Operating Partnership.
Please see “— The Participation Interest”
below for a summary of the calculations of the percentage
interest attributable to the Participation Interest, which
increases over time, and the percentage interests attributable
to partners holding OP Units.
HALP Associates Limited Partnership owns a profits interest in
the Operating Partnership denominated as the Participation
Interest, which increases as described below and entitles it to
receive distributions of the Operating Partnership based upon
its percentage interest of the Operating Partnership at the time
of distribution. Because the Participation Interest is a profits
interest, any value of such interest would be ultimately
realized only if the Operating Partnership has adequate gain or
profit to allocate to the holder of the Participation Interest.
Through their ownership in an affiliate of Hines or other
compensation arrangements, Hines employees (including the
officers and managers of our Advisor) will effectively hold up
to 50% of the Participation Interest for purposes of aligning
their interests with those of our shareholders. The
Participation Interest was issued in consideration for an
obligation by Hines and its affiliates to perform future
services in connection with our real estate operations. We
believe the Participation Interest had a nominal value at
issuance. The percentage interest attributable to the
Participation Interest, initially 0.0% at the first month of
operations of the Operating Partnership and 1.5% as of
September 30, 2007, increases on a monthly basis as
described below. We anticipate that the percentage interest
attributable to the Participation Interest will increase
incrementally over time and, consequently, the percentage
interest of holders of OP Units, including Hines REIT, will
decrease proportionally. See “Risk Factors —
Investment Risks — Hines REIT’s interest in the
Operating Partnership will be diluted by the Participation
Interest in the Operating Partnership held by HALP Associates
Limited Partnership, and your investment in Hines REIT may be
diluted if we issue additional shares” and
“— Hypothetical Impact of the Participation
Interest” below.
The percentage interest of the holder of the Participation
Interest as of the end of a particular calendar month will equal
the sum of:
(a) the percentage interest attributable to the
Participation Interest as of the end of the immediately
preceding month, adjusted for any issuances or redemptions of
OP Units during the month, plus
(b) 0.0625% of the net equity received by the Operating
Partnership and invested in real estate investments as of the
end of the current month, divided by the “Equity
Value” (as defined below) of the Operating Partnership as
of the end of the current month, plus
(c) 0.50% of the “Gross Real Estate Investments”
(as defined below) made by the Operating Partnership during the
current month, divided by the Equity Value of the Operating
Partnership as of the end of such month.
The monthly adjustment to the percentage interest attributable
to the Participation Interest is intended to approximate the
economic equivalent of the cash acquisition and asset management
fees earned by the Advisor under the Advisory Agreement for the
applicable month, and the immediate and automatic reinvestment
of such amount into the Operating Partnership in exchange for
equity. Adjustments in the percentage interest attributable to
the Participation Interest as described above will cease at such
time as an affiliate of Hines no longer serves as our advisor.
“Equity Value” as of a particular date means, in cases
where we have an offering of common shares then in effect, the
product of (i) the per-share offering price for the common
shares that are the subject of such offering, net of selling
commissions and dealer manager fees, multiplied by (ii) a
number equal to the number of OP Units outstanding as of
the end of such month, divided by the difference between 100%
and the percentage interest attributable to the Participation
Interest as of the end of such month. In cases where we do not
have an offering of common shares then in effect, “Equity
Value” as of a particular date means the net fair market
value of the Operating Partnership’s equity as of such
date, as approved by our board of directors, which shall
generally equal the net proceeds that would be available for
distribution by the Operating Partnership if all properties
owned directly or indirectly by the Operating Partnership were
sold at their fair market value in an all cash sale as of such
date, and all expected transaction costs (including all closing
costs customarily borne by a seller in the market where each
property is located and estimated legal fees and expenses) were
paid, and all liabilities were repaid, out of such proceeds.
The term “Gross Real Estate Investments” of the
Operating Partnership means the gross amount invested by the
Operating Partnership in any real estate investments (either
directly or indirectly, including real estate
investments contributed to the Operating Partnership for
OP Units), including debt attributable to such investments;
provided that in the case of amounts invested in entities not
wholly-owned by the Operating Partnership, the term shall mean
our allocable share of the Gross Real Estate Investments of such
entities.
The foregoing calculation of the percentage interest of the
Participation Interest as of the end of a particular month will
be effective as of the first day of the following month. While
the Participation Interest increases on a monthly basis, the
amount of the increase is diluted by the number of OP Units
issued (including OP Units issued to Hines REIT as the
general partner as a result of offering proceeds raised by us),
or increased as a result of OP Units redeemed, during such
calendar month, so that the percentage interest attributable to
the Participation Interest immediately after such issuance or
redemption equals (i) the percentage interest attributable
to the Participation Interest immediately prior to such issuance
or redemption, multiplied by (ii) a fraction whose
numerator is the number of OP Units outstanding immediately
prior to such issuance or redemption and whose denominator is
the number of OP Units outstanding immediately after such
issuance or redemption. The Participation Interest may be
repurchased for common shares or cash as described below.
Repurchases of the Participation Interest will result in a
reduction in the percentage interest attributable to the
Participation Interest to the extent of such repurchase and will
have no impact on the calculation of subsequent increases in the
Participation Interest.
The percentage interest of each partner holding OP Units
for any particular calendar month will equal:
•
100% minus the percentage interest attributable to the
Participation Interest, multiplied by
•
the sum of the number of OP Units held by such partner,
assuming the conversion of any Preference Units held by such
partner (if any) into OP Units, divided by
•
the sum of all OP Units issued and outstanding at such
time, assuming the conversion of all Preference Units issued and
outstanding at such time (if any) into OP Units.
The following table shows an example of the increase of the
Participation Interest, and the proportionate decrease of Hines
REIT’s interest in the Operating Partnership. This table
shows the actual ownership percentages in the Operating
Partnership as of December 31, 2004, 2005 and 2006, and the
estimated percentages for 2007 through 2012 assuming:
(i) we raise $250 million each quarter during this
offering, (ii) we raise no additional capital and otherwise
issue no additional shares remaining during the remaining five
years represented, (iii) we immediately invest all proceeds
received in real estate investments without taking into account
selling commissions, dealer manager fees or organizational and
offering expenses, (iv) no other interests in the Operating
Partnership are issued, and (v) our investments in real
estate investments are 50% leveraged at the time of acquisition.
Represents the $10,200,000 investment HREH made in the Operating
Partnership and subsequently transferred to Hines 2005 VS I LP.
(3)
The increase in the Participation Interest will be less if Hines
REIT conducts future offerings similar to this offering, as the
increase in the Participation Interest will be diluted by future
issuances of shares.
Pursuant to the Partnership Agreement, limited partners will
receive rights that will enable them to request the repurchase
of their OP Units for cash or, at our option, common shares
in Hines REIT. The holder of the Participation Interest likewise
has the right to request the repurchase of the Participation
Interest for cash or, at our option, common shares in Hines
REIT. These repurchase rights will be exercisable one year after
the OP Units or Participation Interest are issued to such
limited partner. In either event, the cash amount to be paid
will be equal to the cash value of the number of our shares that
would be issuable if the OP Units or, in the case of the
Participation Interest, the Participation Interest Unit
Equivalents were exchanged for our shares on a one-for-one
basis. Alternatively, we may elect to purchase the OP Units
or Participation Interest by issuing one common share for each
OP Unit or Participation Interest Unit Equivalent
exchanged. The number of “Participation Interest Unit
Equivalents” equals a number of OP Units that would
represent the percentage interest in the Operating Partnership
evidenced by the Participation Interest or, if less, a number of
OP Units that represents the Participation Interest’s
proportionate share of the Capital Account balances of all
partners in the Partnership (determined as if the assets of the
Partnership were liquidated for a net amount equal to Net Asset
Value). A limited partner cannot exercise these repurchase
rights if such repurchase would:
•
cause us to no longer qualify (or it would be likely that we no
longer would qualify) as a REIT under the Code;
•
result in any person owning common shares in excess of our
ownership limits;
•
constitute or be likely to constitute a violation of any
applicable federal or state securities law;
cause us to be “closely held” within the meaning of
Section 856(h) of the Code;
•
cause us to own 10% or more of the ownership interests in a
tenant within the meaning of Section 856(d)(2)(B) of the
Code;
•
cause the acquisition of shares by a limited partner whose
interests are repurchased to be “integrated” with any
other distribution of our shares for purposes of complying with
the Securities Act; or
•
cause the Operating Partnership to be classified as a
“publicly traded partnership” as that term is defined
in Section 7704 of the Code or cause a technical
termination of the Operating Partnership under Section 708
of the Code. In particular, as long as the Operating Partnership
is potentially subject to classification as a publicly traded
partnership, a limited partner may exercise repurchase rights
only if:
•
the redemption would constitute a “private transfer”
(as that term is defined in the Partnership Agreement); or
•
the redemption, when aggregated with other transfers of
OP Units within the same taxable year (but not including
private transfers), would constitute 10% or less of the
percentage interests in the Operating Partnership.
We do not expect to issue any of the common shares offered
hereby to limited partners of the Operating Partnership in
exchange for their OP Units or the Participation Interest.
Rather, in the event a limited partner of the Operating
Partnership exercises its repurchase rights, and we elect to
purchase the OP Units or Participation Interest with our
common shares, we expect to issue unregistered common shares or
subsequently registered shares in connection with such
transaction.
In the event the Advisory Agreement expires without the consent
of the Advisor, or is terminated for any reason other than by
the Advisor, we may be required to repurchase all or a portion
of the OP Units and Participation Interest held Hines and
its affiliates. In such event, the purchase price is required to
be paid in cash or common shares at the option of the holder.
Please see “Management — The Advisor and the
Advisory Agreement — Removal of the Advisor” and
“Risk Factors — Investment Risks — The
redemption of interests in the Operating Partnership held by
Hines and its affiliates (including the Participation Interest)
as required in our Advisory Agreement may discourage a takeover
attempt if our Advisory Agreement would be terminated in
connection therewith.”
If the Operating Partnership requires additional funds, any
partner may, but is not required to, make an additional capital
contribution to the Operating Partnership. We may loan to the
Operating Partnership the proceeds of any loan obtained or debt
securities issued by us so long as the terms of such loan to the
Operating Partnership are substantially equivalent to the loan
obtained or debt securities issued by us. If any partner
contributes additional capital to the Operating Partnership, the
partner will receive additional OP Units and its percentage
interest in the Operating Partnership will be increased on a
proportionate basis based upon the amount of such additional
capital contributions and the value of the Operating Partnership
at the time of such contributions.
As we accept subscriptions for shares, we will transfer
substantially all of the net proceeds of the offering to the
Operating Partnership as a capital contribution; however, we
will be deemed to have made capital contributions in the amount
of the gross offering proceeds received from investors. The
Operating Partnership will be deemed to have simultaneously paid
the selling commissions and other costs associated with the
offering. Under the Partnership Agreement, we generally are
obligated to contribute the proceeds of a securities offering as
additional capital to the Operating Partnership in exchange for
additional OP Units. In addition, we are authorized to
cause the Operating Partnership to issue partnership interests
for less than fair market value if we conclude in good faith
that such issuance is in the best interests of us and the
Operating Partnership.
The Operating Partnership will be dissolved and its affairs
wound up upon the earliest to occur of the following events:
•
the sale of all or substantially all of the assets of the
Operating Partnership; or
•
unless reconstituted upon bankruptcy, the entry of a final
judgment, order or decree of a court of competent jurisdiction
adjudicating either the Operating Partnership or Hines REIT as
bankrupt, and the expiration without appeal of the period, if
any, allowed by applicable law to appeal therefrom.
Hines REIT is the tax matters partner of the Operating
Partnership and, as such, has the authority to handle tax audits
and to make tax elections under the Code on behalf of the
Operating Partnership.
Generally, all available cash is distributed quarterly to or for
the benefit of the partners of record as of the applicable
record date. The term “available cash” means all cash
receipts of the Operating Partnership from whatever source
during the period in question in excess of all items of
Operating Partnership expense (other than non-cash expenses such
as depreciation) and other cash needs of the Operating
Partnership, including real estate investments, debt payments,
capital expenditures, payments to any dealer manager, advisor or
property manager under any dealer, manager, advisor or property
management agreement, other
fees and expense reimbursements, funds used for redemptions, and
any reserves (as determined by the general partner) established
or increased during such period. In the discretion of the
general partner of the Operating Partnership, but subject to the
Partnership Agreement, reserves may include cash held for future
acquisitions.
The Operating Partnership will distribute cash available for
distribution to its partners at least quarterly. Pursuant to the
Partnership Agreement and subject to the rights of any holders
of Preference Units, the Operating Partnership will distribute
cash among the partners holding OP Units and the partner
holding the Participation Interest in proportion to their
respective percentage interests in the Operating Partnership.
Please see “— The Participation Interest”
above for a summary of how the percentage interests in the
Operating Partnership are calculated.
The Operating Partnership must indemnify and hold Hines REIT
(and its employees, directors,
and/or
officers) harmless from any liability, loss, cost or damage,
including without limitation reasonable legal fees and court
costs, incurred by it by reason of anything it may do or refrain
from doing hereafter for and on behalf of the Operating
Partnership or in connection with its business or affairs.
However, the Operating Partnership will not be required to
indemnify:
•
Hines REIT for any liability, loss, cost or damage caused by its
fraud, willful misconduct or gross negligence;
•
officers and directors of Hines REIT (other than our independent
directors) for any liability, loss, cost or damage caused by
such person’s negligence or misconduct; or
•
our independent directors for any liability, loss, cost or
damage caused by their gross negligence or willful misconduct.
In addition, the Operating Partnership must reimburse Hines REIT
for any amounts paid by it in satisfaction of indemnification
obligations owed to its present or former directors
and/or
officers, as provided for in or pursuant to its corporate
governance documents.
The following is a summary of the material federal income tax
considerations generally applicable to the ownership of common
shares. The following discussion does not cover all possible tax
considerations and does not include a detailed discussion of any
state, local or foreign tax considerations. Nor does it discuss
all aspects of federal income taxation that may be relevant to a
prospective shareholder in light of his or her particular
circumstances or to certain types of shareholders (including
insurance companies, tax-exempt entities, financial institutions
or broker-dealers, and, except as described in
“— Taxation of Foreign Investors” below,
foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special
treatment under the federal income tax laws.
The Code provisions governing the federal tax treatment of REITs
are highly technical and complex. This summary is based on the
following:
•
current provisions of the Code;
•
existing, temporary and currently proposed Treasury Regulations
promulgated under the Code;
No assurance can be given that legislative, judicial or
administrative changes will not affect the accuracy of any
statements in this prospectus with respect to transactions
entered into or contemplated prior to the effective date of such
changes.
This discussion is not intended to be a substitute for careful
tax planning. We urge each prospective investor to consult with
his or her own tax advisor regarding the specific tax
consequences applicable to him or her, in light of his or her
particular circumstances, relating to the purchase, ownership
and disposition of our common shares, including the federal,
state, local, foreign and other tax consequences of such
purchase, ownership, sale and disposition.
We elected to be treated as a REIT for federal income tax
purposes commencing with our taxable year ended
December 31, 2004. However, our qualification for taxation
as a REIT depends on our ability in the future to meet the
various qualification tests imposed by the Code discussed below.
The rules governing REITs are highly technical and require
ongoing compliance with a variety of tests that depend, among
other things, on future operating results. While we expect to
satisfy these tests, and will use our best efforts to do so, we
cannot assure you that the actual results of our operations for
any particular year will satisfy these requirements. We also
cannot assure you that the applicable law will not change and
adversely affect us and our shareholders. The consequences of
failing to be taxed as a REIT are summarized in the
“— Failure to Qualify as a REIT” section
below.
Our counsel, Greenberg Traurig, LLP, has rendered its opinion
that, based on the continuing accuracy of certain assumptions
specified below:
•
We were organized and operated in conformity with the
requirements for classification as a REIT under the Code for our
taxable year ended December 31, 2004;
•
Our current organization and method of operation has enabled,
and our proposed method of operation will enable, us to continue
to meet the requirements for qualification and taxation as a
REIT under the Code.
•
The Operating Partnership will be properly classified as a
partnership under the Code; and
•
All statements of law and legal conclusions, but not statements
of facts, contained in this “Material Tax
Considerations” section are correct in all material
respects.
The foregoing opinion is based on the assumptions that:
•
our method of operation and share ownership structure are as
described in this prospectus and in a certificate of an officer
of Hines REIT;
•
Hines REIT and its subsidiaries are, and will continue to be,
organized and managed as set forth in this prospectus, and in
each such entity’s relevant organizational documents;
•
the organizational documents of Hines REIT and each of its
subsidiaries are not amended or modified in any material
respect, and all material terms and conditions in such documents
are and will be complied with; and
•
each of the written agreements to which we or any of our
subsidiaries are a party will be implemented, construed and
enforced in accordance with its terms.
Our qualification as a REIT under the Code depends upon our
ongoing satisfaction of the various requirements under the Code
and described herein relating to, among other things, the nature
of our gross income, the composition of our assets, the level of
distributions to our shareholders, and the diversity of the
ownership of our stock. Greenberg Traurig, LLP will not review
our compliance with these requirements on a continuing basis.
Accordingly, no assurance can be given that we will satisfy
these requirements.
In order to qualify as a REIT, we must meet the following
criteria:
•
We must be organized as a domestic entity that would, if we did
not maintain our REIT status, be taxable as a regular
corporation.
•
We cannot be a financial institution or an insurance company.
•
We must be managed by one or more trustees or directors.
•
Our taxable year must be a calendar year.
•
Our beneficial ownership must be evidenced by transferable
shares.
•
Beginning with the taxable year after the first taxable year for
which we make an election to be taxed as a REIT, our capital
stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months or during a
proportionate part of a taxable year of less than 12 months.
•
Beginning with the taxable year after the first taxable year for
which we make an election to be taxed as a REIT, not more than
50% of the value of our shares of capital stock may be held,
directly or indirectly, applying certain constructive ownership
rules, by five or fewer individuals at any time during the last
half of each of our taxable years. While generally a tax-exempt
entity is treated as a single taxpayer for this purpose, a
domestic qualified employee pension trust is not. Pursuant to a
“look through” rule, the beneficiaries of such a
pension trust will be treated as holding our common shares in
proportion to their interests in the trust. If we do not satisfy
the stock ownership test described in this paragraph in the
absence of this look through rule, part of the income and gain
recognized by certain qualified employee pension trusts
attributable to the ownership of our common shares may be
treated as unrelated business taxable income. Please see
“— Taxation of Tax Exempt Entities.” We do
not expect to have to rely on this rule in order to meet the
stock ownership requirement described in this paragraph.
•
We must elect to be taxed as a REIT and satisfy certain filing
and other administrative requirements.
To protect against violations of these requirements, our charter
contains restrictions on transfers of our capital stock, as well
as provisions that automatically convert shares of stock into
Excess Securities to the extent that the ownership thereof
otherwise might jeopardize our REIT status. Please see
“Description of Capital Stock — Restrictions on
Transfer.” There is no assurance, however, that these
restrictions will in all cases prevent us from failing to
satisfy the share ownership requirements described above.
We are required to maintain records disclosing the actual
ownership of common shares in order to monitor our compliance
with the share ownership requirements. To do so, we may demand
written statements each year from the record holders of certain
minimum percentages of our shares in which such record holders
must disclose the actual owners of the shares (i.e., the persons
required to include our dividends in their gross income). A list
of those persons failing or refusing to comply with this demand
will be maintained as part of our records. Shareholders who fail
or refuse to comply with the demand must submit a statement with
their tax returns disclosing the actual ownership of our shares
and certain other information.
We believe that we have satisfied each of the requirements
discussed above beginning with our taxable year ended
December 31, 2004. We also believe that we have satisfied
the requirements that are separately described below concerning
the nature and amounts of our income and assets and the levels
of required annual distributions beginning with our taxable year
ended December 31, 2004. Our counsel, Greenberg Traurig,
LLP, has rendered its opinions that, based on the continuing
accuracy of certain assumptions specified in “Material Tax
Considerations — General” above, we were
organized and operated in conformity with the requirements for
classification as a REIT under the Code for our taxable year
ended December 31, 2004, and our current organization and
method of operation has enabled, and our proposed method of
operation will enable, us to continue to meet the requirements
for qualification and taxation as a REIT under the Code.
Our qualification as a REIT under the Code depends upon our
ongoing satisfaction of the various requirements under the Code
and described below relating to, among other things, the nature
of our gross income, the composition of our assets, the level of
distributions to our shareholders, and the diversity of the
ownership of our stock. Greenberg Traurig, LLP will not review
our compliance with these requirements on a continuing basis.
Accordingly, no assurance can be given that we will satisfy
these requirements.
In order to qualify as a REIT for a particular year, we must
meet two tests governing the sources of our income. These tests
are designed to ensure that a REIT derives its income
principally from passive real estate investments. In evaluating
a REIT’s income, the REIT will be treated as receiving its
proportionate share (based on its interest in partnership
capital) of the income produced by any partnership in which the
REIT holds an interest as a partner. Any such income will retain
the character that it has in the hands of the partnership. The
Code allows us to own and operate a number of our properties
through wholly-owned subsidiaries that are “qualified REIT
subsidiaries.” The Code provides that a qualified REIT
subsidiary is not treated as a separate corporation, and all of
its assets, liabilities and items of income, deduction and
credit are treated as assets, liabilities and such items of the
REIT.
75% Gross
Income Test
At least 75% of our gross income for each taxable year must be
derived from specified classes of income that are related to
real estate or income earned by our cash or cash equivalents.
The permitted categories of income currently relevant to us are:
•
“rents from real property” (as described below);
•
gains from the sale of real property (excluding gain from the
sale of property held primarily for sale to customers in the
ordinary course of the Company’s trade or business,
referred to below as “dealer property”);
•
abatements and refunds of real property taxes;
•
dividends or other distributions on, and gain (other than gain
from prohibited transactions) from the sale or other disposition
of, shares in other REITs;
•
interest on obligations secured by mortgages on real property or
on interests in real property; and
•
“qualified temporary investment income” (which
generally means income that is attributable to stock or debt
instruments, is attributable to the temporary investment of
capital received from our issuance of capital stock or debt
securities that have a maturity of at least five years, and is
received or accrued by us within one year from the date we
receive such capital).
In evaluating our compliance with the 75% gross income test, as
well as the 95% gross income test described below, gross income
does not include gross income from “prohibited
transactions.” In general, a prohibited transaction is one
involving a sale of dealer property, not including certain
dealer property held by us for at least four years. In other
words, we are generally required to acquire and hold properties
for investment rather than be in the business of buying and
selling properties.
We expect that substantially all of our operating gross income
will be considered “rent from real property.”“Rent from real property” is qualifying income for
purposes of the gross income tests in accordance with the rules
summarized below.
•
“Rent from real property” can include rent
attributable to personal property we lease in connection with
the real property so long as the personal property rent does not
exceed 15% of the total rent attributable to the lease. We do
not expect to earn material amounts of rent attributable to
personal property.
•
“Rent from real property” generally does not include
rent based on the income or profits of the tenant leasing the
property. We do not currently, nor do we intend to, lease
property and receive rentals based on the tenant’s net
income or profit.
“Rent from real property” can include rent based on a
percentage of a tenant’s gross sales or gross receipts. We
may have some leases, from time to time, where rent is based on
a percentage of gross sales or receipts.
•
“Rent from real property” cannot include rent we
receive from a person or corporation (or subtenant of such
person of corporation) in which we (or any of our 10% or greater
owners) directly or constructively own a 10% or greater interest.
•
“Rent from real property” generally cannot include
amounts we receive with respect to services we provide for
tenants, unless such services are “usually and customarily
rendered” in connection with the rental of space for
occupancy only or are not considered “rendered to the
occupant.” If the services we provide do not meet this
standard, they will be treated as impermissible tenant services,
and the income we derive from the property will not qualify as
“rent from real property,” unless the amount of such
impermissible tenant services income does not exceed one percent
of all amounts received from the property. We are allowed to
operate or manage our properties, or provide services to our
tenants, through an “independent contractor” from whom
we do not derive any income or through taxable REIT subsidiaries.
Upon the ultimate sale of any of our properties, any gains
realized also are expected to constitute qualifying income, as
gain from the sale of real property (not involving a prohibited
transaction).
We expect to invest proceeds we receive from the offering
covered by this prospectus in government securities or
certificates of deposit. Income derived from these investments
is qualifying income under the 75% gross income test to the
extent earned during the first year after receipt of such
proceeds. To the extent that proceeds from this offering are not
invested in properties prior to the expiration of this one year
period, we may invest such proceeds in less liquid investments
such as mortgage-backed securities or shares in other entities
taxed as REITs. This would allow us to continue to include the
income from such invested proceeds as qualified income for
purposes of our qualifying as a REIT.
95%
Gross Income Test
In addition to earning 75% of our gross income from the sources
listed above, at least 95% of our gross income for each taxable
year must come either from those sources, or from dividends,
interest or gains from the sale or other disposition of stock or
other securities that do not constitute dealer property. This
test permits a REIT to earn a significant portion of its income
from traditional “passive” investment sources that are
not necessarily real estate related. The term
“interest” (under both the 75% and 95% tests) does not
include amounts that are based on the income or profits of any
person, unless the computation is based only on a fixed
percentage of gross receipts or sales.
Failing
the 75% or the 95% Gross Income Tests; Reasonable
Cause
As a result of the 75% and 95% gross income tests, REITs
generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or
other fees for services rendered). We may receive certain types
of such income; however, we do not expect such non-qualifying
income to be significant and we expect further that such income
will always be less than 5% of our annual gross income. While we
do not anticipate we will earn substantial amounts of our
non-qualifying income, if non-qualifying income exceeds 5% of
our gross income, we could lose our REIT status.
If we fail to meet either the 75% or 95% gross income tests
during a taxable year, we may still qualify as a REIT for that
year if:
•
following our identification of the failure to meet either or
both of such income tests for any taxable year, a description of
each item of our gross income is set forth in a schedule filed
by us for such taxable year; and
•
our failure to meet the tests is due to reasonable cause and not
to willful neglect.
However, in that case we would be subject to a 100% tax based on
the greater of the amount by which we fail either the 75% or 95%
gross income tests for such year, multiplied by a fraction
intended to reflect our profitability, as described in the
“— Taxation as a REIT” section below.
On the last day of each calendar quarter, we also must meet two
tests concerning the nature of our investments.
First, at least 75% of the value of our total assets generally
must consist of real estate assets, cash, cash items (including
receivables) and government securities. For this purpose,
“real estate assets” include interests in real
property, interests in loans secured by mortgages on real
property or by certain interests in real property, shares in
other REITs and certain options, but do not include mineral, oil
or gas royalty interests. The temporary investment of new
capital in stock or debt instruments also qualifies under this
75% asset test, but only for the one-year period beginning on
the date we receive the new capital.
Second, although the balance of our assets generally may be
invested without restriction, we will not be permitted to own
(i) securities (other than securities qualifying under the
75% asset test described above and securities of taxable REIT
subsidiaries) of any single issuer that represent more than 5%
of the value of our total assets, (ii) more than 10% of the
total voting power of the outstanding voting securities of any
single issuer (other than securities qualifying under the 75%
asset test described above and securities of taxable REIT
subsidiaries), (iii) securities of any single issuer which
have a value of more than 10% of the total value of all the
outstanding securities of such issuer, excluding, for these
purposes, securities qualifying under the 75% asset test
described above, securities of a taxable REIT subsidiary, and
securities described in the following paragraph, or
(iv) securities of one or more taxable REIT subsidiaries
that represent more than 20% of the value of our total assets.
In evaluating a REIT’s assets, the REIT generally is deemed
to own a proportionate share of each of the assets of any
partnership in which it invests (such as the Operating
Partnership) based on the percentage interest held by the REIT
in partnership capital, subject to special rules that are
applicable under the 10% asset test (described in
clause (iii) above) which take into account the REIT’s
interest in certain securities issued by the partnership.
Securities for purposes of the foregoing asset tests may include
debt securities. The 10% value limitation (described in
clause (iii) of the preceding paragraph) will not apply,
however, to (i) any security qualifying as “straight
debt” within the meaning of the Code, (ii) any loan to
an individual or an estate; (iii) any rental agreement
described in Section 467 of the Code, other than with a
“related person”; (iv) any obligation to pay
qualifying rents from real property; (v) certain securities
issued by a State or any political subdivision thereof, the
District of Columbia, a foreign government, or any political
subdivision thereof, or the Commonwealth of Puerto Rico;
(vi) any security issued by a REIT; and (vii) any
other arrangement that, as determined by the Secretary of the
Treasury, is excepted from the definition of a security. For
purposes of the 10% value test, any debt instrument issued by a
partnership (other than straight debt or another excluded
security) will not be considered a security issued by the
partnership if at least 75% of the partnership’s gross
income is derived from sources that would qualify for the 75%
REIT gross income test and any debt instrument issued by a
partnership (other than straight debt or other excluded
security) will not be considered a security issued by the
partnership to the extent of the REIT’s interest as a
partner in the partnership. There are special look-through rules
for determining a REIT’s share of securities held by a
partnership in which the REIT holds an interest.
After initially meeting the asset tests at the close of any
quarter, we will not lose our status as a REIT for failure to
satisfy the asset tests at the end of a later quarter solely by
reason of changes in asset values. If the failure to satisfy the
asset tests results from an acquisition of securities or other
property during a quarter, we can cure the failure by disposing
of a sufficient amount of non-qualifying assets within
30 days after the close of that quarter.
Even after the
30-day cure
period, if we fail the 5% securities limitation or either of the
10% securities limitations, we may avoid disqualification as a
REIT by disposing of a sufficient amount of non-qualifying
assets to cure the violation if the assets causing the violation
do not exceed the lesser of 1% of our assets at the end of the
relevant quarter or $10 million, provided that, in either
case, the disposition occurs within six
months following the last day of the quarter in which we first
identified the violation. For other violations of any of the
REIT asset tests due to reasonable cause, we may avoid
disqualification as a REIT after the
30-day cure
period by taking certain steps, including the disposition of
sufficient non-qualifying assets within the six month period
described above to meet the applicable asset test, paying a tax
equal to the greater of $50,000 or the highest corporate tax
rate multiplied by the net income generated by the
non-qualifying assets during the period of time that the assets
were held as non-qualifying assets and filing a schedule with
the Internal Revenue Service that describes the non-qualifying
assets. We intend to maintain adequate records of the value of
our assets to ensure compliance with the asset tests and to take
such other actions within 30 days after the close of any
quarter as necessary to cure any noncompliance.
In order to qualify as a REIT, we generally must distribute to
our shareholders in each taxable year at least 90% of our net
ordinary income (capital gains are not required to be
distributed). More precisely, we must distribute an amount equal
to (i) 90% of the sum of (a) our “REIT taxable
income” before deduction of dividends paid and excluding
any net capital gain and (b) any net income from property
we foreclose on less the tax on such income, minus
(ii) limited categories of “excess non-cash
income” (including, cancellation of indebtedness and
original issue discount income). In order to meet the foregoing
requirement, the distributions on any particular class of shares
must be pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no
preference to one class of stock as compared with another class
except to the extent that the former is entitled to such
preference under our organizational documents.
REIT taxable income is defined to be the taxable income of the
REIT, computed as if it were a corporation, with certain
modifications. For example, the deduction for dividends paid is
allowed, but neither net income from foreclosure property nor
net income from prohibited transactions, is included. In
addition, a REIT may carry forward, but not carry back, a net
operating loss for 20 years following the year in which it
was incurred.
A REIT may satisfy the 90% distribution test with dividends paid
during the taxable year and with dividends paid after the end of
the taxable year if the dividends fall within one of the
following categories:
•
Dividends declared by us in October, November, or December of a
particular year and payable to our shareholders of record on a
date during such month of such year will be deemed to have been
paid during such year so long as such dividends are actually
paid by us by January 31 of the following year.
•
Dividends declared after the end of, but before the due date
(including extensions) of our tax return for, a particular
taxable year will be deemed to have been paid during such
taxable year if such dividends are actually paid by us
(i) within 12 months of the end of such taxable year
and (ii) no later than the date of our next regular
dividend payment made after such declaration.
Dividends that are paid after the close of a taxable year that
do not qualify under the rule governing payments made in January
(described above) will be taxable to the shareholders in the
year paid, even though we may take them into account for a prior
year. Additionally, such dividends will be treated as paid by us
in the year actually paid, for purposes of determining the
application of the 4% excise tax for the prior year.
It is possible that we may not have sufficient cash or other
liquid assets to meet the distribution requirements discussed
above. This could arise because of competing demands for our
funds, or because of timing differences between taxable income
recognition and actual cash receipts and disbursements. Although
we do not anticipate any difficulty in meeting the REIT
distribution requirements, we cannot assure you that necessary
funds will be available. In the event this occurs, we may
arrange for short-term, or possibly long-term, borrowings to
allow us to pay the required dividends and meet the 90%
distribution requirement.
If we fail to meet the 90% distribution requirement because of
an adjustment to our taxable income by the Internal Revenue
Service, we may be able to retroactively cure the failure by
paying a “deficiency dividend,” as well as applicable
interest and penalties, within a specified period.
In computing our REIT taxable income, we will use the accrual
method of accounting. We are required to file an annual federal
income tax return, which, like other corporate returns, is
subject to examination by the Internal Revenue Service. Because
the tax law requires us to make many judgments regarding the
proper treatment of a transaction or an item of income or
deduction, it is possible that the Internal Revenue Service will
challenge positions we take in computing our REIT taxable income
and our distributions. Issues could arise, for example, with
respect to the allocation of the purchase price of properties
between depreciable or amortizable assets and nondepreciable or
non-amortizable
assets such as land, and the current deductibility of fees paid
to the Advisor or its affiliates. If the Internal Revenue
Service successfully challenges our characterization of a
transaction or determination of our taxable income, we could be
found to have failed to satisfy a requirement required to
maintain our taxable status as a REIT. If, as a result of a
challenge, we are determined to have failed to satisfy the
distribution requirements for a taxable year, we would be
disqualified as a REIT, unless we were permitted to pay a
deficiency distribution to our shareholders, as well as any
required interest thereon to the Internal Revenue Service. A
deficiency distribution cannot be used to satisfy the
distribution requirement, however, if the failure to meet the
requirement is not due to a later adjustment to our income by
the Internal Revenue Service.
In order to qualify as a REIT, we must maintain certain records
as set forth in Treasury Regulations. Further, as we discussed
above, we must request, on an annual basis, certain information
designed to disclose the ownership of our outstanding shares. We
intend to comply with these requirements.
In addition to the statutory relief provisions discussed above,
the American Jobs Creation Act of 2004 created additional relief
provisions for REITs. If we fail to satisfy one or more of the
requirements for qualification as a REIT, other than the income
tests and asset tests discussed above, we will not lose our
status as a REIT if our failure is due to reasonable cause and
not willful neglect and we pay a penalty of $50,000 for each
such failure.
Once we qualify as a REIT, we generally will not be subject to
corporate income tax to the extent we distribute our REIT
taxable income to our shareholders. This treatment effectively
eliminates the “double taxation” (i.e., taxation at
both the corporate and shareholder levels) imposed on
investments in most corporations. We generally will be taxed
only on the portion of our taxable income that we retain,
including any undistributed net capital gain, because we will be
entitled to a deduction for dividends paid to our shareholders
during the taxable year. A “dividends paid” deduction
is not available for dividends that are considered preferential
within any given class of shares or as between classes except to
the extent such class is entitled to such preference. We do not
anticipate we will pay any such preferential dividends.
Even as a REIT, we will be subject to tax in the following
circumstances:
•
we will be taxed at regular corporate rates on our undistributed
taxable income, including undistributed net capital gains;
•
a tax of 100% applies to any net income we receive from
prohibited transactions, (as mentioned, these transactions are
usually sales or other dispositions of property held primarily
for sale to customers in the ordinary course of business);
•
if we fail to meet either the 75% or 95% gross income test
previously described, but still qualify for REIT status under
the reasonable cause exception to those tests, we will be
subject to a 100% tax on the amount obtained by multiplying
(i) the greater of the amount, if any, by which we failed
either the 75% gross income test or the 95% gross income test,
times (ii) the ratio of our REIT taxable income to our
gross income (excluding capital gain and certain other items);
•
under some circumstances, we will be subject to the alternative
minimum tax;
we will be subject to a 4% excise tax if we fail, in any
calendar year, to distribute to our shareholders an amount equal
to the sum of 85% of our REIT ordinary income for such year, 95%
of our REIT capital gain net income for such year, and any
undistributed taxable income from prior years;
•
if we acquire any asset from a C-corporation (i.e., a
corporation generally subject to corporate level tax) in a
carry-over basis transaction and then recognize gain on the
disposition of the asset within 10 years after we acquired
the asset, then a portion of our gain may by subject to tax at
the highest regular corporate rate (currently 35%);
•
any income (other than income otherwise qualifying for REIT
purposes) or gain we receive from foreclosure property will be
taxed at the highest corporate rate (currently 35%); and
•
a tax of 100% applies in certain cases to the extent that income
is shifted away from, or deductions are shifted to, any taxable
REIT subsidiary through the use of certain non-arm’s length
pricing arrangements between the REIT and such taxable REIT
subsidiary.
If we fail to qualify as a REIT and are not successful in
obtaining relief, we will be taxed at regular corporate rates on
all of our taxable income. Distributions to our shareholders
would not be deductible in computing our taxable income and we
would no longer be required to pay dividends. Any corporate
level taxes generally would reduce the amount of cash available
for distribution to our shareholders and, because our
shareholders would continue to be taxed on any distributions
they receive, the net after tax yield to our shareholders likely
would be substantially reduced.
As a result, our failure to qualify as a REIT during any taxable
year could have a material adverse effect on us and our
shareholders. If we lose our REIT status, unless we are able to
obtain relief, we will not be eligible to elect REIT status
again until the fifth taxable year that begins after the taxable
year during which our election was terminated.
In general, distributions paid by us to our shareholders (who
are not
“Non-U.S. Shareholders”
as defined below in “— Taxation of Foreign
Investors”) during periods we qualify as a REIT will be
taxable as follows:
•
Except as provided below, dividends will generally be taxable to
our shareholders, as ordinary income, in the year in which such
dividends are actually or constructively received by them, to
the extent of our current or accumulated earnings and profits.
•
Dividends declared during the last quarter of a calendar year
and actually paid during January of the immediately following
calendar year are generally treated as if received by the
shareholders on December 31 of the calendar year during which
they were declared.
•
Dividends paid to shareholders will not constitute passive
activity income, and as a result generally cannot be offset by
losses from passive activities of a shareholder subject to the
passive activity rules.
•
Distributions we designate as capital gains dividends generally
will be taxed as capital gains to shareholders to the extent
that the distributions do not exceed our actual net capital gain
for the taxable year. Corporate shareholders may be required to
treat up to 20% of any such capital gains dividends as ordinary
income.
•
If we elect to retain and pay income tax on any net long-term
capital gain, our shareholders would include in their income as
long-term capital gain their proportionate share of such net
long-term capital gain. Each of our shareholders would receive a
credit for such shareholder’s proportionate share of the
tax paid by us on such retained capital gains and an increase in
tax basis in their shares in an amount equal to the difference
between the undistributed long-term capital gains and the amount
of tax we paid.
No portion of the dividends paid by us, whether characterized as
ordinary income or as capital gains, are eligible for the
“dividends received” deduction for corporations.
•
Shareholders are not permitted to deduct our losses or loss
carry-forwards.
Future regulations may require that the shareholders take into
account, for purposes of computing their individual alternative
minimum tax liability, certain of our tax preference items.
We may generate cash in excess of our net earnings. If we
distribute cash to our shareholders in excess of our current and
accumulated earnings and profits, other than as a capital gain
dividend, the excess cash will be deemed to be a non-taxable
return of capital to each shareholder to the extent of the
adjusted tax basis of the shareholder’s shares.
Distributions in excess of the adjusted tax basis will be
treated as gain from the sale or exchange of the shares. A
shareholder who has received a distribution in excess of our
current and accumulated earnings and profits may, upon the sale
of the shares, realize a higher taxable gain or a smaller loss
because the basis of the shares as reduced will be used for
purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a shareholder upon the sale
of common shares will be reportable as capital gain or loss.
Such gain or loss will be treated as long-term capital gain or
loss if the shares have been held for more than 12 months
and as short-term capital gain or loss if the shares have been
held for 12 months or less. If a shareholder receives a
long-term capital gain dividend and has held the shares for six
months or less, any loss incurred on the sale or exchange of the
shares is treated as a long-term capital loss to the extent of
the corresponding long-term capital gain dividend received.
If a shareholder has shares of our common stock redeemed by us,
such shareholder will be treated as if such shareholder sold the
redeemed shares if all of such shareholder’s shares of our
common stock are redeemed or if such redemption is not
essentially equivalent to a dividend within the meaning of
Section 302(b)(1) of the Code or substantially
disproportionate within the meaning of Section 302(b)(2) of
the Code. If a redemption is not treated as a sale of the
redeemed shares, it will be treated as a dividend distribution.
Shareholders should consult with their tax advisors regarding
the taxation of any particular redemption of our shares.
In any year in which we fail to qualify as a REIT, our
shareholders generally will continue to be treated in the same
fashion described above, except that:
•
none of our distributions will be eligible for treatment as
capital gains dividends;
•
corporate shareholders will qualify for the “dividends
received” deduction; and
•
shareholders will not be required to report any share of our tax
preference items.
We will report to our shareholders and the Internal Revenue
Service the amount of dividends paid during each calendar year
and the amount of tax withheld, if any. If a shareholder is
subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that shareholder a tax
equal to 28% of the amount of any such dividends. These rules
may apply in the following circumstances:
•
when a shareholder fails to supply a correct and properly
certified taxpayer identification number (which, for an
individual, is his or her Social Security Number);
•
when the Internal Revenue Service notifies us that the
shareholder is subject to the backup withholding rules;
•
when a shareholder furnishes an incorrect taxpayer
identification number; or
in the case of corporations or others within certain exempt
categories, when they fail to demonstrate that fact when
required.
A shareholder that does not provide a correct taxpayer
identification number may also be subject to penalties imposed
by the Internal Revenue Service. Backup withholding is not an
additional tax. Rather, any amount withheld as backup
withholding will be credited against the shareholder’s
actual federal income tax liability. We also may be required to
withhold a portion of capital gain distributions made to
shareholders that fail to certify their non-foreign status.
Income earned by tax-exempt entities (such as employee pension
benefit trusts, individual retirement accounts, charitable
remainder trusts, etc.) is generally exempt from federal income
taxation, unless such income consists of “unrelated
business taxable income” (“UBTI”) as such term is
defined in the Code. In general, dividends received or gain
realized on our shares by a tax-exempt entity will not
constitute UBTI. However, if a tax-exempt entity has financed
the acquisition of its shares with “acquisition
indebtedness” within the meaning of the Code, part or all
of such income or gain would constitute UBTI.
If we were deemed to be “predominately held” by
qualified employee pension benefit trusts and we were required
to rely on the special look-through rule for purposes of meeting
the relevant REIT stock ownership tests as more particularly
described in “— Requirements for Qualification as
a REIT — Organizational Requirements” above, part
of the income and gain recognized by such trusts holding more
than 10% in value of our shares attributable to the ownership of
our common shares may be treated as UBTI. We would be deemed to
be “predominately held” by such trusts if either one
employee pension benefit trust owns more than 25% in value of
our shares, or any group of such trusts, each owning more than
10% in value of our shares, holds in the aggregate more than 50%
in value of our shares. If either of these ownership thresholds
were ever exceeded and we were required to rely on the special
look-through rule for purposes of meeting the relevant REIT
stock ownership tests, a portion of the income and gain
recognized attributable to the ownership of our shares by any
qualified employee pension benefit trust holding more than 10%
in value of our shares would be treated as UBTI that is subject
to tax. Such portion would be equal to the percentage of our
income which would be UBTI if we were a qualified trust, rather
than a REIT. We do not expect to have to rely on the
look-through rule for purposes of meeting the relevant REIT
stock ownership tests. Moreover, we will attempt to monitor the
concentration of ownership of employee pension benefit trusts of
our shares, and we do not expect our shares to be
“predominately held” by qualified employee pension
benefit trusts for purposes of the foregoing rules. However,
there is no assurance in this regard.
For social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group
legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the
Code, respectively, income from an investment in our securities
will constitute UBTI unless the organization is able to deduct
an amount properly set aside or placed in reserve for certain
purposes so as to offset the UBTI generated by the investment in
our securities. These prospective investors should consult their
own tax advisors concerning the “set aside” and
reserve requirements.
The rules governing the federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships
and other foreign shareholders (collectively,
“Non-U.S. Shareholders”)
are complex and no attempt will be made herein to provide more
than a summary of such rules.
Non-U.S. investors
should consult with their own tax advisors to determine the
impact that federal, state and local income tax or similar laws
will have on them as a result of an investment in the Company.
Distributions paid by us that are not attributable to gain from
our sales or exchanges of United States real property interests
and not designated by us as capital gain dividends will be
treated as dividends of ordinary income to the extent that they
are made out of our current or accumulated earnings and profits.
Such dividends to
Non-U.S. Shareholders
ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the dividend unless an applicable tax treaty
reduces or eliminates that tax. However, if income from the
investment in the common shares is treated as effectively
connected with the
Non-U.S. Shareholder’s
conduct of a United States trade or business, the
Non-U.S. Shareholder
generally will be subject to a tax at the graduated rates
applicable to ordinary income, in the same manner as
U.S. shareholders are taxed with respect to such dividends
(and may also be subject to the 30% branch profits tax in the
case of a shareholder that is a foreign corporation that is not
entitled to any treaty exemption). Distributions in excess of
our current and accumulated earnings and profits will not be
taxable to a shareholder to the extent they do not exceed the
adjusted basis of the shareholder’s shares. Instead, they
will reduce the adjusted basis of such shares. To the extent
that such distributions exceed the adjusted basis of a
Non-U.S. Shareholder’s
shares, they will give rise to tax liability if the
Non-U.S. Shareholder
would otherwise be subject to tax on any gain from the sale or
disposition of his shares, as described in
“— Sales of Shares” below.
Distributions
Attributable to Sale or Exchange of Real Property
As long as our stock is not regularly traded in an established
securities market within the United States, distributions that
are attributable to gain from our sales or exchanges of United
States real property interests will be taxed to a
Non-U.S. Shareholder
as if such gain were effectively connected with a United States
trade or business.
Non-U.S. Shareholders
would thus be taxed at the normal capital gain rates applicable
to U.S. shareholders, and would be subject to applicable
alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals. Also, such
distributions may be subject to a 30% branch profits tax in the
hands of a corporate
Non-U.S. Shareholder
not entitled to any treaty exemption.
If our shares of common stock are ever “regularly
traded” on an established securities market in the United
States, then, with respect to distributions by us that are
attributable to gain from the sale or exchange of a United
States real property interest, a
Non-U.S. Shareholder
who does not own more than 5% of our common stock at any time
during the taxable year:
•
will be taxed on such capital gain dividend as if the
distribution was an ordinary dividend;
•
will generally not be required to report distributions received
from us on U.S. federal income tax returns; and
•
will not be subject to a branch profits tax with respect to such
distribution. At the time you purchase shares in this offering,
our shares will not be publicly traded, and we can give you no
assurance that our shares will ever be publicly traded on an
established securities exchange.
Although the law is not clear on this matter, it appears that
amounts designated by us as undistributed capital gains in
respect of the common stock generally should be treated with
respect to
Non-U.S. Shareholders
in the same manner as actual distributions by us of capital gain
dividends. Under that approach, the
Non-U.S. Shareholder
would be able to offset as a credit against his or her resulting
federal income tax liability an amount equal to his or her
proportionate share of the tax paid by us on the undistributed
capital gains and to receive from the Internal Revenue Service a
refund to the extent his or her proportionate share of this tax
paid by us was to exceed his or her actual federal income tax
liability.
Tax
Withholding on Distributions
For withholding tax purposes, we will generally withhold tax at
the rate of 30% on the amount of any distribution (other than
distributions designated as capital gain dividends) made to a
Non-U.S. Shareholder,
unless the
Non-U.S. Shareholder
provides us with a properly completed Internal Revenue Service
Form W-8BEN
evidencing that such
Non-U.S. Shareholder
is eligible for an exemption or reduced rate under an applicable
tax treaty (in which case we will withhold at the lower treaty
rate) or
Form W-8ECI
claiming that the dividend is effectively connected with the
Non-U.S. Shareholder’s
conduct of a trade or business within the United States (in
which case we will not withhold tax). We are also generally
required to withhold tax at the rate of 35% on the portion of
any distribution to a
Non-U.S. Shareholder
that is or could be designated by us as a capital gain dividend.
In addition, we may be required to withhold 10% of distributions
in excess of our current and accumulated earnings and profits.
Such withheld amounts of tax do not represent actual tax
liabilities but, rather, represent payments in respect of those
tax liabilities described in the preceding two paragraphs. Thus,
such withheld amounts are creditable by the
Non-U.S. Shareholder
against its actual U.S. federal income tax liabilities,
including those described in the preceding two paragraphs. The
Non-U.S. Shareholder
would be entitled to a refund of any amounts withheld in excess
of such
Non-U.S. Shareholder’s
actual U.S. federal income tax liabilities, provided that
the
Non-U.S. Shareholder
files applicable returns or refund claims with the Internal
Revenue Service.
Gain recognized by a
Non-U.S. Shareholder
upon a sale of shares generally will not be subject to
U.S. federal income taxation, provided that:
•
such gain is not effectively connected with the conduct by such
Non-U.S. Shareholder
of a trade or business within the United States;
•
the
Non-U.S. Shareholder
is not present in the United States for 183 days or more
during the taxable year and certain other conditions
apply; and
•
we are a “domestically controlled REIT,” which
generally means that less than 50% in value of our shares
continues to be held directly or indirectly by foreign persons
during a continuous
5-year
period ending on the date of disposition or, if shorter, during
the entire period of our existence; provided, however, that even
if we are a “domestically controlled REIT,” a
Non-U.S. Shareholder
may be treated as having gain that is subject to
U.S. federal income taxation if the
Non-U.S. Shareholder
(i) disposes of our common shares within a
30-day
period preceding the ex-dividend date of a distribution on our
common shares, any portion of which, but for such disposition,
would have been treated as gain from the sale or exchange of a
U.S. real property interest and (ii) acquires, or
enters into a contract or option to acquire, other shares of our
common stock within 30 days after such ex-dividend date.
We cannot assure you that we will qualify as a
“domestically controlled REIT.” If we are not a
domestically controlled REIT, a
Non-U.S. Shareholder’s
sale of common shares will be subject to tax, unless
(i) the first two conditions described above are met,
(ii) the common shares were regularly traded on an
established securities market; and (iii) the selling
Non-U.S. Shareholder
has not directly, or indirectly, owned during a specified
testing period more than 5% in value of our common shares. In
this regard, at the time you purchase shares in this offering,
our shares will not be publicly traded, and we can give you no
assurance that our shares will ever be publicly traded on an
established securities exchange or that we will be a
domestically controlled qualified investment entity. If the gain
on the sale of shares were to be subject to taxation, the
Non-U.S. Shareholder
will be subject to the same treatment as U.S. shareholders
with respect to such gain and the purchaser of such common
shares may be required to withhold 10% of the gross purchase
price.
If a
Non-U.S. Shareholder
has shares of our common stock redeemed by us, such
Non-U.S. Shareholder
will be treated as if such
Non-U.S. Shareholder
sold the redeemed shares if all of such
Non-U.S. Shareholder
of our common stock are redeemed or if such redemption is not
essentially equivalent to a dividend within the meaning of
Section 302(b)(1) of the Code or substantially
disproportionate within the meaning of Section 302(b)(2) of
the Code. If a redemption is not treated as a sale of the
redeemed shares, it will be treated as a dividend distribution.
Non-U.S. Shareholders
should consult with their tax advisors regarding the taxation of
any particular redemption of our shares.
We may be subject to state or local taxation. In addition, our
shareholders may also be subject to state or local taxation.
Consequently, you should consult your own tax advisors regarding
the effect of state and local tax laws on an investment in our
securities.
The following discussion summarizes the material United States
federal income tax considerations applicable to our investment
in the Operating Partnership. This summary does not address tax
consequences under state, local or foreign tax laws and does not
discuss all aspects of federal law that may affect the tax
consequences of the purchase, ownership and disposition of an
interest in the Operating Partnership.
The Operating Partnership will be treated as a pass-through
entity that does not incur any federal income tax liability,
provided that the Operating Partnership is classified for
federal income tax purposes as a partnership rather than as a
corporation or an association taxable as a corporation. The
Operating Partnership has been formed as a Delaware limited
partnership under the Delaware Revised Uniform Limited
Partnership Act. An organization formed as a partnership under
applicable state partnership law will be treated as a
partnership, rather than as a corporation, for federal income
tax purposes if:
•
it is not expressly classified as a corporation under
Section 301.7701-2(b)(1)
through (8) of the Treasury Regulations;
•
it does not elect to be classified as an association taxable as
a corporation; and
•
either (i) it is not classified as a “publicly traded
partnership” under Section 7704 of the Code or
(ii) 90% or more of it’s gross income consists of
specified types of “qualifying income” within the
meaning of Section 7704(c)(2) of the Code (including
interest, dividends, “real property rents” and gains
from the disposition of real property). A partnership is deemed
to be a “publicly traded partnership” if its interests
are either (a) traded on an established securities market
or (b) readily tradable on a secondary market (or the
substantial equivalent thereof).
Pursuant to the Treasury Regulations under Section 7704,
the determination of whether a partnership is publicly traded is
generally based on a facts and circumstances analysis. However,
the regulations provide limited “safe harbors” which
preclude publicly traded partnership status. The Partnership
Agreement of the Operating Partnership contains certain
limitations on transfers and redemptions of partnership
interests which are intended to cause the Operating Partnership
to qualify for an exemption from publicly traded partnership
status under one or more of the safe harbors contained in the
applicable regulations. Moreover, we expect that at least 90% of
the Operating Partnership’s gross income will consist of
“qualifying income” within the meaning of
Section 7704(c)(2) of the Code. Finally, the Operating
Partnership is not expressly classified as, and will not elect
to be classified as, a corporation under the Treasury
Regulations. Our counsel, Greenberg Traurig, LLP, has rendered
its opinion that the Operating Partnership is properly
classified as a partnership under the Code, assuming that no
election is made by the Operating Partnership to be classified
as a corporation under the Treasury Regulations.
If for any reason the Operating Partnership were taxable as a
corporation, rather than as a partnership for federal income tax
purposes, we would not be able to satisfy the income and asset
requirements for REIT status. Further, the Operating Partnership
would be required to pay income tax at corporate tax rates on
its net income, and distributions to its partners would
constitute dividends that would not be deductible in computing
the Operating Partnership’s taxable income and would be
taxable to us. Any change in the Operating Partnership’s
status for tax purposes could also, in certain cases, be treated
as a taxable event, in which case we might incur a tax liability
without any related cash distribution.
The following discussion assumes that the Operating Partnership
will be treated as a partnership for federal income tax purposes.
No federal income tax will be paid by the Operating Partnership.
Instead, each partner, including Hines REIT, is required to
report on its income tax return its allocable share of income,
gains, losses, deductions and credits of the Operating
Partnership, regardless of whether the Operating Partnership
makes any distributions. Our allocable shares of income, gains,
losses, deductions and credits of the Operating Partnership are
generally determined by the terms of the Partnership Agreement.
Pursuant to Section 704(c) of the Code, income, gain, loss
and deduction attributable to property that is contributed to a
partnership in exchange for an interest in such partnership must
be allocated in a manner that takes into account the unrealized
tax gain or loss associated with the property at the time of the
contribution. The amount of such unrealized tax gain or loss is
generally equal to the difference between the fair market value
of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution
(a “book/tax difference”). Such allocations are solely
for federal income tax purposes and do not affect the book
capital accounts or other economic or legal arrangements among
the partners. As a result of these rules, certain partners that
contributed property with a book/tax difference may be allocated
depreciation deductions for tax purposes which are lower than
such deductions would be if determined on a pro-rata basis and
in the event of a disposition of any contributed asset which has
a book/tax difference, all income attributable to such book/tax
difference will generally be allocated to the partner that
contributed such asset to the Operating Partnership and the
other partners will generally be allocated only their share of
capital gains attributable to the appreciation in the value of
such asset, if any, since the date of such contribution.
Although the special allocation rules of Section 704(c) are
generally intended to cause the amount of tax allocations with
respect to contributed property which are made to partners other
than the contributing partner to equal the amount of book
allocations to such other partners, the rules do not always have
this result. Thus, in certain cases we may be allocated, with
respect to property which has a book/tax difference and has been
contributed by other partners, tax depreciation and other tax
deductions that are less than, and possibly an amount of taxable
income or gain on the sale of such property which is greater
than, the amount of book depreciation, deductions, income or
gain which is allocated to us. This may cause us to recognize
taxable income in excess of cash proceeds, which might adversely
affect our ability to comply with the REIT distribution
requirements.
The foregoing principles also apply in determining our earnings
and profits for purposes of determining the portion of
distributions taxable as dividend income. The application of
these rules over time may result in a higher portion of
distributions being taxed as dividends than would have occurred
had we purchased the contributed assets entirely for cash. The
characterization of any item of profit or loss (for example, as
capital gain or loss rather than ordinary income or loss) which
is allocated to us will be the same for us as it is for the
Operating Partnership.
Distributions we receive from the Operating Partnership will
generally be nontaxable to us. However, we would have taxable
income in the event the amount of distributions we receive from
the Operating Partnership, or the amount of any decrease in our
share of the Operating Partnership’s indebtedness (any such
decrease being considered a constructive cash distribution to
us), exceeds our adjusted tax basis in our interest in the
Operating Partnership. Such taxable income would normally be
characterized as a capital gain, and if our interest in the
Operating Partnership has been held for longer than one year,
any such gain would constitute long-term capital gain.
In addition, distributions received from the Operating
Partnership could also be taxable in the following cases:
•
If the distributions are made in redemption of part or all of a
partner’s interest in the Operating Partnership, the
partner may recognize ordinary income under Section 751 of
the Code. Such ordinary
income would generally equal the amount of ordinary income (if
any) that would have been allocated to the partner in respect of
the redeemed interest if the Operating Partnership had sold all
of its assets.
•
If a partner contributes appreciated property to the Operating
Partnership and the Operating Partnership makes distributions,
other than distributions of such partner’s share of
operating income, to such partner within two years of such
property contribution, part or all of such distributions may be
treated as taxable sales proceeds to such partner.
Our adjusted tax basis in our interest in the Operating
Partnership generally:
•
will be equal to the amount of cash and the basis of any other
property contributed to the Operating Partnership by us and our
proportionate share of the Operating Partnership’s
indebtedness;
•
will be increased by our share of the Operating
Partnership’s taxable and non-taxable income and any
increase in our share of Operating Partnership
indebtedness; and
•
will be decreased (but not below zero) by the distributions we
receive, our share of deductible and non-deductible losses and
expenses of the Operating Partnership and any decrease in our
share of Operating Partnership indebtedness.
The following is a summary of material considerations arising
under the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”), and the prohibited transaction
provisions of Section 4975 of the Code that may be relevant
to prospective investors. This discussion does not purport to
deal with all aspects of ERISA or the Code that may be relevant
to particular investors in light of their particular
circumstances.
A prospective investor that is an employee benefit plan subject
to ERISA, a tax-qualified retirement plan, an IRA, or a
governmental, church, or other benefit plan that is exempt
form ERISA (each, a “Plan”) is advised to consult
its own legal advisor regarding the specific considerations
arising under applicable provisions of ERISA, the Code, and
state law with respect to the purchase, ownership, or sale of
the shares by such plan or IRA.
A fiduciary of a Plan subject to ERISA should consider the
fiduciary standards under ERISA in the context of the
Plan’s particular circumstances before authorizing an
investment of a portion of such Plan’s assets in our common
shares. In particular, the fiduciary should consider:
•
whether the investment satisfies the diversification
requirements of Section 404(a)(1)(c) of ERISA;
•
whether the investment is in accordance with the documents and
instruments governing the Plan as required by
Section 404(a)(1)(D) of ERISA;
•
whether the investment is for the exclusive purpose of providing
benefits to participants in the Plan and their beneficiaries, or
defraying reasonable administrative expenses of the
Plan; and
•
whether the investment is prudent under ERISA.
In addition to the general fiduciary standards of investment
prudence and diversification, specific provisions of ERISA and
the Code prohibit a wide range of transactions involving the
assets of a Plan and transactions with persons who have
specified relationships to the Plan. Such persons are referred
to as “parties in interest” in ERISA and as
“disqualified persons” in the Code. Thus, a fiduciary
of a Plan considering an investment in our common shares should
also consider whether acquiring or continuing to hold our common
shares, either directly or indirectly, might constitute a
prohibited transaction. An excise tax may be imposed on any
party in interest or disqualified person who participates in a
prohibited transaction. The tax exempt status of an IRA will be
lost if the IRA enters into a prohibited transaction.
Each fiduciary of an investing Plan must independently determine
whether such investment constitutes a prohibited transaction
with respect to that Plan. The prohibited transaction rules of
ERISA and the Code apply to transactions with a Plan and also to
transactions with the “plan assets” of the Plan.
Section 3(42) of ERISA generally provides that “plan
assets” means plan assets as defined in regulations issued
by the Department of Labor. Under these regulations, if a Plan
acquires an equity interest that is neither a “publicly-
offered security” nor a security issued by an investment
company registered under the Investment Company Act, then for
purposes of the fiduciary responsibility and prohibited
transaction provisions under ERISA and the Code, the assets of
the Plan would include both the equity interest and an undivided
interest in each of the entity’s underlying assets, unless
an exemption applies.
These regulations define a publicly-offered security as a
security that is “widely held,”“freely
transferable,” and either part of a class of securities
registered under Section 12(b) or 12(g) of the Exchange
Act, or sold pursuant to an effective registration statement
under the Securities Act, provided the securities are registered
under the Exchange Act within 120 days after the end of the
fiscal year of the issuer during which the offering occurred.
The shares are being sold in an offering registered under the
Securities Act, and will be registered within the relevant time
provided under Section 12(g) of the Exchange Act.
The regulations also provide that a security is “widely
held” only if it is part of a class of securities that is
owned by 100 or more investors independent of the issuer and of
one another. The regulations further provide that whether a
security is “freely transferable” is a factual
question to be determined on the basis of all relevant facts and
circumstances. The regulations also provide that when a security
is part of an offering in which the minimum investment is
$10,000 or less, as is the case with this offering, the
existence of certain restrictions on transferability intended to
prohibit transfers which would result in a termination or
reclassification of the entity for state or federal tax purposes
will not ordinarily affect the determination that such
securities are freely transferable.
Our shares are subject to certain restrictions on
transferability intended to ensure that we continue to qualify
for federal income tax treatment as a REIT. We believe that the
restrictions imposed under our charter and bylaws on the
transfer of common shares are limited to the restrictions on
transfer generally permitted under these regulations, and are
not likely to result in the failure of the common shares to be
“freely transferable.” Nonetheless, we cannot assure
you that the Department of Labor
and/or the
U.S. Treasury Department could not reach a contrary
conclusion. Finally, the common shares offered are securities
that will be registered under the Securities Act and will be
registered under the Exchange Act.
We believe our common shares are “widely held” and
“freely transferable” as described above and,
accordingly, that the common shares offered hereby will be
deemed to be publicly-offered securities for the purposes of the
Department of Labor regulations and that our assets will not be
deemed to be “plan assets” of any Plan that invests in
our common shares.
A fiduciary of an employee benefit plan subject to ERISA is
required to determine annually the fair market value of each
asset of the plan as of the end of the plan’s fiscal year
and to file a report reflecting that value with the Department
of Labor. When the fair market value of any particular asset is
not available, the fiduciary is required to make a good faith
determination of that asset’s fair market value assuming an
orderly liquidation at the time the determination is made. In
addition, a trustee or custodian of an IRA must provide an IRA
participant with a statement of the value of the IRA each year.
In discharging its obligation to value assets of a plan, a
fiduciary subject to ERISA must act consistently with the
relevant provisions of the plan and the general fiduciary
standards of ERISA.
Unless and until our shares are listed on a national securities
exchange or are included for quotation on a national securities
market, it is not expected that a public market for the shares
will develop. To date, neither the Internal Revenue Service nor
the Department of Labor has promulgated regulations specifying
how a plan fiduciary should determine the fair market value of
common shares in a corporation in circumstances where the fair
market value of the shares is not determined in the marketplace.
Therefore, to assist fiduciaries in fulfilling their valuation
and annual reporting responsibilities with respect to ownership
of our common shares,
we intend to include estimated values of our shares in our
Annual Reports on
Form 10-K,
along with the method used to establish such values, and the
date of any data used to develop the estimated values. Such
estimated valuations are not intended to represent the amount
you would receive if our assets were sold and the proceeds
distributed to you in a liquidation of Hines REIT, or the amount
you would receive if you attempt to sell your shares. There is
no public market for our shares, and any sale of our shares
would likely be at a substantial discount.
We caution you that our valuations will be estimates only and
may be based upon a number of estimates and assumptions that may
not be accurate or complete. We are not required to obtain
appraisals for our assets or third-party valuations or opinions
for the specific purpose of preparing these estimates. Our
estimated valuations should not be viewed as an accurate
reflection of the fair market value of our assets, nor will they
represent the amount of net proceeds that would result from an
immediate sale of our assets or upon liquidation. In addition,
real estate and other asset values could decline. As set forth
above, there is no public market for our shares, and it is
unlikely that our shareholders could realize these values if
they were to attempt to sell their shares. One method that we
have used in the past, and may use again in the future, is to
deem the estimated value of our shares to be equal the price at
which we are then offering our shares to the public. Such a
method would be subject to the limitations on valuation
described above. Additionally, in the event we were to use such
a method to establish a value for our shares, that value would
likely be higher than the amount you would receive if our assets
were sold and the proceeds distributed to you in a liquidation
of Hines REIT since the amount of funds available for investment
in our assets is reduced by approximately 9.2% of the offering
proceeds we raise. Please see “Estimated Use of
Proceeds.” For these reasons, our estimated valuations
should not be utilized for any purpose other than to assist plan
fiduciaries and IRA custodians in fulfilling their annual
valuation and reporting responsibilities. Further, we cannot
assure you that the estimated values, or the method used to
establish such values, will comply with the ERISA or IRA
requirements described above.
We will make available to each shareholder an annual report
within 120 days following the close of each fiscal year.
These annual reports will contain, among other things, the
following:
•
financial statements, including a balance sheet, statement of
operations, statement of shareholders’ equity, and
statement of cash flows, prepared in accordance with accounting
principles generally accepted in the United States of America,
which are audited and reported on by our independent registered
public accounting firm; and
•
full disclosure of all material terms, factors and circumstances
surrounding any and all transactions involving us and any of our
directors, their affiliates, the Advisor or any other affiliate
of Hines occurring in the year for which the annual report is
made.
We are required by the Exchange Act to file quarterly reports
with the Securities and Exchange Commission on
Form 10-Q
and we will furnish or make available to our shareholders a
summary of the information contained in each such report within
60 days after the end of each applicable quarter. This
summary information generally will include balance sheets, a
statement of income, and a statement of cash flows, and any
other pertinent information regarding the Company and its
activities during the quarter. Shareholders also may receive a
copy of any
Form 10-Q
upon request to the Company. If we are ever not subject to this
filing requirement, we will still furnish or make available to
our shareholders a quarterly report within 60 days after
each of the first three quarters containing similar information.
We also provide quarterly dividend statements.
We will make available to you through our web site at
www.HinesREIT.com our quarterly and annual reports and any other
reports required to be made available to you.
Our tax accountants, Ernst & Young LLP, will prepare
our federal tax return (and any applicable state income tax
returns). We will provide appropriate tax information to our
shareholders within 30 days following the end of each
fiscal year. Our fiscal year is the same as the calendar year.
In addition to this prospectus, we may use certain sales
material in connection with the offering of the shares. However,
such sales material will only be used when accompanied by or
preceded by the delivery of this prospectus. In certain
jurisdictions, some or all of such sales material may not be
available. This material may include information relating to
this offering, the past performance of the programs managed by
Hines and its affiliates, property brochures and publications
concerning real estate and investments.
The following is a brief description of the supplemental sales
material prepared by us for use in permitted jurisdictions:
•
The Hines Real Estate Investment Trust Property Gallery,
which briefly summarizes (i) information about risks and
suitability investors should consider before investing in us;
(ii) objectives and strategies relating to our selection of
assets; and (iii) certain properties in which we own a
direct or indirect interest.
•
The Hines Real Estate Investment Trust Brochure, which
briefly summarizes (i) information about risks and
suitability investors should consider before investing in us;
(ii) general information about investing in real estate;
and (iii) information about Hines Real Estate Investment
Trust and its sponsor, Hines.
•
Certain print brochures and handouts, which include
(i) information about risks and suitability investors
should consider before investing in us; (ii) various topics
related to real estate; and (iii) information regarding
certain properties in which we own a direct or indirect
interest, in some cases.
•
Certain information on our website, electronic media,
presentations and third party articles.
The offering of our common shares is made only by means of this
prospectus. Although the information contained in such sales
material will not conflict with any of the information contained
in this prospectus, such material does not purport to be
complete and should not be considered a part of this prospectus
or the registration statement of which this prospectus is a
part. Further, such additional material should not be considered
as being incorporated by reference in this prospectus or the
registration statement forming the basis of the offering of the
shares of which this prospectus is a part.
The legality of the common shares being offered hereby has been
passed upon for Hines REIT by Venable LLP. The statements under
the caption “Material Tax Considerations” as they
relate to federal income tax matters have been reviewed by
Greenberg Traurig, LLP, and Greenberg Traurig, LLP has opined as
to certain income tax matters relating to an investment in the
common shares. Greenberg Traurig, LLP has represented Hines and
other of our affiliates in other matters and may continue to do
so in the future. Please see “Conflicts of
Interest — Lack of Separate Representation.”
The consolidated financial statements of Hines Real Estate
Investment Trust, Inc. and subsidiaries as of December 31,2006 and 2005 and for each of the three years in the period
ended December 31, 2006, included in this Prospectus, the
related financial statement schedule included elsewhere in the
Registration Statement and the consolidated financial statements
of Hines-Sumisei U.S. Core Office Fund, L.P. and
subsidiaries as of December 31, 2006 and 2005 and for each
of the three years in the period ended December 31, 2006,
included
in this Prospectus have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in their reports appearing herein and have been so
included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The statements of revenues and certain operating expenses of 321
North Clark, Chicago, Illinois and 1201 W. Peachtree
Street, Atlanta, Georgia, for the years ended December 31,2005, 2004 and 2003, the statements of revenues and certain
operating expenses of the eleven building office complex known
as Airport Corporate Center, Miami, Florida, 3400 Data Drive,
Rancho Cordova, California, 2100 Powell Street, Emeryville,
California, the office complex located at the northwest corner
of Burbank Boulevard and Canoga Avenue, Woodlands Hills,
California, 901 and 951 East Byrd Street, Richmond, Virginia and
the Daytona Buildings, Redmond, Washington for the year ended
December 31, 2005, the statements of revenues and certain
operating expenses of the Laguna Buildings, Redmond, Washington,
595 Bay Street, Toronto, Ontario, 2301 Fifth Avenue,
Seattle, Washington, 3 Huntington Quadrangle, a two-building
office complex located in Melville, New York, One Wilshire, Los
Angeles, California, the portfolio of nine office/flex buildings
located in the I-494, I-394, and Midway submarkets of
Minneapolis, Minnesota, and 2200 Ross Avenue, Dallas, Texas for
the year ended December 31, 2006, and the statement of
revenues and certain operating expenses of the two-building
office complex located at 2200, 2222 and 2230 East Imperial
Highway, El Segundo, California for the year ended
December 31, 2007 included in this prospectus have been
audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein (which
reports on the statements of revenues and certain operating
expenses express unqualified opinions and include explanatory
paragraphs referring to the purpose of the statements) and are
included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
To help you understand how we protect your personal information,
we have included our Privacy Policy as Appendix C to this
prospectus. This appendix describes our current privacy policy
and practices. Should you decide to establish or continue a
shareholder relationship with us, we will advise you of our
policy and practices at least once annually, as required by law.
We have filed with the Securities and Exchange Commission, in
Washington, D.C., a registration statement on
Form S-11
with respect to the shares offered pursuant to this prospectus.
For further information regarding us and the common shares
offered by this prospectus, you may review the full registration
statement, including its exhibits and schedules, filed under the
Securities Act. The registration statement of which this
prospectus forms a part, including its exhibits and schedules,
may be inspected and copied at the public reference room
maintained by the Securities and Exchange Commission at
100 F Street, N.E. Room 1580, N.W.,
Washington, D.C. 20549. Copies of the materials may also be
obtained from the Securities and Exchange Commission at
prescribed rates by writing to the public reference room
maintained by the Securities and Exchange Commission at
100 F Street, N.E. Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of this public reference room by calling the
Securities and Exchange Commission at
1-800-SEC-0330.
The Securities and Exchange Commission maintains a World Wide
Web site on the Internet at www.sec.gov. Our registration
statement, of which this prospectus constitutes a part, can be
downloaded from the Securities and Exchange Commission’s
web site.
We maintain a website at www.HinesREIT.com where there is
additional information about our business, but the contents of
that site are not incorporated by reference in or otherwise a
part of this prospectus.
Advisor: means Hines Advisors Limited
Partnership, a Delaware limited partnership.
Capmark: means Capmark Finance, Inc.
Code: means the Internal Revenue Code of 1986,
as amended, and the regulations promulgated thereunder.
Company: means, collectively, Hines REIT and
the Operating Partnership and their direct and indirect
wholly-owned subsidiaries.
Core Fund: means Hines US Core Office
Fund LP, a Delaware limited partnership.
Dealer Manager: means Hines Real Estate
Securities, Inc., a Delaware corporation, also referred to as
“HRES”.
ERISA: means the Employee Retirement Income
Security Act of 1974, as amended.
Excess Securities: means shares proposed to be
transferred pursuant to a transfer which, if consummated, would
violate the restrictions on transfer contained within our
charter.
Exchange Act: means the Securities Exchange
Act of 1934, as amended.
FINRA: means the Financial Industry Regulatory
Authority.
Fund Investors: means partners in the
Core Fund and certain other investors in entities in which the
Core Fund has an interest.
Hines: means Hines Interests Limited
Partnership, a Texas limited partnership.
Hines REIT: means Hines Real Estate Investment
Trust, Inc., a Maryland corporation.
Hines Value Added Fund: means Hines
U.S. Office Value Added Fund II, L.P., a Delaware
limited partnership.
HREH: means Hines Real Estate Holdings limited
partnership, a Texas limited partnership.
HRES: means Hines Real Estate Securities, Inc., also
referred to as the “Dealer Manager.”
HSH Facility: means the secured credit
facility with HSH Nordbank AG, New York Branch.
HSH Nordbank: means HSH Nordbank AG, New York
Branch.
Institutional Co-Investors: means the
independent pension plans and funds that are advised by the
Institutional Co-Investor Advisor and co-invest in properties
with the Core Fund.
Institutional Co-Investor Advisor: means
General Motors Investment Management Corporation.
IRA: means an individual retirement account
established pursuant to Section 408 or Section 408A of
the Code.
Investment Company Act: means the Investment
Company Act of 1940, as amended.
KeyBank: means KeyBank National Association.
NASAA Guidelines: means the Statement of
Policy Regarding Real Estate Investment Trusts of the North
American Securities Administrators Association, Inc., as revised
and adopted on May 7, 2007.
NOP: means National Office Partners Limited
Partnership, a Delaware limited partnership.
OP Units: means partner interests in the
Operating Partnership.
Operating Partnership: means Hines REIT
Properties, L.P., a Delaware limited partnership.
Participation Interest: means the profits
interest in the Operating Partnership held by HALP Associates
Limited Partnership.
Partnership Agreement: means the Amended and
Restated Agreement of Limited Partnership of Hines REIT
Properties, L.P.
Plan: means a pension, profit-sharing,
retirement employee benefit plan, individual retirement account
or Keogh Plan.
REIT: means an entity that qualifies as a real
estate investment trust for U.S. federal income tax
purposes.
SAB: means a Staff Accounting Bulletin of the
Securities and Exchange Commission.
Securities Act: means the Securities Act of
1933, as amended.
Shell Buildings: means, collectively, One
Shell Plaza located in Houston, Texas, at 910 Louisiana Street
and Two Shell Plaza, located in Houston, Texas, at 777 Walker
Street.
UBTI: means unrelated business taxable income,
as that term is defined in Sections 511 through 514 of the
Code.
UPREIT: means an umbrella partnership real
estate investment trust.
U.S. GAAP: means accounting principles generally
accepted in the United States of America.
1201 W. Peachtree Street, Atlanta,
Georgia, — For the Six Months Ended June 30, 2006
(Unaudited) and For the Years Ended December 31, 2005, 2004
and 2003:
The accompanying interim unaudited condensed consolidated
financial information has been prepared according to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) have been condensed or omitted according to
such rules and regulations. For further information, refer to
the financial statements and footnotes for the year ended
December 31, 2006 included in Hines Real Estate Investment
Trust, Inc.’s Annual Report on
Form 10-K.
In the opinion of management, all adjustments and eliminations,
consisting only of normal recurring adjustments, necessary to
present fairly and in conformity with GAAP the financial
position of Hines Real Estate Investment Trust, Inc. as of
September 30, 2007 and December 31, 2006, and the
results of operations and cash flows for the three and nine
months ended September 30, 2007 and 2006 have been
included. The results of operations for such interim periods are
not necessarily indicative of the results for the full year.
Hines Real Estate Investment Trust, Inc., a Maryland corporation
(“Hines REIT” and, together with its consolidated
subsidiaries, the “Company”), was formed on
August 5, 2003 under the General Corporation Law of the
state of Maryland for the purpose of engaging in the business of
investing in and owning interests in real estate. The Company
operates and intends to continue to operate in a manner to
qualify as a real estate investment trust (“REIT”) for
federal income tax purposes. The Company is structured as an
umbrella partnership REIT under which substantially all of the
Company’s current and future business is and will be
conducted through a majority-owned subsidiary, Hines REIT
Properties, L.P. (the “Operating Partnership”). Hines
REIT is the sole general partner of the Operating Partnership.
Subject to certain restrictions and limitations, the business of
the Company is managed by Hines Advisors Limited Partnership
(the “Advisor”), an affiliate of Hines Interests
Limited Partnership (“Hines”), pursuant to the
advisory agreement the Company entered into with the Advisor
(the “Advisory Agreement”).
Public
Offerings
On June 18, 2004, Hines REIT commenced its initial public
offering, pursuant to which it offered a maximum of
220 million common shares for sale to the public (the
“Initial Offering”). The Initial Offering expired on
June 18, 2006. On June 19, 2006, the Company commenced
its current public offering (the “Current Offering”),
pursuant to which it is offering a maximum of $2.2 billion
in common shares.
The following table summarizes the activity from Hines
REIT’s offerings for the years ended December 31,2006, 2005 and 2004 and the nine months ended September 30,2007 (in millions):
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(b)
Amounts include $13.5 million of gross proceeds relating to
approximately 1.4 million shares issued under the
Company’s dividend reinvestment plan.
(c)
Amounts include $24.8 million of gross proceeds relating to
approximately 2.5 million shares issued under the
Company’s dividend reinvestment plan.
As of September 30, 2007, approximately
$1,030.6 million in common shares remained available for
sale pursuant to the Current Offering, exclusive of
approximately $165.8 million in common shares available
under the Company’s dividend reinvestment plan.
Hines REIT contributes all net proceeds from its public
offerings to the Operating Partnership in exchange for
partnership units in the Operating Partnership. As of
September 30, 2007 and December 31, 2006, Hines REIT
owned a 97.8% and 97.4%, respectively, general partner interest
in the Operating Partnership.
From October 1 through November 9, 2007, Hines REIT
received gross offering proceeds of approximately
$59.6 million from the sale of 5.7 million common
shares, including approximately $12.6 million relating to
1.3 million shares sold under Hines REIT’s dividend
reinvestment plan. As of November 9, 2007,
$983.5 million in common shares remained available for sale
to the public pursuant to the Current Offering, exclusive of
$153.2 million in common shares available under the
dividend reinvestment plan.
Minority
Interests
Hines 2005 VS I LP, an affiliate of Hines, owned a 0.7% and 1.3%
interest in the Operating Partnership as of September 30,2007 and December 31, 2006, respectively. As a result of
HALP Associates Limited Partnership’s (“HALP”)
ownership of the Participation Interest (see Note 6),
HALP’s percentage ownership in the Operating Partnership
was 1.5% and 1.3% as of September 30, 2007 and
December 31, 2006, respectively.
Investment
Property
As of September 30, 2007, the Company held direct and
indirect investments in 37 office properties located throughout
the United States, one mixed-use office and retail property in
Toronto, Ontario, and a 50% interest in one industrial property
in Rio de Janeiro, Brazil. The Company’s interests in 23 of
these properties are owned indirectly through the Company’s
investment in Hines-Sumisei U.S. Core Office Fund, L.P.
(the “Core Fund”). As of September 30, 2007 and
December 31, 2006, the Company owned an approximate 32.0%
and 34.0% non-managing general partner interest in the Core
Fund, respectively. See Note 3 for further discussion.
2.
Summary
of Significant Accounting Policies
Use of
Estimates
The preparation of the consolidated financial statements
requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities and contingencies as
of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. The
Company evaluates its assumptions and estimates on an ongoing
basis. The Company bases its estimates on historical experience
and on various other assumptions that the Company believes to be
reasonable under the circumstances. Additionally, application of
the Company’s accounting policies involves exercising
judgments regarding assumptions as to future uncertainties.
Actual results may differ from these estimates under different
assumptions or conditions.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Basis
of Presentation
The consolidated financial statements of the Company included in
this quarterly report include the accounts of Hines REIT, the
Operating Partnership (over which Hines REIT exercises financial
and operating control) and the Operating Partnership’s
wholly-owned subsidiaries (see Note 3), as well as the
related amounts of minority interest. All intercompany balances
and transactions have been eliminated in consolidation.
The Company evaluates the need to consolidate joint ventures
based on standards set forth in Financial Accounting Standards
Board (“FASB”) Interpretation No. 46R,
Consolidation of Variable Interest Entities
(“FIN 46R”) and American Institute of
Certified Public Accountants’ Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures
(“SOP 78-9”),
as amended by Emerging Issues Task Force Issue
No. 04-5,
Investor’s Accounting for an Investment in a Limited
Partnership When the Investor Is the Sole General Partner and
the Limited Partners Have Certain Rights. In accordance with
this accounting literature, the Company will consolidate joint
ventures that are determined to be variable interest entities
for which it is the primary beneficiary. The Company will also
consolidate joint ventures that are not determined to be
variable interest entities, but for which it exercises control
over major operating decisions through substantive participation
rights, such as approval of budgets, selection of property
managers, asset management, investment activity and changes in
financing.
On June 28, 2007, the Company invested $28.9 million
into HCB River II, LLC, a joint venture it created with HCB
Interests II LP (“HCB”). HCB is an investment
vehicle organized by Hines and the California Public
Employees’ Retirement System. The joint venture is in the
form of a Delaware limited liability company governed by an
Amended and Restated Limited Liability Company Agreement. The
Company and HCB each own a 50% interest in the joint venture.
HCB is responsible for managing the day-to-day operations of the
joint venture, however, the Company has various approval rights
and must approve certain major decisions related to the joint
venture. On July 2, 2007, the joint venture acquired Cargo
Center Dutra II, an industrial property located in Rio de
Janeiro, Brazil for $103.7 million Brazilian real
($53.7 million USD as of July 2, 2007). The Company
owns a 50% interest in Cargo Center Dutra II as a result of
its investment in the joint venture.
The Company concluded that the joint venture does not meet the
definition of a variable interest entity under FIN 46R.
Further, as neither the Company nor HCB has a controlling
interest in the joint venture or any special or disproportionate
voting or participation rights, consolidation is not required
under
SOP 78-9.
Therefore, the Company accounts for its interest in the joint
venture as an equity method investment. See Note 3 for
additional details regarding the joint venture.
Reportable
Segments
Statement of Financial Accounting Standards (“SFAS”)
No. 131, Disclosures about Segments of an Enterprise and
Related Information, establishes standards for reporting
financial and descriptive information about an enterprise’s
reportable segments. As described above, the Company owned
interests in 38 office properties and one industrial property as
of September 30, 2007. The Company’s investments in
real estate are geographically diversified and management
evaluates operating performance on an individual property level.
The Company has determined it has two reportable segments: one
with activities related to investing in office properties and
one with activities related to investing in industrial
properties. The Company’s office properties have similar
economic characteristics, tenants, and products and services. As
such, all of the Company’s 38 office properties have been
aggregated into one reportable segment.
The Company also owns an indirect investment in one industrial
property, which is accounted for using the equity method of
accounting for investments. As such, the activities of the
industrial property are reflected in investments in
unconsolidated entities in the condensed consolidated balance
sheet and equity in losses of
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
unconsolidated entities in the condensed consolidated statement
of operations. See “Investments in Unconsolidated
Entities” in Note 3 for additional discussion.
The Company’s investments in office properties generate
rental revenue and other income through the leasing of office
properties, which constituted 100% of the Company’s total
consolidated revenues for the nine months ended
September 30, 2007.
Comprehensive
Loss
The Company reports comprehensive loss in its condensed
consolidated statements of shareholders’ equity.
Comprehensive loss was approximately $39.6 million for the
nine months ended September 30, 2007 resulting from the
Company’s net loss of $50.2 million offset by its
foreign currency translation adjustment of $10.6 million.
See “International Operations” below for additional
information.
International
Operations
The Canadian dollar is the functional currency for the
Company’s subsidiaries operating in Toronto, Ontario and
the Brazilian real is the functional currency for the
Company’s subsidiary operating in Rio de Janeiro, Brazil.
The Company’s foreign subsidiaries have translated their
financial statements into U.S. dollars for reporting
purposes. Assets and liabilities are translated at the exchange
rate in effect as of the balance sheet date. The Company
translates income statement accounts using the average exchange
rate for the period and significant nonrecurring transactions
using the rate on the transaction date. As described above,
these translation gains or losses are included in accumulated
other comprehensive income as a separate component of
shareholders’ equity.
The Company’s international subsidiaries may have
transactions denominated in currencies other than their
functional currency. In these instances, assets and liabilities
are remeasured into the functional currency at the exchange rate
in effect at the end of the period, and income statement
accounts are remeasured at the average exchange rate for the
period. These gains or losses are included in the Company’s
results of operations.
The Company’s subsidiaries also record gains or losses in
the income statement when a transaction with a third party,
denominated in a currency other than the entity’s
functional currency, is settled and the functional currency cash
flows realized are more or less than expected based upon the
exchange rate in effect when the transaction was initiated.
Investment
Property
Real estate assets the Company owns directly are stated at cost
less accumulated depreciation. Depreciation is computed using
the straight-line method. The estimated useful lives for
computing depreciation are generally 10 years for furniture
and fixtures,
15-20 years
for electrical and mechanical installations and 40 years
for buildings. Major replacements that extend the useful life of
the assets are capitalized. Maintenance and repair costs are
expensed as incurred.
Real estate assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of
the individual property may not be recoverable. In such an
event, a comparison will be made of the current and projected
operating cash flows of each property on an undiscounted basis
to the carrying amount of such property. Such carrying amount
would be adjusted, if necessary, to estimated fair values to
reflect impairment in the value of the asset. At
September 30, 2007, management believes no such impairment
has occurred.
Acquisitions of properties are accounted for utilizing the
purchase method and, accordingly, the results of operations of
acquired properties are included in the Company’s results
of operations from their respective
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
dates of acquisition. Estimates of future cash flows and other
valuation techniques that the Company believes are similar to
those used by independent appraisers are used to allocate the
purchase price of acquired property between land, buildings and
improvements, equipment and identifiable intangible assets and
liabilities such as amounts related to in-place leases, acquired
above- and below-market leases, tenant relationships, asset
retirement obligations and mortgage notes payable. Initial
valuations are subject to change until such information is
finalized, no later than 12 months from the acquisition
date.
The estimated fair value of acquired in-place leases are the
costs the Company would have incurred to lease the properties to
the occupancy level of the properties at the date of
acquisition. Such estimates include the fair value of leasing
commissions, legal costs and other direct costs that would be
incurred to lease the properties to such occupancy levels.
Additionally, the Company evaluates the time period over which
such occupancy levels would be achieved and includes an estimate
of the net market-based rental revenues and net operating costs
(primarily consisting of real estate taxes, insurance and
utilities) that would be incurred during the
lease-up
period. Acquired in-place leases as of the date of acquisition
are amortized over the remaining lease terms.
Acquired above-and below-market lease values are recorded based
on the present value (using an interest rate that reflects the
risks associated with the lease acquired) of the difference
between the contractual amounts to be paid pursuant to the
in-place leases and management’s estimate of fair market
value lease rates for the corresponding in-place leases. The
capitalized above- and below-market lease values are amortized
as adjustments to rental revenue over the remaining
non-cancelable terms of the respective leases. Should a tenant
terminate its lease, the unamortized portion of the in-place
lease value is charged to amortization expense and the
unamortized portion of out-of-market lease value is charged to
rental revenue.
Acquired above- and below-market ground lease values are
recorded based on the difference between the present value
(using an interest rate that reflects the risks associated with
the lease acquired) of the contractual amounts to be paid
pursuant to the ground leases and management’s estimate of
fair market value of land under the ground leases. The
capitalized above- and below-market lease values are amortized
as adjustments to ground lease expense over the lease term.
Management estimates the fair value of assumed mortgage notes
payable based upon indications of current market pricing for
similar types of debt with similar maturities. Assumed mortgage
notes payable are initially recorded at their estimated fair
value as of the assumption date, and the difference between such
estimated fair value and the note’s outstanding principal
balance is amortized over the life of the mortgage note payable.
Cash
and Cash Equivalents
The Company considers all short-term, highly liquid investments
that are readily convertible to cash with an original maturity
of three months or less at the time of purchase to be cash
equivalents.
Restricted
Cash
As of September 30, 2007 and December 31, 2006, the
Company had restricted cash of approximately $6.3 million
and $2.5 million, respectively, related to escrow accounts
required by certain of the Company’s mortgage and purchase
and sale agreements.
Deferred
Leasing Costs
Direct leasing costs, primarily consisting of third-party
leasing commissions and tenant inducements, are capitalized and
amortized over the life of the related lease. Tenant inducement
amortization is recorded as an offset to rental revenue and the
amortization of other direct leasing costs is recorded in
amortization expense.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company considers a number of different factors to evaluate
whether it or the lessee is the owner of the tenant improvements
for accounting purposes. These factors include: 1) whether
the lease stipulates how and on what a tenant improvement
allowance may be spent; 2) whether the tenant or landlord
retains legal title to the improvements; 3) the uniqueness
of the improvements; 4) the expected economic life of the
tenant improvements relative to the term of the lease; and
5) who constructs or directs the construction of the
improvements.
The determination of who owns the tenant improvements for
accounting purposes is subject to significant judgment. In
making that determination, the Company considers all of the
above factors. No one factor is determinative.
Tenant inducement amortization was approximately
$1.4 million and $429,000 for the nine months ended
September 30, 2007 and 2006, respectively, and was recorded
as an offset to rental revenue. In addition, the Company
recorded approximately $468,000 and $60,000 as amortization
expense related to other direct leasing costs for the nine
months ended September 30, 2007 and 2006, respectively.
Tenant inducement amortization was approximately $493,000 and
$155,000 for the three months ended September 30, 2007 and
2006, respectively, and was recorded as an offset to rental
revenue. In addition, the Company recorded approximately
$188,000 and $33,000 as amortization expense related to other
direct leasing costs for the three months ended
September 30, 2007 and 2006, respectively.
Derivative
Instruments
The loss on derivative instruments recorded in the
Company’s condensed consolidated statements of operations
for the three and nine months ended September 30, 2007 is
the result of the following (additional details provided below):
•
the decrease in the fair value of the interest rate swaps during
the period resulted in losses of $21.3 million and
$5.6 million for the three and nine months ended
September 30, 2007, respectively;
•
transaction fees incurred upon entering into the swaps of
approximately $0 and $731,000 for the three and nine months
ended September 30, 2007, respectively; and
•
a gain of approximately $939,000 for the nine months ended
September 30, 2007 resulting from the settlement of a
foreign currency contract in February 2007. There were no
similar transactions during the three months ended
September 30, 2007.
The Company recorded a loss of $7.8 million and
$6.4 million on an interest rate swap for the three and
nine months ended September 30, 2006, respectively. This
loss resulted from the decrease in the fair value of an interest
rate swap and included fees of approximately $552,000 incurred
upon entering into the swap transaction.
To date, the Company has entered into five forward interest rate
swap transactions with HSH Nordbank AG, New York Branch
(“HSH Nordbank”). All of these swap transactions were
entered into as economic hedges against the variability of
future interest rates on the Company’s variable interest
rate borrowings with HSH Nordbank.
The Company has not designated any of these contracts as cash
flow hedges for accounting purposes. The interest rate swaps
have been recorded at their estimated fair value in the
accompanying condensed consolidated balance sheets as of
September 30, 2007 and December 31, 2006. The Company
will continue to mark the interest rate swap contracts to their
estimated fair value as of each balance sheet date and the
changes in fair value will be reflected in the condensed
consolidated statements of operations.
In addition, on February 8, 2007, the Company entered into
a foreign currency contract related to the acquisition of Atrium
on Bay, an office property located in Toronto, Ontario. The
contract was entered into as
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
an economic hedge against the variability of the foreign
currency exchange rate related to the Company’s equity
investment and was settled at the close of this acquisition on
February 26, 2007, as described above.
Deferred
Financing Costs
Deferred financing costs as of September 30, 2007 and
December 31, 2006 consist of direct costs incurred in
obtaining debt financing (see Note 4). These costs are
being amortized into interest expense on a straight-line basis,
which approximates the effective interest method, over the terms
of the obligations. For the nine months ended September 30,2007 and 2006, approximately $874,000 and $718,000,
respectively, was amortized and recorded in interest expense in
the accompanying condensed consolidated statements of
operations. For the three months ended September 30, 2007
and 2006, approximately $311,000 and $286,000, respectively, was
amortized and recorded in interest expense in the accompanying
condensed consolidated statements of operations.
Other
Assets
Other assets includes the following (in thousands):
Organizational and offering costs related to the Current Offering
$
1,670
$
4,992
Dealer manager fees and selling commissions
784
885
Asset management, acquisition fees and property-level fees and
reimbursements
4,698
3,077
Other
247
—
Total
$
7,399
$
8,954
Organizational
and Offering Costs
Initial
Offering
Certain organizational and offering costs associated with the
Initial Offering were paid by the Advisor on behalf of the
Company. Pursuant to the Advisory Agreement among Hines REIT,
the Operating Partnership and the Advisor during the Initial
Offering, the Company was obligated to reimburse the Advisor in
an amount equal to the lesser of actual organizational and
offering costs incurred related to the Initial Offering or 3.0%
of the gross proceeds raised from the Initial Offering.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2006, the Advisor had incurred on behalf
of the Company organizational and offering costs related to the
Initial Offering of approximately $43.3 million (of which
approximately $23.0 million relates to the Advisor or its
affiliates). This amount includes approximately
$24.2 million of organizational and internal offering
costs, and approximately $19.1 million of third- party
offering costs, such as legal and accounting fees and printing
costs. No such amounts were incurred subsequent to
December 31, 2006.
As described above, the Company’s obligation to reimburse
the Advisor for organizational and offering costs related to the
Initial Offering was limited by the amount of gross proceeds
raised from the sale of the Company’s common shares in the
Initial Offering. Amounts of organizational and offering costs
recorded in the Company’s financial statements in periods
prior to the quarter ended June 30, 2006 were based on
estimates of gross proceeds to be raised through the end of the
Initial Offering period. Such estimates were based on highly
subjective factors including the number of retail broker-dealers
signing selling agreements with the Company’s Dealer
Manager, Hines Real Estate Securities, Inc. (“HRES” or
the “Dealer Manager”), anticipated market share
penetration in the retail broker-dealer network and the Dealer
Manager’s best estimate of the growth rate in sales.
Based on actual gross proceeds raised in the Initial Offering,
the total amount of organizational and offering costs for which
the Company was obligated to reimburse the Advisor related to
the Initial Offering was $16.0 million. As a result of
amounts recorded in prior periods, during the six months ended
June 30, 2006, organizational and internal offering costs
related to the Initial Offering totaling $1.0 million
incurred by the Advisor were expensed and included in the
accompanying condensed consolidated statement of operations and
third-party offering costs related to the Initial Offering of
$2.0 million were offset against additional paid-in
capital. During the six months ended June 30, 2006,
organizational and internal offering costs related to the
Initial Offering totaling $1.9 million and third-party
offering costs related to the Initial Offering of
$1.5 million were incurred by the Advisor but were not
recorded in the consolidated condensed financial statements
because the Company was not obligated to reimburse the Advisor
for these costs.
Current
Offering
The Company commenced the Current Offering on June 19,2006. Certain organizational and offering costs associated with
the Current Offering have been paid by the Advisor on the
Company’s behalf. Pursuant to the terms of the Advisory
Agreement, the Company is obligated to reimburse the Advisor in
an amount equal to the amount of actual organizational and
offering costs incurred, so long as such costs, together with
selling commissions and dealer-manager fees, do not exceed 15%
of gross proceeds from the Current Offering. As of
September 30, 2007 and December 31, 2006, the Advisor
had incurred on the Company’s behalf organizational and
offering costs in connection with the Current Offering of
$24.6 million and $12.6 million, respectively (of
which $9.6 million and $4.7 million, respectively,
relates to the Advisor or its affiliates).
The Advisor incurred $5.1 million and $2.1 million of
internal offering costs, which have been expensed in the
accompanying condensed consolidated statements of operations for
the nine months ended September 30, 2007 and 2006,
respectively. In addition, $6.9 million and
$5.0 million of third-party offering costs have been offset
against net proceeds of the Current Offering within additional
paid-in capital for the nine months ended September 30,2007 and 2006, respectively.
The Advisor incurred approximately $1.6 million and
$1.5 million of internal offering costs, which have been
expensed in the accompanying condensed consolidated statements
of operations for the three months ended September 30, 2007
and 2006, respectively. In addition, $2.3 million and
$2.0 million of third-party offering costs have been offset
against net proceeds of the Current Offering within additional
paid-in capital for the three months ended September 30,2007 and 2006, respectively.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revenue
Recognition
The Company recognizes rental revenue on a straight-line basis
over the life of the lease including rent holidays, if any.
Straight-line rent receivable in the amount of $9.2 million
and $3.4 million as of September 30, 2007 and
December 31, 2006, respectively, consisted of the
difference between the tenants’ rents calculated on a
straight-line basis from the date of acquisition or lease
commencement over the remaining terms of the related leases and
the tenants’ actual rents due under the lease agreements
and is included in tenant and other receivables in the
accompanying condensed consolidated balance sheets. Revenues
associated with tenant reimbursements are recognized in the
period in which the expenses are incurred based upon the tenant
lease provision. Revenues relating to lease termination fees are
recognized at the time that a tenant’s right to occupy the
space is terminated and when the Company has satisfied all
obligations under the agreement.
The Company commences revenue recognition on its leases based on
a number of factors. In most cases, revenue recognition under a
lease begins when the lessee takes possession of or controls the
physical use of the leased asset. The determination of who is
the owner of the tenant improvements for accounting purposes
determines the nature of the leased asset and when revenue
recognition under a lease begins. If the Company is the owner of
the tenant improvements for accounting purposes, then the leased
asset is the finished space and revenue recognition begins when
the lessee takes possession of the finished space, typically
when the improvements are substantially complete. If the Company
concludes the lessee is the owner of the tenant improvements for
accounting purposes, then the leased asset is the unimproved
space and any tenant improvement allowances funded under the
lease are treated as lease incentives which reduce revenue
recognized over the term of the lease. In these circumstances,
the Company begins revenue recognition when the lessee takes
possession of the unimproved space to construct their own
improvements.
Stock-based
Compensation
Under the terms of the Employee and Director Incentive Share
Plan, the Company grants each independent member of its board of
directors 1,000 restricted shares of common stock annually. The
restricted shares granted each year fully vest upon completion
of each director’s annual term. In accordance with the
provisions of SFAS No. 123(R), Share-Based
Payment, the Company recognizes the expense related to these
shares over the vesting period. The Company granted 1,000
restricted common shares to each of its independent board
members in November 2004, June 2005, June 2006 and July 2007.
For the nine months ended September 30, 2007 and 2006, the
Company amortized approximately $19,000 and $23,000,
respectively, of related compensation expense. For the three
months ended September 30, 2007 and 2006, the Company
amortized approximately $8,000 of related compensation expense.
Such amounts are included in general and administrative expenses
in the accompanying condensed consolidated statements of
operations.
Income
Taxes
Hines REIT made an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the “Code”), beginning with its
taxable year ended December 31, 2004. In addition, as of
September 30, 2007 and 2006the Company owned an investment
in the Core Fund, which has invested in properties through other
entities that have elected to be taxed as REITs. Hines
REIT’s management believes that the Company and the
applicable entities in the Core Fund are organized and operate
in such a manner as to qualify for treatment as REITs and intend
to operate in the foreseeable future in such a manner so that
they will remain qualified as REITs for federal income tax
purposes. Accordingly, no provision has been made for
U.S. federal income taxes for the nine months ended
September 30, 2007 and 2006 in the accompanying condensed
consolidated financial statements.
During 2006, the State of Texas enacted new tax legislation that
restructures the state business tax in Texas by replacing the
taxable capital and earned surplus components of the
then-current franchise tax with a
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
new “margin tax,” which for financial reporting
purposes is considered an income tax under
SFAS No. 109, Accounting for Income Taxes. This
legislation had an immaterial impact on the Company’s
financial statements.
Due to the acquisition of Atrium on Bay, an office property
located in Toronto, Ontario, the Company has recorded a
provision for Canadian income taxes of approximately $236,000
and $552,000 for the three and nine months ended
September 30, 2007, respectively, in accordance with
Canadian tax laws and regulations.
In June 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in tax positions. FIN 48 requires companies
to recognize uncertain tax positions in the financial statements
if management believes it is more likely than not that the
position will be sustained on examination by the taxing
authorities, based on the technical merits of the positions. The
Company reviewed its current tax positions and believes its
positions will be sustained on examination. The adoption of the
provisions of FIN 48 on January 1, 2007 did not have a
material impact on the Company’s financial statements.
As of September 30, 2007, the Company had no significant
temporary differences, tax credits, or net operating loss
carry-forwards.
Per
Share Data
Loss per common share is calculated by dividing the net loss for
each period by the weighted average number of common shares
outstanding during such period. Loss per common share on a basic
and diluted basis is the same because the Company has no
potentially dilutive common shares outstanding.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Direct
Investments
Properties that are wholly owned by the Operating Partnership
are referred to as “direct investments.” As of
December 31, 2006, the Company owned direct investments in
eight office properties through its interest in the Operating
Partnership and acquired the following office properties during
the nine months ended September 30, 2007:
Acquisition
City
Property
Date Acquired
Cost
(In millions)
Redmond, Washington
The Laguna Buildings
January 2007
$
118.0
Toronto, Ontario
Atrium on Bay
February 2007
$
215.6
(1)
Seattle, Washington
Seattle Design Center
June 2007
$
56.8
Seattle, Washington
5th and Bell
June 2007
$
72.2
Melville, New York
3 Huntington Quadrangle
July 2007
$
87.0
Los Angeles, California
One Wilshire
August 2007
$
287.0
Minneapolis, Minnesota
Minneapolis Portfolio
September 2007
$
87.0
(1)
This amount was translated from the $250.0 million Canadian
dollars (“CAD”) acquisition cost as of the date of
this acquisition.
As of September 30, 2007, accumulated depreciation and
amortization related to direct investments in real estate assets
and related lease intangibles were as follows (in thousands):
Buildings and
In-Place
Out-of-Market
Out-of-Market
Improvements
Leases
Lease Assets
Lease Liabilities
Cost
$
1,224,118
$
258,837
$
53,011
$
71,331
Less: accumulated depreciation and amortization
(23,887
)
(38,458
)
(7,534
)
(8,589
)
Net
$
1,200,231
$
220,379
$
45,477
$
62,742
As of December 31, 2006, accumulated depreciation and
amortization related to direct investments in real estate assets
and related lease intangibles were as follows (in thousands):
Buildings and
In-Place
Out-of-Market
Out-of-Market
Improvements
Leases
Lease Assets
Lease Liabilities
Cost
$
519,843
$
137,344
$
40,267
$
19,046
Less: accumulated depreciation and amortization
(7,882
)
(16,579
)
(3,853
)
(3,232
)
Net
$
511,961
$
120,765
$
36,414
$
15,814
Amortization expense was $23.0 million and
$10.4 million for in-place leases for the nine months ended
September 30, 2007 and 2006, respectively, and amortization
of out-of-market leases, net, was an increase to rental revenue
of approximately $1.6 million and $86,000, respectively.
Amortization expense was $8.2 million and $4.4 million
for in-place leases for the three months ended
September 30, 2007 and 2006, respectively. Amortization of
out-of-market leases, net, was an increase to rental revenue of
approximately $925,000 for the three months ended
September 30, 2007 and a decrease to rental revenue of
approximately $104,000 for the three months ended
September 30, 2006.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Anticipated amortization of in-place and out-of-market leases,
net, for the period from October 1 through December 31,2007 and for each of the following four years ended December 31
is as follows (in thousands):
In connection with its direct investments, the Company has
entered into non-cancelable lease agreements with tenants for
office and retail space. As of September 30, 2007, the
approximate fixed future minimum rentals for the period from
October 1 through December 31, 2007, and each of the years
ending December 31, 2008 through 2011 and for the period
thereafter are as follows (in thousands):
One of the Company’s properties is subject to a ground
lease, which expires on March 31, 2032. Although the lease
provides for increases in payments over the term of the lease,
ground rent expense accrues on a straight-line basis. The fixed
future minimum rentals to be paid under the ground lease for the
period from October 1, 2007 through December 31, 2007
are approximately $100,000. In addition, the fixed future
minimum rentals for each of the years ended December 31,2008 through December 31, 2011 and thereafter are
approximately $405,000, $412,000, $420,000, $428,000 and
$10.8 million, respectively.
Pursuant to the lease agreements with certain tenants in one of
its buildings, the Company receives fees for the provision of
various telecommunication-related services. The fixed future
minimum rentals received for such services for the period from
October 1, 2007 through December 31, 2007 are
approximately $672,000. In addition, the fixed future minimum
rentals expected to be received for such services for each of
the years ended December 31, 2008 through December 31,2011 and for the period thereafter are approximately
$2.5 million, $1.9 million, $1.7 million,
$1.3 million and $1.3 million, respectively. The
Company has outsourced the provision of these services to a
tenant in the same building, to whom it pays fees for the
provision of such services. The fixed future minimum payments
for such services for the period from October 1, 2007
through December 31, 2007 are approximately $271,000. In
addition, the fixed future minimum payments for each of the
years ended December 31, 2008 through December 31,2011 and for the period thereafter are approximately
$1.1 million, $900,000, $727,000, $515,000 and $567,000,
respectively.
Of the total rental revenue earned by the Company for the nine
months ended September 30, 2006, approximately 11% was
earned from a state government agency, whose leases representing
approximately 10% of the rentable space in the Company’s
portfolio expire in October 2012 and whose remaining lease
expires in April 2013. No other tenant provided more than 10% of
the Company’s total rental revenues for the
The Company owns indirect interests in real estate through its
investments in Hines-Sumisei U.S. Core Office Fund, L.P.
and HCB II River LLC. The carrying values of its investments in
these entities as of September 30, 2007 and
December 31, 2006 are as follows (in thousands):
Equity in losses of Hines-Sumisei U.S. Core Office Fund,
L.P.
$
4,971
$
6,864
Equity in losses of HCB II River LLC
58
58
Total equity in losses of unconsolidated entities
$
5,029
$
6,922
Investment
in Hines-Sumisei U.S. Core Office Fund, L.P.
The Core Fund is a partnership organized in August 2003 by Hines
to invest in existing office properties in the United States
that Hines believes are desirable long-term holdings. The Core
Fund owns interests in real estate assets through certain
limited liability companies and limited partnerships which have
mortgage financing in place.
As of December 31, 2006, the Company owned a 34.0%
non-managing general partnership interest in the Core Fund,
which held ownership interests in 15 properties across the
United States. As of June 30, 2007, the Company owned a
29.8% non-managing general partnership interest in the Core
Fund, which held ownership interests in 22 properties across the
United States.
On July 2, 2007, an indirect subsidiary of the Core Fund
acquired the Carillon Building, a 24-story office building
located at 227 West Trade Street in downtown Charlotte,
North Carolina and a one-half acre parcel of land adjacent to
the building. The contract purchase price for the Carillon
Building was approximately $140.0 million, exclusive of
transaction costs, financing fees and working capital reserves.
The Carillon Building was constructed in 1991 and contains
469,226 square feet of rentable area that is approximately
99% leased.
On July 2, 2007the Company acquired additional interests
in the Core Fund totaling $58.0 million. As of
September 30, 2007, the Company owned a 32.0% non-managing
general partnership interest in the Core Fund, which held
ownership interests in 23 properties across the United States.
Of the total rental revenue of the Core Fund for the nine months
ended September 30, 2007, approximately 30% was earned from
14 tenants in the legal services industry, whose leases expire
at various times during the years 2007 through 2027. No other
tenant provided more than 10% of the Core Fund’s total
rental revenues for the nine months ended September 30,2007.
Of the total rental revenue of the Core Fund for the nine months
ended September 30, 2006, approximately 12% was earned from
two affiliated tenants in the oil and gas industry, whose leases
expire on December 31, 2015. In addition, 36% was earned
from 13 tenants in the legal services industry, whose leases
expire at various times during the years 2007 through 2027. No
other tenant provided more than 10% of the Core Fund’s
total rental revenues for the nine months ended
September 30, 2006.
Investment
in HCB River II LLC
As described in Note 2, the Company invested
$28.9 million into HCB River II LLC, a joint venture
it created with HCB on June 28, 2007. On July 2, 2007,
the joint venture acquired Cargo Center Dutra II
(“CCDII”), an industrial property located in Rio de
Janeiro, Brazil. The Property consists of four industrial
buildings that were constructed in
2001-2007.
The buildings contain 693,116 square feet of rentable area
that is 97% leased. The Company owns a 50% indirect interest in
CCDII through its investment in the joint venture.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
HCB is the managing member responsible for day-to-day operations
of the joint venture. However, the Company has various approval
rights and must approve certain major decisions of the joint
venture including, but not limited to: the direct or indirect
sale of any interest in CCDII; any financing or other
indebtedness incurred by the joint venture and the creation of
any lien or encumbrance on CCDII; annual plans and budgets for
the joint venture and CCDII; and any new leases at CCDII.
Condensed financial information is not presented for HCB
River II LLC as it does not meet the quantitative
thresholds for a significant equity method investee described in
Rule 3-09
of
Regulation S-X
set forth by the United States Securities and Exchange
Commission.
Key Bank National Association — Revolving Credit
Facility
9/9/2005
10/31/2009
Variable(1
)
$
66,000
$
162,000
SECURED MORTGAGE DEBT
Wells Fargo Bank, N.A. — Airport Corporate Center
1/31/2006
3/11/2009
4.775
%
89,836
(6)
89,233
Metropolitan Life Insurance Company —
1515 S. Street
4/18/2006
5/1/2011
5.680
%
45,000
45,000
Capmark Finance, Inc. — Atrium on Bay
2/26/2007
2/26/2017
5.330
%
191,539
(4)
—
HSH POOLED MORTGAGE FACILITY
HSH Nordbank — Citymark, 321 North Clark, 1900 and
2000 Alameda
8/1/2006
8/1/2016
5.8575
%(2)
185,000
185,000
HSH Nordbank — 3400 Data Drive, Watergate Tower IV
1/23/2007
1/12/2017
5.2505
%(3)
98,000
—
HSH Nordbank — Daytona and Laguna Buildings
5/2/2007
5/2/2017
5.3550
%(5)
119,000
—
HSH Nordbank — 3 Huntington Quadrangle
7/19/2007
7/19/2017
5.9800
%(7)
48,000
—
HSH Nordbank — Seattle Design Center /
5th and
Bell
8/14/2007
8/14/2017
6.0300
%(8)
70,000
—
$
912,375
$
481,233
(1)
The revolving credit facility with KeyBank National Association
(“KeyBank”) provides a maximum aggregate borrowing
capacity of $250.0 million, which may be increased to
$350.0 million upon the Company’s election. Borrowings
under the revolving credit facility are at variable interest
rates based on LIBOR plus 125 to 200 basis points based on
prescribed leverage ratios. The weighted average interest rate
on outstanding borrowings under this facility was 6.32% and
6.73% as of September 30, 2007 and December 31, 2006,
respectively.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(2)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 5.8575%.
(3)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 5.2505%.
(4)
This amount was translated to U.S. dollars at a rate of $1.0081
as of September 30, 2007. The mortgage agreement provided
for a principal amount of $190.0 million CAD as of
September 30, 2007.
(5)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 5.355%.
(6)
This mortgage is an interest-only loan in the principal amount
of $91.0 million, which the Company assumed in connection
with its acquisition of Airport Corporate Center. At the time of
acquisition, the fair value of this mortgage was estimated to be
$88.5 million, resulting in a premium of $2.5 million.
The premium is being amortized over the term of the mortgage.
(7)
Borrowings under the HSH Credit Facility that closed prior to
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.40%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 5.98%.
(8)
Borrowings under the HSH Credit Facility that closed after
August 1, 2007 have variable interest rates equal to
one-month LIBOR plus 0.45%. However, the Company entered into an
interest rate swap agreement which effectively fixed the
interest rate of this borrowing at 6.03%.
As of September 30, 2007, the Company has complied with all
covenants stipulated by the debt financings referenced above.
5.
Distributions
The Company began declaring distributions (as authorized by its
board of directors) in November 2004, after the Company
commenced business operations. The Company has declared
distributions monthly and aggregated and paid such distributions
quarterly. The Company intends to continue this distribution
policy for so long as its board of directors decides this policy
is in the best interests of its shareholders. The Company has
declared and paid the following quarterly distributions to its
shareholders and minority interests for the year ended
December 31, 2006 and the nine months ended
September 30, 2007 (in thousands):
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
6.
Related
Party Transactions
Advisory
Agreement
Pursuant to the Advisory Agreement, the Company is required to
pay the following fees and expense reimbursements:
Acquisition Fees — The Company pays an
acquisition fee to the Advisor for services related to the due
diligence, selection and acquisition of direct or indirect real
estate investments. The acquisition fee is payable following the
closing of each acquisition in an amount equal to 0.50% of
(i) the purchase price of real estate investments acquired
directly by the Company, including any debt attributable to such
investments, or (ii) when the Company makes an investment
indirectly through another entity, such investment’s pro
rata share of the gross asset value of the real estate
investments held by that entity. The Advisor earned cash
acquisition fees totaling $5.3 million and
$3.1 million for the nine months ended September 30,2007 and 2006, respectively, which have been recorded as an
expense in the accompanying condensed consolidated statements of
operations. The Advisor earned cash acquisition fees totaling
$3.1 million and $561,000 for the three months ended
September 30, 2007 and 2006, respectively, which have been
recorded as an expense in the accompanying condensed
consolidated statements of operations. See discussion of the
Participation Interest below for additional information
concerning acquisition fees.
Asset Management Fees — The Company pays asset
management fees to the Advisor for services related to managing,
operating, directing and supervising the operations and
administration of the Company and its assets. The asset
management fee is earned by the Advisor monthly in an amount
equal to 0.0625% multiplied by the net equity capital the
Company has invested in real estate investments as of the end of
the applicable month. The Advisor earned cash asset management
fees totaling approximately $5.7 million and
$2.1 million during the nine months ended
September 30, 2007 and 2006, respectively, which have been
recorded as an expense in the accompanying condensed
consolidated statements of operations. The Advisor earned cash
asset management fees totaling approximately $2.4 million
and $882,000 during the three months ended September 30,2007 and 2006, respectively, which have been recorded as an
expense in the accompanying condensed consolidated statements of
operations. See discussion of the Participation Interest below
for additional information concerning acquisition fees.
Expense Reimbursements — In addition to
reimbursement of organizational and offering costs (see
Note 2), the Company reimburses the Advisor and its
affiliates for certain other expenses incurred in connection
with the Company’s administration and ongoing operations.
For the year ended December 31, 2006, the Advisor had
advanced to or made payments on the Company’s behalf
totaling $1.6 million and the Company made repayments
totaling $2.7 million. No advances were received after
June 30, 2006 and no amounts were owed to the Advisor as of
September 30, 2007 or December 31, 2006 related to any
advances.
Dealer
Manager Agreement
The Company has retained HRES, an affiliate of the Advisor, to
serve as dealer manager for the Initial Offering and the Current
Offering. The dealer manager agreement related to the Initial
Offering provided that HRES would earn selling commissions equal
to 6.0% of the gross proceeds from sales of common stock sold in
the Company’s primary offering and 4.0% of gross proceeds
from the sale of shares issued pursuant the Company’s
dividend reinvestment plan, all of which was reallowed to
participating broker dealers. On May 30, 2006, the Company
executed a separate dealer manager agreement for the Current
Offering providing that HRES earns selling commissions equal to
7.0% of the gross proceeds from sales of common stock, all of
which is reallowed to participating broker dealers, and earns no
selling commissions related to shares issued pursuant to the
dividend reinvestment plan. Both agreements also provide that
HRES earns a dealer manager fee equal to 2.2% of gross proceeds
from the sales of common stock other than issuances pursuant to
the dividend reinvestment plan, a portion of which may be
reallowed to participating broker dealers. HRES earned
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
selling commissions of $46.7 million and $20.5 million
and earned dealer manager fees of $15.3 million and
$7.9 million for the nine months ended September 30,2007 and 2006, respectively, which have been offset against
additional paid-in capital in the accompanying condensed
consolidated statements of shareholders’ equity.
Property
Management and Leasing Agreements
The Company has entered into property management and leasing
agreements with Hines to manage the leasing and operations of
properties in which it directly invests. As compensation for its
services, Hines receives the following:
•
A property management fee equal to the lesser of 2.5% of the
annual gross revenues received from the properties or the amount
of property management fees recoverable from tenants of the
property under the leases. The Company incurred property
management fees of approximately $2.6 million and
$1.1 million for the nine months ended September 30,2007 and 2006, respectively, and approximately $1.1 million
and $472,000 for the three months ended September 30, 2007
and 2006, respectively. As of September 30, 2007 and
December 31, 2006, the Company had liabilities for incurred
and unpaid property management fees of approximately $392,000
and $233,000, respectively, which have been included in the
accompanying condensed consolidated balance sheets.
•
A leasing fee of 1.5% of gross revenues payable over the term of
each executed lease, including any lease renewal, extension,
expansion or similar event and certain construction management
and re-development construction management fees, in the event
Hines renders such services. The Company incurred leasing,
construction management or redevelopment fees of approximately
$1.1 million and $28,000 during the nine months ended
September 30, 2007 and 2006, respectively, and
approximately $462,000 and $6,100 during the three months ended
September 30, 2007 and 2006, respectively. As of
September 30, 2007the Company had a related liability of
approximately $952,000, which is included in due to affiliates
in the accompanying condensed consolidated balance sheet. No
related liability existed as of December 31, 2006.
•
The Company generally will be required to reimburse Hines for
certain operating costs incurred in providing property
management and leasing services pursuant to the property
management and leasing agreements. Included in this
reimbursement of operating costs are the cost of personnel and
overhead expenses related to such personnel who are located at
the property as well as off-site personnel located in
Hines’ headquarters and regional offices, to the extent the
same relate to or support the performance of Hines’ duties
under the agreement. However, the reimbursable cost of these
off-site personnel and overhead expenses are limited to the
lesser of the amount that is recovered from the tenants under
their leases
and/or a
limit calculated based on the rentable square feet covered by
the agreement. The Company incurred reimbursable expenses of
approximately $5.8 million and $2.5 million for the
nine months ended September 30, 2007 and 2006,
respectively, and approximately $2.5 million and $734,000
for the three months ended September 30, 2007 and 2006,
respectively. As of September 30, 2007 and
December 31, 2006, the Company had related liabilities of
approximately $2.0 million and $498,000, respectively,
which were included in due to affiliates in the accompanying
condensed consolidated balance sheets.
The
Participation Interest
Pursuant to the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, HALP owns a profits
interest in the Operating Partnership (the “Participation
Interest”). The percentage interest in the Operating
Partnership attributable to the Participation Interest was 1.5%
and 1.3% as of September 30, 2007 and December 31,2006, respectively. The Participation Interest entitles HALP to
receive
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
distributions from the Operating Partnership based upon its
percentage interest in the Operating Partnership at the time of
distribution.
As the percentage interest of the Participation Interest is
adjusted, the value attributable to such adjustment related to
acquisition fees and asset management fees is charged against
earnings and recorded as a liability until such time as the
Participation Interest is repurchased for cash or converted into
common shares of Hines REIT. This liability totaled
$22.8 million and $11.8 million as of
September 30, 2007 and December 31, 2006,
respectively, and is included in the participation interest
liability in the accompanying condensed consolidated balance
sheets. The related expense for asset management and acquisition
fees of $11.0 million and $5.2 million for the nine
months ended September 30, 2007 and 2006, respectively, is
included in asset management and acquisition fees in the
accompanying condensed consolidated statements of operations.
The Company expensed asset management and acquisition fees of
$5.4 million and $1.4 million for the three months
ended September 30, 2007 and 2006, respectively.
7.
Changes
in Assets and Liabilities
The effect of changes in asset and liability accounts on cash
flows from operating activities for the nine months ended
September 30, 2007 and 2006 is as follows (in thousands):
2007
2006
Changes in assets and liabilities:
Increase in other assets
$
(940
)
$
(197
)
Increase in tenant and other receivables
(11,556
)
(2,927
)
Additions to deferred leasing costs
(6,300
)
(1,039
)
Increase in accounts payable and accrued expenses
6,043
1,994
Increase in participation interest liability
11,007
5,222
Increase (decrease) in other liabilities
1,876
(55
)
Increase in due to affiliates
1,747
512
Changes in assets and liabilities
$
1,877
$
3,510
8.
Supplemental
Cash Flow Disclosures
Supplemental cash flow disclosures for the nine months ended
September 30, 2007 and 2006 are as follows
(in thousands):
2007
2006
Cash paid for interest
$
31,722
$
9,878
Supplemental Schedule of Non-Cash Activities
Unpaid selling commissions and dealer manager fees
$
784
$
1,131
Deferred offering costs offset against additional
paid-in-capital
$
6,889
$
7,096
Distributions declared and unpaid
$
23,059
$
9,056
Distributions receivable
$
7,481
$
4,844
Distributions reinvested
$
24,849
$
8,023
Non-cash net liabilities acquired upon acquisition of property
$
11,831
$
9,253
Accrual of deferred financing costs
$
132
$
221
Assumption of mortgage upon acquisition of property
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
9.
Commitments
and Contingencies
On December 8, 2006, Norwegian Cruise Line (NCL) signed a
lease renewal for its space in Airport Corporate Center, an
office property located in Miami, Florida. In connection with
this renewal, the Company committed to funding approximately
$10.4 million of construction costs related to NCL’s
expansion and refurbishment of its space, which will be paid in
future periods. This amount has been recorded in deferred
leasing costs and accounts payable and accrued expenses in the
accompanying condensed consolidated balance sheets as of
December 31, 2006 and September 30, 2007.
10.
Subsequent
Events
One
Wilshire Mortgage Loan
On October 25, 2007, a subsidiary of the Operating
Partnership borrowed $159.5 million from The Prudential
Insurance Company of America pursuant to a Deed of Trust and
Security Agreement dated October 25, 2007 and a Promissory
Note dated October 25, 2007. The Loan is secured by a
mortgage and related security interests in One Wilshire, an
office property located in Los Angeles, California that the
Company acquired on August 1, 2007. The subsidiary of the
Operating Partnership that directly owns One Wilshire is the
borrower under the Loan Documents. The Loan matures on
November 1, 2012 and bears interest at a fixed annual rate
of 5.98%. Interest payments are due monthly, beginning on
December 1, 2007 through maturity.
KeyBank
Activity
From October 1, 2007 to November 9, 2007, the Company
repaid all amounts outstanding under its revolving credit
facility with KeyBank. No new borrowings were made under the
KeyBank facility during that period.
Shareholder
Redemption
In October 2007, in accordance with the Company’s share
redemption plan, the Company redeemed approximately 636,000
common shares and made corresponding payments totaling
$6.2 million to shareholders who had requested these
redemptions. The shares redeemed were cancelled and will have
the status of authorized, but unissued shares.
To the Board of Directors and Shareholders of
Hines Real Estate Investment Trust, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of
Hines Real Estate Investment Trust, Inc. and subsidiaries (the
“Company”) as of December 31, 2006 and 2005, and
the related consolidated statements of operations,
shareholders’ equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2006. Our
audits also included the financial statement schedule listed in
the Index at Item 36. These financial statements and
financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. 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
Hines Real Estate Investment Trust, Inc. and subsidiaries at
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three 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
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Preferred shares, $.001 par value; 500,000 preferred shares
authorized, none issued or outstanding as of December 31,2006 and 2005
—
—
Common shares, $.001 par value; 1,500,000 common shares
authorized as of December 31, 2006 and 2005; 80,217 and
23,046 common shares issued and outstanding as of
December 31, 2006 and 2005, respectively
80
23
Additional paid-in capital
692,780
199,846
Retained deficit
(50,275
)
(11,785
)
Total shareholders’ equity
642,585
188,084
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,213,662
$
297,334
See notes to the consolidated financial statements.
Hines Real Estate Investment Trust, Inc., a Maryland corporation
(“Hines REIT” and, together with its consolidated
subsidiaries, the “Company”), was formed on
August 5, 2003 under the General Corporation Law of the
state of Maryland for the purpose of engaging in the business of
investing in and owning interests in real estate. The Company
operates and intends to continue to operate in a manner to
qualify as a real estate investment trust (“REIT”) for
federal income tax purposes and elected to be taxed as a REIT in
connection with the filing of its 2004 federal income tax
return. The Company is structured as an umbrella partnership
REIT under which substantially all of the Company’s current
and future business is and will be conducted through a
majority-owned subsidiary, Hines REIT Properties, L.P. (the
“Operating Partnership”). Hines REIT is the sole
general partner of the Operating Partnership. Subject to certain
restrictions and limitations, the business of the Company is
managed by Hines Advisors Limited Partnership (the
“Advisor”), an affiliate of Hines Interests Limited
Partnership (“Hines”), pursuant to the advisory
agreement the Company entered into with the Advisor (the
“Advisory Agreement”).
Public
Offering
On June 18, 2004, Hines REIT commenced its initial public
offering, pursuant to which it offered a maximum of
220 million common shares for sale to the public (the
“Initial Offering”). The Initial Offering expired on
June 18, 2006. On June 19, 2006, the Company commenced
its current public offering (the “Current Offering”),
pursuant to which it is offering a maximum of $2.2 billion
in common shares.
The following table summarizes the activity from our offerings
for the years ended December 31, 2006, 2005 and 2004 (in
millions):
Amounts include $2.1 million of gross proceeds relating to
approximately 223,000 shares issued under our dividend
reinvestment plan.
(2)
Amounts include $13.5 million of gross proceeds relating to
approximately 1.4 million shares issued under our dividend
reinvestment plan.
As of December 31, 2006, approximately
$1,726.6 million in common shares remained available for
sale pursuant to our Current Offering, exclusive of
approximately $190.7 million in common shares available
under our dividend reinvestment plan.
Hines REIT contributes all net proceeds from its public
offerings to the Operating Partnership in exchange for
partnership units in the Operating Partnership. As of
December 31, 2006 and 2005, Hines REIT owned a 97.38% and
94.24%, respectively, general partner interest in the Operating
Partnership.
From January 1 through March 16, 2007, Hines REIT received
gross offering proceeds of approximately $138.8 million
from the sale of 13.4 million common shares, including
approximately $6.7 million relating to 674,000 shares
sold under Hines REIT’s dividend reinvestment plan. As of
March 16, 2007, 1,594.5 million common shares remained
available for sale to the public pursuant to the Offering,
exclusive of 184.0 million common shares available under
the dividend reinvestment plan.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Minority
Interests
Hines 2005 VS I LP, an affiliate of Hines, owned a 1.34% and
4.53% interest in the Operating Partnership as of
December 31, 2006 and 2005, respectively. As a result of
HALP Associates Limited Partnership’s (“HALP”)
ownership of the Participation Interest (see Note 6),
HALP’s percentage ownership in the Operating Partnership
was 1.28% and 1.23% as of December 31, 2006 and 2005,
respectively.
Investment
Property
As of December 31, 2006, the Company held direct and
indirect investments in 23 office properties located in
17 cities throughout the United States. The Company’s
interests in 15 of these properties are owned indirectly through
the Company’s investment in the Core Fund (as defined in
Note 3). As of December 31, 2006 and 2005, the Company
owned an approximate 34.0% and 26.2% non-managing general
partner interest in the Core Fund, respectively. See further
discussion in Note 3.
On January 3, 2007, the Company acquired a direct
investment in an office complex located in Redmond, Washington
and on February 26, 2007, the Company acquired a direct
investment in a mixed-use office and retail complex located in
Toronto, Canada (see Note 10).
2.
Summary
of Significant Accounting Policies
Basis
of Presentation
The consolidated financial statements of the Company included in
this registration statement include the accounts of Hines REIT,
the Operating Partnership (over which Hines REIT exercises
financial and operating control) and the Operating
Partnership’s wholly-owned subsidiaries (see Note 3),
as well as the related amounts of minority interest. All
intercompany balances and transactions have been eliminated in
consolidation.
The Company evaluates the need to consolidate joint ventures
based on standards set forth in FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities
“FIN 46” and American Institute of Certified
Public Accountants’ Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures, as
amended by Emerging Issues Task Force
04-5,
“Investor’s Accounting for an Investment in a
Limited Partnership When the Investor Is the Sole General
Partner and the Limited Partners Have Certain Rights. In
accordance with this accounting literature, the Company will
consolidate joint ventures that are determined to be variable
interest entities for which it is the primary beneficiary. The
Company will also consolidate joint ventures that are not
determined to be variable interest entities, but for which it
exercises significant control over major operating decisions,
such as approval of budgets, selection of property managers,
asset management, investment activity and changes in financing.
As of December 31, 2006, the Company has no unconsolidated
interests in joint ventures, other than its interest in the Core
Fund.
Reportable
Segments
The Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standards
(“SFAS”) No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes
standards for reporting financial and descriptive information
about an enterprise’s reportable segments. The Company has
determined that it has one reportable segment, with activities
related to investing in office properties. The Company’s
investments in real estate generate rental revenue and other
income through the leasing of office properties, which
constituted 100% of the Company’s total consolidated
revenues for the year ended December 31, 2006. The
Company’s investments in real estate are geographically
diversified and management evaluates operating performance on an
individual property level. However, as each of the
Company’s office properties has similar economic
characteristics, tenants, and products and services, the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company’s office properties have been aggregated into one
reportable segment for the years ended December 31, 2006,
2005 and 2004.
Investment
Property
Real estate assets we own directly are stated at cost less
accumulated depreciation, which in the opinion of management,
does not exceed the individual property’s fair value.
Depreciation is computed using the straight-line method. The
estimated useful lives for computing depreciation are generally
10 years for furniture and fixtures,
15-20 years
for electrical and mechanical installations and 40 years
for buildings. Major replacements that extend the useful life of
the assets are capitalized. Maintenance and repair costs are
expensed as incurred.
Real estate assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of
the individual property may not be recoverable. In such an
event, a comparison will be made of the current and projected
operating cash flows of each property on an undiscounted basis
to the carrying amount of such property. Such carrying amount
would be adjusted, if necessary, to estimated fair values to
reflect impairment in the value of the asset. At
December 31, 2006, management believes no such impairment
has occurred.
Acquisitions of properties are accounted for utilizing the
purchase method and, accordingly, the results of operations of
acquired properties are included in our results of operations
from their respective dates of acquisition. Estimates of future
cash flows and other valuation techniques that we believe are
similar to those used by independent appraisers are used to
allocate the purchase price of acquired property between land,
buildings and improvements, equipment and identifiable
intangible assets and liabilities such as amounts related to
in-place leases, acquired above- and below-market leases, tenant
relationships, asset retirement obligations and mortgage notes
payable. Initial valuations are subject to change until such
information is finalized no later than 12 months from the
acquisition date.
The estimated fair value of acquired in-place leases are the
costs we would have incurred to lease the properties to the
occupancy level of the properties at the date of acquisition.
Such estimates include the fair value of leasing commissions,
legal costs and other direct costs that would be incurred to
lease the properties to such occupancy levels. Additionally, we
evaluate the time period over which such occupancy levels would
be achieved and include an estimate of the net market-based
rental revenues and net operating costs (primarily consisting of
real estate taxes, insurance and utilities) that would be
incurred during the
lease-up
period. Acquired in-place leases as of the date of acquisition
are amortized over the remaining lease terms.
Acquired above-and below-market lease values are recorded based
on the present value (using an interest rate that reflects the
risks associated with the lease acquired) of the difference
between the contractual amounts to be paid pursuant to the
in-place leases and management’s estimate of fair market
value lease rates for the corresponding in-place leases,
measured. The capitalized above- and below-market lease values
are amortized as adjustments to rental revenue over the
remaining non-cancelable terms of the respective leases. Should
a tenant terminate its lease, the unamortized portion of the
in-place lease value is charged to amortization expense and the
unamortized portion of out-of-market lease value is charged to
rental revenue.
Management estimates the fair value of assumed mortgage notes
payable based upon indications of current market pricing for
similar types of debt with similar maturities. Assumed mortgage
notes payable are initially recorded at their estimated fair
value as of the assumption date, and the difference between such
estimated fair value and the note’s outstanding principal
balance is amortized over the life of the mortgage note payable.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash
and Cash Equivalents
The Company considers all short-term, highly liquid investments
that are readily convertible to cash with an original maturity
of three months or less at the time of purchase to be cash
equivalents.
Restricted
Cash
As of December 31, 2006, the Company had restricted cash of
approximately $2.5 million related to certain escrows
required by one of our mortgage agreements.
Deferred
Leasing Costs
Direct leasing costs, primarily consisting of third-party
leasing commissions and tenant inducements, are capitalized and
amortized over the life of the related lease. Tenant inducement
amortization is recorded as an offset to rental revenue and the
amortization of other direct leasing costs is recorded in
amortization expense.
The Company commences revenue recognition on its leases based on
a number of factors. In most cases, revenue recognition under a
lease begins when the lessee takes possession of or controls the
physical use of the leased asset. Generally, this occurs on the
lease commencement date. The determination of who is the owner
of the tenant improvements for accounting purposes, determines
the nature of the leased asset and when revenue recognition
under a lease begins. If the Company is the owner of the tenant
improvements for accounting purposes, then the leased asset is
the finished space and revenue recognition begins when the
lessee takes possession of the finished space, typically when
the improvements are substantially complete. If the Company
concludes the lessee is the owner of the tenant improvements for
accounting purposes, then the leased asset is the unimproved
space and any tenant improvement allowances funded under the
lease are treated as lease incentives which reduce revenue
recognized over the term of the lease. In these circumstances,
the Company begins revenue recognition when the lessee takes
possession of the unimproved space to construct their own
improvements. The Company considers a number of different
factors to evaluate whether it or the lessee is the owner of the
tenant improvements for accounting purposes. These factors
include: 1) whether the lease stipulates how and on what a
tenant improvement allowance may be spent; 2) whether the
tenant or landlord retains legal title to the improvements;
3) the uniqueness of the improvements; 4) the expected
economic life of the tenant improvements relative to the length
of the lease; and 5) who constructs or directs the
construction of the improvements.
The determination of who owns the tenant improvements for
accounting purposes is subject to significant judgment. In
making that determination, the Company considers all of the
above factors. No one factor, however, necessarily establishes
our determination.
Tenant inducement amortization was approximately $685,000 and
$81,000 for the years ended December 31, 2006 and 2005,
respectively, and was recorded as an offset to rental revenue.
In addition, the Company recorded approximately $137,000 as
amortization expense related to other direct leasing costs for
the year ended December 31, 2006. There was no amortization
expense related to other direct leasing costs for the years
ended December 31, 2005 and 2004.
During the year ended December 31, 2006, the Company
entered into two forward interest rate swap transactions with
HSH Nordbank AG, New York Branch (“HSH Nordbank”).
Both swap transactions were entered into as economic hedges
against the variability of future interest rates on the
Company’s variable interest rate borrowings with HSH
Nordbank.
The first swap transaction had a notional amount of
$185.0 million, a
10-year
term, and was effective on August 1, 2006. This agreement
has effectively fixed the interest rate at 5.8575% for the
$185.0 million in
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
borrowings under the credit facility with HSH Nordbank that
closed August 1, 2006. See Note 4 for additional
information.
The second swap transaction had a notional amount of
$98.0 million, a
10-year
term, and was effective on January 12, 2007 (as amended).
This agreement has effectively fixed the interest rate at
5.2505% for the $98.0 million borrowing under the credit
facility with HSH Nordbank that closed January 23, 2007.
See Note 10 for additional information.
The Company has not designated either of these contracts as cash
flow hedges for accounting purposes. The interest rate swaps
have been recorded at their estimated fair value in the
accompanying consolidated balance sheet as of December 31,2006. The loss resulting from the decrease in the fair value of
the interest rate swaps for the year ended December 31,2006 of approximately $5.3 million, which includes fees of
$862,000 incurred upon entering into these swap transactions,
has been recorded in loss on interest rate swap contract in the
consolidated statements of operations for the year ended
December 31, 2006.
The Company will mark the interest rate swap contracts to their
estimated fair value as of each balance sheet date, and the
changes in fair value will be reflected in the consolidated
statements of operations.
Deferred
Financing Costs
Deferred financing costs as of December 31, 2006 and 2005
consist of direct costs incurred in obtaining debt financing
(see Note 4). These costs are being amortized into interest
expense on a straight-line basis, which approximates the
effective interest method, over the terms of the obligations.
For the years ended December 31, 2006 and 2005,
approximately $967,000 and $470,000, respectively, was amortized
and recorded in interest expense in the accompanying
consolidated statements of operations.
Other
Assets
Other assets primarily consists of prepaid insurance, earnest
money deposits paid in connection with future acquisitions and
capitalized acquisition costs that have not yet been applied to
investments in real estate assets. Other assets will be
amortized to expense or reclassified to other asset accounts
upon being put into service in future periods. Other assets
includes the following:
Unaccepted subscriptions for common shares includes proceeds
related to subscriptions which had not been accepted by the
Company as of December 31, 2006 and 2005.
Organizational and offering costs related to the Initial Offering
$
—
$
6,900
Organizational and offering costs related to the Current Offering
4,992
1,478
Dealer manager fees and selling commissions
885
1,108
Asset management, acquisition fees and property-level fees and
reimbursements
3,077
325
General, administrative and other expenses
—
1,045
Total
$
8,954
$
10,856
As discussed in Note 6 below, the Advisor and its
affiliates have advanced or paid on behalf of the Company
certain expenses incurred in connection with the Company’s
administration and ongoing operations. During the year ended
December 31, 2005, the Advisor forgave amounts due from the
Company totaling approximately $1.7 million related to
amounts previously advanced to the Company to cover certain
corporate-level general and administrative expenses. This
transaction is included in forgiveness of related party payable
in the accompanying statement of operations for the year ended
December 31, 2005.
Organizational
and Offering Costs
Initial
Offering
Certain organizational and offering costs associated with the
Initial Offering were paid by the Advisor on behalf of the
Company. Pursuant to the Advisory Agreement among Hines REIT,
the Operating Partnership and the Advisor during the Initial
Offering, the Company was obligated to reimburse the Advisor in
an amount equal to the lesser of actual organizational and
offering costs incurred related to the Initial Offering or 3.0%
of the gross proceeds raised from the Initial Offering.
As of December 31, 2006, 2005 and 2004, the Advisor had
incurred on behalf of the Company organizational and offering
costs related to the Initial Offering of approximately
$43.3 million, $36.8 million and $24.0 million,
respectively (of which approximately $23.0 million,
$20.4 million, and $14.8 million as of
December 31, 2006, 2005 and 2004, respectively, relates to
the Advisor or its affiliates). These amounts include
approximately $24.2 million, $21.3 million and
$14.8 million as of December 31, 2006, 2005 and 2004,
respectively, of organizational and internal offering costs, and
approximately $19.1 million, $15.5 million and
$9.2 million as of December 31, 2006, 2005 and 2004,
respectively, of third-party offering costs, such as legal and
accounting fees and printing costs.
As described above, the Company’s obligation to reimburse
the Advisor for organizational and offering costs related to the
Initial Offering was limited by the amount of gross proceeds
raised from the sale of the Company’s common shares in the
Initial Offering. Amounts of organizational and offering costs
recorded in the Company’s financial statements in periods
ending on or before June 30, 2006 were based on estimates
of gross proceeds to be raised through the end of the Initial
Offering period. Such estimates were based on highly subjective
factors including the number of retail broker-dealers signing
selling agreements with the Company’s Dealer Manager, Hines
Real Estate Securities, Inc. (“HRES” or the
“Dealer Manager”), anticipated market share
penetration in the retail broker-dealer network and the Dealer
Manager’s best estimate of the growth rate in sales.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Based on actual gross proceeds raised in the Initial Offering,
the total amount of organizational and offering costs the
Company was obligated to reimburse the Advisor related to the
Initial Offering is approximately $16.0 million. As a
result of amounts recorded in prior periods, during the year
ended December 31, 2006, organizational and internal
offering costs related to the Initial Offering totaling
approximately $1.0 million incurred by the Advisor were
expensed and included in the accompanying consolidated
statements of operations and third-party offering costs related
to the Initial Offering of approximately $2.0 million were
offset against additional paid-in capital in the accompanying
consolidated statement of shareholders’ equity (deficit).
During the year ended December 31, 2006, organizational and
internal offering costs related to the Initial Offering totaling
approximately $1.9 million and third-party offering costs
related to the Initial Offering totaling approximately
$1.5 million were incurred by the Advisor but were not
recorded in the consolidated condensed financial statements
because the Company will not be obligated to reimburse the
Advisor for these costs.
For the year ended December 31, 2005, organizational and
internal offering costs related to the Initial Offering of
approximately $1.5 million were expensed and included in
the accompanying consolidated statement of operations, and
third-party offering costs of approximately $1.1 million
were offset against additional paid-in capital on the
accompanying consolidated statement of shareholders’ equity
(deficit). For the year ended December 31, 2005,
organizational and offering costs related to the Initial
Offering totaling approximately $10.2 million incurred by
the Advisor (including approximately $5.0 million of
organizational and internal offering costs and approximately
$5.2 million of third-party offering costs) were not
recorded in the accompanying consolidated financial statements
because management determined that the Company would not be
obligated to reimburse the Advisor for these costs.
Current
Offering
The Company commenced the Current Offering on June 19,2006. Certain organizational and offering costs associated with
the Current Offering have been paid by the Advisor on the
Company’s behalf. Pursuant to the terms of the Advisory
Agreement, the Company is obligated to reimburse the Advisor in
an amount equal to the amount of actual organizational and
offering costs incurred, so long as such costs, together with
selling commissions and dealer manager fees, do not exceed 15%
of gross proceeds from the Current Offering. As of
December 31, 2006 and 2005, the Advisor had incurred on the
Company’s behalf organizational and offering costs in
connection with the Current Offering of approximately
$12.6 million and $1.5 million, respectively (of
which approximately $4.7 million and $256,000,
respectively relates to the Advisor or its affiliates). These
amounts include approximately $4.7 million and $256,000 of
internal offering costs, which have been expensed in the
accompanying consolidated statements of operations for the years
ended December 31, 2006 and 2005, respectively.
Approximately $7.6 million of third-party offering costs
for the years ended December 31, 2006 have been offset
against net proceeds of the Current Offering within additional
paid-in capital.
Revenue
Recognition
The Company recognizes rental revenue on a straight-line basis
over the life of the lease including rent holidays, if any.
Straight-line rent receivable in the amount of approximately
$3.4 million and $277,000 as of December 31, 2006 and
2005, respectively, consisted of the difference between the
tenants’ rents calculated on a straight-line basis from the
date of acquisition or lease commencement over the remaining
terms of the related leases and the tenants’ actual rents
due under the lease agreements. Revenues associated with tenant
reimbursements are recognized in the period in which the
expenses are incurred based upon the tenant lease provision.
Revenues relating to lease termination fees are recognized at
the time that a tenant’s right to occupy the space is
terminated and when the Company has satisfied all obligations
under the agreement. There was no rental revenue for the year
ended December 31, 2004 as the Company did not own a direct
interest in any properties during that period.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock-based
Compensation
Under the terms of the Employee and Director Incentive Share
Plan, the Company grants each independent member of its board of
directors 1,000 restricted shares of common stock annually. The
restricted shares granted each year fully vest upon completion
of each director’s annual term. In accordance with the
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (as amended), the Company
recognizes the expense related to these shares over the vesting
period. During each of the years ended December 31, 2006,
2005 and 2004, the Company granted 3,000 restricted shares of
common stock to its independent board members. For the years
ended December 31, 2006, 2005 and 2004, the Company
amortized approximately $31,000, $40,000 and $6,000 of related
compensation expense, respectively. Such amounts are included in
general and administrative expenses in the accompanying
consolidated statements of operations.
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, that addresses the accounting for
share-based payment transactions in which an enterprise receives
services in exchange for either equity instruments of the
enterprise or liabilities that are based on the fair value of
the enterprise’s equity instruments or that may be settled
by the issuance of such equity instruments. The statement
eliminates the ability to account for share-based compensation
transactions using the intrinsic value method as prescribed by
Accounting Principles Board, (“APB”), Opinion
No. 25, Accounting for Stock Issued to Employees,
and generally requires that such transactions be accounted
for using a fair-value-based method and recognized as expenses
in the Company’s consolidated statement of income. The
standard requires that the modified prospective method be used,
which requires that the fair value of new awards granted from
the beginning of the period of adoption (plus unvested awards at
the date of adoption) be expensed over the vesting period. The
statement requires companies to assess the most appropriate
model to calculate the value of the options. The Company
adopted this standard on January 1, 2006 and the adoption
of this statement did not have a material impact on the
Company’s consolidated financial statements.
Income
Taxes
Hines REIT made an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the “Code”), beginning with its
taxable year ended December 31, 2004. In addition, as of
December 31, 2006 and 2005the Company owned an investment
in the Core Fund, which has invested in properties through other
entities that have elected to be taxed as REITs. Hines
REIT’s management believes that the Company and the
applicable entities in the Core Fund are organized and operate
in such a manner as to qualify for treatment as REITs and intend
to operate in the foreseeable future in such a manner so that
they will remain qualified as REITs for federal income tax
purposes. Accordingly, no provision has been made for federal
income taxes for the years ended December 31, 2006, 2005
and 2004 in the accompanying consolidated financial statements.
During 2006, the state of Texas enacted new tax legislation that
restructures the state business tax in Texas by replacing the
taxable capital and earned surplus components of the current
franchise tax with a new “margin tax,” which for
financial reporting purposes is considered an income tax under
SFAS No. 109, Accounting for Income Taxes. The
Company believes the impact of this legislation was not material
to the Company for the year ended December 31, 2006.
Accordingly, it has not recorded deferred income taxes in its
accompanying consolidated financial statements for the year
ended December 31, 2006.
Per
Share Data
Loss per common share is calculated by dividing the net loss for
each period by the weighted average number of common shares
outstanding during such period. Loss per common share on a basic
and diluted basis are the same because the Company has no
potential dilutive common shares outstanding.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fair
Value of Financial Instruments
Disclosure about the fair value of financial instruments is
based on pertinent information available to management as of
December 31, 2006 and 2005. Considerable judgment is
necessary to interpret market data and develop estimated fair
values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could obtain
on disposition of the financial instruments. The use of
different market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
As of December 31, 2006 and 2005, management estimated that
the carrying value of cash and cash equivalents, restricted
cash, distributions receivable, accounts receivable, accounts
payable and accrued expenses, distributions payable and notes
payable were recorded at amounts which reasonably approximated
fair value. Excluding notes payable, the primary factor in
determining the fair value of the financial statement items
listed above was the short-term nature of the items. The fair
value of notes payable was determined based upon interest rates
available for the issuance of debt with similar terms and
maturities.
Recent
Accounting Pronouncements
In June 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes — an Interpretation of
FASB Statement No. 109, which clarifies the accounting
for uncertainty in tax positions. FIN 48 requires the
Company to recognize in its financial statements the impact of a
tax position, if the position is more likely than not of being
sustained on audit, based on the technical merits of the
position. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The Company has assessed the
potential impact of FIN 48 and does not anticipate its
adoption will have a material impact on its financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements. The
statement does not require new fair value measurements, but is
applied to the extent other accounting pronouncements require or
permit fair value measurements. The statement emphasizes fair
value as a market-based measurement which should be determined
based on assumptions market participants would use in pricing an
asset or liability. The Company will be required to disclose the
extent to which fair value is used to measure assets and
liabilities, the inputs used to develop the measurements, and
the effect of certain of the measurements on earnings (or
changes in net assets) for the period. SFAS No. 157 is
effective for fiscal years beginning after September 30,2007. Management does not anticipate the adoption of this
statement will have a material impact on the Company’s
financial position, results of operations or cash flows.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 expands opportunities to
use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and
certain other items at fair value. This Statement is effective
for fiscal years beginning after September 30, 2007.
Management has not decided if it will early adopt
SFAS No. 159 or if it will choose to measure any
eligible financial assets and liabilities at fair value.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
3.
Real
Estate Investments
The following table provides summary information regarding the
properties in which the Company owned interests as of
December 31, 2006. All assets which are 100% owned by the
Company are referred to as “directly-owned
properties”. All other properties are owned indirectly
through the Company’s investment in the Core Fund as
discussed below.
Leasable
Percent
Our Effective
Property
City
Square Feet
Leased
Ownership(1)
(Unaudited)
(Unaudited)
321 North Clark
Chicago, Illinois
885,664
94
%
100
%
Citymark
Dallas, Texas
218,096
100
%
100
%
Watergate Tower IV
Emeryville, California
344,433
100
%
100
%
Airport Corporate Center
Miami, Florida
1,018,627
95
%
100
%
3400 Data Drive
Rancho Cordova, California
149,703
100
%
100
%
Daytona Buildings
Redmond, Washington
250,515
100
%
100
%
1515 S Street
Sacramento, California
348,881
100
%
100
%
1900 and 2000 Alameda
San Mateo, California
253,377
75
%
100
%
Total for Directly-Owned Properties
3,469,296
95
%
One Atlantic Center
Atlanta, Georgia
1,100,312
82
%
30.95
%
Three First National Plaza
Chicago, Illinois
1,419,079
92
%
24.76
%
333 West Wacker
Chicago, Illinois
845,247
90
%
24.70
%
One Shell Plaza
Houston, Texas
1,228,160
97
%
15.47
%
Two Shell Plaza
Houston, Texas
566,960
94
%
15.47
%
425 Lexington Avenue
New York, New York
700,034
100
%
13.81
%
499 Park Avenue
New York, New York
288,184
100
%
13.81
%
600 Lexington Avenue
New York, New York
281,072
100
%
13.81
%
Riverfront Plaza
Richmond, Virginia
949,873
99
%
30.95
%
525 B Street
San Diego, California
447,159
89
%
30.95
%
The KPMG Building
San Francisco, California
379,328
96
%
30.95
%
101 Second Street
San Francisco, California
388,370
99
%
30.95
%
720 Olive Way
Seattle, Washington
300,710
82
%
24.70
%
1200 19th Street
Washington, D.C.
234,718
100
%
13.81
%
Warner Center
Woodland Hills, California
808,274
98
%
24.70
%
Total for Core Fund Properties
9,937,480
94
%
Total for All Properties
13,406,776
94
%
(1)
This percentage shows the effective ownership of the Operating
Partnership in the properties listed. On December 31, 2006,
Hines REIT owned a 97.38% interest in the Operating Partnership
as its sole general partner. Affiliates of Hines owned the
remaining 2.62% interest in the Operating Partnership. We own
interests in all of the properties other than those identified
above as being owned 100% by us through our interest in the Core
Fund, in which we owned an approximate 34.0% non-managing
general partner interest as of December 31, 2006. The Core
Fund does not own 100% of these buildings; its ownership
interest in its buildings ranges from 40.6% to 91.0%.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Direct
real estate investments
Summarized below is certain information about the eight office
properties the Company owned directly as of December 31,2006:
Date Built/
Market
Property
Date Acquired
Renovated(1)
(Unaudited)
San Mateo, California
1900 and 2000 Alameda
June 2005
1983,1996
(2)
Dallas, Texas
Citymark
August 2005
1987
Sacramento, California
1515 S Street
November 2005
1987
Miami, Florida
Airport Corporate Center
January 2006
1982-1996
(3)
Chicago, Illinois
321 North Clark
April 2006
1987
Rancho Cordova, California
3400 Data Drive
November 2006
1990
Emeryville, California
Watergate Tower IV
December 2006
2001
Redmond, Washington
Daytona Buildings
December 2006
2002
(1)
The date shown reflects the later of the building’s
construction completion date or the date of the building’s
most recent renovation.
(2)
1900 Alameda was constructed in 1971 and substantially renovated
in 1996; 2000 Alameda was constructed in 1983.
(3)
Airport Corporate Center consists of 11 buildings constructed
between 1982 and 1996 and a 5.46-acre land development site.
On February 26, 2007, the Company acquired Atrium on Bay, a
mixed-use office and retail complex located in the Downtown
North submarket of the central business district of Toronto,
Canada. See Note 10 for additional information.
As of December 31, 2006, amounts of related accumulated
depreciation and amortization were as follows
(in thousands):
Acquired
Acquired
Buildings and
In-Place
Above-Market
Below-Market
Improvements
Leases
Leases
Leases
Cost
$
519,843
$
137,344
$
40,267
$
19,046
Less: accumulated depreciation and amortization
(7,882
)
(16,579
)
(3,853
)
(3,232
)
Net
$
511,961
$
120,765
$
36,414
$
15,814
As of December 31, 2005, amounts of related accumulated
depreciation and amortization were as follows
(in thousands):
Acquired
Acquired
Buildings and
In-Place
Above-Market
Below-Market
Improvements
Leases
Leases
Leases
Cost
$
80,000
$
28,490
$
16,208
$
9,075
Less: accumulated depreciation and amortization
(539
)
(2,791
)
(1,108
)
(356
)
Net
$
79,461
$
25,699
$
15,100
$
8,719
Amortization expense for the years ended December 31, 2006
and 2005 was approximately $15.0 million and
$2.8 million, respectively, for in-place leases and
$263,000 and $752,000, respectively, for out-of-market
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
leases, net. The weighted average lease life of in-place and
out-of-market leases at December 31, 2006 and 2005 was
6 years and 7 years, respectively.
Anticipated amortization of in-place and out-of-market leases,
net, for each of the following five years ended December 31 is
as follows (in thousands):
In-Place
Out-of-Market
Leases
Leases, Net
2007
$
22,066
$
1,932
2008
20,439
2,074
2009
19,128
2,308
2010
13,621
1,924
2011
11,974
1,596
In connection with its direct investments, the Company has
entered into non-cancelable lease agreements with tenants for
office space. As of December 31, 2006, the approximate
fixed future minimum rentals for each of the years ending
December 31, 2007 through 2011 and thereafter were as
follows:
Fixed Future
Minimum Rentals
(In thousands)
2007
$
72,084
2008
67,021
2009
64,926
2010
49,351
2011
43,924
Thereafter
140,860
Total
$
438,166
Approximately 10% of the rental revenue recognized during the
year ended December 31, 2006 was earned from a state
government agency, whose leases representing 10% of their space
expire in October 2012 and whose remaining space expires in
April 2013. No other tenant leased space representing more than
10% of the total rental revenue of the Company for the year
ended December 31, 2006.
Investment
in Hines-Sumisei U.S. Core Office Fund, L.P.
The Core Fund is a partnership organized in August 2003 by Hines
to invest in existing office properties in the United States
that Hines believes are desirable long-term holdings. During the
year ended December 31, 2005, the Company acquired
interests in the Core Fund totaling approximately
$99.9 million, including purchases of approximately
$81.5 million that were acquired from affiliates of Hines.
The Company had invested $128.2 million and owned an
approximate 26.2% non-managing general partner interest in the
Core Fund as of December 31, 2005. During the year ended
December 31, 2005, the Core Fund acquired controlling
interests in two additional properties located in Chicago,
Illinois and San Diego, California. As of December 31,2005, the Core Fund had controlling interests in ten properties
located in New York City, Washington, D.C., Houston, Texas,
San Francisco, California, Chicago, Illinois and
San Diego, California.
During the year ended December 31, 2006, the Company
acquired additional interests in the Core Fund totaling
approximately $209.3 million. The Company owned an
approximate 34.0% non-managing general partner interest in the
Core Fund as of December 31, 2006. During the year ended
December 31, 2006, the Core Fund acquired controlling
interests in five additional properties located in Chicago,
Illinois, Seattle, Washington, Atlanta, Georgia, Los Angeles,
California and Richmond, Virginia.
Of the total rental revenue of the Core Fund for the year ended
December 31, 2006, approximately:
•
11% was earned from two affiliated tenants in the oil and gas
industry, whose leases expire on December 31, 2015; and
•
36% was earned from several tenants in the legal services
industry, whose leases expire at various times during the years
2007 through 2027.
4.
Debt
Financing
Revolving
Credit Facility with KeyBank National Association
The Company is party to a credit agreement with KeyBank National
Association (“KeyBank”), as administrative agent for
itself and various other lenders named in the credit agreement,
which provides for a revolving credit facility (the
“Revolving Credit Facility”) with maximum aggregate
borrowing capacity of up to $250.0 million.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company established this facility to repay certain bridge
financing incurred in connection with certain of its
acquisitions and to provide a source of funds for future real
estate investments and to fund its general working capital needs.
The Revolving Credit Facility has a maturity date of
October 31, 2009, which is subject to extension at the
election of the Company for two successive periods of one year
each, subject to specified conditions. The Company may increase
the amount of the facility to a maximum of $350.0 million
upon written notice prior to May 8, 2008, subject to
KeyBank’s ability to syndicate the additional amount. The
facility allows, at the election of the Company, for borrowing
at a variable rate or a LIBOR-based rate plus a spread ranging
from 125 to 200 basis points based on prescribed leverage
ratios. The weighted-average interest rate on outstanding
borrowings was 6.73% and 6.22% as of December 31, 2006 and
2005.
In addition to customary covenants and events of default, the
Revolving Credit Facility provides that it shall be an event of
default under the agreement if the Company’s Advisor ceases
to be controlled by Hines or if Hines ceases to be
majority-owned and controlled, directly or indirectly, by
Jeffrey C. Hines or certain members of his family. The amounts
outstanding under this facility are secured by a pledge of the
Operating Partnership’s equity interests in entities that
directly or indirectly hold real property assets, including the
Company’s interest in the Core Fund, subject to certain
limitations and exceptions. The Company has entered into a
subordination agreement with Hines and the Advisor, which
provides that the rights of Hines and the Advisor to be
reimbursed by the Company for organizational and offering and
other expenses are subordinate to the Company’s obligations
under the Revolving Credit Facility.
On September 9, 2005, the Company made its initial
borrowing of $56.3 million under the Revolving Credit
Facility to retire its term loan agreement with KeyBank, which
was used to complete the acquisitions of 1900 and 2000 Alameda
and Citymark. Additionally, it made borrowings totaling
$84.3 million to complete the acquisition of
1515 S Street and to fund a capital contribution to
the Core Fund. For the period from September 9, 2005
through December 31, 2005, the Company used proceeds from
its public offering to make repayments under the Revolving
Credit Facility totaling $65.7 million and the remaining
principal amount due under this obligation as of
December 31, 2005 was $74.9 million.
During the year ended December 31, 2006, the Company
incurred borrowings of $410.2 million under the Revolving
Credit Facility to complete several property acquisitions and to
fund capital contributions to the Core Fund. During the year
ended December 31, 2006, the Company used proceeds from its
public offerings, proceeds from a mortgage loan secured by
1515 S Street and proceeds from a credit facility with
HSH Nordbank (see below) to make repayments under the Revolving
Credit Facility totaling $323.1 million and the remaining
principal amount due under this obligation as of
December 31, 2006 was $162.0 million. In addition, the
Company has an outstanding letter of credit under its Revolving
Credit Facility totaling approximately $336,000 at
December 31, 2006 for a utility deposit at one of its
directly-owned properties. As of December 31, 2006, the
Company has complied with all covenants stipulated by the
Revolving Credit Facility agreement.
From January 1, 2007 through March 16, 2007, the
Company incurred borrowings totaling $112.7 million under
the Revolving Credit Facility in connection with the acquisition
of the Laguna Buildings on January 3, 2007 and other
working capital needs. The Company used proceeds from the
Current Offering to make repayments totaling
$142.0 million, and the remaining principal amount due
under this obligation was $132.7 million as of
March 16, 2007.
Debt
Secured by Investment Property
In connection with the acquisition of Airport Corporate Center,
on January 31, 2006the Company assumed a mortgage loan
with Wells Fargo Bank, N.A., as trustee for the registered
holders of certain commercial mortgage pass-through
certificates, in the principal amount of $91.0 million. The
loan bears interest at a fixed rate of 4.775%
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
per annum, is payable on March 11, 2009 and is secured by
Airport Corporate Center. The mortgage agreement contains
customary events of default, with corresponding grace periods,
including payment defaults, cross-defaults to other agreements
and bankruptcy-related defaults, and customary covenants,
including limitations on the incurrence of debt and granting of
liens and the maintenance of certain financial ratios. The
Company executed a customary recourse carve-out guaranty of
certain obligations under the mortgage agreement and the other
loan documents. At the date of acquisition, management estimated
the fair value of the assumed mortgage note payable to be
approximately $88.5 million, which included a premium of
approximately $2.5 million. This premium is being amortized
over the life of the mortgage note payable and the amortization
is included in interest expense in the accompanying consolidated
condensed statements of operations.
On April 18, 2006, the Company entered into a mortgage
agreement with Metropolitan Life Insurance Company in the
principal amount of $45.0 million. The loan bears interest
at a fixed rate of 5.68% per annum, matures and becomes payable
on May 1, 2011 and is secured by 1515 S Street.
The mortgage agreement contains customary events of default,
with corresponding grace periods, including payment defaults,
cross-defaults to other agreements and bankruptcy-related
defaults, and customary covenants, including limitations on
liens and indebtedness and maintenance of certain financial
ratios. The Company has executed a customary recourse carve-out
guaranty of certain obligations under the mortgage agreement and
the other loan documents.
In connection with the acquisition of 321 North Clark, on
April 24, 2006, the subsidiary of the Operating Partnership
that acquired 321 North Clark entered into a term loan agreement
with KeyBank to provide bridge financing in the principal amount
of $165.0 million. On August 2, 2006, the Company paid
this loan in full with proceeds received from the Company’s
credit agreement with HSH Nordbank, which is described below,
and terminated the term loan agreement.
On August 1, 2006, certain of the Company’s
subsidiaries entered into a credit agreement with HSH Nordbank,
as administrative agent for itself and the other lenders named
in the credit agreement, which provides a secured credit
facility in the maximum principal amount of $500.0 million,
subject to certain borrowing limitations (the “HSH Credit
Facility”). The total borrowing capacity under this credit
facility is based upon a percentage of the appraised values of
the properties that the Operating Partnership selects to serve
as collateral. On August 1, 2006, the borrowers under the
loan documents borrowed approximately $185.0 million under
the HSH Credit Facility to repay amounts owed under the
Operating Partnership’s then existing term loan and the
Credit Facility and to pay certain fees and expenses related to
the HSH Credit Facility. The loans under the HSH Credit Facility
are secured initially by mortgages or deeds of trust and related
assignments and security interests on three properties: 321
North Clark in Chicago, Illinois, Citymark in Dallas, Texas and
1900 and 2000 Alameda in San Mateo, California. The
subsidiaries of the Operating Partnership that own such
properties are the borrowers under the loan documents. The
Operating Partnership has and may continue, at its election, to
pledge newly acquired properties as security under the HSH
Credit Facility for additional borrowings.
The initial $185.0 million borrowing has a term of ten
years and bears interest at a variable rate, as described below.
The effective fixed interest rate on such borrowing is 5.8575%
as a result of an interest rate swap agreement the Operating
Partnership entered into with HSH Nordbank on August 1,2006. Future borrowings under the HSH Credit Facility must be
drawn, if at all, between August 1, 2006 and July 31,2009, and undrawn amounts will be subject to an unused facility
fee of 0.15% per annum on the average daily outstanding undrawn
loan amount during this period. For amounts drawn on the HSH
Credit Facility after August 1, 2006, the Operating
Partnership may select terms of five, seven or 10 years for
the applicable borrowings. The outstanding balance of these
loans will bear interest at a rate equal to: one-month LIBOR,
plus an applicable margin of (1) 0.40% for amounts funded
before August 1, 2007 that have
10-year
terms, and (2) 0.45% for all other borrowings and
maturities. The Operating Partnership is required to purchase
interest rate protection prior to borrowing any additional
amounts under this facility, the effect of which is to
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
secure it against fluctuations of LIBOR. The loans made under
the HSH Credit Facility allow for prepayment, in whole or in
part, subject to certain prepayment fees and breakage costs.
In connection with the closing of the HSH Credit Facility, the
Operating Partnership provided customary non-recourse carve-out
guarantees. Hines REIT also made certain limited guarantees with
respect to the payment and performance of (1) specified
tenant improvement and leasing commission obligations in the
event the properties securing the loan fail to meet certain
occupancy requirements and (2) specified major capital
repairs with respect to the properties securing the loans.
The HSH Credit Facility provides that an event of default will
exist under the agreement if a change in majority ownership or
control occurs for the Advisor or Hines, or if the Advisor no
longer provides advisory services or manages the day-to-day
operations of Hines REIT. The HSH Credit Facility also contains
other customary events of default, some with corresponding cure
periods, including, without limitation, payment defaults,
cross-defaults to other agreements evidencing indebtedness and
bankruptcy-related defaults, and customary covenants, including
limitations on the incurrence of debt and granting of liens and
the maintenance of certain financial ratios. As of
December 31, 2006, the Company has complied with all
covenants stipulated by the HSH Credit Facility agreement.
On January 23, 2007, the Company borrowed
$98.0 million under the HSH Credit Facility. See
Note 10 for additional information.
On February 26, 2007, the Company entered into a
$190.0 million CAD mortgage loan with Capmark Finance, Inc.
in connection with its acquisition of Atrium on Bay. See
Note 10 for additional information.
On February 27, 2007, the Company entered into a forward
interest rate swap contract with HSH Nordbank with a notional
amount of $119.0 million. See Note 10 for additional
information.
5.
Distributions
The Company’s board of directors began declaring
distributions in November 2004, after it commenced business
operations. The Company has declared distributions monthly and
aggregated and paid such distributions quarterly. The Company
intends to continue this distribution policy for so long its our
board of directors decides this policy is in the best interests
of its shareholders. The Company has made the following
quarterly distributions to its shareholders for the years ended
December 31, 2006 and 2005:
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
6.
Related
Party Transactions
Advisory
Agreement
Pursuant to the Advisory Agreement, the Company is required to
pay the following fees and expense reimbursements:
Acquisition Fees — The Company pays an
acquisition fee to the Advisor for services related to the due
diligence, selection and acquisition of direct or indirect real
estate investments. The acquisition fee is payable following the
closing of each acquisition in an amount equal to 0.50% of
(i) the purchase price of real estate investments acquired
directly by the Company, including any debt attributable to such
investments, or (ii) when the Company makes an investment
indirectly through another entity, such investment’s pro
rata share of the gross asset value of the real estate
investments held by that entity. The Advisor earned cash
acquisition fees totaling approximately $5.6 million,
$1.8 million and $388,000 for the years ended
December 31, 2006, 2005 and 2004, respectively, which have
been recorded as an expense in the accompanying consolidated
statements of operations. See discussion of the Participation
Interest below.
Asset Management Fees — The Company pays asset
management fees to the Advisor for services related to managing,
operating, directing and supervising the operations and
administration of the Company and its assets. The asset
management fee is earned by the Advisor monthly in an amount
equal to 0.0625% multiplied by the net equity capital the
Company has invested in real estate investments as of the end of
the applicable month. The Advisor earned cash asset management
fees totaling approximately $3.2 million, $850,000 and
$21,000 during the years ended December 31, 2006, 2005 and
2004, respectively, which have been recorded as an expense in
the accompanying consolidated statements of operations. See
discussion of the Participation Interest below.
Expense Reimbursements — In addition to
reimbursement of organizational and offering costs (see
Note 2), the Company reimburses the Advisor and its
affiliates for certain other expenses incurred in connection
with the Company’s administration and ongoing operations.
During the year ended December 31, 2004, the Advisor
advanced to or made payments on the Company’s behalf
totaling $1.0 million.
During the year ended December 31, 2005, the Advisor
advanced to or made payments on the Company’s behalf
totaling $2.2 million. During that period, the Advisor
forgave approximately $1.7 million of amounts previously
advanced to the Company to pay these expenses and the Company
made repayments totaling $375,000. As of December 31, 2005
(after taking into account the Advisor’s forgiveness
referred to above), the Company owed the Advisor approximately
$1.0 million for these advances.
For the year ended December 31, 2006, the Advisor had
advanced to or made payments on the Company’s behalf
totaling $1.6 million and the Company made repayments
totaling $2.7 million. No advances were received after
June 30, 2006 and no amounts were owed to the Advisor as of
December 31, 2006 related to these advances.
Reimbursement by the Advisor to the Company —
The Advisor must reimburse the Company quarterly for any amounts
by which operating expenses exceed, in any four consecutive
fiscal quarters, the greater of (i) 2.0% of the
Company’s average invested assets, which consists of the
average book value of its real estate properties, both equity
interests in and loans secured by real estate, before reserves
for depreciation or bad debts or other similar non-cash
reserves, or (ii) 25.0% of its net income (as defined by
the Company’s Amended and Restated Articles of
Incorporation), excluding the gain on sale of any of the
Company’s assets, unless Hines REIT’s independent
directors determine that such excess was justified. Operating
expenses generally include all expenses paid or incurred by the
Company as determined by generally accepted accounting
principles, except certain expenses identified in Hines
REIT’s Amended and Restated Articles of Incorporation. For
the years ended December 31, 2006 and 2005, no such
reimbursements were received by the Company.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Dealer
Manager Agreement
The Company has retained HRES, an affiliate of the Advisor, to
serve as dealer manager for the Initial Offering and the Current
Offering. The dealer manager agreement related to the Initial
Offering provided that HRES would earn selling commissions equal
to 6.0% of the gross proceeds from sales of common stock sold in
the Company’s primary offering and 4.0% of gross proceeds
from the sale of shares issued pursuant the Company’s
dividend reinvestment plan, all of which was reallowed to
participating broker dealers. On May 30, 2006, the Company
executed a separate dealer manager agreement for the Current
Offering providing that HRES will earn selling commissions equal
to 7.0% of the gross proceeds from sales of common stock, all of
which is reallowed to participating broker dealers, and will
earn no selling commissions related to shares issued pursuant to
the dividend reinvestment plan. Both agreements also provide
that HRES will earn a dealer manager fee equal to 2.2% of gross
proceeds from the sales of common stock other than issuances
pursuant to the dividend reinvestment plan, a portion of which
may be reallowed to participating broker dealers. HRES earned
selling commissions of approximately $34.7 million,
$10.5 million and $1.1 million and earned dealer
manager fees of approximately $12.5 million,
$4.5 million and $439,000 for the years ended
December 31, 2006, 2005 and 2004, respectively, which have
been offset against additional paid-in capital in the
accompanying consolidated condensed statement of
shareholders’ equity.
Property
Management and Leasing Agreements
The Company has entered into property management and leasing
agreements with Hines to manage the leasing and operations of
properties in which it directly invests. As compensation for its
services, Hines receives the following:
•
A property management fee equal to the lesser of 2.5% of the
annual gross revenues received from the properties or the amount
of property management fees recoverable from tenants of the
property under the leases. The Company incurred property
management fees of approximately $1.5 million and $167,000
for the years ended December 31, 2006 and 2005,
respectively. These amounts, net of payments, resulted in
liabilities of approximately $312,000 and $31,000 as of
December 31, 2006 and 2005, respectively, which have been
included in the accompanying consolidated balance sheets. The
Company incurred no property management fees for the year ended
December 31, 2004.
•
A leasing fee of 1.5% of gross revenues payable over the term of
each executed lease including any lease renewal, extension,
expansion or similar event and certain construction management
and re-development construction management fees, in the event
Hines renders such services. The Company incurred leasing,
construction management or redevelopment fees of
$1.2 million during the year ended December 31, 2006,
all of which were repaid by the end of the year. No such fees
were incurred during the years ended December 31, 2005 and
2004.
•
The Company generally will be required to reimburse Hines for
certain operating costs incurred in providing property
management and leasing services pursuant to the property
management and leasing agreements. Included in this
reimbursement of operating costs are the cost of personnel and
overhead expenses related to such personnel who are located at
the property as well as off-site personnel located in
Hines’ headquarters and regional offices, to the extent the
same relate to or support the performance of Hines’s duties
under the agreement. However, the reimbursable cost of these
off-site personnel and overhead expenses will be limited to the
lesser of the amount that is recovered from the tenants under
their leases
and/or a
limit calculated based on the rentable square feet covered by
the agreement. The Company incurred reimbursable expenses of
approximately $3.5 million and $405,000 for the years ended
December 31, 2006 and 2005, respectively. These amounts,
net of payments, resulted in liabilities of approximately
$498,000 and $100,000 as of December 31, 2006 and 2005,
respectively, which have been included in the accompanying
consolidated balance sheets. The Company incurred no
reimbursable expenses for the year ended December 31, 2004.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The
Participation Interest
Pursuant to the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, HALP owns a profits
interest in the Operating Partnership (the “Participation
Interest”). The percentage interest in the Operating
Partnership attributable to the Participation Interest was
1.28%, 1.23% and 1.38% as of December 31, 2006, 2005 and
2004, respectively. The Participation Interest entitles HALP to
receive distributions from the Operating Partnership based upon
its percentage interest in the Operating Partnership at the time
of distribution.
As the percentage interest of the participation interest is
adjusted, the value attributable to such adjustment related to
acquisition fees and asset management fees is charged against
earnings and recorded as a liability until such time as the
Participation Interest is repurchased for cash or converted into
common shares of Hines REIT. This liability totaled
approximately $11.8 million and $3.0 million as of
December 31, 2006 and 2005, respectively, and is included
in the participation interest liability in the accompanying
consolidated balance sheets. The related expense for asset
management and acquisition fees of approximately
$8.8 million, $2.6 million and $409,000 for the years
ended December 31, 2006, 2005 and 2004, respectively, is
included in asset management and acquisition fees in the
accompanying consolidated statements of operations.
Acquisition
of Interests in the Core Fund
During the years ended December 31, 2006 and 2005, the
Company acquired interests in the Core Fund totaling
approximately $209.3 million and $99.9 million,
respectively (of which $81.5 million and $28.4 million
was acquired from affiliates of Hines for the years ended
December 31, 2005 and 2004, respectively). The Company
acquired the interests from affiliates of Hines at the same
price at which the affiliates originally acquired the interests
(in the form of limited partnership interests). See further
discussion of the Company’s investment in the Core Fund in
Note 3.
7.
Changes
in Assets and Liabilities
The effect of changes in asset and liability accounts on cash
flows from operating activities is as follows
(in thousands):
Unpaid selling commissions and dealer manager fees
$
885
$
1,108
$
337
Deferred offering costs offset against additional
paid-in-capital
$
9,613
$
1,141
$
9,013
Reversal of deferred offering costs offset against additional
paid-in-capital
$
—
$
(5,321
)
$
—
Distributions authorized and unpaid
$
11,281
$
3,209
$
172
Distributions receivable
$
5,858
$
3,598
$
—
Dividends reinvested
$
13,509
$
2,117
$
—
Non-cash net assets acquired upon acquisition of property
$
11,036
$
1,072
$
—
Accrual of deferred offering costs
$
—
$
1,222
$
—
Accrual of deferred financing costs
$
185
$
—
$
—
Assumption of mortgage upon acquisition of property
$
88,495
$
—
$
—
Accrued deferred leasing costs
$
15,062
$
1,045
$
—
Accrued additions to investment property
$
163
$
—
$
—
9.
Commitments
and Contingencies
On November 28, 2006, the Company entered into a contract
to acquire the Laguna Buildings, a group of six office buildings
located in Redmond, Washington. This acquisition was completed
on January 3, 2007. See Note 10 for further discussion.
On December 8, 2006, Norwegian Cruise Line (NCL) signed a
lease renewal for its space in Airport Corporate Center, an
office property located in Miami, Florida. In connection with
this renewal, we committed to funding approximately
$10.4 million of construction costs related to NCL’s
expansion and refurbishment of its space, which will be paid in
future periods. This amount has been recorded in accounts
payable and accrued expenses in the accompanying consolidated
balance sheet as of December 31, 2006.
On December 22, 2006, the Company entered into a contract
to acquire Atrium on Bay, a mixed-use office and retail complex
located in the Downtown North submarket of the central business
district of Toronto, Canada. This acquisition was completed on
February 26, 2007. See Note 10 for further discussion.
On February 27, 2007, the Company entered into a forward
interest rate swap contract with HSH Nordbank with a notional
amount of $119.0 million. See Note 10 for additional
information.
10.
Subsequent
Events
On January 3, 2007, the Company acquired six office
buildings located in Redmond, Washington (the “Laguna
Buildings”). The buildings have an aggregate of
approximately 465,000 square feet (unaudited) of rentable
area that is 100% leased (unaudited). The contract purchase
price of the Laguna Buildings was approximately
$118.0 million, exclusive of transaction costs, financing
fees and working capital reserves.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On January 23, 2007, the Company borrowed
$98.0 million under its HSH Credit Facility. The borrowing
was used to repay amounts owed under its existing credit
facility with KeyBank. The $98.0 million borrowing is
secured by mortgages or deeds of trust and related assignments
and security interests on two of its directly owned properties:
3400 Data Drive in Rancho Cordova, California and Watergate
Tower IV in Emeryville, California. The subsidiaries that
directly own such properties are the borrowers under the loan
documents. The borrowing matures on January 12, 2017 and
bears interest at a variable rate based on one-month LIBOR plus
a margin of 0.40%. The interest rate on such borrowing has been
effectively fixed at 5.2505% as a result of an interest rate
swap agreement the Company entered into with HSH Nordbank.
On February 26, 2007, the Company acquired Atrium on Bay, a
mixed-use office and retail complex located in the Downtown
North submarket of the central business district of Toronto,
Canada. Atrium on Bay is comprised of three office towers, a
two-story retail mall, and a two-story parking garage. The
buildings consist of 1,079,870 square feet (unaudited) of
rentable area and are 86% (unaudited) leased to a variety of
office and retail tenants. The contract purchase price of Atrium
on Bay was approximately $250.0 million CAD (approximately
$215.6 million USD as of February 26, 2007), exclusive
of transaction costs, financing fees and working capital
reserves.
On February 26, 2007, the Company entered into a
$190.0 million CAD (approximately $163.9 million USD
as of February 26, 2007) mortgage loan with Capmark
Finance, Inc. (“Capmark”) in connection with its
acquisition of Atrium on Bay. The Capmark loan bears interest at
an effective fixed rate of 5.33%, has a
10-year term
and is secured by Atrium on Bay. The loan documents contain
customary events of default with corresponding grace periods,
including, without limitation, payment defaults, cross-defaults
to other agreements and bankruptcy-related defaults, and
customary covenants, including limitations on the incurrence of
debt and granting of liens. This loan is not recourse to Hines
REIT.
On February 27, 2007, the Company entered into a forward
interest rate swap contract with HSH Nordbank with a notional
amount of $119.0 million. The contract, which has an
effective date of May 1, 2007 and a
10-year
term, was entered into as an economic hedge against the
variability of future interest rates on variable interest rate
debt. Under the agreement, the Company will pay a fixed rate of
4.955% in exchange for receiving floating interest rate payments
based on one-month LIBOR. The Company anticipates that on or
about May 1, 2007, it will pay down amounts outstanding
under its Revolving Credit Facility with additional borrowings
under its HSH Credit Facility. The Company expects that the
$119 million borrowing will have an effective fixed
interest rate of 5.355% as a result of this swap agreement and
will be secured by mortgages or deeds of trust and related
assignments and security interests on the Daytona and Laguna
Buildings.
On March 27, 2007, the Company entered into a contract to
acquire Seattle Design Center, a mixed-use office and retail
complex located near the central business district of Seattle,
Washington. Seattle Design Center is comprised of a two-story
building and a five-story building with an underground parking
garage. The buildings consist of 390,684 square feet
(unaudited) of rentable area and are 90% (unaudited) leased to a
variety of office and retail tenants. The contract purchase
price of Seattle Design Center is approximately
$57.0 million, exclusive of transaction costs, financing
fees and working capital reserves and the acquisition is
expected to close on or about June 22, 2007.
On March 29, 2007, an affiliate of Hines entered into a
contract (the “Purchase Agreement”) to acquire a
portfolio of office buildings in Sacramento, California (the
“Sacramento Properties”) on behalf of an indirect
subsidiary of the Core Fund, as well as acquire certain other
properties on behalf of another affiliate of Hines. The
Sacramento Properties consist of approximately 1.4 million
square feet (unaudited) and are located in and around the
Sacramento metropolitan area. The contract purchase price of the
Sacramento Properties is expected to be approximately
$490.2 million, exclusive of transaction costs, financing
fees and working capital reserves, and the transaction is
expected to close on or about May 1, 2007. Additionally,
the indirect subsidiary of the Core Fund has entered into an
unconditional guaranty to pay a termination fee in the amount of
approximately $49.0 million in the event that the
acquisition of any of the properties subject to the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Purchase Agreement does not close (including the failure to
purchase any of the properties to be acquired by the other
affiliate of Hines). There are no financing or due diligence
conditions to the closing of this transaction.
11.
Quarterly
Financial data (unaudited)
The following table presents selected unaudited quarterly
financial data for each quarter during the year ended
December 31, 2006:
All assets are institutional-quality office properties.
(b)
In addition to its mortgage debt, the Company had debt of
$162.0 million outstanding as of December 31, 2006 on
its revolving line of credit.
(c)
Real estate assets are depreciated or amortized using the
straight-lined method over the useful lives of the assets by
class. Generally, tenant inducements and lease intangibles are
amortized over the respective lease term. Building improvements
are depreciated over 5-25 years and buildings are
depreciated over 40 years.
(d)
Airport Corporate Center consists of 11 buildings constructed
between 1982 and 1996 and a 5.46-acre land development site.
Hines-Sumisei U.S. Core Office Fund, L.P. and consolidated
subsidiaries (the “Fund”) was organized in August 2003
as a Delaware limited partnership by affiliates of Hines
Interests Limited Partnership (“Hines”) for the
purpose of investing in existing office properties
(“Properties”) in the United States. The Fund’s
third-party investors are primarily U.S. and foreign
institutional investors. The managing general partner is Hines
U.S. Core Office Capital LLC (“Capital”), an
affiliate of Hines.
As of September 30, 2007, the Fund owned indirect interests
in office properties as follows:
Effective
Ownership
by the Fund
September 30,
Property
City
2007(1)
One Atlantic Center
Atlanta, Georgia
85.9
%
Three First National Plaza
Chicago, Illinois
68.7
333 West Wacker
Chicago, Illinois
68.6
One Shell Plaza
Houston, Texas
43.0
Two Shell Plaza
Houston, Texas
43.0
425 Lexington Avenue
New York, New York
40.6
499 Park Avenue
New York, New York
40.6
600 Lexington Avenue
New York, New York
40.6
Riverfront Plaza
Richmond, Virginia
85.9
525 B Street
San Diego, California
85.9
The KPMG Building
San Francisco, California
85.9
101 Second Street
San Francisco, California
85.9
720 Olive Way
Seattle, Washington
68.6
1200 Nineteenth Street
Washington, D.C.
40.6
Warner Center
Woodland Hills, California
68.6
Douglas Corporate Center
Sacramento, California
68.6
Johnson Ranch Corporate Centre
Sacramento, California
68.6
Roseville Corporate Center
Sacramento, California
68.6
Summit at Douglas Ridge
Sacramento, California
68.6
Olympus Corporate Centre
Sacramento, California
68.6
Wells Fargo Center
Sacramento, California
68.6
Charlotte Plaza
Charlotte, North Carolina
85.9
Carillon
Charlotte, North Carolina
85.9
(1)
This percentage shows the Fund’s effective ownership
interests in the applicable operating companies
(“Companies”) that own the Properties. The Fund holds
an indirect ownership interest in the Companies through its
investments in (1) Hines-Sumisei NY Core Office Trust
(“NY Trust”) (40.60% at September 30,2007) and (2) Hines-Sumisei U.S. Core Office Trust
(“Core Office Trust”) (99.8% at September 30,2007).
Basis of Presentation — The consolidated
financial statements include the accounts of the Fund, as well
as the accounts of entities over which the Fund exercises
financial and operating control and the related amounts of
minority interest. All intercompany balances and transactions
have been eliminated in consolidation.
The Fund evaluates the need to consolidate joint ventures based
on standards set forth in Financial Accounting Standards Board
(“FASB”) Interpretation No. (“FIN”) 46R,
Consolidation of Variable Interest Entities, and American
Institute of Certified Public Accountants’ Statement of
Position
78-9,
Accounting for Investments in Real Estate Ventures, as
amended by Emerging Issues Task Force Issue
No. 04-5,
Investor’s Accounting for an Investment in a Limited
Partnership When the Investor Is the Sole General Partner and
the Limited Partners Have Certain Rights. In accordance with
this accounting literature, the Fund will consolidate joint
ventures that are determined to be variable interest entities
for which it is the primary beneficiary. The Fund will also
consolidate joint ventures that are not determined to be
variable interest entities, but for which it exercises
significant control over major operating decisions, such as
approval of budgets, selection of property managers, asset
management, investment activity and changes in financing. As of
September 30, 2007, the Fund has no unconsolidated
interests in joint ventures.
Investment Property — Real estate assets are
stated at cost less accumulated depreciation, which, in the
opinion of management, does not exceed the individual
property’s fair value. Depreciation is computed using the
straight-line method. The estimated useful lives for computing
depreciation are 5 to 10 years for furniture and fixtures,
5 to 20 years for electrical and mechanical installations,
and 40 years for buildings. Major replacements where the
betterment extends the useful life of the assets are
capitalized. Maintenance and repair items are expensed as
incurred.
Real estate assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of
the individual property may not be recoverable. In such an
event, a comparison will be made of the current and projected
operating cash flows of each property on an undiscounted basis
to the carrying amount of such property. Such carrying amount
would be adjusted, if necessary, to estimated fair values to
reflect impairment in the value of the asset. At
September 30, 2007, management believes no such impairment
has occurred.
Acquisitions of properties are accounted for utilizing the
purchase method, and accordingly, the results of operations of
acquired properties are included in the Fund’s results of
operations from the respective dates of acquisition. Estimates
of future cash flows and other valuation techniques similar to
those used by independent appraisers are used to allocate the
purchase price of acquired property between land, buildings and
improvements, equipment, asset retirement obligations, assumed
mortgage notes payable, and identifiable intangible assets and
liabilities, such as amounts related to in-place leases,
acquired above- and below-market leases, acquired above- and
below-market ground leases and tenant relationships. Initial
valuations are subject to change until such information is
finalized no later than 12 months from the acquisition date.
The estimated fair value of acquired in-place leases are the
costs the Fund would have incurred to lease the properties to
the occupancy level of the properties at the date of
acquisition. Such estimates include the fair value of leasing
commissions, legal costs and other direct costs that would be
incurred to lease the properties to such occupancy levels.
Additionally, the Fund evaluates the time period over which such
occupancy levels would be achieved and includes an estimate of
the net operating costs (primarily consisting of real estate
taxes, insurance and utilities) that would be incurred during
the lease-up
period. Acquired in-place leases as of the date of acquisition
are amortized to amortization expense over the remaining lease
terms.
Acquired above- and below-market lease values are recorded based
on the present value (using an interest rate that reflects the
risks associated with the lease acquired) of the difference
between the contractual amounts to be paid pursuant to the
in-place leases and management’s estimate of fair market
value lease rates for the corresponding in-place leases,
measured over a period equal to the remaining noncancelable
terms of the leases. The capitalized above- and below-market
lease values are amortized as adjustments to rent revenue
over the remaining noncancelable terms of the respective leases.
Should a tenant terminate its lease, the unamortized portion of
the in-place lease value is charged to amortization expense, and
the unamortized portion of out-of-market lease value is charged
to rental revenue.
Acquired above- and below-market ground lease values are
recorded based on the difference between the present value
(using an interest rate that reflects the risks associated with
the lease acquired) of the contractual amounts to be paid
pursuant to the ground leases and management’s estimate of
fair market value of land under the ground leases. The
capitalized above- and below-market lease values are amortized
as adjustments to ground lease expense over the lease term.
Cash and Cash Equivalents — The Fund defines
cash and cash equivalents as cash on hand and investment
instruments with original maturities of three months or less.
Restricted Cash — As of September 30, 2007
and December 31, 2006, restricted cash consists of tenant
security deposits and escrow deposits held by lenders for
property taxes, tenant improvements and leasing commissions.
Substantially all restricted cash is invested in demand or
short-term instruments.
Deferred Financing Costs — Deferred financing
costs consist of direct costs incurred in obtaining the notes
payable (see Note 4). These costs are being amortized into
interest expense on a straight-line basis, which approximates
the effective interest method, over the term of the notes. For
the nine months ended September 30, 2007 and 2006,
$3.4 million and $3.3 million, respectively, was
amortized into interest expense. For the three months ended
September 30, 2007 and 2006, $1.2 million and
$1.1 million, respectively, was amortized into interest
expense. Deferred financing costs are shown at cost in the
condensed consolidated balance sheets, net of accumulated
amortization of $13.7 million and $10.3 million at
September 30, 2007 and December 31, 2006, respectively.
Deferred Leasing Costs — Direct leasing costs,
primarily third-party leasing commissions and tenant incentives,
are capitalized and amortized over the life of the related
lease. Tenant incentive amortization was $4.0 million, and
$2.0 million for the nine months ended September 30,2007, and 2006, respectively, and was recorded as an offset to
rental revenue. Amortization expense related to other direct
leasing costs for the nine months ended September 30, 2007,
and 2006, was $2.1 million, and $1.5 million,
respectively.
Tenant incentive amortization was $1.8 million and
approximately $800,000 for the three months ended
September 30, 2007 and 2006, respectively, and was recorded
as an offset to rental revenue. Amortized expense related to
other direct leasing costs for the three months ended
September 30, 2007 and 2006, was approximately $900,000
and $600,000, respectively.
Deferred leasing costs are shown at cost in the condensed
consolidated balance sheets, net of accumulated amortization of
$13.6 million and $8.4 million at September 30,2007 and December 31, 2006, respectively.
Revenue Recognition — The Fund recognizes
rental revenue on a straight-line basis over the life of the
lease, including the effect of rent holidays, if any.
Straight-line rent receivable included in the accompanying
consolidated balance sheets consists of the difference between
the tenants’ rent calculated on a straight-line basis from
the date of acquisition or lease commencement over the remaining
term of the related leases and the tenants’ actual rent due
under the leases. Revenues relating to lease termination fees
are recognized at the time a tenant’s right to occupy the
space is terminated and when the Fund has satisfied all
obligations under the lease agreement.
Other revenues consist primarily of parking revenue and tenant
reimbursements. Parking revenue represents amounts generated
from contractual and transient parking and is recognized in
accordance with contractual terms or as services are rendered.
Other revenues relating to tenant reimbursements are recognized
in the period that the expense is incurred.
Other Income — In April 2007, the Fund received
a payment of $9.6 million in consideration for conveying
certain air rights under an easement agreement associated with
600 Lexington Avenue.
Income Taxes — No provision for
U.S. Federal income taxes is made in the accounts of the
Fund since such taxes are liabilities of the partners and depend
upon their respective tax situations.
During 2006, the State of Texas enacted legislation that
replaces the current franchise tax with a new “margin
tax,” which is effective for tax reports due on or after
January 1, 2008, and which will compute the tax based on
business done in calendar years beginning after
December 31, 2006. The new legislation expands the number
of entities covered by the current Texas franchise tax and
specifically includes limited partnerships as subject to the new
margin tax, which for financial reporting purposes is considered
an income tax under Statement of Financial Accounting Standards
(“SFAS”) No. 109, Accounting for Income
Statements. Currently, the Fund owns an indirect interest in
two properties located in Texas, and has recorded a provision
for income taxes of approximately $96,000 and $289,000 for the
three and nine months ended September 30, 2007. As of
September 30, 2007, the Fund had no significant temporary
differences, tax credits or net operating loss carry-forwards.
Use of Estimates — The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Concentration of Credit Risk — At
September 30, 2007, the Fund had cash and cash equivalents
and restricted cash in excess of federally insured levels on
deposit with financial institutions. Management regularly
monitors the financial stability of these financial institutions
and believes that the Fund is not exposed to any significant
credit risk in cash or cash equivalents or restricted cash.
At September 30, 2007, the Fund indirectly owned interests
in properties as follows:
Leasable
Property
City
Acquisition Date
Square Feet
% Leased
(Unaudited)
(Unaudited)
One Atlantic Center
Atlanta, Georgia
July 2006
1,100,312
82
%
Three First National Plaza
Chicago, Illinois
March 2005
1,419,978
93
333 West Wacker
Chicago, Illinois
April 2006
845,206
84
One Shell Plaza
Houston, Texas
May 2004
1,228,160
99
Two Shell Plaza
Houston, Texas
May 2004
566,960
95
425 Lexington Avenue
New York, New York
August 2003
700,034
100
499 Park Avenue
New York, New York
August 2003
288,722
100
600 Lexington Avenue
New York, New York
February 2004
282,409
100
Riverfront Plaza
Richmond, Virginia
November 2006
950,025
100
525 B Street
San Diego, California
August 2005
447,159
92
The KPMG Building
San Francisco, California
September 2004
379,328
100
101 Second Street
San Francisco, California
September 2004
388,370
100
720 Olive Way
Seattle, Washington
January 2006
300,710
93
1200 Nineteenth Street
Washington, D.C.
August 2003
235,404
11
Warner Center
Woodland Hills, California
October 2006
808,274
97
Douglas Corporate Center
Sacramento, California
May 2007
214,606
86
Johnson Ranch Corporate Centre
Sacramento, California
May 2007
179,990
72
Roseville Corporate Center
Sacramento, California
May 2007
111,418
95
Summit at Douglas Ridge
Sacramento, California
May 2007
185,128
82
Olympus Corporate Centre
Sacramento, California
May 2007
191,494
86
Wells Fargo Center
Sacramento, California
May 2007
502,365
92
Charlotte Plaza
Charlotte, North Carolina
June 2007
625,026
98
Carillon
Charlotte, North Carolina
July 2007
470,726
100
12,421,804
As of September 30, 2007, cost and accumulated depreciation
and amortization related to investments in real estate assets
and related lease intangibles were as follows (in thousands):
As of December 31, 2006, cost and accumulated depreciation
and amortization related to investments in real estate assets
and related lease intangibles were as follows (in thousands):
Acquired
Acquired
Acquired
Buildings and
In-Place
Above-Market
Below-Market
Above-Market
Improvements
Leases
Leases
Leases
Ground Leases
Cost
$
1,666,784
$
531,218
$
211,179
$
50,876
$
4,787
Less: accumulated depreciation and amortization
(60,720
)
(118,197
)
(55,881
)
(15,037
)
(56
)
Net
$
1,606,064
$
413,021
$
155,298
$
35,839
$
4,731
Amortization expense was $65.2 million and
$37.7 million for in-place leases for the nine months ended
September 30, 2007 and 2006, respectively. Amortization of
out-of-market leases, net, was $7.4 million and
$11.9 million for the nine months ended September 30,2007 and 2006, respectively. Amortization of above-market ground
leases was approximately $90,000 and $33,000 for the nine months
ended September 30, 2007, and 2006, respectively.
Amortization expense was $24.7 million and
$15.5 million for in-place leases for the three months
ended September 30, 2007 and 2006, respectively.
Amortization of out-of-market leases, net, was $1.5 million
and $3.9 million for the three months ended
September 30, 2007 and 2006, respectively. Amortization of
above-market ground leases was approximately $30,000 and $33,000
for the three months ended September 30, 2007, and 2006,
respectively.
Anticipated amortization of in-place leases, out-of-market
leases, net, and above-market ground leases for the period from
October 1 through December 31, 2007, and each of the
following four years ended December 31 is as follows (in
thousands):
Nippon Life Insurance Companies — The KPMG Building
5.13
9/20/2014
80,000
80,000
Nippon Life Insurance Companies — 101 Second Street
5.13
4/19/2010
75,000
75,000
The Northwestern Mutual Life Insurance Company — Three
First National Plaza
4.67
4/01/2012
126,900
126,900
NLI Properties East, Inc. — 525 B Street
4.69
8/07/2012
52,000
52,000
Prudential Insurance Company of America — 720 Olive Way
5.32
2/1/2016
42,400
42,400
Prudential Insurance Company of America —
333 West Wacker
5.66
5/1/2016
124,000
124,000
Prudential Insurance Company of America — One Atlantic
Center
6.10
8/1/2016
168,500
168,500
Bank of America, N.A. — Warner Center
5.628
10/2/2016
174,000
174,000
Metropolitan Life Insurance Company — Riverfront Plaza
5.20
6/1/2012
135,900
135,900
Bank of America, N.A. — Douglas Corporate Center,
Wells Fargo Center, Roseville Corporate Center, Summit at
Douglas Ridge, Olympus Corporate Centre, Johnson Ranch Corporate
Centre
Note A1
5.5585
5/1/2017
163,950
—
Note A2
5.5125
5/1/2014
18,650
—
Note A3
5.4545
5/1/2012
54,650
—
Key Bank National Association — Douglas Corporate
Center
5.427
6/1/2014
36,000
—
Metropolitan Life Insurance Company — Charlotte Plaza
6.02
8/1/2012
97,500
—
Metropolitan Life Insurance Company — Carillon
6.02
8/1/2012
78,000
—
1,910,355
1,540,455
SECURED NONRECOURSE VARIABLE RATE MEZZANINE LOANS —
The Northwestern Mutual Life Insurance Company — Three
First National Plaza
6.665%
4/01/2010
14,100
14,100
REVOLVING CREDIT FACILITIES
Key Bank National Association —
NY Core Office Trust
7.18% weighted avg.
1/28/2008
27,400
18,575
Key Bank National Association —
US Core Office Properties
7.05% weighted avg.
10/31/2009
1,000
—
Total
$
2,031,705
$
1,573,130
Substantially all the mortgage notes described above require
monthly interest-only payments, and prepayment of principal
balance is permitted with payment of a premium. Each mortgage
note is secured by a mortgage on the related property, the
leases on the related property, and the security interest in
personal property located on the related property.
Revolving
Credit Facilities
Key Bank National Association — NY Core Office
Trust — On January 28, 2005, and as amended
July 13, 2006, Hines-Sumisei NY Core Office Trust (“NY
Trust”), a subsidiary of the Fund, entered into an
agreement with Key Bank National Association for a
$30.0 million revolving line of credit (“Key Bank
Agreement 1”). The Key Bank Agreement 1 allows for
borrowing at a variable rate or a LIBOR-based rate plus a spread
ranging from 150 to 200 basis points based on a prescribed
leverage ratio calculated for NY Trust. Payments
of interest are due monthly. NY Trust may extend the maturity
date for two successive
12-month
periods. NY Trust may prepay the note at any time with three
business days’ notice. KeyBank Agreement 1 was retired
in conjunction with the execution of a new credit facility with
Key Bank National Association on December 19, 2007, as
described in Note 10.
Key Bank National Association — U.S. Core
Office Properties — On August 31, 2005, and
as amended November 8, 2006, Hines-Sumisei U.S. Core
Office Properties LP (“Core Office Properties”), a
subsidiary of the Fund, entered into an agreement with Key Bank
National Association for a $175.0 million revolving line of
credit (“Key Bank Agreement 2”) with an option to
increase the capacity up to $300.0 million. The Key Bank
Agreement 2 allows for borrowing at a variable rate or a
LIBOR-based rate plus a spread ranging from 125 to
200 basis points based on a prescribed leverage ratio
calculated for Core Office Properties, which ratio under the Key
Bank Agreement 2 takes into account Core Office Properties’
effective ownership interest in the debt and certain allowable
assets of entities in which Core Office Properties directly and
indirectly invests. Payments of interest are due monthly, and
all outstanding principal and unpaid interest is due on
October 31, 2009. Core Office Properties may extend the
maturity date for two successive
12-month
periods. Core Office Properties may prepay the note at any time
with three business days’ notice.
As of September 30, 2007, the scheduled principal payments
on notes payable are due in the period from October 1
through December 31, 2007, and each of the years ending
December 31, 2008 through 2011 and thereafter as follows
(in thousands):
All of the notes described above contain both affirmative and
negative covenants. Management believes that the Fund was in
compliance with such covenants at September 30, 2007.
5.
RENTAL
REVENUES
The Fund has entered into noncancelable lease agreements,
subject to various escalation clauses, with tenants for office
and retail space.
As of September 30, 2007, the approximate fixed future
minimum rentals for the period from October 1 through
December 31, 2007, and each of the years ending
December 31, 2008 through 2011 and thereafter are as
follows:
Of the total rental revenue for the nine months ended
September 30, 2007, approximately 10% was earned from one
tenant that provides legal services, and whose lease expires on
September 31, 2018. No other tenant provided more than 10%
of the total rental revenue for the nine months ended
September 30, 2007.
Of the total rental revenue for the nine months ended
September 30, 2006, approximately 12% was earned from two
affiliated tenants that provide oil and gas services, whose
leases expire on December 31, 2015. In addition,
approximately 16% was earned from one tenant that provides legal
services, and whose lease expires on September 31, 2018. No
other tenant provided more than 10% of the total rental revenue
for the nine months ended September 30, 2006.
The tenant leases generally provide for annual rentals that
include the tenants’ proportionate share of real estate
taxes and certain building operating expenses and generally
include tenant renewal options that can extend the lease terms.
6.
GOVERNING
AGREEMENTS AND INVESTOR RIGHTS
Governance of the Fund — The Fund is governed
by the Partnership Agreement, as amended and restated on
September 1, 2006. The term of the Fund shall continue
until the Fund is dissolved pursuant to the provisions of the
Partnership Agreement.
Management — Capital, as managing general
partner, manages the day-to-day affairs of the Fund. The
managing general partner has the power to direct the management,
operation, and policies of the Fund subject to oversight of a
management board. A subsidiary of Hines Real Estate Investment
Trust, Inc. holds a non-managing general partner interest in the
Fund. The Fund is required to obtain approval from the
non-managing general partner for certain significant actions
specified in the Partnership Agreement. Hines provides advisory
services to the Fund pursuant to an advisory agreement.
Governance — The managing general partner is
subject to the oversight of a seven-member management board and
certain approval rights of the Non-Managing General Partner, the
Advisory Committee, and the Limited Partners. The approval of
the management board is required for acquiring and disposing of
investments, incurring indebtedness, undertaking offerings of
equity interests in the Fund, approving annual budgets, and
other major decisions as outlined in the Partnership Agreement.
Contributions — A new investor entering the
Fund generally acquires units of limited partnership interest
pursuant to a subscription agreement under which the investor
agrees to contribute a specified amount of capital to the Fund
in exchange for units (“Capital Commitment”). A
Capital Commitment may be funded and units may be issued in
installments; however, the new investor is admitted to the Fund
as a limited partner upon payment for the first units issued to
the investor. Additional cash contributions for any unfunded
commitments are required upon direction by the managing general
partner.
Distributions — Cash distributions will be made
to the partners of record as of the applicable record dates, not
less frequently than quarterly, in proportion to their ownership
interests.
Allocation of Profits/Losses — All profits and
losses for any fiscal year shall be allocated pro rata among the
partners in proportion to their ownership interests. All profit
and loss allocations are subject to the special and curative
allocations as provided in the Partnership Agreement.
Fees — Unaffiliated limited partners, as
defined in the Partnership Agreement, of the Fund pay
acquisition and asset management fees to the managing general
partner or its designees. These fees are deducted from
distributions otherwise payable to a partner and are in addition
to, rather than a reduction of, the Capital Commitment of the
partner. During the Fund’s initial investment period, which
ended on February 2, 2007, these fees were paid 100% in
cash. After the initial investment period, they will be paid 50%
in cash and 50% in the form of a profits interest intended to
approximate Capital having reinvested such 50% of the fees in
Partnership units at current unit value.
Redemptions — Beginning with the fiscal year
ending after the later of (1) February 2, 2007, or
(2) one year after acquisition of such interest, a partner
may request redemption of all or a portion of its interest in
the Fund at a price equal to the interest’s value based on
the net asset value of the Fund at the time of redemption. The
Fund will attempt to redeem up to 10%, in the aggregate, of the
outstanding interests in the Fund, Core Office Trust, and Core
Office Properties during any calendar year, provided that the
Fund will not redeem any interests if the managing general
partner determines that such redemption would result in any real
estate investment trust (“REIT”) in which the Fund has
an interest ceasing to qualify as a domestically controlled REIT
for U.S. income tax purposes.
Debt — The Fund, through its subsidiaries, may
incur debt with respect to any of its investments or future
investments in real estate properties, subject to the following
limitations at the time the debt is incurred: (1) 65%
debt-to-value limitation for each property and (2) 50%
aggregate debt-to-value limitation for all Fund assets,
excluding in both cases assets held by NY Trust. However, the
Fund may exceed the 50% aggregate limitation in (2) above
if the managing general partner determines it is advisable to do
so as long as the managing general partner makes a reasonable
determination that the excess indebtedness will be repaid within
one year of its incurrence. NY Trust has a 55% debt-to-value
limitation at the time any such indebtedness is incurred. In
addition, the Fund, through its subsidiaries, may obtain a
credit facility secured by unfunded capital commitments from its
partners. Such credit facility will not be counted for purposes
of the leverage limitations above, as long as no assets of the
Fund are pledged to secure such indebtedness.
Rights of General Motors Investment Management
Corporation — The Second Amended and Restated
Investor Rights Agreement among Hines, the Fund, Core Office
Properties, NY Trust, Hines Shell Plaza Partners LP (“Shell
Plaza Partners”), Hines Three First National Partners LP
(“TFN Partners”), Hines 720 Olive Way Partners LP
(“720 Olive Way Partners”), Hines 333 West Wacker
Partners LP (“333 West Wacker Partners”), Hines
Warner Center Partners LP (“Warner Center Partners”),
Hines CF Sacramento Partners LP (“Sacramento
Partners”), General Motors Investment Management
Corporation (“GMIMC”) and a number of institutional
investors advised by GMIMC (each an “Institutional
Co-Investor” and collectively, the “Institutional
Co-Investors”), dated October 12, 2005, provides GMIMC
with certain co-investment rights with respect to the
Fund’s investments. As of September 30, 2007, the
Institutional Co-Investors co-invest with the Fund in 16 of the
Fund’s Properties, owning effective interests in the
Properties as follows:
Olympus Corporate Centre, Wells Fargo Center Douglas Corporate
Center, Johnson Ranch Corporate Centre, Roseville Corporate
Center, Summit at Douglas Ridge
20.00
Co-Investment Rights — GMIMC, on behalf of one
or more funds it advises, has the right to co-invest with the
Fund in connection with each investment made by the Fund in an
amount equal to at least 20% of the total equity capital to be
invested in such investment.
GMIMC also has the right, but not the obligation, on behalf of
one or more funds it advises, to co-invest with third-party
investors in an amount equal to at least 50% of any
co-investment capital sought by the Fund from third-party
investors for a prospective investment. In order to exercise
such third-party co-investment right, GMIMC must invest at least
50% of the equity to be invested from sources other than the
Fund.
If the owner of an investment desires to contribute the
investment to the Fund and receive interests in the Fund or a
subsidiary of the Fund on a tax-deferred basis, GMIMC has no
co-investment rights with respect to the portion of such
investment being made through the issuance of such tax-deferred
consideration.
Redemption Rights — For each asset in
which the Institutional Co-Investors acquire interests pursuant
to GMIMC’s co-investment rights, the Fund must establish a
three-year period ending no later than the 12th anniversary
of the date such asset is acquired, unless GMIMC elects to
extend it, during which the entity through which the
Institutional Co-Investors make their investments will redeem or
acquire such Institutional
Co-Investors’ interest in such entity at a price based on
the net asset value of such entity at the time of redemption
date.
Buy/Sell Rights — GMIMC, on behalf of the
Institutional Co-Investors having an interest in NY Trust, Shell
Plaza Partners, TFN Partners, 720 Olive Way Partners, 333 Wacker
Partners, Warner Center Partners, Sacramento Partners and any
other entity through which a co-investment is made (each, a
“Co-Investment Entity”), on the one hand, and the
Fund, on the other hand, have the right to initiate at any time
the purchase and sale of any property in which any Institutional
Co-Investor has an interest (the “Buy/Sell”). A
Buy/Sell is triggered by either party delivering a written
notice to the other party that identifies the property and
states the value the tendering party assigns to such property
(the “Stated Value”). The recipient may elect by
written notice to be the buyer or seller with respect to such
property or, in the absence of a written response, will be
deemed to have elected to be a seller. If the property that is
the subject of the Buy/Sell is owned by a Co-Investment Entity
that owns more than one property, then such Co-Investment Entity
will sell the property to the party determined to be the buyer
pursuant to the Buy/Sell notice procedure for the Stated Value,
and the proceeds of the sale will be distributed in accordance
with the applicable provisions of the constituent documents of
the Co-Investment Entity. If the property in question is the
only property owned by a Co-Investment Entity, then the party
determined to be the buyer pursuant to the Buy/Sell notice
procedure will acquire the interest of the selling party in the
Co-Investment Entity for an amount equal to the amount that
would be distributed to the selling party if the property were
sold for the Stated Value and the proceeds distributed in
accordance with the applicable provisions of the constituent
documents of the Co-Investment Entity. For this purpose, the
Shell Buildings and Warner Center are each considered to be a
single property.
Rights of IK Funds — As of September 30,2007, IK US Portfolio Invest GmbH & Co. KG (“IK
Fund I”), a limited partnership established under the
laws of Germany, owned 109,497 units of limited partner
interest in Core Office Properties. Additionally, IK US
Portfolio Invest Zwei GmbH & Co. KG (“IK
Fund II”) and IK US Portfolio Invest Drei
GmbH & Co. KG (“IK Fund III”), each a
limited partnership established under the laws of Germany
(collectively with IK Fund I, the “IK Funds”),
owned 29,869 and 21,061 units, respectively, of limited
partnership interest in Core Office Properties, and also had
unfunded commitment to invest additional $149.1 million to
Core Office Properties, which is conditioned on IK Fund II
and IK Fund III raising sufficient equity capital to fund
such commitment. The IK Funds have the right to require Core
Office Properties to redeem, at a price based on the net asset
value of Core Office Properties as of the date of redemption,
all or any portion of its interest, subject to a maximum
redemption amount of $150.0 million for IK Fund II and
IK Fund III, as of the following dates:
Any remaining interest not redeemed due to the maximum
limitation will be redeemed in the subsequent year or years
according to the Partnership Agreement’s redemption policy
as described above. The Fund is obligated to provide Core Office
Properties with sufficient funds to fulfill this priority
redemption right, to the extent sufficient funds are otherwise
not available to Core Office Properties. An IK Fund is not
entitled to participate in the redemption rights available to
Core Office Properties investors prior to such IK Funds’
redemption date.
7.
RELATED-PARTY
TRANSACTIONS
The Companies have entered into management agreements with
Hines, a related party, to manage the operations of the
Properties. As compensation for its services, Hines receives the
following:
•
A property management fee equal to the lesser of the amount of
the management fee that is allowable under tenant leases or a
specific percentage of the gross revenues of the specific
Property. The Fund incurred management fees of $6.5 million
and $4.1 million for the nine months ended
September 30,
2007, and 2006, respectively. The Fund incurred management fees
of $2.3 million and $1.5 million for the three months
ended September 30, 2007, and 2006, respectively.
•
Reimbursement for salaries and wages of its
on-site
personnel. Salary and wage reimbursements of its
on-site
property personnel incurred by the Fund for the nine months
ended September 30, 2007 and 2006, were $10.1 million
and $7.4 million, respectively, and for the three months
ended September 30, 2007 and 2006, were $3.5 million
and $2.7 million, respectively.
•
Reimbursement for various direct services performed off site
that are limited to the amount that is recovered from tenants
under their leases and usually will not exceed in any calendar
year a per-rentable-square-foot limitation. In certain
instances, the per-rentable-square-foot limitation may be
exceeded, with the excess offset against property management
fees received. For the nine months ended September 30, 2007
and 2006, reimbursable services incurred by the Fund were
$2.8 million and $1.1 million, respectively, and for
the three months ended September 30, 2007 and 2006, were
$1.0 million and approximately $500,000, respectively.
•
Leasing commissions equal to 1.5% of gross revenues payable over
the term of each executed lease, including any lease amendment,
renewal, expansion, or similar event. Leasing commissions of
$1.8 million and $2.1 million were incurred by the
Fund during the nine months ended September 30, 2007 and
2006, respectively, and approximately $600,000 and
$1.2 million for the three months ended September 30,2007 and 2006, respectively.
•
Construction management fees equal to 2.5% of the total project
costs relating to the redevelopment, plus direct costs incurred
by Hines in connection with providing the related services.
Construction management fees of approximately $624,000 and
$90,000 were incurred by the Fund during the nine months ended
September 30, 2007 and 2006, respectively, and
approximately $19,000 for the three months ended
September 30, 2006.
•
Other fees, primarily related to security services and parking
operations, in the amounts of approximately $780,000 and
$116,000 were incurred by the Fund during the nine months ended
September 30, 2007 and 2006, respectively, and
approximately $306,000 and $42,000 for the three months
ended September 30, 2007 and 2006, respectively.
Certain Companies of the Fund have entered into lease agreements
with Hines Core Fund Services, LLC (“Services”),
an affiliate of Hines, for the operation of their respective
parking garages. Under the terms of the lease agreements, the
Fund received rental fees of $4.6 million and
$3.3 million during the nine months ended
September 30, 2007 and 2006, respectively, and
$2.1 million and $1.2 million for the three months
ended September 30, 2007 and 2006, respectively.
Receivables due to the Fund from Services were approximately
$1.6 million and $386,000 at September 30, 2007 and
December 31, 2006, respectively.
In addition, the Fund has related-party payables owed to Hines
and its affiliated entities at September 30, 2007 and
December 31, 2006, of $4.6 million and
$4.2 million, respectively, for accrued management fees,
payroll expense, leasing commissions, off-site services, and
legal and other general and administrative costs.
8.
LEASE
OBLIGATIONS
The Shell Buildings are subject to certain ground leases that
expire in 2065 and 2066. One ground lease that expires in 2065
contains a purchase option that allows the Fund to purchase the
land within a five-year period that begins in June 2026.
One Atlantic Center is subject to a ground lease that expires in
2033. The ground lease contains renewal options at
10-year term
increments, up to a total term of 99 years.
Straight-line rent payable included on the Fund’s condensed
consolidated balance sheets consists of the difference between
the rental payments due under the lease calculated on a
straight-line basis from the date of acquisition or the lease
commencement date over the remaining term of the lease and the
actual rent due under the lease.
As of September 30, 2007, required payments under the terms
of the leases in the period from October 1 through
December 31, 2007, and each of the years ending
December 31, 2008 through 2011 and thereafter are as
follows (in thousands):
Ground lease expense for the nine months ended
September 30, 2007, and 2006, was approximately
$1.1 million and $500,000, respectively, and is included in
general and administrative expenses in the accompanying
condensed consolidated statements of operations. Ground lease
expense for the three months ended September 30, 2007 and
2006, was approximately $380,000 and $325,000 respectively, and
is included in generally and administrative expenses in the
accompanying condensed consolidated statement of operations.
9.
SUPPLEMENTAL
CASH FLOW DISCLOSURES
Supplemental cash disclosures for the nine months ended
September 30, 2007 and 2006 were as follows (in thousands):
2007
2006
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION —
Cash paid during the period for interest
$
70,766
$
40,969
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accrued additions to investment property
$
1,218
$
766
Distributions authorized and unpaid
$
23,400
$
15,389
Dividends declared and unpaid to minority interest holders
$
13,659
$
9,158
Security deposits assumed upon acquisition of property
$
1,319
$
585
10.
SUBSEQUENT
EVENTS
On October 8, the Fund entered into a construction contract
for the redevelopment of the property located at 1200
19th Street in Washington, D.C., for a maximum
guaranteed payment of $46.2 million.
On December 19, 2007, NY Trust entered into an unsecured
revolving line of credit facility with KeyBank National
Association, as administrative agent for itself and certain
other lenders. This facility provides for borrowing capacity of
up to $100.0 million with an option to increase the
capacity up to $150.0 million prior to June 19, 2009
subject to certain terms and conditions. It has an initial
three-year term, with the NY Trust having the right to extend
the initial term for two successive one-year periods, subject to
specified conditions. Loans under this facility bear interest,
at the borrowers’ option, at (a) LIBOR plus a spread
of 100 to 137.5 basis points or (b) the greater of the
prime rate designated from time to time by KeyBank or the
federal funds rate plus 50 basis points. Initial borrowings
under this facility were used to pay in full the outstanding
balance under Key Bank Agreement 1 and Key Bank
Agreement 1 was retired. As of December 31, 2007,
$31.9 million was outstanding under this facility at a
weighted average interest rate of 5.93%.
On December 27, 2007, the Fund acquired Renaissance Square,
a property consisting of two office buildings, One Renaissance
Square and Two Renaissance Square, located in the central
business district of Phoenix, Arizona. Renaissance Square was
constructed between 1987 and 1989 and contains
965,508 square
feet of rentable area that is approximately 95% leased. The
contract purchase price for Renaissance Square was
$270.9 million, exclusive of transaction costs, financing
fees and working capital reserves.
In connection with the acquisition of Renaissance Square, the
Fund assumed two mortgage loans. A mortgage loan made by Bank of
America, N.A. in the principal amount of $103.6 million
matures on April 1, 2012, bears interest at a fixed rate of
5.1325% per annum, and requires monthly installments of interest
only throughout the remaining term. Prepayment of the loan is
permitted with prior written notice and payment of a prepayment
fee. No prepayment fee is due if loan is repaid in full during
the last 180 days before the maturity date. The loan is
secured by a mortgage/deed of trust on One Renaissance Square,
the leases on the property, a security interest in the personal
property in the property and an assignment of the property
management agreement. A mortgage loan made by Principle
Financial Group, LLC in the principal amount of
$85.2 million matures on April 1, 2012, bears interest at a
fixed rate of 5.14% per annum, and requires monthly installments
of interest only throughout the remaining term. Prepayment of
the loan is permitted on 30 days’ prior written notice
and payment of a prepayment fee. No prepayment fee is due if
loan is repaid in full during the last 90 days before the
maturity date. The loan is secured by a mortgage/deed of trust
on Two Renaissance Square, the leases on the property, a
security interest in the personal property in the property and
an assignment of the property management agreement. Both loan
agreements contain customary covenants and events of default,
including, without limitation, payment defaults, cross-defaults
to certain other agreements with respect to the loan and
bankruptcy-related defaults. Both loans are non-recourse to the
Fund.
We have audited the accompanying consolidated balance sheets of
Hines-Sumisei U.S. Core Office Fund, L.P. and subsidiaries
(the “Partnership”) as of December 31, 2006 and
2005, and the related consolidated statements of operations,
partners’ equity, and cash flows for each of the three
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Partnership’s management. Our responsibility is to express
an opinion on the 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 Partnership 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 Partnership’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
Hines-Sumisei U.S. Core Office Fund, L.P. and subsidiaries
at December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
Hines-Sumisei U.S. Core Office Fund, L.P. and consolidated
subsidiaries (the “Fund”) was organized in August 2003
as a Delaware limited partnership by affiliates of Hines
Interests Limited Partnership (“Hines”) for the
purpose of investing in existing office properties
(“Properties”) in the United States. The Fund’s
third-party investors are primarily U.S. and foreign
institutional investors. The managing general partner is Hines
U.S. Core Office Capital LLC (“Capital”), an
affiliate of Hines.
As of December 31, 2006, the Fund owned indirect interests
in office properties as follows:
Effective
Ownership
by the Fund
December 31,
Property
City
2006(1)
One Atlantic Center
Atlanta, Georgia
91.0
%
Three First National Plaza
Chicago, Illinois
72.8
333 West Wacker
Chicago, Illinois
72.6
One Shell Plaza
Houston, Texas
45.5
Two Shell Plaza
Houston, Texas
45.5
425 Lexington Avenue
New York, New York
40.6
499 Park Avenue
New York, New York
40.6
600 Lexington Avenue
New York, New York
40.6
Riverfront Plaza
Richmond, Virginia
91.0
525 B Street
San Diego, California
91.0
The KPMG Building
San Francisco, California
91.0
101 Second Street
San Francisco, California
91.0
720 Olive Way
Seattle, Washington
72.6
1200 Nineteenth Street
Washington, D.C.
40.6
Warner Center
Woodland Hills, California
72.6
(1)
This percentage shows the Fund’s effective ownership
interests in the applicable operating companies
(“Companies”) that own the Properties. The Fund holds
an indirect ownership interest in the Companies through its
investments in (1) Hines-Sumisei NY Core Office Trust
(“NY Trust”) (40.60% at December 31,2006) and (2) Hines-Sumisei U.S. Core Office Trust
(“Core Office Trust”) (99.75% at December 31,2006).
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The consolidated
financial statements include the accounts of the Fund, as well
as the accounts of entities over which the Fund exercises
financial and operating control and the related amounts of
minority interest. All intercompany balances and transactions
have been eliminated in consolidation.
The Fund evaluates the need to consolidate joint ventures based
on standards set forth in Financial Accounting Standards Board
(“FASB”) Interpretation No. (“FIN”) 46R,
Consolidation of Variable Interest Entities, and American
Institute of Certified Public Accountants’ Statement of
Position
78-9,
Accounting for Investments in Real Estate Ventures, as
amended by Emerging Issues Task Force Issue
No. 04-5,
Investor’s Accounting for an Investment in a Limited
Partnership When the Investor Is the Sole General Partner and
the
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Limited Partners Have Certain Rights. In accordance with
this accounting literature, the Fund will consolidate joint
ventures that are determined to be variable interest entities
for which it is the primary beneficiary. The Fund will also
consolidate joint ventures that are not determined to be
variable interest entities, but for which it exercises
significant control over major operating decisions, such as
approval of budgets, selection of property managers, asset
management, investment activity and changes in financing. As of
December 31, 2006, the Fund has no unconsolidated interests
in joint ventures.
Investment Property — Real estate assets are
stated at cost less accumulated depreciation, which, in the
opinion of management, does not exceed the individual
property’s fair value. Depreciation is computed using the
straight-line method. The estimated useful lives for computing
depreciation are 5 to 10 years for furniture and fixtures,
5 to 20 years for electrical and mechanical installations,
and 40 years for buildings. Major replacements where the
betterment extends the useful life of the assets are
capitalized. Maintenance and repair items are expensed as
incurred.
Real estate assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of
the individual property may not be recoverable. In such an
event, a comparison will be made of the current and projected
operating cash flows of each property on an undiscounted basis
to the carrying amount of such property. Such carrying amount
would be adjusted, if necessary, to estimated fair values to
reflect impairment in the value of the asset. At
December 31, 2006 and 2005, management believes no such
impairment has occurred.
Acquisitions of properties are accounted for utilizing the
purchase method, and accordingly, the results of operations of
acquired properties are included in the Fund’s results of
operations from the respective dates of acquisition. Estimates
of future cash flows and other valuation techniques similar to
those used by independent appraisers are used to allocate the
purchase price of acquired property between land, buildings and
improvements, equipment, asset retirement obligations, assumed
mortgage notes payable, and identifiable intangible assets and
liabilities, such as amounts related to in-place leases,
acquired above- and below-market leases, acquired above- and
below-market ground leases and tenant relationships. Initial
valuations are subject to change until such information is
finalized no later than 12 months from the acquisition date.
The estimated fair value of acquired in-place leases are the
costs the Fund would have incurred to lease the properties to
the occupancy level of the properties at the date of
acquisition. Such estimates include the fair value of leasing
commissions, legal costs and other direct costs that would be
incurred to lease the properties to such occupancy levels.
Additionally, the Fund evaluates the time period over which such
occupancy levels would be achieved and includes an estimate of
the net operating costs (primarily consisting of real estate
taxes, insurance and utilities) that would be incurred during
the lease-up
period. Acquired in-place leases as of the date of acquisition
are amortized to amortization expense over the remaining lease
terms.
Acquired above- and below-market lease values are recorded based
on the present value (using an interest rate that reflects the
risks associated with the lease acquired) of the difference
between the contractual amounts to be paid pursuant to the
in-place leases and management’s estimate of fair market
value lease rates for the corresponding in-place leases,
measured over a period equal to the remaining noncancelable
terms of the leases. The capitalized above- and below-market
lease values are amortized as adjustments to rent revenue over
the remaining noncancelable terms of the respective leases.
Should a tenant terminate its lease, the unamortized portion of
the in-place lease value is charged to amortization expense, and
the unamortized portion of out-of-market lease value is charged
to rental revenue.
Acquired above- and below-market ground lease values are
recorded based on the difference between the present value
(using an interest rate that reflects the risks associated with
the lease acquired) of the contractual amounts to be paid
pursuant to the ground leases and management’s estimate of
fair market value of land
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
under the ground leases. The capitalized above- and below-market
lease values are amortized as adjustments to ground lease
expense over the lease term.
Cash and Cash Equivalents — The Fund defines
cash and cash equivalents as cash on hand and investment
instruments with original maturities of three months or less.
Restricted Cash — At December 31, 2006 and
2005, restricted cash consists of tenant security deposits and
escrow deposits held by lenders for property taxes, tenant
improvements and leasing commissions. Substantially all
restricted cash is invested in demand or short-term instruments.
Deferred Financing Costs — Deferred financing
costs consist of direct costs incurred in obtaining the notes
payable (see Note 4). These costs are being amortized into
interest expense on a straight-line basis, which approximates
the effective interest method, over the term of the notes. For
the years ended December 31, 2006, 2005, and 2004,
$4.4 million, $4.2 million, and $2.4 million,
respectively, was amortized into interest expense. Deferred
financing costs are shown at cost in the consolidated balance
sheets, net of accumulated amortization of $10.3 million
and $5.9 million at December 31, 2006 and 2005,
respectively.
Deferred Leasing Costs — Direct leasing costs,
primarily third-party leasing commissions and tenant incentives,
are capitalized and amortized over the life of the related
lease. Tenant incentive amortization was $2.9 million,
$1.8 million, and $0 for the years ended December 31,2006, 2005, and 2004, respectively, and was recorded as an
offset to rental revenue. Amortization expense related to other
direct leasing costs for the years ended December 31, 2006,
2005, and 2004, was $2.1 million, $1.4 million, and
$0.3 million, respectively. Deferred leasing costs are
shown at cost in the consolidated balance sheets, net of
accumulated amortization of $8.4 million and
$3.5 million at December 31, 2006 and 2005,
respectively.
Revenue Recognition — The Fund recognizes
rental revenue on a straight-line basis over the life of the
lease, including the effect of rent holidays, if any.
Straight-line rent receivable included in the accompanying
consolidated balance sheets consists of the difference between
the tenants’ rent calculated on a straight-line basis from
the date of acquisition or lease commencement over the remaining
term of the related leases and the tenants’ actual rent due
under the leases.
Revenues relating to lease termination fees are recognized at
the time a tenant’s right to occupy the space is terminated
and when the Fund has satisfied all obligations under the lease
agreement. For the years ended December 31, 2006, 2005, and
2004, the Fund recorded $1.2 million, $22,000, and
$13.2 million, respectively, in rental revenue relating to
lease termination fees.
Other revenues consist primarily of parking revenue and tenant
reimbursements. Parking revenue represents amounts generated
from contractual and transient parking and is recognized in
accordance with contractual terms or as services are rendered.
Other revenues relating to tenant reimbursements are recognized
in the period that the expense is incurred.
Income Taxes — No provision for income taxes is
made in the accounts of the Fund since such taxes are
liabilities of the partners and depend upon their respective tax
situations.
In May 2006, the State of Texas enacted legislation that
replaces the current franchise tax with a new “margin
tax,” which is effective for tax reports due on or after
January 1, 2008, and which will compute the tax based on
business done in calendar years beginning after
December 31, 2006. The new legislation expands the number
of entities covered by the current Texas franchise tax and
specifically includes limited partnerships as subject to the new
margin tax. Currently, the Fund owns an indirect interest in two
properties located in Texas, and as a consequence, the new
margin tax will result in income tax expense in future years.
Use of Estimates — The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Reclassifications — Certain reclassifications
have been made to amounts in the 2005 and 2004 consolidated
financial statements to be consistent with the 2006
presentation, which includes the reclassification of amounts due
to affiliates to be disclosed separately from accounts payable
and accrued expenses in the consolidated balance sheets and
within cash flows from operating activities in the consolidated
statements of cash flows.
Concentration of Credit Risk — At
December 31, 2006, the Fund had cash and cash equivalents
and restricted cash in excess of federally insured levels on
deposit with financial institutions. Management regularly
monitors the financial stability of these financial institutions
and believes that the Fund is not exposed to any significant
credit risk in cash or cash equivalents or restricted cash.
Recent Accounting Pronouncements — In June
2006, the FASB issued FIN 48, Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement
No. 109, which clarifies the accounting for uncertainty
in tax positions. FIN 48 requires we recognize in our
financial statements the impact of a tax position, if the
position is more likely than not of being sustained on audit,
based on the technical merits of the position. FIN 48 is
effective for fiscal years beginning after December 15,2006. Management has assessed the potential impact of
FIN 48 and does not anticipate the adoption will have a
material impact on the Fund’s financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (“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. The statement does not require
new fair value measurements, but is applied to the extent other
accounting pronouncements require or permit fair value
measurements. The statement emphasizes fair value as a
market-based measurement that should be determined based on
assumptions market participants would use in pricing an asset or
liability. Management will be required to disclose the extent to
which fair value is used to measure assets and liabilities, the
inputs used to develop the measurements, and the effect of
certain of the measurements on earnings (or changes in net
assets) for the period. SFAS No. 157 is effective for
fiscal years beginning after September 30, 2007. Management
does not anticipate the adoption of this statement will have a
material impact on the Fund’s financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB Statement
No. 115. SFAS No. 159 expands opportunities
to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and
certain other items at fair value. This statement is effective
for fiscal years beginning after September 30, 2007.
Management has not decided if it will early adopt
SFAS No. 159 or if it will choose to measure any
eligible financial assets and liabilities at fair value.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
3.
REAL
ESTATE INVESTMENTS
At December 31, 2006, the Fund indirectly owned interests
in properties as follows:
Acquisition
Leasable
Property
City
Date
Square Feet
% Leased
(Unaudited)
(Unaudited)
One Atlantic Center
Atlanta, Georgia
July 2006
1,100,312
82
%
Three First National Plaza
Chicago, Illinois
March 2005
1,419,079
92
333 West Wacker
Chicago, Illinois
April 2006
845,247
90
One Shell Plaza
Houston, Texas
May 2004
1,228,160
97
Two Shell Plaza
Houston, Texas
May 2004
566,960
94
425 Lexington Avenue
New York, New York
August 2003
700,034
100
499 Park Avenue
New York, New York
August 2003
288,184
100
600 Lexington Avenue
New York, New York
February 2004
281,072
100
Riverfront Plaza
Richmond, Virginia
November 2006
949,873
99
525 B Street
San Diego, California
August 2005
447,159
89
The KPMG Building
San Francisco, California
September 2004
379,328
96
101 Second Street
San Francisco, California
September 2004
388,370
99
720 Olive Way
Seattle, Washington
January 2006
300,710
82
1200 Nineteenth Street
Washington, D.C.
August 2003
234,718
100
Warner Center
Woodland Hills, California
October 2006
808,274
98
9,937,480
As of December 31, 2006, cost and accumulated depreciation
and amortization related to investments in real estate assets
and related lease intangibles were as follows (in thousands):
Acquired
Acquired
Acquired
Buildings and
In-Place
Above-Market
Below-Market
Above-Market
Improvements
Leases
Leases
Leases
Ground Leases
Cost
$
1,666,784
$
531,218
$
211,179
$
50,876
$
4,787
Less: accumulated depreciation and amortization
(60,720
)
(118,197
)
(55,881
)
(15,037
)
(56
)
Net
$
1,606,064
$
413,021
$
155,298
$
35,839
$
4,731
As of December 31, 2005, cost and accumulated depreciation
and amortization related to investments in real estate assets
and related lease intangibles were as follows (in thousands):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense was $56.3 million, $38.9 million,
and $32.5 million for in-place leases for the years ended
December 31, 2006, 2005, and 2004, respectively.
Amortization of out-of-market leases, net, was
$15.3 million, $16.2 million, and $10.8 million
for the years ended December 31, 2006, 2005, and 2004,
respectively. Amortization of above-market ground leases was
approximately $56,000 for the year ended December 31, 2006,
and $0 for the years ended December 31, 2005 and 2004. The
weighted-average lease life of in-place and out-of-market leases
was eight years at December 31, 2006.
Anticipated amortization of in-place leases, out-of-market
leases, net, and above-market ground leases for the next five
years is as follows (in thousands):
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
4.
NOTES PAYABLE
The Fund’s notes payable at December 31, 2006 and
2005, consist of the following (in thousands):
Outstanding
Outstanding
Interest Rate
Principal
Principal
as of
Balance at
Balance at
December 31,
Maturity
December 31,
December 31,
Description
2006
Date
2006
2005
MORTGAGE DEBT
SECURED NONRECOURSE FIXED RATE MORTGAGE LOANS:
Bank of America/Connecticut General Life Insurance:
425 Lexington Avenue, 499 Park Avenue, 1200 Nineteenth Street
Note A1
4.7752%
9/01/2013
$
160,000
$
160,000
Note A2
4.7752
9/01/2013
104,600
104,600
Note B
4.9754
9/01/2013
51,805
51,805
Prudential Financial, Inc. — 600 Lexington Avenue
5.74
3/01/2014
49,850
49,850
Prudential Mortgage Capital Company Note A — One
Shell Plaza/Two Shell Plaza
4.64
6/01/2014
131,963
131,963
Prudential Mortgage Capital Company Note B — One
Shell Plaza/Two Shell Plaza
5.29
6/01/2014
63,537
63,537
Nippon Life Insurance Companies — The KPMG Building
5.13
9/20/2014
80,000
80,000
Nippon Life Insurance Companies — 101 Second Street
5.13
4/19/2010
75,000
75,000
The Northwestern Mutual Life Insurance Company — Three
First National Plaza
4.67
4/01/2012
126,900
126,900
NLI Properties East, Inc. — 525 B Street
4.69
8/07/2012
52,000
52,000
Prudential Insurance Company of America — 720 Olive Way
5.32
2/1/2016
42,400
—
Prudential Insurance Company of America —
333 West Wacker
5.66
5/1/2016
124,000
—
Prudential Insurance Company of America — One Atlantic
Center
6.10
8/1/2016
168,500
—
Bank of America, N.A. — Warner Center
5.628
10/2/2016
174,000
—
Metropolitan Life Insurance Company — Riverfront Plaza
5.20
6/1/2012
135,900
—
1,540,455
895,655
SECURED NONRECOURSE VARIABLE RATE MEZZANINE LOANS —
The Northwestern Mutual Life Insurance Company — Three
First National Plaza
6.33%
4/01/2010
14,100
14,100
REVOLVING CREDIT FACILITIES Key Bank National
Association — NY Core Office Trust
6.95% weighted avg.
1/28/2008
18,575
5,275
Total
$
1,573,130
$
915,030
Substantially all the mortgage notes described above require
monthly interest-only payments, and prepayment of principal
balance is permitted with payment of a premium. Each mortgage
note is secured by a
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
mortgage on the related property, the leases on the related
property, and the security interest in personal property located
on the related property.
Revolving
Credit Facilities
Key Bank National Association — NY Core Office
Trust — On January 28, 2005, and as amended
July 13, 2006, Hines-Sumisei NY Core Office Trust (“NY
Trust”), a subsidiary of the Fund, entered into an
agreement with Key Bank National Association for a
$30.0 million revolving line of credit (“Key Bank
Agreement 1”). The Key Bank Agreement 1 allows for
borrowing at a variable rate or a LIBOR-based rate plus a spread
ranging from 150 to 200 basis points based on a prescribed
leverage ratio calculated for NY Trust. Payments of interest are
due monthly. NY Trust may extend the maturity date for two
successive
12-month
periods. NY Trust may prepay the note at any time with three
business days’ notice.
Key Bank National Association — U.S. Core
Office Properties — On August 31, 2005, and
as amended November 8, 2006, Hines-Sumisei U.S. Core
Office Properties LP (“Core Office Properties”), a
subsidiary of the Fund, entered into an agreement with Key Bank
National Association for a $175.0 million revolving line of
credit (“Key Bank Agreement 2”) with an accordion to
$300.0 million. The Key Bank Agreement 2 allows for
borrowing at a variable rate or a LIBOR-based rate plus a spread
ranging from 125 to 200 basis points based on a prescribed
leverage ratio calculated for Core Office Properties, which
ratio under the Key Bank Agreement 2 takes into account Core
Office Properties’ effective ownership interest in the debt
and certain allowable assets of entities in which Core Office
Properties directly and indirectly invests. Payments of interest
are due monthly, and all outstanding principal and unpaid
interest is due on October 31, 2009. Core Office Properties
may extend the maturity date for two successive
12-month
periods. Core Office Properties may prepay the note at any time
with three business days’ notice. There was no outstanding
principal balance on this revolving line of credit at
December 31, 2006.
As of December 31, 2006, the scheduled principal payments
on notes payable are due as follows (in thousands):
Years Ending December 31
2007
$
—
2008
18,575
2009
1,466
2010
92,139
2011
3,189
Thereafter
1,457,761
1,573,130
Unamortized discount
(1,840
)
Total
$
1,571,290
All of the notes described above contain both affirmative and
negative covenants. Management believes that the Fund was in
compliance with such covenants at December 31, 2006.
5.
RENTAL
REVENUES
The Fund has entered into noncancelable lease agreements,
subject to various escalation clauses, with tenants for office
and retail space.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2006, the approximate fixed future
minimum rentals in various years through 2029 (excluding rentals
from month-to-month leases) are as follows:
Fixed Future
Minimum
Years Ending December 31
Rentals
2007
$
243,718
2008
233,152
2009
228,546
2010
217,327
2011
207,206
Thereafter
876,941
Of the total rental revenue for the year ended December 31,2006, approximately:
•
36% was earned from several tenants in the legal services
industry, whose leases expire at various times during the years
2007 through 2027, and
•
11% was earned from two affiliated tenants in the oil and gas
industry, whose leases expire on December 31, 2015.
The tenant leases generally provide for annual rentals that
include the tenants’ proportionate share of real estate
taxes and certain building operating expenses. The
Properties’ tenant leases have remaining terms of up to
23 years and generally include tenant renewal options that
can extend the lease terms.
6.
GOVERNING
AGREEMENTS AND INVESTOR RIGHTS
Governance of the Fund — The Fund is governed
by the Partnership Agreement, as amended and restated on
September 1, 2006. The term of the Fund shall continue
until the Fund is dissolved pursuant to the provisions of the
Partnership Agreement.
Management — Capital, as managing general
partner, manages the day-to-day affairs of the Fund. The
managing general partner has the power to direct the management,
operation, and policies of the Fund subject to oversight of a
management board. A subsidiary of Hines Real Estate Investment
Trust, Inc. holds a non-managing general partner interest in the
Fund. The Fund is required to obtain approval from the
non-managing general partner for certain significant actions
specified in the Partnership Agreement. Hines provides advisory
services to the Fund pursuant to an advisory agreement.
Governance — The managing general partner is
subject to the oversight of a seven-member management board and
certain approval rights of the Non-Managing General Partner, the
Advisory Committee, and the Limited Partners. The approval of
the management board is required for acquiring and disposing of
investments, incurring indebtedness, undertaking offerings of
equity interests in the Fund, approving annual budgets, and
other major decisions as outlined in the Partnership Agreement.
Contributions — A new investor entering the
Fund generally acquires units of limited partnership interest
pursuant to a subscription agreement under which the investor
agrees to contribute a specified amount of capital to the Fund
in exchange for units (“Capital Commitment”). A
Capital Commitment may be funded and units may be issued in
installments; however, the new investor is admitted to the Fund
as a limited partner upon payment for the first units issued to
the investor. Additional cash contributions for any unfunded
commitments are required upon direction by the managing general
partner.
Distributions — Cash distributions will be made
to the partners of record as of the applicable record dates, not
less frequently than quarterly, in proportion to their ownership
interests.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Allocation of Profits/Losses — All profits and
losses for any fiscal year shall be allocated pro rata among the
partners in proportion to their ownership interests. All profit
and loss allocations are subject to the special and curative
allocations as provided in the Partnership Agreement.
Fees — Unaffiliated limited partners, as
defined in the Partnership Agreement, of the Fund pay
acquisition and asset management fees to the managing general
partner or its designees. These fees are deducted from
distributions otherwise payable to a partner and are in addition
to, rather than a reduction of, the Capital Commitment of the
partner. During the Fund’s initial investment period, which
ended on February 2, 2007, these fees were paid 100% in
cash. After the initial investment period, they will be paid 50%
in cash and 50% in the form of a profits interest intended to
approximate Capital having reinvested such 50% of the fees in
Partnership units at current unit value.
Redemptions — Beginning with the fiscal year
ending after the later of (1) February 2, 2007, or
(2) one year after acquisition of such interest, a partner
may request redemption of all or a portion of its interest in
the Fund at a price equal to the interest’s value based on
the net asset value of the Fund at the time of redemption. The
Fund will attempt to redeem up to 10%, in the aggregate, of the
outstanding interests in the Fund, Core Office Trust, and Core
Office Properties during any calendar year, provided that the
Fund will not redeem any interests if the managing general
partner determines that such redemption would result in any real
estate investment trust (“REIT”) in which the Fund has
an interest ceasing to qualify as a domestically controlled REIT
for U.S. income tax purposes.
Debt — The Fund, through its subsidiaries, may
incur debt with respect to any of its investments or future
investments in real estate properties, subject to the following
limitations at the time the debt is incurred: (1) 65%
debt-to-value limitation for each property and (2) 50%
aggregate debt-to-value limitation for all Fund assets,
excluding in both cases assets held by NY Trust. However, the
Fund may exceed the 50% aggregate limitation in (2) above
if the managing general partner determines it is advisable to do
so as long as the managing general partner makes a reasonable
determination that the excess indebtedness will be repaid within
one year of its incurrence. NY Trust has a 55% debt-to-value
limitation at the time any such indebtedness is incurred. In
addition, the Fund, through its subsidiaries, may obtain a
credit facility secured by unfunded capital commitments from its
partners. Such credit facility will not be counted for purposes
of the leverage limitations above, as long as no assets of the
Fund are pledged to secure such indebtedness.
Rights of General Motors Investment Management
Corporation — The Second Amended and Restated
Investor Rights Agreement among Hines, the Fund, Core Office
Properties, NY Trust, Hines Shell Plaza Partners LP (“Shell
Plaza Partners”), Hines Three First National Partners LP
(“TFN Partners”), Hines 720 Olive Way Partners LP
(“720 Olive Way Partners”), Hines 333 West Wacker
Partners LP (“333 West Wacker Partners”), Hines
Warner Center Partners LP (“Warner Center Partners”),
General Motors Investment Management Corporation
(“GMIMC”) and a number of institutional investors
advised by GMIMC (each an “Institutional Co-Investor”
and collectively, the “Institutional Co-Investors”),
dated October 12, 2005, provides GMIMC with certain
co-investment rights with respect to the Fund’s
investments. As of December 31, 2006,
Co-Investment Rights — GMIMC, on behalf of one
or more funds it advises, has the right to co-invest with the
Fund in connection with each investment made by the Fund in an
amount equal to at least 20% of the total equity capital to be
invested in such investment.
GMIMC also has the right, but not the obligation, on behalf of
one or more funds it advises, to co-invest with third-party
investors in an amount equal to at least 50% of any
co-investment capital sought by the Fund from third-party
investors for a prospective investment. In order to exercise
such third-party co-investment right, GMIMC must invest at least
50% of the equity to be invested from sources other than the
Fund.
If the owner of an investment desires to contribute the
investment to the Fund and receive interests in the Fund or a
subsidiary of the Fund on a tax-deferred basis, GMIMC has no
co-investment rights with respect to the portion of such
investment being made through the issuance of such tax-deferred
consideration.
Redemption Rights — For each asset in
which the Institutional Co-Investors acquire interests pursuant
to GMIMC’s co-investment rights, the Fund must establish a
three-year period ending no later than the 12th anniversary
of the date such asset is acquired, unless GMIMC elects to
extend it, during which the entity through which the
Institutional Co-Investors make their investments will redeem or
acquire such Institutional Co-Investors’ interest in such
entity at a price based on the net asset value of such entity at
the time of redemption date.
Buy/Sell Rights — GMIMC, on behalf of the
Institutional Co-Investors having an interest in NY Trust, Shell
Plaza Partners, TFN Partners, 720 Olive Way Partners, 333 Wacker
Partners, Warner Center Partners and any other entity through
which a co-investment is made (each, a “Co-Investment
Entity”), on the one hand, and the Fund, on the other hand,
have the right to initiate at any time the purchase and sale of
any property in which any Institutional Co-Investor has an
interest (the “Buy/Sell”). A Buy/Sell is triggered by
either party delivering a written notice to the other party that
identifies the property and states the value the tendering party
assigns to such property (the “Stated Value”). The
recipient may elect by written notice to be the buyer or seller
with respect to such property or, in the absence of a written
response, will be deemed to have elected to be a seller. If the
property that is the subject of the Buy/Sell is owned by a
Co-Investment Entity that owns more than one property, then such
Co-Investment Entity will sell the property to the party
determined to be the buyer pursuant to the Buy/Sell notice
procedure for the Stated Value, and the proceeds of the sale
will be distributed in accordance with the applicable provisions
of the constituent documents of the Co-Investment Entity. If the
property in question is the only property owned by a
Co-Investment Entity, then the party determined to be the buyer
pursuant to the Buy/Sell notice procedure will acquire the
interest of the selling party in the Co-Investment Entity for an
amount equal to the amount that would be distributed to the
selling party if the property were sold for the Stated Value and
the proceeds distributed in accordance with the applicable
provisions of the constituent documents of the Co-Investment
Entity. For this purpose, the Shell Buildings and Warner Center
are each considered to be a single property.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Rights of IK Funds — As of December 31,2006, IK US Portfolio Invest GmbH & Co. KG (“IK
Fund I”), a limited partnership established under the
laws of Germany, owned 73,106 units of limited partner
interest in Core Office Properties and also had an unfunded
commitment to invest an additional $40.8 million to Core
Office Properties. Additionally, IK US Portfolio Invest Zwei
GmbH & Co. KG (“IK Fund II”) and IK US
Portfolio Invest Drei GmbH & Co. KG (“IK
Fund III”), each a limited partnership established
under the laws of Germany (collectively with IK Fund I, the
“IK Funds”), have made a commitment to contribute up
to an additional $200.0 million to Core Office Properties,
which is conditioned on IK Fund II and IK Fund III
raising sufficient equity capital to fund such commitment. The
IK Funds have the right to require Core Office Properties to
redeem, at a price based on the net asset value of Core Office
Properties as of the date of redemption, all or any portion of
its interest, subject to a maximum redemption amount of
$150.0 million for IK Fund II and IK Fund III, as
of the following dates:
Any remaining interest not redeemed due to the maximum
limitation will be redeemed in the subsequent year or years
according to the Partnership Agreement’s redemption policy
as described above. The Fund is obligated to provide Core Office
Properties with sufficient funds to fulfill this priority
redemption right, to the extent sufficient funds are otherwise
not available to Core Office Properties. An IK Fund is not
entitled to participate in the redemption rights available to
Core Office Properties investors prior to such IK Funds’
redemption date.
7.
RELATED-PARTY
TRANSACTIONS
The Companies have entered into management agreements with
Hines, a related party, to manage the operations of the
Properties. As compensation for its services, Hines receives the
following:
•
A property management fee equal to the lesser of the amount of
the management fee that is allowable under tenant leases or a
specific percentage of the gross revenues of the specific
Property. The Fund incurred management fees of
$5.8 million, $3.9 million, and $2.4 million for
the years ended December 31, 2006, 2005, and 2004,
respectively.
•
Reimbursement for salaries and wages of its
on-site
personnel. Salary and wage reimbursements of its
on-site
property personnel incurred by the Fund for the years ended
December 31, 2006, 2005, and 2004, were $10.6 million,
$7.8 million, and $4.2 million, respectively.
•
Reimbursement for various direct services performed off site
that are limited to the amount that is recovered from tenants
under their leases and usually will not exceed in any calendar
year a per-rentable-square-foot limitation. In certain
instances, the per-rentable-square-foot limitation may be
exceeded, with the excess offset against property management
fees received. This per-rentable-square-foot limitation was
approximately $0.23, $0.21, and $0.21 for 2006, 2005, and 2004,
respectively, increasing on January 1 of each subsequent year
based on changes in the consumer price index. For the years
ended December 31, 2006, 2005, and 2004, reimbursable
services incurred by the Fund were $1.7 million,
$2.6 million, and $0.5 million, respectively.
•
Leasing commissions equal to 1.5% of gross revenues payable over
the term of each executed lease, including any lease amendment,
renewal, expansion, or similar event. Leasing commissions of
$3.5 million, $2.9 million, and $2.9 million were
incurred by the Fund during the years ended December 31,2006, 2005, and 2004, respectively.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
•
Construction management fees equal to 2.5% of the total project
costs relating to the redevelopment, plus direct costs incurred
by Hines in connection with providing the related services.
Construction management fees of approximately $64,000, $52,000,
and $4,000 were incurred by the Fund during the years ended
December 31, 2006, 2005, and 2004, respectively.
•
Other fees, primarily related to security services and parking
operations, in the amounts of $1.1 million,
$1.0 million, and $0.9 million were incurred by the
Fund during the years ended December 31, 2006, 2005, and
2004, respectively.
Certain Companies of the Fund have entered into lease agreements
with Hines Core Fund Services, LLC (“Services”),
an affiliate of Hines, for the operation of their respective
parking garages. Under the terms of the lease agreements, the
Fund received rental fees of $4.5 million,
$3.4 million, and $2.7 million during the years ended
December 31, 2006, 2005, and 2004, respectively.
Receivables due to the Fund from Services were approximately
$386,000 and $259,000 at December 31, 2006 and 2005,
respectively.
In addition, the Fund has related-party payables owed to Hines
and its affiliated entities at December 31, 2006 and 2005,
of $4.2 million and $2.4 million, respectively, for
accrued management fees, payroll expense, leasing commissions,
off-site services, and legal and other general and
administrative costs.
8.
LEASE
OBLIGATIONS
The Shell Buildings are subject to certain ground leases that
expire in 2065 and 2066. One ground lease that was to expire in
2065 contained a purchase option that allowed the Fund to
purchase the land in June 2006. The Fund exercised the purchase
option and paid the purchase price of $1.2 million in June
2006. A second ground lease that expires in 2065 contains a
purchase option that allows the Fund to purchase the land within
a five-year period that begins in June 2026.
One Atlantic Center is subject to a ground lease that expires in
2033. The ground lease contains renewal options at
10-year term
increments, up to a total term of 99 years.
Straight-line rent payable included on the Fund’s
consolidated balance sheets consists of the difference between
the rental payments due under the lease calculated on a
straight-line basis from the date of acquisition or the lease
commencement date over the remaining term of the lease and the
actual rent due under the lease.
As of December 31, 2006, required payments under the terms
of the leases are as follows (in thousands):
Fixed Future
Minimum
Years Ending December 31
Rentals
2007
$
1,513
2008
1,574
2009
1,633
2010
1,695
2011
1,759
Thereafter
61,720
Ground lease expense for the years ended December 31, 2006,
2005, and 2004, was $2.0 million, $0.5 million, and
$0.3 million, respectively, and is included in general and
administrative expenses in the accompanying consolidated
statements of operations.
9.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Disclosure about fair value of financial instruments is based on
pertinent information available to management as of
December 31, 2006 and 2005. Considerable judgment is
necessary to interpret market data
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and develop estimated fair values. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
the Fund could obtain on disposition of the financial
instruments. The use of different market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
As of December 31, 2006 and 2005, management estimates that
the carrying values of cash and cash equivalents, tenant and
other receivables, accounts payable and accrued expenses, other
liabilities, and distributions payable are recorded at amounts
that reasonably approximate fair value due to the short-term
nature of these items. Fair value of notes payable at
December 31, 2006 and 2005, was approximately
$1,548.9 million and $891.6 million, respectively,
based upon interest rates available for the issuance of debt
with similar terms and maturities, with carrying amounts of
$1,571.3 million and $915.0 million, respectively.
10.
SUPPLEMENTAL
CASH FLOW DISCLOSURES
Supplemental cash disclosures were as follows (in thousands):
2006
2005
2004
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION —
Cash paid during the period for interest
$
61,432
$
42,496
$
26,630
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Accrued additions to investment property
$
1,364
$
2,836
$
—
Distributions authorized and unpaid
$
17,218
$
13,960
$
7,078
Dividends declared and unpaid to minority interest holders
$
11,674
$
7,256
$
6,117
Conversion of note payable to equity
$
—
$
—
$
44,053
Conversion of minority interests
$
—
$
18,837
$
—
Mortgage assumed upon acquisition of property
$
134,017
$
—
$
—
Security deposits assumed upon acquisition of property
$
1,644
$
—
$
—
11.
SUBSEQUENT
EVENTS
On March 29, 2007, an affiliate of Hines entered into a
contract (the “Purchase Agreement”) to acquire a
portfolio of office buildings in Sacramento, California (the
“Sacramento Properties”) on behalf of an indirect
subsidiary of the Fund, as well as acquire certain other
properties on behalf of another affiliate of Hines. The
Sacramento Properties consist of approximately 1.4 million
square feet (unaudited) and are located in and around the
Sacramento metropolitan area. The contract purchase price of the
Sacramento Properties is expected to be approximately
$490.2 million, exclusive of transaction costs, financing
fees and working capital reserves, and the transaction is
expected to close on or about May 1, 2007. Additionally,
the indirect subsidiary of the Fund has entered into an
unconditional guaranty to pay a termination fee in the amount of
approximately $49.0 million in the event that the
acquisition of any of the properties subject to the Purchase
Agreement does not close (including the failure to purchase any
of the properties to be acquired by the other affiliate of
Hines). There are no financing or due diligence conditions to
the closing of this transaction.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
Property for the year ended December 31, 2007 in conformity
with accounting principles generally accepted in the United
States of America.
2200, 2222 and 2230 East Imperial Highway (the
“Raytheon/DirecTV Buildings” or the
“Property”), is a complex consisting of two office
buildings located in the South Bay submarket of El Segundo,
California that contains 550,579 square feet (unaudited) of
office space. Hines Real Estate Investment Trust, Inc.
(“Hines REIT”) entered into a contract to acquire the
Property through Hines REIT Properties, L.P., its majority owned
subsidiary (the “Operating Partnership,” and together,
the “Company”). The acquisition is expected to be
completed in February 2008 by Hines REIT El Segundo LP, a
wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. This Historical Summary includes the
historical revenues and operating expenses of the Property,
exclusive of interest income, early lease termination fees,
management fees, and depreciation and amortization, which may
not be comparable to the corresponding amounts reflected in the
future operations of the Property.
(3)
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
Revenue
Recognition
The Property’s operations consist of rental revenue earned
from a tenant under a leasing arrangement which provides for
minimum rents and an escalation charge to the tenant for the
real estate tax amount of 1,232,930. All leases with the tenants
are
triple-net
leases and leases have been accounted for as operating leases.
Rental revenue is recognized by amortizing the aggregate lease
payments on the straight-line basis over the entire terms of the
leases, which resulted in cash receipts in excess of rental
revenue of $7,184,530 for the year ended December 31, 2007.
(5)
Rental
Revenue
The aggregate annual minimum future rental revenue on
noncancelable operating leases in effect as of December 31,2007 is as follows:
RAYTHEON/DIRECTV
BUILDINGS, EL SEGUNDO, CALIFORNIA
NOTES TO
STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES —
(Continued)
Total minimum future rental revenue represents the base rent
that tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents and real estate taxes.
There were no contingent rents for the year-ended
December 31, 2007.
Of the total rental revenue for the year ended December 31,2007, 100% was earned from a tenant in the manufacturing
industry, whose lease expires in December 2008. The tenant has
executed a lease for 345,377 square feet, or approximately
63% of the buildings’ rentable area, which commences
January 1, 2009, and expires on December 31, 2018.
Additionally, a tenant in the information industry, has executed
a lease for 205,202 square feet, or approximately 37% of
the buildings’ rentable area, which commences
January 1, 2009, and expires on December 31, 2013.
(6)
Mortgage
Note Payable
In connection with the acquisition of the Property, Hines REIT
El Segundo LP assumed a mortgage note payable to IXIS Real
Estate Capital Inc. (the “Mortgage Note”). The
Mortgage Note is secured by a deed of trust on certain land and
all improvements and an assignment of tenant leases and related
receivables. The Mortgage Note accrues interest daily at a fixed
rate of 5.675% per annum, which is paid in monthly installments
until the maturity date of December 5, 2016.
Future principal payments on the Mortgage Note are as follows:
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the property located at 2200 Ross Avenue, Dallas, Texas (the
“Property”) for the year ended December 31, 2006.
This Historical Summary is the responsibility of the
Property’s management. Our responsibility is to express an
opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
Property for the year ended December 31, 2006 in conformity
with accounting principles generally accepted in the United
States of America.
2200 Ross Avenue (“Chase Tower” or the
“Property”) is a 55-story office building located in
Dallas, Texas that contains 1,296,407 square feet
(unaudited) of office space. Hines Real Estate Investment Trust,
Inc. (“Hines REIT”) acquired the Property through
Hines REIT Properties, L.P., its majority owned subsidiary (the
“Operating Partnership,” and together, the
“Company”). The acquisition was completed on
November 16, 2007 by Hines REIT 2200 Ross Avenue LP, a
wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statements of revenues and certain operating expenses (the
“Historical Summaries”) have been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. These Historical Summaries include the
historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the nine months ended September 30, 2007
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental revenue earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases with the tenants are gross leases and leases have been
accounted for as operating leases. Rental revenue is recognized
by amortizing the aggregate lease payments on the straight-line
basis over the entire terms of the leases, which resulted in
rental revenue in excess of cash payments of $767,019
(unaudited) for the nine months ended September 30, 2007,
and $1,427,613 for the year ended December 31, 2006.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Revenue
The aggregate annual minimum future rental revenue on
noncancelable operating leases in effect as of December 31,2006 is as follows:
Year Ended December 31:
Amount
2007
$
23,104,680
2008
24,815,715
2009
24,848,185
2010
24,800,258
2011
24,192,861
Thereafter
112,992,395
Total minimum future rental revenue represents the base rent
that tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service and
real estate taxes.
Of the total rental revenue for the year ended December 31,2006, 36% was earned from two tenants in the legal industry,
whose leases expire in various years through 2016, 19% was
earned from a tenant in the finance and insurance industry,
whose lease expires in 2008, and 14% was earned from a tenant in
the accounting industry, whose leases expire in various years
through 2012. Also, of the total rental revenue for the year
ended December 31, 2006, 39% was earned from seven tenants
in the legal industry and 34% was earned from ten tenants in the
finance and insurance industry. The Property did not earn rental
revenue from any other tenants or industry concentration of
tenants that represent more than 10% of the total rental revenue
of the Property for the year ended December 31, 2006.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of a portfolio of nine office/flex buildings located in the
I-494, I-394, and Midway submarkets of Minneapolis, Minnesota
(collectively, the “Properties”) for the year ended
December 31, 2006. This Historical Summary is the
responsibility of the Properties’ management. Our
responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Properties’ internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Properties’ revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
Properties for the year ended December 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America.
Hines Real Estate Investment Trust, Inc. (“Hines
REIT”) acquired a portfolio of nine one-story office/flex
buildings located in the I-494, I-394, and Midway submarkets of
Minneapolis, Minnesota (collectively known as the
“Properties” or “Minneapolis Office/Flex
Portfolio”). The Properties consist of 766,240 square
feet (unaudited) of rentable area. Hines REIT acquired the
Properties, through Hines REIT Properties, L.P., its majority
owned subsidiary (the “Operating Partnership,” and
together, the “Company”). The acquisition was
completed on September 28, 2007 by Hines REIT Minneapolis
Industrial, LLC, a wholly-owned subsidiary of the Operating
Partnership.
(2)
Basis of
Presentation
The statements of revenues and certain operating expenses (the
“Historical Summaries”) have been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included in certain
filings with the SEC. These Historical Summaries include the
historical revenues and certain operating expenses of the
Properties, exclusive of interest income and interest expense,
early lease termination fees, management fees, and depreciation
and amortization, which may not be comparable to the
corresponding amounts reflected in the future operations of the
Properties.
The statement of revenues and certain operating expenses and
notes thereto for the six months ended June 30, 2007
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Properties’ management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Properties’ operations consist of rental revenue earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
revenue is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which resulted in rental revenue in excess of cash payments of
approximately $90,000 (unaudited) for the six months ended
June 30, 2007, and approximately $386,000 for the year
ended December 31, 2006.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Revenue
The aggregate annual minimum future rental revenue on
noncancelable operating leases in effect as of December 31,2006 is as follows:
Year Ended December 31:
Amount
2007
$
5,917,626
2008
5,448,514
2009
4,477,265
2010
3,871,580
2011
2,904,463
Thereafter
7,477,396
Total minimum future rental revenue represents the base rent
that tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. There were no
contingent rents for the year ended December 31, 2006.
Of the total rental revenue for the year ended December 31,2006, approximately 12% was earned from a tenant in the finance
and insurance industry, whose lease expires in 2015. Also, of
the total revenue for the year ended December 31, 2006, 21%
was earned from two tenants in the finance and insurance
industry, whose leases expire in various years through 2015, and
27% was earned from 11 tenants in the manufacturing industry,
whose leases expire in various years through 2012. The
Properties did not earn rental revenue from any other tenants or
industry concentration of tenants that represent more than 10%
of the total rental revenue of the Properties for the year ended
December 31, 2006.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the property located at One Wilshire, Los Angeles, California
(the “Property”) for the year ended December 31,2006. This Historical Summary is the responsibility of the
Property’s management. Our responsibility is to express an
opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
Property for the year ended December 31, 2006 in conformity
with accounting principles generally accepted in the United
States of America.
One Wilshire (the “Property”), a thirty-story office
building located in Downtown Los Angeles, California and
contains 664,248 square feet (unaudited) of office space.
Hines Real Estate Investment Trust, Inc. acquired the Property
through Hines REIT Properties, L.P., its majority owned
subsidiary (the “Operating Partnership,” and together,
the “Company”). The acquisition was completed on
August 1, 2007 by Hines REIT One Wilshire LP, a
wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statements of revenues and certain operating expenses (the
“Historical Summaries”) have been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. These Historical Summaries include the
historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, depreciation and
amortization, and fees earned from telecommunication services,
which may not be comparable to the corresponding amounts
reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the six months ended June 30, 2007
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental revenue earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases with the tenants are gross leases and leases have been
accounted for as operating leases. Rental revenue is recognized
by amortizing the aggregate lease payments on the straight-line
basis over the entire terms of the leases, which resulted in
rental revenue in excess of cash payments of approximately
$16,000 (unaudited) for the six months ended June 30, 2007,
and approximately $153,000 for the year ended December 31,2006.
Other revenue consists of fees earned from tenants under leasing
arrangements related to space rental of the HVAC condenser unit,
emergency generator usage, access to telecommunications rooms
and use of connections thereto (excluding fees related to the
use of telecommunication services), and parking fees. Such fees
are specified under lease agreements with the tenants and are
recognized by amortizing the aggregate lease payments on the
straight-line basis over the entire terms of the leases.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
(5)
Rental
Revenue
The aggregate annual minimum future rental revenue on
noncancelable operating leases in effect as of December 31,2006 is as follows:
Year Ended December 31:
Amount
2007
$
13,580,118
2008
12,391,652
2009
10,816,817
2010
10,168,030
2011
8,196,425
Thereafter
23,039,965
Total minimum future rental revenue represents the base rent
that tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service and
real estate taxes. The contingent rents for the year ended
December 31, 2006 were approximately $283,000.
Of the total rental revenue for the year ended December 31,2006, 13% was earned from a tenant in the telecommunications
industry, whose lease expires in various years through 2013, and
12% was earned from a tenant in the legal industry, whose lease
expires in 2018. Also, of the total rental revenue for the year
ended December 31, 2006, 53% was earned from 34 tenants in
the telecommunications industry, whose leases expire in various
years through 2014, and 16% was earned from 4 tenants in the
legal industry whose leases expire in various years through
2018. The Property did not earn rental revenue from any other
tenants or industry concentration of tenants that represent more
than 10% of the total rental revenue of the Property for the
year ended December 31, 2006.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of 3 Huntington Quadrangle, a two-building office complex
located in Melville, New York (the “Property”) for the
year ended December 31, 2006. This Historical Summary is
the responsibility of the Property’s management. Our
responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
Property for the year ended December 31, 2006 in conformity
with accounting principles generally accepted in the United
States of America.
3 Huntington Quadrangle (the “Property”) is a
two-building office complex located in Melville, New York and
contains 407,731 square feet (unaudited) of office space.
Hines Real Estate Investment Trust, Inc. acquired the Property
through Hines REIT Properties, L.P., its majority owned
subsidiary (the “Operating Partnership,” and together,
the “Company”). The acquisition was completed on
July 19, 2007 by Hines REIT 3HQ LLC, a wholly-owned
subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statements of revenues and certain operating expenses (the
“Historical Summaries”) have been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. These Historical Summaries include the
historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the six months ended June 30, 2007
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental revenue earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases with the tenants are gross leases and leases have been
accounted for as operating leases. Rental revenue is recognized
by amortizing the aggregate lease payments on the straight-line
basis over the entire terms of the leases, which resulted in
rental revenue in excess of cash payments of approximately
$152,072 (unaudited) for the six months ended June 30,2007, and approximately $442,245 for the year ended
December 31, 2006.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Revenue
The aggregate annual minimum future rental revenue on
noncancelable operating leases in effect as of December 31,2006 is as follows:
Year Ended December 31:
Amount
2007
$
7,805,613
2008
7,054,349
2009
6,980,288
2010
5,903,657
2011
1,658,057
Thereafter
5,243,645
Total minimum future rental revenue represents the base rent
that tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service and
real estate taxes. There were no contingent rents for the year
ended December 31, 2006.
Of the total rental revenue for the year ended December 31,2006, 31% was earned from a tenant in the finance and insurance
industry, whose lease expires in 2010 and 15% was earned from a
tenant in the healthcare industry, whose lease expires in 2010.
Also, 75% of the total rental revenue for the year ended
December 31, 2006 was earned from nine tenants in the
finance and insurance industry, whose leases expire in various
years through 2017. The Property did not earn rental revenue
from any other tenants or industry concentration of tenants
which represent more than 10% of the total rental revenue of the
Property for the year ended December 31, 2006.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of 2301 Fifth Avenue, Seattle, Washington (the
“Property”) for the year ended December 31, 2006.
This Historical Summary is the responsibility of the
Property’s management. Our responsibility is to express an
opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
Property for the year ended December 31, 2006 in conformity
with accounting principles generally accepted in the United
States of America.
2301 Fifth Avenue (the “Property” or
“5th and Bell”), is a six-story office building
with 197,135 square feet (unaudited) of office space
located in Seattle, Washington. Hines Real Estate Investment
Trust, Inc. (“Hines REIT”) acquired, through Hines
REIT Properties, L.P., its majority owned subsidiary (the
“Operating Partnership,” and together, the
“Company”), the Property. The acquisition was
completed on June 28, 2007 by Hines REIT 5th and Bell
LLC, a wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included in certain
filings with the SEC. This Historical Summary includes the
historical revenues and certain operating expenses of the
Property, exclusive of interest income and interest expense,
early lease termination fees, management fees, and depreciation
and amortization, which may not be comparable to the
corresponding amounts reflected in the future operations of the
Property.
The statement of revenues and certain operating expenses and
notes thereto for the three months ended March 31, 2007
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which amounted to a decrease in rental income of approximately
$7,399 (unaudited) for the three months ended March 31,2007, and an increase in rental income of approximately $52,316
for the year ended December 31, 2006.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2006 was as follows:
Year Ended December 31:
Amount
2007
$
3,469,944
2008
3,593,468
2009
3,284,477
2010
3,347,838
2011
3,451,874
Thereafter
1,976,286
Total future minimum rentals
$
19,123,887
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. Contingent
rent was approximately $2,000 (unaudited) for the three months
ended March 31, 2007. There were no contingent rents for
the year ended December 31, 2006.
Of the total rental income for the year ended December 31,2006, approximately 81% was earned from a tenant in the
technology industry, whose lease expires in 2012.
(6)
Ground
Lease
The Property is subject to a ground lease with Frank H. Hopkins
and Frederick J. Hopkins. The lease expires on March 31,2032. Although the lease provides for increases in payments over
the term of the lease, ground rent expense accrues on a
straight-line basis. Related adjustments increased ground rent
expense by approximately $21,000 (unaudited) for the three
months ending March 31, 2007 and $88,000 for the year ended
December 31, 2006.
Future minimum rents to be paid under the ground lease in effect
at December 31, 2006 are as follows:
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the property located at 595 Bay Street, Toronto, Ontario (the
“Property”) for the year ended December 31, 2006.
This Historical Summary is the responsibility of the
Property’s management. Our responsibility is to express an
opinion on the Historical Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
property located at 595 Bay Street, Toronto, Ontario for the
year ended December 31, 2006 in conformity with accounting
principles generally accepted in the United States of America.
595 Bay Street, Toronto, Ontario (the “Property”
or “Atrium on Bay”), is a mixed use office and retail
complex containing 1,079,870 square feet (unaudited) of
office space located at 595 Bay Street, Toronto, Ontario. Hines
Real Estate Investment Trust, Inc. (“Hines REIT”)
acquired the Property through Hines REIT Properties, L.P., its
majority owned subsidiary (the “Operating
Partnership,” and together, the “Company”). The
acquisition was completed on February 26, 2007 by Hines
REIT 595 Bay Trust, a wholly-owned subsidiary of the Operating
Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. This Historical Summary includes the
historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The Historical Summary is presented in United States dollars
(USD) and the Property’s functional currency is Canadian
dollars (CAD). The translation adjustment from converting the
Historical Summary from CAD to USD resulted in a decrease in
revenues in excess of certain operating expenses of
approximately $1,785,000.
(3)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. The Property
recognizes rental revenue on a straight-line basis over the life
of the lease, including the effect of any rent holidays, which
amounted to an increase in rental income of approximately
$556,000 for the year ended December 31, 2006.
Parking revenue represents amounts generated from contractual
and transient parking and is recognized in accordance with
contractual terms or as services are rendered. Other revenues
consist primarily of tenant reimbursements. Other revenues
relating to tenant reimbursements are recognized in the period
that the expenses are incurred.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
(c)
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Property’s management to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTES TO
STATEMENT OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(4)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2006 is as follows:
Year Ended December 31:
Amount
2007
$
11,712,563
2008
11,709,935
2009
10,665,100
2010
10,233,961
2011
9,797,206
Thereafter
27,735,677
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. The
contingent rents for the year ended December 31, 2006 were
approximately $68,000.
Of the total rental income for the year ended December 31,2006, 38% was earned from a tenant in the financial services
industry, whose leases expire in 2011, 2013, and 2016. No other
tenant leases space representing more than 10% of the total
rental income of the Property for the year ended
December 31, 2006.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the Laguna Buildings, an office complex located on N. E.
31st Way in Redmond, Washington (“Laguna”) for
the year ended December 31, 2006. This Historical Summary
is the responsibility of the Property’s management. Our
responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of Laguna’s revenues and expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of Laguna for
the year ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America.
Located on N. E. 31st Way, Redmond, Washington (the
“Property” or “The Laguna Buildings”), is a
group of six office buildings containing 464,701 (unaudited)
square feet of office space. Hines Real Estate Investment Trust,
Inc. (“Hines REIT”) acquired the Property through
Hines REIT Properties, L.P., its majority owned subsidiary (the
“Operating Partnership,” and together, the
“Company”). The acquisition was completed on
January 3, 2007 by Hines REIT Laguna Campus LLC, a
wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of Article 3.14 of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. This Historical Summary includes the
historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents. Under most of the leases, the tenants pay for
operating expenses directly. All leases have been accounted for
as operating leases. Rental income is recognized by amortizing
the aggregate lease payments on the straight-line basis over the
entire terms of the leases, which amounted to a decrease in
rental income of approximately $357,168 for the year ended
December 31, 2006.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENT OF REVENUES AND CERTAIN OPERATING
EXPENSES (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2006 is as follows:
Year Ended December 31:
Amount
2007
$
7,416,076
2008
7,426,426
2009
6,477,688
2010
4,931,677
2011
4,465,300
Thereafter
763,160
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. There were no
contingent rents for the year ended December 31, 2006.
Of the total rental income for the year ended December 31,2006, 27% was earned from a tenant in the application software
industry, whose leased space expires in 2008 and 2011 and 73%
was earned from a tenant in the industrial products industry,
whose leases expire in 2009 and 2012.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the Daytona Buildings, an office complex located at
148th Avenue and N. E. 32nd Street, Redmond,
Washington (“Daytona”) for the year ended
December 31, 2005. This Historical Summary is the
responsibility of the Property’s management. Our
responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of Daytona’s revenues and expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of Daytona
for the year ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America.
Located at 148th Avenue and N. E. 32nd Street,
Redmond, Washington (the “Property” or “The
Daytona Buildings”), is a group of three office buildings
containing 250,515 (unaudited) square feet of office space.
Hines Real Estate Investment Trust, Inc. (“Hines
REIT”) acquired the Property through Hines REIT Properties,
L.P., its majority owned subsidiary (the “Operating
Partnership,” and together, the “Company”). The
acquisition was completed on December 20, 2006 by Hines
REIT Daytona Campus LLC, a wholly-owned subsidiary of the
Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of Article 3.14 of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. This Historical Summary includes the
historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the nine months ended September 30, 2006
included in this report is unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents. Some leases also provide for escalations and
charges to tenants for their pro rata share of real estate taxes
and operating expenses. All leases have been accounted for as
operating leases. Rental income is recognized by amortizing the
aggregate lease payments on the straight-line basis over the
entire terms of the leases, which amounted to an increase in
rental income of approximately $100,155 (unaudited) for the nine
months ended September 30, 2006, and an increase in rental
income of approximately $300,360 for the year ended
December 31, 2005.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2005 is as follows:
Amount
Year ended December 31:
2006
$
6,276,894
2007
5,968,586
2008
6,115,199
2009
6,205,544
2010
6,391,139
Thereafter
7,684,970
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. There were no
contingent rents for the year ended December 31, 2005.
Of the total rental income for the year ended December 31,2005, 88% was earned from a tenant in the application software
industry, whose lease expires in 2012. No other tenant leases
space representing more than 10% of the total rental income of
the Property for the year ended December 31, 2005.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the property located at 2100 Powell Street, Emeryville,
California (the “Property”) for the year ended
December 31, 2005. This Historical Summary is the
responsibility of the Property’s management. Our
responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
property located at 2100 Powell Street, Emeryville, California
for the year ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America.
2100 Powell Street (the “Property or “Watergate
Tower IV”), is a sixteen-story office building with
344,433 square feet of office space located at 2100 Powell
Street in Emeryville, California. Hines Real Estate Investment
Trust, Inc. (“Hines REIT”) acquired, through Hines
REIT Properties, L.P., its majority owned subsidiary (the
“Operating Partnership,” and together, the
“Company”) the Property. The acquisition was completed
on December 8, 2006 by Hines REIT Watergate Tower IV
LP, a wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to acquired real estate operations to be included with
certain filings with the SEC. This Historical Summary includes
the historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the nine months ended September 30, 2006
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which amounted to an increase in rental income of approximately
$189,000 (unaudited) for the nine months ended
September 30, 2006, and an increase in rental income of
approximately $489,000 for the year ended December 31, 2005.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2005 is as follows:
Amount
Year ended December 31:
2006
$
12,040,766
2007
12,257,759
2008
12,495,418
2009
12,743,410
2010
12,991,401
Thereafter
31,041,004
Total future minimum rentals
$
93,569,758
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. There were no
contingent rents for the year ended December 31, 2005.
Of the total rental income for the year ended December 31,2005, 92% was earned from a tenant in the application software
industry, whose lease expires in 2013 and 8% was earned from a
tenant in the pharmaceutical industry, whose lease expires in
2013.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the property located at 3400 Data Drive, Rancho Cordova,
California (the “Property”) for the year ended
December 31, 2005. This Historical Summary is the
responsibility of the Property’s management. Our
responsibility is to express an opinion on the Historical
Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
property located at 3400 Data Drive, Rancho Cordova, California
for the year ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America.
3400 Data Drive (the “Property”), is a
three-story office building with 149,703 square foot of
office space located in Rancho Cordova, California. Hines Real
Estate Investment Trust, Inc. (“Hines REIT”) acquired,
through Hines REIT Properties, L.P., its majority owned
subsidiary (the “Operating Partnership,” and together,
the “Company”) the Property. The acquisition was
completed on November 21, 2006 by Hines REIT 3400 Data
Drive LP, a wholly-owned subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to acquired real estate operations to be included with
certain filings with the SEC. This Historical Summary includes
the historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the nine months ended September 30, 2006
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which amounted to a decrease in rental income of approximately
$155,000 (unaudited) for the nine months ended
September 30, 2006, and a decrease in rental income of
approximately $117,000 for the year ended December 31, 2005.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2005 is as follows:
Amount
Year ended December 31:
2006
$
3,233,585
2007
3,233,585
2008
3,278,496
2009
3,323,407
2010
3,323,407
Thereafter
8,533,071
Total future minimum rentals
$
24,925,551
Total minimum future rental income represents the base rent the
tenant is required to pay under the terms of their lease
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. There were no
contingent rents for the year ended December 31, 2005.
Of the total rental income for the year ended December 31,2005, 100% was earned from a tenant in the healthcare industry,
whose lease expires in 2013.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Properties’ revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the
properties located at 901 and 951 East Byrd Street, Richmond,
Virginia for the year ended December 31, 2005 in conformity
with accounting principles generally accepted in the United
States of America.
901 and 951 East Byrd Street (the “Properties” or
“Riverfront Plaza”) consists of two 21-story office
buildings containing 950,475 square feet of office space
located in Richmond, Virginia. Hines Riverfront Plaza LP (the
“Company”), an indirect subsidiary of Hines-Sumisei
U.S. Core Office Fund L.P. (the “Core
Fund”), acquired the Properties on November 16, 2006.
Hines REIT Properties, L.P., a subsidiary of Hines Real Estate
Investment Trust, Inc., owned a 32.81% (unaudited) non-managing
general partner interest in the Core Fund as of the date of this
acquisition.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to acquired real estate operations to be included with
certain filings with the SEC. This Historical Summary includes
the historical revenues and operating expenses of the
Properties, exclusive of interest income and interest expense,
early lease termination fees, management fees, and depreciation
and amortization, which may not be comparable to the
corresponding amounts reflected in the future operations of the
Properties.
The statement of revenues and certain operating expenses and
notes thereto for the nine months ended September 30, 2006
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Properties’ management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(e)
Revenue
Recognition
The Properties’ operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which amounted to an increase in rental income of approximately
$577,700 (unaudited) for the nine months ended
September 30, 2006, and an increase in rental income of
approximately $1,306,000 for the year ended December 31,2005.
(f)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2005 is as follows:
Amount
Year ended December 31:
2006
$
14,396,690
2007
13,944,038
2008
13,972,050
2009
13,498,696
2010
12,835,791
Thereafter
51,284,937
Total future minimum rentals
$
119,932,202
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. Contingent
rent was approximately $1,000 in 2005.
Of the total rental income for the year ended December 31,2005, approximately 32% was earned from a tenant in the banking
industry, whose lease expires in June 2013 and 35% was earned
from a tenant in the legal industry, whose lease expires in June
2015. No other tenant leases space representing more than 10% of
the total rental income of the Properties for the year ended
December 31, 2005.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the office
complex located at the northwest corner of Burbank Boulevard and
Canoga Avenue, Woodland Hills, California for the year ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America.
The office complex located at the northwest corner of Burbank
Boulevard and Canoga Avenue, (the “Property” or
“Warner Center”) consists of four five-story office
buildings, one three-story office building and two parking
structures that were constructed between 2001 and 2005. The
buildings contain an aggregate of 808,274 square feet of
rentable area and are located in Woodlands Hills, California.
Hines Warner Center LP (the “Company”), an indirect
subsidiary of Hines-Sumisei U.S. Core Office Fund L.P.
(the “Core Fund”), acquired the Property on
October 2, 2006. Hines REIT Properties, L.P., a subsidiary
of Hines Real Estate Investment Trust, Inc., owned a 31.48%
(unaudited) non-managing general partner interest in the Core
Fund as of the date of this acquisition.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of
Article 3-14
of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to acquired real estate operations to be included with
certain filings with the SEC. This Historical Summary includes
the historical revenues and operating expenses of the Property,
exclusive of interest income and interest expense, early lease
termination fees, management fees, and depreciation and
amortization, which may not be comparable to the corresponding
amounts reflected in the future operations of the Property.
The statement of revenues and certain operating expenses and
notes thereto for the nine months ended September 30, 2006
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(c)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which amounted to an increase in rental income of approximately
$855,000 (unaudited) for the nine months ended
September 30, 2006, and an increase in rental income of
approximately $3,968,000 for the year ended December 31,2005.
(d)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2005 is as follows:
Amount
Year ended December 31:
2006
$
24,875,963
2007
25,932,689
2008
24,618,419
2009
24,872,484
2010
23,813,843
Thereafter
53,846,858
Total future minimum rentals
$
177,960,256
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. There were no
contingent rents for the year ended December 31, 2005.
Of the total rental income for the year ended December 31,2005, approximately 50% was earned from a tenant in the
healthcare industry, whose lease expires in December 2011 and
15% was earned from a tenant in the internet service industry,
whose lease expires in September 2014. No other tenant leases
space representing more than 10% of the total rental income of
the Property for the year ended December 31, 2005.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summaries are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summaries, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summaries. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the
purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in this
Registration Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described
in Note 2 to the Historical Summaries and is not intended
to be a complete presentation of the Property’s revenues
and expenses.
In our opinion, the Historical Summaries present fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summaries of the
property located at 1201 W. Peachtree Street, Atlanta,
Georgia for the years ended December 31, 2005, 2004 and
2003 in conformity with accounting principles generally accepted
in the United States of America.
1201 W. Peachtree Street, Atlanta, Georgia (the
“Property”) is a 50-story, 1,100,808 square foot
(unaudited) office building and a nine-story parking garage
constructed in 1987. Hines One Atlantic Center LP (the
“Company”), an indirect subsidiary of Hines-Sumisei
U.S. Core Office Fund L.P. (the “Core
Fund”), acquired the Property on or about July 14,2006. Hines REIT Properties, L.P., a subsidiary of Hines Real
Estate Investment Trust, Inc. (“Hines REIT”), owned a
29.25% (unaudited) non-managing general partner interest in the
Core Fund as of the date of this acquisition. The seller,
Sumitomo Life Realty (N.Y.), Inc. is a limited partner in the
Core Fund and is therefore considered a related party of Hines
REIT.
(2)
Basis of
Presentation
The statements of revenues and certain operating expenses (the
“Historical Summaries”) have been prepared for the
purpose of complying with the provisions of Article 3.14 of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. These Historical Summaries include the
historical revenues and certain operating expenses of the
Property, exclusive of interest income and interest expense,
early lease termination fees, management fees, and depreciation
and amortization, which may not be comparable to the
corresponding amounts reflected in the future operations of the
Property.
The statement of revenues and certain operating expenses and
notes thereto for the six months ended June 30, 2006
included in this report are unaudited. In the opinion of the
Company’s management, all adjustments necessary for a fair
presentation of such statement of revenues and certain operating
expenses have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily
indicative of results for a full year.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the entire terms of the leases,
which amounted to an increase in rental income of approximately
$1,374,000 (unaudited) for the six months ended June 30,2006, and increases in rental income of approximately
$4,588,000, $4,529,000, and $170,000 for the years ended
December, 31, 2005, 2004 and 2003, respectively.
(b)
Repairs
and Maintenance
Expenditures of repairs and maintenance are expensed as incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rental income on
noncancelable operating leases in effect as of December 31,2005 is as follows:
Amount
Year ending December 31:
2006
$
15,438,312
2007
16,752,733
2008
16,019,434
2009
14,070,477
2010
13,677,968
Thereafter
67,052,849
Total future minimum rentals
$
143,011,773
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
real estate taxes, and operating cost escalations. Contingent
rents were $0, $503 and $1,767 in 2005, 2004 and 2003,
respectively.
Of the total rental income for the year ended December 31,2005, approximately 84% was earned from tenants in the legal
industry, whose leases expire various years through 2019. No
other tenant leases space representing more than 10% of the
total rental income of the Property for the year ended
December 31, 2005.
(6)
Ground
Rent
The Property is subject to a ground lease with Metropolitan
Atlanta Rapid Transit Authority. The lease expires on
August 31, 2033. Although the lease provides for increases
in payments over the term of the lease, ground rent expense
accrues on a straight-line basis. Related adjustments increased
ground rent expense by approximately $219,000 (unaudited) for
the six months ending June 30, 2006 and $468,000, $509,000,
and $550,000 for the years ended December 31, 2005, 2004,
and 2003, respectively.
Future minimum rents to be paid under the ground lease in effect
at December 31, 2005 are as follows:
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summaries are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summaries, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the Historical Summaries. We believe
that our audits provide a reasonable basis for our opinion.
The accompanying Historical Summaries were prepared for the
purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in this
Registration Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summaries and is not intended to
be a complete presentation of the Property’s revenues and
expenses.
In our opinion, the Historical Summaries present fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summaries of the
property located at 321 North Clark, Chicago, Illinois, for the
years ended December 31, 2005, 2004 and 2003 in conformity
with accounting principles generally accepted in the United
States of America.
321 North Clark, Chicago, Illinois (the
“Property”), is a 35 story, approximately
897,000 square foot (unaudited) office building with a
below-grade parking structure constructed in 1987. Hines Real
Estate Investment Trust, Inc. (“Hines REIT”), through
Hines REIT Properties, L.P., its majority owned subsidiary (the
“Operating Partnership,” and together, the
“Company”) acquired the Property from 321 North Clark
Realty LLC, a joint venture between Hines Interests Limited
Partnership (“Hines”), an affiliate of Hines REIT, and
an institution advised by JP Morgan Chase, on
April 24, 2006.
(2)
Basis of
Presentation
The statements of revenues and certain operating expenses (the
“Historical Summaries”) have been prepared for the
purpose of complying with the provisions of Article 3.14 of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. These Historical Summaries includes the
historical revenues and certain operating expenses of the
Property, exclusive of items which may not be comparable to the
proposed future operations of the Property.
(3)
Principles
of Reporting and Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the
Property’s management to make estimates and assumptions
that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Property’s operations consist of rental revenues earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, and charges to tenants for their
pro rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on the straight-line basis over the terms of the leases, which
amounted to an increase in rental income of approximately
$3,319,107, $6,060,450 and $5,060,703 for the years ended
December 31, 2005, December 31, 2004, and
December 31, 2003, respectively.
(b)
Repairs
and Maintenance
Expenditures for repairs and maintenance are expensed as
incurred.
NOTES TO
STATEMENTS OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Rental
Income
The aggregate annual minimum future rentals on noncancelable
operating leases in effect as of December 31, 2005 are as
follows:
Amount
Year ending December 31:
2006
$
15,616,749
2007
15,748,789
2008
15,746,385
2009
15,532,567
2010
10,580,784
Thereafter
92,570,598
Total future minimum rentals
$
165,795,872
Total minimum future rentals represents the base rent tenants
are required to pay under the terms of their leases exclusive of
charges for contingent rents, electric service, real estate
taxes, and operating cost escalations.
Of the total rental income is for the year ended
December 31, 2005, approximately:
•
74% were earned from tenants in the legal industry, whose leases
expire various years through 2019; and
•
18% was earned from tenants in the financial services industry,
whose leases expire various years through 2009.
No other tenant leases space representing more than 10% of the
total rental income of the Property for the year ended
December 31, 2005.
We have audited the accompanying statement of revenues and
certain operating expenses (the “Historical Summary”)
of the eleven building office complex known as Airport Corporate
Center located in Miami, Florida (the “Properties”)
for the year ended December 31, 2005. This Historical
Summary is the responsibility of the Properties’
management. Our responsibility is to express an opinion on the
Historical Summary based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Historical Summary is
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Property’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Historical
Summary, assessing the accounting principles used and
significant estimates made by management, as well as the overall
presentation of the Historical Summary. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying Historical Summary was prepared for the purpose
of complying with the rules and regulations of the Securities
and Exchange Commission (for inclusion in this Registration
Statement on
Form S-11
of Hines Real Estate Investment Trust, Inc.) as described in
Note 2 to the Historical Summary and is not intended to be
a complete presentation of the Properties’ revenues and
expenses.
In our opinion, the Historical Summary presents fairly, in all
material respects, the revenues and certain operating expenses
described in Note 2 to the Historical Summary of the eleven
building office complex known as Airport Corporate Center
located in Miami, Florida, for the year ended December 31,2005 in conformity with accounting principles generally accepted
in the United States of America.
The Airport Corporate Center (the “Properties”), is an
11-Building, 53 acres office complex with
1,018,477 square foot of office space located in Miami,
Florida. Hines Real Estate Investment Trust, Inc.(“Hines
REIT”) acquired, through Hines REIT Properties, L.P., its
majority-owned subsidiary (the “Operating
Partnership,” and together, the “Company”) the
Properties. The acquisition was completed on January 31,2006 by Hines REIT Airport Corporate Center LLC, a wholly-owned
subsidiary of the Operating Partnership.
(2)
Basis of
Presentation
The statement of revenues and certain operating expenses (the
“Historical Summary”) has been prepared for the
purpose of complying with the provisions of Article 3.14 of
Regulation S-X
promulgated by the Securities and Exchange Commission (the
“SEC”), which requires certain information with
respect to real estate operations to be included with certain
filings with the SEC. This Historical Summary includes the
historical revenues and certain operating expenses of the
Properties, exclusive of items which may not be comparable to
the proposed future operations of the Properties.
(3)
Principles
of Reporting and Use of Estimates
The preparation of historical summaries in conformity with
generally accepted accounting principles in the United States of
America requires the Properties’ management to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(4)
Significant
Accounting Policies
(a)
Revenue
Recognition
The Properties’ operations consist of rental income earned
from tenants under leasing arrangements which generally provide
for minimum rents, escalations, charges to tenants for their pro
rata share of real estate taxes and operating expenses. All
leases have been accounted for as operating leases. Rental
income is recognized by amortizing the aggregate lease payments
on a straight-line basis over the terms of the leases, which
amounted to a decrease in rental income of approximately $54,000
for the year ended December 31, 2005.
Rental payments under certain leases are based on a minimum
rental amount plus a percentage of the lessee’s sales in
excess of stipulated amounts. Since inception, no income has
been received from such contingent rent agreements.
Approximately 92% (unaudited) of the Properties’ net
rentable space is committed under operating leases at
December 31, 2005. The tenants’ leases expire in
various years through 2015. Of the total net rentable area
leased, approximately 13% (unaudited) is leased to tenants in
import/export/transportation industry and 18% (unaudited) is
leased to tenants in hospitality industry.
(b)
Repairs
and Maintenance
Expenditures for repairs and maintenance are expensed as
incurred.
NOTES TO
STATEMENT OF REVENUES AND CERTAIN OPERATING
EXPENSES — (Continued)
(5)
Leases
The aggregate annual minimum future rental revenue on
non-cancelable operating leases in effect at December 31,2005 is as follows:
Amount
Year ending December 31:
2006
$
16,486,686
2007
14,086,258
2008
9,440,706
2009
5,240,765
2010
2,488,487
Thereafter
2,975,074
Total future minimum rentals
$
50,717,976
Total minimum future rental income represents the base rent that
tenants are required to pay under the terms of their leases
exclusive of charges for contingent rents, electric service,
insurance, real estate taxes, and operating cost escalations.
(6)
Mortgage
Note Payable
In connection with the acquisition of the Properties, Hines REIT
Airport Corporate Center LLC assumed a mortgage note payable to
Wells Fargo Bank, N.A. (the “Mortgage Note”). The
Mortgage Note is secured by a deed of trust on certain land and
all improvements and an assignment of tenant leases and related
receivables. The Mortgage Note accrues interest daily at a fixed
rate of 4.775% per annum, which is paid in monthly installments
until the maturity date of March 11, 2009, at which time
all remaining outstanding principal and interest is due and
payable.
Future principal payments on the Mortgage Note are as follows:
Hines Real Estate Investment Trust, Inc. (“Hines REIT”
and, together with Hines REIT Properties, L.P. (the
“Operating Partnership”), the “Company”)
made the following acquisitions since January 1, 2006:
Additionally, the Company made equity investments in
Hines-Sumisei U.S. Core Office Fund, L.P. (the “Core
Fund”) totaling $209.3 million during the year ended
December 31, 2006, and an additional $58.0 million
effective July 2, 2007.
On July 2, 2007, the Company acquired a 50% interest in
Cargo Center Dutra II, an industrial property located in Rio de
Janeiro, Brazil, through a joint venture with another affiliate
of Hines. The Company accounts for its investment in Cargo
Center Dutra II using the equity method of accounting. The
Company funded this equity method investment on June 28,2007.
On December 17, 2007, the Company entered into a contract
to acquire the Raytheon/DirecTV Buildings, a complex consisting
of two buildings located in El Segundo, California. The contract
purchase price for the Raytheon/DirecTV Buildings is expected to
be $120.0 million and the acquisition is expected to close
in February 2008. Management believes this acquisition is likely
to occur and has included it in these unaudited pro forma
consolidated financial statements accordingly.
The unaudited pro forma consolidated balance sheet assumes the
acquisitions of JPMorgan Chase Tower and the Raytheon/DirecTV
Buildings occurred on September 30, 2007. The unaudited pro
forma consolidated statements of operations assume the
$267.3 million in investments in the Core Fund, the
investment in Cargo Center Dutra II, and all of the
Company’s acquisitions listed above occurred on
January 1, 2006.
In management’s opinion, all adjustments necessary to
reflect the effects of these transactions have been made. The
unaudited pro forma consolidated statements of operations are
not necessarily indicative of what actual results of operations
would have been had the Company made these acquisitions on
January 1, 2006, nor does it purport to represent the
results of operations for future periods.
Preferred shares, $.001 par value; 500,000 preferred shares
authorized, none issued or outstanding as of September 30,2007
—
—
—
Common shares, $.001 par value; 1,500,000 common shares
authorized as of September 30, 2007; 149,186 common shares
issued and outstanding as of September 30, 2007
149
6
(d)
155
Additional paid-in capital
1,286,130
54,006
(d)
1,340,136
Retained deficit
(100,520
)
(4,081
)(b)
(104,601
)
Accumulated other comprehensive income
10,642
—
10,642
Total shareholders’ equity
1,196,401
49,931
1,246,332
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,301,190
$
456,427
$
2,757,617
See notes to unaudited pro forma consolidated balance sheet
and
notes to unaudited pro forma consolidated financial statements.
Notes to
Unaudited Pro Forma Consolidated Balance Sheet as of
September 30, 2007
(a)
To record the pro forma effect of the Company’s
acquisitions of JPMorgan Chase Tower and the Raytheon/DirecTV
Buildings, assuming they had occurred on September 30, 2007.
(b)
To record the pro forma effect of the acquisition fees (50% of
which is payable in cash and 50% of which is reflected in the
participation interest) related to the acquisitions of JPMorgan
Chase Tower and the Raytheon/DirecTV Buildings, assuming they
had occurred on September 30, 2007.
(c)
To record the pro forma effect of the Company’s
acquisitions of JPMorgan Chase Tower and the Raytheon/DirecTV
Buildings assuming they had occurred on September 30, 2007
and that the financing for these acquisitions as well as other
financing activity (as described below) had taken place as of
September 30, 2007:
•
Entered into a $159.5 million mortgage with Prudential at a
rate of 5.98% related to the acquisition of One Wilshire;
•
Entered into a $205.0 million mortgage with Metropolitan
Life Insurance Company at a rate of 5.7%, secured by interests
in JPMorgan Chase Tower and the Minneapolis Office/Flex
Portfolio;
•
Assumed a $54.2 million mortgage with IXIS Real Estate
Capital Inc. at a rate of 5.675%, in connection with the
acquisition of the Raytheon/DirecTV Buildings; and
•
Paid down the entire $66.0 million outstanding balance
under the Company’s revolving credit facility with KeyBank
National Association.
(d)
To record the pro forma effect of the proceeds required from the
issuance of shares of the Company’s common stock to
complete the acquisitions described in (a) above, less
amounts received from the financing activities described in
(c) above.
Notes to
Unaudited Pro Forma Consolidated Statement of Operations for
the
Nine Months Ended September 30, 2007
(a)
To record the pro forma effect of the Company’s
acquisitions of the Laguna Buildings, Atrium on Bay, Seattle
Design Center, 5th and Bell, 3 Huntington Quadrangle, One
Wilshire, the Minneapolis Office/Flex Portfolio, JPMorgan Chase
Tower, and the Raytheon/DirecTV Buildings assuming that the
acquisitions had occurred on January 1, 2006.
(b)
To record the pro forma effect of the acquisition fees (50% of
which is payable in cash and 50% of which is reflected in the
participation interest) related to the Company’s additional
investment in the Core Fund and acquisitions of Cargo Center
Dutra II, 3 Huntington Quadrangle, One Wilshire, the Minneapolis
Office/Flex Portfolio, JPMorgan Chase Tower, and the
Raytheon/DirecTV Buildings.
(c)
To record the pro forma effect on the Company’s equity in
income of the Core Fund and Cargo Center Dutra II assuming
that the Company’s additional investment in the Core Fund,
the Core Fund’s acquisitions of the Sacramento Properties,
Charlotte Plaza, the Carillon building, Renaissance Square, and
the Company’s acquisition of Cargo Center Dutra II had
occurred on January 1, 2006.
(d)
To record the pro forma effect of the Company’s interest
expense assuming that the Company had permanent financing in
place as of January 1, 2006 related to its acquisitions of
Airport Corporate Center, 321 North Clark, 3400 Data Drive,
Watergate Tower IV, the Daytona Buildings, the Laguna Buildings,
Atrium on Bay, Seattle Design Center, 5th and Bell, 3 Huntington
Quadrangle, One Wilshire, the Minneapolis Office/Flex Portfolio,
JPMorgan Chase Tower, and the Raytheon/DirecTV Buildings. The
financing for each acquisition is described as follows:
•
$190.0 million CAD ($163.9 million USD as of
February 26, 2007) mortgage upon the acquisition of
Atrium on Bay at a rate of 5.33%;
•
$119.0 million mortgage at 5.355% under its pooled mortgage
facility with HSH Nordbank for the purchase of the Daytona
Buildings and the Laguna Buildings;
•
$70.0 million mortgage at 6.03% under its pooled mortgage
facility with HSH Nordbank for the purchase of Seattle Design
Center and 5th and Bell;
•
$48.0 million mortgage at 5.98% under its pooled mortgage
facility with HSH Nordbank for the purchase of 3 Huntington
Quadrangle;
•
$159.5 million mortgage with Prudential at 5.98% for the
purchase of One Wilshire; and
•
$205.0 million mortgage with Metropolitan Life Insurance
Company at a rate of 5.7%, for the acquisition of the JPMorgan
Chase Tower and the Minneapolis Office/Flex Portfolio
•
Assumed a $54.2 million mortgage with IXIS Real Estate
Capital Inc. at a rate of 5.675%, in connection with the
acquisition of the Raytheon/DirecTV Buildings.
(e)
To record the pro forma effect of income taxes, primarily
related to the Company’s acquisition of Atrium on Bay,
assuming the acquisition had occurred on January 1, 2006.
(f)
To record the pro forma effect of the proceeds required from the
issuance of shares of the Company’s common stock to
complete the acquisitions described in (a) above, less
amounts received from the financing activities described in
(d) above.
Notes to
Unaudited Pro Forma Consolidated Statement of Operations for
the
Year Ended December 31, 2006
(a)
To record the pro forma effect of the Company’s
acquisitions of Airport Corporate Center, 321 North Clark, 3400
Data Drive, Watergate Tower IV, the Daytona Buildings, the
Laguna Buildings, Atrium on Bay, Seattle Design Center, 5th and
Bell, 3 Huntington Quadrangle, One Wilshire, the Minneapolis
Office/Flex Portfolio JPMorgan Chase Tower and the
Raytheon/DirecTV Buildings, assuming that the acquisitions had
occurred on January 1, 2006.
(b)
To record the pro forma effect of the acquisition fees (50% of
which is payable in cash and 50% of which is reflected in the
participation interest) related to the Company’s additional
investments in the Core Fund and acquisitions of the Laguna
Buildings, Atrium on Bay, Seattle Design Center, 5th and Bell,
Cargo Center Dutra II, 3 Huntington Quadrangle, One Wilshire,
the Minneapolis Office/Flex Portfolio, JPMorgan Chase Tower and
the Raytheon/DirecTV Buildings.
(c)
To record the pro forma effect on the Company’s equity in
losses assuming that the Company’s additional investments
in the Core Fund, the Core Fund’s acquisitions of 720 Olive
Way, 333 West Wacker, One Atlantic Center, Warner Center,
Riverfront Plaza, the Sacramento Properties, Charlotte Plaza,
the Carillon building and Renaissance Square as well as the
Company’s acquisition of Cargo Center Dutra II had
occurred on January 1, 2006.
(d)
To record the pro forma effect of the Company’s interest
expense assuming that the Company had permanent financing in
place as of January 1, 2006 related to its acquisitions of
Airport Corporate Center, 321 North Clark, 3400 Data Drive,
Watergate Tower IV, the Daytona Buildings, the Laguna Buildings,
Atrium on Bay, Seattle Design Center,
5th
and Bell, 3 Huntington Quadrangle, One Wilshire, the Minneapolis
Office/Flex Portfolio, JPMorgan Chase Tower, and the
Raytheon/DirecTV Buildings. The financing related to each
acquisition is as follows:
•
$91 million mortgage note upon the acquisition of Airport
Corporate Center with a rate of 4.78%;
•
$45.0 million mortgage upon the acquisition of
1515 S Street with a rate of 5.68%;
•
$185.0 million mortgage at 5.8575% under its pooled
mortgage facility with HSH Nordbank for the purchase of 321
North Clark, Citymark, and 1900 and 2000 Alameda;
•
$190.0 million CAD ($163.9 million USD as of
February 26, 2007) mortgage upon the acquisition of
Atrium on Bay at a rate of 5.33%;
•
$119.0 million mortgage at 5.355% under its pooled mortgage
facility with HSH Nordbank for the purchase of the Daytona
Buildings and the Laguna Buildings;
•
$70.0 million mortgage at 6.03% under its pooled mortgage
facility with HSH Nordbank for the purchase of Seattle Design
Center and
5th and
Bell;
•
$48.0 million mortgage at 5.98% under its pooled mortgage
facility with HSH Nordbank for the purchase of 3 Huntington
Quadrangle;
•
$159.5 million mortgage with Prudential at 5.98% for the
purchase of One Wilshire; and
•
$205.0 million mortgage with Metropolitan Life Insurance
Company at a rate of 5.7%, for the acquisition of the JPMorgan
Chase Tower and the Minneapolis Office/Flex Portfolio
•
Assumed a $54.2 million mortgage with IXIS Real Estate
Capital Inc. at a rate of 5.675%, in connection with the
acquisition of the Raytheon/DirecTV Buildings.
(e)
To record the pro forma of income taxes, primarily resulting
from foreign income taxes related to the Company’s
acquisition of Atrium on Bay, assuming the acquisition had
occurred on January 1, 2006.
(f)
To record the pro forma effect of the proceeds required from the
issuance of shares of the Company’s common stock to
complete the acquisitions described in (a) above, less
amounts received from the financing activities described in
(d) above.
On January 31, 2006, the Company acquired Airport Corporate
Center, a
45-acre
office park located in the Airport West/Doral airport submarket
of Miami, Florida. Airport Corporate Center consists of 11
buildings constructed between 1982 and 1996 that contain an
aggregate of 1,018,627 square feet of rentable area and a
5.46-acre land development site. The aggregate purchase price of
Airport Corporate Center was $156.8 million, excluding
transaction costs and financing fees. In connection with the
acquisition, mortgage financing was assumed in the amount of
$91.0 million.
On April 24, 2006, the Company acquired 321 North Clark, a
35-story, 885,664 square foot office building located in
Chicago, Illinois. The building has a below-grade parking
structure and was constructed in 1987. The seller was 321 North
Clark Realty LLC, a joint venture between Hines Interests
Limited Partnership (“Hines”) and an institution
advised by JPMorgan Chase. The acquisition was consummated on
April 24, 2006 by Hines REIT 321 North Clark, a
wholly-owned subsidiary of the Company. The aggregate purchase
price of 321 North Clark was $247.3 million, excluding
transaction costs and financing fees.
On November 21, 2006, the Company acquired 3400 Data Drive,
a three-story, 149,703 square foot office building located
in Rancho Cordova, California, a submarket of Sacramento. The
building was constructed in 1990. The aggregate purchase price
of 3400 Data Drive was $32.8 million, excluding transaction
costs and financing fees.
On December 8, 2006, the Company acquired Watergate Tower
IV, a 16-story, 344,433 square foot office building located
in Emeryville, California. The building was constructed in 2001.
The aggregate purchase price of Watergate Tower IV was
$144.9 million, excluding transaction costs and financing
fees.
On December 20, 2006, the Company acquired three office
buildings located at 148th Avenue and N.E. 31st way in
Redmond, Washington (the “Daytona Buildings”). The
buildings were constructed in 2002 and contain an aggregate of
250,515 square feet of rentable area. The aggregate
purchase price for the Daytona Buildings was $99.0 million,
excluding transaction costs and financing fees.
On January 3, 2007, the Company acquired six office
buildings located on N.E. 31st Way in Redmond, Washington
(the “Laguna Buildings”). Four of the buildings were
constructed in the 1960’s, while the remaining two
buildings were constructed in 1998 and 1999. In aggregate, the
buildings contain 464,701 square feet of rentable area. The
aggregate purchase price for the Laguna Buildings was
$118.0 million, excluding transaction costs and financing
fees.
On February 26, 2007, the Company acquired Atrium on Bay, a
mixed-use office and retail complex located in the Downtown
North submarket of the central business district of Toronto,
Canada. Atrium on Bay is comprised of three office towers, a
two-story retail mall, and a two-story parking garage. The
buildings consist of 1,079,870 square feet of rentable area
and are 86% leased to a variety of office and retail tenants.
The contract purchase price of Atrium on Bay was approximately
$250.0 million CAD (approximately $215.6 million USD
as of February 26, 2007), exclusive of transaction costs,
financing fees and working capital reserves. In connection with
the acquisition, mortgage financing was secured in the amount of
$190.0 million CAD ($163.9 million USD as of
February 26, 2007). The financial statements of Atrium on
Bay were translated from Canadian Dollars, the property’s
functional currency, into United States Dollars for reporting
purposes.
On June 22, 2007, the Company acquired Seattle Design
Center, a mixed-use office and retail complex that contains
390,684 square feet of rentable area, located in Seattle,
Washington. The complex consists of two buildings, one
constructed in 1973 and the other in 1983. The aggregate
purchase price of Seattle Design Center was $56.8 million,
excluding transaction costs and financing fees.
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On June 28, 2007, the Company acquired
5th and
Bell, a six-story office building that contains
197,135 square feet of rentable area, located in Seattle,
Washington. The building was constructed in 2002. The net
contract purchase price of 5th and Bell was
$72.2 million, excluding transaction costs and financing
fees.
On July 2, 2007, the Company acquired a 50% interest in
Cargo Center Dutra II, an industrial property located in Rio de
Janeiro, Brazil for $103.7 million BRL ($53.7 million
USD as of July 2, 2007) through a joint venture with
an affiliate of Hines. The property consists of four industrial
buildings that contain 693,116 square feet of rentable
area. The buildings were constructed in various years from 2001
to 2007. The Company funded this equity method investment on
June 28, 2007.
On July 19, 2007, the Company acquired 3 Huntington
Quadrangle, an office complex that contains 407,731 square
feet of rentable area, located on Long Island in New York. The
complex consists of two four-story buildings constructed in
1971. The aggregate purchase price of 3 Huntington Quadrangle
was $87.0 million, excluding transaction costs and
financing fees.
On August 1, 2007, the Company acquired One Wilshire, a
thirty-story office building that contains 664,248 square
feet of rentable area, located in Los Angeles, California. The
building was constructed in 1966 and renovated in 1992. The
aggregate purchase price of One Wilshire was
$287.0 million, excluding transaction costs and financing
fees.
On September 28, 2007, the Company acquired the Minneapolis
Office/Flex Portfolio, a collection of nine office/flex
buildings located in the I-494, I-394, and Midway submarkets of
Minneapolis, Minnesota. The buildings were constructed between
1986 and 1992. The aggregate purchase price of the Minneapolis
Portfolio was $87.0 million, excluding transaction costs
and financing fees.
On November 16, 2007, the Company acquired JPMorgan Chase
Tower, a fifty five-story office building that contains
1,296,407 square feet of rentable area, located in Dallas,
Texas. The building was constructed in 1987. The aggregate
purchase price of JPMorgan Chase Tower was $289.6 million,
excluding transaction costs and financing fees.
On December 17, 2007, the Company entered into a contract
to acquire the Raytheon/DirecTV Buildings, a complex consisting
of two buildings located in El Segundo, California. The contract
purchase price for the Raytheon/DirecTV Buildings is expected to
be $120.0 million and the acquisition is expected to close
in February 2008. Management believes this acquisition is likely
to occur and has included it in these unaudited pro forma
consolidated financial statements accordingly.
The unaudited pro forma consolidated balance sheet of the
Company assumes that the acquisitions of JPMorgan Chase Tower
and the Raytheon/DirecTV Buildings occurred on
September 30, 2007, and the unaudited pro forma
consolidated statements of operations of the Company assume that
all acquisitions described above occurred on January 1,2006.
(2)
Core
Fund
The Core Fund is an investment vehicle organized in August 2003
by Hines to invest in existing office properties in the United
States. The third-party investors in the Core Fund other than
Hines REIT are, and Hines expects that future third-party
investors in the Core Fund will be primarily U.S. and
foreign institutional investors or high net worth individuals.
The Core Fund was formed as a Delaware limited partnership.
On January 31, 2006, the Core Fund purchased 720 Olive Way,
an office property located in the retail core submarket of the
central business district of Seattle, Washington. The property
consists of a 20-story office building and a parking structure
that were constructed in 1981 and substantially renovated in
1997. The aggregate purchase price of 720 Olive Way was
$83.7 million, including transaction costs, financing fees
and working capital reserves. In connection with the
acquisition, mortgage financing was secured in the amount of
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$42.4 million. The Core Fund currently holds approximately
a 68.56% interest in 720 Olive Way. Institutional Co-Investors,
affiliates of Hines, and third-party investors hold, indirectly,
the remaining 20.0%, 0.36%, and 11.08%, respectively.
On April 3, 2006, the Core Fund purchased 333 West
Wacker, an office property located in the central business
district of Chicago, Illinois. The property consists of a
36-story office building and a parking structure that were
constructed in 1983. The aggregate purchase price of
333 West Wacker was $223.0 million, excluding
transaction costs, financing fees and working capital reserves.
In connection with the acquisition, mortgage financing was
secured in the amount of $124.0 million. The Core Fund
currently holds approximately a 68.56% interest in 333 West
Wacker. Institutional Co-Investors, affiliates of Hines, and
third-party investors hold, indirectly, the remaining 20.0%,
0.36%, and 11.08%, respectively.
On July 14, 2006, the Core Fund acquired One Atlantic
Center, a 50-story, office building located in Atlanta, Georgia.
The building was constructed in 1987. The contract purchase
price of One Atlantic Center was $305.0 million, exclusive
of transaction costs, financing fees and working capital
reserves. In connection with the acquisition, mortgage financing
was secured in the amount of $168.5 million. The Core Fund
currently holds approximately a 85.91% interest in One Atlantic
Center. Affiliates of Hines and third-party investors hold,
indirectly, the remaining 0.20% and 13.89%, respectively.
On October 2, 2006, the Core Fund purchased
LNR I, II, and III (“Warner Center”),
an office complex located in the central business district of
Woodland Hills, California. The property consists of four
five-story office buildings, one three-story office building,
and two parking structures that were constructed between 2001
and 2005. The aggregate purchase price of Warner Center was
$311.0 million, excluding transaction costs, financing fees
and working capital reserves. In connection with the
acquisition, mortgage financing was secured in the amount of
$174.0 million. The Core Fund currently holds approximately
a 68.56% interest in Warner Center. Institutional Co-Investors,
affiliates of Hines, and third-party investors hold, indirectly,
the remaining 20.0%, 0.36%, and 11.08%, respectively.
On November 16, 2006, the Core Fund purchased Riverfront
Plaza, an office property located in Richmond, Virginia. The
property consists of two 21-story office buildings that were
constructed in 1990. The contract purchase price of Riverfront
Plaza was $277.5 million, excluding transaction costs,
financing fees and working capital reserves. In connection with
the acquisition, mortgage financing was secured in the amount of
$135.9 million. The Core Fund currently holds approximately
a 85.91% interest in Riverfront Plaza. Affiliates of Hines and
third-party investors hold, indirectly, the remaining 0.20% and
13.89%, respectively.
On May 1, 2007, the Core Fund purchased a portfolio of six
office properties located in Sacramento, California
(collectively the “Sacramento Properties”). The
Sacramento Properties include 15 office buildings located in and
around the Sacramento metropolitan area that contain
approximately 1.4 million square feet. The contract
purchase price of the Sacramento Properties was
$490.2 million, excluding transaction costs, financing fees
and working capital reserves. In connection with the
acquisition, mortgage financing was secured in the amount of
$273.3 million. The Core Fund currently holds approximately
a 68.56% interest in the Sacramento Properties. Institutional
Co-Investors, affiliates of Hines, and third-party investors
hold, indirectly, the remaining 20.0%, 0.36%, and 11.08%,
respectively.
On June 20, 2007, the Core Fund purchased Charlotte Plaza,
a 27-story office building located in Charlotte, N.C. The
building was constructed in 1981. The contract purchase price of
Charlotte Plaza was $175.5 million, excluding transaction
costs, financing fees and working capital reserves. In
connection with the acquisition, mortgage financing was secured
in the amount of $97.5 million. The Core Fund currently
holds approximately a 85.91% interest in Charlotte Plaza.
Affiliates of Hines and third-party investors hold, indirectly,
the remaining 0.20% and 13.89%, respectively.
On July 2, 2007, the Core Fund purchased the Carillon
building, a 24-story office building located in Charlotte, N.C.
The building was constructed in 1989. The contract purchase
price of the Carillon building
NOTES TO
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
was $140.0 million, excluding transaction costs, financing
fees and working capital reserves. In connection with the
acquisition, mortgage financing was secured in the amount of
$78.0 million. The Core Fund currently holds approximately
a 85.91% interest in the Carillon building. Affiliates of Hines
and third-party investors hold, indirectly, the remaining 0.20%
and 13.89%, respectively.
On December 27, 2007, the Core Fund purchased Renaissance
Square, a complex consisting of two office buildings located in
Phoenix, Arizona. The buildings were constructed between 1987
and 1989. The contract purchase price of Renaissance Square was
$270.9 million, excluding transaction costs, financing fees
and working capital reserves. In connection with the
acquisition, mortgage financing was assumed in the amount of
$188.8 million. The Core Fund currently holds approximately
a 85.91% interest in Renaissance Square. Affiliates of Hines and
third-party investors hold, indirectly, the remaining 0.20% and
13.89%, respectively.
The unaudited pro forma consolidated balance sheet of the Core
Fund summarized below assumes that the acquisition of
Renaissance Square occurred on September 30, 2007, and the
unaudited pro forma condensed consolidated statements of
operations of the Core Fund summarized below assume that all
acquisitions described above occurred on January 1, 2006.
The Company acquired interests in the Core Fund totaling
approximately $209.3 million during the year ended
December 31, 2006 and an additional $58.0 million
effective July 2, 2007. The unaudited pro forma
consolidated statements of operations of the Company assume that
these investments occurred on January 1, 2006.
Additionally, the unaudited pro forma consolidated financial
statements of the Company have been prepared assuming the
Company’s investment in the Core Fund is accounted for
utilizing the equity method as the Company has the ability to
exercise significant influence, but does not exercise financial
and operating control, over the Core Fund.
UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS OF THE CORE FUND
For the Nine Months Ended September 30, 2007
and the Year Ended December 31, 2006
SUBSCRIPTION AGREEMENT FOR THE FOLLOW-ON OFFERING OF SHARES
OF HINES REAL ESTATE INVESTMENT TRUST, INC.
(1) YOUR INITIAL INVESTMENT
Make all checks* payable to: Hines REIT * Cash, cashier’s checks/official bank checks,
temporary checks, foreign checks, money orders, third party
checks, or travelers checks are not accepted.
Investment Amount $
Brokerage Account Number
(The minimum investment is $2,500)
(If Applicable)
A. Purchase Options
Please check one of the following options that pertains to
the commission structure which applies to your subscription. If
no option is selected then your subscription will be processed
under Option 1. Please see the “Plan of
Distribution” section of the prospectus for details
regarding each of these options.
OPTION 1
o STANDARD
ACCOUNT — Broker-Dealer receives selling
commission.
OPTION 2
o FEE-BASED
ACCOUNT — You have an agreement with a
Broker-Dealer, investment advisor or bank trust department
pursuant to which you pay a fee based on assets under
management. Broker-Dealer does not receive selling commission
and dealer manager fee.
OPTION 3
o REGISTERED
REPRESENTATIVE PURCHASE — Broker-Dealer does
not receive selling commission.
B. Rights of Accumulation
o Please
link the tax identification numbers or account numbers listed
below for rights of accumulation privileges as a
“qualifying purchaser.” Please see the “Plan of
Distribution” section of the prospectus for details.
Tax
ID/SSN or Hines REIT Account Number
Tax
ID/SSN or Hines REIT Account Number
Tax
ID/SSN or Hines REIT Account Number
(2) FORM OF OWNERSHIP (Select only one)
Non-Custodial Ownership
o
INDIVIDUAL OR JOINT TENANT (Joint accounts will be registered as joint tenants with
rights of survivorship unless otherwise indicated)
o TRANSFER
ON DEATH-optional designation of beneficiaries for
individual, joint owners with rights of survivorship, or tenants
by the entireties. Please complete Section 3D.
o
UNIFORM GIFT/TRANSFER TO MINORS (UGMA/UTMA) Under
the UGMA/UTMA of the State
of
o
PENSION PLAN (Include Plan Documents)
o
TRUST (Include title and signature pages)
o
CORPORATION OR PARTNERSHIP(Include Corporate
Resolution or Partnership Agreement)
o
OTHER
(Include
title and signature pages)
Custodial Ownership
o THIRD
PARTY ADMINISTERED CUSTODIAN PLAN
o IRA o ROTH/IRA o SEP/IRA o
SIMPLE
o OTHER
Name of
Custodian
Mailing
Address
City
State
Zip
Custodian Information (To be completed by Custodian
above)
(3) INVESTOR INFORMATION Please print name(s) in
which Shares are to be registered.
A. Investor
First Name
(MI) Last Name
Gender
Social Security Number
Drivers License Number/State (optional)
Date of Birth (MM/DD/YYYY)
Street Address
City State
Zip Code
If Non-U.S.
Citizen, Specify Country of Citizenship
Daytime Phone Number
B. Co-Investor (if any)
First Name
(MI) Last Name
Gender
Social Security Number
Drivers License Number/State (optional)
Date of Birth (MM/DD/YYYY)
Street Address
City State
Zip Code
If Non-U.S.
Citizen, Specify Country of Citizenship
Daytime Phone Number
For Transfer Agent Use Only
Sub.
#
Admit
Date
Amount
Check
#
C. Residential Street Address (This section must be
completed for verification purposes if mailing address in
Section 3A is a P.O. Box)
Street Address
City
State
Zip Code
If Non-U.S.,
Specify Country
Daytime Phone Number
D. Transfer on Death Beneficiary Information (For
Individual or Joint Accounts only)
First Name
(MI)
Last Name
Social Security Number
Primary
%
First Name
(MI)
Last Name
Social Security Number
Primary
%
E. Trust/Corporation/Partnership/Other
(Trustee(s) information must be provided in
Sections 3A and 3B)
Entity
Name
Tax ID Number
Date of Trust
(4)
DISTRIBUTIONS (Select only one)
Complete this section to enroll in the Dividend Reinvestment
Plan, to elect to receive dividend distributions by check mailed
to you at the address set forth in Section 3A above, to
elect to receive dividend distributions by check mailed to
third-party or alternate address, or to elect to receive
dividend distributions by direct deposit.
For Custodial held accounts, if you elect cash distributions
the funds will be directed back to the Custodian (Select option
C).
I hereby subscribe for Shares of Hines REIT and elect the
distribution option indicated below:
A. o Reinvest/Dividend
Reinvestment Plan (See Prospectus for details)
B. o Check
mailed to the address set forth in Section 3A.
C. o Check
Mailed to Third-Party/Alternate Address/Custodian
To direct dividends to a party other than the registered owner,
please provide applicable information below.
D. o
Direct Deposit Please attach a pre-printed voided check.
(Non-Custodian Investors Only)
I authorize Hines REIT or its agent to deposit my distribution
to my checking or savings account. This authority will remain in
force until I notify Hines REIT in writing to cancel it. In the
event that Hines REIT deposits funds erroneously into my
account, they are authorized to debit my account for an amount
not to exceed the amount of the erroneous deposit.
Name/Entity Name/Financial Institution
Mailing Address
City
State
Zip Code
Your Bank’s ABA Routing Number
Your Bank Account Number
o Checking
Account
o Savings
Account
Please
Attach a Pre-printed Voided Check
* The above services cannot be established without a
pre-printed voided check.
For Electronic Funds Transfers, signatures of bank account
owners are required exactly as they appear on bank records. If
the registration at the bank differs from that on this
Subscription Agreement, all parties must sign below.
Signature
(CHECK PHOTO)
Signature
(5)
PAPER
DELIVERY AND
HOUSEHOLDING
(check only boxes that apply)
o
Paper Delivery. Although Hines REIT makes
shareholder communications available on its website
(www.HinesREIT.com), I hereby request that Hines REIT
deliver any such shareholder communication (including proxy
statements, annual and quarterly reports, prospectus supplements
and other required reports) to me by mailing paper documents to
the address listed in Section 3A. I understand that I may
revoke my request for paper delivery at any time by calling
(888) 220-6121.
o
Householding. To the extent that I have requested
paper delivery, I consent to “householding” of
shareholder communications, which means that Hines REIT may
deliver one printed copy of any shareholder communication to all
shareholders sharing my address. I understand that my consent to
householding is effective so long as my account with Hines REIT
remains active, unless I revoke my consent by calling
(888) 220-6121.
BROKER-DEALER/FINANCIAL ADVISOR INFORMATION (All
fields must be completed)
The Financial Advisor must sign below to complete order. The
Financial Advisor herby warrants that
he/she is
duly licensed and may lawfully sell Shares in the state
designated as the investor’s legal residence.
Broker-Dealer
Financial Advisor Name
Advisor Mailing Address
City
State
Zip Code
Advisor Number
Branch Number
Telephone Number
E-mail
Address
Fax Number
Please note that all sales of securities must be made through a
Broker-Dealer, including when an RIA has introduced the sale
(Section 6 must be filled in).
The undersigned confirm on behalf of the Broker-Dealer that they
(i) have reasonable grounds to believe that the information
and representations concerning the investor identified herein
are true, correct and complete in all respects; (ii) have
discussed such investor’s prospective purchase of Shares
with such investor; (iii) have advised such investor of all
pertinent facts with regard to the lack of liquidity and
marketability of the Shares; (iv) have delivered or made
available a current Prospectus and related supplements, if any,
to such investor; (v) have reasonable grounds to believe
that the investor is purchasing these Shares for his or her own
account; and (vi) have reasonable grounds to believe that
the purchase of Shares is a suitable investment for such
investor, that such investor meets the suitability standards
applicable to such investor set forth in the Prospectus and
related supplements, if any, and that such investor is in a
financial position to enable such investor to realize the
benefits of such an investment and to suffer any loss that may
occur with respect thereto.
The undersigned Financial Advisor further represents and
certifies that, in connection with this subscription for Shares,
he or she has complied with and has followed all applicable
policies and procedures under his or her firm’s existing
Anti-Money Laundering Program and Customer Identification
Program.
×
×
Financial Advisor Signature
Date
Branch Manager Signature
(If required by Broker-Dealer)
(7) SUBSCRIBER SIGNATURES
TAXPAYER IDENTIFICATION NUMBER OR SOCIAL SECURITY NUMBER
CONFIRMATION (required): The investor signing below, under
penalties of perjury, certifies that (i) the number shown
on this subscription agreement is my correct taxpayer
identification number (or I am waiting for a number to be issued
to me), (ii) I am not subject to backup withholding because
I am exempt from backup withholding, I have not been notified by
the Internal Revenue Service (“IRS”) that I am subject
to backup withholding, and (iii) I am a U.S. person
(including a U.S. resident alien).
Hines REIT is required by law to obtain, verify and record
certain personal information from you or persons on your behalf
in order to establish the account. Required information includes
name, date of birth, permanent residential address and social
security/taxpayer identification number. We may also ask to see
other identifying documents. If you do not provide the
information, Hines REIT may not be able to open your account. By
signing the Subscription Agreement, you agree to provide this
information and confirm that this information is true and
correct. If we are unable to verify your identity, or that of
another person(s) authorized to act on your behalf, or if we
believe we have identified potentially criminal activity, we
reserve the right to take action as we deem appropriate which
may include closing your account.
Please separately initial each of the representations below.
Registered Representatives are not permitted to initial the
representations on your behalf. In order to induce Hines REIT to
accept this subscription, I hereby represent and warrant to you
as follows:
PLEASE NOTE: ALL ITEMS MUST BE READ AND
INITIALED.
Owner
Joint Owner
(a)
A copy of the Prospectus of Hines Real Estate Investment Trust,
Inc. has been delivered or made available to me.
o
o
Initials
Initials
(b)
I/We have (i) a minimum net worth (not including home, home
furnishings and personal automobiles) of at least $250,000, or
(ii) a minimum net worth (as previously described) of at
least $70,000 and a minimum annual gross income of at least
$70,000, or that I meet the higher suitability requirements
imposed by my state of primary residence as set forth in the
Prospectus under “SUITABILITY STANDARDS.”
o
o
Initials
Initials
(c)
I acknowledge that there is no public market for the Shares and,
thus, my investment in Shares is not liquid.
o
o
Initials
Initials
(d)
I am purchasing the Shares for my own account.
o
o
Initials
Initials
The Internal Revenue Service does not require your consent to
any provision of this document other than the certifications
required to avoid backup withholding.
×
×
Signature of Investor
Date
Signature of Co-Investor or Custodian
(if applicable)
Date
(MUST BE SIGNED BY CUSTODIAN OR TRUSTEE IF IRA OR QUALIFIED
PLAN IS ADMINISTERED BY A THIRD PARTY)
(8)
MISCELLANEOUS Investors participating in the Dividend Reinvestment Plan or
making subsequent purchases of Shares of Hines REIT, agree that,
if they fail to meet the suitability requirements for making an
investment in Shares or can no longer make the other
representations or warranties set forth in Section 7 above, they
are required to promptly notify Hines REIT and the Broker-Dealer
in writing.
All items on the Subscription Agreement must be completed in
order for your subscription to be processed. Subscribers are
encouraged to read the Prospectus in its entirety for a complete
explanation of an investment in the Shares of Hines REIT. Return to: Hines REIT
n
P.O. Box 5238
n
Englewood, CO
80155-5238 Overnight Delivery: Hines
REIT n
7103 S. Revere Parkway
n
Centennial, CO80112 Hines REIT Investor Relations: 1-888-220-6121
Accepted by Hines Real Estate Investment Trust, Inc.
HINES
REAL ESTATE INVESTMENT TRUST, INC.
DIVIDEND REINVESTMENT PLAN
As
of ,
2008
Hines Real Estate Investment Trust, Inc., a Maryland Corporation
(the “Company”), has adopted the following Dividend
Reinvestment Plan (the “DRP”). Capitalized terms shall
have the same meaning as set forth in the Company’s charter
(the “Charter”) unless otherwise defined herein.
1. Dividend Reinvestment. As an agent for
the shareholders (“Shareholders”) of the Company who
purchase shares of the Company’s shares of common stock
(the “Shares”) pursuant to an offering by the Company
(“Offering”), and who elect to participate in the DRP
(the “Participants”), the Company will apply all
dividends and other distributions authorized and paid in respect
of the Shares held by each Participant, but exclusive of
distributions made to Shareholders attributable to the net
proceeds from the sale of the Company’s properties
(“Dividends”), including Dividends paid with respect
to any full or fractional Shares acquired under the DRP, to the
purchase of the Shares for such Participants directly, if
permitted under state securities laws and, if not, through the
Dealer Manager or Soliciting Dealers registered in the
Participant’s state of residence.
2. Effective Date. The effective date of
this DRP
was ,
2008.
3. Procedure for Participation. Any
Shareholder who owns Shares and who has received a prospectus,
as contained in a Company’s Registration Statement filed
with the Commission, may elect to become a Participant by
completing and executing a subscription agreement, an enrollment
form or any other appropriate authorization form as may be
available from the Company from time to time. Participation in
the DRP will begin with the next Dividend payable after receipt
of a Participant’s subscription, enrollment or
authorization. Shares will be purchased under the DRP on the
date that Dividends are paid by the Company. Each Participant
agrees that if, at any time prior to the listing of the Shares
on a national securities exchange or inclusion of the Shares for
quotation on a national securities market he or she fails to
meet the suitability requirements for making an investment in
the Company or cannot make the other representations or
warranties set forth in the subscription agreement or other
applicable enrollment form, he or she will promptly so notify
the Company in writing.
Participation in the DRP shall continue until such participation
is terminated in writing by the Participant pursuant to
Section 8 below. If the DRP transaction involves Shares
which are registered with the Securities and Exchange Commission
(the “Commission”) in a future registration or the
Board of Directors elects to change the purchase price to be
paid for Shares issued pursuant to the DRP, the Company shall
make available to all Participants the prospectus as contained
in the Company’s registration statement filed with the
Commission with respect to such future registration or provide
public notification to all Participants of such change in the
purchase price of Shares issued pursuant to the DRP. If, after a
price change, a Participant does not desire to continue to
participate in the DRP, he should exercise his right to
terminate his participation pursuant to the provisions of
Section 8 below.
4. Purchase of Shares. Participants will
acquire DRP Shares from the Company at a fixed price of
$ per share until (i) all DRP
Shares registered in the Offering are issued, (ii) the
Offering terminates and the Company elects to deregister with
the Commission the unsold DRP Shares, or (iii) the Board of
Directors of the Company decides to change the purchase price
for DRP Shares or terminate the DRP for any reason. Participants
in the DRP may also purchase fractional Shares so that 100% of
the Dividends will be used to acquire Shares. However, a
Participant will not be able to acquire DRP Shares to the extent
that any such purchase would cause such Participant to violate
any provision in the Charter.
Shares to be distributed by the Company in connection with the
DRP may (but are not required to) be supplied from: (a) the
DRP Shares which are being registered with the Commission in
connection with the Offering, (b) Shares to be registered
with the Commission after the Offering for use in the DRP (a
“Future Registration”), or (c) Shares of the
Company’s common stock purchased by the Company for the DRP
in a secondary market (if available) or on a securities exchange
or national securities market (if listed) (collectively,
the “Secondary Market”). Shares purchased on the
Secondary Market as set forth in (c) above will be
purchased at the then-prevailing market price, which price will
be utilized for purposes of purchases of Shares in the DRP.
Shares acquired by the Company on the Secondary Market or will
have a price per share equal to the then-prevailing market
price, which shall equal the price on the securities exchange,
national securities market or over-the-counter market on which
such shares are listed at the date of purchase if such shares
are then listed. If Shares are not so listed, the Board of
Directors of the Company will determine the price at which
Shares will be issued under the DRP.
If the Company acquires Shares in the Secondary Market for use
in the DRP, the Company shall use reasonable efforts to acquire
Shares for use in the DRP at the lowest price then reasonably
available. However, the Company does not in any respect
guarantee or warrant that the Shares so acquired and purchased
by the Participant in the DRP will be at the lowest possible
price. Further, irrespective of the Company’s ability to
acquire Shares in the Secondary Market or to complete a Future
Registration for Shares to be used in the DRP, the Company is in
no way obligated to do either, in its sole discretion.
5. Shares Certificates. The ownership of
the Shares purchased through the DRP will be in book-entry form
only.
6. Reports. Within 90 days after the end of the
Company’s fiscal year, the Company shall provide each
Shareholder with an individualized report on his or her
investment, including the purchase date(s), purchase price and
number of Shares owned, as well as the dates of Dividend
distributions and amounts of Dividends paid during the prior
fiscal year. In addition, the Company shall provide to each
Participant an individualized quarterly report at the time of
each Dividend payment showing the number of Shares owned prior
to the current Dividend, the amount of the current Dividend and
the number of Shares owned after the current Dividend.
7. Commissions. The Company will not pay
any selling commissions or Dealer Manager fees in connection
with Shares sold pursuant to the DRP.
8. Termination by Participant. A
Participant may terminate participation in the DRP at any time,
without penalty by delivering to the Company a written notice of
such termination. Any such withdrawal will be effective only
with respect to dividends paid more than 30 days after
receipt of such written notice. Prior to listing of the Shares
on a national securities exchange or inclusion of the shares for
quotation on a national securities market, any transfer of
Shares by a Participant to a non-Participant will terminate
participation in the DRP with respect to the transferred Shares.
Upon termination of DRP participation, future Dividends, if any,
will be distributed to the Shareholder in cash.
9. Taxation of Distributions. The
reinvestment of Dividends in the DRP does not relieve
Participants of any taxes which may be payable as a result of
those Dividends and their reinvestment in Shares pursuant to the
terms of the DRP.
10. Amendment or Termination of DRP by the
Company. The Board of Directors of the Company
may by majority vote amend or terminate the DRP for any reason
upon 10 days’ notice to the Participants.
11. Liability of the Company. The Company
shall not be liable for any act done in good faith, or for any
good faith omission to act, including, without limitation, any
claims or liability: (a) arising out of failure to
terminate a Participant’s account upon such
Participant’s death prior to receipt of notice in writing
of such death; and (b) with respect to the time and the
prices at which Shares are purchased or sold for
Participant’s account.
OUR COMMITMENT TO PROTECTING YOUR PRIVACY. We
consider customer privacy to be fundamental to our relationship
with our shareholders. In the course of servicing your account,
we collect personal information about you (“Nonpublic
Personal Information”). We are committed to maintaining the
confidentiality, integrity and security of our
shareholders’ personal information. It is our policy to
respect the privacy of our current and former shareholders and
to protect the personal information entrusted to us. This
privacy policy (this “Privacy Policy”) describes the
standards we follow for handling your personal information, with
the dual goals of meeting your financial needs while respecting
your privacy.
1.
Information
We May Collect.
We may collect Nonpublic Personal Information about you from
three sources:
•
Information on applications, subscription agreements or other
forms which may include your name, address,
e-mail
address, telephone number, tax identification number, date of
birth, marital status, driver’s license number,
citizenship, assets, income, employment history, beneficiary
information, personal bank account information, broker/dealer,
financial advisor, IRA custodian, account joint owners and
similar parties;
•
Information about your transactions with us, our affiliates and
others, such as the types of products you purchase, your account
balances and transactional history; and
•
Information obtained from others, such as from consumer credit
reporting agencies which may include information about your
creditworthiness, debts, financial circumstances and credit
history, including any bankruptcies and foreclosures.
2.
Why We
Collect Nonpublic Personal Information.
We collect information from and about you:
•
in order to identify you as a customer;
•
in order to establish and maintain your customer accounts;
•
in order to complete your customer transactions;
•
in order to market investment products or services that may meet
your particular financial and investing circumstances;
•
in order to communicate and share information with your
broker/dealer, financial advisor, IRA custodian, joint owners
and other similar parties acting at your request and on your
behalf; and
•
in order to meet our obligations under the laws and regulations
that govern us.
3.
Use and
Disclosure of Information.
We do not disclose any Nonpublic Personal Information about you
to anyone except as permitted by law.
•
Internal Use. We will use your Nonpublic
Personal Information within our business for the purposes of
furthering our business, including analyzing your information,
matching your information with the information of others, and
other possible uses.
•
Aggregate Use and Disclosure. We will use and
disclose your Nonpublic Personal Information on an aggregate
basis, which means that we combine parts of your information
with parts of the information
from our other users without including your name, complete
telephone number, complete
e-mail
address or your street address, in the combination. For example,
we might determine the most common zip code among the users of
our Web Site and disclose that zip code to other companies, or
determine and disclose the average age of investors in our
investment product(s).
•
Our Affiliated Companies. We may offer
investment products and services through certain of our
affiliated companies, and we may share all of the Nonpublic
Personal Information we collect on you with such affiliates. We
believe that by sharing information about you and your accounts
among our companies, we are better able to serve your investment
needs and to suggest services or educational materials that may
be of interest to you.
•
Opt Out. You may request that the information
we collect on you from consumer reporting agencies not be shared
among our affiliated companies, except where one company
performs services for another company, by notifying us in
writing.
•
Nonaffiliated Service Providers and Joint Marketing
Partners. From time to time, we use outside
companies to perform services for us or functions on our behalf
, including marketing of our own investment products and
services or marketing products or services that we may offer
jointly with other financial institutions. We may disclose all
of the Nonpublic Personal Information we collect as described
above to such companies. However, before we disclose Nonpublic
Personal Information to any of our service providers or joint
marketing partners, we require them to agree to keep your
Nonpublic Personal Information confidential and secure and to
use it only as authorized by us.
•
Other Nonaffiliated Third Parties. We do not
sell or share your Nonpublic Personal Information with outside
marketers, for example, retail department stores, grocery stores
or discount merchandise chains, who may want to offer you their
own products and services.
We may use and disclose your Nonpublic Personal Information to
the extent reasonably necessary to:
•
correct technical problems and malfunctions in how we provide
our products and services to you and to technically process your
information;
•
protect the security and integrity of our records, Web Site and
customer service center;
•
protect our rights and property and the rights and property of
others;
•
take precautions against liability;
•
respond to claims that your information violates the rights and
interests of third parties;
•
take actions required by law or to respond to judicial process;
•
assist with detection, investigation or reporting of actual or
potential fraud, misrepresentation or criminal activity; and
•
provide personal information to law enforcement agencies or for
an investigation on a matter related to public safety to the
extent permitted under other provisions of law.
4.
Protecting
Your Information.
Our employees are required to follow the procedures we have
developed to protect the integrity of your information. These
procedures include:
•
Restricting physical and other access to your Nonpublic Personal
Information to persons with a legitimate business need to know
the information in order to service your account;
•
Contractually obligating third parties doing business with us to
keep your Nonpublic Personal Information confidential and secure
and to use it only as authorized by us;
•
Providing information to you only after we have used reasonable
efforts to assure ourselves of your identity by asking for and
receiving from you information only you should know; and
•
Maintaining reasonably adequate physical, electronic and
procedural safeguards to protect your information.
We treat information concerning our former customers the same
way we treat information about our current customers.
6.
Keeping
You Informed.
We will provide notice of our Privacy Policy annually, as long
as you maintain an ongoing relationship with us. If we decide to
change our Privacy Policy, we will post those changes on our Web
Site so our users and customers are always aware of what
information we collect, use and disclose. If at any point we
decide to use or disclose your Nonpublic Personal Information in
a manner different from that stated at the time it was
collected, we will notify you in writing, which may or may not
be by
e-mail. If
you object to the change to our Privacy Policy, then you must
contact us using the information provided in the notice. We will
otherwise use and disclose a user’s or a customer’s
Nonpublic Personal Information in accordance with the Privacy
Policy that was in effect when such information was collected.
7.
Questions
About Our Privacy Policy.
If you have any questions about our Privacy Policy, please
contact us via email at: HinesREITprivacy@Hines.com.
Hines, our sponsor, has over 49 years of experience. This
timeline briefly summarizes this history. Our Advisor relies on
Hines to locate, evaluate and assist in the acquisition of our
real estate investments and to perform many of our day-to-day
operations. Hines also manages all of our direct and indirect
real estate investments. The Core Fund relies on Hines in a
similar manner. Please see “Management — Hines
and Our Property Management and Leasing Agreements —
The Hines Organization.”
Except for the Core Fund and any properties identified in the
prospectus, we do not have an interest in any of the funds,
properties or projects listed below. This summary is included to
provide potential investors with additional historical
information about our sponsor. See “Risk
Factors — Business and Real Estate Risks —
We are different in some respects from prior programs sponsored
by Hines, and therefore the past performance of such programs
may not be indicative of our future results.” Hines’
past performance may not be indicative of our future results.
Please see “Investment Objectives and Policies With Respect
to Certain Activities” for a description of our investment
objectives and policies, which differ from some of the current
and historical projects sponsored by Hines. For example, a
significant portion of the prior programs, financial results and
history of Hines involve development projects. We do not
currently expect to undertake development projects.
Establishment
Through Recognized Performance: The Late 50s, 60s &
70s
Originally a developer of warehouse and distribution buildings
with some ancillary office space in the 1960s, Hines shifted its
strategy during the 1970s from smaller industrial and office
properties to large and distinctive office towers, anticipating
corporate America’s interest in signature office buildings.
1957
—
Gerald D. Hines Interests founded as a sole proprietorship.
1958
—
After six office/warehouse projects, Hines completes the
firm’s first Class A Office Project, 4219 Richmond Ave.,
Houston, Texas.
1967
—
Gerald D. Hines Interests celebrates its 10th anniversary
with 97 office, warehouse, retail, parking and residential
projects in its portfolio.
1971
—
Hines builds its first office tower in downtown Houston, the
50-story One Shell Plaza.
1973
—
Banking Division is formed to pursue development of bank
headquarters in joint ventures outside Houston, starting
national expansion of firm.
1975
—
Pennzoil Place is completed and named building of the year by
the NY Times.
1976
—
Hines sells a major interest in Pennzoil Place to an
international investor. Hines completes its first international
development in Montreal.
1978
—
Construction of Three First National Plaza (Chicago) begins.
Equity
Joint Ventures and Selective Recapitalization: The 80s
During the high interest rate environment of the 1980s, Hines
structured development partnerships with providers of long term
equity to capitalize larger and more complex development
projects in central business districts.
1981
—
The East Region office opens in New York City.
1982
—
The Southeast Region office opens in Atlanta.
1983
—
Transco Tower, now called Williams Tower, and Republic Bank
Center, now called Bank of America Center (both in Houston) are
completed, as is United Bank Center, now Wells Fargo Center
(Denver) is completed.
1984
—
580 California (San Francisco), Huntington Center
(Columbus) and Southeast Financial Center, now Wachovia
Financial Center (Miami) are completed.
1985
—
Ravinia Center (Atlanta) is completed.
1986
—
53rd At Third and 31 West 52nd Street are completed (both
in New York). The Midwest Region office opens in Chicago.
1987
—
Hines celebrates its 30th anniversary with 373 projects
completed and 921 employees throughout the U.S. The
Norwest Center (Minneapolis) and Columbia Square
(Washington, D.C.) buildings are completed.
1988 — 1989
—
500 Bolyston (Boston) and Franklin Square
(Washington, D.C.) are completed.
Global
Expansion, Acquisitions and Investment Management: The
90s
In the early 1990s, Hines strategically decided to expand
internationally, seeing an opportunity to provide quality space
in overseas markets to multi-national firms. Domestically, as
real estate markets softened in the early 90s, Hines saw an
opportunity to buy buildings below replacement cost and
purchased over 27 million square feet in existing
properties during the decade.
In the late 90s, Hines formed a series of co-investment
partnerships with major investors to execute a suburban office
market development strategy.
1990
—
Jeffrey C. Hines appointed President of Hines Interests Limited
Partnership; Gerald D. Hines becomes Chairman. 343 Sansome
(San Francisco), 225 High Ridge Road (Stamford) and
Figueroa at Wilshire (Los Angeles) are completed.
1991
—
The first international office opens in Berlin. 450 Lexington
(New York) and One Detroit Center, now Comerica Tower (Detroit)
are completed.
1992
—
Mexico City and Moscow offices open. The renovation and
development of the historic Postal Square
(Washington, D.C.) is completed.
1993
—
700 11th Street (Washington, D.C.) is acquired, the
first building acquisition by Hines.
1994
—
Hines begins the year with 18 major developments in progress in
the U.S. and three foreign countries. Greenspoint Plaza
(Houston) is acquired. Del Bosque is completed in Mexico City
and sold to Coca-Cola for its Latin America headquarters.
1995
—
Paris, London, Frankfurt and Prague offices are all opened. In
partnership with Morgan Stanley, Hines acquires the Homart
portfolio (15 U.S. office buildings).
1996
—
The Barcelona and Beijing offices open. Hines closes its first
international fund, Emerging Markets Fund I.
1997
—
Hines celebrates its 40th anniversary with
2,700 employees worldwide. Warsaw office opens.
Construction begins on Diagonal Mar in Barcelona, the largest
European undertaking for Hines to date.
1998
—
Hines completes its first international property acquisition,
Reforma 350 in Mexico City. Hines Corporate Properties
(Hines’ first Build-to-Suit Fund) closes. Hines U.S.
Development Fund I closes. CalPERS selects Hines as partner and
investment manager for its $1.0 billion portfolio of 18
properties. Sào Paulo office opens.
1999
—
The Hines U.S. Office Development Fund II and Emerging
Markets Real Estate Fund II close. Hines completes Mala
Sarka (Prague), DZ Bank (Berlin), and Main Tower (Frankfurt).
Hines acquires Figueroa at Wilshire (Los Angeles), 1100
Louisiana (Houston), and Bank of America Tower (Miami).
Continuing
Development, Expanded Investment Vehicles: The 00s
2000
—
Hines starts major office projects in the central business
districts of Seattle, Chicago, New York and
San Francisco. Hines acquires 750 Seventh Avenue (New
York).
2001
—
Hines develops, Gannett/USA Today headquarters in Virginia and
projects for Morgan Stanley Dean Witter, Bear Stearns and
Swiss Bank Corporation (now UBS Warburg) in New York.
2002
—
Hines initiates the Hines Suburban Office Venture to acquire
suburban office properties. Hines completes 745 Seventh Avenue
in New York City and the resort community of Aspen Highlands
Village in Aspen, Colorado.
2003
—
Completed projects include Hilton Americas-Houston, Toyota
Center and Calpine Center (all in Houston), 2002 Summit
Boulevard (Atlanta), ABN AMRO (Chicago), Benrather Karree
(Düsseldorf) and Panamérica Park (São Paulo).
Hines expands its presence in Paris with three significant
projects. Hines begins the urban planning project Garibaldi
Repubblica (Milan), a master plan project which includes
residential, office, retail and a hotel as well as a 26-acre
public park. Additional residential projects include Tower I
of Park Avenue (Beijing), River Valley Ranch (Colorado) and
master-planned community Diagonal Mars Illa de Llac in
Barcelona.
The Hines European Development Fund is formed to focus on Class
A office properties in Western Europe. The Hines U.S. Core
Fund acquires its first buildings, three New York City office
buildings and a building in Washington D.C. The Hines U.S.
Office Value Added Fund offering is closed. Construction begins
on One South Dearborn (Chicago), 2525 Ponce de Leon (Coral
Gables), 1180 Peachtree (Atlanta) and Torre Almirante (Rio de
Janeiro).
2004
—
Hines sponsors its first public program, Hines REIT, which
commences its first public offering. Development continues on
Cannon Place, 99 Queen Victoria and the new world headquarters
for the Salvation Army (all in London), and International
Plaza-Kempinski Hotel (São Paulo).
2005
—
Hines continues to seek out new development and investment
opportunities in over 100 markets around the world.
Hines and CalPERS create funds to invest in Mexico’s real
estate market and Brazil’s office, industrial and
residential markets.
Properties in development include 300 North LaSalle and One
South Dearborn in Chicago and 900 de Maisonneuve,
(Montreal).
2006
—
Hines and CalPERS establish the nation’s first real estate
investment fund devoted solely to sustainable development.
Hines is honored with the Environmental Protection
Agency’s ENERGY STAR Sustained Excellence Award. New Delhi
office opens. Hines develops new region called Eurasia, which
includes Poland, Russia and now India.
2007
—
Hines celebrates its 50th anniversary with more than
3,150 employees and almost 900 projects completed and
under way around the globe. The Dubai office opens.
All capitalized terms used and not defined in Part II of
this registration statement shall have the meanings assigned to
them in the prospectus which forms a part of this registration
statement.
Item 31.
Other
Expenses of Issuance and Distribution
The following is a statement of estimated expenses to be
incurred in connection with the issuance and distribution of the
securities being registered pursuant to this registration
statement, other than underwriting compensation. All amounts are
estimated except the Securities Act registration fee and the
FINRA filing fee.
Amount*
Securities Act registration fee
$
137,550
FINRA filing fee
75,500
Blue sky qualification fees and expenses
279,000
Printing and engraving fees and expenses
7,569,000
Legal fees and expenses
2,172,000
Accounting fees and other professional expenses
500,000
Transfer agent and escrow fees
1,810,000
Educational conferences and seminars
4,760,000
Sales and advertising expenses
3,056,000
Miscellaneous
11,234,000
Total
$
31,593,050
*
All of the listed expenses will be paid by an affiliate of Hines.
Item 32.
Sales
to Special Parties
We may sell shares to retirement plans of participating
broker-dealers, to participating broker-dealers themselves (and
their employees), to IRAs and qualified plans of their
registered representatives or to any one of their registered
representatives in their individual capacities (and to each of
their spouses, parents and minor children) at a 7.0% discount,
or $ per share, reflecting that
selling commissions will not be paid in connection with such
transactions. The net proceeds we receive will not be affected
by such sales of shares made net of commissions.
Our directors and officers, as well as affiliates of Hines and
their directors, officers and employees (and their spouses,
parents and minor children) and entities owned substantially by
such individuals, may purchase shares in this offering at a 9.2%
discount, or $ per share,
reflecting the fact that no selling commissions or dealer
manager fees will be paid in connection with any such sales. The
net offering proceeds we receive will not be affected by such
sales of shares at a discount. Hines and its affiliates will be
expected to hold their shares purchased as shareholders for
investment and not with a view towards distribution.
In addition, Hines, the Dealer Manager or one of their
affiliates may form one or more foreign-based entities for the
purpose of raising capital from foreign investors to invest in
our shares. Sales of our shares to any such foreign entity may
be at a 9.2% discount, or $ per
share, reflecting the fact that no selling commissions or dealer
manager fees will be paid in connection with any such
transactions. The net offering proceeds we receive will not be
affected by such sales of shares at a discount.
Item 33.
Recent
Sales of Unregistered Securities
Under the terms of our Employee and Director Incentive Share
Plan, on each of July 6, 2005, June 7, 2006 and
July 9, 2007, 1,000 restricted common shares were granted
to each of our independent directors, Messrs. George A.
Davis, Thomas A. Hassard and Stanley D. Levy. Such shares were
granted without
registration under the Securities Act of 1933, as amended, in
reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act.
There have been no other sales of unregistered securities within
the past three years.
Item 34.
Indemnification
of Directors and Officers
The Maryland General Corporation Law (the “MGCL”)
permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers
to the corporation and its shareholders for money damages except
for liability resulting from: (i) actual receipt of an
improper benefit or profit in money, property or services or
(ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action.
Subject to the conditions set forth in this Item, our charter
and bylaws provide that we shall, subject only to the
limitations in our charter and bylaws, or any limitations
required by the MGCL as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the
extent that such amendment narrows the limitations of our
ability to provide indemnification rights compared to such
rights existing prior to such amendment), indemnify and hold
harmless against, and shall pay, advance or reimburse the
reasonable expenses of any director or officer of Hines REIT
(each an “Indemnified Party”) related to, any and all
losses or liabilities reasonably incurred by any such person in
connection with or by reason of any act or omission performed or
omitted to be performed on our behalf in such capacities. Under
our charter and bylaws, we shall not indemnify any Indemnified
Party for any liability or loss suffered by such Indemnified
Party, nor shall such Indemnified Party be held harmless for any
loss or liability suffered by us, unless all of the following
conditions are met: (i) the Indemnified Party determined,
in good faith, that the course of conduct that caused the loss
or liability was in our best interests; (ii) the
Indemnified Party was acting on behalf of or performing services
for us; (iii) such liability or loss was not the result of
negligence or misconduct by such Indemnified Party except in the
event that the Indemnified Party is or was an independent
director, such liability or loss was not the result of gross
negligence or willful misconduct; and (iv) such
indemnification or agreement to hold harmless is recoverable
only out of our net assets and not from our shareholders.
Notwithstanding the foregoing, we shall not indemnify any
Indemnified Party for any loss, liability or expenses arising
from or out of an alleged violation of federal or state
securities laws unless one or more of the following conditions
are met: (i) there has been a successful adjudication on
the merits of each count involving alleged securities law
violations as to the particular indemnitee; (ii) such
claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee;
or (iii) a court of competent jurisdiction approves a
settlement of the claims against the particular indemnitee and
finds that indemnification of the settlement and the related
costs should be made, and the court considering the request for
indemnification has been advised of the position of the
Securities and Exchange Commission and of the published position
of any state securities regulatory authority in which our
securities were offered or sold as to indemnification for
violations of securities laws. Our charter provides that the
advancement of our funds to an Indemnified Party for legal
expenses and other costs incurred as a result of any legal
action for which indemnification is being sought is permissible
only if all of the following conditions are satisfied:
(i) the legal action relates to acts or omissions with
respect to the performance of duties or services by the
Indemnified Party on behalf of us; (ii) the legal action is
initiated by a third party who is not a shareholder of ours or
the legal action is initiated by a shareholder acting in his or
her capacity as such and a court of competent jurisdiction
specifically approves such advancement; and (iii) the
Indemnified Party undertakes to repay the advanced funds to us,
together with the applicable legal rate of interest thereon, in
cases in which such Indemnified Party is found not to be
entitled to indemnification.
The MGCL requires a Maryland corporation (unless its charter
provides otherwise, which our charter does not) to indemnify a
director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made
or threatened to be made a party by reason of his service in
that capacity. The MGCL permits a Maryland corporation to
indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made or threatened to be
made a
party by reason of their service in those or other capacities
unless it is established that: (i) the act or omission of
the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or
(b) was the result of active and deliberate dishonesty;
(ii) the director or officer actually received an improper
personal benefit in money, property or services; or
(iii) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or
omission was unlawful. However, under the MGCL a Maryland
corporation may not provide indemnification for an adverse
judgment in a suit by or in the right of the corporation or for
a judgment of liability on the basis that personal benefit was
improperly received, unless in either case a court orders
indemnification, and then only for expenses. In addition, the
MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation’s receipt of:
(i) a written affirmation by the director or officer of his
good faith belief that he or she has met the standard of conduct
necessary for indemnification by us as authorized by our charter
and bylaws; and (ii) a written undertaking by him or her or
on his or her behalf to repay the amount paid or reimbursed by
us if it shall ultimately be determined that the standard of
conduct was not met.
Indemnification under the provisions of the MGCL is not deemed
exclusive of any other rights, by indemnification or otherwise,
to which an officer or director may be entitled under our
charter or bylaws, or under resolutions of shareholders or
directors, contract or otherwise. We have entered into separate
indemnification agreements with each of our directors and
certain of our executive officers. The indemnification
agreements require, among other things, that we indemnify our
directors and officers to the fullest extent permitted by law
and our charter, and advance to the directors and officers all
related expenses, subject to reimbursement if it is subsequently
determined that such indemnification or advance is not
permitted. We also must indemnify and advance all expenses
incurred by directors and officers seeking to enforce their
rights under the indemnification agreements and cover directors
and officers under our directors’ and officers’
liability insurance. Although these indemnification agreements
offer substantially the same scope of coverage afforded by
provisions in our charter and bylaws, as a contract, it cannot
be unilaterally modified by the board of directors or by the
shareholders to eliminate the rights it provides. We have
purchased and maintain insurance on behalf of all of our
directors and executive officers against liability asserted
against or incurred by them in their official capacities with
us, whether or not we are required or have the power to
indemnify them against the same liability. Our bylaws provide
that neither the amendment, nor the repeal, nor the adoption of
any other provision of the charter or bylaws will limit, in any
respect, any Indemnified Party’s right to indemnification
for actions or failures to act which occurred prior to such
amendment, repeal or adoption.
To the extent that the indemnification may apply to liabilities
arising under the Securities Act, the Company has been advised
that, in the opinion of the Securities and Exchange Commission,
such indemnification is contrary to public policy and,
therefore, unenforceable pursuant to Section 14 of the
Securities Act.
Statements of Revenues and Certain Operating Expenses
F-138
Notes to Statements of Revenues and Certain Operating Expenses
F-139
Warner Center, Woodland Hills, California — For the
Nine Months Ended September 30, 2006 (Unaudited) and For
the Year Ended December 31, 2005:
Independent Auditors’ Report
F-141
Statements of Revenues and Certain Operating Expenses
F-142
Notes to Statements of Revenues and Certain Operating Expenses
F-143
1201 W. Peachtree Street, Atlanta,
Georgia, — For the Six Months Ended June 30, 2006
(Unaudited) and For the Years Ended December 31, 2005, 2004
and 2003:
Independent Auditor’s Report
F-145
Statements of Revenues and Certain Operating Expenses
F-146
Notes to Statements of Revenues and Certain Operating Expenses
Unaudited Pro Forma Consolidated Statements of Operations For
the Nine Months Ended September 30, 2007
F-160
Unaudited Pro Forma Consolidated Statements of Operations For
the Year Ended December 31, 2006
F-162
Unaudited Notes to Pro Forma Consolidated Financial Statements
F-164
(b)
Exhibits:
The documents listed on the Index to Exhibits are filed as
exhibits to this registration statement.
Item 37.
Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(a) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the
effective registration statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(b) (i) that, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(ii) that all post-effective amendments will comply with
the applicable forms, rules and regulations of the Commission in
effect at the time such post-effective amendments are
filed; and
(iii) to remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(c) that, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:
(A) each prospectus filed by the registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the registration
statement as of the date the filed prospectus was deemed part of
and included in the registration statement; and
(B) each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration statement
in reliance on Rule 430B relating to an offering made
pursuant to Rule 415(a)(1)(i), (vii), or (x) for the
purpose of providing the information required by
section 10(a) of the Securities Act of 1933 shall be deemed
to be part of and included in the registration statement as of
the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the registration
statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however,
that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale
prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that
was part of the registration statement or made in any such
document immediately prior to such effective date; or
(ii) if the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness.
Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(d) that, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities: The undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(e) to file a sticker supplement pursuant to
Rule 424(c) under the Securities Act during the
distribution period describing each property not identified in
the prospectus at such time as there arises a reasonable
probability that such property will be acquired and to
consolidate all such stickers into a post-effective amendment
filed at least once every three months with the information
contained in such amendment provided simultaneously to the
existing shareholders. Each sticker supplement should disclose
all compensation and fees received by the Advisor and its
affiliates in connection with any such acquisition. The
post-effective amendment shall include audited financial
statements meeting the requirements of
Rule 3-14
of
Regulation S-X
only for properties acquired during the distribution period.
(f) to file, after the end of the distribution period, a
current report on
Form 8-K
containing the financial statements and any additional
information required by
Rule 3-14
of
Regulation S-X,
to reflect each commitment (i.e., the signing of a binding
purchase agreement) made after the end of the distribution
period involving the use of 10% or more (on a cumulative basis)
of the net proceeds of the offering and to provide the
information contained in such report to the shareholders at
least once each quarter after the distribution period of the
offering has ended.
Pursuant to the requirements of the Securities Act, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-11
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
city of Houston, state of Texas on January 25, 2008.
Hines Real Estate
Investment Trust, Inc.
By:
/s/ Charles
M. Baughn
Charles M. Baughn
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
Directors and officers of Hines Real Estate Investment Trust,
Inc., a Maryland corporation, which is filing a registration
statement on
Form S-11
with the Securities and Exchange Commission under the provisions
of the Securities Act of 1933 hereby constitutes and appoints
Sherri W. Schugart and Frank R. Apollo, and each of them, his or
her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in
his or her name, place and stead, and in any and all capacities,
to sign and file (i) any and all amendments (including
post-effective amendments) to this registration statement, with
all exhibits thereto, and other documents in connection
therewith, and (ii) a registration statement, and any and
all amendments thereto, relating to the offering covered hereby
filed pursuant to Rule 462(b) under the Securities Act of
1933, with the Securities and Exchange Commission, it being
understood that said attorneys-in-fact and agents, and each of
them, shall have full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as
he or she might or could do in person and that each of the
undersigned hereby ratifies and confirms all that said
attorneys-in-fact as agents or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Form of Selected Dealer Agreement, with Form of Dealer
Management Agreement between Hines Real Estate Investment Trust,
Inc. and Hines Real Estate Securities, Inc. attached thereto as
Exhibit A.
Second Amended and Restated Bylaws of Hines Real Estate
Investment Trust, Inc. (filed as Exhibit 3.1 to the
registrant’s Current Report on
Form 8-K
dated July 28, 2006 and incorporated herein by reference).
4
.1
Form of Subscription Agreement (filed as Appendix A to the
prospectus included in the Second Registration Statement and
incorporated herein by reference).
5
.1++
Opinion of Venable LLP
8
.1++
Opinion of Greenberg Traurig, LLP as to tax matters
10
.1
Second Amended and Restated Agreement of Limited Partnership of
Hines REIT Properties, L.P. (filed as Exhibit 10.1 to
Amendment No. 5 to the Registration Statement on
Form S-11,
originally filed on September 12, 2003 (the “Initial
Registration Statement”), filed on May 24, 2004 and
incorporated herein by reference)
10
.2
Form of Property Management and Leasing Agreement between Hines
REIT Properties, L.P. and Hines Interests Limited Partnership
(filed as Exhibit 3.3 to the registrant’s Quarterly
Report on
Form 10-Q
of Hines Real Estate Investment Trust, Inc. for the quarter
ended March 31, 2006, and incorporated herein by reference).
10
.3
Advisory Agreement, dated June 26, 2006, by and among Hines
Real Estate Investment Trust, Inc., Hines REIT Properties, L.P.,
and Hines Advisors Limited Partnership (filed as
Exhibit 10.8 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 and incorporated herein
by reference, as renewed on identical terms for an additional
one-year term, pursuant to a verbal agreement by and among the
parties thereto).
10
.4
Employee and Director Incentive Share Plan of Hines Real Estate
Investment Trust, Inc. (filed as Exhibit 10.4 to Amendment
No. 2 to the Initial Registration Statement on
March 2, 2004 and incorporated herein by reference).
10
.5
Hines Real Estate Investment Trust, Inc. Dividend Reinvestment
Plan (filed as Appendix B to the Prospectus included in the
Second Registration Statement and incorporated herein by
reference).
10
.6
Sixth Amended and Restated Agreement of Limited Partnership of
Hines-Sumisei U.S. Core Office Fund, L.P., dated May 9,2005, as amended and restated December 1, 2005 (filed as
Exhibit 10.6 to Post Effective Amendment No. 7 to the
Initial Registration Statement on February 14, 2006 and
incorporated herein by reference).
10
.7
Third Amended and Restated Declaration of Trust of Hines-Sumisei
N.Y. Core Office Trust, dated December 21, 2005 (filed as
Exhibit 10.7 to Post Effective Amendment No. 7 to the
Initial Registration Statement on February 14, 2006 and
incorporated herein by reference).
Amended and Restated Master Agreement dated as of March 31,2003, among Hines Interests Limited Partnership, Hines US Core
Office Properties LP and Sumitomo Life Realty (N.Y.), Inc., as
amended (filed as Exhibit 10.9 to Amendment No. 2 to
the Initial Registration Statement on March 2, 2004 and
incorporated herein by reference).
10
.10
Second Amended and Restated Shareholder Agreement for
Hines-Sumisei NY Core Office Trust, dated as of
December 21, 2005 (filed as Exhibit 10.10 to Post
Effective Amendment No. 7 to the Initial Registration
Statement on February 14, 2006 and incorporated herein by
reference).
Second Amended and Restated Investor Rights Agreement, dated as
of October 12, 2005 (filed as Exhibit 10.11 to Post
Effective Amendment No. 7 to the Initial Registration
Statement on February 14, 2006 and incorporated herein by
reference).
10
.12
Amended and Restated Organization Agreement for Hines-Sumisei NY
Core Office Trust, dated as of December 23, 2003, by and
among General Motors Investment Management Corporation, Hines
Interests Limited Partnership, Hines-Sumisei U.S. Core Office
Fund, L.P., Hines Sumisei NY Core Office Trust and various
shareholders to Hines-Sumisei NY Core Office Trust (filed as
Exhibit 10.12 to Amendment No. 2 to the Initial
Registration Statement on March 2, 2004 and incorporated
herein by reference).
10
.13
Amended Declaration of Trust of Hines-Sumisei NY Core Office
Trust II (filed as Exhibit 10.13 to Amendment
No. 2 to the Initial Registration Statement on
March 2, 2004 and incorporated herein by reference).
Shareholder Agreement for Hines-Sumisei NY Core Office
Trust II, dated as of February 2, 2004, by and among
General Motors Investment Management Corporation, Hines-Sumisei
U.S. Core Office Fund, L.P., Hines-Sumisei NY Core Office
Trust II and certain shareholders of Hines-Sumisei NY Core
Office Trust II (filed as Exhibit 10.15 to Amendment
No. 2 to the Initial Registration Statement on
March 2, 2004 and incorporated herein by reference).
10
.16
Subscription Agreement for Hines-Sumisei NY Core Office Trust
and Hines-Sumisei NY Core Office Trust II, dated as of
February 2, 2004, by and among General Motors Investment
Management Corporation, Hines Interests Limited Partnership,
Hines-Sumisei U.S. Core Office Fund, L.P., Hines-Sumisei NY Core
Office Trust, Hines-Sumisei NY Core Office Trust II and
various shareholders of Hines-Sumisei NY Core Office Trust and
Hines-Sumisei NY Core Office Trust II (filed as
Exhibit 10.16 to Amendment No. 2 to the Initial
Registration Statement on March 2, 2004 and incorporated
herein by reference).
10
.17
Subscription Agreement, dated as of September 11, 2003,
between Hines REIT Properties, L.P. and Hines Real Estate
Holdings Limited Partnership (filed as Exhibit 10.17 to
Amendment No. 2 to the Initial Registration Statement on
March 2, 2004 and incorporated herein by reference).
10
.18
Agreement, dated as of June 3, 2004, between Hines REIT
Properties, L.P., Hines U.S. Core Office Capital
Associates II Limited Partnership and Hines-Sumisei U.S.
Core Office Fund, L.P. (filed as Exhibit 10.18 to Amendment
No. 6 to the Initial Registration Statement on
June 10, 2004 and incorporated herein by reference).
10
.19
Amended and Restated Escrow Agreement between Hines Real Estate
Investment Trust, Inc. and Wells Fargo Bank, National
Association (filed as Exhibit 10.19 to Amendment No. 2
to the Initial Registration Statement on March 2, 2004 and
incorporated herein by reference).
10
.20
Articles of Amendment dated May 4, 2004 to the Declaration
of Trust of Hines-Sumisei N.Y. Core Office Trust (filed as
Exhibit 10.20 to Amendment No. 5 to the Initial
Registration Statement on May 25, 2004 and incorporated
herein by reference) (superseded by Exhibit No. 10.7).
10
.21
Articles of Amendment dated May 4, 2004 to the Declaration
of Trust of Hines-Sumisei N.Y. Core Office Trust II (filed
as Exhibit 10.21 to Amendment No. 5 to the Initial
Registration Statement on May 25, 2004 and incorporated
herein by reference).
10
.22
Articles of Amendment dated December 27, 2004 to the
Declaration of Trust of Hines-Sumisei N.Y. Core Office Trust
(filed as Exhibit 10.22 to the registrant’s Annual
Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference) (superseded by Exhibit No. 10.7).
10
.23
Articles of Amendment dated December 27, 2004 to the
Declaration of Trust of Hines-Sumisei N.Y. Core Office
Trust II (filed as Exhibit 10.23 to the
registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.24
Purchase and Sale Agreement, dated November 23, 2004, by
and among Hines U.S. Core Office Capital Associates II
Limited Partnership, Hines REIT Properties, L.P. and Hines U.S.
Core Office Capital LLC (filed as Exhibit 10.22 to Post
Effective Amendment No. 1 to the Initial Registration
Statement on February 22, 2005 and incorporated herein by
reference).
Purchase and Sale Agreement, dated February 1, 2005, by and
among Hines US Core LLC, Hines REIT Properties, L.P. and Hines
U.S. Core Office Capital LLC (filed as Exhibit 10.23 to
Post Effective Amendment No. 1 to the Initial Registration
Statement on February 22, 2005 and incorporated herein by
reference).
10
.26
Second Amended and Restated Agreement of Limited Partnership of
Hines-Sumisei US Core Office Properties LP (filed as
Exhibit 10.26 to Post Effective Amendment No. 1 to the
Initial Registration Statement on February 22, 2005 and
incorporated herein by reference).
10
.27
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Jeffrey C. Hines (filed as Exhibit 10.27 to
the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference)
10
.28
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and C. Hastings Johnson (filed as Exhibit 10.28
to the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.29
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and George A. Davis (filed as Exhibit 10.29 to
the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.30
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Thomas A. Hassard (filed as Exhibit 10.30
to the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.31
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Stanley D. Levy (filed as Exhibit 10.31 to
the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.32
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Charles M. Baughn (filed as Exhibit 10.32
to the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.33
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Charles N. Hazen (filed as Exhibit 10.33 to
the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.34
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Sherri W. Schugart (filed as Exhibit 10.34
to the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
10
.35
Indemnification Agreement between Hines Real Estate Investment
Trust, Inc. and Frank R. Apollo (filed as Exhibit 10.35 to
the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2004 and incorporated
herein by reference).
Agreement of Purchase and Sale, dated as of May 19, 2005,
between OTR, an Ohio general Partnership acting as duly
authorized nominee of the Board of the State Teachers Retirement
System of Ohio, and Hines REIT Properties, L.P. (filed as
Exhibit 10.38 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 and incorporated herein
by reference).
10
.39
Property Management and Leasing Agreement, dated as of
June 28, 2005, by and between Hines Interests Limited
Partnership and 1900/2000 Alameda de las Pulgas LLC (filed as
Exhibit 10.39 to Post Effective Amendment No. 4 to the
Initial Registration Statement on August 22, 2005 and
incorporated herein by reference).
Agreement for Purchase and Sale of Real Property and Escrow
Instructions between GREIT — 525 and
600 B Street, LP and Hines-Sumisei US Core Office
Properties, LP, dated June 27, 2005 (filed as
Exhibit 10.41 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 and incorporated herein
by reference).
10
.41
Purchase and Sale Agreement, dated as of July 25, 2005, by
and among Hines US Core LLC, as seller, Hines REIT Properties,
L.P., as buyer, and acknowledged by Hines U.S. Core Office
Capital LLC, the managing general partner of Hines-Sumisei U.S.
Core Office Fund, L.P. (filed as Exhibit 99.1 to the
registrant’s Current Report on
Form 8-K
dated July 25, 2005 and incorporated herein by reference).
10
.42
Term Loan Agreement, made and entered into as of June 28,2005, by and between Hines REIT Properties, L.P. and KeyBank
National Association, as agent for itself and the other lending
institutions which may become parties thereto (filed as
Exhibit 10.39 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 and incorporated herein
by reference).
10
.43
Ownership Interests Pledge and Security Agreement, dated
June 28, 2005, by and between Hines REIT Properties, L.P.
and KeyBank National Association, in its capacity as
administrative agent (filed as Exhibit 10.40 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 and incorporated herein
by reference).
10
.44
First Amendment to Term Loan Agreement, dated August 23,2005, between Hines REIT Properties, L.P. and KeyBank National
Association, as administrative agent, and the other lenders from
time to time parties to that certain Credit Agreement dated
September 9, 2005 (filed as Exhibit 10.4 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.45
Revolving Line of Credit Agreement, dated September 9,2005, by and between Hines REIT Properties, L.P., and KeyBank
National Association, as administrative agent, and the other
lenders from time to time parties thereto (filed as
Exhibit 10.5 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.46
Unconditional Guaranty of Payment and Performance of Hines Real
Estate Investment Trust, Inc. in favor of KeyBank National
Association, as administrative agent, and the other lenders from
time to time parties to that certain Credit Agreement dated
September 9, 2005 (filed as Exhibit 10.6 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.47
Ownership Interests Pledge and Security Agreement of Hines REIT
Properties, L.P. dated September 9, 2005 (filed as
Exhibit 10.8 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.48
Subordination Agreement, dated September 9, 2005, among
Hines REIT Properties, L.P., Hines Advisors Limited Partnership,
Hines Interests Limited Partnership and KeyBank National
Association (filed as Exhibit 10.7 to the registrant’s
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.49
Agreement of Sale and Purchase, dated as of August 9, 2005
between Centex Office Citymark I, L.P. and Hines REIT
Properties, L.P. (filed as Exhibit 10.2 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.50
Agreement for Purchase of Office Building, dated effective as of
August 12, 2005, between Hines REIT Properties, L.P. and JB
Management L.P., as amended (filed as Exhibit 10.3 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.51
Agreement of Sale, dated October 12, 2005, by and between
Miami RPFIV Airport Corporate Center Associates Limited
Liability Company and Hines REIT Properties, L.P. (including
first through fourth amendments)(filed as Exhibit 10.9 to
the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
Letter Agreement, dated November 9, 2005, among
Hines-Sumisei U.S. Core Office Fund, L.P., Hines US Core Office
Capital LLC and Hines REIT Properties, L.P. (filed as
Exhibit 10.9 to the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2005 and incorporated
herein by reference).
10
.53
Subscription Agreement, dated November 14, 2005, between
Hines-Sumisei U.S. Core Office Fund, L.P. and Hines REIT
Properties, L.P. (filed as Exhibit 10.53 to Post-Effective
Amendment No. 6 to the Registrant’s Registration
Statement on
Form S-11,
File
No. 333-108870,
filed on November 2, 2005, and incorporated by reference
herein).
10
.54
Fifth Amendment, dated November 16, 2005, to Agreement of
Sale, dated October 12, 2005, by and between Miami RPFIV
Airport Corporate Center Associates Limited Liability Company
and Hines REIT Properties, L.P.
10
.55
Sixth Amendment, dated January 20, 2006, to Agreement of
Sale, dated October 12, 2005, by and between Miami RPFIV
Airport Corporate Center Associates Limited Liability Company
and Hines REIT Properties, L.P. (filed as Exhibit 10.55 to
Post Effective Amendment No. 7 to the Initial Registration
Statement and incorporated herein by reference).
10
.56
Purchase and Sale Agreement between Kan Am Grund
Kapitalanlagegesellschaft MBH and Hines-Sumisei U.S. Core Office
Properties, LP, dated as of March 10, 2006 (filed as
Exhibit 10.56 to the registrant’s Annual Report on
Form 10-K
for the year ended December 31, 2005 and incorporated
herein by reference).
10
.57
Purchase and Sale Agreement between 321 North Clark Realty
L.L.C. and Hines REIT Properties, LP, dated as of March 23,2006 (filed as Exhibit 10.57 to the registrant’s
Annual Report on
Form 10-K
for the year ended December 31, 2005 and incorporated
herein by reference).
10
.58
Agreement of Purchase and Sale by and between WXIII/SCV Real
Estate Limited Partnership and Hines 720 Olive Way LP, dated as
of December 29, 2005, as amended by First Amendment, dated
as of January 6, 2006, and Second Amendment, dated
January 11, 2006 (filed as Exhibit 10.58 to
Post-Effective Amendment No. 8 to the Initial Registration
Statement on April 14, 2006 and incorporated herein by
reference).
10
.59
Deed of Trust, Security Agreement and Fixture Filing, dated as
of April 18, 2006, by and between Hines REIT
1515 S Street LP, First American Title Insurance
Company and Met Life Bank, N.A., and Promissory Notes, dated
April 18, 2006, executed by Hines REIT
1515 S Street LP (filed as Exhibit 10.59 to
Pre-Effective Amendment No. 1 to this Registration
Statement on April 25, 2006 and incorporated by reference
herein).
10
.60
Term Loan Agreement, dated as of April 24, 2006, between
Hines REIT Properties, L.P., KeyBank National Association and
the other Lenders party thereto, and Promissory Note executed by
Hines REIT Properties, L.P., dated April 24, 2006 (filed as
Exhibit 10.60 to Pre-Effective Amendment No. 1 to this
Registration Statement on April 25, 2006 and incorporated
by reference herein).
10
.61
Unconditional Guaranty of Payment and Performance of Hines Real
Estate Investment Trust, Inc. in favor of KeyBank National
Association, dated April 24, 2006 (filed as
Exhibit 10.61 to Pre-Effective Amendment No. 1 to this
Registration Statement on April 25, 2006 and incorporated
by reference herein).
10
.62
Ownership Interests Pledge and Security Agreement of Hines REIT
Properties, L.P., dated April 24, 2006 (filed as
Exhibit 10.62 to Pre-Effective Amendment No. 1 to this
Registration Statement on April 25, 2006 and incorporated
by reference herein).
10
.63
Subordination Agreement, dated April 24, 2006, among Hines
REIT Properties, L.P., Hines Advisors Limited Partnership, Hines
Interests Limited Partnership and KeyBank National Association
(filed as Exhibit 10.63 to Pre-Effective Amendment
No. 1 to this Registration Statement on April 25, 2006
and incorporated by reference herein).
10
.64
Contract of Sale by and between Sumitomo Life Realty (N.Y.),
Inc. and Hines One Atlantic Center LP, dated May 18, 2006
(filed as Exhibit 10.64 to Amendment No. 2 to the
Second Registration Statement on June 15, 2006, and
incorporated by reference herein).
Agreement by and between Hines REIT Properties, L.P. and HSH
Nordbank AG NY Branch dated June 5, 2006 (filed as
Exhibit 10.65 to Amendment No. 2 to the Second
Registration Statement on June 15, 2006, and incorporated
by reference herein).
10
.66
Selected Dealer Agreement, dated July 20, 2006, by and
among Hines Real Estate Investment Trust, Inc., Hines Real
Estate Securities, Inc., Hines Advisors Limited Partnership,
Hines Interests Limited Partnership and Ameriprise Financial
Services, Inc. (filed as Exhibit 10.1 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 and incorporated
herein by reference).
10
.67
Reimbursement Agreement, dated July 20, 2006, by and
between Hines Interests Limited Partnership and Hines Real
Estate Investment Trust, Inc. (filed as Exhibit 10.2 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 and incorporated
herein by reference).
10
.68
Agreement of Purchase and Sale, dated as of September 27,2006, between MP Warner Center, LLC, MP Warner Center III, LLC,
and Hines-Sumisei US Core Office Properties LP (as amended by
Amendments No 1, dated September 15, 2006, and No. 2,
dated September 27, 2006) (filed as Exhibit 10.3 to
the registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 and incorporated
herein by reference).
10
.69
Credit Agreement, dated as of August 1, 2006, among Hines
REIT 3100 McKinnon Street LP, Hines REIT 1900/2000 Alameda de
las Pulgas LLC, Hines REIT 321 North Clark Street LLC and the
Borrowing Base Subsidiaries party thereto from time to time, as
Borrowers, Hines REIT Properties, L.P., as Sponsor, and HSH
Nordbank AG, New York Branch and the Lenders party thereto from
time to time, as Lenders (filed as Exhibit 10.4 to the
registrant’s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2006 and incorporated
herein by reference).
10
.70
Purchase and Sale Agreement, dated November 1, 2006,
between 3400 Data Drive Associates, LLC and Hines Real Estate
Properties, L.P. (filed as Exhibit 10.70 to Post-Effective
Amendment No. 1 to the Second Registration Statement on
December 19, 2006, and incorporated by reference herein).
10
.71
Purchase and Sale Agreement, dated as of October 31, 2006,
between Commerz Grundbesitz-Investmentgesellschaft mbH, a
limited liability company under German Law, acting as investment
company for the account of the German open-ended real estate
investment fund Haus Invest Global and Hines Riverfront
Plaza LP (filed as Exhibit 10.71 to Post-Effective
Amendment No. 1 to the Second Registration Statement on
December 19, 2006, and incorporated by reference herein).
10
.72
First Amendment to Credit Agreement and other Credit Documents,
dated November 8, 2006, by and among Hines REIT Properties,
L.P. and KeyBank National Association, for itself and the other
lending institutions party to the Credit Agreement (filed as
Exhibit 10.72 to Post-Effective Amendment No. 1 to the
Second Registration Statement on December 19, 2006, and
incorporated by reference herein).
10
.73
Real Estate Purchase and Sale Agreement, dated November 28,2006, by and among Laguna North Building Sellers, Laguna North
Land Sellers, Laguna South Building Sellers, Laguna South Land
Sellers, FC27 Sellers and Hines REIT Laguna Campus LLC, and
First Amendment thereto, dated November 29, 2006 (filed as
Exhibit 10.73 to Post-Effective Amendment No. 1 to the
Second Registration Statement on December 19, 2006, and
incorporated by reference herein)
10
.74
Real Estate Purchase and Sale Agreement, dated November 28,2006, by and among Daytona Building Sellers, RCC Building
Sellers, Daytona-RCC Land Sellers and Hines REIT Daytona Campus
LLC, and First Amendment thereto, dated November 29, 2006
(filed as Exhibit 10.74 to Post-Effective Amendment
No. 1 to the Second Registration Statement on
December 19, 2006, and incorporated by reference herein).
10
.75
Real Estate Sale Agreement, by and between CA Watergate
Tower IV Limited Partnership and Hines REIT Watergate, LP.,
and First Amendment thereto, dated December 8, 2006 (filed
as Exhibit 10.75 to Post-Effective Amendment No. 1 to
the Second Registration Statement on December 19, 2006, and
incorporated by reference herein).
Agreement of Purchase and Sale between The Atrium on Bay Inc. as
vender and Hines REIT Properties, L.P. as Purchaser, dated
December 22, 2006 (filed as Exhibit 10.76 to
Post-Effective Amendment No. 2 to the Second Registration
Statement on February 23, 2007, and incorporated by
reference herein).
10
.77
First Amendment to Credit Agreement, dated as of
January 19, 2007, among Hines Reit 3100 McKinnon Street LP,
Hines REIT 1900/2000 Alameda de las Pulgas LLC, Hines REIT 321
North Clark Street LLC and the Borrowing, Base Subsidiaries
party thereto from time to time, as Borrowers, Hines REIT
Properties, LP., as sponsor, HSH Nordbank AG, New York Branch,
as lender and as Agent and Arranger, and the lenders party
thereto from time to time (filed as Exhibit 10.77 to
Post-Effective Amendment No. 2 to the Second Registration
Statement on February 23, 2007, and incorporated by
reference herein).
10
.78
Purchase and Sale Agreement, dated as of March 27, 2007, by
and between Bay West Design Center, LLC, Bay West Seattle, LLC,
and Hines REIT Properties, L.P. (filed as Exhibit 10.78 to
Post-Effective Amendment No. 4 to the Second Registration
Statement on April 16, 2007, and incorporated by reference
herein).
10
.79
Purchase and Sale Agreement, dated as of May 11, 2007, by
and between Touchstone Venture II and Hines REIT
Properties, L.P. (filed as Exhibit 10.79 to Post-Effective
Amendment No. 5 to the Second Registration Statement on
July 16, 2007, and incorporated by reference herein).
10
.80
Purchase and Sale Agreement and Joint Escrow Instructions, dated
as of July 11, 2007, by and between Carlyle One Wilshire
II, L.P. and Hines REIT One Wilshire LP (filed as
Exhibit 10.80 to Post-Effective Amendment No. 5 to the
Second Registration Statement on July 16, 2007, and
incorporated by reference herein).
10
.81
Purchase and Sale Agreement dated as of June 4, 2007, by
and between 3 Huntington Quadrangle, LLC, and Hines REIT
Properties, L.P. (filed as Exhibit 10.81 to Post-Effective
Amendment No. 5 to the Second Registration Statement on
July 16, 2007, and incorporated by reference herein).
10
.82
Agreement of Purchase and Sale, dated September 25, 2007,
between Firstcal Industrial 2 Acquisition, LLC and Hines REIT
Minneapolis Industrial LLC (filed as Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
on October 1, 2007, and incorporated by reference herein).
10
.83
First Amendment , dated September 27, 2007, to the
Agreement of Purchase and Sale, dated September 25, 2007
between Firstcal Industrial 2 Acquisition, LLC and Hines REIT
Minneapolis Industrial LLC (filed as Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
on October 1, 2007, and incorporated by reference herein).
10
.84
Agreement of Purchase and Sale, dated October 16, 2007,
between 2200 Ross, L.P., and Hines REIT 2200 Ross Avenue, L.P.
(filed as Exhibit 10.84 to Post-Effective Amendment
No. 6 to the Second Registration Statement on
October 16, 2007, and incorporated by reference herein).
10
.85
Deed of Trust and Security Agreement, dated October 25,2007, by and between Hines REIT One Wilshire LP, First American
Title Insurance Company and The Prudential Insurance
Company of America (filed as Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
on October 31, 2007, and incorporated by reference herein).
10
.86
Promissory Note by and between Hines REIT One Wilshire LP and
The Prudential Insurance Company of America, dated
October 25, 2007 (filed as Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
on October 31, 2007, and incorporated by reference herein).
10
.87
Environmental Liability by and between Hines REIT One Wilshire
LP and The Prudential Insurance Company of America, dated
October 25, 2007 (filed as Exhibit 10.1 to the
Registrant’s Current Report on
Form 8-K
on October 31, 2007, and incorporated by reference herein).
10
.88
Agreement of Purchase and Sale, dated December 17, 2007,
between Newkirk Segair L.P., LLC and Hines REIT El Segundo LP
(filed as Exhibit 10.88 to Post-Effective Amendment
No. 8 to the Second Registration Statement on
January 16, 2008, and incorporated by reference herein).
10
.89
Loan Facility Agreement, dated as of December 20, 2007,
between Hines REIT 2007 Facility Holdings LLC and Metropolitan
Life Insurance Company (filed as Exhibit 10.89 to
Post-Effective Amendment No. 8 to the Second Registration
Statement on January 16, 2008, and incorporated by
reference herein).
Deed of Trust, Security Agreement and Fixture Filing between
Hines REIT 2200 Ross Avenue LP and Metropolitan Life Insurance
Company (filed as Exhibit 10.90 to Post-Effective Amendment
No. 8 to the Second Registration Statement on
January 16, 2008, and incorporated by reference herein)
10
.91
Promissory Note between Hines REIT 2200 Ross Avenue LP and
Metropolitan Life Insurance Company (filed as Exhibit 10.91
to Post-Effective Amendment No. 8 to the Second
Registration Statement on January 16, 2008, and
incorporated by reference herein).
10
.92
Mortgage, Security Agreement and Fixture Filing between Hines
REIT Minneapolis Industrial LLC and Metropolitan Life Insurance
Company (filed as Exhibit 10.92 to Post-Effective Amendment
No. 8 to the Second Registration Statement on
January 16, 2008, and incorporated by reference herein).
10
.93
Promissory Note between Hines REIT Minneapolis Industrial LLC
and Metropolitan Life Insurance Company (filed as
Exhibit 10.93 to Post-Effective Amendment No. 8 to the
Second Registration Statement on January 16, 2008, and
incorporated by reference herein).
10
.94*
Form of Advisory Agreement Among Hines REIT Properties, L.P.,
Hines Advisors Limited Partnership and Hines Real Estate
Investment Trust, Inc.
