GBE Grubb & Ellis Company Common Stock

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

(Amendment No. 1)

 

 

Commission file number 1-8122

 

GRUBB & ELLIS COMPANY

(Exact name of registrant as specified in its charter)

 

 

1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705

(Address of principal executive offices) (Zip Code)

 

(714) 667-8252

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

The number of shares outstanding of the registrant’s common stock as of May 15, 2009 was 65,265,828 shares.

 

EXPLANATORY NOTE

 

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (the “Amended 10-Q”), amends our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the Securities and Exchange Commission on May 28, 2009 (the “Original 10-Q”). This Amended 10-Q amends the Original 10-Q solely for the purpose of clarifying certain disclosures in Part I, Item 4 with respect to our evaluation of disclosure controls and procedures.

 

This Amended 10-Q does not reflect events occurring after the filing of the Original 10-Q (including, without limitation, the consummation of our recapitalization plan and our private placement of 12% Cumulative Participating Perpetual Convertible Preferred Stock, as disclosed on our Current Reports on Form 8-K filed with the Securities and Exchange Commission on October 26, 2009 and November 12, 2009) and does not modify or update the disclosure in the Original 10-Q, other than the amendment noted above and the filing of certifications of our principal executive officer and principal financial officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002. This Amended 10-Q replaces the Original 10-Q in its entirety.

TABLE OF CONTENTS

 

Part I — FINANCIAL INFORMATION

 

 

GRUBB & ELLIS COMPANY

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

See accompanying notes to consolidated financial statements.

GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 

 

See accompanying notes to consolidated financial statements.

GRUBB & ELLIS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

 

See accompanying notes to consolidated financial statements.

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

Overview

 

Grubb & Ellis Company (“the Company” or “Grubb & Ellis”), a Delaware corporation founded 50 years ago in Northern California, is a commercial real estate services and investment management firm. On December 7, 2007, the Company effected a stock merger (the “Merger”) with NNN Realty Advisors, Inc. (“NNN”), a real estate asset management company and sponsor of public non-traded real estate investment trusts (“REITs”), as well as a sponsor of tax deferred tenant-in-common (“TIC”) 1031 property exchanges and other investment programs. Upon the closing of the Merger, a change of control occurred. The former stockholders of NNN acquired approximately 60% of the Company’s issued and outstanding common stock.

 

The Company offers property owners, corporate occupants and program investors comprehensive integrated real estate solutions, including transactions, management, consulting and investment advisory services supported by market research and local market expertise.

 

In certain instances throughout these Financial Statements phrases such as “legacy Grubb & Ellis” or similar descriptions are used to reference, when appropriate, Grubb & Ellis prior to the Merger. Similarly, in certain instances throughout these Financial Statements the term NNN, “legacy NNN”, or similar phrases are used to reference, when appropriate, NNN Realty Advisors, Inc. prior to the Merger.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned controlled subsidiaries’, variable interest entities (“VIEs”) in which the Company is the primary beneficiary, and partnerships/limited liability companies (“LLCs”) in which the Company is the managing member or general partner and the other partners/members lack substantive rights (hereinafter collectively referred to as the “Company”), and are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been included in these financial statements and are of a normal and recurring nature.

 

The Company consolidates entities that are VIEs when the Company is deemed to be the primary beneficiary of the VIE. For entities in which (i) the Company is not deemed to be the primary beneficiary, (ii) the Company’s ownership is 50.0% or less and (iii) the Company has the ability to exercise significant influence, the Company uses the equity accounting method (i.e. at cost, increased or decreased by the Company’s share of earnings or losses, plus contributions less distributions). The Company also uses the equity method of accounting for jointly-controlled tenant-in-common interests. As reconsideration events occur, the Company will reconsider its determination of whether an entity is a VIE and who the primary beneficiary is to determine if there is a change in the original determinations and will report such changes on a quarterly basis.

 

As more fully discussed in Note 12, the Company has entered into a Third Amendment to its Credit Facility that requires the Company to comply with the Approved Budget that has been agreed to by the Company and the lenders, subject to agreed upon variances. The Company is also required under the Third Amendment to effect the Recapitalization plan on or before September 30, 2009 and in connection therewith to effect a Partial Prepayment on or before September 30, 2009. Among other things, in the event the Company does not complete the recapitalization plan and/or make the Partial Prepayment, the Credit Facility will terminate on January 15, 2010. In light of the current state of the financial markets and economic

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

environment, there is risk that the Company will be unable to meet the terms of the Credit Facility which would result in the entire balance of the debt becoming due and payable. If the Credit Facility were to become due and payable on the alternative due date of January 15, 2010, there can be no assurances that the Company will have access to alternative funding sources, or if such sources are available to the Company, that they will be on favorable terms and conditions to the Company, which at that time could create substantial doubt about the Company’s ability to continue as a going concern after January 15, 2010.

 

Use of Estimates

 

The financial statements have been prepared in conformity with GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Credit Facility

 

Weak economic conditions could impact the Company’s ability to remain in compliance with the debt covenants contained within its Credit Facility described in Note 12 below. If revenues are less than the Company has projected, the Company will be required to take further actions within its control to reduce costs so as to allow the Company to remain in compliance with the financial covenants in the Credit Facility. In the event the Company is required to amend the Credit Facility in order to remain in compliance with the financial covenants set forth therein, there can be no assurances that it will be able to do so.

 

Reclassifications

 

Certain reclassifications have been made to prior year and prior period amounts in order to conform to the current period presentation. These reclassifications have no effect on reported net income (loss).

 

Restricted Cash

 

Restricted cash is comprised primarily of cash and loan impound reserve accounts for property taxes, insurance, capital improvements, and tenant improvements related to consolidated properties.

 

Fair Value Measurements

 

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value instruments. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (the “FSP”). The FSP amends SFAS No. 157 to delay the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). There was no effect on the Company’s consolidated financial statements as a result of the adoption of SFAS No. 157 as of January 1, 2008 as it relates to financial assets and financial liabilities. For items within its scope, the FSP deferred the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted SFAS No. 157 as it relates to non-financial assets and non-financial liabilities in the first quarter of 2009, which did not have a material impact on the consolidated financial statements.

 

SFAS No. 157 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. Level 1 inputs are the highest priority and are quoted prices in active markets for identical assets or liabilities. Level 2 inputs reflect other than quoted prices included in Level 1 that are

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

either observable directly or through corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little or no market activity for the asset or liability, such as internally-developed valuation models.

 

The following table presents changes in financial and nonfinancial assets measured at fair value on either a recurring or nonrecurring basis for the three months ended March 31, 2009:

 

 

Noncontrolling Interests

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51, (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 requires that noncontrolling interests be presented as a component of consolidated stockholders’ equity, eliminates minority interest accounting such that the amount of net income attributable to the noncontrolling interests will be presented as part of consolidated net income in the accompanying consolidated statements of operations and not as a separate component of income and expense, and requires that upon any changes in ownership that result in the loss of control of the subsidiary, the noncontrolling interest be re-measured at fair value with the resultant gain or loss recorded in net income. SFAS No. 160 became effective for fiscal years beginning on or after December 15, 2008. The Company adopted SFAS No. 160 on a prospective basis on January 1, 2009, except for the presentation and disclosure requirements which were applied retrospectively for all periods presented. The adoption of SFAS No. 160 had an impact on the presentation and disclosure of noncontrolling (minority) interests in the consolidated financial statements. As a result of the retrospective presentation and disclosure requirements of SFAS No. 160, the Company is required to reflect the change in presentation and disclosure for all periods presented. Principal effect on the consolidated balance sheet as of December 31, 2008 related to the adoption of SFAS No. 160 was the change in presentation of the mezzanine section of the minority interest to redeemable noncontrolling interest as reported herein. Additionally, the adoption of SFAS No. 160 had the effect of reclassifying (income) loss attributable to noncontrolling interest in the consolidated statements of operations from minority interest to separate line items. SFAS No. 160 also requires that net income (loss) be adjusted to include the net (income) loss attributable to the noncontrolling interest, and a new line item for net income (loss) attributable to controlling interest be presented in the consolidated statements of operations.

 

A noncontrolling interest relates to the interest in the consolidated entities that are not wholly-owned by the Company. As a result of adopting FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of Accounting Research Bulletin No. 51 , or SFAS No. 160, on

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

January 1, 2009, the Company has restated the December 31, 2008 consolidated balance sheet, as well as the statement of operations for the three months ended March 31, 2008 as follows:

 

 

 

Recently Issued Accounting Pronouncements

 

In December 2007, the FASB issued revised SFAS No. 141, Business Combinations, (“SFAS No. 141R”). SFAS No. 141R will change the accounting for business combinations and will require an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted SFAS No. 141(R) on a prospective basis on January 1, 2009. The adoption of SFAS No. 141(R) will materially affect the accounting for any future business combinations.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting of derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. SFAS No. 161 became effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company adopted SFAS No. 161 in the first quarter of 2009. The adoption of SFAS No. 161 did not have a material impact on the consolidated financial statements.

 

In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets, (“FSP SFAS 142-3”). FSP SFAS 142-3 is intended to improve the consistency between the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”), and the period of expected cash flows used to measure the fair value of the assets under SFAS No. 141R. FSP SFAS 142-3 amends the factors an entity should consider in developing renewal or extension assumptions in determining the useful life of recognized intangible assets. In addition to the required disclosures under SFAS No. 142, FSP SFAS 142-3 requires disclosure of the entity’s accounting policy regarding costs incurred to renew or extend the term of recognized intangible assets, the weighted average period to the next renewal or extension, and the total amount of capitalized costs incurred to renew or extend the term of recognized intangible assets. FSP SFAS 142-3 is effective for financial statements issued for fiscal

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

years and interim periods beginning after December 15, 2008. The Company adopted FSP SFAS 142-3 on January 1, 2009. The adoption of FSP SFAS 142-3 did not have a material impact on the consolidated financial statements.

 

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”) , which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the computation of earnings per share under the two-class method described in SFAS No. 128, Earnings per Share . FSP EITF 03-6-1, which will apply to the Company because it grants instruments to employees in share-based payment transactions that meet the definition of participating securities, is effective retrospectively for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 did not have a material impact on the consolidated financial statements.

 

 

During the period ended March 31, 2008, the Company believed that a decline in the value of marketable equity securities was other than temporary and recognized $90,000 in losses. During the subsequent quarter, the Company recognized additional losses of $1.6 million for a decline in the value that was believed to be other than temporary and sold the remaining investment in marketable equity securities as of the year ended December 31, 2008 for a realized loss of approximately $1.8 million. There were no sales of equity securities during the three months ended March 31, 2009 or 2008.

 

Investments in Limited Partnerships

 

Since the acquisition of its subsidiary, Grubb & Ellis Alesco Global Advisors, LLC (“Alesco”) in 2007, the Company serves as general partner and investment advisor to six hedge fund limited partnerships, five of which are required to be consolidated in accordance with EITF 04-05 “Determining Whether a General Partner, or the General Partners as a Group Controls a Limited Partnership of Similar Entity When the Limited Partners Have Certain Rights:” Grubb & Ellis AGA Realty Income Fund, LP, AGA Strategic Realty Fund, L.P., AGA Global Realty Fund LP and AGA Realty Income Partners LP and one mutual fund which is required to be consolidated, Grubb & Ellis Realty Income Fund.

 

For the three months ended March 31, 2009 and 2008, Alesco had investment losses of approximately $409,000 and $457,000, respectively, which are reflected in other expense and offset in noncontrolling interest in loss of consolidated entities on the statement of operations. Alesco earned approximately $3,000 and $103,000 of management fees based on ownership interest under the agreements for the three months ended March 31, 2009 and 2008, respectively. As of March 31, 2009 and December 31, 2008, these limited partnerships had assets of approximately $1.7 million and $1.5 million, respectively, primarily consisting of exchange traded marketable securities, including equity securities and foreign currencies.

 

The following table reflects trading securities and their original cost, gross unrealized appreciation and depreciation, and estimated market value:

 

 

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

 

 

Related party balances are summarized below:

 

Accounts Receivable

 

Accounts receivable from related parties consisted of the following:

 

 

Advances to Related Parties

 

The Company makes advances to affiliated real estate entities under management in the normal course of business. Such advances are uncollateralized, have payment terms of one year or less, and generally bear interest at a range of 6.0% to 12.0% per annum. The advances consisted of the following:

 

 

As of March 31, 2009, accounts receivable totaling $310,000 due from a program 30.0% owned and managed by Anthony W. Thompson, the Company’s former Chairman who subsequently resigned in February 2008 but remains a substantial stockholder of the Company, had been fully reserved against. On November 4, 2008, the Company made a formal written demand to Mr. Thompson for these monies.

 

As of December 31, 2008, advances to a program 40.0% owned and, as of April 1, 2008, managed by Mr. Thompson, totaled $963,000, which includes $61,000 in accrued interest. As of March 31, 2009, the total

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

outstanding balance of $1.0 million, inclusive of $82,000 in accrued interest, was past due. The total amount of $1.0 million has been reserved for and is included in the allowance for uncollectible advances. On November 4, 2008 and April 3, 2009, the Company made a formal written demand to Mr. Thompson for these monies.

 

Notes Receivable From Related Party

 

In December 2007, the Company advanced $10.0 million to Grubb & Ellis Apartment REIT, Inc. (“Apartment REIT”) on an unsecured basis. The unsecured note required monthly interest-only payments which began on January 1, 2008. The balance owed to the Company as of December 31, 2007 which consisted of $7.6 million in principal was repaid in full in the first quarter of 2008.

 

In June 2008, the Company advanced $3.7 million to Apartment REIT on an unsecured basis. The unsecured note originally had an original maturity date of December 27, 2008 and bore interest at a fixed rate of 4.95% per annum. On November 10, 2008, the Company extended the maturity date to May 10, 2009 and adjusted the interest rate to a fixed rate of 5.26% per annum. The note required monthly interest-only payments beginning on August 1, 2008 and provided for a default interest rate in an event of default equal to 2.00% per annum in excess of the stated interest rate. Effective May 10, 2009 the Company entered into a second extension agreement with Apartment REIT, whereby extending the maturity date to November 10, 2009. The new terms of the extension continue to require monthly interest-only payments beginning May 1, 2009 and bears interest at a fixed rate of 8.43% with the original default rate.

 

In September 2008, the Company advanced an additional $5.4 million to Apartment REIT on an unsecured basis. The unsecured note originally had a maturity date of March 15, 2009 and bore interest at a fixed rate of 4.99% per annum. Effective March 9, 2009, the Company extended the maturity date to September 15, 2009 and adjusted the interest rate to a fixed rate of 5.00% per annum. The note requires monthly interest-only payments beginning on October 1, 2008 and provides for a default interest rate in an event of default equal to 2.00% per annum in excess of the stated interest rate.

 

There were no advances to or repayments made by Apartment REIT during the period ending March 31, 2009. As of March 31, 2009, the balance owed by Apartment REIT to the Company on the two unsecured notes totals $9.1 million in principal with no interest outstanding.

 

 

The determination of the appropriate accounting method with respect to the Company’s variable interest entities (“VIEs”), including joint ventures, is based on FASB Interpretation No. (“FIN”) 46(R) (“FIN 46(R)”). The Company consolidates any VIE for which it is the primary beneficiary.

 

The Company determines if an entity is a VIE under FIN No. 46(R) based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. The Company makes judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, then a quantitative analysis, if necessary. In a quantitative analysis, the Company incorporates various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, the Company then determines whether to consolidate the entity as the primary beneficiary. The Company is deemed to be the primary beneficiary of the VIE and consolidates the entity if the Company will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both.

 

A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that is not currently consolidated or accounting for an investment on the equity method that is currently consolidated, the effects of which could be material to the Company’s consolidated financial statements.

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

As of March 31, 2009 and December 31, 2008, the Company had investments in seven LLCs that are VIEs in which the Company is the primary beneficiary. These seven LLCs hold interests in the Company’s TIC investments. The carrying value of the assets and liabilities for these consolidated VIEs as of March 31, 2009 were $2.5 million and $293,000, respectively. The carrying value of the assets and liabilities for these consolidated VIEs as of December 31, 2008 was $3.7 million and $309,000, respectively. In addition, these consolidated VIEs are joint and severally liable on the non-recourse mortgage debt related to the interests in the Company’s TIC investments totalling $277.6 million and $277.8 million as of March 31, 2009 and December 31, 2008, respectively. This mortgage debt is not consolidated as the LLCs account for the interests in the Company’s TIC investments under the equity method and the non recourse mortgage debt does not meet the criteria under SFAS No. 140 for recognizing the share of the debt assumed by the other TIC interest holders for consolidation. The Company does consider the third party TIC holders ability and intent to repay their share of the joint and several liability in evaluating the recovery.

 

If the interest in the entity is determined to not be a VIE under FIN No. 46(R), then the entity is evaluated for consolidation under the American Institute of Certified Public Accountants’ Statement of Position No. 78-9, Accounting for Investments in Real Estate Ventures , (“SOP 78-9”), as amended by Emerging Issues Task Force (“EITF”) No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”).

 

As of March 31, 2009 and December 31, 2008 the Company had a number of entities that were determined to be VIEs, that did not meet the consolidation requirements of FIN No. 46(R). The unconsolidated VIEs are accounted for under the equity method. The aggregate investment carrying value of the unconsolidated VIEs was $2.3 million and $5.0 million as of March 31, 2009 and December 31, 2008, respectively, and was classified under Investments in Unconsolidated Entities in the consolidated balance sheet. The Company’s maximum exposure to loss as a result of its investments in unconsolidated VIEs is typically limited to the aggregate of the carrying value of the investment and future funding commitments. Future funding commitments as of March 31, 2009 for the unconsolidated VIEs totalled $169,000. In addition, as of March 31, 2009 and December 31, 2008, these unconsolidated VIEs are joint and severally liable on non-recourse mortgage debt totalling $390.2 million and $385.3 million, respectively. Although the mortgage debt is non-recourse to the VIE that holds the TIC interest, the Company has full recourse guarantees on a portion of such mortgage debt totalling $3.5 million as of March 31, 2009 and December 31, 2008, respectively. This mortgage debt is not consolidated as the LLCs account for the interests in the Company’s TIC investments under the equity method and the non recourse mortgage debt does not meet the criteria under SFAS No. 140 for recognizing the share of the debt assumed by the other TIC interest holders for consolidation. The Company does consider the third party TIC holders ability and intent to repay their share of the joint and several liability in evaluating the recovery. In evaluating the recovery of the TIC investment the Company evaluated the likelihood that the lender would foreclose on the VIEs interest in the TIC to satisfy the obligation. See Note 5 — Investments in Unconsolidated Entities for additional information.

 

 

As of March 31, 2009 and December 31, 2008, the Company held investments in five joint ventures totaling $1.6 million and $3.8 million, which represent a range of 5.0% to 10.0% ownership interest in each property. In addition, pursuant to FIN No. 46(R), the Company has consolidated seven LLCs with investments in unconsolidated entities totaling $2.5 million and $3.7 million as of March 31, 2009 and December 31, 2008, respectively. The remaining amounts within investments in unconsolidated entities are related to various LLCs, which represent ownership interests of less than 1.0%.

 

At December 31, 2007, Legacy Grubb & Ellis owned approximately 5.9 million shares of common stock of Grubb & Ellis Realty Advisors, Inc. (“GERA”), which was a publicly traded special purpose acquisition

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

company, which represented approximately 19% of the outstanding common stock. Legacy Grubb & Ellis also owned approximately 4.6 million GERA warrants which were exercisable into additional GERA common stock, subject to certain conditions. As part of the Merger, the Company recorded each of these investments at fair value on December 7, 2007, the date they were acquired, at a total investment of approximately $4.5 million.

 

All of the officers of GERA were also officers or directors of legacy Grubb & Ellis, although such persons did not receive any compensation from GERA in their capacity as officers of GERA. Due to the Company’s ownership position and influence over the operating and financial decisions of GERA, the Company’s investment in GERA was accounted for within the Company’s consolidated financial statements under the equity method of accounting. The Company’s combined carrying value of these GERA investments as of December 31, 2007, totaled approximately $4.1 million, net of an unrealized loss, and was included in investments in unconsolidated entities in the Company’s consolidated balance sheet as of that date.

 

On February 28, 2008, a special meeting of the stockholders of GERA was held to vote on, among other things, a proposed transaction with the Company. GERA failed to obtain the requisite consents of its stockholders to approve the proposed business transaction and at a subsequent special meeting of the stockholders of GERA held on April 14, 2008, the stockholders of GERA approved the dissolution and plan of liquidation of GERA. The Company did not receive any funds or other assets as a result of GERA’s dissolution and liquidation.

 

As a consequence, the Company wrote off its investment in GERA and other advances to that entity in the first quarter of 2008 and recognized a loss of approximately $5.8 million which is recorded in equity in losses on the consolidated statement of operations and is comprised of $4.5 million related to stock and warrant purchases and $1.3 million related to operating advances and third party costs, which included an unrealized loss previously reflected in accumulated other comprehensive loss.

 

 

Merger of Grubb & Ellis Company with NNN

 

On December 7, 2007, the Company effected the Merger with NNN, a real estate asset management company and sponsor of TIC Programs as well as a sponsor of two non-traded REITs and other investment programs.

 

Under the purchase method of accounting, the Merger consideration of $172.2 million was determined based on the closing price of the Company’s common stock of $6.43 per share on the date the merger closed, applied to the 26,195,655 shares of the Company’s common stock outstanding plus the fair value of vested options outstanding of approximately $3.8 million. The fair value of these vested options was calculated using the Black-Scholes option-pricing model which incorporated the following assumptions: weighted average exercise price of $7.02 per option, volatility of 105.11%, a 5 year expected life of the awards, risk-free interest rate of 3.51% and no expected dividend yield.

 

As part of its Merger transition, the Company completed its personnel reorganization plan, and recorded additional severance liabilities totaling approximately $2.3 million during the year ended December 31, 2008, which increased the goodwill recorded from the acquisition.

 

Under SFAS No. 142, goodwill is recorded at its carrying value and is tested for impairment at least annually or more frequently if impairment indicators exist at a level of reporting referred to as a reporting unit. The Company recognizes goodwill in accordance with SFAS No. 142 and tests the carrying value for impairment during the fourth quarter of each year. During the fourth quarter of 2008, the Company identified the uncertainty surrounding the global economy and the volatility of the Company’s market capitalization as

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

goodwill impairment indicators. The Company’s goodwill impairment analysis resulted in the recognition of an impairment charge of approximately $172.7 million during the year ended December 31, 2008.

 

No impairment charges were recorded at March 31, 2009 and 2008, respectively.

 

 

Acquisition of Properties for TIC Sponsored Programs

 

During the three months ended March 31, 2008, the Company completed the acquisition of one office property, which the Company classified as property held for sale upon acquisition and were sold to the related investment program in the same period. The aggregate purchase price, including closing costs, of this property was $21.8 million, of which $14.7 million was financed with mortgage debt. The Company made no acquisitions of properties during the three months ended March 31, 2009.

 

 

Identified intangible assets consisted of the following:

 

 

Amortization expense recorded for contract rights was approximately $423,000 for the three months ended March 31, 2008. No amortization expense was recognized for the three months ended March 31, 2009 related to the contract rights. Amortization expense is charged as a reduction to investment management revenue the applicable period. During the period of future real property sales, the amortization of the contract rights for intangible assets will be applied based on the net relative value of disposition fees realized.

 

Amortization expense recorded for the other identified intangible assets was approximately $806,000 and $874,000 for the three months ended March 31, 2009 and 2008, respectively. Amortization expense was included as part of operating expense in the accompanying consolidated statement of operations.

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

 

Accounts payable and accrued expenses consisted of the following:

 

 

 

Capital lease obligations consisted of the following:

 

 

11.  NOTES PAYABLE OF PROPERTIES HELD FOR SALE INCLUDING INVESTMENTS IN UNCONSOLIDATED ENTITIES

 

Notes payable of properties held for sale including investments in unconsolidated entities consisted of the following:

 

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

 

In February 2007, the Company entered into a $25.0 million revolving line of credit with LaSalle Bank N.A. to replace the previous revolving line of credit. This line of credit consisted of $10.0 million for acquisitions and $15.0 million for general corporate purposes and bore interest at prime rate plus 0.50% or three-month LIBOR plus 1.50%, at the Company’s option and matured February 20, 2010. During 2007, the Company paid $100,000 in loan fees relating to the revolving line of credit.

 

On December 7, 2007, the Company terminated the $25.0 million line of credit with LaSalle Bank N.A. and entered into a $75.0 million Second Amended and Restated Credit Agreement by and among the Company, the guarantors named therein, the financial institutions defined therein as lender parties, Deutsche Bank Trust Company Americas, as lender and administrative agent (the “Credit Facility”). The Company is restricted to solely use the line of credit for investments, acquisitions, working capital, equity interest repurchase or exchange, and other general corporate purposes. The line bore interest at either the prime rate or LIBOR based rates, as the Company may choose on each of its borrowings, plus an applicable margin based on the Company’s Debt/Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) ratio as defined in the credit agreement.

 

On August 5, 2008, the Company entered into an amendment (the “First Letter Amendment”) to its Credit Facility. The First Letter Amendment, among other things, provided the Company with an extension from September 30, 2008 to March 31, 2009 to dispose of the three real estate assets that the Company had previously acquired on behalf of GERA. Additionally, the First Letter Amendment also, among other things, modified select debt and financial covenants in order to provide greater flexibility to facilitate the Company’s TIC Programs.

 

On November 4, 2008, the Company amended (the “Second Letter Amendment”) its Credit Facility revising certain terms of that certain Second Amended and Restated Credit Agreement dated as of December 7, 2007, as amended. The effective date of the Second Letter Amendment was September 30, 2008.

 

The Second Letter Amendment, among other things: (a) modified the amount available under the Credit Facility from $75.0 million to $50.0 million by providing that no advances or letters of credit shall be made available to the Company after September 30, 2008 until such time as borrowings have been reduced to less than $50.0 million; (b) provided that 100% of any net cash proceeds from the sale of certain real estate assets that have to be sold by the Company shall permanently reduce the Revolving Credit Commitments, provided that the Revolving Credit Commitments shall not be reduced to less than $50.0 million by reason of the operation of such asset sales; and (c) modified the interest rate incurred on borrowings by increasing the applicable margins by 100 basis points and by providing for an interest rate floor for any prime rate related borrowings.

 

Additionally, the Second Letter Amendment, among other things, modified restrictions on guarantees of primary obligations from $125.0 million to $50.0 million, modified select financial covenants to reflect the impact of the current economic environment on the Company’s financial performance, amended certain restrictions on payments by deleting any dividend/share repurchase limitations and modifies the reporting requirements of the Company with respect to real property owned or held.

 

As of September 30, 2008, the Company was not in compliance with certain of its financial covenants related to EBITDA. As a result, part of the Second Letter Amendment included a provision which modified selected covenants. The Debt /EBITDA ratio for the quarters ending September 30, 2008 and December 31, 2008 were amended from 3.75:1.00 to 5.50:1.00, while the Debt /EBITDA Ratio for the quarters ending March 31, 2009 and thereafter remain at 3.50:1.00. The Interest Coverage Ratio for the quarters ending September 30, 2008, December 31, 2008 and March 31, 2009 were amended from 3.50:1.00 to 3.25:1.00, while the Interest Coverage Ratio for the quarters ended June 30, 2009 and September 30, 2009 remained unchanged at 3.50:1.00 and for the quarters ended December 31, 2009 and thereafter remained unchanged at

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

4.00:1.00. The Recourse Debt/Core EBITDA Ratio for the quarters ending September 30, 2008 and December 31, 2008 were amended from 2.25:1.00 to 4.25:1.00, while the Recourse Debt/Core EBITDA Ratio for the quarters thereafter remained unchanged at 2.25:1.00. The Core EBITDA to be maintained by the Company at all times was reduced from $60.0 million to $30.0 million and the Minimum Liquidity to be maintained by the Company at all times was reduced from $25.0 million to $15.0 million. The Company was not in compliance with certain debt covenants as of March 31, 2009, all of which were effectively cured as of such date by the Third Amendment to the Credit Facility described below. As a consequence of the foregoing, and certain provisions of the Third Amendment, the Credit Facility has been classified as a current liability as of March 31, 2009.

 

On May 20, 2009, the Company further amended its Credit Facility by entering into the Third Amendment. The Third Amendment, among other things, bifurcates the existing credit facility into two revolving credit facilities, (i) a $38,000,000 Revolving Credit A Facility which is deemed fully funded as of the date of the Third Amendment, and (ii) a $29,289,245 Revolving Credit B Facility, comprised of revolving credit advances in the aggregate of $25,000,000 which are deemed fully funded as of the date of the Third Amendment and letters of credit advances in the aggregate amount of $4,289,245 which are issued and outstanding as of the date of the Third Amendment. The Third Amendment requires the Company to draw down $4,289,245 under the Revolving Credit B Facility on the date of the Third Amendment and deposit such funds in a cash collateral account to cash collateralize outstanding letters of credit under the Credit Facility and eliminates the swingline features of the Credit Facility and the Company’s ability to cause the lenders to issue any additional letters of credit. In addition, the Third Amendment also changes the termination date of the Credit Facility from December 7, 2010 to March 31, 2010 and modifies the interest rate incurred on borrowings by initially increasing the applicable margin by 450 basis points (or to 7.00% on prime rate loans and 8.00% on LIBOR based loans).

 

The Third Amendment also eliminated specific financial covenants, and in its place, the Company is required to comply with the Approved Budget, that has been agreed to by the Company and the lenders, subject to agreed upon variances. The Company is also required under the Third Amendment to effect the Recapitalization Plan, on or before September 30, 2009 and in connection therewith to effect a prepayment of at least seventy two (72%) of the Revolving Credit A Advances (the “Partial Prepayment”). In the event the Company fails to effect the Recapitalization Plan and in connection therewith to effect a Partial Prepayment on or before September 30, 2009, the (i) lenders will have the right commencing on October 1, 2009, to exercise the Warrants, for nominal consideration, to purchase common stock of the Company equal to 15% of the common stock of the Company on a fully diluted basis as of such date, subject to adjustment, (ii) the applicable margin automatically increases to 11% on prime rate loans and increases to 12% on LIBOR based loans, (iii) the Company shall be required to amortize an aggregate of $10 million of the Revolving Credit A Facility in three (3) equal installments on the first business day of each of the last three (3) months of 2009, (iv) the Company is obligated to submit a revised budget by October 1, 2009, (v) the Credit Facility will terminate on January 15, 2010, and (vi) no further advances may be drawn under the Credit Facility.

 

In the event that Company effects the Recapitalization Plan and in connection therewith effects a partial repayment of the Revolving A Credit Facility on or prior to September 30, 2009, the Warrants automatically will expire and not become exercisable, the applicable margin will automatically be reduced to 3% on prime rate loans and 4% on LIBOR based loans and the Company shall have the right, subject to the requisite approval of the lenders, to seek an extension to extend the term of the Credit Facility to January 5, 2011, provided the Company also pays a fee of .25% of the then outstanding commitments under the Credit Facility.

 

As a result of the Third Amendment the Company is required to prepay outstanding Revolving Credit A Advances (and to the extent the Revolving Credit A Facility shall be reduced to zero, prepay outstanding Revolving Credit B Advances) in an amount equal to 100% (or, after the Revolving Credit A Advances are

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

reduced by at least the Partial Prepayment amount, in an amount equal to 50%) of Net Cash Proceeds (as defined in the Credit Agreement) from:

 

 

provided, however , that (a) the Net Cash Proceeds received from the sale of the certain real property assets shall be used to prepay outstanding Revolving Credit B Advances and to the extent Revolving Credit B Advances shall be reduced to zero, to prepay outstanding Revolving Credit A Advances, (b) the Company shall prepay outstanding Revolving Credit B Advances in an amount equal to 100% of the Net Cash Proceeds from the sale of the Danbury Corporate Center in Danbury Connecticut (the “Danbury Property”) unless the Company is then not in compliance with the Recapitalization Plan in which event Revolving Credit A Advances shall be prepaid first and (c) the Company’s 2008 tax refund was used to prepay outstanding Revolving Credit B Advances upon the closing of the Third Amendment.

 

The Third Amendment requires the Company to (a) sell the Danbury Property by June 1, 2009, unless such date is extended with the applicable approval of the lenders and (b) use its commercially reasonable best efforts to sell four other commercial properties, including the two other GERA Properties, by September 30, 2009.

 

The Company’s Credit Facility is secured by substantially all of the Company’s assets. The outstanding balance on the Credit Facility was $63.0 million as of March 31, 2009 and December 31, 2008 and carried a weighted average interest rate of 4.02% and 5.80%, respectively.

 

In light of the current state of the financial markets and economic environment, there is risk that the Company will be unable to meet the terms of the Credit Facility which would result in the entire balance of the debt becoming due and payable. If the Credit Facility were to become due and payable immediately or on the alternative due date of January 15, 2010, there can be no assurances that the Company will have access to alternative funding sources, or if such sources are available to the Company, that they will be on favorable terms and conditions to the Company. If the Credit Facility were to become immediately due and payable, the recoverability of the Company’s assets may be further impaired which could affect the ability to repay the debt.

 

 

Management has determined the reportable segments identified below according to the types of services offered and the manner in which operations and decisions are made. The Company operates in the following reportable segments:

 

Management Services  — Management Services provides property management and related services for owners of investment properties and facilities management services for corporate owners and occupiers.

 

Transaction Services  — Transaction Services advises buyers, sellers, landlords and tenants on the sale, leasing and valuation of commercial property and includes the Company’s national accounts group and national affiliate program operations.

 

Investment Management  — Investment Management includes services for acquisition, financing and disposition with respect to the Company’s investment programs, asset management services related to the

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

Company’s programs, and dealer-manager services by its securities broker-dealer, which facilitates capital raising transactions for its investment programs.

 

The Company also has certain corporate level activities including interest income from notes and advances, property rental related operations, legal administration, accounting, finance and management information systems which are not considered separate operating segments.

 

The Company evaluates the performance of its segments based upon operating (loss) income. Operating (loss) income is defined as operating revenue less compensation and general and administrative costs and excludes other rental related, rental expense, interest expense, depreciation and amortization, allocation of overhead and other operating and non-operating expenses.

 

 

 

The following is a reconciliation between segment operating (loss) income to net loss attributable to Grubb & Ellis Company:

 

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

14.  PROPERTIES HELD FOR SALE INCLUDING INVESTMENTS IN UNCONSOLIDATED ENTITIES AND DISCONTINUED OPERATIONS

 

A summary of the properties and related LLC’s held for sale balance sheet information is as follows:

 

 

During 2008, the Company initiated a plan to sell the properties it classified as real estate held for investment in its financial statements. As of March 31, 2009, the Company has a covenant within its Credit Facility which requires the sale of one of these assets by June 1, 2009. The recent downturn in the global capital markets significantly lessened the probability that the Company would be able to achieve relief from this covenant through amendment or other financial resolutions. Pursuant to SFAS No. 144 , the Company assessed the value of the assets. In addition, the Company reviewed the valuation of its other owned properties and real estate investments. This valuation review resulted in the Company recognizing an impairment charge of approximately $6.8 million against the carrying value of the properties and real estate investments as of March 31, 2009, all of which is recorded in discontinued operations.

 

On October 31, 2008, the Company entered into that certain Agreement for the Purchase and Sale of Real Property and Escrow Instructions to effect the sale of the Corporate Center located at 39 Old Ridgebury Road, Danbury, Connecticut, to an unaffiliated entity for a purchase price of $76.0 million. This agreement was amended and restated in its entirety by that certain Danbury Merger Agreement dated as of January 23, 2009, as amended by the First Amendment to Danbury Merger Agreement dates as of January 23, 2009 which reduced the purchase price to $73.5 million. In accordance with the terms of the Danbury Merger Agreement, as amended by the First Danbury Amendment, the Company received one half of the buyer’s deposits in an amount of $3.1 million from the buyer upon the execution of the Danbury Merger Agreement which payment remains subject to the terms of the Danbury Merger Agreement and the remaining $3.1 million of deposits are held in escrow pending the closing. The Company is scheduled to receive the remainder of the purchase price upon the closing of the sale of the property, which is expected to occur on or before June 1, 2009.

 

The investments in unconsolidated entities held for sale represent the Company’s interest in certain real estate properties that it holds through various limited liability companies. In accordance with SFAS No. 66, Accounting for Sales of Real Estate , and Emerging Issues Task Force 98-8, the Company treats the disposition of these interests similar to the disposition of real estate it holds directly. In addition, pursuant to FIN No. 46(R), when the Company is no longer the primary beneficiary of the LLC, the Company deconsolidates the LLC.

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

In instances when the Company expects to have significant ongoing cash flows or significant continuing involvement in the component beyond the date of sale, the income (loss) from certain properties held for sale continue to be fully recorded within the continuing operations of the Company through the date of sale.

 

The net results of discontinued operations and the net gain on dispositions of properties sold or classified as held for sale as of March 31, 2009, in which the Company has no significant ongoing cash flows or significant continuing involvement, are reflected in the consolidated statements of operations as discontinued operations. The Company will receive certain fee income from these properties on an ongoing basis that is not considered significant when compared to the operating results of such properties.

 

The following table summarizes the income and expense components that comprised discontinued operations, net of taxes, for the three months ended March 31, 2009 and 2008:

 

 

 

Operating Leases  — The Company has non-cancelable operating lease obligations for office space and certain equipment ranging from one to ten years, and sublease agreements under which the Company acts as a sublessor. The office space leases often times provide for annual rent increases, and typically require payment of property taxes, insurance and maintenance costs.

 

Rent expense under these operating leases was approximately $6.2 million and $5.9 million for the three months ended March 31, 2009 and 2008, respectively. Rent expense is included in general and administrative expense in the accompanying consolidated statements of operations.

 

Operating Leases — Other  — The Company is a master lessee of seven multifamily properties in various locations under non-cancelable leases. The leases, which commenced in various months and expire from June 2015 through March 2016, require minimum monthly payments averaging $795,000 over the 10-year period. Rent expense under these operating leases was approximately $2.3 million and $2.2 million for three months ended March 31, 2009 and 2008, respectively.

 

The Company subleases these multifamily spaces to third parties. Rental income from these subleases was approximately $3.7 million and $4.2 million for the three months ended March 31, 2009 and 2008, respectively. As multifamily leases are executed for no more than one year, the Company is unable to project the future minimum rental receipts related to these leases.

 

The Company is also a 50% joint venture partner of four multi-family residential properties in various locations under non-cancelable leases. The leases, which commenced in various months and expire from

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

November 2014 through January 2015, require minimum monthly payments averaging $372,000 over the 10-year period. Rent expense under these operating leases was approximately $1.2 million and $1.1 million, for the three months ended March 31, 2009 and 2008, respectively.

 

The Company subleases these multifamily spaces to third parties. Rental income from these subleases was approximately $2.3 million and $2.2 million for the three months ended March 31, 2009 and 2008, respectively. As multifamily leases are executed for no more than one year, the Company is unable to project the future minimum rental receipts related to these leases.

 

As of March 31, 2009, the Company had recorded liabilities totaling $7.3 million related to such master lease arrangements, consisting of $4.6 million of cumulative deferred revenues relating to acquisition fees and loan fees received from 2004 through 2006 and $2.7 million of additional loss reserves which were recorded in 2008.

 

TIC Program Exchange Provision - Prior to the Merger, NNN entered into agreements in which NNN agreed to provide certain investors with a right to exchange their investment in certain TIC Programs for an investment in a different TIC program. NNN also entered into an agreement with another investor that provided the investor with certain repurchase rights under certain circumstances with respect to their investment. The agreements containing such rights of exchange and repurchase rights pertain to initial investments in TIC programs totaling $31.6 million. The Company deferred revenues relating to these agreements of $96,000 and $246,000 for the three months ended March 31, 2009 and 2008, respectively. Additional losses of $14.3 million and $2.9 million related to these agreements were recorded through in 2008 and for the three months ended March 31, 2009 to reflect the impairment in value of properties underlying the agreements with investors. As of March 31, 2009, the Company had recorded liabilities totaling $21.0 million related to such agreements, consisting of $3.8 million of cumulative deferred revenues and $17.2 million of additional losses related to these agreements.

 

Capital Lease Obligations  — The Company leases computers, copiers and postage equipment that are accounted for as capital leases (see Note 10 of the Notes to Consolidated Financial Statements for additional information).

 

General  — The Company is involved in various claims and lawsuits arising out of the ordinary conduct of its business, as well as in connection with its participation in various joint ventures and partnerships, many of which may not be covered by the Company’s insurance policies. In the opinion of management, the eventual outcome of such claims and lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.

 

Guarantees  — From time to time the Company provides guarantees of loans for properties under management. As of March 31, 2009, there were 150 properties under management with loan guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.7 billion as of March 31, 2009. As of December 31, 2008, there were 151 properties under management with loan guarantees of approximately $3.5 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.8 billion as of December 31, 2008. In addition, the consolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to the interests in the Company’s TIC investments totaling $277.6 million as of March 31, 2009.

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

The Company’s guarantees consisted of the following as of March 31, 2009 and December 31, 2008:

 

 

 

 

Management initially evaluates these guarantees to determine if the guarantee meets the criteria required to record a liability in accordance with FASB Interpretation No. 45. In addition, on an ongoing basis, the Company evaluates the need to record additional liability in accordance with SFAS No. 5, Accounting for Contingencies . As of March 31, 2009 and December 31, 2008, the Company recorded a liability of $9.1 million, respectively, related to recourse guarantees of debt of properties under management which matured in January and April 2009. Any other such liabilities were insignificant as of March 31, 2009 and December 31, 2008.

 

Environmental Obligations  — In the Company’s role as property manager, it could incur liabilities for the investigation or remediation of hazardous or toxic substances or wastes at properties the Company currently or formerly managed or at off-site locations where wastes were disposed of. Similarly, under debt financing arrangements on properties owned by sponsored programs, the Company has agreed to indemnify the lenders for environmental liabilities and to remediate any environmental problems that may arise. The Company is not aware of any environmental liability or unasserted claim or assessment relating to an environmental liability that the Company believes would require disclosure or the recording of a loss contingency.

 

Real Estate Licensing Issues  — Although Triple Net Properties Realty, Inc. (“Realty”), which became a subsidiary of the Company as part of the merger with NNN, was required to have real estate licenses in all of the states in which it acted as a broker for NNN’s programs and received real estate commissions prior to 2007, Realty did not hold a license in certain of those states when it earned fees for those services. In addition, almost all of GERI’s revenue was based on an arrangement with Realty to share fees from NNN’s programs. GERI did not hold a real estate license in any state, although most states in which properties of the NNN’s programs were located may have required GERI to hold a license. As a result, Realty and the Company may be subject to penalties, such as fines (which could be a multiple of the amount received), restitution payments and termination of management agreements, and to the suspension or revocation of certain of Realty’s real estate broker licenses. To date there have been no claims, and the Company cannot assess or estimate whether it will incur any losses as a result of the foregoing.

 

To the extent that the Company incurs any liability arising from the failure to comply with real estate broker licensing requirements in certain states, Mr. Thompson, Louis J. Rogers, former President of GERI, and Jeffrey T. Hanson, the Company’s Chief Investment Officer, have agreed to forfeit to the Company up to an aggregate of 4,124,120 shares of the Company’s common stock, and each share will be deemed to have a value of $11.36 per share in satisfying this obligation. Mr. Thompson has agreed to indemnify the Company, to the extent the liability incurred by the Company for such matters exceeds the deemed $46,865,000 value of these shares, up to an additional $9,435,000 in cash. These obligations terminate on November 16, 2009.

 

Alesco Seed Capital - On November 16, 2007, the Company completed the acquisition of a 51% membership interest in Grubb & Ellis Alesco Global Advisors, LLC (“Alesco”). Pursuant to the Intercompany Agreement between the Company and Alesco, dated as of November 16, 2007, the Company committed to

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

invest $20.0 million in seed capital into the open and closed end real estate funds that Alesco expects to launch. Additionally, upon achievement of certain earn-out targets, the Company is required to purchase up to an additional 27% interest in Alesco for $15.0 million. The Company is allowed to use $15.0 million of seed capital to fund the earn-out payments. As of March 31, 2009, the Company has invested $500,000 in seed capital into the open and closed end real estate funds that Alesco launched during 2008.

 

Deferred Compensation Plan – During 2008, the Company implemented a deferred compensation plan that permits employees and independent contractors to defer portions of their compensation, subject to annual deferral limits, and have it credited to one or more investment options in the plan. As of March 31, 2009 and December 31, 2008, $2.1 million and $1.7 million, respectively, reflecting the non-stock liability under this plan were included in Other Long Term Liabilities. The Company has purchased whole-life insurance contracts on certain employee participants to recover distributions made or to be made under this plan and as of March 31, 2009 and December 31, 2008 have recorded the cash surrender value of the policies of $1.2 million and $1.1 million, respectively, in Other Noncurrent Assets.

 

In addition, the Company awards “phantom” shares of Company stock to participants under the deferred compensation plan. As of March 31, 2009 and December 31, 2008, the Company awarded an aggregate of 5.8 million and 5.4 million phantom shares, respectively, to certain employees with an aggregate value on the various grant dates of $22.9 million and $22.5 million, respectively. On March 31, 2009, an aggregate of 5.6 million phantom share grants were outstanding. Generally, upon vesting, recipients of the grants are entitled to receive the number of phantom shares granted, regardless of the value of the shares upon the date of vesting; provided, however, grants with respect to 900,000 phantom shares had a guaranteed minimum share price ($3.1 million in the aggregate) that will result in the Company paying additional compensation to the participants should the value of the shares upon vesting be less than the grant date value of the shares.

 

 

The Company computes earnings (loss) per share in accordance with SFAS No. 128, Earnings Per Share (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period less unvested restricted shares. Diluted earnings (loss) per share is computed using the weighted-average number of common and common equivalent shares of stock outstanding during the periods utilizing the treasury stock method for stock options and unvested restricted stock.

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

The following is a reconciliation between weighted-average shares used in the basic and diluted earnings per share calculations:

 

 

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

 

 

The components of comprehensive (loss) income, net of tax, are as follows:

 

 

 

Offering Costs and Other Expenses Related to Public Non-Traded REITs  — The Company, through its consolidated subsidiaries Grubb & Ellis Apartment REIT Advisor, LLC, and Grubb & Ellis Healthcare REIT Advisor, LLC, bears certain general and administrative expenses in its capacity as advisor of Apartment REIT and Healthcare REIT, respectively, and is reimbursed for these expenses. However, Apartment REIT and Healthcare REIT will not reimburse the Company for any operating expenses that, in any four consecutive fiscal quarters, exceed the greater of 2.0% of average invested assets (as defined in their respective advisory agreements) or 25.0% of the respective REIT’s net income for such year, unless the board of directors of the respective REITs approve such excess as justified based on unusual or nonrecurring factors. All unreimbursable amounts are expensed by the Company.

 

The Company also pays for the organizational, offering and related expenses on behalf of Apartment REIT and Healthcare REIT. These organizational, offering and related expenses include all expenses (other than selling commissions and the marketing support fee which generally represent 7.0% and 2.5% of the gross offering proceeds, respectively) to be paid by Apartment REIT and Healthcare REIT in connection with their offerings. These expenses only become the liability of Apartment REIT and Healthcare REIT to the extent selling commissions, the marketing support fee and due diligence expense reimbursements and other organizational and offering expenses do not exceed 11.5% of the gross proceeds of the offering. As of March 31, 2009 and 2008, the Company has incurred expenses of $3.9 million and $3.8 million, respectively, in excess of 11.5% of the gross proceeds of the Apartment REIT and Healthcare REIT offerings, respectively. As of March 31, 2009 and December 31, 2008, the Company has recorded an allowance for bad debt of approximately $3.9 million and $3.8 million, respectively, related to the Apartment REIT offering costs incurred as the Company believes that such amounts will not be reimbursed.

 

Management Fees  — The Company provides both transaction and management services to parties which are related to an affiliate of a principal stockholder and director of the Company (collectively, “Kojaian Companies”). In addition, the Company also pays asset management fees to the Kojaian Companies related to properties the Company manages on their behalf. Revenue, including reimbursable expenses related to salaries, wages and benefits, earned by the Company for services rendered to Kojaian Companies, including joint ventures, officers and directors and their affiliates, was $1.6 million and $1.8 million for the three months ended March 31, 2009 and 2008, respectively.

 

Other Related Party  — GERI, which is wholly owned by the Company, owns a 50.0% managing member interest in Grubb & Ellis Apartment REIT Advisor, LLC and each of Grubb & Ellis Apartment Management, LLC and ROC REIT Advisors, LLC own a 25.0% equity interest in Grubb & Ellis Apartment REIT Advisor,

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

LLC. As of March 31, 2009, Andrea R. Biller, the Company’s General Counsel, Executive Vice President and Secretary, owned an equity interest of 18.0% of Grubb & Ellis Apartment Management, LLC. As of December 31, 2007, each of Scott D. Peters, the Company’s former Chief Executive Officer and President, and Andrea R. Biller owned an equity interest of 18.0% of Grubb & Ellis Apartment Management, LLC. On August 8, 2008, in accordance with the terms of the operating agreement of Grubb & Ellis Apartment Management, LLC, Grubb & Ellis Apartment Management LLC tendered settlement for the purchase of the 18.0% equity interest in Grubb & Ellis Apartment Management LLC that was previously owned by Mr. Peters. As a consequence, through a wholly-owned subsidiary, the Company’s equity interest in Grubb & Ellis Apartment Management, LLC increased from 64.0% to 82.0% after giving effect to this purchase from Mr. Peters. As of March 31, 2009 and December 31, 2008, Stanley J. Olander, the Company’s Executive Vice President — Multifamily, owned an equity interest of 33.3% of ROC REIT Advisors, LLC.

 

GERI owns a 75.0% managing member interest in Grubb & Ellis Healthcare REIT Advisor, LLC and, therefore, consolidates Grubb & Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis Healthcare Management, LLC owns a 25.0% equity interest in Grubb & Ellis Healthcare REIT Advisor, LLC. As of March 31, 2009, each of Ms. Biller and Mr. Hanson, the Company’s Chief Investment Officer and GERI’s President, owned an equity interest of 18.0% of Grubb & Ellis Healthcare Management, LLC. On August 8, 2008, in accordance with the terms of the operating agreement of Grubb & Ellis Healthcare Management, LLC, Grubb & Ellis Healthcare Management, LLC tendered settlement for the purchase of 18.0% equity interest in Grubb & Ellis Healthcare Management, LLC that was previously owned by Mr. Peters. As a consequence, through a wholly-owned subsidiary, the Company’s equity interest in Grubb & Ellis Healthcare Management, LLC increased from 46.0% to 64.0% after giving effect to this purchase from Mr. Peters.

 

Anthony W. Thompson, former Chairman of the Company and NNN, as a special member, was entitled to receive up to $175,000 annually in compensation from each of Grubb & Ellis Apartment Management, LLC and Grubb & Ellis Healthcare Management, LLC. Effective February 8, 2008, upon his resignation as Chairman, he was no longer a special member. As part of his resignation, the Company has agreed to continue to pay him up to an aggregate of $569,000 through the initial offering periods related to Apartment REIT, Inc. and Healthcare REIT, Inc., of which $219,000 remains outstanding as of as of March 31, 2009.

 

The grants of membership interests in Grubb & Ellis Apartment Management, LLC and Grubb & Ellis Healthcare Management, LLC to certain executives are being accounted for by the Company as a profit sharing arrangement. Compensation expense is recorded by the Company when the likelihood of payment is probable and the amount of such payment is estimable, which generally coincides with Grubb & Ellis Apartment REIT Advisor, LLC and Grubb & Ellis Healthcare REIT Advisor, LLC recording its revenue. Compensation expense related to this profit sharing arrangement associated with Grubb & Ellis Apartment Management, LLC includes distributions of $30,000, earned by each of Mr. Peters and Ms. Biller for the three months ended March 31, 2008. There was no compensation expense related to the profit sharing arrangement with Grubb & Ellis Apartment Management, LLC, and therefore no distributions to any members, for the period ended March 31, 2009. Compensation expense related to this profit sharing arrangement associated with Grubb & Ellis Healthcare Management, LLC includes distributions of $44,000 and $44,000, respectively, earned by Mr. Thompson, $0 and $107,000, respectively, earned by Mr. Peters, $31,000 and $42,000, respectively, earned by Ms. Biller, and $31,000 and $42,000, earned by Mr. Hanson for the three months ended March 31, 2009 and 2008, respectively.

 

As of March 31, 2009 and December 31, 2008, respectively, the remaining 82.0% equity interest in Grubb & Ellis Apartment Management, LLC and the remaining 64.0% equity interest in Grubb & Ellis Healthcare Management, LLC were owned by GERI. Any allocable earnings attributable to GERI’s ownership interests are paid to GERI on a quarterly basis. Grubb & Ellis Apartment Management, LLC incurred expenses of $42,000 for the three months ended March 31, 2008, and Grubb & Ellis Healthcare Management, LLC incurred expenses of $65,000 and $158,000 for the three months ended March 31, 2009 and 2008,

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

respectively, to other Company employees, which was included in compensation expense in the consolidated statement of operations. No expense was incurred by Grubb & Ellis Apartment Management, LLC for the three months ended March 31, 2009.

 

The Company’s directors and officers, as well as officers, managers and employees have purchased, and may continue to purchase, interests in offerings made by the Company’s programs at a discount. The purchase price for these interests reflects the fact that selling commissions and marketing allowances will not be paid in connection with these sales. The net proceeds to the Company from these sales made net of commissions will be substantially the same as the net proceeds received from other sales.

 

Mr. Thompson has routinely provided personal guarantees to various lending institutions that provided financing for the acquisition of many properties by our programs. These guarantees cover certain covenant payments, environmental and hazardous substance indemnification and any indemnification for any liability arising from the SEC investigation of Triple Net Properties. In connection with the formation transactions, the Company indemnified Mr. Thompson for amounts he may be required to pay under all of these guarantees to which Triple Net Properties, Realty or NNN Capital Corp. is an obligor to the extent such indemnification would not require the Company to book additional liabilities on the Company’s balance sheet.

 

 

The components of income tax (benefit) provision from continuing operations for the three months ended March 31, 2009 and 2008 consisted of the following:

 

 

The Company recorded net prepaid taxes totaling approximately $1.4 million as of March 31, 2009, comprised primarily of state tax refund receivables and state prepaid tax estimates. Included in prepaid expenses and other current assets at March 31, 2009 was a federal income tax refund receivable of $10.3 million, of which $10.2 million was received in April 2009.

 

As of December 31, 2008, federal net operating loss carryforwards were available to the Company in the amount of approximately $2.2 million, translating to a deferred tax asset before valuation allowance of $800,000 which will begin to expire in 2027. The Company also had state net operating loss carryforwards from previous periods totaling $74.5 million, translating to a deferred tax asset of $6.1 million before valuation allowances.

 

In evaluating the need for a valuation allowance as of March 31, 2009, the Company evaluated both positive and negative evidence in accordance with the requirements of SFAS No. 109, Accounting for Income Taxes . Management determined that $15.2 million of deferred tax assets recorded in the three months ended March 31, 2009 do not satisfy the recognition criteria set forth in SFAS No. 109. Accordingly, a valuation

 

GRUBB & ELLIS COMPANY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

 

allowance has been recorded for this amount. If released, the entire amount would result in a benefit to continuing operations.

 

The differences between the total income tax (benefit) provision of the Company for financial statement purposes and the income taxes computed using the applicable federal income tax rate of 35% for the three months ended March 31, 2009 and 2008 were as follows:

 

 

 

Forward-Looking Statements

 

This Interim Report contains statements that are not historical facts and constitute projections, forecasts or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements are not guarantees of performance. They involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company (as defined below) in future periods to be materially different from any future results, performance or achievements expressed or suggested by these statements. You can identify such statements by the fact that they do not relate strictly to historical or current facts. These statements use words such as “believe,” “expect,” “should,” “strive,” “plan,” “intend,” “estimate” and “anticipate” or similar expressions. When we discuss strategy or plans, we are making projections, forecasts or forward-looking statements. Actual results and stockholder’s value will be affected by a variety of risks and factors, including, without limitation, international, national and local economic conditions and real estate risks and financing risks and acts of terror or war. Many of the risks and factors that will determine these results and values are beyond the Company’s ability to control or predict. These statements are necessarily based upon various assumptions involving judgment with respect to the future. All such forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates of revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Factors that could adversely affect the Company’s ability to obtain these results and value include, among other things: (i) the slowdown in the volume and the decline in the transaction values of sales and leasing transactions, (ii) the general economic downturn and recessionary pressures on business in general, (iii) a prolonged and pronounced recession in real estate markets and values, (iv) the unavailability of credit to finance real estate transactions in general, and the Company’s tenant-in-common programs in particular, (v) the reduction in borrowing capacity under the Company’s current credit facility, and the additional limitations with respect thereto, (vi) the continuing ability to make interest and principal payments with respect to the Company’s credit facility, (vii) an increase in expenses related to new initiatives, investments in people, technology, and service improvements, (viii) the success of current and new investment programs, (ix) the success of new initiatives and investments, (x) the inability to attain expected levels of revenue, performance, brand equity and expense synergies resulting from the merger of Grubb & Ellis Company and NNN Realty Advisors in general, and in the current macroeconomic and credit environment in particular, and (xi) other factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on May 27, 2009.

 

Overview and Background

 

The Company reports its revenue by three business segments in accordance with the provisions of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”). Transaction Services, which comprises its real estate brokerage operations; Investment Management, which includes providing acquisition, financing and disposition services with respect to its investment programs, asset management services related to its programs, and dealer-manager services by its securities broker-dealer, which facilitates capital raising transactions for its TIC, REIT and other investment programs; and Management Services, which includes property management, corporate facilities management, project management, client accounting, business services and engineering services for unrelated third parties and the properties owned by the programs it sponsors. Additional information on these business segments can be found in Note 13 of Notes to Consolidated Financial Statements in Item 1 of this Report.