ITEM 1. DESCRIPTION OF BUSINESS
Background
We are a Texas limited partnership formed in April 2005 to acquire, develop and operate, directly or indirectly through joint venture arrangements, commercial real estate consisting primarily of single-tenant and multi-tenant retail properties. Our investment strategy is to retain approximately 50% of our properties as income-producing assets during our projected six-year operating period, and opportunistically sell the remaining properties under attractive market conditions and reinvest the net sales proceeds into additional property investments. Our principal office is located at 8 Greenway Plaza, Suite 1000, Houston, Texas 77046. Our telephone number is (713) 850-1400.
We commenced our principal operations on June 30, 2005, when we raised the minimum offering of $2.0 million pursuant to the terms of a private placement memorandum dated April 19, 2005, which we refer to as the Offering Memorandum, and issued our initial 80 limited partnership units, or Units. As of October 31, 2006, we had received approximately $71.1 million for the sale of 2,844 Units and closed the Offering. We refer to the holders of our Units as Limited Partners.
On April 30, 2007 we filed a Form 10-SB with the United States Securities and Exchange Commission, or SEC, to register our Units pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We are subject to the registration requirements of Section 12(g) of the Exchange Act because the aggregate value of our assets exceeds applicable thresholds and the Units of record are held by 500 or more persons. As a result of our obligations to register our securities with the SEC under the Exchange Act, we are subject to the requirements of the Exchange Act rules, including the filing of this Annual Report on Form 10-K.
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Our general partner is AmREIT Monthly Income & Growth III Corporation, a Texas corporation and subsidiary of AmREIT, an SEC reporting, non-traded Texas real estate investment trust. We refer to AmREIT Monthly Income & Growth III Corporation as the General Partner. AmREIT and its predecessors have sponsored and advised 17 partnerships formed for the purpose of investing in properties during their 25 year history. Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement, which we refer to as the Partnership Agreement. The Limited Partners have the right to remove and replace our General Partner, with or without cause, by a vote of the Limited Partners owning a majority of the outstanding Units. Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of the properties and the reinvestment of net sales proceeds. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties under the Partnership Agreement. Our General Partner has invested $1,000 in us for its general partner interest and has invested $800,000 in us for Limited Partner Units. We refer to our General Partner and our Limited Partners collectively as the Partners.
Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933, as amended, and are not currently listed on a national exchange. These Units will be transferable only if we register them under applicable securities laws (such registration is not expected), or pursuant to an exemption under the Securities Act of 1933 and applicable state securities laws. We do not anticipate that any public market for the Units will develop.
We directly own three properties and have investments in eight additional properties, all of which are located in Texas, are primarily multi-tenant retail properties and comprise in the aggregate approximately 1.5 million rentable square feet. As of December 31, 2008, these properties were 83% leased. We acquired all of these properties subsequent to our formation.
The following is a summary of the eleven properties in which we owned an interest as of December 31, 2008.
(1)
Annualized gross base rent represents base rents in place on leases with rent having commenced as of December 31, 2008 and does not reflect straight-line rent or other adjustments required under generally accepted accounting principles.
(2)
Property is under redevelopment.
(3)
Property is 60% owned through a joint venture and is consolidated in our financial statements.
(4)
Property is owned through a joint venture that is not consolidated in our financial statements.
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See “Item 2.
ITEM 2. DESCRIPTION OF PROPERTY
Overview
During the period from April 19, 2005 (inception) to December 31, 2008, we acquired interests in eleven properties. We directly own three properties and have investments in eight properties through joint venture arrangements. We have included a description of the types of real estate in which we have invested and will invest, and a summary of our investment policies and limitations on investment and the competitive conditions in which we operate under “Item 1. Description of Business” above. We believe our properties are suitable for their intended use and are adequately insured.
As of December 31, 2008, we owned interests in the following properties, all of which are located in Texas:
(1)
Annualized gross base rent represents base rents in place on leases with rent having commenced as of December 31, 2008 and does not reflect straight-line rent or other adjustments under generally accepted accounting principles.
(2)
Property is 60% owned through a joint venture which is consolidated in our financial statements.
(3)
Property is owned through a joint venture that is not consolidated in our financial statements.
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Description of Our Real Estate Investments
Westside Plaza
On September 30, 2005, we purchased a 100% interest in the Westside Plaza property, a 43,021 square foot retail shopping center located in Houston, Texas. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and assumed two 20-year mortgage loans to fund the acquisition of the Westside Plaza property. The first loan in the amount of $10.2 million bears an annual interest rate of 5.62% and had an outstanding principal balance of $9.8 million as of December 31, 2008. The second loan in the amount of $640,000 bears an annual interest rate of 12.75% and had an outstanding principal balance of $637,000 as of December 31, 2008.
The Westside Plaza property is anchored by Designer Shoe Warehouse which occupies 24,500 square feet and has a lease scheduled to expire in July 2010. Fadi’s restaurant is another major tenant and occupies 5,125 square feet with a lease scheduled to expire in January 2012. We completed the redevelopment of the property by adding aesthetic enhancements during 2007 and plan to resell it under attractive market conditions.
The Market at Lake Houston
On December 12, 2005, through a joint venture arrangement with an affiliate of our General Partner, AmREIT Monthly Income & Growth Fund, Ltd, we acquired a 60% interest in The Market at Lake Houston property, a 101,799 square foot retail shopping center located in Houston, Texas. Our joint venture partner owns the other 40% interest in the joint venture. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and obtained a 30-year mortgage loan to fund the acquisition of The Market at Lake Houston property. The loan was in the amount of $15.7 million, bears an annual interest rate of 5.75% and is interest-only until January 1, 2016.
This property is 100% leased. H-E-B Grocery is the largest tenant occupying 80,641 square feet with a lease scheduled to expire February 2017. We acquired this property with the expectation that it would provide a stable stream of rental income. We have no plans to renovate or redevelop The Market at Lake Houston property.
5433 Westheimer
On March 31, 2006, through a special purpose entity, 5433 Westheimer, LP, we purchased a 50% interest in the 5433 Westheimer property, a 133,881 square foot, 11 story office building located in Houston, Texas. Our joint venture partner, Songy Partners, purchased the other 50% interest in the joint venture. The property was purchased from an unaffiliated third party. We acquired our interest in the 5433 Westheimer property with proceeds from the Offering. In January 2008, we mortgaged our interest in this property with a $32.9 million, three-year variable-rate loan with a third-party lender. We have the option to extend the loan an additional year. The loan bears interest at LIBOR plus a spread of 1.70%. This property currently has 39 tenants, all of whom have short term leases. Prosperity Bank is the largest tenant occupying 17,185 square feet with a lease scheduled to expire in May 2011. We acquired this property with the intent to redevelop the site into a mixed use complex with retail shopping and potentially, an office, hotel or condominium component. We made a loan in the amount of approximately $7.0 million in March 2006 in connection with our plans for redeveloping the site. This loan had a LIBOR-based variable interest rate of LIBOR plus 2%. The interest rate on the note was 6.82% as of December 31, 2007. During 2008, the property was refinanced with a third party lender. In conjunction with that refinancing, the lender required an additional equity contribution of $7.0 million. This requirement was satisfied through conversion of our $7.0 million loan to equity. We established a note receivable with our joint venture partner for its portion of the additional equity contribution ($3.5 million). In November 2008, we converted $800,000 of that note into an additional equity investment in the property. The balance of the note was approximately $334,000 at December 31, 2008, and we expect the balance to be paid in full during 2009. We expect to complete construction and build out of the property by June 30, 2009.
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Olmos Creek
On June, 30, 2006, through our wholly-owned special purpose entity, AmREIT Olmos Creek, LP, we purchased a 100% interest in the Olmos Creek property, a 102,178 square foot retail shopping center located in San Antonio, Texas. The property was purchased from an unaffiliated third party. We used proceeds from the Offering to fund the acquisition of Olmos Creek. Subsequent to the acquisitions, we obtained a 10-year interest-only mortgage loan in the amount of $11.2 million that bears an annual interest rate of 6.02%. As of December 31, 2008, major tenants of the Olmos Creek property include H-E-B Grocery as the largest tenant occupying 55,513 square feet, Blockbuster, Subway, UPS Store and Edward Jones. Additionally, we have ground leases with Compass Bank through May 2017 and McDonald’s through June 2017. We acquired this property with the expectation that it would provide a stable stream of rental income. We currently do not have plans to renovate or redevelop the Olmos Creek property.
During 2006, we sold a parcel of the Olmos Creek property to an unaffiliated third party for $775,000. We paid our General Partner $25,000 in real estate brokerage commissions on the sale.
Lantern Lane
On September 29, 2006, through our wholly-owned special purpose entity, AmREIT Lantern Lane, LP, we purchased a 100% interest in the Lantern Lane property, a 79,462 square foot retail shopping center located in Houston, Texas. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and obtained a 5-year interest-only mortgage loan in the amount of $13.4 million that bears an annual interest rate of 6% to fund the acquisition of the Lantern Lane property.
Rice Food Market, Inc. is the largest tenant occupying 21,450 square feet with a lease scheduled to expire in January 2013. We acquired this property with the expectation that it would provide a stable stream of rental income and have no plans to redevelop the property.
Properties in Plano, Texas Owned Through a Joint Venture with an Affiliate of JPMorgan
Through our investment in PTC/BSQ Holding Company LLC (“PTC/BSQ”), we purchased a 20% interest in Preston Towne Crossing, Berkeley Square and Preston Park Gold. The joint venture, 80% owned by JPMorgan Asset Management, acquired each of these shopping centers from unrelated third parties. These retail centers, further described below, are adjacent to one another in Plano, Texas, and total 395,927 square feet. Preston Park Gold was acquired by PTC/BSQ on November 15, 2006 while Preston Towne Crossing and Berkeley Square were both acquired on December 7, 2006.
Preston Park Gold. The 101,096-square-foot Preston Park Gold, which is the former Target/Vineyard Antique Mall building, is located between Preston Towne Crossing and Berkeley Square and was retrofitted in 2007.
Major tenants of the Preston Gold property include Gold’s Gym which occupies 49,427 square feet and Chair King which occupies 27,438 square feet. Leases for these tenants are scheduled to expire in October 2024 and June 2017, respectively. The property was redeveloped in order to increase value and construction was completed in July 2007. The property is unencumbered and is 77% occupied as of December 31, 2008.
Preston Towne Crossing and Berkeley Square. The 169,844-square-foot Preston Towne Crossing and the 124,987-square-foot Berkeley Square are 94% and 93% occupied, respectively at December 31, 2008 and are located on 35 acres at the northeast corner of Preston Road and West Park Boulevard in Plano. PTC/BSQ assumed mortgage loans in the amount of $22.4 million and $18.1 million encumbering Preston Towne Crossing and Berkeley Square, respectively. Each of the loans matures in January 2012. The Preston Towne Crossing loan bears interest at 5.83% and the Berkeley Square loan bears interest at 5.87%. The Preston Towne Crossing loan has a balance of $21.4 million as of December 31, 2008, and the Berkeley Square loan has a balance of $17.3 million as of December 31, 2008.
Major tenants of the Preston Towne Crossing property include REI which occupies 27,000 square feet and
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Park Plaza Salon which occupies 20,000 square feet. Leases for these tenants are scheduled to expire in April 2015 and January 2012, respectively. Movie Grill Concepts, Ltd. is the largest tenant of Berkeley Square occupying 30,977 square feet with a lease scheduled to expire in February 2010.
Developed during 1986 and 1987, the shopping centers underwent renovations during 2007 and 2008 to enhance the facades, complete store pop-ups, upgrade landscaping and add new signage. These enhancements were completed during 2008. The properties also include undeveloped land behind Berkeley Square that we believe can be sold to an office or residential developer.
Casa Linda Plaza
On December 8, 2006, through a joint venture arrangement with an affiliate of our General Partner, AmREIT Monthly Income & Growth Fund IV, L.P., we acquired a 50% interest in the Casa Linda Plaza property, a 324,638 square foot retail shopping center located in Dallas, Texas. Our joint venture partner owns the remaining 50% interest in the joint venture. The property was purchased from an unaffiliated third-party. We used proceeds from the Offering and obtained a 7-year mortgage loan from Morgan Stanley Mortgage Capital, Inc. to fund the acquisition of the Casa Linda Plaza property. The loan was in the amount of $38.0 million, bears an annual interest rate of 5.48% and is interest-only until maturity.
Albertson’s is the largest tenant occupying 59,561 square feet with a lease scheduled to expire in July 2016. Additional tenants are Petco, 24-Hour Fitness, Starbucks, Wachovia, Chili’s, Blockbuster, Washington Mutual, Supercuts and Guarantee Federal Bank. The property was originally built between 1946 and 1949 and is currently being redeveloped. Redevelopment is scheduled to be complete during 2009.
Woodlake Square
On August 31, 2007, through a joint venture arrangement with affiliates of our General Partner, AmREIT Monthly Income & Growth Fund IV, L.P. and AmREIT Realty Investment Company, we acquired a 30% interest in the Woodlake Square property, a 205,522 square foot retail shopping center located in Houston, Texas. Our joint venture partners own the other 70% interest in the joint venture. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and obtained a 3-year mortgage loan from Frost Bank to fund the acquisition of the Woodlake Square property. The loan was in the amount of $24.0 million and is interest-only until maturity. The interest related to this debt is at a variable interest rate of LIBOR plus 1.35%. At December 31, 2008, the variable interest rate was 2.78%. In December, 2007, the property entered into an interest rate swap to hedge its position on the mortgage. As a result, the interest rate will remain fixed at 5.465% for the life of the loan.
Randall’s is the largest tenant occupying 56,430 square feet with a lease scheduled to expire in July 2013. Additional tenants are Walgreen’s, Hooters, Jos. A. Bank Clothiers, Ragin Cajun, and Woodlake Children’s Center.
Woodlake Pointe
On November 21, 2007, through a joint venture arrangement with affiliates of our General Partner, AmREIT Monthly Income & Growth Fund IV, L.P. and AmREIT Realty Investment Company, we acquired a 30% interest in AmREIT Westheimer Gessner, L.P. which owns the Woodlake Pointe property, a 82,120 square foot retail shopping center located in Houston, Texas. Our joint venture partners own the other 70% interest in the joint venture. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and paid cash for the acquisition.
Border’s is the largest tenant occupying 41,060 square feet with a lease scheduled to expire in January, 2010.
On May 29, 2008, through the same joint venture arrangement with affiliates of our General Partner, AmREIT Monthly Income and Growth Fund IV, L.P. and AmREIT Realty Investment Company, we acquired a 30% interest in a tract of land adjacent to Woodlake Pointe. Our joint venture partners own the other 70% interest in
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the property. The acquisition is accounted for as part of AmREIT Westheimer Gessner, L.P. We used proceeds from the Offering and paid cash for the acquisition.
Portfolio Information
The following table shows our five highest tenant industry concentrations for all properties in which we own an interest as of December 31, 2008.
The following table shows our tenants which occupy 10% or more of the rentable square feet for each property in which we own an interest and the lease expirations of such tenants as of December 31, 2008, assuming no exercise of renewal option or termination rights.
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The following table shows lease expirations for our four consolidated properties as of December 31, 2008, during each of the next ten years and thereafter, assuming no exercise of renewal options or termination rights.
As of December 31, 2008, we have invested substantially all of the net proceeds of the Offering in real properties. We have approximately $918,000 in cash and cash equivalents to be used for investment in new properties, capital expenditures on existing properties or for working capital. As of December 31, 2008, our dispositions were limited to the sale of a parcel of land on our Olmos Creek property in San Antonio, Texas in 2006. This sale generated $775,000 in proceeds.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may become subject to litigation or claims. Neither we nor our properties are the subject of any non-routine pending legal proceeding, nor are we aware of any proceeding that a governmental authority is contemplating against us.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our Partners during the fourth quarter of 2007.
PART II
ITEM 5.
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
On April 19, 2005, we commenced the Offering. We closed the Offering on October 31, 2006 after having raised aggregate gross proceeds of $71,090,290 through the sale of 2,844 Units to 1,231 Limited Partners.
There is no established trading market for our Units. The Units, which are “restricted securities” as defined in Rule 144 promulgated by the SEC under the Securities Act, must be held indefinitely unless they are subsequently registered under the Securities Act and any applicable state securities laws or unless, upon the advice of counsel satisfactory to us, the Units are sold in a transaction that is exempt from the registration requirements of such laws. As of December 31, 2007, no Units were eligible for sale under Rule 144 or that we have agreed to register under the Securities Act for sale by Limited Partners and there were no Units that are being, or have been publicly proposed to be, publicly offered by us. No Units have been sold since we closed the Offering on October 31, 2006.
The following table shows the distributions to our Limited Partners we have declared (including the total amount paid and the amount paid on a per Unit basis) from the last two fiscal years ended December 31, 2007 and December 31, 2008:
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We have made monthly distributions to our Limited Partners at a rate of 7.5% per annum from January 2006 through November 2008. Beginning December 1, 2008, distributions will be made at a rate of 3.0% per annum. All of the distributions we have paid through December 31, 2008 constitute a return of capital to our Limited Partners for tax purposes. One of our primary goals is to pay regular (monthly) distributions to our Limited Partners. We expect to maintain the distribution rate of 3.0%, unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
our operating and interest expenses;
•
the ability of tenants to meet their obligations under the leases associated with our properties;
•
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 for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.
We qualified as a partnership for federal income tax purposes commencing with our taxable year ended December 31, 2005. For income tax purposes, distributions to our Limited Partners are characterized as ordinary income, capital gains, or as a return of a Limited Partner’s invested capital.
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Offering and Use of Proceeds
We commenced our principal operations on June 30, 2005, when we raised the minimum offering of $2.0 million pursuant to the terms the Offering Memorandum and issued the initial 80 Units. AmREIT Securities Company served as the dealer manager for our Offering. As of October 31, 2006, we had received approximately $71.1 million for the sale of 2,844 Units and closed the Offering. Our Units were sold in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act, and are not currently listed on a national exchange. No public market currently exists for the Units.
On April 30, 2007 we filed a Form 10-SB to register our Units pursuant to Section 12(g) of the Exchange Act. We are subject to the registration requirements of Section 12(g) of the Exchange Act because the aggregate value of our assets exceeds applicable thresholds and the Units of record are held by 500 or more persons.
From the start of the Offering through December 31, 2008, we have incurred approximately $8.1 million in organization and offering costs in connection with the Offering. Approximately $7.7 million of those costs represent offering costs such as sales commissions and dealer manager fees paid for the placement of the Units. Approximately $418,000 of those costs represent organizational costs such as legal and accounting fees, printing costs, filing fees and distribution costs. Substantially all of these organizational costs were direct or indirect payments to our General Partner and its affiliates. The remaining expenses were direct or indirect payments to others. Our net offering proceeds from the Offering totaled $63.0 million. From the start of the Offering through December 31, 2008, we invested substantially all of the net proceeds of the Offering in real properties. See “Item 2. Description of Property” for more information regarding real estate purchases. Additionally, see Note 9 to our consolidated financial statements for a discussion of payments made to affiliated entities for capital-raising and real estate services.
ITEM 6.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward Looking Statements” preceding Part I.
Overview
We are a Texas limited partnership formed on April 19, 2005 to acquire, develop and operate, directly or indirectly through joint venture or other arrangements, commercial retail real estate consisting of single-tenant and multi-tenant properties throughout the United States net leased to investment grade and other creditworthy tenants. We focus on properties characterized by high automobile traffic counts, high populations, high household incomes and limited opportunities for competition.
We have no employees and are managed by AmREIT Monthly Income and Growth III Corporation, our General Partner, pursuant to the Partnership Agreement. Our General Partner is a subsidiary of AmREIT, an SEC reporting, non-traded Texas real estate investment trust. In addition to owning its general partner interest in us for which it contributed $1,000, our General Partner contributed $800,000 to us in exchange for limited partnership units, or Units, which represent approximately 1% of the outstanding Units. The remaining Units are held by other Limited Partners. We qualify as a partnership for federal income tax purposes.
We derive a substantial portion of our revenue from rental income from our properties, primarily from net leasing arrangements where most of the operating expenses of the properties are absorbed by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property acquisition indebtedness. Rental income accounted for 100% of our total revenue during the years ended December 31, 2008, 2007, and 2006. As of December 31, 2008, our properties had an average occupancy of 83%, and the average debt leverage ratio of the properties in which we have an investment was approximately 54%, with 85% of such debt carrying a fixed rate of interest.
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We commenced our principal operations on June 30, 2005, when we raised the minimum offering of $2.0 million pursuant to the terms of our Offering Memorandum and issued 80 Units to the initial investors. As of October 31, 2006, we had received $71.1 million from the sale of 2,844 Units to investors and closed the Offering. We acquired our first interest in a property on September 30, 2005.
As of December 31, 2008, we directly owned three properties comprising 225,000 square feet of gross leasable area and owned an interest in eight additional properties through joint ventures comprising 1,243,000 square feet of gross leasable area. As of December 31, 2008, we have invested substantially all of the net proceeds of the Offering in real properties. We have approximately $918,000 in cash and cash equivalents that may be used for investment in new properties, capital expenditures on existing properties or for working capital. All of our properties are located in highly populated, suburban communities in Texas.
Selecting properties with high quality tenants and mitigating risk through diversifying our tenant base is at the forefront of our acquisition and leasing strategy. We believe our strategy of purchasing premier retail properties in high-traffic, highly-populated areas will produce stable earnings and growth opportunities in future years.
We continually monitor the sales trends and creditworthiness of our tenants. We do not expect store closings or bankruptcy reorganizations to have a material impact on our consolidated financial statements. The tenants with which we have concerns represent less than 10% of our current total portfolio annualized rental income.
Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933, as amended, and are not currently listed on a national exchange. These Units will be transferable only if we register them under applicable securities laws (such registration is not expected), or pursuant to an exemption under the Securities Act of 1933 and applicable state securities laws. We do not anticipate that any public market for the Units will develop.
Summary of Critical Accounting Policies
Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related footnotes, are subject to management’s evaluation and interpretation of business conditions, retailer performance, changing capital market conditions and other factors, which could affect the ongoing viability of our tenants. Management believes the most critical accounting policies in this regard are revenue recognition, regular evaluation of whether the value of a real estate asset has been impaired, allowance for uncollectible accounts and accounting for real estate acquisitions. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience as well as various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.
Revenue Recognition
We lease space to tenants under agreements with varying terms. The majority of the leases are accounted for as operating leases and although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. 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. In all cases, we have determined that we are the owner of the tenant improvements. In cases where tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete.
Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage
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rent). We defer the recognition of contingent or percentage rental income until the specific targets as defined in lease agreements that trigger the contingent or percentage rental income are achieved. Cost recoveries from tenants are included in rental income in the period the related costs are incurred.
Valuation of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate assets, including accrued rental income, may not be recoverable through operations. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, we assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. We have not recorded any impairment losses for the years ended December 31, 2008, 2007 or 2006.
Investment in Real Estate Assets
Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest and loan acquisition costs, and direct and indirect development costs related to buildings under construction are capitalized as part of construction in progress. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize acquisition costs as incurred. Such costs are expensed if and when the acquisition becomes no longer probable.
We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments, which are based on estimates, have a direct impact on net income. Depreciation is computed using the straight-line method over an estimated useful life of up to 50 years for buildings, up to 20 years for site improvements and over the life of lease for tenant improvements and intangible lease costs.
Investment in Non- consolidated Entities
As of December 31, 2008, we have ownership interests in eleven real estate properties, four of which are consolidated into our financial statements. Although we exercise significant influence over the activities of the remaining seven properties, we do not have a controlling financial interest in them. Accordingly, all of our real estate investments in these properties are reported under the equity method of accounting pursuant to U.S. generally accepted accounting principles. Our joint ventures recognize revenues from rents and tenant reimbursements in the same manner as discussed in the “Revenue Recognition” section above and account for real estate acquisitions in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”) as discussed in the “Real Estate Acquisitions” section below.
Valuation of Receivables
We determine an appropriate allowance for the uncollectible portion of tenant receivables and accounts receivable based upon an analysis of balances outstanding, historical payment history, tenant credit worthiness, additional guarantees and other economic trends. Balances outstanding include base rents, tenant reimbursements and receivables attributed to the accrual of straight line rents. Additionally, we consider estimates of the expected recovery of pre-petition and post-petition claims with respect to tenants in bankruptcy in our assessment of the likelihood of collecting the related receivables.
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Real Estate Acquisitions
We account for real estate acquisitions pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”). Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationships, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to above and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Below market lease amortization includes fixed-rate renewal periods. Premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.
Depreciation is computed using the straight-line method over an estimated useful life of up to 50 years for buildings, up to 20 years for site improvements and over the life of the respective leases for tenant improvements. Leasehold estate properties, where the Company owns the building and improvements but not the related ground, are amortized over the life of the lease. The determination of useful lives requires judgment and includes significant estimates.
The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and are amortized as an adjustment of rental income over the remaining terms of the respective leases.
The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in intangible lease assets in the accompanying consolidated balance sheet and are amortized to expense over the remaining term of the respective leases.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. This statement is effective for our fiscal year beginning January 1, 2008, except for non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis, for which the effective date is our fiscal year beginning January 1, 2009. We adopted the provisions of SFAS No. 157 for financial assets and liabilities as of January 1, 2008 and there was
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no material effect on the our results of operations, cash flows, or financial condition. Management is currently evaluating the impact SFAS No. 157 will have on our consolidated financial position and results of operations when it is applied to non-financial assets and liabilities.
In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 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 did not elect the fair value option for any eligible financial assets and liabilities under the provisions of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R 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. We currently capitalize acquisition costs as part of the basis of the asset acquired. Upon effectiveness of SFAS No. 141R we will expense acquisition costs as incurred.
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 accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS No. 160 shall be applied prospectively. We are currently evaluating the potential impact of the adoption of SFAS No. 160 on our consolidated financial statements. We expect that the impact of our adoption of SFAS 160 will be to increase our shareholders’ equity as a result of transferring the minority interest in our consolidated subsidiaries from the mezzanine section of our balance sheet into equity.
In March 2008, the FASB issued SFAS No. 161: Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. Under SFAS No. 161, entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material effect on our results of operations or financial position.
Factors Which May Influence Results of Operations
Rental Income
The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from unscheduled lease terminations at levels not less than the existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Scheduled Lease Expirations
During 2009, 9.6% of the leased square footage of our consolidated properties expires. Our leasing strategy for 2009 focuses on negotiating renewals for leases scheduled to expire during the year and identifying new tenants or existing tenants seeking additional space to occupy the square footage for which we are unable to negotiate such renewals.
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Results of Operations
We commenced our principal operations on June 30, 2005, when we raised the minimum offering of $2.0 million pursuant to the terms of our Offering Memorandum and issued the initial 80 Units to investors. During 2005, we acquired one interest in a property through a consolidated joint venture on September 30, 2005 and acquired a direct interest in another property on December 12, 2005. During 2006, we acquired direct interests in two additional properties, one on June 30, 2006 and the other on September 29, 2006. In 2006, we also made investments in three joint ventures through which we obtained an ownership interest in five other properties. During 2007, we made investments in two other joint ventures through which we obtained an ownership interest in two additional properties. During 2008, we made an investment in one additional property through an existing joint venture and acquired an additional equity interest in another existing joint venture. Our direct property acquisitions were accounted for as purchases and the results of their operations are included in our consolidated financial statements from their respective dates of acquisition. With the exception of our investment in AmREIT Lake Houston GP, Inc, which we consolidate into our financial statements, we report our investments in joint ventures under the equity method of accounting given our ability to exercise significant influence over them.
Comparison of the year ended December 31, 2008 to the year ended December 31, 2007
Revenue. Revenue increased approximately $506,000 to approximately $7.3 million during the year ended December 31, 2008 compared to approximately $6.7 million for the year ended December 31, 2007. This increase resulted from an increase in rental income due to rent increases at Lantern Lane and new tenants at Westside Plaza as well as an increase in common area maintenance recoveries at Lantern Lane.
General and Administrative. General and administrative fees increased approximately $37,000 to approximately $164,000 during the year ended December 31, 2008 compared to approximately $127,000 for the year ended December 31, 2007. This increase is primarily due to an increase in marketing and conference expenses.
General and Administrative - Related Party. General and administrative - related party represents reimbursements made to our General Partner for its costs incurred in providing various services to us, including accounting, financial reporting and investor service costs. These costs increased approximately $74,000 to approximately $302,000 during the year ended December 31, 2008 compared to approximately $228,000 during the year ended December 31, 2007. This increase is due to administrative cost reimbursements such as personnel and technology costs incurred by our Advisor on behalf of the Partnership. The prior year reflected only a portion of such costs as the Partnership was in its early stages.
Property Expenses. Property operating expenses increased approximately $307,000 to approximately $1.9 million during the year ended December 31, 2008 compared to approximately $1.6 million for the year ended December 31, 2007. This increase was primarily due to an increase in property taxes and related consulting fees at Lake Houston and Lantern Lane as well as an increase in bad debt expense at Lantern Lane and Olmos Creek.
Legal and Professional Fees. Legal and professional fees decreased approximately $177,000 to approximately $363,000 during the year ended December 31, 2008 compared to approximately $540,000 for the year ended December 31, 2007. This decrease was primarily due to lower rates on our audit and tax fees as well as a reduced level of legal services provided in our second year of complying with SEC rules and regulations.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased approximately $267,000 to approximately $2.6 million during the year ended December 31, 2008 compared to approximately $2.9 million for the year ended December 31, 2007. This decrease was primarily due to a decrease in amortization of in-place leases as a substantial portion of those costs were fully amortized in the latter part of 2007 or early 2008.
Interest Income - Related Party. Interest income - related party decreased approximately $492,000 to approximately $29,000 during the year ended December 31, 2008 compared to approximately $521,000 for the year ended December 31, 2007. This decrease was the result of our conversion of the note receivable due from 5433 Westheimer LP, of which we own a 57.5% interest, into an increased equity investment in January 2008.
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Interest and Other Income. Interest and other income decreased approximately $478,000 to approximately $389,000 during the year ended December 31, 2008 compared to approximately $867,000 for the year ended December 31, 2007. This decrease resulted from a combination of lower interest rates during 2008 and a reduced balance of invested funds. We invested approximately $4.1 million in AmREIT Westheimer Gessner, LP in November, 2007 and then a follow-on $1.3 million investment in that same entity in May 2008.
Interest Expense. Interest expense remained relatively constant at approximately $3.1 million during the year ended December 31, 2008 and approximately $3.2 million for the year ended December 31, 2007. We had no significant changes in the terms of our debt instruments in the 2008 period.
Loss From Non-Consolidated Entities. Loss from non-consolidated decreased approximately $171,000 to approximately $1.8 million for the year ended December 31, 2008 compared to approximately $2.0 million for the year ended December 31, 2007. This loss represents our ownership portion of our joint ventures’ net income or loss for the period, such loss being driven primarily by depreciation and amortization charges. Our 5433 Westheimer property and our Casa Linda property are both undergoing redevelopment. Specifically as it relates to 5433 Westheimer, we have not been seeking new leases or renewals of existing leases in order to facilitate the redevelopment process on the office building, which has resulted in increased vacancies. Additionally, our Woodlake Square and Woodlake Pointe properties are in the planning stages of their respective redevelopments. We believe these property enhancements will allow us to drive occupancy and improve the operating results of the property once the redevelopment is complete.
Minority Interest in Loss of Consolidated Subsidiaries. Minority interest in loss of consolidated subsidiaries decreased by $29,000 to $59,000 during the year ended December 31, 2008 compared to $88,000 for the year ended December 31, 2007. Minority interest in loss of consolidated subsidiaries represents the 40% ownership interest that one of our affiliated investment funds has in a real estate partnership that we consolidate as a result of our controlling financial interest in such partnership. The partnership investment was made in December 2005 concurrent with the acquisition of The Market at Lake Houston. This decrease was primarily due to a decrease in amortization of in-place leases for The Market at Lake Houston as certain of such balances became fully amortized during the latter part of 2007 or early part of 2008.
Comparison of the year ended December 31, 2007 to the year ended December 31, 2006
Revenue. Revenue increased approximately $2.0 million to approximately $6.7 million during the year ended December 31, 2007 compared to approximately $4.7 million for the year ended December 31, 2006. This increase was primarily due to the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year of rental income in 2007.
General and Administrative. General and administrative fees increased approximately $63,000 to approximately $127,000 during the year ended December 31, 2007 compared to approximately $64,000 for the year ended December 31, 2006. This increase is primarily due to accounting software costs.
General and Administrative - Related Party. General and administrative - related party represents reimbursements made to our General Partner for its costs incurred in providing various services to us, including accounting, financial reporting and investor service costs. These costs increased due to our increased financial reporting requirements during 2007 as a result of becoming subject to rules and regulations of the Securities and Exchange Commission. Additionally, these costs increased substantially during 2007 as a result of our increased Limited Partner base due to our significant capital-raising activity in 2007.
Asset Management Fees - Related Party. Asset management fees - related party increased approximately $265,000 to approximately $618,000 during the year ended December 31, 2007 compared to approximately $353,000 for the year ended December 31, 2006. Asset management fees have increased commensurate with the increase in assets under management as a result of our capital-raining efforts which continued through October 31, 2006. The year ended December 31, 2007 was the first year that incurred fees on the full amount of the $71.1 million in capital that we have raised since our inception.
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Property Expenses. Property operating expenses increased approximately $519,000 to approximately $1.6 million during the year ended December 31, 2007 compared to approximately $1.1 million for the year ended December 31, 2006. This increase was primarily due to the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year of property expenses in 2007.
Property Management Fees - Related Party. Property management fees - related party increased approximately $85,000 to $245,000 during the year ended December 31, 2007 compared to approximately $160,000 during the year ended December 31, 2006. This increase was primarily due to the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year of property management fees in 2007.
Legal and Professional Fees. Legal and professional fees increased approximately $170,000 to approximately $540,000 during the year ended December 31, 2007 compared to approximately $370,000 for the year ended December 31, 2006. This increase was primarily due to the costs associated with our increased financial reporting requirements, including incremental costs related to our 2006 Form 10-SB, which was the first of such required reporting.
Depreciation and Amortization Expense. Depreciation and amortization expense increased approximately $1.1 million to approximately $2.9 million during the year ended December 31, 2007 compared to approximately $1.8 million for the year ended December 31, 2006. This increase was primarily due to the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year of depreciation and amortization in 2007.
Interest Income - Related Party. Interest income - related party increased approximately $128,000 to approximately $521,000 during the year ended December 31, 2007 compared to approximately $393,000 for the year ended December 31, 2006. This increase is due to interested earned on our note receivable from 5433 Westheimer, LP for a full year in 2007 versus nine months in 2006.
Interest and Other Income. Interest and other income increased approximately $329,000 to approximately $867,000 during the year ended December 31, 2007 compared to approximately $538,000 for the year ended December 31, 2006. We had a short term note receivable that we invested in and were repaid on during 2007 that generated interest income of $89,000. In addition, interest income is higher due to a higher average cash balance in 2007.
Interest Expense. Interest expense increased approximately $1.2 million to approximately $3.2 million during the year ended December 31, 2007 compared to approximately $2.0 million for the year ended December 31, 2006. This increase was primarily due to the Lantern Lane and Olmos Creek 2006 acquisitions reflecting a full year of interest expense in 2007.
Loss From Non-Consolidated Entities. Loss from non-consolidated entities was a loss of $2.0 million for the year ended December 31, 2007, and represents our ownership portion of our joint venture’s net income or loss for the period. Loss from non-consolidated entities was a loss of $344,000 for the year ended December 31, 2006. The loss increased by $1.7 million primarily due to our investments in the 5433 Westheimer property as well as the Casa Linda property. Both properties had been operating at net losses as a result of their vacancies - 5433 Westheimer is 61% leased while Casa Linda, our single largest property, is 82% leased. To allow us to begin executing on our plan to redevelop 5433 Westheimer, we have not been seeking out new long-term leases nor have we been renewing existing tenants on a long-term basis, resulting in the vacancies. With respect to Casa Linda, we are redeveloping the property and expect that the property enhancements will allow us to drive occupancy and improve the operating results once the redevelopment is complete.
Minority Interest in Loss of Consolidated Subsidiaries. Minority interest in loss of consolidated subsidiaries decreased by $37,000 to $88,000 during the year ended December 31, 2007 compared to $125,000 for the year ended December 31, 2006. Minority interest in loss of consolidated subsidiaries represents the 40% ownership interest that one of our affiliated investment funds has in a real estate partnership that we consolidate as a result of our controlling financial interest in such partnership. The partnership investment was made in December 2005 concurrent with the acquisition of The Market at Lake Houston. This decrease was primarily due to a decrease
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in intangible lease cost amortization for The Market at Lake Houston as certain of such balances became fully amortized during 2007.
Income Tax Expense. In May 2006, the State of Texas adopted House Bill 3, which modified the state’s franchise tax structure, replacing the previous tax based on capital or earned surplus with one based on margin (often referred to as the “Texas Margin Tax” effective with franchise tax reports filed on or after January 1, 2008. The Texas Margin Tax is computed by applying the applicable tax rate (1% for the Partnership) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. Although House Bill 3 states that the Texas Margin Tax is not an income tax, the Partnership believes that SFAS No. 109, Accounting for Income Taxes, applies to the Texas Margin Tax. The Texas Margin Tax was $59,000 for the year ended December 31, 2007 compared to $0 for the year ended December 31, 2006.
Loss From Discontinued Operations. We had no loss from discontinued operations during the year ended December 31, 2007 as we had no disposition activity during 2007 nor did we have any assets held for sale as of December 31, 2007. Loss from discontinued operations during the year ended December 31, 2006 was $19,000, which represents the operating activity (up through the date of disposition) related to a parcel of land that we sold during 2006.
Liquidity and Capital Resources
We expect to meet our short-term liquidity requirements through net cash provided by property operations. We expect to meet our long-term liquidity requirements through proceeds from secured or unsecured financings from banks and other lenders, the selective and strategic sale of properties and net cash flows from operations. We expect that our primary uses of capital will be for investment in real estate properties and related improvements, the payment of operating expenses, including interest expense on any outstanding indebtedness, and the payment of distributions to our Partners. As we sell properties during our operating period, we plan to strategically reinvest the proceeds from such sales rather than distributing the proceeds to our Partners.
During the past 18 months, the United States has experienced an unprecedented business downturn, coupled with a substantial curtailment of available debt financing and a virtual shutdown of equity capital markets, particularly in the real estate sector. A significant additional deterioration in the national economy or the bankruptcy or insolvency of one or more of our large tenant could cause our 2009 cash resources to be insufficient to meet our obligations. In such event, we would likely suspend our distributions. In 2011, a mortgage on one of our consolidated properties matures, and we cannot predict whether the credit markets or equity capital markets will be accessible at that time at a reasonable price.
At December 31, 2008 and 2007, our cash and cash equivalents totaled approximately $918,000 and approximately $5.2 million, respectively. Cash flows provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2008 and 2007 are as follows (in thousands):
Net cash provided by operating activities increased approximately $584,000 to approximately $971,000 for the year ended December 31, 2008 compared to approximately $387,000 for the year ended December 31, 2007. Income before the effect of depreciation and amortization and of loss from non-consolidated affiliates decreased by approximately $688,000 to approximately $876,000 for the year ended December 31, 2008 compared to approximately $1.6 million for the year ended December 31, 2007. This decrease was the result of a decrease in interest income and interest income - related party, as discussed in the “Results of Operations” section above. Working capital inflows increased approximately $1.3 million from outflows of approximately $1.2 million for the year ended December 31, 2007 to cash inflows of approximately $95,000 for the year ended December 31, 2008. The primary driver of the reduction in working capital outflows was a $1.7 million increase in cash receipts on
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accounts receivable - related party that was driven by repayment of a loan made to one of our non-consolidated subsidiaries.
Net cash provided by investing activities increased approximately $12.3 million from outflows of approximately $11.4 million for the year ended December 31, 2007 compared to inflows of approximately $894,000 for the year ended December 31, 2008. This decrease in outflows was primarily due to decreased acquisition activity in 2008 as compared to 2007. In 2007, we invested approximately $8.2 million to purchase a 30% interest in Woodlake Square, LP and a 30% interest in Woodlake Pointe and an additional $1.0 million in capital calls for existing investments. In 2008, our investment activity was limited to a $1.3 million investment in a property adjacent to Woodlake Pointe and $1.5 million in additional contributions to existing investments. We also received approximately $2.4 million as payment on notes receivable from one of our joint venture partners, and payments received on notes receivable - related party from one of our non-consolidated subsidiaries increased approximately $2.2 million.
Net cash used in financing activities decreased approximately $685,000 to approximately $6.2 million for the year ended December 31, 2008 compared to approximately $6.9 million for the year ended December 31, 2007. This decrease was primarily attributable to a decrease in payments on notes payable to related parties of $1.1 million offset by an increase in distributions to minority interest partners of $457,000.
Contractual Obligations
As of December 31, 2008, we had the following contractual debt obligations (see also Note 2 of the Consolidated Financial Statements for further discussion regarding the specific terms of our debt) (in thousands):
We invest any excess cash in short-term investments or overnight funds. This investment strategy allows us to offset a portion of the interest costs from our fixed-rate mortgage loans and provides us with the liquidity to acquire properties at such time as those suitable for acquisition are located.
We believe that inflation has a minimal effect on our income from operations. We expect that increases in store sales volumes due to inflation, as well as increases in the consumer price index, may contribute to capital appreciation of our properties. These factors, however, also may have an adverse impact on the operating margins of the tenants of the properties.
Indemnification of General Partner
The Partnership Agreement provides for indemnification of our General Partner for liabilities incurred by or claims made against our General Partner or its employees or agents in connection with business on our behalf, provided that our General Partner determined in good faith that the conduct which gave rise to the liabilities or claims was within the scope of our General Partner’s authority and was taken to promote our best interests. Amounts to be indemnified include judgments, fines, settlements, litigation expenses and reasonable attorneys’ fees, which may be paid as incurred. Only assets of the Partnership may be reached to indemnify our General Partner, its employees or agents. To the extent that this indemnification applies to liabilities under the Securities Act, such indemnification is contrary to public policy and therefore unenforceable.
Conflicts of Interest
Our General Partner is subsidiary of AmREIT, a Texas real estate investment trust. Affiliates of AmREIT act as sponsor, general partner or advisor to various private real estate programs. As such, there are conflicts of interest where AmREIT or its affiliates, while serving in the capacity as sponsor, general partner or advisor for another AmREIT-sponsored program, may be in competition with us in connection with property acquisitions,
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property dispositions and property management. The compensation arrangements between affiliates of AmREIT and these other AmREIT real estate programs could influence our General Partner’s management of us. See “Item 1. Description of Business - Conflicts of Interest” above.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements as of December 31, 2008.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Issuer, including notes thereto, and the report of independent auditors are included in this Annual Report on Form 10-K beginning at page and are incorporated herein by reference.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There were no changes in or disagreements with our independent registered public accountants during the years ended December 31, 2008 and December 31, 2007, or the period from April 19, 2005 (inception) through December 31, 2006.
ITEM 8A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our General Partner’s Chief Executive Officer and Chief Financial Officer, our General Partner’s management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2008. Based on that evaluation, our General Partner’s CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2008.
Management’s Report on Internal Control over Financial Reporting
Our General Partner and its affiliates maintain a system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, which is a process designed under the supervision of the AmREIT principal executive officer and principal financial officer and effected by AmREIT’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of AmREIT Monthly Income and Growth Fund III, LTD and its subsidiaries are being made only in accordance with authorizations of management and trust managers of our General Partner; and
- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our General Partner is responsible for establishing and maintaining adequate internal control over financial reporting, and, with the participation of AmREIT’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of AmREIT’s internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, we believe that our internal control over
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financial reporting is effective as of December 31, 2008.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in Internal Controls
There has been no change to our internal control over financial reporting during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9.
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
We have no directors or executive officers. We are managed by our General Partner, AmREIT Monthly Income & Growth III Corporation. Our General Partner does not have any employees and relies upon the personnel of AmREIT and its affiliates to perform services for us. Our Partnership Agreement provides that the Partnership will continue until December 31, 2025, unless sooner terminated.
The following table sets forth certain information regarding the officers and director of our General Partner, all of whom are officers of AmREIT and expected to make a significant contribution to us.
H. Kerr Taylor serves as our General Partner’s President, Chief Executive Officer and Director. He has served as the sole director of our General Partner since its formation. He is the founder of AmREIT and serves as its Chairman of the Board, Chief Executive Officer and President. Mr. Taylor has guided the growth of AmREIT and its predecessors for over 23 years. His primary responsibilities include overseeing strategic initiatives as well as building, coaching and leading AmREIT’s team of professionals. Mr. Taylor has over 30 years of experience within the real estate industry. He received a Bachelor of Arts degree from Trinity University, a Masters Degree in Business Administration from Southern Methodist University and his law degree from South Texas College of Law. Mr. Taylor is chairman of the board of Pathways for Little Feet and serves as a board member of Life House, Inc., Uptown District and as an Elder of First Presbyterian Church. Mr. Taylor is a lifetime member of the International Council of Shopping Centers and Urban Land Institute and is a member of the Texas Bar Association.
Chad C. Braun serves as our General Partner’s Executive Vice President, Chief Financial Officer, Treasurer and Secretary. He also serves in this same position for AmREIT. Mr. Braun is responsible for corporate finance, equity capital markets, debt structuring and placement, investor relations, accounting and SEC reporting, and he oversees investment sponsorship and product creation. Mr. Braun has over 14 years of accounting, financial and real estate experience. Prior to joining AmREIT in 1999, he served as a manager in the real estate advisory services group at Ernst & Young, LLP. He has provided extensive consulting and audit services to a number of
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REITs and private real estate companies, including financial statement audits, portfolio acquisition and disposition, portfolio management, merger integration and process improvement, financial analysis and capital markets and restructuring transactions. Mr. Braun received a Bachelor of Business Administration degree in Accounting and Finance from Hardin Simmons University and subsequently earned the CPA designation and his Series 63, 7, 24 and 27 securities licenses. He is a member of the National Association of Real Estate Investment Trusts and the Texas Society of Certified Public Accountants.
Brett P. Treadwell serves as our General Partner’s Vice President - Finance and he also serves in this position for AmREIT. Within AmREIT he is responsible for its financial reporting function as well as for assisting in the establishment and execution of AmREIT’s strategic financial initiatives. Mr. Treadwell’s responsibilities also include overall risk management and treasury management functions and SEC reporting as well as periodic internal reporting to management. Mr. Treadwell has over 18 years of accounting, financial and SEC reporting experience, and, prior to joining AmREIT in August 2004, served as a senior manager with Arthur Andersen LLP and then with PricewaterhouseCoopers LLP. Mr. Treadwell received a Bachelor of Business Administration degree from Baylor University and is a Certified Public Accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on a review of Forms 3 furnished to us under Rule 16a-3(e) of the Exchange Act during the fiscal year ended December 31, 2008, we know of no reporting person that has failed to file on a timely basis, as disclosed in the above forms, report required by Section 16(a) of the Exchange act during the fiscal year ended December 31, 2008.
Code of Ethics
We are managed by our General Partner, and we have no officers to whom a code of ethics would apply.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION
We are managed by our General Partner, and we have no directors or executive officers to whom we pay compensation.
See “Item 12. Certain Relationships and Related Transactions, and Director Independence” below for the fees and expenses we pay to our General Partner and its affiliates.
ITEM 11.
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have any compensation plans under which we are authorized to issue equity securities.
Security Ownership of Certain Beneficial Owners and Management
We know of no person (including a “group” as that term is used in Section 13(d)(3) of the Exchange Act) who is the beneficial owner of more than five percent of our Units.
We have no officers or directors. Our General Partner owns our sole general partner interest and also owns limited partner Units in us. No person who is an officer of our General Partner as of the date of this filing owns any direct interest in us. None of the officers of our General Partner own any of our Units. AmREIT, the sole shareholder of our General Partner, has assigned the economic interest in 28.5% of our General Partner to certain of its management team. The address of the officers of our General Partner is 8 Greenway Plaza, Suite 1000, Houston, Texas 77046.
As of December 31, 2008, there were 2,834 Units owned by 1,228 investors.
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ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Compensation Arrangements
Our General Partner and its affiliates received the payments and fees from us described below. These payments and fees were not negotiated and may be higher than payments and fees that would have resulted from an arm’s-length transaction with an unrelated entity.
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(1)
Although we are most likely to pay real estate brokerage commissions in the event of our liquidation, these fees may also be earned during our operational stage.
Joint Ventures with Affiliates
As of December 31, 2008, we had entered into five joint ventures with our affiliates.
In December 2005, we acquired a 60% interest in AmREIT Lake Houston, LP, which owns the multi-tenant retail property The Market at Lake Houston. The remaining 40% is owned by AmREIT Monthly Income & Growth Fund, Ltd., our affiliate.
In December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP, which owns Casa Linda Plaza, the multi-tenant retail property in Dallas, Texas. The remaining 50% is owned by AmREIT Monthly Income & Growth Fund IV, L.P., our affiliate.
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In August 2007, we acquired a 30% interest in AmREIT Woodlake, LP, which owns Woodlake Square, the multi-tenant retail property in Houston, Texas. The remaining 70% is 40% owned by AmREIT Monthly Income & Growth Fund IV, L.P., our affiliate, and 30% owned by AmREIT Realty Investment Corporation, our affiliate.
In November 2007, we acquired a 30% interest in AmREIT Westheimer Gessner, LP, which owns Woodlake Pointe, a multi-tenant retail property occupied by Border’s in Houston, Texas. The remaining 70% is 40% owned by AmREIT Monthly Income & Growth Fund IV, L.P., our affiliate, and 30% owned by AmREIT Realty Investment Corporation, our affiliate.
In May 2008, we acquired a 30% interest in a tract of land adjacent to Woodlake Pointe. The remaining 70% is owned by AmREIT Monthly Income & Growth Fund IV, L.P. (40%) and by AmREIT Realty Investment Corporation (30%). The acquisition is accounted for as part of Westheimer Gessner, L.P.
Our joint venture properties paid a total of $406,000, $272,000 and $79,000 in property management fees to one of our affiliate entities for the years ended December 31, 2008, 2007 & 2006.
Directors
We have no directors and are managed by our General Partner. H. Kerr Taylor is the sole director of our General Partner.
Loan to an Affiliate
During 2007, we loaned $7.0 million to 5433 Westheimer, LP, a joint venture entity in which we own a 57.5% interest. During 2008, the property was refinanced with a third party lender in connection with the planned redevelopment. In conjunction with that refinancing, the $7.0 million note payable due to MIG III was converted to equity in order to meet the lender’s equity contribution requirement of approximately $10.0 million. We established a note receivable with our joint venture partner for its portion of the additional equity contribution ($3.5 million). To date, $2.4 million of the note has been paid, and $800,000 was converted to additional 7.5% interest in the joint venture. We expect the balance to be paid during 2009.
AmREIT Realty Investment Corporation
AmREIT Realty Investment Corporation, which we refer to as ARIC, is a fully integrated real estate development and operating business which is wholly owned by AmREIT, the parent of our General Partner. ARIC employs a full complement of brokers and real estate professionals that provide development, acquisition, brokerage, leasing, construction management, asset and property management services to AmREIT affiliated entities and to third parties. ARIC serves as one of our property managers, and is responsible for managing and leasing some of our properties. We pay ARIC property management and leasing fees as described above. ARIC hires, directs and establishes policies for employees who will have direct responsibility for the operations of each property it manages, which may include but is not limited to on-site managers and building and maintenance personnel. Certain employees of the property manager may be employed on a part-time basis and may also be employed by our General Partner or its affiliates. ARIC also directs the purchase of equipment and supplies and supervises all maintenance activity. The management fees paid to ARIC includes, without additional expense to us, all of its general overhead costs.
We have historically engaged, AmREIT Construction Company, a wholly-owned subsidiary of ARIC, to provide construction and construction management services for our development and redevelopment projects. During 2008, AmREIT Construction Company ceased providing these services although it will see through to completion all work currently in process. We may engage in the future AmREIT Realty Investment Corporation (“ARIC”), also an affiliate of our General Partner, for construction management services. In these cases, such services are provided on terms and conditions no less favorable to us than can be obtained from independent third parties for comparable services in the same location.
AmREIT Securities Company
AmREIT Securities Company is a member firm of the NASD and a wholly-owned subsidiary of AmREIT. AmREIT Securities Company was organized in 1999 for the purpose of participating in and facilitating the
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distribution of securities of AmREIT affiliated entities. As the dealer manager for our Offering of Units, AmREIT Securities Company provided certain sales, promotional and marketing services to us in connection with the distribution of the Units. We paid selling commission and marketing reimbursements to AmREIT Securities Company in connection with our offering, a portion of which was reallowed to participating broker-dealers. Chad C. Braun is the President, Secretary and Treasurer of AmREIT Securities Company and H. Kerr Taylor serves as its Chairman and as the sole member of its board of directors. As of October 2008, AmREIT Securities Company is no longer operating as a broker-dealer. As AmREIT Securities Company has not provided capital-raising services to us since the closing of our offering in 2006, we expect that the closing of the broker-dealer operation will have no impact on the Partnership.
ITEM 13.
ITEM 13. EXHIBITS
INDEX TO EXHIBITS
It is inappropriate for readers to assume the accuracy of, or rely upon any covenants, representations or warranties that may be contained in agreements or other documents filed as Exhibits to, or incorporated by reference in, this report. Any such covenants, representations or warranties may have been qualified or superseded by disclosures contained in separate schedules or exhibits not filed with or incorporated by reference in this report, may reflect the parties’ negotiated risk allocation in the particular transaction, may be qualified by materiality standards that differ from those applicable for securities law purposes, and may not be true as of the date of this report or any other date and may be subject to waivers by any or all of the parties. Where exhibits and schedules to agreements filed or incorporated by reference as Exhibits hereto are not included in these exhibits, such exhibits and schedules to agreements are not included or incorporated by reference herein.
The following exhibits are filed as part of or incorporated by reference in this Annual Report on Form 10-K:
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ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG, LLP, independent registered public accounting firm and certified public accountants, served as our independent accountants for the fiscal year ended December 31, 2008. The following is an explanation of the fees billed to us by Accountants for professional services rendered for the fiscal years ended December 31, 2008, 2007 and 2006.
Audit Fees
The aggregate fees billed to us for professional services related to the audit of our annual financial statements, review of financial statements included in our Forms 10-QSB, or other services normally provided by KPMG, LLP in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2008, 2007 and 2006 totaled $114,000, $286,500 and $123,500 respectively.
Audit-Related Fees, Tax Fees and All Other Fees
The services that have been performed by KPMG have been limited to audit services. Accordingly, we have paid no audit-related fees, tax fees or other fees to KPMG for the fiscal years ended December 31, 2008 and 2007.
Audit Committee’s Pre-Approval Policies and Procedures
The Company does not have an independent audit committee. Our General Partner must approve any services to be performed by our independent auditors.
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PART F/S
AmREIT MONTHLY INCOME AND GROWTH FUND III, LTD. AND SUBSIDIARIES
All other financial statement schedules are omitted as the required information is either inapplicable or is included in the financial statements or related notes.
Report of Independent Registered Public Accounting Firm
The Partners
AmREIT Monthly Income and Growth Fund III, Ltd.:
We have audited the accompanying consolidated balance sheets of AmREIT Monthly Income and Growth Fund III, Ltd. and subsidiaries (the “Partnership”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, partners’ capital and cash flows for the years ended December 31, 2008, 2007 and 2006. These consolidated financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated 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. An audit 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AmREIT Monthly Income and Growth Fund III, Ltd. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years ended December 31, 2008, 2007 and 2006, in conformity with U.S. generally accepted accounting principles.
(signed) KPMG LLP
Houston, Texas
March 31, 2009
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and December 31, 2007
(in thousands)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2008, 2007, and 2006
(in thousands)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
For the years ended December 31, 2008, 2007 and 2006
(in thousands)
(1)
The allocation of net loss includes a curative allocation to increase the GP capital account by $89. The cumulative curative allocation since inception of the partnership is $207. The partnership agreement provides that no partner shall be required to fund a deficit balance in their capital account.
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2008, 2007, and 2006
(in thousands)
Supplemental schedule of noncash investing and financing activities:
During 2008, the $7.0 million note receivable from our 5433 Westheimer property was converted to equity. In conjunction with the equity conversion, we obtained a $3.5 million note receivable from our joint venture partner in the 5433 Westheimer property. Also during 2008, an additional $800,000 of the note from our joint venture partner was converted to equity. See receivables and allowance for uncollectible accounts section of Note 2.
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT Monthly Income & Growth Fund III, Ltd., a Texas limited partnership (the “Partnership”), was formed on April 19, 2005 to directly or indirectly acquire, develop and hold for lease primarily commercial retail real estate net leased to high quality tenants. The General Partner of the Partnership is AmREIT Monthly Income & Growth III Corporation, a Texas Corporation (the “General Partner”), which is a subsidiary of AmREIT, a Texas real estate investment trust. The General Partner maintains its principal place of business in Houston, Texas.
We commenced our principal operations on June 30, 2005 when we raised the minimum offering of $2.0 million pursuant to the terms of our Offering Memorandum dated April 19, 2005 (the “Offering Memorandum”) and issued the initial 80 Units. As of October 31, 2006, we had received $71.1 million for the sale of 2,844 Units and closed the Offering. At December 31, 2008, we directly owned three properties comprising 225,000 square feet of gross leasable area and owned an investment interest in eight other properties through joint ventures comprising 1,243,000 square feet of gross leasable area.
Our limited partnership units were sold pursuant to exemptions from registration under the Securities Act of 1933 and are not currently listed on a national exchange. These units will be transferable only if we register them under such laws, and such registration is not expected. We do not anticipate that any public market for the limited partnership units will develop.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships where we have the ability to exercise significant influence but do not exercise financial and operating control, are accounted for using the equity method. We would consolidate certain joint ventures and partnerships in which we own less than a 100% equity interest if the entity is a variable interest entity and we are the primary beneficiary (as defined in FASB Interpretation (“FIN”) 46(R): Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, as revised). Following consideration under FIN 46(R), if required, we also evaluate applicable partially-owned entities under Emerging Issues Task Force (“EITF”) Issue 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 for consolidation considerations. All significant inter-company accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
We lease space to tenants under agreements with varying terms. The majority of the leases are accounted for as operating leases and although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. 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. In all cases, we have determined that we are the owner of the tenant improvements. In cases where tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete.
Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). We defer the recognition of contingent or percentage rental income until the specific targets as defined in lease agreements that trigger the contingent or percentage rental income are achieved. During the years ended December 31, 2008, 2007 and 2006, there were no percentage rents recognized. We record lease termination income if there is a signed termination letter agreement, all of the conditions of the agreement have been met and collectability is certain. Upon early lease termination we provide for losses related to unrecovered intangibles and other assets. During the years ended December 31, 2008, 2007 and 2006, we recognized no lease termination fees.
REAL ESTATE INVESTMENTS
Development Properties - Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest, real estate taxes, loan acquisition costs, and direct and indirect development costs related to buildings under construction, are capitalized as part of construction in progress. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize acquisition costs as incurred. Such costs are expensed if and when the acquisition becomes no longer probable. During the years ended December 31, 2008, 2007 and 2006, we did not capitalize any interest or taxes on properties under development.
Acquired Properties and Acquired Lease Intangibles - We account for real estate acquisitions pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”). Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to above-market and in-place leases are recorded as acquired lease intangibles, and intangibles related to below-market leases are recorded as below-market leases. Amortization of above and below-market leases and in-place leases recorded as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired above and below market debt are amortized to interest expense over the remaining term of such debt.
Depreciation - Depreciation is computed using the straight-line method over an estimated useful life of up to 50 years for buildings, up to 20 years for site improvements and over the term of lease for tenant improvements.
Properties Held for Sale - Properties are classified as held for sale if we have decided to market the property for immediate sale in its present condition with the belief that the sale will be completed within one year. Operating properties held for sale are carried at the lower of cost or fair value less cost to sell. Depreciation and amortization are suspended during the held for sale period. At December 31, 2008 and 2007, we had no properties held for sale.
Our properties generally have operations and cash flows that can be clearly distinguished from the rest of the Partnership. The operations and gains on sales reported in discontinued operations include those properties that have been sold or are held for sale and for which operations and cash flows have been clearly distinguished. The operations of these properties have been eliminated from ongoing operations, and we will not have continuing involvement after disposition. Prior period operating activity related to such properties has been reclassified as discontinued operations in the accompanying statements of operations.
Impairment - We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. No impairment charges were recognized during the years ended December 31, 2008, 2007 and 2006.
ENVIRONMENTAL EXPOSURES
We are subject to numerous environmental laws and regulations as they apply to real estate pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. We believe that the tenants who currently operate dry cleaning plants or gas stations do so in accordance with current laws and regulations. We believe that the ultimate disposition of currently known environmental matters will not have a material affect on our financial position, liquidity, or operations (See Note 11). However, we can give no assurance that existing environmental studies with respect to the shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to it; that the current environmental condition of the shopping centers will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to the Partnership.
RECEIVABLES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Tenant Receivables - Included in tenant receivables are base rents, tenant reimbursements and adjustments related to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Bad debt expenses and any related recoveries are included in general and administrative expense. As of December 31, 2008 and 2007, our allowance for uncollectible accounts related to our tenant receivables was $98,000 and $34,000, respectively.
Accounts Receivable Related Party - included in accounts receivable related party are short-term cash advances provided to certain of our affiliated investment entities primarily for their development needs. These cash advances are due upon demand.
Notes Receivable and Notes Receivable - Related Party - included in notes receivable - related party at December 31, 2007 is a $7.0 million loan made to 5433 Westheimer, L.P. in which we own an investment interest. During 2008, the $7.0 million note receivable was converted to equity. In conjunction with the equity conversion, we obtained a $3.5 million note receivable from our joint venture partner. As of December 31, 2008, $2.4 million of the note had been paid, and $800,000 was converted into an additional equity investment in 5433 Westheimer, LP. Interest accrues monthly at a rate of 15% per annum, and interest payments are due monthly. The balance of the note and any unpaid interest is due in full on December 31, 2009.
DEFERRED COSTS
Deferred costs include deferred leasing costs and loan acquisition costs, net of amortization. Loan acquisition costs are incurred in obtaining financing and are amortized to interest expense over the term of the debt agreements. Deferred leasing costs consist of external commissions associated with leasing our properties and are amortized to expense over the lease term. Accumulated amortization related to loan acquisition costs as of December 31, 2008 and 2007 totaled $197,000 and $211,000, respectively. During 2008, we reduced accumulated amortization by $90,000 related to deferred loan acquisition costs that were fully amortized as of December 31, 2007. Accumulated amortization related to leasing costs as of December 31, 2008 and 2007, totaled $55,000 and $18,000, respectively.
INCOME TAXES
Federal - No provision for U.S. federal income taxes is included in the accompanying consolidated financial statements. As a partnership, we are not subject to federal income tax, and the federal tax effect of our activities is passed through to our partners.
State - In May 2006, the State of Texas adopted House Bill 3, which modified the state’s franchise tax structure, replacing the previous tax based on capital or earned surplus with one based on margin (often referred to as the “Texas Margin Tax” effective with franchise tax reports filed on or after January 1, 2008. The Texas Margin Tax is computed by applying the applicable tax rate (1% for the Partnership) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. Although House Bill 3 states that the Texas Margin Tax is not an income tax, the Partnership believes that SFAS No. 109, Accounting for Income Taxes, applies to the Texas Margin Tax. The Texas Margin Tax accrued as of December 31, 2008 and 2007 totaled $46,000 and $59,000, respectively.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our consolidated financial instruments consist primarily of cash and cash equivalents, tenant receivables, accounts receivable, accounts receivable - related party, notes receivable, accounts payable, accounts payable -related party, and notes payable. The carrying values of such instruments are representative of their respective fair values due to the short-term nature of these instruments. As of December 31, 2008 and 2007, the carrying value of our total debt obligations was $50.7 and $50.8 million, respectively, all of which represent fixed-rate obligations with an estimated fair value of $52.8 million and $53.6 million, respectively, based on a discounted cash flow analysis using current market rates of interest.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the Financial Accounting Standards Board (“FASB”) reissued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46R), as revised. FIN No. 46R addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights. FIN No. 46R requires a variable interest entity to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. Disclosures are also required about variable interest entities in which a company has a significant variable interest but that it is not required to consolidate. As of December 31, 2008 and 2007, we had no investments in any entities that qualify as variable interest entities pursuant to FIN No. 46R.
NEWACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of financial instruments according to a fair value hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. This statement is effective for our fiscal year beginning January 1, 2008, except for non-financial assets and liabilities that are not recognized or disclosed at fair value on a recurring basis, for which the effective date is our fiscal year beginning January 1, 2009. We adopted the provisions of SFAS No. 157 for financial assets and liabilities as of January 1, 2008 and there was
no material effect on the our results of operations, cash flows, or financial condition. Management is currently evaluating the impact SFAS No. 157 will have on our consolidated financial position and results of operations when it is applied to non-financial assets and liabilities.
In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 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 did not elect the fair value option for any eligible financial assets and liabilities under the provisions of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R 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. We currently capitalize acquisition costs as part of the basis of the asset acquired. Upon effectiveness of SFAS No. 141R we will expense acquisition costs as incurred.
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 accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS No. 160 shall be applied prospectively. We are currently evaluating the potential impact of the adoption of SFAS No. 160 on our consolidated financial statements. We expect that the impact of our adoption of SFAS 160 will be to increase our shareholders’ equity as a result of transferring the minority interest in our consolidated subsidiaries from the mezzanine section of our balance sheet into equity.
In March 2008, the FASB issued SFAS No. 161: Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. Under SFAS No. 161, entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material effect on our results of operations or financial position.
DISCONTINUED OPERATIONS
The following is a summary of our discontinued operations (in thousands):
OFFERING COSTS
The General Partner funded all of the organization and offering costs on the Partnership’s behalf. As of December 31, 2008, we had reimbursed the General Partner for approximately $418,000 of organization and offering costs. The offering costs, which include items such as legal and accounting fees, marketing, and promotional printing costs are treated as a reduction of partners’ capital along with sales commissions and dealer manager fees of 7.75% and 2.5%, respectively. (See Note 9.)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, we consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.
INTEREST
Interest is charged to interest expense as it accrues. No interest was capitalized during the years ended December 31, 2008 or 2007.
SEGMENT REPORTING
The FASB issued 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. We determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate generate rental revenue and other income through the leasing of multi-tenant retail properties, which comprised 100% of our total consolidated revenues for the years ended December 31, 2008, 2007 and 2006. We evaluate operating performance on an individual property level. However, as each of our properties have similar economic characteristics, tenants and products and services, our properties have been aggregated into one reportable segment.
RECLASSIFICATIONS
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the presentation used in the current period consolidated financial statements.
3. OPERATING LEASES
Our operating leases generally range from two to twenty-five years and generally include one or more five year renewal options. A summary of minimum future base rentals to be received, exclusive of any renewals, under non-cancelable operating leases in existence at December 31, 2008 is as follows (in thousands):
Future minimum rental revenue excludes amounts that may be received from tenants for reimbursements of operating costs, real estate taxes and insurance. Expense reimbursements recognized as revenue totaled $1.7, $1.7 and $1.0 million during the years ended December 31, 2008, 2007 and 2006, respectively.
4. INVESTMENTS IN NON-CONSOLIDATED ENTITIES
During 2006, we made the following investments in three entities through which we own an interest in five properties:
During 2007, we made the following investments in two entities through which we own an interest in two properties:
•
In August 2007, we acquired a 30% interest in AmREIT Woodlake Square, LP which owns a multi-tenant retail property located in Houston, Texas with a combined gross leasable area of 206,000 square feet. The remaining 70% is owned by affiliated AmREIT entites, AmREIT Monthly Income and Growth Fund IV, Ltd., and AmREIT Realty Investment Company.
•
In November 2007, we acquired a 30% interest in AmREIT Westheimer Gessner, LP which owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas with a combined gross leasable area of 82,120 square feet. The remaining 70% is owned by affiliated AmREIT entites, AmREIT Monthly Income and Growth Fund IV, Ltd., and AmREIT Realty Investment Company.
During 2008, we made the following investments through which we own an interest in one additional property:
•
In May 2008, we acquired a 30% interest in a land tract adjacent to Woodlake Pointe for $1.3 million. The acquisition is reported as a part of AmREIT Westheimer Gessner, LP (which owns Woodlake Pointe). The remaining 70% is owned by affiliated AmREIT entities, AmREIT Monthly Income & Growth Fund IV, L.P. and AmREIT Realty Investment Company.
•
In November 2008, we acquired an additional 7.5% interest in 5433 Westheimer, LP from our third party, joint-venture partner for $800,000. The remaining 42.5% is owned by that same party. The property is not consolidated into our financial statements as it does not meet all conditions for consolidation outlined in FASB Interpretation 46R, “Consolidation of Variable Interest Entities (as amended)” or EITF 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.”
We report our investments in these entities using the equity method of accounting due to our ability to exercise significant influence over them. Combined condensed financial information for our non-consolidated entities (at 100%) is summarized as of and for the years ended December 31, 2008 and 2007 as follows:
DERIVATIVE FINANCIAL INSTRUMENTS
In December 2007, one of our investment properties entered into an interest rate swap with a notional amount of $23.8 million and a fixed rate of 5.465% in order to manage the volatility inherent in its variable-rate mortgage. On October 1, 2008, that interest rate swap was designated a hedge for financial reporting purposes. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”) and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, changes in fair value of derivatives that qualify as cash flow hedges are recognized in other comprehensive income (“OCI”). Prior to October 1, 2008, such changes in fair value were recorded as a loss on derivative on the property’s statement of operations. For the nine months ended September 30, 2008, our portion of the loss totaled $125,000 and is included in loss from non-consolidated entities in our consolidated statements of operations. For the period October 1, 2008 through December 31, 2008, our portion of the change in fair value totaled $253,000 and is included in accumulated other comprehensive loss on our consolidated statements of partners’ capital.
5. ACQUIRED LEASE INTANGIBLES
In accordance with SFAS No. 141, we have identified and recorded the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of in-place leases and above and below market leases. Acquired lease intangible assets (in-place leases and above-market leases) and acquired lease intangible liabilities (below-market leases) are amortized over the leases’ remaining terms, which range from 2 years to 25 years. The amortization of above (and below) market leases is recorded as a reduction of (increase in) rental income, and the amortization of in-place leases is included in amortization expense. The amortization expense related to in-place leases was approximately $686,000, $911,000 and $763,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The amortization of above-market leases, which was recorded as a reduction of rental income, was approximately $71,000, $68,000 and $19,000 during the years ended December 31, 2008, 2007 and 2006, respectively. Accretion of below market leases was approximately $189,000, $243,000 and $246,000 during the years ended December 31, 2008, 2007 and 2006, respectively.
In-place and above and below market lease amounts and their respective accumulated amortization are as follows (in thousands):
The estimated aggregate amortization amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):
6. NOTES PAYABLE
Our outstanding debt at December 31, 2008 and 2007 consisted entirely of fixed-rate mortgage loans of approximately $50.7 million and $50.8 million, respectively. Our mortgage loans are secured by our real estate properties and may be prepaid, but could be subject to a yield-maintenance premium or prepayment penalty. Mortgage loans are generally due in monthly installments of interest and principal and mature over various terms ranging from September 2011 through January 2036.
As of December 31, 2008, the weighted-average interest rate on our fixed-rate debt is 5.9%, and the weighted average remaining life of such debt is 12.1 years. As of December 31, 2008, scheduled principal repayments on notes payable were as follows (in thousands):
We serve as guarantor on debt in the amount of $21.6 million that is the primary obligation of our wholly-owned subsidiaries. Additionally, we serve as guarantor on debt in the amount of $44.0 million that is the primary obligation of our joint ventures.
7. CONCENTRATIONS
As of December 31, 2008, each of our four consolidated properties individually comprises greater than 14% of our consolidated total assets. Consistent with our strategy of investing in areas that we know well, three of our four properties are located in the Houston metropolitan area. These Houston properties represent 82% of our rental income for the year ended December 31, 2008. Houston is Texas’ largest city and the fourth largest city in the United States.
Following are the base rents generated by our top tenants during the years ended December 31, 2008, 2007 and 2006 ($ in thousands):
8. PARTNERS’ CAPITAL AND MINORITY INTEREST
The General Partner invested $800,000 as a limited partner and $1,000 as a general partner. We began raising capital in June 2005 and had raised approximately $71.1 million at the time of the offering’s closing in October 2006. The General Partner’s $800,000 investment represents a 1.1% limited partner interest in the Partnership.
Limited Optional Redemption - Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933 and are not currently listed on a national exchange or otherwise traded in an organized securities market. These Units may be transferred only with consent of the General Partner after delivery of required documents, and in any event, only if we register the offer and sale of the Units under applicable securities laws or if an exemption from such registration is available. We do not expect to register the offer and sale of the Units. Moreover, we do not anticipate that any public market for the Units will develop. In order to provide limited partners with the possibility of liquidity, limited partners who have held their units for at least three years may receive the benefit of interim liquidity by presenting all of those units to the Partnership for redemption. At that time, we may, at our sole election and subject to the conditions and limitations described below, redeem the Units presented for cash to the extent that we have sufficient funds available to us to fund such redemption. The redemption price to be paid will be 92% of the limited partner’s unreturned invested capital. At no time during a 12-month period, however, may the number of Units redeemed by us exceed 2% of the number of Units outstanding at the beginning of that 12-month period. We redeemed nine units during 2008 for $207,000, one unit during 2007 for $23,000 and no units during 2006.
Distributions - During the operating stage of the Partnership, net cash flow, as defined, will be distributed 99% to the limited partners and 1% to the General Partner. We paid a distribution of 7.5% per annum on invested capital through November 30, 2008. Beginning on December 31, 2008, we will distribute 3.0% per annum on invested capital during the operating stage of the partnership. During the liquidation stage of the Partnership (commencing in October 2012) net cash flow, as defined, will be distributed among the limited partners and the General Partner in the following manner:
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First - 99% to the limited partners and 1% to the General Partner until such time as the limited partners have received cumulative distributions from all sources (including monthly cash distributions during the operating stage of the Partnership) equal to 100% of their unreturned invested capital plus an amount equal to 10% per annum uncompounded on their invested capital.
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Second - 100% to the General Partner until it has received cumulative distributions from all sources (other than with respect to its limited partner units it purchased) in an amount equal to 40% of the net cash flow paid to date to the limited partners in excess of their adjusted capital.
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Thereafter - 60% to the limited partners and 40% to the General Partner.
Minority Interest - Minority interest represents a 40% ownership interest that one of our affiliate investment funds has in a real estate partnership that we consolidate as a result of our 60% controlling financial interest in such partnership.
9. RELATED PARTY TRANSACTIONS
Certain of our affiliates received fees and compensation during the organizational stage of the Partnership, including securities commissions and due diligence reimbursements, marketing reimbursements and reimbursement of organizational and offering expenses. In the event that these companies are unable to provide us with the respective services, we would be required to find alternative providers of these services. The following table summarizes the amount of such compensation paid to our affiliates during the years ended December 31, 2008 and 2007:
We have no employees or offices. Additionally, certain of our affiliates receive fees and compensation during the operating stage of the Partnership, including compensation for providing services to us in the areas of asset management, development and acquisitions, property management and leasing, financing, brokerage and administration. We reimburse our General Partner for an allocation of salary and other overhead costs. The following table summarizes the amount of such compensation paid to our affiliates during the 2008, 2007 and 2006 periods:
See also Note 4 regarding investments in non-consolidated entities and Note 1 regarding notes receivable from related parties.
10. REAL ESTATE ACQUISITIONS AND DISPOSITIONS
During 2006, we invested approximately $33.5 million through the acquisition of two properties. On June 30, 2006, we acquired Olmos Creek, a multi-tenant retail property in San Antonio, Texas with a gross leasable area of 102,000 square feet. On September 29, 2006, we acquired Lantern Lane, a shopping center in Houston, Texas anchored by Rice Food Markets. The center has a gross leasable area of 79,000 square feet. These acquisitions were accounted for as purchases and the results of their operations are included in the accompanying consolidated financial statements from the respective dates of acquisition.
Additionally, during 2006, we generated proceeds of $775,000 from the sale to a third party of a ground-leased parcel of land on Olmos Creek property.
We had no acquisitions or dispositions of properties in which we have a controlling financial interest during the years ended December 31, 2008 and 2007. See Note 4 for a discussion of our investment activity with respect to our non-consolidated subsidiaries during the same periods.
11. COMMITMENTS AND CONTINGENCIES
Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.
Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim.
In conjunction with our acquisition of the Lantern Lane Shopping Center in September 2006, we identified an environmental exposure caused by a dry cleaning business that operated on the property prior to our ownership. Our agreement with the seller provides that, if the seller cannot satisfactorily evidence that they have performed such remediation, we can reduce our note payable to them by the lesser of the actual costs to remediate or $1.0 million. We believe that the remediation costs will not exceed $1.0 million based on our environmental investigation. We have not recorded a separate liability for this exposure as we believe that we are fully indemnified by the seller pursuant to this arrangement. To the extent that we are required to fund a portion of the remediation, such amount will be financed through the reduction of the note payable to the seller. We believe that this matter will not have an adverse effect on our consolidated financial position or results of operations, and we are aware of no other environmental exposures.
AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
SCHEDULE III - Consolidated Real Estate Owned and Accumulated Depreciation
For the year ended December 31, 2008
Note A - The negative balance for costs capitalized subsequent to acquisition could be the result of out-parcels sold or tenant activity.
Activity within real estate and accumulated depreciation during the three years in the period ended December 31, 2008 is as follows:
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SIGNATURES
In accordance with the Securities Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.