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As filed with the Securities and Exchange Commission on September 9, 2011

Registration No. 333-[              ]

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM S-11

 

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 


 

INLAND CORE ASSETS REAL ESTATE TRUST, INC.

(Exact name of registrant as specified in governing instruments)

 


 

2901 Butterfield Road
Oak Brook, Illinois 60523
(630) 218-8000

(Address, including zip code, and telephone number, including, area code of principal executive offices)

 


 

The Corporation Trust, Inc.
300 East Lombard Street
Baltimore, Maryland  21202
(410) 539-2837

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


 

with copies to:

 

 

Michael J. Choate, Esq.

Robert H. Baum

Shefsky & Froelich Ltd.

Executive Vice President and

111 East Wacker Drive

General Counsel

Suite 2800

The Inland Real Estate Group, Inc.

Chicago, Illinois 60601

2901 Butterfield Road

(312) 836-4066

Oak Brook, Illinois 60523

 

(630) 218-8000

 

Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after this registration statement becomes effective.

 

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

 

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

 

Large accelerated filer o

 

Accelerated filer o

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered

 

Amount to be
Registered

 

Proposed Maximum
Offering Price Per Share

 

Proposed Maximum
Aggregate Offering Price

 

Amount of
Registration Fee (1)

 

Common Stock, par value $0.001 per Share

 

150,000,000

 

$

10.00

 

$

1,500,000,000

 

$

174,150.00

 

Common Stock, par value $0.001 per Share (2)

 

30,000,000

 

$

9.50

 

$

285,000,000

 

$

33,088.50

 

(1)           Calculated pursuant to Rule 457(o)

(2)           Represents shares issuable pursuant to the registrant’s distribution reinvestment plan

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 



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The information in this prospectus is not complete and may be changed.  We may not sell any of the securities described in this prospectus until the registration statement that we have filed with the Securities and Exchange Commission is effective.  This prospectus is not an offer to sell the securities, and it is not soliciting an offer to buy these securities, in any state where an offer or sale of the securities is not permitted.

 

PROSPECTUS

SUBJECT TO COMPLETION,
DATED SEPTEMBER 9, 2011

 

[LOGO]
INLAND CORE ASSETS REAL ESTATE TRUST, INC.

 

180,000,000

 

shares of common stock — maximum offering

200,000

 

shares of common stock — minimum offering

 

We are a Maryland corporation organized on August 24, 2011 and sponsored by Inland Real Estate Investment Corporation, or “IREIC.”  We intend to acquire, directly or indirectly, a diversified portfolio of commercial real estate located throughout the United States.  We will focus primarily on retail properties, office buildings, multi-family properties and industrial/distribution and warehouse facilities.  We may acquire these properties directly or through joint ventures.  We also may invest in real estate-related equity securities as well as commercial mortgage-backed securities. We are offering 150,000,000 shares of our common stock at a price of $10.00 per share on a “best efforts” basis through Inland Securities Corporation, or “Inland Securities,” our dealer manager. “Best efforts” means that Inland Securities is not obligated to purchase any specific number or dollar amount of shares. We also are offering up to 30,000,000 shares of our common stock at a price of $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan. In each case, the offering price was determined by our board of directors.  We reserve the right to reallocate the shares offered between our “best efforts” offering and the distribution reinvestment plan.  We intend to be taxed as a real estate investment trust, or “REIT,” commencing with the tax year ending December 31, 20[    ]. We expect that shares of our common stock will be issued in book entry form only.

 

Investing in our common stock involves a substantial degree of risk. You should purchase shares of our common stock only if you can afford a complete loss of your investment. See Risk Factorsbeginning on page 27.  Material risks of an investment in our common stock include:

 

·       no public market currently exists, and one may never exist, for our shares, and we are not required to liquidate

·       the offering price is not indicative of the price at which you may be able to sell your shares, and is not based on the book value or net asset value of our current or expected investments or our current or expected cash flow

·       until we generate sufficient cash flow from operations to fully fund distributions, some or all of our distributions may be paid from other sources, including cash flow generated from investing activities, which may reduce the amount of money available to invest in properties

·       our investment policies and strategies are very broad and permit us to invest in numerous types of commercial real estate

·       the number of properties we acquire will depend on the proceeds raised in this offering

·       we do not have employees and will rely on our business manager and real estate managers to manage our business and assets

·       persons performing services for our business manager are employed by IREIC or its affiliates and will face competing demands for their time and service

·       we do not have arm’s length agreements with our business manager, real estate managers or other affiliates of our sponsor

·       we will pay significant fees to our business manager, real estate managers and other affiliates of IREIC

·       this is a “blind pool” offering because we have not identified the specific properties that we will acquire with the proceeds raised in this offering

·       on acquiring shares, you will experience substantial dilution in the net tangible book value of your shares

·       principal and interest payments on any borrowings will reduce the funds available for distribution

·       we may fail to qualify as a REIT

 

Inland Securities is a member of the Financial Industry Regulatory Authority, Inc., or “FINRA.”  The minimum purchase requirement in this offering is 300 shares at a price of $10.00 per share ($3,000) for individuals and 100 shares at a price of $10.00 per share ($1,000) for tax-exempt entities.  We will not sell any shares unless we sell a minimum of 200,000 shares of our common stock by [                    ], 20[    ], which is one year from the effective date of this offering. Prior to the time we sell at least 200,000 shares of our common stock, subscription payments will be placed in an account held by UMB Bank, N.A. as escrow agent.  If we are not able to sell at least 200,000 shares by [                    ], 20[    ], we will terminate this offering and funds in the escrow account, including any interest, will be returned to subscribers within ten business days.  This offering will end no later than [                    ], 20[    ], unless extended.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The use of forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or the future cash benefit or tax consequence which may flow from an investment in our common stock is not permitted.

 

No one is authorized to make any statements about this offering different from those that appear in this prospectus. We will accept subscriptions only from people who meet the suitability standards described in this prospectus. The description of our company contained in this prospectus was accurate as of [                    ], 20[    ].  We will amend or supplement this prospectus if there are any material changes in our affairs.

 

 

 

Per Share

 

Minimum Offering

 

Maximum Offering

 

Public offering price, primary shares

 

$

10.00

 

$

2,000,000

 

$

1,500,000,000

 

Public offering price, distribution reinvestment plan

 

$

  9.50

 

 

 

$

   285,000,000

 

Commissions(1)

 

$

  1.00

 

$

   200,000

 

$

   150,000,000

 

Proceeds, before expenses, to us(2)

 

$

  9.00

 

$

1,800,000

 

$

1,635,000,000

 

 


(1)  Commissions are paid only for primary shares offered on a “best efforts” basis and consist of a 7% selling commission and a 3% marketing contribution.  Discounts are available for certain categories of investors. 

(2)  Organization and offering expenses, excluding commissions, will not exceed 1.5% of the gross offering proceeds. These expenses include registration and filing fees, possibly certain bona fide itemized and detailed due diligence expenses, legal and accounting fees, printing and mailing expenses, bank fees and other administrative expenses. Total organization and offering expenses, including commissions and issuer costs, will not exceed 11.5% of the gross offering proceeds from shares sold in the “best efforts” offering over the life of the offering.

 

The date of this prospectus is [                      ].

 



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FOR RESIDENTS OF MICHIGAN ONLY

 

A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE OFFICE OF FINANCIAL AND INSURANCE SERVICES, SECURITIES SECTION, MICHIGAN DEPARTMENT OF LABOR AND ECONOMIC GROWTH. THE DEPARTMENT HAS NOT UNDERTAKEN TO PASS UPON THE VALUE OF THESE SECURITIES NOR TO MAKE ANY RECOMMENDATIONS AS TO THEIR PURCHASE.

 

THE USE OF THIS PROSPECTUS IS CONDITIONED UPON ITS CONTAINING ALL MATERIAL FACTS AND THAT ALL STATEMENTS CONTAINED HEREIN ARE TRUE AND CAN BE SUBSTANTIATED. THE DEPARTMENT HAS NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.

 

NO BROKER-DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING HEREBY MADE OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR EFFECTIVE LITERATURE.

 

THIS IS A BEST EFFORTS OFFERING, AND WE RESERVE THE RIGHT TO ACCEPT OR REJECT ANY SUBSCRIPTION AND WILL PROMPTLY NOTIFY THE SUBSCRIBER OF ACCEPTANCE OR REJECTION. THERE IS NO ASSURANCE AS TO HOW MANY SHARES WE WILL SELL.

 

THE SECURITIES HEREBY OFFERED INVOLVE A HIGH DEGREE OF RISK. THE OFFERING PRICE HAS BEEN ARBITRARILY SELECTED BY US. NO MARKET EXISTS FOR THESE SECURITIES, AND UNLESS A MARKET IS ESTABLISHED, YOU MIGHT NOT BE ABLE TO SELL THEM.

 

THERE IS NO ASSURANCE THAT OUR OPERATIONS WILL BE PROFITABLE OR THAT LOSSES WILL NOT OCCUR.

 

IT IS NOT OUR POLICY TO REDEEM OUR STOCK (EXCEPT AS PROVIDED IN THIS OFFERING).

 

ANY REPRESENTATIONS CONTRARY TO ANY OF THE FOREGOING SHOULD BE REPORTED FORTHWITH TO THE LANSING OFFICE OF THE DEPARTMENT AT 611 WEST OTTAWA, P.O. BOX 30701, LANSING, MICHIGAN 48909-8201, OR BY TELEPHONE AT (877) 999-6442.

 

FOR RESIDENTS OF NEW YORK ONLY

 

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.  SUBJECT TO THE CONDITIONS SPECIFIED IN THIS PROSPECTUS, THE COMPANY WILL PLACE INVESTOR SUBSCRIPTIONS IN ESCROW UNTIL THE TIME THE COMPANY SELLS AT LEAST 200,000 SHARES OF ITS COMMON STOCK.

 

FOR RESIDENTS OF PENNSYLVANIA ONLY

 

BECAUSE THE MINIMUM CLOSING AMOUNT IS LESS THAN $75,000,000, YOU ARE CAUTIONED TO CAREFULLY EVALUATE THE COMPANY’S ABILITY TO FULLY

 

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ACCOMPLISH ITS STATED OBJECTIVES AND TO INQUIRE AS TO THE CURRENT DOLLAR VOLUME OF COMPANY SUBSCRIPTIONS.

 

WE WILL PLACE ALL PENNSYLVANIA INVESTOR SUBSCRIPTIONS IN ESCROW UNTIL THE COMPANY HAS RECEIVED TOTAL SUBSCRIPTIONS OF AT LEAST $75,000,000, OR FOR AN ESCROW PERIOD OF 120 DAYS, WHICHEVER IS SHORTER.

 

IF THE COMPANY HAS NOT RECEIVED TOTAL SUBSCRIPTIONS OF AT LEAST $75,000,000 BY THE END OF THE ESCROW PERIOD, THE COMPANY MUST:

 

A.            RETURN THE PENNSYLVANIA INVESTORS’ FUNDS WITHIN 15 CALENDAR DAYS OF THE END OF THE ESCROW PERIOD; OR

 

B.            NOTIFY THE PENNSYLVANIA INVESTORS IN WRITING BY CERTIFIED MAIL OR ANY OTHER MEANS WHEREBY RECEIPT OF DELIVERY IS OBTAINED WITHIN 10 CALENDAR DAYS AFTER THE END OF THE ESCROW PERIOD, THAT THE PENNSYLVANIA INVESTORS HAVE A RIGHT TO HAVE THEIR INVESTMENT RETURNED TO THEM.  IF AN INVESTOR REQUESTS THE RETURN OF SUCH FUNDS WITHIN 10 CALENDAR DAYS AFTER RECEIPT OF NOTIFICATION, THE COMPANY MUST RETURN SUCH FUNDS WITHIN 15 CALENDAR DAYS AFTER RECEIPT OF THE INVESTOR’S REQUEST.

 

ANY PENNSYLVANIA INVESTOR WHO REQUESTS A RETURN OF FUNDS AT THE END OF THE INITIAL 120-DAY ESCROW PERIOD OR ANY SUBSEQUENT 120-DAY ESCROW PERIOD WILL BE ENTITLED TO RECEIVE INTEREST EARNED, IF ANY, FOR THE TIME THAT THE INVESTOR’S FUNDS REMAIN IN ESCROW.

 

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SUITABILITY STANDARDS

 

An investment in our common stock involves significant risk and is suitable only for persons who have adequate financial means, desire a relatively long-term investment and who will not need immediate liquidity from their investment. Persons who meet this standard and seek to diversify their personal portfolios with a real estate-based investment, preserve capital, receive current income, obtain the benefits of potential long-term capital appreciation and who are able to hold their investment for a time period consistent with our liquidity plans are most likely to benefit from an investment in our company. On the other hand, we caution persons who require immediate liquidity or guaranteed income, or who seek a short-term investment not to consider an investment in our common stock as meeting these needs.

 

In order to purchase shares in this offering, you must:

 

·                                          meet the applicable financial suitability standards as described below; and

 

·                                          purchase at least the minimum number of shares as described below.

 

We have established suitability standards for initial investors and subsequent purchasers of shares from our stockholders. These suitability standards require that an investor have, excluding the value of the investor’s home, home furnishings and automobiles, either:

 

·                                          minimum net worth of at least $250,000; or

 

·                                          minimum annual gross income of at least $70,000 and a minimum net worth of at least
$70,000.

 

Several states have established suitability requirements that are more stringent than the standards that we have established and described above. Shares will be sold to investors in these states only if they meet the special suitability standards set forth below. In each case, these special suitability standards exclude from the calculation of net worth the value of the investor’s home, home furnishings and automobiles.

 

·                                          California — You must have either a minimum net worth of at least $250,000 or a minimum annual gross income of at least $70,000 and a minimum net worth of at least $100,000.

 

·                                          California, Kentucky, Massachusetts, Missouri, Oregon, Pennsylvania and Tennessee — In addition to meeting the applicable minimum suitability standards set forth above, your investment may not exceed 10% of your liquid net worth, which may be defined as the remaining balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.

 

·                                          Alabama, Iowa, Michigan and Ohio — In addition to meeting the applicable minimum suitability standards set forth above, your investment in us and other IREIC-sponsored real estate programs may not exceed 10% of your liquid net worth, which may be defined as the remaining balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.  For these purposes, “other IREIC-sponsored real estate programs” means Inland Diversified Real Estate Trust, Inc., Inland American Real Estate Trust, Inc. and Inland Western Retail Real Estate Trust, Inc., but does not include Inland Real Estate Corporation, a REIT sponsored by IREIC, that is publicly traded on the New York Stock Exchange.

 

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·                                          Kansas — In addition to meeting the applicable minimum suitability standards set forth above, the Office of the Kansas Securities Commissioner recommends that an investor’s aggregate investment in our securities and similar direct participation investments should not exceed 10% of the investor’s liquid net worth. For these purposes, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.

 

In the case of sales to fiduciary accounts (such as an IRA, Keogh Plan or pension or profit-sharing plan), these minimum suitability standards must be satisfied by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase shares of our common stock if the donor or the grantor is the fiduciary. In the case of gifts to minors, the minimum suitability standards must be met by the custodian of the account or by the donor.

 

We, IREIC, our dealer manager and each soliciting dealer must make every reasonable effort to determine that the purchase of common stock is a suitable and appropriate investment for each investor based on the information provided by the investor in the subscription agreement or otherwise.

 

MINIMUM PURCHASE

 

Subject to the restrictions imposed by state law, we will sell shares of our common stock only to investors who initially purchase a minimum of 300 shares of common stock at a price of $10.00 per share for a total purchase price of $3,000, or tax-exempt entities which purchase a minimum of 100 shares of common stock at a price of $10.00 per share for a total purchase price of $1,000.  Except in respect of a transfer made pursuant to a transfer on death designation or a qualified transfer to meet a required minimum distribution, you may not transfer fewer shares than the minimum purchase requirement.  A tax-exempt entity is generally any investor that is exempt from federal income taxation, including:

 

·                                          a pension, profit-sharing, retirement, IRA or other employee benefit plan that satisfies the requirements for qualification under Section 401(a), 414(d) or 414(e) of the Internal Revenue Code of 1986, as amended (the “Code”);

 

·                                          a pension, profit-sharing, retirement, IRA or other employee benefit plan that meets the requirements of Section 457 of the Code;

 

·                                          trusts that are otherwise exempt under Section 501(a) of the Code;

 

·                                          a voluntary employees’ beneficiary association under Section 501(c)(9) of the Code; or

 

·                                          an IRA that meets the requirements of Section 408 of the Code.

 

The term “plan” includes plans subject to Title I of ERISA, other employee benefit plans and IRAs subject to the prohibited transaction provisions of Section 4975 of the Code, governmental or church plans that are exempt from ERISA and Section 4975 of the Code, but that may be subject to state law requirements, or other employee benefit plans.

 

An investment in our common stock will not, in itself, create a retirement plan; in order to create a retirement plan, an investor must comply with all applicable provisions of the Code.

 

Subject to any restrictions imposed by state law, subsequent additional investments by investors will require a minimum investment of ten shares of common stock at a price of $10.00 per share for a

 

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total purchase price of $100.  These minimum investment amounts for future purchases do not apply to purchases of shares through our distribution reinvestment plan.

 

RESTRICTIONS IMPOSED BY THE PATRIOT AND RELATED ACTS

 

In accordance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “USA PATRIOT ACT”), the shares of common stock offered hereby may not be offered, sold, transferred or delivered, directly or indirectly, to any “unacceptable investor.” “Unacceptable investor” means any:

 

·                                          person or entity who is a “designated national,” “specially designated national,” “specially designated terrorist,” “specially designated global terrorist,” “foreign terrorist organization” or “blocked person” within the definitions set forth in the Foreign Assets Control Regulations of the U.S. Treasury Department;

 

·                                          person acting on behalf of, or any entity owned or controlled by, any government against whom the U.S. maintains economic sanctions or embargoes under the Regulations of the U.S. Treasury Department;

 

·                                          person or entity who is within the scope of Executive Order 13224-Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism, effective September 24, 2001;

 

·                                          person or entity subject to additional restrictions imposed by the following statutes or regulations and executive orders issued thereunder: the Trading with the Enemy Act, the Iraq Sanctions Act, the National Emergencies Act, the Antiterrorism and Effective Death Penalty Act of 1996, the International Emergency Economic Powers Act, the United Nations Participation Act, the International Security and Development Cooperation Act, the Nuclear Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the Foreign Operations, Export Financing and Related Programs Appropriations Act or any other law of similar import as to any non-U.S. country, as each such act or law has been or may be amended, adjusted, modified or reviewed from time to time; or

 

·                                          person or entity designated or blocked, associated or involved in terrorism, or subject to restrictions under laws, regulations or executive orders as may apply in the future similar to those set forth above.

 

DISTRIBUTION IN CANADA

 

Shares of our common stock also may be offered and sold in Canada in reliance on and in accordance with exemptions from the prospectus requirements of Canadian provincial and territorial securities laws or pursuant to discretionary exemption orders obtained in advance from applicable provincial or territorial regulatory authorities.

 

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TABLE OF CONTENTS

 

 

 

Page

 

 

 

QUESTIONS AND ANSWERS ABOUT THE OFFERING

 

1

PROSPECTUS SUMMARY

 

11

RISK FACTORS

 

27

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

57

SELECTED FINANCIAL DATA

 

58

CAPITALIZATION

 

58

COMPENSATION TABLE

 

59

ESTIMATED USE OF PROCEEDS

 

68

PRIOR PERFORMANCE OF IREIC AFFILIATES

 

69

MANAGEMENT

 

92

CONFLICTS OF INTEREST

 

114

PRINCIPAL STOCKHOLDERS

 

117

INVESTMENT OBJECTIVES AND POLICIES

 

118

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

131

DESCRIPTION OF SECURITIES

 

141

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

149

SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS

 

151

FEDERAL INCOME TAX CONSIDERATIONS

 

161

ERISA CONSIDERATIONS

 

187

PLAN OF DISTRIBUTION

 

193

HOW TO SUBSCRIBE

 

202

SALES LITERATURE

 

203

ELECTRONIC DELIVERY OF DOCUMENTS

 

203

DISTRIBUTION REINVESTMENT PLAN AND SHARE REPURCHASE PROGRAM

 

204

INVESTMENTS THROUGH IRA ACCOUNTS

 

210

REPORTS TO STOCKHOLDERS

 

210

PRIVACY POLICY NOTICE

 

211

RELATIONSHIPS AND RELATED TRANSACTIONS

 

211

LEGAL MATTERS

 

211

EXPERTS

 

212

WHERE YOU CAN FIND MORE INFORMATION

 

212

INDEX TO FINANCIAL STATEMENTS

 

F-i

APPENDIX A - PRIOR PERFORMANCE TABLES

 

A-1

APPENDIX B - DISTRIBUTION REINVESTMENT PLAN

 

B-1

APPENDIX C-1 - SUBSCRIPTION AGREEMENT

 

C-1-1

APPENDIX C-2 - TRANSFER ON DEATH FORM

 

C-2-1

APPENDIX D-1 - LETTER OF DIRECTION

 

D-1-1

APPENDIX D-2 - NOTICE OF REVOCATION

 

D-2-1

APPENDIX E - PRIVACY POLICY NOTICE

 

E-1

 

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QUESTIONS AND ANSWERS ABOUT THE OFFERING

 

Below we have provided some of the more frequently asked questions and answers relating to an offering of this type.  Please see “Prospectus Summary” and the remainder of this prospectus for more detailed information about this offering.  References in this prospectus to “we,” “us” or the “company” refer to Inland Core Assets Real Estate Trust, Inc. and its consolidated wholly owned or majority owned subsidiaries except in each case where the context indicates otherwise.  References in this prospectus to “Inland” refer to some or all of the entities that are part of The Inland Real Estate Group of Companies, Inc., which is comprised of a group of independent legal entities, some of which may be affiliates, share some common ownership or have been previously sponsored or managed by our sponsor or its subsidiaries.

 

Q:  What is Inland Core Assets Real Estate Trust, Inc.?

 

A:  We are an externally managed, Maryland corporation formed in August 2011 to acquire a diversified portfolio of commercial real estate located throughout the United States.  We will focus primarily on “core assets,” which consists of retail properties, office buildings, multi-family properties and industrial/distribution and warehouse facilities.  We may purchase existing or newly-constructed properties, properties that are under development or construction or properties that have not yet been developed.  In addition, in all cases, we may acquire or develop properties directly, by purchasing the property, also known as a “fee interest,” or through joint ventures, including joint ventures in which we do not own a controlling interest.  We intend to be taxed as a REIT commencing with the tax year ending December 31, 20[    ].

 

Q:  What are the company’s investment objectives?

 

A:  Our investment objectives generally are:

 

·                                          to preserve and protect our stockholders’ investments;

 

·                                          to acquire quality commercial real estate assets that generate sufficient cash flow from operations, as adjusted for acquisition costs, to fund sustainable and predictable distributions to our stockholders; and

 

·                                          to realize capital appreciation through the potential sale of our assets or other liquidity events, as described in this prospectus.

 

We cannot guarantee that we will achieve any of these investment objectives.

 

Q:  What do you think distinguishes the company from most other unlisted REITs?

 

A:   In general, we believe our company is distinguishable in some important ways:

 

·                                          No Distributions Paid from Offering Proceeds — We will not use offering proceeds to pay cash distributions.

 

·                                          Limits on Amounts Paid to Acquire our Business Manager and Real Estate Managers — We do not currently anticipate internalizing our management functions except in connection with a listing or other liquidity event, as defined and explained herein.  We have limited the aggregate purchase price that we will pay to acquire our Business Manager and Real Estate Managers (each as defined herein) to an amount equal

 

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to 1.5% of the amount of our total assets on our last balance sheet, giving effect to any asset acquisitions that were probable or completed since the date of the last balance sheet.

 

·                                          Acquisition Flexibility — Our proposed strategy of acquiring a diversified portfolio of commercial real estate will provide us with flexibility, because we are not limited to investing in a single asset class.  We will have the ability to take advantage of existing market conditions, and target buying opportunities as economic and real estate cycles change.

 

·                                          Sponsor Track Record — Inland has more than forty years of experience in acquiring and managing real estate assets.   As of June 30, 2011, Inland had completed 424 programs.  No completed program had paid total distributions less than the total contributed capital.

 

Q:   What competitive advantages does the company achieve through its relationship with Inland?

 

A:   We believe our relationship with Inland provides us with various benefits, including:

 

·                                          Experienced Management Team — Inland’s management team has substantial experience in all aspects of acquiring, owning, managing and operating commercial real estate and other real estate assets across diverse property types, as well as a broad range of experience in financing real estate assets.  As of June 30, 2011, Inland cumulatively owned properties located in forty-eight states and managed assets with a book value exceeding $25.4 billion.

 

·                                          Expertise with Core Real Estate Assets — Two of the REITs previously sponsored by IREIC, Inland American Real Estate Trust, Inc. (sometimes referred to herein as “Inland American”) and Inland Diversified Real Estate Investment Trust, Inc. (sometimes referred to herein as “Inland Diversified”) own or are acquiring portfolios that contain core real estate assets.  As of June 30, 2011, Inland American owned, directly or indirectly through joint ventures in which it has a controlling interest, 981 properties, representing approximately 48.4 million square feet of retail, industrial and office properties, 9,790 multi-family units and 15,564 lodging rooms.  As of the same date, Inland Diversified, which was formed in 2009, owned, directly or indirectly, forty-one retail properties and two office properties, collectively totaling approximately 4.8 million square feet, and one multi-family property with 300 multi-family units.  Our management, including Ms. Armenta, Ms. Matlin, Ms. Foust, Ms. Hrtanek, Mr. Sajdak and Ms. McNeeley, among others, will be able to draw on Inland’s expertise in acquiring and managing a diverse portfolio of properties.

 

·                                          Seasoned Acquisition Team — Both our Business Manager and Inland Real Estate Acquisitions, Inc., or “IREA,” will assist us in identifying potential acquisition opportunities, negotiating contracts related thereto and acquiring properties on our behalf.   Since January 2005, the individuals performing services for these entities have closed over 1,100 transactions in the aggregate, involving real estate valued at more than $17 billion.

 

·                                          Strong Industry Relationships —  We believe that Inland’s extensive network of industry relationships with the real estate brokerage, development and investor communities will enable us to successfully execute our acquisition and investment

 

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strategies. These relationships will augment our ability to source acquisitions in off-market transactions outside of competitive marketing processes, capitalize on opportunities and capture repeat business and transaction activity. In addition, Inland’s strong relationships with the tenant and leasing brokerage communities will aid in attracting and retaining tenants.

 

·                                          Ability to Purchase Properties for Cash —  We expect that one of our competitive advantages will be our ability to purchase properties for cash and to close transactions quickly. We believe our ability to purchase properties for cash will expedite our acquisition process and make us an attractive purchaser to potential sellers of properties, particularly those sellers motivated by time constraints. Although we have not yet raised any capital in this offering, Inland Securities Corporation has successfully raised capital for other IREIC-sponsored programs, and we expect that, through their well-developed distribution capabilities and relationships with other soliciting dealers Inland Securities Corporation will be successful in selling shares on our behalf.

 

·                                          Centralized Resources — All of Inland’s skilled personnel, specializing in areas such as real estate management, leasing, marketing, human resources, cash management, risk management, tax and internal audit, are based at Inland’s corporate headquarters located in the suburbs of Chicago.

 

See “Conflicts of Interest” for a discussion of certain risks and potential disadvantages of our relationship with Inland.

 

Q:  Why should I consider an investment in real estate?

 

A: Allocating some portion of your investment portfolio to real estate may diversify your portfolio, reduce overall risk in your portfolio and provide a hedge against inflation and the potential to earn attractive returns across a variety of market conditions and economic cycles. For these reasons, institutional investors like pension funds and endowments have increased the amount allocated to real estate.  For example, various surveys report that some of the largest pension plans in the U.S. are targeting a real estate allocation of 10% to 12% of their overall investment portfolios. Individual investors may also benefit by adding a real estate component to their investment portfolios. You and your financial advisor should determine whether investing in real estate would benefit your investment portfolio.

 

Q:  What is a public, non-listed REIT?

 

A:  In general, a REIT is an entity that:

 

·                                          combines the capital of many investors to, among other things, acquire or invest in commercial real estate;

 

·                                          allows individual investors to invest in a real estate portfolio under professional management through the purchase of interests, typically shares;

 

·                                          must pay distributions to its stockholders equal to at least 90% of its “REIT taxable income;” and

 

·                                          is not typically subject to federal corporate income taxes as long as it pays distributions to its stockholders equal to at least 100% of its “REIT taxable income,” thus eliminating the “double taxation” (taxation at both the corporate and stockholder levels) generally applicable to a corporation.

 

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A public, non-listed REIT includes all of the REIT factors listed above.  In addition, the shares of a public, non-listed REIT are not listed and traded on a national stock exchange.  A public, non-listed REIT, like a listed REIT, files all financial statements and material updates to the program with the Securities and Exchange Commission, sometimes referred to herein as the “SEC,” and all other applicable regulatory authorities.

 

Q:  In what types of properties will the company invest?

 

A:  As discussed above, we intend to focus primarily on “core assets,” which consists of retail properties, office buildings, multi-family properties and industrial/distribution and warehouse facilities.

 

Q:  What are the advantages of a diversified portfolio?

 

A: We believe that a diversified portfolio may potentially offer investors significant benefits for a given level of risk relative to a more concentrated portfolio. Because we believe that most real estate markets are cyclical in nature, a diversified investment strategy may allow us to more effectively deploy capital into sectors and locations where the underlying investment fundamentals are relatively strong and away from sectors where the fundamentals are relatively weak. Further, we believe that an investment strategy that combines real property investments with other real estate-related investments may offer investors additional diversification benefits. However, there is no assurance that we will be successful in creating a diversified portfolio or that such a portfolio will provide greater benefits to stockholders than a portfolio that is more concentrated in any particular individual real estate investment sector.

 

Q:  Other than real properties, in which types of assets will the company invest?

 

A:  We may invest in common and preferred real estate-related equity securities of both publicly traded and private real estate companies. Real estate-related equity securities are generally unsecured and also may be subordinated to other obligations of the issuer. Our investments in real estate-related equity securities will involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer.   See “Risk Factors — Risks Associated with Investments in Securities.”

 

We may also make investments in commercial mortgage-backed securities, or “CMBS.” CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. We may invest in investment grade and non-investment grade CMBS classes.

 

Q:  Does the company intend to invest in joint ventures?

 

A:  Yes, we may acquire or develop properties through joint ventures, including joint ventures in which we do not own a controlling interest.  We may make these investments to diversify our portfolio in terms of geographic region or property type, to access the capital or expertise of third parties and to enable us to make investments sooner than would be possible otherwise. Additionally, investing through joint ventures may help may help us to diversify our portfolio. In compliance with our conflicts of interest policies, however, we will not invest in any joint ventures with other IREIC-affiliated entities.

 

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Q:  How will the company identify investments and make decisions on whether to acquire properties?

 

A:    Our business manager, Inland Core Business Manager & Advisor, Inc., referred to herein as our “Business Manager,” will have the authority, subject to the direction and approval of our board of directors, to make all of our investment decisions.

 

We will consider a number of factors in evaluating whether to acquire any particular asset, including: geographic location and property type; creditworthiness of the tenants or potential tenants; condition and use of the assets; historical performance; current and projected cash flow; potential for capital appreciation; potential for economic growth in the area where the assets are located; presence of existing and potential competition; prospects for liquidity through sale, financing or refinancing of the assets; and tax considerations.

 

Q:    How will you determine whether tenants have the appropriate creditworthiness?

 

A: To the extent available, we intend to use industry credit rating services to determine the creditworthiness of potential tenants and any personal or corporate guarantor, to the extent available. We will review the reports produced by these services together with relevant financial data and other available information about the tenant, such as income statements, balance sheets, net worth, cash flow, business plans and other information our Business Manager may deem relevant, before consummating a lease transaction. In addition, if we are seeking to obtain a guarantee of a lease by the corporate parent of the tenant, our Business Manager will analyze the creditworthiness of the guarantor. In many instances, especially in sale-leaseback situations, where we are acquiring a property and simultaneously leasing it back to the seller under a long-term lease, we also will meet with the seller’s management to discuss the seller’s business plan and strategy.

 

Q:  What are your strategies for providing stockholders with a liquidity event?

 

A:  Presently, our board does not anticipate evaluating a liquidity event until at least 2017.  A liquidity event could take many forms.  For example, our board may decide to:

 

·                                          list our shares, or the shares of one of our subsidiaries, on a national securities exchange;

 

·                                          sell our assets individually, including seeking stockholder approval if the action would constitute the sale of all or substantially all of our assets, or sell certain subsidiaries or joint venture interests, any of which could result in a distribution to our stockholders of the net proceeds; or

 

·                                          enter into a merger or other business combination, which results in our stockholders receiving cash or shares of another entity.

 

Q:  Have you set a finite date for a liquidity event?

 

A:  No, the timing of any liquidity event will be influenced by many factors, including market conditions at that time.

 

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Q:  Will the company consider doing a business combination with the Business Manager and its Real Estate Managers in the future?

 

A:    At some point in the future, we may consider becoming “self-managed” by internalizing the functions performed for us by our Business Manager and Real Estate Managers, particularly if we seek to list our shares on an exchange as a way of providing our stockholders with a liquidity event.  The method by which we could internalize these functions could take many forms.  For example, we may hire our own group of executives and other employees or we may acquire our Business Manager and Real Estate Managers or their respective assets, including their existing workforce.  The method of internalizing cannot be determined or estimated at this time.  Our Business Managers and Real Estate Managers have advised our board that neither the Business Manager nor the Real Estate Managers will agree to be acquired unless the internalization occurs in connection with a listing or other liquidity event.  See “Investment Objectives and Policies — Liquidity Events” for a definition of “liquidity event,” and see “Management — Becoming Self-Managed” for additional discussion regarding a potential future business combination with our Business Manager and Real Estate Managers.

 

Q:  Will the company pay to acquire the Business Manager and Real Estate Managers in connection with an internalization?

 

A:    The terms of any business combination, including the actual purchase price to be paid for the Business Manager and Real Estate Managers, will be negotiated by our independent directors, or a committee thereof, at the time of the transaction.  However, our Business Manager and Real Estate Managers have agreed that if we internalize our management functions in connection with a liquidity event or events, the purchase price we may pay for these entities, and the form of the consideration to be paid to these entities, will be limited. See “Investment Objectives and Policies — Liquidity Events” for a definition of “liquidity event.”  More specifically, in no event may the aggregate payment for these entities exceed 1.5% of the amount of our total assets on the last audited balance sheet prior to closing the transaction, after giving effect to any asset acquisitions that were probable or completed since the date of the last audited balance sheet, prior to the applicable transaction.  In addition, we will issue shares of our common stock, rather than cash, to pay the purchase price.  In calculating this purchase price, we will exclude any costs or expenses of the internalization transaction that we may agree to pay or reimburse for either (1) costs and expenses our Business Manager or Real Estate Managers have incurred on our behalf or (2) costs and expenses our Business Manager or Real Estate Managers incur directly in connection with the internalization transaction.

 

Q:  If I buy shares, will I receive distributions and, if so, how often?

 

A:   We intend to pay regular monthly cash distributions to our stockholders. The actual amount and timing of distributions will be determined by our board of directors, in its discretion, based on its analysis of our actual and expected earnings, cash flow, capital expenditures and investments, as well as general financial conditions.  Actual cash available for distribution may vary substantially from estimates made by our board.  As a result, our distribution rate and payment frequency may vary from time to time. However, we will not use offering proceeds to pay cash distributions.  Further, in order to remain qualified as a REIT, we must make distributions equal to at least 90% of our “REIT taxable income” each year.  We anticipate that we will begin declaring distributions no later than sixty days after we have sold enough shares to satisfy the minimum offering condition.

 

Q:  Will distributions I receive be taxable?

 

A:   Yes, for tax purposes, any distributions that you receive generally will be considered ordinary income to the extent that the distributions are paid out of our current and accumulated earnings and profits

 

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(excluding distributions of amounts either subject to corporate-level taxation or designated as a capital gain dividend). However, because certain deductible items, such as depreciation expense, for example, reduce taxable income but do not reduce cash available for distribution, we expect a portion of your distributions might exceed our current and accumulated earnings and profits and be considered a return of capital for tax purposes up to the amount of your tax basis in your shares (and any excess over your tax basis in your shares will result in capital gain). The amount of distributions considered a return of capital for tax purposes will not be subject to tax immediately but will instead reduce the tax basis of your investment, generally deferring any tax on that portion of the distribution until you sell your shares or we liquidate. Because each investor’s tax implications are different, you should consult with your tax advisor.  The Form 1099 described below will report to you, each year, the portion of your distribution that is considered ordinary income and the portion that is considered a return of capital for tax purposes.

 

Q:  How do I decide if an investment in the company’s shares is appropriate for me?

 

A:  An investment in our shares may be appropriate as part of your investment portfolio if:

 

·                                          You satisfy the minimum suitability standards described in this prospectus.

 

·                                          You seek to receive current income through our payment of regular monthly cash distributions to our stockholders.

 

·                                          You seek to preserve your capital and obtain the benefits of potential long-term capital appreciation, because we intend to acquire properties that offer appreciation potential while balancing the objective of preserving your capital.

 

·                                          You seek to diversify your portfolio by allocating a portion of your portfolio to a long-term investment in commercial real estate, which is not correlated to the stock market.

 

·                                          You are able to hold your investment in our shares as a long-term investment due to the absence of a liquid market for our shares.

 

Q:  What kind of offering is this?

 

A:   We are offering a minimum of 200,000 shares and a maximum of 150,000,000 shares at a price of $10.00 per share on a “best efforts” basis.  Prior to the time we sell at least 200,000 shares, subscription payments will be placed in an escrow account with our escrow agent, UMB Bank, N.A.  If we are not able to sell at least 200,000 shares by [                    ], 20[    ], which is one year from the original effective date of this prospectus, we will terminate this offering and all funds in the escrow account, including any interest earned on the funds, will be returned to subscribers within ten business days following the termination date.  Common stock purchased by any of our officers, directors or affiliates, or by our dealer manager or any soliciting dealer, will not count toward satisfying the minimum offering.

 

We also are offering up to 30,000,000 shares at a purchase price of $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan.  We reserve the right to reallocate the shares offered between our “best efforts” offering and the distribution reinvestment plan.

 

If you choose to purchase shares in this offering, you will need to fill out a subscription agreement, forms of which are included in this prospectus as Appendix C-1, and pay for the shares at the time you subscribe. If you decide to purchase shares, our escrow agent will hold your funds in escrow, along with those of other subscribers, until we accept your subscription. Generally, we accept or reject subscriptions within ten days of receipt.

 

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Q:  What is the significance of the “blind pool” offering?

 

A:   Traditionally, public real estate programs acquire interests in various real estate assets. The assets in which these public programs intend to invest are not always known prior to commencing the offering.  A real estate program is commonly referred to as a “blind pool” program when a significant number of the assets that the real estate program intends to acquire are not yet identified. During this blind pool offering, we will identify acquisition opportunities during and possibly after our public offering has closed. Pending investment in properties, we expect to invest the offering proceeds in short-term government securities or other liquid instruments.

 

We believe that the blind pool offering format offers us a greater degree of flexibility than a specified asset program because we are more likely to have funds available before identifying specific assets for acquisition. Otherwise, IREIC would need to begin the SEC registration process only after identifying the assets we may acquire. Under this scenario, we believe we would operate at a significant competitive disadvantage as compared to entities that may have currently available sources of financing. In addition, because we do not own, and have not owned, any real estate assets, you do not need to be concerned about possible “legacy issues” related to assets acquired before the commencement of this offering.

 

Because we have not yet identified the assets we may acquire, however, investors will not be able to fully assess how we will use the net proceeds of this offering. Therefore, we provide you with “prior performance” or a “track-record” of information of other programs sponsored by IREIC. Please note however, that the prior performance of IREIC’s other programs does not indicate, and should not be relied upon as to, how we may perform in the future.

 

Q:  How is the purchase price of an investment in shares of your common stock different from the purchase price of an investment in a listed REIT?

 

A:   An investment in shares of our common stock generally differs from an investment in listed REITs, in a few respects.  Shares of listed REITs are priced by the trading market, which is influenced generally by numerous factors such as supply (number of sellers) and demand (number of buyers) of shares, dividend yields, growth in FFO and shifting preferences among investors.  Our board of directors determined the offering price of our shares in its sole discretion.

 

In addition, listed REITs often focus on selected property types or geographic markets, which would require you to own shares of several listed REITs, with attendant transaction costs and effort, in order to invest in a diversified real property portfolio.  In contrast, we intend to own a diversified portfolio of various real estate assets.

 

Finally, industry benchmarks that track the value of direct investments in real estate properties as an asset class have demonstrated a low correlation with the benchmarks for traditional asset classes, such as stocks and bonds.

 

Investors should bear in mind that investing in our shares differs from investing in listed REITs in significant ways. An investment in our shares has limited liquidity and our repurchase program may be limited, modified or suspended. In contrast, an investment in a listed REIT is a liquid investment, as shares can be sold on an exchange at any time. Investing in our shares also differs from investing directly in real estate, including the expenses related to this offering and other fees and expenses that are payable.

 

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Q:  How long will the offering last?

 

A:   This offering will end no later than [                    ], 20[    ], unless extended.  Our board may terminate this offering at any time and may extend the “best efforts” offering for an additional year.  If we extend the offering for another year and file another registration statement during the one-year extension in order to sell additional shares, we could continue to sell shares in this offering until the earlier of 180 days after the third anniversary of commencing this offering or the effective date of the subsequent registration statement.  If we decide to extend the “best efforts” offering beyond two years from the date of this prospectus, we will provide that information in a prospectus supplement.  If we file a subsequent registration statement, we could continue offering shares with the same or different terms and conditions.  Nothing in our organizational documents prohibits us from engaging in additional subsequent public offerings of our stock.

 

The offering must be registered in every state in which we offer or sell shares. Generally, these registrations are for a period of one year.  Thus, we may have to stop offering and selling in any state in which the registration is not renewed annually.

 

Q:  Will I receive a stock certificate?

 

A:   No, unless expressly authorized by our board of directors. In this offering, we anticipate that all common stock will be issued only in book entry form. The use of book entry registration protects against loss, theft or destruction of stock certificates and reduces our offering costs.

 

Q:  Will fractional shares be issued?

 

A:   Yes, we may issue fractional shares of common stock in this offering.

 

Q:  Is there any minimum required investment?

 

A:   Yes. Individuals must initially invest at least $3,000 and tax-exempt entities must initially invest at least $1,000. The minimum amount of any subsequent investments, other than investments through our distribution reinvestment plan, is $100.

 

Q:  After I subscribe for shares, can I change my mind and withdraw my money?

 

A:  Prior to the time we sell at least 200,000 shares, you may rescind your subscription.  If you choose to rescind your subscription, all subscription payments held in escrow for your benefit will be returned to you by the escrow agent within ten business days of being notified by us of your election to rescind.  You generally will not be able to rescind your subscription after we sell at least 200,000 shares.

 

Q:  Will I be notified of how my investment is doing?

 

A:  Yes, we will provide you with periodic updates on the performance of your investment, including:

 

·                                          regular correspondence to stockholders;

 

·                                          supplements to this prospectus, during the course of the “best efforts” offering;

 

·                                          an annual report; and

 

·                                          three quarterly financial reports.

 

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In addition, to assist FINRA members and their associated persons that participate in this offering, we will disclose in each annual report distributed to stockholders a per share estimated value of our shares, the method by which it was developed, and the date of the data used to develop the estimated value. Our Business Manager has indicated that it intends to use the most recent offering price in our “best efforts” offering (ignoring purchase price discounts for certain categories of purchasers) or any follow-on public “best efforts” offering as its estimated per share value of our shares until we have completed our offering stage. We will consider our offering stage complete when we are no longer publicly offering equity securities — whether through this offering or follow-on public offerings — and have not done so for eighteen months. If our board of directors determines that it is in our best interest, we may conduct follow-on offerings upon the termination of this offering. Our charter does not restrict our ability to conduct offerings in the future. (For purposes of this definition, we do not consider a “public offering” to include offerings on behalf of selling stockholders or offerings related to a distribution reinvestment plan or employee benefit plan.)

 

Although the initial estimated value (the offering price in this offering) will represent the price at which most investors are willing to purchase shares in this “best efforts” offering, this reported value likely will differ from the price at which a stockholder could resell his or her shares because: (1) there is no public trading market for the shares at this time; (2) the estimated value neither will reflect, and will not be derived from, the fair market value of our assets, nor will it represent the amount of net proceeds that would result from an immediate liquidation of those assets, because the amount of proceeds available for investment from our public “best efforts” offering is net of selling commissions, the marketing contribution, other organization and offering costs and acquisition fees and expenses; and (3) the estimated value will not take into account how market fluctuations will affect the value of our investments.

 

Beginning eighteen months after the last offering of our shares of common stock, a new estimated value of our shares will be determined by our Business Manager.  Our board has adopted a policy requiring the engagement of an independent third party (at the applicable time) to review the valuation approach used by our Business Manager to estimate the value of our shares, including the underlying assumptions made by our Business Manager and the valuation conclusion, and to make that report accessible to soliciting dealers.

 

Q:  When will I get my tax information?

 

A:   We expect to mail a Form 1099 with your tax information by January 31st of each year.

 

Q:  Who can help answer questions?

 

A:   If you have more questions about the offering or if you would like additional copies of this prospectus, you should contact your registered representative or our dealer manager:

 

Inland Securities Corporation
2901 Butterfield Road
Oak Brook, Illinois 60523
(630) 218-8000
Attention: Ms. Roberta S. Matlin

 

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PROSPECTUS SUMMARY

 

This summary highlights the material information contained elsewhere in this prospectus. Because this is a summary, it does not contain all information that may be important to you. You should read this entire prospectus and its appendices carefully before you decide to invest in shares of our common stock.

 

Inland Core Assets Real Estate Trust, Inc.

 

We are a Maryland corporation formed to acquire a diversified portfolio of commercial real estate located throughout the United States.  We will focus primarily on “core assets,” consisting of retail properties, office buildings, multi-family properties and industrial/distribution and warehouse facilities.  We also may purchase single-tenant, net leased properties in each of these four core asset classes.  In all cases, we may purchase existing or newly-constructed properties, properties that are under development or construction, or properties that have not yet been developed.  In addition, in all cases, we may acquire properties directly, by purchasing the property, also known as a “fee interest,” or through joint ventures, including joint ventures in which we do not own a controlling interest.  We also may invest in real estate-related equity securities of both publicly traded and private real estate companies, as well as commercial mortgage-backed securities.

 

We intend to be taxed as a REIT commencing with the tax year ending December 31, 20[    ].  Our office is located at 2901 Butterfield Road, Oak Brook, Illinois 60523.   Our toll-free telephone number is 800-826-8228 and our website address is [                    ].

 

Our Management

 

We operate under the direction of our board of directors, the members of which are accountable to us and our stockholders as fiduciaries.  Our board, including a majority of our independent directors, must approve certain actions set forth in our charter.  We have five members on our board of directors, three of whom are independent of IREIC and its affiliates.  These independent directors are responsible for reviewing the performance of our Business Manager and Real Estate Managers, as described below.  All of our directors will be elected annually by our stockholders.

 

We are externally managed and advised by our Business Manager, a wholly owned subsidiary of IREIC.  Various other affiliates of IREIC will be involved in our operations, and we will rely upon the executive officers of our Business Manager and the executive officers and employees of other IREIC-affiliated entities to manage our day-to-day affairs and to identify and acquire property and make other investments on our behalf.  Inland Core Real Estate Services LLC and Inland Core Management LLC, which we together refer to herein as our “Real Estate Managers,” will manage our properties and our Business Manager and IREA, an indirect wholly owned subsidiary of The Inland Group, Inc., will assist us in identifying potential acquisition opportunities, negotiating contracts related thereto and acquiring properties on our behalf.

 

Terms of the Offering

 

We are offering a maximum of 150,000,000 shares at a price of $10.00 per share on a “best efforts” basis. A “best efforts” offering is one in which the securities dealers participating in the offering are only required to use their good faith efforts and reasonable diligence to sell the shares, and have no firm commitment or obligation to purchase any of the shares. No specified number of securities is, therefore, guaranteed to be sold and no specified amount of money is guaranteed to be raised in this offering.  The offering price of our shares was determined by our board of directors in its sole discretion.  The offering

 

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price is not based on the book value or net asset value of our current or expected investments, or our current or expected cash flow. See “Risk Factors — Risks Related to the Offering” for additional discussion regarding a “best efforts” offering and the offering price of our shares.

 

We also are offering up to 30,000,000 shares to be sold to stockholders who participate in our distribution reinvestment plan, or “DRP.”  You may participate in the plan by reinvesting distributions in additional shares of our common stock at a purchase price per share initially equal to $9.50. Distributions may be fully reinvested. If you participate, you will be taxed on income attributable to the reinvested distributions based on the fair market value of shares of our common stock received in lieu of a cash distribution.  Thus, you would have to rely solely on sources other than distributions from us to pay taxes on the distributions. As a result, you may have a tax liability without receiving cash distributions to pay the tax liability. Our board may amend, suspend or terminate the plan, including increasing or decreasing the per share purchase price, in its sole discretion at any time without prior notice to participants.

 

We reserve the right to reallocate the shares offered between our “best efforts” offering and the distribution reinvestment plan.

 

Our REIT Status

 

Once we qualify as a REIT, we generally will not be subject to federal income tax on income that we distribute to our stockholders.  Under the Internal Revenue Code of 1986, as amended (the “Code”), REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute at least 90% of their “REIT taxable income,” excluding income from operations or sales through a taxable REIT subsidiary.  If we fail to qualify for taxation as a REIT in any year, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four years following the year of our failure to qualify as a REIT.  Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our income and property and to federal income and excise taxes on our undistributed income.  For additional discussion regarding REITs and REIT qualification, see “Federal Income Tax Considerations.”

 

Summary Risk Factors

 

An investment in our shares involves significant risks. If we are unable to effectively manage these risks, we may not meet our investment objectives and you may lose some or all of your investment. See “Risk Factors” beginning on page 27.  The following is a summary of the material risks that we believe are most relevant to an investment in shares of our common stock, and should be read together with “— Conflicts of Interest” set forth below.

 

·                                          No public market currently exists, and one may never exist, for our shares.  Our board does not anticipate evaluating a liquidity event until at least 2017, and we are not required to liquidate.

 

·                                          The offering price of our shares is not indicative of the price that you may be able to sell them.  Further, the offering price is not based on the book value or net asset value of our current or expected investments, or our current or expected cash flow.  The offering price may be greater than the per share “estimated value” that we publish in the future.

 

·                                          Investors who purchase shares of our common stock in this offering will incur immediate dilution.

 

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·                                          Our investment policies and strategies are very broad and permit us to invest in numerous types of properties, regardless of geographic location.

 

·                                          There is no assurance that we will be able to achieve our investment objectives.

 

·                                          Because this is a “blind pool” offering, you will not have the opportunity to evaluate all investments before we make them.  The number and value of properties we acquire will depend initially on the proceeds raised in this offering.

 

·                                          Until the proceeds from this offering are fully invested and from time to time thereafter, we may not generate sufficient cash flow from operations, determined in accordance with GAAP, as adjusted for acquisition costs, to fully fund distributions.  As used herein, “GAAP” means generally accepted accounting principles as in effect in the United States of America from time to time or any other accounting basis mandated by the SEC.  Therefore, some or all of our distributions may be paid from cash flow generated from investing activities, including the net proceeds from the sale of our assets, which may reduce the amount of money available to invest in properties.  In addition, we may fund distributions from, among other things, advances or contributions from our Business Manager or IREIC or from the cash retained by us in the case that our Business Manager defers, accrues or waives all, or a portion, of its base business management fee, or waives its right to be reimbursed for certain expenses.  However, neither our Business Manager nor IREIC has any obligation to provide us with advances or contributions, and our Business Manager is not obligated to defer, accrue or waive any portion of its base business management fee or reimbursements.  Further, there is no assurance that any of these other sources will be available to fund distributions.

 

·                                          We are subject to the risks associated with the significant dislocations and liquidity disruptions currently occurring in the global credit markets.

 

·                                          Our share repurchase program is subject to numerous restrictions, may be amended, suspended or terminated by our board of directors at any time and should not be relied upon as a means of liquidity.

 

·                                          We do not have any employees and will rely entirely on our Business Manager and Real Estate Managers to manage our business and assets.

 

·                                          We may borrow up to 300% of our net assets, equivalent to a 75% loan-to-asset value ratio, and principal and interest payments on our borrowings will reduce the funds available for other purposes, including distribution to our stockholders.

 

·                                          Our charter limits any person from owning more than 9.8% in value of our outstanding stock or more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding common stock without the prior approval of our board of directors.

 

·                                          We may fail to qualify as a REIT, and thus be required to pay entity-level taxes.

 

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Conflicts of Interest

 

As of June 30, 2011, IREIC and Inland Private Capital Corporation (f/k/a Inland Real Estate Exchange Corporation), or “IPCC,” had sponsored five other REITs and ninety-nine real estate exchange private placement limited partnerships and limited liability companies.  Two of the REITs, Inland American and Inland Diversified, are presently managed by affiliates of our Business Manager.  Two other REITs, Inland Real Estate Corporation, which we refer to herein as “IRC,” and Inland Western Retail Real Estate Trust, Inc., which we refer to herein as “Inland Western,” are self-managed, but IREIC and its affiliates continue to hold a significant investment in these entities.  Inland Retail Real Estate Trust, Inc., also sponsored by IREIC and referred to herein as “IRRETI,” was acquired in a merger in 2007.

 

Conflicts will exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where properties owned by other IREIC- or IPCC-sponsored programs are located. In these cases, a conflict may arise in the acquisition or leasing of properties if we and another IREIC- or IPCC-sponsored program are competing for the same properties or tenants in negotiating leases, or a conflict may arise in connection with the resale of properties if we and another IREIC- or IPCC-sponsored program are selling similar properties at the same time.

 

The following is a summary of other conflicts of interest that we believe are most relevant to an investment in shares of our common stock.

 

·                                          Certain persons performing services for our Business Manager and Real Estate Managers are employees of IREIC or its affiliates, and may also perform services for its affiliates and other entities sponsored by IREIC. These individuals will face competing demands for their time and services and may have conflicts in allocating their time between our business and assets and the business and assets of these other entities. IREIC also may face a conflict of interest in allocating personnel and resources among these entities.

 

·                                          We do not have arm’s length agreements with our Business Manager, Real Estate Managers or any other affiliates of IREIC, and will pay these entities significant fees.  In some cases, these fees will be based upon various metrics such as our total assets, a percentage of our average invested assets, the purchase price for these assets or the revenues generated by these assets. This may result in our Business Manager recommending investments, or other actions, in an effort to increase these fees.

 

·                                          We may acquire our Business Manager and Real Estate Managers in an effort to internalize our management functions, but may not be able to retain key personnel.

 

·                                          We, along with the other IREIC-sponsored programs, will rely to some degree on affiliates of IREIC, including specifically IREA, to identify and assist in acquiring properties.

 

·                                          Inland Securities, our dealer manager, is an affiliate of IREIC and has not conducted an independent review of this offering.

 

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Policies and Procedures with Respect to Related Party Transactions

 

We have adopted a conflicts of interest policy, which prohibits us from engaging in the following types of transactions with IREIC-affiliated entities:

 

·                                          purchasing properties from, or selling properties to, any IREIC-affiliated entities (excluding circumstances where an entity affiliated with IREIC, such as IREA, enters into a purchase agreement to acquire a property and then assigns the purchase agreement to us);

 

·                                          making loans to, or borrowing money from, any IREIC-affiliated entities (excluding expense advancements under existing agreements and the deposit of monies in any banking institution affiliated with IREIC); and

 

·                                          investing in joint ventures with any IREIC-affiliated entities.

 

This policy will not impact agreements or relationships between us and IREIC and its affiliates, including, for example, agreements with our Business Manager, Real Estate Managers and Inland Securities.

 

Dedicated Acquisitions Staff

 

Our Business Manager will employ a person or persons exclusively focused on identifying and acquiring properties for us.  Any opportunities identified by our Business Manager will be presented only to us, and will not be subject to rights of first refusal previously granted to other programs sponsored by IREIC or its affiliates.  As described in this prospectus, IREA also will identify and assist in acquiring properties for us. 

 

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Organizational Structure

 

 

The following chart depicts the services that affiliates of IREIC may render to us, and our organizational structure:

 

 

We intend to acquire 1,000 shares of common stock in The Inland Real Estate Group of Companies, Inc., a marketing entity whose primary function is to promote the business interests of its individual stockholder members, including other entities previously sponsored by IREIC. The Inland Real Estate Group of Companies coordinates, among other things, marketing to prospective tenants as well as identifying and monitoring legislation that may impact us and our stockholders.

 

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Compensation Payable To Affiliates of IREIC

 

We will pay fees to affiliates of IREIC, including Inland Securities, our Business Manager and our Real Estate Managers and their respective affiliates. We also will reimburse these entities for expenses incurred in performing services on our behalf.

 

Set forth below is a summary of the most significant fees and expenses that we expect to pay to these entities. For purposes of illustrating offering stage fees and expenses, we have assumed that we will sell the maximum of 150,000,000 shares in the “best efforts” portion of this offering at $10.00 per share.  We will not pay selling commissions, the marketing contribution or issuer costs in connection with shares of common stock issued through our distribution reinvestment plan.  For additional discussion regarding these fees and expenses, see “Compensation Table” beginning on page 59.

 

Type of Compensation

 

Offering Stage

 

 

 

 

 

Selling Commissions

 

We will pay Inland Securities a selling commission equal to 7% of the sale price for each share sold in the “best efforts” offering. Inland Securities anticipates reallowing the full amount of the selling commissions to participating soliciting dealers. If the maximum amount of shares is sold in our “best efforts” offering, and there are no special sales, we will pay a total of $105 million in selling commissions.

 

 

 

Marketing Contribution

 

We will pay Inland Securities a fee for marketing the shares, which includes coordinating the marketing of the shares with any participating soliciting dealers, in an amount equal to 3% of the gross offering proceeds from shares sold in the “best efforts” offering. Inland Securities may reallow up to 1.5% of this marketing contribution to participating soliciting dealers. If the maximum amount of shares is sold in our “best efforts” offering, and there are no special sales, we will pay a total of a $45 million marketing contribution.

 

 

 

Due Diligence Expense Reimbursement

 

We will reimburse Inland Securities and participating soliciting dealers for bona fide out-of-pocket, itemized and detailed due diligence expenses incurred by these entities, in amounts up to 0.5% of the gross offering proceeds from shares sold in the “best efforts” offering. These expenses may, in our sole discretion, be reimbursed from amounts paid or reallowed to these entities as a marketing contribution, or may be reimbursed from issuer costs. If the maximum amount of shares is sold in our “best efforts” offering, and we reimburse these expenses out of issuer costs, the maximum reimbursement will be $7.5 million. If, however, these expenses are reimbursed from amounts paid or reallowed as a marketing contribution, there will be no additional costs to us.

 

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Issuer Costs

 

We will reimburse IREIC, its affiliates and third parties for any issuer costs that they pay on our behalf, including any bona fide out-of-pocket, itemized and detailed due diligence expenses not reimbursed from amounts paid or reallowed as a marketing contribution, in an amount not to exceed 1.5% of the gross offering proceeds from shares sold in the “best efforts” offering over the life of the offering. Our Business Manager or its affiliates will pay or reimburse any organization and offering expenses, including any “issuer costs,” that exceed 11.5% of the gross offering proceeds from shares sold in the “best efforts” offering over the life of the offering. If the maximum amount of shares is sold in our “best efforts” offering, we may reimburse issuer costs of $22.5 million.

 

 

 

Operational Stage

 

 

 

 

 

Acquisition Fees

 

We will pay our Business Manager or its affiliates a fee equal to 1.5% of the “contract purchase price” of each asset we acquire, including any incremental interest therein, including by way of exchanging a debt interest for an equity interest (excluding the contribution of an asset owned, directly or indirectly, by us to a joint venture), or developing, constructing, renovating, or otherwise physically improving an asset, including, but not limited to major tenant upgrades, whether pursuant to allowances, concessions or rent abatements provided for at the time the property is acquired. In the case of an asset acquired through a joint venture, the acquisition fee payable will be proportionate to our ownership interest in the venture. For the purpose of calculating acquisition fees, the “contract purchase price” will be equal to the amount of monies or other consideration paid or contributed by us either to acquire, directly or indirectly, any asset or an incremental interest in the asset, and including, without duplication, any indebtedness for money borrowed to finance the purchase, indebtedness secured by the asset, which is assumed, or indebtedness that is refinanced or restructured, all in connection with the acquisition, and which is or will be secured by the asset at the time of the acquisition or to develop, construct, renovate or otherwise improve that asset. The contract purchase price will exclude acquisition fees and acquisition expenses. Assuming aggregate borrowings equivalent to a 55% loan-to-asset ratio consistent with our borrowing policy, we will pay acquisition fees in an amount equal to approximately $50 million. Assuming aggregate borrowings equivalent to a 75% loan-to-asset ratio, which represents the limit set forth in our charter, we will pay acquisition fees in an amount equal to approximately $90 million.

 

 

 

Acquisition Expenses

 

We will reimburse our Business Manager, Real Estate Managers and entities affiliated with each of them, including IREA and its respective affiliates, as well as third parties, for any investment-related expenses they pay, including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, third-party broker or finder’s fees, title insurance expenses, survey expenses, property inspection expenses and other closing costs, regardless of whether we acquire a particular property, subject to the limits in our charter. Assuming aggregate

 

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borrowings equivalent to a 55% loan-to-asset ratio consistent with our borrowing policy, we will reimburse acquisition expenses in an amount equal to approximately $16.7 million. Assuming aggregate borrowings equivalent to a 75% loan-to-asset ratio, which represents the limit set forth in our charter, we will reimburse acquisition expenses in an amount equal to approximately $30 million.

 

 

 

Business Management Fees

 

We will pay our Business Manager: (1) an annual base business management fee equal to up to 0.65% of our “average invested assets,” payable quarterly in an amount equal to 0.1625% of our average invested assets as of the last day of the immediately preceding quarter; provided, that our Business Manager may decide, in its sole discretion, to be paid an amount less than the total amount to which it is entitled in any particular quarter, and the excess amount that is not paid may, in the Business Manager’s sole discretion, be deferred, waived permanently or accrued, without interest, to be paid at a later point in time; and (2) a disposition fee in an amount equal to 1.5% of “gross consideration” in connection with: (a) the sale of any asset or assets (excluding our investments in securities), in which the net sales proceeds resulting from the sale are specifically identified and distributed to stockholders; (b) a listing of our shares, or the shares of any subsidiary, on a national securities exchange; or (c) a merger, reorganization, business combination, share exchange or acquisition, in which our stockholders receive cash or the securities of the acquiror; provided, that if any of the events triggering payment of the disposition fee occurs in connection with an internalization in which we are acquiring our Business Manager and Real Estate Managers, in no event will the aggregate amount of the disposition fee and the aggregate purchase price we will pay to acquire our Business Manager and Real Estate Managers exceed 1.5% of the amount of our total assets on the last audited balance sheet prior to closing the transaction, giving effect to any asset acquisitions that were probable or completed since the date of the last audited balance sheet, prior to the applicable transaction. The actual amount of the base business management fee will depend on the carrying value of our assets and distributions declared to our stockholders and the actual amount of the 1.5% disposition fee will depend on numerous variables.

“Average invested assets” means, for any period, the average of the aggregate book value of our assets, including all intangibles and goodwill, invested, directly or indirectly, in equity interests in, and loans secured by, properties, as well as amounts invested in securities and consolidated and unconsolidated joint ventures or other partnerships, before reserves for amortization and depreciation or bad debts, impairments or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the relevant calendar quarter.

“Gross consideration” means: (a) in the case of the sale of any asset or

 

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assets, the amount of net sales proceeds specifically identified and distributed to stockholders; (b) in the case of a listing of our shares, or the shares of any subsidiary, on a national securities exchange, the market value calculated by taking the average closing price over the period of thirty consecutive trading days during which our shares, or the shares of the common stock of our subsidiary, as applicable, are eligible for trading, beginning on the 180th day after the applicable listing; or (c) in the case of a merger, reorganization, business combination, share exchange or acquisition, the market value of the other entity’s securities, if listed, or the gross consideration as reflected in the documents governing the transaction.

 

 

 

Real Estate Management Fees, Leasing Fees and Construction Management Fees

 

For each property that is managed directly by our Real Estate Managers or their affiliates, we will pay the applicable Real Estate Manager a monthly management fee of up to 1.9% of the gross income from any single-tenant, net-leased property, and up to 3.9% of the gross income from any other type of property. Each Real Estate Manager will determine, in its sole discretion, the amount of the management fee payable in connection with a particular property, subject to these limits. For each property that is managed directly by one of our Real Estate Managers or its affiliates, we will pay the Real Estate Manager a separate leasing fee based upon prevailing market rates applicable to the geographic market of that property. If we engage our Real Estate Managers to provide construction management services for a property, we also will pay a separate construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project.

We also will reimburse the Real Estate Managers and their affiliates for property-level expenses that they pay or incur on our behalf, including the salaries, bonuses and benefits of persons performing services for the Real Estate Managers and their affiliates (excluding the executive officers of the Real Estate Managers). The actual amount depends on the gross income generated and cannot be determined at the present time.

 

 

 

Expense Reimbursements

 

We will reimburse IREIC, our Business Manager and their respective affiliates, including the ancillary service providers, for any expenses that they pay or incur on our behalf in providing services to us, including all expenses and the costs of salaries and benefits of persons performing services for these entities on our behalf (except for the salaries and benefits of persons who also serve as one of our executive officers or as an executive officer of our Business Manager or its affiliates). Expenses include, but are not limited to: expenses incurred in connection with any sale of assets or any contribution of assets to a joint venture; expenses incurred in connection with any liquidity event or business combination; taxes and assessments on income or real property and taxes; premiums and other associated fees for insurance policies including director and officer liability insurance; expenses associated with investor communications including the cost of preparing, printing and mailing annual reports, proxy statements and other reports required by governmental entities; administrative service expenses charged to, or

 

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for the benefit of, us by third parties; audit, accounting and legal fees charged to, or for the benefit of, us by third parties; transfer agent and registrar’s fees and charges paid to third parties; and expenses relating to any offices or office facilities maintained solely for our benefit that are separate and distinct from our executive offices. The actual amount will depend on the services provided and the method by which reimbursement rates are calculated. Actual amounts cannot be determined at the present time.

 

 

 

Liquidation Stage

 

 

 

 

 

Real Estate Sales Commission

 

For substantial assistance in connection with the sale of properties, we will pay our Business Manager or its affiliates a real estate sales commission equal to up to one-half of the customary commission which would be paid to a third party broker for the sale of a comparable property, provided that the amount may not exceed 3% of the contract price of the property sold and, when added to all other real estate commissions paid to unaffiliated parties in connection with a sale, may not exceed the lesser of a competitive real estate commission or 6% of the sales price of the property. The actual amounts to be paid will depend upon the contract sales price of our properties and the customary commissions paid to third party brokers and, therefore, cannot be determined at the present time.

 

If our Business Manager or its affiliates receives a real estate commission, it will be in addition to the 1.5% disposition fee that will be payable to our Business Manager, as described under the heading “Operational Stage — Business Management Fees” in this table.

 

 

 

Subordinated Incentive Fee

 

Upon a “triggering event,” we will pay our Business Manager a fee equal to 10% of the amount by which (1) the “liquidity amount” (as defined below) exceeds (2) the “aggregate invested capital,” less any distributions of net sales or financing proceeds, plus the total distributions required to be paid to our stockholders in order to pay them a 8% per annum cumulative, pre-tax non-compounded return on the aggregate invested capital. If we have not satisfied this return threshold at the time of the applicable triggering event, the fee will be paid at the time that we have satisfied the return requirements.

 

As used herein, a “triggering event” means any sale of assets (excluding the sale of marketable securities), in which the net sales proceeds are specifically identified and distributed to our stockholders, or any liquidity event, such as a listing or any merger, reorganization, business combination, share exchange or acquisition, in which our stockholders receive cash or the securities of another issuer that are listed on a national securities exchange. “Aggregate invested capital” means the aggregate original issue price paid for the shares of our common stock, before reduction for organization and offering expenses, reduced by any distribution of sale or financing proceeds.

 

For purposes of this subordinated incentive fee, the “liquidity amount” will be calculated as follows:

 

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·      In the case of the sale of our assets, the net sales proceeds realized by us from the sale of assets since inception and distributed to stockholders plus the total amount of any other distributions paid by us from inception until the date that the liquidity amount is determined.

 

·      In the case of a listing or any merger, reorganization, business combination, share exchange, acquisition or other similar transaction in which our stockholders receive cash or the securities of another issuer that are listed on a national securities exchange, as full or partial consideration for their shares, the “market value” of the applicable shares, plus the total distributions paid by us from inception until the date that the liquidity amount is determined. “Market value” means the value determined as follows: (1) in the case of the listing of our shares, or the common stock of our subsidiary, on a national securities exchange, by taking the average closing price over the period of thirty consecutive trading days during which our shares, or the shares of the common stock of our subsidiary, as applicable, are eligible for trading, beginning on the 180th day after the applicable listing; or (2) in the case of the receipt by our stockholders of securities of another entity that are trading on a national securities exchange prior to, or that become listed concurrent with, the consummation of the liquidity event, as follows: (a) in the case of shares trading before consummation of the liquidity event, the value ascribed to the shares in the transaction giving rise to the liquidity event; and (b) in the case of shares which become listed concurrent with the closing of the transaction giving rise to the liquidity event, the average closing price over the period of thirty consecutive trading days during which the shares are eligible for trading, beginning on the 180th day after the applicable listing. In addition, any cash consideration received by our stockholders in connection with any liquidity event will be added to the market value determined in accordance with clause (1) or (2).

 

The actual amount of the subordinated incentive fee is not determinable at this time.

 

We May Borrow Money

 

We may finance a portion of the purchase price of any properties that we acquire with monies borrowed on an interim or permanent basis from banks, institutional investors and other third party lenders. Any money that we borrow may be secured by a mortgage or other security interest in some, or all, of our assets. The interest we will pay on our loans may be fixed or variable. We also may establish a revolving line of credit for short-term cash management and bridge financing purposes. Further, we may agree to limit the time during which we may prepay any loan in order to reduce the interest rate on the loan.

 

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We expect that our aggregate borrowings, secured by all of our assets, will average approximately 55% of the total fair market value of our assets.  For these purposes, the fair market value of each asset will be equal to the purchase price paid for the asset or the value reported in a more recent appraisal of the asset, whichever is later.  This policy, however, will not apply to individual assets and only will apply once we have ceased raising capital under this or any subsequent offering and invested substantially all of our capital. As a result, we expect to borrow more than 55% of the contract purchase price of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent.

 

Our charter limits the aggregate amount we may borrow, whether secured or unsecured, to an amount not to exceed 300% of our net assets, equivalent to a 75% loan-to-asset value ratio, unless our board (including a majority of the independent directors) determines that a higher level is appropriate and the excess in borrowing is disclosed to stockholders in our next quarterly report along with the justification for the excess.  Loan agreements with our lenders may impose additional restrictions on the amount we may borrow and may impose limits on, among other things, our ability to pay distributions. We do not intend to exceed the leverage limits in our charter except that we may do so from time to time during this or any future offering (excluding offerings solely through a distribution reinvestment plan).

 

Distribution Policy

 

We intend to pay regular monthly cash distributions to our stockholders, and will not fund any distributions from the net proceeds of this offering.  We anticipate that we will begin declaring distributions no later than sixty days after we have sold enough shares to satisfy the minimum offering condition. Until the proceeds from this offering are fully invested and from time to time thereafter, we may not generate sufficient cash flow from operations, determined in accordance with GAAP, as adjusted for acquisition costs, to fully fund distributions.  Some or all of our distributions may be paid from cash flow generated from investing activities, including the net proceeds from the sale of our assets.  In addition, we may fund distributions from, among other things, advances or contributions from our Business Manager or IREIC or from the cash retained by us in the case that our Business Manager defers, accrues or waives all, or a portion, of its base business management fee, or waives its right to be reimbursed for certain expenses.  A deferral, accrual or waiver of any fee or reimbursement owed to our Business Manager will have the effect of increasing cash flow from operations for the relevant period because we do not have to use cash to pay any fee or reimbursement which was deferred, accrued or waived during the relevant period.  We will, however, use cash in the future if we pay any fee or reimbursement that was deferred or accrued.  Neither our Business Manager nor IREIC has any obligation to provide us with advances or contributions, and our Business Manager is not obligated to defer, accrue or waive any portion of its base business management fee or reimbursements.  Further, there is no assurance that these other sources will be available to fund distributions.

 

Stockholder Voting Rights and Limitations

 

We will elect directors or conduct other business matters that may be properly presented at our annual meetings of stockholders. We also may call special meetings of stockholders from time to time. The holders of our common stock are entitled to one vote per share on all matters voted on by stockholders, including electing our directors.

 

Restriction on Share Ownership

 

Our charter contains restrictions on the number of shares any one person or group may own. Specifically, no person or group may own or control more than 9.8% in value of our outstanding stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding

 

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common stock.  This limit may be further reduced if our board of directors waives this limit for certain holders.  See “Management — The Business Management Agreement — Compensation.”  These restrictions are designed, among other purposes, to enable us to comply with ownership restrictions imposed on REITs by the Code, and may have the effect of preventing a third party from engaging in a business combination or other transaction even if doing so would result in you receiving a “premium” for your shares. See “Risk Factors — Risks Related to Our Corporate Structure” for additional discussion regarding restrictions on share ownership.

 

Share Repurchase Program

 

Our shares are not listed for trading on any national securities exchange and our board does not anticipate evaluating a liquidity event, including a listing on a national securities exchange, until at least 2017.  There is no assurance the board will decide to seek a listing at that time, if ever.  A public market may never develop. You may not be able to sell your shares when you desire or at a price equal to or greater than the offering price.  In addition, our charter imposes restrictions on the ownership of our common stock, which will apply to potential purchasers of your stock.  As a result, you may find it difficult to find a buyer for your shares.

 

If you meet the limited qualifications to participate in our share repurchase program, you may be able to sell your shares to us if we choose to repurchase them.  We may repurchase shares through the program, from time to time, at prices ranging from 92.5% of our “share price,” as defined in the program, for stockholders who have owned shares for at least one year to 100% of our “share price” for stockholders who have owned shares for at least four years.  Stockholders who have held their shares for at least one year may request that we repurchase any number of shares by submitting a repurchase request, the form of which is available on our website, to our repurchase agent. We will effect all repurchases on the last business day of the calendar month or any other business day that may be established by our board of directors.  As used in the program, “share price” means: (1) prior to the first valuation date, the offering price of our shares in our most recent “best efforts” offering (unless the shares were purchased at a discount from that price, and then that purchase price), reduced by any distributions of net sale proceeds that we designate as constituting a return of capital; and (2) after the first valuation date, the lesser of: (A) the share price determined in (1); or (B) the most recently disclosed estimated value per share, as determined by our board, our Business Manager or another firm that we have chosen for that purpose.

 

We are authorized to use only the proceeds from our distribution reinvestment plan to fund repurchases.  Further, we will limit the number of shares repurchased during any calendar year to 5% of the number of shares of common stock outstanding on December 31st of the previous calendar year.

 

The terms of our share repurchase program are more generous with respect to repurchases sought upon a stockholder’s death or qualifying disability.  In these instances, the one-year holding period will be waived, shares will be repurchased at a price equal to 100% of our “share price,” we are authorized to use any funds to complete the repurchase and neither the limit regarding funds available from the distribution reinvestment plan nor the 5% limit will apply.  In order for a determination of disability to entitle a stockholder to these special repurchase terms: (1) the stockholder would have to receive a determination of disability arising after the date the stockholder acquired the shares to be repurchased; and (2) the determination of disability would have to be made by the governmental entities specified in the share repurchase program.  See “Distribution Reinvestment Plan and Share Repurchase Program — Share Repurchase Program” for a more detailed definition of “qualifying disability.”

 

The share repurchase program will immediately terminate if our shares are listed on any national securities exchange.  In addition, our board of directors, in its sole discretion, may at any time amend,

 

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suspend (in whole or in part), or terminate our share repurchase program.  In the event that we amend, suspend or terminate the share repurchase program, however, we will send stockholders notice of the change at least thirty days prior to the change.  Further, our board reserves the right in its sole discretion to reject any requests for repurchases.

 

ERISA Considerations

 

The section of this prospectus captioned “ERISA Considerations” describes the effect that the purchase of shares will have on individual retirement accounts and retirement plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Code. ERISA is a federal law that regulates the operation of certain tax-advantaged retirement plans. Any retirement plan trustee or individual considering purchasing shares for a retirement plan or an individual retirement account should consider, at a minimum: (1) whether the investment is in accordance with the documents and instruments governing the IRA, plan or other account; (2) whether the investment satisfies the fiduciary requirements associated with the IRA, plan or other account; (3) whether the investment will generate unrelated business taxable income, or “UBTI,” to the IRA, plan or other account; (4) whether there is sufficient liquidity for that investment under the IRA, plan or other account; (5) the need to value the assets of the IRA, plan or other account annually or more frequently; and (6) whether the investment would constitute a non-exempt prohibited transaction under applicable law.

 

Investment Company Act of 1940

 

We intend to conduct our operations so that the company and each of its subsidiaries are exempt from registration as an investment company under the Investment Company Act of 1940, as amended, referred to herein as the “Investment Company Act.” If we become obligated to register the company or any of its subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act, which would restrict our activities and significantly increase our operating expenses. See “Risk Factors — Risks Related to our Business.”

 

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Estimated Use of Proceeds

 

The amounts listed in the table below represent our best good faith estimate of the use of offering proceeds.  The estimates may not accurately reflect the actual receipt or application of the offering proceeds.  The first scenario assumes we sell the minimum of 200,000 shares in the “best efforts” portion of the offering at $10.00 per share.  The second scenario assumes we sell the maximum of 150,000,000 shares in the “best efforts” portion of the offering at $10.00 per share.  We have not given effect to any special sales or volume discounts which could reduce selling commissions but not the net proceeds we would realize from the sale, under either scenario.  In addition, we will not pay selling commissions, the marketing contribution or issuer costs in connection with shares of common stock issued through our distribution reinvestment plan.

 

 

 

Minimum Offering

 

Maximum Offering

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

Gross Offering Proceeds

 

$

2,000,000

 

100.0%

 

$

1,500,000,000

 

100.0%

 

Less Organization and Offering Expenses:

 

 

 

 

 

 

 

 

 

Selling Commissions

 

$

140,000

 

7.0%

 

$

105,000,000

 

7.0%

 

Marketing Contribution

 

$

60,000

 

3.0%

 

$

45,000,000

 

3.0%

 

Issuer Costs

 

$

30,000

 

1.5%

 

$

22,500,000

 

1.5%

 

TOTAL EXPENSES:

 

$

230,000

 

11.5%

 

$

172,500,000

 

11.5%

 

Net Offering Proceeds

 

$

1,770,000

 

88.5%

 

$

1,327,500,000

 

88.5%

 

Less:

 

 

 

 

 

 

 

 

 

Acquisition Fees

 

$

30,000

 

1.5%

 

$

22,500,000

 

1.5%

 

Acquisition Expenses

 

$

10,000

 

0.5%

 

$

7,500,000

 

0.5%

 

NET PROCEEDS AVAILABLE FOR INVESTMENT:

 

$

1,730,000

 

86.5%

 

$

1,297,500,000

 

86.5%

 

 

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RISK FACTORS

 

An investment in our shares involves significant risks and is suitable only for those persons who understand the following risks and who are able to bear the risk of losing their entire investment. The occurrence of any of the risks discussed in this prospectus, particularly those described under the subheadings “ — Risks Related to the Offering,” “— Risks Related to Our Business,” “— Risks Related to Investments in Real Estate” and “— Risks Associated with Debt Financing,” “— Risks Related to Our Corporate Structure,” and “— Federal Income Tax Risks,” could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to you.  You should consider the following risks in addition to other information set forth elsewhere in this prospectus before making your investment decision.

 

Risks Related to the Offering

 

We have no operating history, and the prior performance of programs sponsored by IREIC should not be used to predict our future results.

 

We are newly formed with no operating history.  You should consider an investment in our shares in light of the risks, uncertainties and difficulties frequently encountered by companies that are, like us, in their early stage of development.  You should not rely upon the past performance of other IREIC-sponsored programs as an indicator of our future performance. There is no assurance that we will achieve our investment objectives.

 

There is no public market for our shares, and you may not be able to sell your shares.

 

There is no established public market for our shares and no assurance that one may develop. Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading by a specified date.  Our board does not anticipate evaluating a liquidity event, including a listing on a national securities exchange, until at least 2017.  In addition, even if our board decides to seek a listing of our shares of common stock, there is no assurance that we will satisfy the listing requirements or that we will be approved for listing.  Further, our charter limits any person or group from owning more than 9.8% in value of our outstanding stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding common stock without prior approval of our board. These restrictions may inhibit your ability to sell your shares.  You should purchase our shares only as a long-term investment because of the generally illiquid nature of the shares.

 

The offering price of our shares was determined by the board in its sole discretion.

 

Our board of directors established the offering price of our shares in its sole discretion, and did not consider any projection of the book or net value of our assets or operating income.  The offering price also is not based on a negotiation among our sponsor, us and the dealer manager, or on an independent valuation.  The offering price may not be indicative of the proceeds that you would receive upon liquidation. Further, the offering price may be significantly more than the price at which the shares would trade if they were to be listed on an exchange or actively traded by broker-dealers.

 

To assist FINRA members and their associated persons that participate in this public offering of common stock, we intend to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed, and the date of the data used to develop the estimated value. Our Business Manager has indicated that it intends to use the most recent price paid to acquire a share in our “best efforts” offering (ignoring purchase price discounts for certain

 

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categories of purchasers) or any follow-on public equity offering as its estimated per share value of our shares until we have completed our offering stage. We will consider our offering stage complete when we are no longer offering equity securities — whether through this offering or follow-on public offerings — and have not done so for eighteen months. (For purposes of this definition, we will not consider a “public equity offering” to include offerings on behalf of selling stockholders or offerings related to a distribution reinvestment plan or employee benefit plan.)

 

Although this initial estimated value (the offering price in this offering) will represent the most recent price at which most investors are willing to purchase shares in this “best efforts” offering, this reported value likely will differ from the price at which a stockholder could resell his or her shares because: (1) there is no public trading market for the shares at this time; (2) the estimated value neither will reflect, and will not be derived from, the fair market value of our assets, nor will it represent the amount of net proceeds that would result from an immediate liquidation of those assets, because the amount of proceeds available for investment from our public “best efforts” offering is net of selling commissions, the marketing contribution, other organization and offering costs and acquisition fees and expenses; and (3) the estimated value will not take into account how market fluctuations will affect the value of our investments.

 

In determining the estimated value of our shares by methods other than the last price paid to acquire a share in an offering, our Business Manager may estimate the value of our shares based upon a number of assumptions that may not be accurate or complete. Accordingly, these estimates may not accurately reflect the fair market value of our investments and will not likely represent the amount of net proceeds that would result from an immediate sale of our assets.

 

Investors will experience substantial dilution in the net tangible book value of their shares equal to the offering costs associated with those shares.

 

Investors who purchase shares of our common stock in this offering will incur immediate dilution equal to the costs of the offering associated with those shares.  This means that the investor who purchases shares of common stock will pay a price per share that substantially exceeds the per share net asset value.

 

Because this is a “blind pool” offering, you will not have the opportunity to evaluate all of our investments before we make them.

 

We will not provide investors with a significant amount of information, if any, regarding our future investments prior to the time an acquisition becomes “probable” or we complete the acquisition.  Since we have not identified specific properties that we intend to purchase with the proceeds from this offering, we are considered a “blind pool,” which makes an investment in our common stock speculative.  We have established policies relating to the types of investments we will make and the creditworthiness of tenants of our properties, but our Business Manager will have wide discretion in implementing these policies, subject to the oversight of our board of directors.  Additionally, our Business Manager has discretion to determine the location, number and size of our investments and the percentage of net proceeds we may dedicate to a single investment.

 

This is a “best efforts” offering and the number and type of investments will depend on the proceeds raised in this offering.

 

This offering is being made on a “best efforts” basis, meaning that the securities dealers participating in the offering are only required to use their good faith efforts and reasonable diligence to sell the shares, and have no firm commitment or obligation to purchase any of the shares.  The minimum

 

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amount we are required to sell is $2 million and we are not required to sell the full amount offered hereby.  Accordingly, if we are unable to raise substantially more than the minimum offering amount of $2 million, we will make very few investments, resulting in less diversification in terms of the number of investments we make and the geographic regions in which our real property investments are located.  For example, if we only raise the minimum amount, we will most likely invest through one or more joint ventures with third parties and may only be able to make one investment. A lack of diversification would increase the likelihood that any single investment’s performance would materially affect our overall investment performance.  Additionally, our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income.

 

We depend on our dealer manager to raise funds in this offering.  Events that prevent our dealer manager from serving in that capacity would jeopardize the success of this offering.

 

The success of this offering depends to a large degree on the efforts of our dealer manager, Inland Securities Corporation, an affiliate of our sponsor.  Our dealer manager has limited capital.  In order to conduct its operations, our dealer manager depends on transaction-based compensation that it earns in connection with offerings in which it participates.  If our dealer manager does not earn sufficient revenues from the offerings that it manages, it may not have sufficient resources to retain the personnel necessary to market and sell large amounts of shares on our behalf.  In the event that Inland Securities became unable to serve in the capacity of dealer manager for this or any public offering of our shares, we believe that it could be difficult to secure the services of another dealer manager.  Therefore, any event that hinders the ability of our dealer manager to conduct the offering on our behalf would jeopardize the success of the offering.

 

Our share repurchase program may be amended, suspended or terminated by our board of directors.

 

Our board of directors, in its sole discretion, may amend, suspend (in whole or in part), or terminate our share repurchase program.  Further, our board reserves the right in its sole discretion to change the repurchase prices or reject any requests for repurchases.  Any amendments to, or suspension or termination of, the share repurchase program may restrict or eliminate your ability to have us repurchase your shares and otherwise prevent you from liquidating your investment. See “Distribution Reinvestment Plan and Share Repurchase Program — Share Repurchase Program” for additional discussion regarding amendments to, or suspension or termination of, our share repurchase program.

 

Our charter authorizes us to issue additional shares of stock, which may reduce the percentage of our common stock owned by our other stockholders, subordinate stockholders’ rights or discourage a third party from acquiring us.

 

Investors purchasing in this offering will not have preemptive rights to purchase any shares issued by us in the future. Our charter authorizes us to issue up to 1,500,000,000 shares of capital stock, of which 1,460,000,000 shares are classified as common stock and 40,000,000 shares are classified as preferred stock.  We may, in the sole discretion of our board:

 

·                                          sell additional shares in this or future offerings;

 

·                                          issue equity interests in a private offering of securities;

 

·                                          classify or reclassify any unissued shares of common or preferred stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions,

 

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limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of the stock;

 

·                                          amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue; or

 

·                                          issue shares of our capital stock in exchange for properties.

 

Future issuances of common stock will reduce the percentage of our outstanding shares owned by our other stockholders.  Further, our board of directors could authorize the issuance of stock with terms and conditions that could subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders.  See “Description of Securities — Authorized Stock” for additional discussion regarding the issuance of additional shares.

 

Risks Related to Our Business

 

Recent market disruptions may adversely impact many aspects of our operating results and operating condition.

 

The financial and real estate markets have undergone pervasive and fundamental disruptions in the last few years. The disruptions have had and may continue to have an adverse impact on the availability of credit to businesses generally, and real estate in particular, and have resulted in and could lead to further weakening of the U.S. and global economies.  The availability of debt financing secured by commercial real estate has declined as a result of tightened underwriting standards.  Our business will be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the dislocations in the credit markets and general global economic recession.  If these conditions continue after we begin acquiring properties, they may materially affect the value of our investment properties, our ability to pay distributions, the availability or the terms of financing that we anticipate utilizing and our ability to refinance any outstanding debt when due.  These challenging economic conditions also may impact the ability of certain of our tenants to satisfy rental payments under existing leases.  Specifically, these conditions may have the following consequences:

 

·                                          the financial condition of our tenants may be adversely affected, which may result in us having to reduce rental rates in order to retain the tenants;

 

·                                          an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay our efforts to collect rent and any past due balances under the relevant leases and ultimately could preclude collection of these sums;

 

·                                          credit spreads for major sources of capital may widen if stockholders demand higher risk premiums or interest rates could increase due to inflationary expectations, resulting in an increased cost for debt financing;

 

·                                          our ability to borrow on terms and conditions that we find acceptable may be limited, which could result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders, or pursue acquisition opportunities, among other things, and increase our interest expense;

 

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·                                          a further reduction in the amount of capital that is available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real estate transaction activity and reduce the loan to value ratio upon which lenders are willing to lend;

 

·                                          the value of certain of properties may decrease below the amounts we pay for them, which would limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and could reduce the availability of unsecured loans;

 

·                                          the value and liquidity of short-term investments, if any, could be reduced as a result of the dislocation of the markets for our short-term investments and increased volatility in market rates for these investments or other factors; and

 

·                                          one or more counterparties to derivative financial instruments that we enter into could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments.

 

For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our investments.

 

The amount and timing of distributions may vary.  We may pay distribution from sources other than cash flow from operations, including cash flow generated from investing activities.

 

There are many factors that can affect the availability and timing of cash distributions paid to our stockholders such as our ability to buy, and earn positive yields on, properties, our operating expense levels, as well as many other variables. The actual amount and timing of distributions will be determined by our board of directors in its discretion, based on its analysis of our actual and expected earnings, cash flow, capital expenditures and investments, as well as general financial conditions.  Actual cash available for distribution may vary substantially from estimates made by our board.  In addition, to the extent we invest in development or redevelopment projects, or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially while we are raising capital and acquiring properties.  Until we generate sufficient cash flow from operations, determined in accordance with GAAP, as adjusted for acquisition costs, to fully fund distributions, some or all of our distributions may be paid from other sources, including cash flow generated from investing activities, including the net proceeds from the sale of our assets.  Distributions from these sources reduce the amount of money available to invest in properties.  In addition, to the extent distributions exceed our current and accumulated earnings and profits, your tax basis in our stock will be reduced and, to the extent distributions exceed your tax basis, you will generally recognize capital gain.

 

Although IREIC or its affiliates have previously forgone or deferred base business management fees or contributed monies in an effort to increase cash available for distribution by the other REITs previously sponsored by IREIC, our Business Manager is under no obligation, and may not agree, to continue to forgo or defer its base business management fee.

 

From time to time, IREIC or its affiliates have agreed to forgo or defer a portion of the base business management fee due them from the other REITs previously sponsored by IREIC to ensure that the particular REIT generated sufficient cash from operating, investing and financing activities to pay distributions while continuing to raise capital and acquire properties.  In addition, from time to time, IREIC or its affiliates have contributed monies to the other IREIC-sponsored REITs to fund distributions.  In each case, IREIC or its affiliates determined the amounts that would be forgone, deferred or contributed in their sole discretion.

 

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Likewise, we may fund distributions from, among other things, advances or contributions from our Business Manager or IREIC or from the cash retained by us in the case that our Business Manager defers, accrues or waives all, or a portion, of its base business management fee, or waives its right to be reimbursed for certain expenses.  Neither our Business Manager nor IREIC has any obligation to provide us with advances or contributions, and our Business Manager is not obligated to defer, accrue or waive any portion of its base business management fee or reimbursements.  Further, there is no assurance that any of these other sources will be available to fund distributions.

 

We may suffer from delays in selecting, acquiring and developing suitable properties.

 

Regardless of the amount of capital we raise or borrow, we may experience delays in investing our capital into assets or in realizing a return on the capital we invest.  The more money we raise in this offering, the more important it will be to invest the net offering proceeds promptly. Delays in locating suitable investments may result due to competition in the relevant market, regulatory requirements such as those imposed by the SEC which require us to provide audited financial statements and our reliance on our Business Manager to locate suitable investments for us at times when the management of our Business Manager is simultaneously seeking to locate suitable investments for other IREIC-sponsored programs.  We also may experience delays as a result of negotiating or obtaining the necessary purchase documentation to close an acquisition.  Further, our investments may not yield immediate returns.

 

We also may invest proceeds we receive from this offering in short-term, highly-liquid but very low yield investments.  These yields will be less than the distribution yield paid to stockholders, requiring us to earn a greater return from our other investments to make up for this “negative spread.” Further, we may use the principal amount of these investments, and any returns generated on these investments, to pay expenses or to acquire properties instead of funding distributions with these amounts.

 

Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investment.

 

Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of our stockholders. These policies may change over time. The methods of implementing our investment policies may also vary, as new investment techniques are developed. Our investment policies, the methods for implementing them, and our other objectives, policies and procedures may be altered by a majority of the directors (which must include a majority of the independent directors), without the approval of our stockholders. As a result, the nature of your investment could change without your consent. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and commercial real property market fluctuations, all of which could materially adversely affect our ability to achieve our investment objectives.

 

Actions of our joint venture partners could negatively impact our performance.

 

We may enter into joint ventures with third parties. Our organizational documents do not limit the amount of funds that we may invest in these joint ventures.  We intend to develop and acquire properties through joint ventures with other persons or entities when warranted by the circumstances. The venture partners may share certain approval rights over major decisions and these investments may involve risks not otherwise present with other methods of investment in real estate, including, but not limited to:

 

·                                          the current economic conditions make it more likely that our co-member, co-venturer or partner in an investment may become bankrupt, which would mean that we and any other

 

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remaining general partners, members or co-venturers would generally remain liable for the partnership’s, limited liability company’s or joint venture’s liabilities;

 

·                                          that our co-member, co-venturer or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals, and we and our venture partner may not agree on all proposed actions to certain aspects of the venture;

 

·                                          that our co-member, co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our objective to qualify as a REIT;

 

·                                          that, if our partners fail to fund their share of any required capital contributions, we may be required to contribute that capital;

 

·                                          that joint venture, limited liability company and partnership agreements often restrict the transfer of a co-venturer’s, member’s or partner’s interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 

·                                          that our relationships with our partners, co-members or co-venturers are contractual in nature and may be terminated or dissolved under the terms of the agreements and, in each event, we may not continue to own or operate the interests or assets underlying the relationship or may need to purchase these interests or assets at an above-market price to continue ownership;

 

·                                          that disputes between us and our partners, co-members or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business; and

 

·                                          that we may in certain circumstances be liable for the actions of our partners, co-members or co-venturers.

 

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and invest in properties.

 

We expect to deposit our cash and cash equivalents in several banking institutions in an attempt to minimize exposure to the failure or takeover of any one of these entities.  However, the Federal Insurance Deposit Corporation, or “FDIC,” generally only insures limited amounts per depositor per insured bank.  Through 2013, the FDIC is insuring up to $250,000 per depositor per insured bank for interest-bearing accounts.  If our deposits exceed these federally insured levels and if any of the banking institutions in which we have deposited our funds ultimately fails, we may lose our deposits over the federally insured levels.  The loss of our deposits could reduce the amount of cash we have available to distribute or invest.

 

If we internalize our management functions, we may be unable to retain key personnel.

 

At some point in the future, we may consider becoming self-managed by internalizing the functions performed for us by our Business Manager and Real Estate Managers in connection with a liquidity event.  If we internalize our management functions, certain key employees may not become our employees but may instead remain employees of our Business Manager and Real Estate Managers or their respective affiliates, especially if we internalize our management functions but do not acquire our Business

 

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Manager and Real Estate Managers. An inability to manage an internalization transaction could effectively result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. These deficiencies could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with the internalization transaction.

 

If we pursue the acquisition of our Business Manager and Real Estate Managers, there is no assurance that we will reach an agreement with these parties as to the terms of the transaction.

 

Although we have limited the aggregate purchase price that we will pay to acquire our Business Manager and Real Estate Managers, neither the Business Manager nor the Real Estate Managers are obligated to enter into a transaction with us at any particular price. If we desire to internalize our management functions by acquiring our Business Manager and Real Estate Managers, our independent directors, as a whole, or a committee thereof, will have to negotiate the specific terms and conditions of any agreement or agreements to acquire these entities, including the actual purchase price, subject to this limit.  There is no assurance that we will be able to enter into an agreement with the Business Manager and Real Estate Managers on mutually acceptable terms.  Accordingly, we would have to seek alternative courses of actions to internalize our management functions.

 

If we seek to internalize our management functions, other than by acquiring our Business Manager and Real Estate Managers, we could incur greater costs and lose key personnel.

 

Our Business Manager and Real Estate Managers have advised our board that neither the Business Manager nor the Real Estate Managers will agree to be acquired unless the internalization occurs in connection with a listing or other liquidity event.  If our board deems an internalization to be in our best interests prior to a listing or other liquidity event, it may decide that we should pursue an internalization by hiring our own group of executives and other employees or entering into an agreement with a third party, such as a merger, which would result in us having our own management team.  Either choice could cause us to incur additional costs, and we would lose the benefit of the experience of our Business Manager and Real Estate Managers.

 

Your return may be reduced if we are required to register as an investment company under the Investment Company Act.

 

The company is not registered, and does not intend to register itself or any of its subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register the company or any of its subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

 

·                                          limitations on capital structure;

 

·                                          restrictions on specified investments;

 

·                                          prohibitions on transactions with affiliates; and

 

·                                          compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

 

The company intends to conduct its operations, directly and through wholly or majority-owned subsidiaries, so that the company and each of its subsidiaries are exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is not deemed to be an “investment company” if it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is not deemed to be an “investment company” if it neither is engaged, nor proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis, which we refer to as the “40% test.”

 

We believe that the company and any wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. In the event that the company or any of its wholly or majority-owned subsidiaries would

 

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ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.

 

The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past.  These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago.  No assurance can be given that the SEC staff will concur with our classification of our assets.  In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for exemption from regulation under the Investment Company Act.  If we are required to re-classify our assets, we may no longer be in compliance with the exemption from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.

 

A change in the value of any of our assets could cause us to fall within the definition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act.  To avoid being required to register the company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain.  In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.

 

If we were required to register the company as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

 

Risks Related to Investments in Real Estate

 

There are inherent risks with real estate investments.

 

Investments in properties are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted to cash, limiting our ability to promptly vary our portfolio in response to changing economic, financial and investment conditions. Investments in properties also are subject to adverse changes in general economic conditions which, for example, reduce the demand for rental space.

 

Among the factors that could impact our properties and the value of an investment in us are:

 

·                                          local conditions such as an oversupply of space or reduced demand for properties of the type that we seek to acquire;

 

·                                          inability to collect rent from tenants;

 

·                                          vacancies or inability to rent space on favorable terms;

 

·                                          inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;

 

·                                          adverse changes in the laws and regulations applicable to us;

 

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·                                          the relative illiquidity of real estate investments;

 

·                                          changing market demographics;

 

·                                          an inability to acquire and finance properties on favorable terms, if at all;

 

·                                          acts of God, such as earthquakes, floods or other uninsured losses; and

 

·                                          changes or increases in interest rates and availability of financing.

 

In addition, periods of economic slowdown or recession, or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or increased defaults under existing leases.

 

Economic conditions may adversely affect our income and we could be subject to risks associated with acquiring discounted real estate assets.

 

U.S. and international markets are currently experiencing increased levels of volatility due to a combination of many factors, including decreasing values of home prices, limited access to credit markets, higher fuel prices, less consumer spending and fears of a national and global recession. The effects of the current market dislocation may persist as financial institutions continue to take the necessary steps to restructure their business and capital structures. As a result, this economic downturn has reduced demand for space and removed support for rents and property values. Since we cannot predict when the real estate markets will recover, the value of any properties we acquire may decline if current market conditions persist or worsen.

 

In addition, we will be subject to the risks generally incident to the ownership of discounted real estate assets.  These assets may be purchased at a discount from historical cost due to, among other things, substantial deferred maintenance, abandonment, undesirable locations or markets, or poorly structured financing of the real estate or debt instruments underlying the assets, which has since lowered their value. Further, the continuing instability in the financial markets has limited the availability of lines of credit and the degree to which people and entities have access to cash to pay rents or debt service on the underlying the assets. This illiquidity has the effect of increasing vacancies, increasing bankruptcies and weakening interest rates commercial entities can charge consumers, which can all decrease the value of already discounted real estate assets. If conditions persist or worsen, the continued inability of the underlying real estate assets to produce income may weaken our return on our investments.

 

Further, irrespective of the instability the financial markets may have on the return produced by discounted real estate assets, the evolving efforts to correct the instability make the valuation of these assets highly unpredictable. The fluctuation in market conditions make judging the future performance of these assets difficult. There is a risk that we may not purchase real estate assets at absolute discounted rates and that these assets may continue to decline in value.

 

We will depend on tenants for the majority of our revenue from real property investments, and lease terminations or the exercise of any co-tenancy rights adversely affect our operations.

 

Any defaults on lease payment obligations by a tenant will cause us to lose the revenue associated with the relevant lease.  If these defaults become significant, we will be forced to use other funds to make payments on the mortgage indebtedness secured by the impacted property to prevent a foreclosure action.  If a tenant defaults, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment.  In addition, if a tenant at a single-user facility, which has

 

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been designed or built primarily for a particular tenant or a specific type of use, fails to renew its lease or defaults on its lease obligations, we may not be able to readily market a single-user facility to a new tenant, if at all, without making substantial capital improvements or incurring other significant re-leasing costs.

 

Further, with respect to any retail properties we acquire, we may enter into leases containing co-tenancy provisions. Co-tenancy provisions may allow a tenant to exercise certain rights if, among other things, another tenant fails to open for business, delays its opening or ceases to operate, or if a percentage of the property’s gross leasable space or a particular portion of the property is not leased or subsequently becomes vacant. A tenant exercising co-tenancy rights may be able to abate minimum rent, reduce its share or the amount of its payments of common area operating expenses and property taxes or cancel its lease.

 

We may suffer adverse consequences due to the financial difficulties, bankruptcy or insolvency of our tenants.

 

Recent economic conditions may cause tenants of the properties that we acquire to experience financial difficulties, including bankruptcy, insolvency or a general downturn in their business. The retail sector in particular has been, and could continue to be, adversely affected by weakness in the national, regional and local economies, the level of consumer spending and consumer confidence, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing competition from discount retailers, outlet malls, internet retailers and other online businesses. We cannot provide assurance that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.

 

Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas.

 

In the event that we have a concentration of properties in a particular geographic area, our operating results are likely to be impacted by economic changes affecting the real estate markets in that area.  Your investment will be subject to greater risk to the extent that we lack a geographically diversified portfolio of properties.

 

Inflation may adversely affect our financial condition and results of operations.

 

Increases in the rate of inflation may adversely affect our net operating income from leases with stated rent increases or limits on the tenant’s obligation to pay its share of operating expenses, which could be lower than the increase in inflation at any given time.  Inflation could also have an adverse effect on consumer spending, which may impact our tenants’ sales and, with respect to those leases including percentage rent clauses, our average rents.

 

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We may be restricted from re-leasing space at our retail properties.

 

In the case of leases with retail tenants, the majority of the leases contain provisions giving the particular tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center. These provisions may limit the number and types of prospective tenants interested in leasing space in a particular retail property.

 

Our real estate investments may include single-tenant properties that may be difficult to sell or re-lease upon tenant defaults  or early lease.

 

We may acquire freestanding single-tenant net-leased properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. Moreover, as the current lease nears expiration, it may be difficult to sell the property on terms and conditions that we consider favorable, if at all.  In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed.

 

Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.

 

From time to time, we may acquire multiple properties in a single transaction. Portfolio acquisitions typically are more complex and expensive than single property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our Business Manager and Real Estate Managers in managing the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties.  We also may be required to accumulate a large amount of cash to fund such acquisitions. We would expect the returns that we earn on such cash to be less than the returns on real property.  Therefore, acquiring multiple properties in a single transaction may reduce the overall yield on our portfolio.

 

Short-term leases may expose us to the effects of declining market rent.

 

Certain types of the properties we own, such as multi-family properties, typically have short term leases with tenants.  There is no assurance that we will be able to renew these leases as they expire or attract replacement tenants on comparable terms, if at all.

 

We will not own or control the land in any ground lease properties that we may acquire.

 

We may acquire property on land owned by a governmental entity or other third party, while we own a leasehold, permit, or similar interest. This means that while we have a right to use the property, we do not retain fee ownership in the underlying land. Accordingly, we will have no economic interest in the land or building at the expiration of the ground lease or permit. As a result, we will not share in any increase in value of the land associated with the underlying property. Further, because we do not control the underlying land, the lessor could take certain actions to disrupt our rights in the property or our

 

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tenants’ operation of the properties or the case of a governmental entity, take the property in an eminent domain proceeding.

 

We may be unable to sell assets if or when we decide to do so.

 

Qualifying as a REIT and avoiding registration under the Investment Company Act as well as many other factors, such as general economic conditions, the availability of financing, interest rates and the supply and demand for the particular asset type, may limit our ability to sell real estate assets. These factors are beyond our control. We cannot predict whether we will be able to sell any real estate asset on favorable terms and conditions, if at all, or the length of time needed to sell an asset.

 

Operating expenses may increase in the future and to the extent these increases cannot be passed on to our tenants, our cash flow and our operating results would decrease.

 

Operating expenses, such as expenses for fuel, utilities, labor, building materials and insurance are not fixed and may increase in the future. There is no guarantee that we will be able to pass these increases on to our tenants. To the extent these increases cannot be passed on to our tenants, any increases would cause our cash flow and our operating results to decrease.

 

We will depend on the availability of public utilities and services, especially for water and electric power. Any reduction, interruption or cancellation of these services may adversely affect us.

 

Public utilities, especially those that provide water and electric power, will be fundamental for the sound operation of our assets. The delayed delivery or any material reduction or prolonged interruption of these services could allow certain tenants to terminate their leases or result in an increase in our costs, as we may be forced to use backup generators, which also could be insufficient to fully operate our facilities and could result in our inability to provide services. Accordingly, any interruption or limitation in the provision of these essential services may adversely affect us.

 

An increase in real estate taxes may decrease our income from properties.

 

Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes will increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through the tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions.

 

Potential development and construction delays and resulting increased costs and risks may hinder our operating results and decrease our net income.

 

Although we expect that we will invest primarily in existing or newly-constructed properties, from time to time we may acquire unimproved real property or properties that are under development or construction. Investments in these properties will be subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for development, environmental concerns of governmental entities or community groups and the builders’ ability to complete the property in conformity with plans, specifications, budgeted costs and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the

 

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builder’s control. Delays in completing construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.

 

If we contract with a development company for newly developed property, our earnest money deposit made to the development company may not be fully refunded.

 

We may enter into one or more contracts, either directly or indirectly through joint ventures with affiliates or others, to acquire real property from a development company that is engaged in construction and development of commercial real properties. Properties acquired from a development company may be either existing income-producing properties, properties to be developed or properties under development. We anticipate that we will be obligated to pay a substantial earnest money deposit at the time of contracting to acquire these properties. In the case of properties to be developed by a development company, we anticipate that we will be required to close the purchase of the property upon completion of the development of the property. At the time of contracting and the payment of the earnest money deposit by us, the development company typically will not have acquired title to any real property. Typically, the development company will only have a contract to acquire land, a development agreement to develop a building on the land and an agreement with one or more tenants to lease all or part of the property upon its completion. We may enter into a contract with the development company even if at the time we enter into the contract we have not yet raised sufficient proceeds in our offering to enable us to close the purchase of such property. However, we may not be required to close a purchase from the development company, and may be entitled to a refund of our earnest money, in the following circumstances:

 

·                                          the development company fails to develop the property;

 

·                                          all or a specified portion of the pre-leased tenants fail to take possession under their leases for any reason; or

 

·                                          we are unable to raise sufficient proceeds from our offering to pay the purchase price at closing.

 

The obligation of the development company to refund our earnest money will be unsecured, and we may not be able to obtain a refund of such earnest money deposit from it under these circumstances since the development company may be an entity without substantial assets or operations.

 

We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.

 

The seller of a property often sells the property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property.

 

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Uninsured losses or premiums for insurance coverage may adversely affect your returns.

 

The nature of the activities at certain properties we may acquire will expose us and our tenants or operators to potential liability for personal injuries and, in certain instances, property damage claims. In addition, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally require property owners to purchase specific coverage insuring against terrorism as a condition for providing mortgage, bridge or mezzanine loans. These policies may or may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot provide any assurance that we will have adequate coverage for these losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of the particular asset will likely be reduced by the uninsured loss. In addition, we cannot provide any assurance that we will be able to fund any uninsured losses.

 

The costs of complying with environmental laws and other governmental laws and regulations may adversely affect us.

 

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. We also are required to comply with various local, state and federal fire, health, life-safety and similar regulations.  Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigating or remediating contaminated properties.  These laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances.  The cost of removing or remediating could be substantial.  In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.

 

Environmental laws and regulations also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures by us.  Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties.  Third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.  Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by us.  For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions.  Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management.  These requirements could increase the costs of maintaining or improving our existing properties or developing new properties.

 

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We may acquire properties in regions that are particularly susceptible to natural disasters.

 

We may acquire properties located in geographical areas that are regularly impacted by severe storms, such as hurricanes or tornados, or other natural disasters such as flooding or earthquakes.  In addition, according to some experts, global climate change could result in heightened severe weather, thus further impacting these geographical areas.  Natural disasters in these areas may cause damage to our properties beyond the scope of our insurance coverage, thus requiring us to make substantial expenditures to repair these properties and resulting in a loss of revenues from these properties.  Any properties located near either coast will be exposed to more severe weather than properties located inland.  Elements such as salt water and humidity in these areas can increase or accelerate wear on the properties’ weatherproofing and mechanical, electrical and other systems, and cause mold issues over time. As a result, we may incur additional operating costs and expenditures for capital improvements at properties that we acquire in these areas.

 

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

 

The presence of mold at any of our properties could require us to undertake a costly program to remediate, contain or remove the mold. Mold growth may occur when moisture accumulates in buildings or on building materials. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing because exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. The presence of mold could expose us to liability from our tenants, their employees and others if property damage or health concerns arise.

 

We may incur significant costs to comply with the Americans With Disabilities Act or similar laws.

 

Our properties will generally be subject to the Americans With Disabilities Act of 1990, as amended, which we refer to as the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. In addition, with respect to any apartment properties, we also must comply with the Fair Housing Amendment Act of 1988, or FHAA, which requires that apartment communities first occupied after March 13, 1991 be accessible to handicapped residents and visitors.

 

The requirements of the Disabilities Act or FHAA could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act and the FHAA or place the burden on the seller or other third party, such as a tenant, to ensure compliance with these laws. However, we cannot provide assurance that we will be able to acquire properties or allocate responsibilities in this manner. We may incur significant costs to comply with these laws.

 

Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.

 

We may acquire properties located in areas that are susceptible to attack. In addition, any kind of terrorist activity, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could lessen travel by the public, which could have a negative effect on our operations. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we

 

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may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.

 

More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy. Any terrorist incident may, for example, deter people from traveling, which could affect the ability of some of our properties to generate operating income and therefore our ability to pay distributions. Additionally, increased economic volatility could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock at acceptable prices.

 

A proposed change in U.S. accounting standards for leases could reduce the overall demand to lease our properties.

 

The existing accounting standards for leases require lessees to classify their leases as either capital or operating leases. Under a capital lease, both the leased asset, which represents the tenant’s right to use the property, and the contractual lease obligation are recorded on the tenant’s balance sheet if one of the following criteria are met: (1) the lease transfers ownership of the property to the lessee by the end of the lease term; (2) the lease contains a bargain purchase option; (3) the non-cancellable lease term is more than 75% of the useful life of the asset; or (4) if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value. If the terms of the lease do not meet these criteria, the lease is considered an operating lease, and no leased asset or contractual lease obligation is recorded by the tenant.

 

In order to address concerns raised by the SEC regarding the transparency of contractual lease obligations under the existing accounting standards for operating leases, the U.S. Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) initiated a joint project to develop new guidelines to lease accounting. The FASB and IASB (collectively, the “Boards”) issued an Exposure Draft on August 17, 2010 (the “Exposure Draft”), which proposed substantial changes to the current lease accounting standards, primarily by eliminating the concept of operating lease accounting. As a result, a lease asset and obligation would be recorded on the tenant’s balance sheet for all lease arrangements if the standard is finalized as currently proposed. In addition, the Exposure Draft would impact the method in which contractual lease payments will be recorded. In order to mitigate the effect of the proposed lease accounting, tenants may seek to negotiate certain terms within new lease arrangements or modify terms in existing lease arrangements, such as shorter lease terms or fewer extension options, which would generally have less impact on tenant balance sheets. Also, tenants may reassess their lease-versus-buy strategies. This could result in a greater renewal risk, a delay in investing our offering proceeds, or shorter lease terms, all of which may negatively impact our operations and ability to pay distributions.

 

Subsequent to the Exposure Draft, the Boards have deliberated and have made further significant revisions to certain proposals in their Exposure Draft.  The Boards plan to continue deliberations.  The Exposure Draft does not include a proposed effective date; however, the Boards currently plan to issue a final standard regarding lease accounting in the second half of 2011.

 

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Risks Associated with Investments in Securities

 

Through owning real estate-related equity securities, we will be subject to the risks impacting each entity’s assets.

 

We intend to invest in real estate-related securities. Equity securities are always unsecured and subordinated to other obligations of the issuer. Investments in real estate-related equity securities are subject to numerous risks including: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) substantial market price volatility resulting from, among other things, changes in prevailing interest rates in the overall market or related to a specific issuer, as well as changing investor perceptions of the market as a whole, REIT or real estate securities in particular or the specific issuer in question; (3) subordination to the liabilities of the issuer; (4) the possibility that earnings of the issuer may be insufficient to meet its debt service obligations or to pay distributions; and (5) with respect to investments in real estate-related preferred equity securities, the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to redeem the securities. In addition, investments in real estate-related securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments discussed herein.  Investing in real estate-related securities will expose our results of operations and financial condition to the factors impacting the trading prices of publicly-traded entities.

 

Recent market conditions and the risk of continued market deterioration may reduce the value of any real estate related securities in which we may invest.

 

Mortgage loans experienced delinquency, foreclosure and loss during the recent dislocations in the U.S. credit markets. These and other related events significantly impacted the capital markets associated not only with mortgage-backed securities, asset-backed securities and collateralized debt obligations, but also with the U.S. credit and financial markets as a whole. Investing significant amounts in real estate related securities, including CMBS, will expose our results of operations and financial condition to the volatility of the credit markets.

 

Because there may be significant uncertainty in the valuation of, or in the stability of the value of, securities holdings, the fair values of these investments might not reflect the prices that we would obtain if we sold these investments. Furthermore, these investments are subject to rapid changes in value caused by sudden developments that could have a material adverse affect on the value of these investments.

 

To the extent that these volatile market conditions persist or deteriorate, they may negatively impact our ability to both acquire and potentially sell our real estate related securities holdings at a price and on terms acceptable to us, and we may be required to recognize impairment charges or unrealized losses.

 

The CMBS in which we invest are subject to all of the risks of the underlying mortgage loans and the risks of the securitization process.

 

CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities are subject to all of the risks of the underlying mortgage loans. In a rising interest rate environment, the value of CMBS may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of CMBS may also change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole. In addition, CMBS are subject to the credit risk associated with the performance of the underlying mortgage properties. In certain instances, third-party guarantees or other forms of credit support designed to reduce credit risk may not be effective due, for example, to defaults by third party guarantors.

 

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CMBS are also subject to several risks created through the securitization process. Generally, CMBS are issued in classes or tranches similar to mortgage loans. To the extent that we invest in a subordinate class or tranche, we will be paid interest only to the extent that there are funds available after paying the senior class. To the extent the collateral pool includes delinquent loans, subordinate classes will likely not be fully paid. Subordinate CMBS are also subject to greater credit risk than those CMBS that are more highly rated. Further, the ratings assigned to any particular class of CMBS may prove to be inaccurate. Thus, any particular class of CMBS may be riskier and more volatile than the rating may suggest, all of which may cause the returns on any CMBS investment to be less than anticipated.

 

Risks Associated with Debt Financing

 

Continued disruptions in the financial markets and challenging economic conditions could adversely affect our ability to secure debt financing on attractive terms and our ability to service any future indebtedness that we may incur.

 

The domestic and international commercial real estate debt markets are currently experiencing volatility as a result of certain factors including the tightening of underwriting standards by lenders and credit rating agencies. This is resulting in lenders increasing the cost for debt financing.  If the overall cost of borrowings increases, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.

 

Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans.

 

We may, in some instances, acquire properties by assuming existing financing or borrowing new monies. We may also borrow money for other purposes to, among other things, satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income,” subject to certain adjustments to our stockholders, or as is otherwise necessary or advisable to assure that we continue to qualify as a REIT for federal income tax purposes. Over the long term, however, payments required on any amounts we borrow reduce the funds available for, among other things, acquisitions, capital expenditures for existing properties or distributions to our stockholders because cash otherwise available for these purposes is used to pay principal and interest on this debt.

 

Defaults on loans secured by a property or properties we own may result in us losing the property or properties securing the loan that is in default as a result of foreclosure actions initiated by a lender. For tax purposes, a foreclosure is treated as a sale of the property or properties for a purchase price equal to the outstanding balance of the debt secured by the property or properties. If the outstanding balance of the debt exceeds our tax basis in the property or properties, we would recognize taxable gain on the foreclosure but would not receive any cash proceeds. We also may fully or partially guarantee any monies that subsidiaries borrow to purchase or operate properties. In these cases, we will likely be responsible to the lender for repaying the loans if the subsidiary is unable to do so. If any mortgage contains cross-collateralization or cross-default provisions, more than one property may be affected by a default.

 

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If we are unable to borrow at favorable rates, we may not be able to acquire new properties,  which could reduce our income and the amount of distributions that we can make to you.

 

If we are unable to borrow money at favorable rates, we may be unable to acquire additional properties or refinance existing loans at maturity. Further, we may enter into loan agreements or other credit arrangements that require us to pay interest on amounts we borrow at variable or “adjustable” rates. Increases in interest rates will increase our interest expense on any variable rate debt, as well as any debt that must be refinanced at higher interest rates at the time of maturity. Our future earnings and cash flows could be adversely affected due to the increased requirement to service our debt and could reduce the amount we are able to distribute to our stockholders. Further, during periods of rising interest rates, we may be forced to sell one or more of our properties in order to repay existing loans, which may not permit us to maximize the return on the particular properties being sold.

 

Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.

 

We may borrow monies on terms that do not require us to pay any principal until the maturity of the debt. During the period when no principal payments are required, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan is not reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal required during this period. After the interest-only period, we may be required either to make scheduled payments of principal and interest or to make a lump-sum or “balloon” payment at or prior to maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related loan and will reduce the funds available for, among other things, distribution to our stockholders.

 

Lenders may restrict certain aspects of our operations, which could, among other things, limit our ability to make distributions to you.

 

The terms and conditions contained in any of our loan documents may require us to maintain cash reserves, limit the aggregate amount we may borrow on a secured and unsecured basis, require us to satisfy restrictive financial covenants, prevent us from entering into certain business transactions, such as a merger, sale of assets or other business combination, restrict our leasing operations or require us to obtain consent from the lender to complete transactions or make investments that are ordinarily approved only by our board of directors. In addition, secured lenders may restrict our ability to discontinue insurance coverage on a mortgaged property even though we may believe that the insurance premiums paid to insure against certain losses, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, are greater than the potential risk of loss.

 

We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.

 

The terms of any loan that we may enter into may preclude us from pre-paying the principal amount of the loan or could restrict us from selling or otherwise disposing of or refinancing properties. For example, lock-out provisions may prohibit us from reducing the outstanding indebtedness secured by any of our properties, refinancing this indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness secured by our properties. Lock-out provisions could impair our ability to take other actions during the lock-out period. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

 

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To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective.

 

From time to time, we may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy.  There is no assurance that our hedging strategy will achieve our objectives.  We may be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.

 

To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract.  As a result of the global credit crisis, there is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts. The failure of a counterparty that holds collateral that we post in connection with an interest rate swap agreement could result in the loss of that collateral.

 

We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition.

 

We expect to finance a portion of the purchase price for each property that we acquire. However, to ensure that our offers are as competitive as possible, we do not expect to enter into contracts to purchase property that include financing contingencies. Thus, we may be contractually obligated to purchase a property even if we are unable to secure financing for the acquisition. In this event, we may choose to close on the property by using cash on hand, which would result in less cash available for our operations and distributions to stockholders. Alternatively, we may choose not to close on the acquisition of the property and default on the purchase contract. If we default on any purchase contract, we could lose our earnest money and become subject to liquidated or other contractual damages and remedies.

 

The total amount we may borrow is limited by our charter.

 

Our charter generally limits the total amount we may borrow to 300% of our net assets, equivalent to a 75% loan-to-asset value ratio, unless our board of directors (including a majority of our independent directors) determines that a higher level is appropriate and the excess in borrowing is disclosed to stockholders in our next quarterly report along with the justification for the excess. This limit could adversely affect our business, including:

 

·                                          limiting our ability to purchase properties;

 

·                                          causing us to lose our REIT status if we cannot borrow to fund the monies needed to satisfy the REIT distribution requirements;

 

·                                          causing operational problems if there are cash flow shortfalls for working capital purposes; and

 

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·                                          causing the loss of a property if, for example, financing is necessary to cure a default on a mortgage.

 

Risks Related to Conflicts of Interest

 

IREIC may face a conflict of interest in allocating personnel and resources between its affiliates, our Business Manager and our Real Estate Managers.

 

We do not have any employees and will rely on persons performing services for our Business Manager and Real Estate Managers and their affiliates to manage our day-to-day operations. Some of these persons, including Ms. Gujral, Ms. Armenta, Ms. Matlin, Ms. Foust, Ms. Hrtanek, Mr. Sajdak and Ms. McNeeley, also provide services to one or more investment programs previously sponsored by IREIC. These individuals face competing demands for their time and service and may have conflicts in allocating their time between our business and assets and the business and assets of IREIC, its affiliates and the other entities formed and organized by IREIC. In addition, if another investment program sponsored by IREIC decides to internalize its management functions, it may do so by hiring and retaining certain of the persons currently performing services for our Business Manager and Real Estate Managers, and if it did so, would likely not allow these persons to perform services for us.

 

Our Business Manager, our Real Estate Managers and other affiliates of IREIC will receive commissions, fees and other compensation, which will be based upon our invested assets.

 

We will pay significant fees to our Business Manager, Real Estate Managers and other affiliates of IREIC for services provided to us.  Our Business Manager will receive fees based on the aggregate book value, including acquired intangibles, of our invested assets, the contract purchase price of our assets and on the gross consideration we receive from selling our assets.  Further, our Real Estate Managers will receive fees based on the gross income from properties under management and may also receive market-based leasing and construction management fees.  Other parties related to, or affiliated with, our Business Manager or Real Estate Managers, including Inland Securities Corporation, may also receive fees or cost reimbursements from us.  These compensation arrangements may cause these entities to take or not take certain actions.  For example, these arrangements may impact: (1) the amount of money we borrow; (2) our decisions to retain or sell assets; or (3) the carrying value of assets.  The interests of these parties in receiving fees may conflict with the interest of our stockholders in earning income on their investment in our common stock.

 

We compete with other programs previously sponsored by IREIC or IPCC for certain properties and other real estate-related investments.

 

We may compete with other IREIC- or IPCC-sponsored programs for opportunities to acquire, finance or sell certain types of properties. We may also buy, finance or sell properties at the same time as other IREIC- or IPCC-sponsored programs are buying, financing or selling properties. We may purchase a property that provides lower returns to us than a property purchased by another IREIC- or IPCC-sponsored program. Certain of these programs own and manage properties in the geographical areas in which we expect to own properties. Therefore, our properties may compete for tenants with other properties owned and managed by other IREIC- or IPCC-sponsored programs. Persons performing services for our Real Estate Managers may face conflicts of interest when evaluating tenant leasing opportunities for our properties and other properties owned and managed by IREIC- or IPCC-sponsored programs, and these conflicts of interest may have an adverse impact on our ability to attract and retain tenants.

 

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We will rely, in part, on an entity affiliated with IREIC to identify real estate assets.

 

We will rely, in part, on IREA to identify real estate assets for us to acquire.  IREA provides this service to other programs organized by IREIC.  These entities have, in some cases, rights of first refusal or other pre-emptive rights to the properties that IREA identifies.  Specifically, IREA has granted Inland American a right of first refusal to acquire all properties, REITs or real estate operating companies that IREA identifies, acquires or obtains the right to acquire and granted Inland Diversified a right of first refusal to acquire all real estate assets, other than real estate operating companies, that Inland American does not acquire.  Our right to acquire properties identified by IREA will be subject to the exercise of any prior rights vested in these entities.  We may not, therefore, be presented with opportunities to acquire properties that we otherwise would be interested in acquiring.

 

Inland Securities Corporation, the dealer manager of this offering, is an affiliate of IREIC.

 

Inland Securities Corporation is an affiliate of IREIC and is not, therefore, independent. Thus, investors will not have the benefit of an independent due diligence review and investigation of the type normally performed by unaffiliated, independent underwriters in securities offerings. Further, none of the fees and expenses payable to Inland Securities have been negotiated at arm’s length.

 

We have the same legal counsel as our dealer manager and certain of its affiliates.

 

Shefsky & Froelich Ltd. serves as our legal counsel as well as legal counsel to Inland Securities Corporation. Under applicable legal ethics rules, Shefsky & Froelich Ltd. may be precluded from representing us due to a conflict of interest between us and our dealer manager. If any situation arises in which our interests are in conflict with those of our dealer manager or its affiliates, we would be required to retain additional counsel and may incur additional fees and expenses.  Moreover, should a conflict of interest not be readily apparent, Shefsky & Froelich may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.

 

Risks Related to Our Corporate Structure

 

Our rights, and the rights of our stockholders, to recover claims against our officers, directors, Business Manager and Real Estate Managers are limited.

 

Under our charter, no director or officer will be liable to us or to any stockholder for money damages to the extent that Maryland law permits the limitation of the liability of directors and officers of a corporation and we may generally indemnify our directors, officers, employees, Business Manager, Real Estate Managers and their respective affiliates for any losses or liabilities suffered by any of them as long as: (1) the directors have determined in good faith that the course of conduct that caused the loss or liability was in our best interest; (2) these persons or entities were acting on our behalf or performing services for us; (3) the loss or liability was not the result of the negligence or misconduct of the directors (gross negligence or willful misconduct of the independent directors), officers, employees, Business Manager, the Real Estate Managers or their respective affiliates; or (4) the indemnity or agreement to hold harmless is recoverable only out of our net assets and not from our stockholders.  As a result, we and our stockholders may have more limited rights against our directors, officers and employees, our Business Manager, the Real Estate Managers and their respective affiliates, than might otherwise exist under common law.  In addition, we may be obligated to fund the defense costs incurred by our directors, officers and employees or our Business Manager and the Real Estate Managers and their respective affiliates in some cases.

 

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Our board of directors may, in the future, adopt certain measures under Maryland law without stockholder approval that may have the effect of making it less likely that a stockholder would receive a “control premium” for his or her shares.

 

Corporations organized under Maryland law with a class of registered securities and at least three independent directors are permitted to protect themselves from unsolicited proposals or offers to acquire the company by electing to be subject, by a charter or bylaw provision or a board of directors resolution and notwithstanding any contrary charter or bylaw provision, to any or all of five provisions:

 

·                                          staggering the board of directors into three classes;

 

·                                          requiring a two-thirds vote of stockholders to remove directors;

 

·                                          providing that only the board can fix the size of the board;

 

·                                          providing that all vacancies on the board, regardless of how the vacancy was created, may be filled only by the affirmative vote of a majority of the remaining directors in office and for the remainder of the full term of the class of directors in which the vacancy occurred; and

 

·                                          requiring that special stockholders meetings be called only by holders of shares entitled to cast a majority of the votes entitled to be cast at the meeting.

 

These provisions may discourage an extraordinary transaction, such as a merger, tender offer or sale of all or substantially all of our assets, all of which might provide a premium price for stockholders’ shares.

 

Further, under the Maryland Business Combination Act, we may not engage in any merger or other business combination with an “interested stockholder” or any affiliate of that interested stockholder for a period of five years after the most recent date on which the interested stockholder became an interested stockholder. After the five-year period ends, any merger or other business combination with the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least:

 

·                                          80% of all votes entitled to be cast by holders of outstanding shares of our voting stock; and

 

·                                          two-thirds of all of the votes entitled to be cast by holders of outstanding shares of our voting stock other than those shares owned or held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder unless, among other things, our stockholders receive a minimum payment for their common stock equal to the highest price paid by the interested stockholder for its common stock.

 

Our directors have adopted a resolution exempting any business combination involving us and The Inland Group or any affiliate of The Inland Group, including our Business Manager and Real Estate Managers, from the provisions of this law.

 

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Our charter places limits on the amount of common stock that any person may own without the prior approval of our board of directors.

 

No more than 50% of the outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year (other than the first taxable year for which an election to be a REIT has been made). Our charter prohibits any persons or groups from owning more than 9.8% in value of our outstanding stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding common stock without the prior approval of our board of directors. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets that might involve a premium price for holders of our common stock. Further, any person or group attempting to purchase shares exceeding these limits could be compelled to sell the additional shares and, as a result, to forfeit the benefits of owning the additional shares.

 

Our charter permits our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

 

Our board of directors is permitted, subject to certain restrictions set forth in our charter, to issue up to 40,000,000 shares of preferred stock without stockholder approval. Further, our board may classify or reclassify any unissued shares of common or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of the stock and may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue without stockholder approval. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.

 

Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a “control share acquisition.”

 

The Maryland Control Share Acquisition Act provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (1) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (2) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

 

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Federal Income Tax Risks

 

If we fail to qualify as a REIT, our operations and distributions to stockholders will be adversely affected.

 

In connection with this offering, Shefsky & Froelich Ltd. has rendered an opinion to us that we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code for our taxable year ending December 31, 20[    ] and that our proposed method of operations, as described in this prospectus, will enable us to meet the requirements for qualification and taxation as a REIT beginning with our taxable year ending December 31, 20[    ].  In providing its opinion, Shefsky & Froelich Ltd. has relied, as to certain factual matters, upon the statements and representations contained in certificates provided by us.  These certificates include representations regarding the manner in which we are and will be owned, the nature of our assets and the past, present and future conduct of our operations.  Shefsky & Froelich Ltd. has not independently verified, and will not verify, these facts.  Moreover, our qualification for taxation as a REIT depends on our ability to meet the various qualification tests imposed under the Code, the results of which have not been, and will not be, reviewed by Shefsky & Froelich Ltd. Accordingly, we cannot assure you that the actual results of our operations for any one taxable year will satisfy these requirements. Moreover, an opinion of counsel is not binding on the Internal Revenue Service, and we cannot assure you that the Internal Revenue Service will not successfully challenge our status as a REIT.  Qualification as a REIT involves the application of highly technical and complex rules related to, among other things, the composition of our assets, the income generated by those assets and distributions paid to our stockholders. There are limited judicial or administrative interpretations regarding these rules. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualifying as a REIT or the federal income tax consequences of qualification.

 

If we were to fail to qualify as a REIT, without the benefit of certain relief provisions, in any taxable year:

 

·                                          we would not be allowed to deduct distributions paid to stockholders when computing our taxable income;

 

·                                          we would be subject to federal (including any applicable alternative minimum tax) and state income tax on our taxable income at regular corporate rates;

 

·                                          we would be disqualified from being taxed as a REIT for the four taxable years following the year during which we failed to qualify, unless entitled to relief under certain statutory provisions;

 

·                                          we would have less cash to pay distributions to stockholders; and

 

·                                          we may be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of being disqualified.

 

In addition, if we were to fail to qualify as a REIT, we would not be required to pay distributions to stockholders, and all distributions to stockholders that we did pay would be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits.  This means that, under current law, which is subject to change, our U.S. stockholders who are taxed as individuals generally would be taxed on our dividends at long-term capital gains rates through 2012 and that our

 

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corporate stockholders generally would be entitled to the dividends received deduction with respect to such dividends, subject, in each case, to applicable limitations under the Code.

 

If we fail to invest a sufficient amount of the net proceeds from this offering in real estate assets within one year from the receipt of the proceeds, we could fail to qualify as a REIT.

 

Temporary investment of the net proceeds from this offering in short-term securities and income from these investments generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from sales of our stock in qualifying real estate assets within the one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Code, we could fail to qualify as a REIT.

 

To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions to make distributions to our stockholders, which could increase our operating costs.

 

To qualify as a REIT, we must distribute to our stockholders each year 90% of our annual taxable income, subject to certain adjustments. At times, we may not have sufficient funds to satisfy these distribution requirements and may need to borrow funds to make these distributions and maintain our REIT status and avoid the payment of income and excise taxes. These borrowing needs could result from: (1) differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes; (2) the effect of non-deductible capital expenditures; (3) the creation of reserves; or (4) required debt amortization payments. We may need to borrow funds at times when market conditions are unfavorable. Further, if we are unable to borrow funds when needed for this purpose, we would have to find alternative sources of funding or risk losing our status as a REIT.

 

If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.

 

The requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income is determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the Internal Revenue Service’s position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan inadvertently causing a greater than 5% discount on the price of such stock purchased). There is no de minimis exception with respect to preferential dividends; therefore, if the Internal Revenue Service were to take the position that we inadvertently paid a preferential dividend, we may be deemed to have failed the 90% distribution test, and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure.

 

Certain of our business activities are potentially subject to the prohibited transaction tax.

 

Our ability to dispose of property during the first two years following acquisition is restricted to a substantial extent as a result of our REIT status. Under applicable provisions of the Code regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain realized on the sale or

 

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other disposition of any property (other than foreclosure property) we own, directly or through any wholly owned subsidiary (or entity in which we are treated as a partner), excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Determining whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We cannot provide assurance that any particular property we own, directly or through any wholly owned subsidiary (or entity in which we are treated as a partner), excluding our taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.

 

Certain fees paid to us may affect our REIT status.

 

Income received in the nature of rental subsidies or rent guarantees, in some cases, may not qualify as rental income from real estate and could be characterized by the Internal Revenue Service as non-qualifying income for purposes of satisfying the 75% and 95% gross income tests required for REIT qualification. If the aggregate of non-qualifying income under the 95% gross income test in any taxable year ever exceeded 5% of our gross revenues for the taxable year or non-qualifying income under the 75% gross income test in any taxable year ever exceeded 25% of our gross revenues for the taxable year, we could lose our REIT status for that taxable year and the four taxable years following the year of losing our REIT status.

 

Complying with the REIT requirements may cause to forego investments we might otherwise make or to liquidate otherwise attractive investments.

 

To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities (other than governmental securities, qualified real estate assets and taxable REIT subsidiaries) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets may be securities (including securities issued by our taxable REIT subsidiaries), excluding government securities, stock issued by our qualified REIT subsidiaries and other securities that qualify as REIT real estate assets. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

 

If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within thirty days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments, which, in the case of foreign stockholders, may impose a withholding tax obligation on us.

 

Our ability to dispose of some of our properties may be constrained by their tax attributes.

 

Federal tax laws may limit our ability to sell properties and this may affect our ability to sell properties without adversely affecting returns to our stockholders. These restrictions may reduce our ability to respond to changes in the performance of our investments.

 

Our ability to dispose of some of our properties is constrained by their tax attributes. Properties which we own for a significant period of time often have low tax bases. If we dispose of low-basis properties outright in taxable transactions, we may recognize a significant amount of taxable gain that we

 

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must distribute to our stockholders in order to avoid tax, and potentially in order to meet the minimum distribution requirements of the Code for REITs, which in turn would impact our cash flow. To dispose of low basis or tax-protected properties efficiently we may use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants).

 

You may have tax liability on distributions that you elect to reinvest in our common stock.

 

If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the fair market value of the share of our common stock that you receive in lieu of cash distributions. As a result, unless you are a tax-exempt entity, you will have to use funds from other sources to pay any tax liability.

 

In certain circumstances, we may be subject to federal, state and local income taxes as a REIT, which would reduce our cash available to pay distributions to you.

 

Even if we qualify and maintain our status as a REIT, we may become subject to federal, state and local income taxes.  For example:

 

·                                          We will be subject to tax on any undistributed income.  We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year plus amounts retained for which federal income tax was paid are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

 

·                                          If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

 

·                                          If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax.

 

·                                          We will be subject to a 100% penalty tax on certain amounts if the economic arrangements of our tenants, our taxable REIT subsidiaries and us are not comparable to similar arrangements among unrelated parties.

 

Complying with REIT requirements may limit our ability to hedge effectively.

 

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk generally will not constitute gross income for purposes of the 75%  and 95% income requirements applicable to REITs.  In addition, any income from other hedging transactions would generally not constitute gross income for purposes of both the 75% and 95% income tests.  However, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

 

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Legislative or regulatory action could adversely affect investors.

 

Changes to the tax laws are likely to occur, and these changes may adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.  You also should note that our counsel’s tax opinion is based upon existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.

 

The maximum tax rate on qualified dividends paid by corporations to individuals is 15% through 2012. REIT dividends, however, generally do not constitute qualified dividends and consequently are not eligible for the current reduced tax rates. Therefore, our stockholders will pay federal income tax on distributions out of our current and accumulated earnings and profits (excluding distributions of amounts either subject to corporate-level taxation or designated as a capital gain dividend) at the applicable “ordinary income” rate, the maximum of which is 35% through 2012.  However, as a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the “double taxation” to which other corporations are typically subject.

 

Future legislation might result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed, for federal income tax purposes, as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.

 

Retirement Plan Risks

 

Investors subject to ERISA must address special considerations when determining whether to acquire our common stock.

 

Fiduciaries of a pension, profit-sharing or other employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended, or “ERISA,” should consider whether investing in our common stock: is subject to the “plan assets” rules under ERISA and the Code; satisfies the fiduciary standards of care established under ERISA; is subject to the unrelated business taxation rules under Section 511 of the Code; and constitutes a prohibited transaction under ERISA or the Code.

 

We intend to satisfy the “real estate operating company” exception to the plan assets regulations promulgated pursuant to ERISA. Consequently, our assets should not be treated as plan assets of an investing plan subject to ERISA. We cannot assure you, however, that this exception will apply to our assets and, if not, our assets may be treated as plan assets of an investing plan subject to ERISA. Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Code, the fiduciary who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by using words such as “may,” “will,” “expects,” “anticipates,” “believes,” “intends,” “should,” “estimates,” “could” or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among other things, those discussed above under the heading “Risk Factors” above. We do not undertake to publicly update or revise any forward-looking statements, whether as a result as new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law.

 

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SELECTED FINANCIAL DATA

 

We are a newly-formed entity without any operating history.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes thereto appearing elsewhere in this prospectus.

 

CAPITALIZATION

 

The following table sets forth our historical capitalization as of August 31, 2011 and our pro forma capitalization as of August 31, 2011 as adjusted to give effect to the sale of the minimum offering of 200,000 shares of common stock and the application of the estimated net proceeds therefrom as described in “Estimated Use of Proceeds.”  We sold 20,000 shares to IREIC for an aggregate purchase price of $200,000 in connection with our formation.  The information set forth in the following table should be read in conjunction with our historical financial statements included elsewhere in this prospectus and the discussion set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

 

 

August 31, 2011

 

 

 

Historical

 

Pro Forma

 

Debt:

 

 

 

 

 

Mortgage Notes Payable

 

$

 

$

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.001 par value per share, 40,000,000 shares authorized, none outstanding

 

 

 

Common stock, $0.001 par value per share, 1,460,000,000 shares authorized, 20,000 shares issued and outstanding historical; 220,000 shares issued and outstanding pro forma

 

20

 

220

 

Additional Paid-in Capital

 

$

199,980

 

$

1,669,980

 

Retained Earnings Deficit

 

$

(2,991

)

$

(2,991

)

TOTAL STOCKHOLDERS’ EQUITY:

 

$

197,009

 

$

1,667,209

 

TOTAL CAPITALIZATION:

 

$

197,009

 

$

1,667,209

 

 

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COMPENSATION TABLE

 

The following tables describe the compensation we expect to pay to affiliates of IREIC such as Inland Securities, our Business Manager and our Real Estate Managers and their respective affiliates. We also will reimburse these entities for expenses incurred in performing services on our behalf. In those instances in which there are maximum amounts or ceilings on the compensation that may be received, excess amounts may not be recovered by reclassifying them under a different compensation or fee category.  Our independent directors will determine, from time to time but at least annually, that our total fees and expenses are reasonable in light of our investment performance, net assets, net income, and the fees and expenses of other comparable unaffiliated REITs.  Each determination will be reflected in the minutes of our board of directors meetings.

 

Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

 

 

Offering Stage

 

 

 

 

 

 

 

Selling Commissions (1)(2)(3)

 

We will pay Inland Securities a selling commission equal to 7% of the sale price for each share sold in the “best efforts” offering, subject to reduction for special sales under the circumstances as described in the “Plan of Distribution — Compensation We Pay for the Sale of Our Shares.” Inland Securities anticipates reallowing the full amount of the selling commissions to participating soliciting dealers.

 

$140,000 / $105,000,000
(assumes no special sales)

 

 

 

 

 

Marketing Contribution (1)(2)(3)

 

We will pay Inland Securities a fee for marketing the shares in connection with this offering, which includes coordinating the marketing of the shares with any participating soliciting dealers, in an amount equal to 3% of the gross offering proceeds from shares sold in the “best efforts” offering. Inland Securities may reallow up to 1.5% of this marketing contribution to participating soliciting dealers. We will not pay the marketing contribution in connection with any special sales, except those receiving volume discounts and those described in “Plan of Distribution — Volume Discounts.”

 

$60,000 / $45,000,000
(assumes no special sales)

 

 

 

 

 

Itemized and Detailed Due Diligence Expenses (3)

 

We will reimburse Inland Securities and participating soliciting dealers for bona fide out-of-pocket, itemized and detailed due diligence expenses incurred by these entities, in amounts up to 0.5% of the gross offering proceeds from shares sold in the “best efforts” offering. These expenses may, in our sole discretion, be reimbursed from amounts paid or reallowed to these entities as a marketing contribution, or may be reimbursed from issuer costs.

 

$10,000 / $7,500,000
(assumes all expenses are reimbursed from issuer costs and no special sales; if these expenses are reimbursed from amounts paid or reallowed as a marketing contribution, there will be no additional costs to us)

 

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Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

Issuer Costs (3)

 

We will reimburse IREIC, its affiliates and third parties for any issuer costs that they pay on our behalf, including any bona fide out-of-pocket, itemized and detailed due diligence expenses not reimbursed from amounts paid or reallowed as a marketing contribution, in an amount not to exceed 1.5% of the gross offering proceeds from shares sold in the “best efforts” offering over the life of the offering. Our Business Manager or its affiliates will pay or reimburse any organization and offering expenses, including any “issuer costs,” that exceed 11.5% of the gross offering proceeds from shares sold in the “best efforts” offering over the life of the offering.

 

$30,000 / $22,500,000

 

 

 

 

 

 

 

Acquisition and Operations Stage (4)

 

 

 

 

 

 

 

Acquisition Fee

 

We will pay our Business Manager or its affiliates a fee equal to 1.5% of the “contract purchase price” of each asset we acquire, including any incremental interest therein, including by way of exchanging a debt interest for an equity interest (excluding the contribution of an asset owned, directly or indirectly, by us to a joint venture), or developing, constructing, renovating, or otherwise physically improving an asset, including, but not limited to tenant improvements, whether pursuant to allowances, concessions or rent abatements provided for at the time the property is acquired. In the case of an asset acquired through a joint venture, the acquisition fee payable will be proportionate to our ownership interest in the venture. For the purpose of calculating acquisition fees, the “contract purchase price” will be equal to the amount of monies or other consideration paid or contributed by us either to acquire, directly or indirectly, any asset or an incremental interest in the asset, and including, without duplication, any indebtedness for money borrowed to finance the purchase, indebtedness secured by the asset, which is assumed, or indebtedness that is refinanced or restructured, all in connection with the acquisition, and which is or will be secured by the asset at the time of the acquisition or to develop, construct, renovate or otherwise improve that asset. The contract purchase price will exclude acquisition fees and acquisition expenses.

 

$66,667 / $50,000,000
(assumes aggregate borrowings equivalent to a 55% loan-to-asset value ratio, consistent with our borrowing policy)

 

$120,000 / $90,000,000
(assumes aggregate borrowings equivalent to a 75% loan-to-asset value ratio, which represents the limit set forth in our charter)

 

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Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

Acquisition Expenses

 

We will reimburse our Business Manager, Real Estate Managers and entities affiliated with each of them, including IREA and its respective affiliates, as well as third parties, for any investment-related expenses they pay, including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, third-party broker or finder’s fees, title insurance expenses, survey expenses, property inspection expenses and other closing costs, regardless of whether we acquire a particular property, subject to the limits in our charter.

 

$22,222 / $16,666,667
(assumes aggregate borrowings equivalent to a 55% loan-to-asset value ratio, consistent with our borrowing policy)

 

$40,000 / $30,000,000
(assuming aggregate borrowings equivalent to a 75% loan-to-asset value ratio, which represents the limit set forth in our charter)

 

 

 

 

 

Business Management Fees

 

We will pay our Business Manager an annual base business management fee equal to up to 0.65% of our “average invested assets,” payable quarterly in an amount equal to 0.1625% of our average invested assets as of the last day of the immediately preceding quarter; provided, that our Business Manager may decide, in its sole discretion, to be paid an amount less than the total amount to which it is entitled in any particular quarter, and the excess amount that is not paid may, in the Business Manager’s sole discretion, be deferred, waived permanently or accrued, without interest, to be paid at a later point in time. We will pay the base business management fee for services provided or arranged by our Business Manager, such as managing our day-to-day business operations, arranging for the ancillary services provided by other affiliates and overseeing these services, administering our bookkeeping and accounting functions, consulting with our board, overseeing our properties and providing other services as our board deems appropriate.

 

We will also pay the Business Manager a disposition fee in an amount equal to 1.5% of the “gross consideration” in connection with: (a) the sale of any asset or assets (excluding our investments in securities), in which the net sales proceeds resulting from the sale are specifically identified and distributed to stockholders; (b) a listing of our shares, or the shares of any subsidiary, on a national securities exchange; or (c) a merger, reorganization, business combination, share exchange or acquisition, in which our stockholders receive cash or the securities of the acquiror; provided, that if any of the events triggering payment of

 

Not determinable at this time. The actual amount of the base business management fee will depend on the carrying value of our assets and distributions declared to our stockholders and the actual amount of the 1.5% disposition fee will depend on numerous variables.

 

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Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

 

 

the disposition fee occurs in connection with an internalization in which we are acquiring our Business Manager and Real Estate Managers, in no event will the aggregate amount of the disposition fee and the aggregate purchase price we will pay to acquire our Business Manager and Real Estate Managers exceed 1.5% of the amount of our total assets on the last audited balance sheet prior to closing the transaction, giving effect to any asset acquisitions that were probable or completed since the date of the last audited balance sheet, prior to the applicable transaction.

 

We will pay this fee for services performed by our Business Manager in connection with the events set forth above, including assisting the board of directors in evaluating these events, investigating, selecting and conducting relationships with experts, investment banking firms and potential acquirors and performing due diligence in connection with potential disposition events.

 

“Average invested assets” means, for any period, the average of the aggregate book value of our assets, including all intangibles and goodwill, invested, directly or indirectly, in equity interests in, and loans secured by, properties, as well as amounts invested in securities and consolidated and unconsolidated joint ventures or other partnerships, before reserves for amortization and depreciation or bad debts, impairments or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the relevant calendar quarter.

 

“Gross consideration” means: (a) in the case of the sale of any asset or assets, the amount of net sales proceeds specifically identified and distributed to stockholders; (b) in the case of a listing of our shares, or the shares of any subsidiary, on a national securities exchange, the market value calculated by taking the average closing price over the period of thirty consecutive trading days during which our shares, or the shares of the common stock of our subsidiary, as applicable, are eligible for trading, beginning on the 180th day after the applicable listing; or (c) in the case of a merger, reorganization, business combination, share exchange or acquisition, the market value of the other entity’s securities, if listed, or the gross consideration as reflected in the documents governing the transaction.

 

 

 

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Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

 

 

Separate and distinct from any business management fees, we also will reimburse our Business Manager or any affiliate for all expenses that it, or any affiliate including IREIC, pays or incurs on our behalf including the salaries and benefits of persons performing services for Business Manager or its affiliates on our behalf for us, except for the salaries and benefits of persons who also serve as one of our executive officers or as an executive officer of our Business Manager or its affiliates. For these purposes, secretary will not be considered an “executive officer.”

 

 

 

 

 

 

 

Real Estate Management Fees, Leasing Fees and Construction Management Fees

 

We will pay the Real Estate Managers a monthly management fee of up to 1.9% of the gross income from any single-tenant, net-leased property managed directly by the Real Estate Managers or their affiliates, and up to 3.9% of the gross income from any other type of property managed directly by the Real Estate Managers or their affiliates. Each Real Estate Manager will determine, in its sole discretion, the amount of the fee payable in connection with a particular property, subject to these limits. For each property that is managed directly by one of our Real Estate Managers or its affiliates, we will pay the Real Estate Manager a separate leasing fee based upon prevailing market rates applicable to the geographic market of that property. If we engage our Real Estate Managers to provide construction management services for a property, we also will pay a separate construction management fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project.

 

The actual amount will depend on the gross income generated by properties managed by our Real Estate Managers and its affiliates, and cannot be determined at the present time.

 

 

 

 

 

 

 

We also will reimburse the Real Estate Managers and their affiliates for property-level expenses that they pay or incur on our behalf, including the salaries, bonuses and benefits of persons performing services for the Real Estate Managers and their affiliates (excluding the executive officers of the Real Estate Managers). See “Management — Real Estate Management Agreements” for more information about the services provided or arranged by our

 

 

 

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Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

 

 

Real Estate Managers.

 

 

 

 

 

 

 

Expense Reimbursement

 

We will reimburse IREIC, our Business Manager and their respective affiliates, including the ancillary service providers, for any expenses that they pay or incur on our behalf in providing services to us, including all expenses and the costs of salaries and benefits of persons performing services for these entities on our behalf (except for the salaries and benefits of persons who also serve as one of our executive officers or as an executive officer of our Business Manager or its affiliates). Expenses include, but are not limited to: expenses incurred in connection with any sale of assets or any contribution of assets to a joint venture; expenses incurred in connection with any liquidity event or business combination; taxes and assessments on income or real property and taxes; premiums and other associated fees for insurance policies including director and officer liability insurance; expenses associated with investor communications including the cost of preparing, printing and mailing annual reports, proxy statements and other reports required by governmental entities; administrative service expenses charged to, or for the benefit of, us by third parties; audit, accounting and legal fees charged to, or for the benefit of, us by third parties; transfer agent and registrar’s fees and charges paid to third parties; and expenses relating to any offices or office facilities maintained solely for our benefit that are separate and distinct from our executive offices. See “Management — The Business Management Agreement — Ancillary Agreements” for a description of how we may reimburse these service providers.

 

The actual amount will depend on the services provided and the method by which reimbursement rates are calculated. Actual amounts cannot be determined at the present time.

 

 

 

 

 

 

 

Liquidation Stage

 

 

 

 

 

 

 

Real Estate Sales Commission

 

For substantial assistance in connection with the sale of properties, we will pay our Business Manager or its affiliates a real estate sales commission equal to up to one-half of the customary commission which would be paid to a third party broker for the sale of a comparable property, provided that the amount may not exceed 3% of the contract price of the property sold and, when added to all other real estate commissions paid to unaffiliated parties in connection with a sale, may not exceed the lesser of a competitive real estate commission or 6% of the sales price of the property. Substantial assistance in connection with the sale of a property includes the preparation of an investment package for the property (including a new investment analysis, rent rolls, tenant information regarding credit, a property title report, an environmental

 

The actual amounts to be received will depend upon the contract sales price of our properties and the customary commissions paid to third party brokers and, therefore, cannot be determined at the present time.

 

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Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

 

 

report, a structural report and exhibits) or other substantial services performed by in connection with a sale.

 

 

 

 

 

 

 

 

 

If our Business Manager or its affiliates receives a real estate commission, it will be in addition to the 1.5% disposition fee that will be payable to our Business Manager, as described under the heading “Operational Stage — Business Management Fees” in this table.

 

 

 

 

 

 

 

Subordinated Incentive Fee

 

Upon a “triggering event,” we will pay our Business Manager a fee equal to 10% of the amount by which: (1) the “liquidity amount” (as defined below) exceeds (2) the “aggregate invested capital,” less any distributions of net sales or financing proceeds, plus the total distributions required to be paid to our stockholders in order to pay them a 8% per annum cumulative, pre-tax non-compounded return on aggregate invested capital. If we have not satisfied this return threshold at the time of the applicable triggering event, the fee will be paid at the time that we have satisfied the return requirements.

 

The actual amount will depend on numerous variables and cannot be determined at the present time.

 

 

 

 

 

 

 

As used herein, a “triggering event” means any sale of assets (excluding the sale of marketable securities), in which the net sales proceeds are specifically identified and distributed to our stockholders, or any liquidity event, such as a listing or any merger, reorganization, business combination, share exchange or acquisition, in which our stockholders receive cash or the securities of another issuer that are listed on a national securities exchange. “Aggregate invested capital” means the aggregate original issue price paid for the shares of our common stock, before reduction for organization and offering expenses, reduced by any distribution of sale or financing proceeds.

 

 

 

 

 

 

 

 

 

For purposes of this subordinated incentive fee, the “liquidity amount” will be calculated as follows:

 

 

 

 

 

 

 

 

 

·      In the case of the sale of our assets, the net sales proceeds realized by us from the sale of assets since inception and distributed to stockholders plus the total amount of any other distributions paid by us from inception until the date that the liquidity amount is determined.

 

 

 

 

 

 

 

 

 

·      In the case of a listing or any merger, reorganization, business combination, share exchange, acquisition or other similar transaction in which our stockholders receive cash or the securities of another issuer that are listed on a national securities exchange, as full or partial consideration for their shares, the “market

 

 

 

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Table of Contents

 

Type of Compensation

 

Method of Compensation

 

Estimated Amount for
Minimum Offering
(200,000 shares) /
Maximum Offering
(150,000,000 shares)

 

 

 

 

 

 

 

value” of the applicable shares, plus the total distributions paid by us from inception until the date that the liquidity amount is determined. “Market value” means the value determined as follows: (1) in the case of the listing of our shares, or the common stock of our subsidiary, on a national securities exchange, by taking the average closing price over the period of thirty consecutive trading days during which our shares, or the shares of the common stock of our subsidiary, as applicable, are eligible for trading, beginning on the 180th day after the applicable listing; or (2) in the case of the receipt by our stockholders of securities of another entity that are trading on a national securities exchange prior to, or that become listed concurrent with, the consummation of the liquidity event, as follows: (a) in the case of shares trading before consummation of the liquidity event, the value ascribed to the shares in the transaction giving rise to the liquidity event; and (b) in the case of shares which become listed concurrent with the closing of the transaction giving rise to the liquidity event, the average closing price over the period of thirty consecutive trading days during which the shares are eligible for trading, beginning on the 180th day after the applicable listing. In addition, any cash consideration received by our stockholders in connection with any liquidity event will be added to the market value determined in accordance with clause (1) or (2).

 

 

 


(1)

In no event will the amount we pay to FINRA members exceed FINRA’s 10% cap on underwriting compensation. All amounts deemed to be “underwriting compensation” by FINRA will be subject to FINRA’s 10% cap.  In connection with the minimum offering and FINRA’s 10% cap, our dealer manager will advance all the fixed expenses, including, but not limited to, wholesaling salaries, salaries of dual employees allocated to wholesaling activities, and other fixed expenses (including, but not limited to wholesaling expense reimbursements and the dealer manager’s legal costs associated with filing the offering with FINRA), that are required to be included within FINRA’s 10% cap to ensure that the aggregate underwriting compensation paid in connection with the offering does not exceed FINRA’s 10% cap. Also, our dealer manager will repay to the company any excess amounts received over FINRA’s 10% cap if the offering is abruptly terminated after reaching the minimum amount, but before reaching the maximum amount, of offering proceeds.

 

 

(2)

Inland Securities or any of its or our directors, officers, employees or affiliates, or any family members of those individuals (including spouses, parents, grandparents, children and siblings), may purchase shares net of sales commissions and the marketing contribution for $9.00 per share.  Each soliciting dealer and their respective directors, officers, employees or affiliates may purchase shares net of selling commissions for $9.30 per share.

 

 

(3)

We will not pay selling commissions, the marketing contribution or issuer costs in connection with shares of common stock issued

 

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through our distribution reinvestment plan.

 

 

(4)

For any year in which we qualify as a REIT, our Business Manager must  reimburse us for the amounts, if any, by which our total operating expenses paid during the previous fiscal year exceed the greater of: (i) 2% of our average invested assets for that fiscal year; or (ii) 25% of our net income for that fiscal year.  For these purposes, items such as organization and offering expenses, property-level expenses (including any fees payable under our agreements with the Real Estate Managers), interest payments, taxes, non-cash charges such as depreciation, amortization, impairments and bad debt reserves, the incentive fee payable to our Business Manager, acquisition fees and expenses, commissions payable on the sale of properties and any other expenses incurred in connection with acquiring, disposing (including any disposition fee) and owning real estate assets are excluded from the definition of total operating expenses.

 

We define “net income” as total revenues less expenses, other than additions to reserves for depreciation, bad debts or other similar non-cash reserves and acquisition expenses to the extent not capitalized, and excluding any gain from the sale of our assets. This definition of net income is prescribed by the Statement of Policy Regarding REITs adopted by the North American Securities Administrators Association, Inc., or “NASAA,” but is not in accordance with GAAP. Thus, our net income calculated in accordance with GAAP may be greater or less than our net income calculated under the NASAA guidelines.

 

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Table of Contents

 

ESTIMATED USE OF PROCEEDS

 

The amounts listed in the table below represent our best good faith estimate of the use of offering proceeds.  The estimates may not accurately reflect the actual receipt or application of the offering proceeds.  The first scenario assumes we sell the minimum of 200,000 shares in the “best efforts” portion of the offering at $10.00 per share.  The second scenario assumes we sell the maximum of 150,000,000 shares in the “best efforts” portion of the offering at $10.00 per share.  We have not given effect to any special sales or volume discounts which could reduce selling commissions but not the net proceeds we would realize from the sale, under either scenario.  In addition, we will not pay selling commissions, the marketing contribution or issuer costs in connection with shares of common stock issued through our distribution reinvestment plan.

 

 

 

Minimum Offering

 

Maximum Offering

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

Gross Offering Proceeds

 

$

2,000,000

 

100.0%

 

$

1,500,000,000

 

100.0%

 

Less Organization and Offering Expenses:

 

 

 

 

 

 

 

 

 

Selling Commissions

 

$

140,000

 

7.0%

 

$

105,000,000

 

7.0%

 

Marketing Contribution(1)

 

$

60,000

 

3.0%

 

$

45,000,000

 

3.0%

 

Issuer Costs(1)(2)

 

$

30,000

 

1.5%

 

$

22,500,000

 

1.5%

 

TOTAL EXPENSES(3):

 

$

230,000

 

11.5%

 

$

172,500,000

 

11.5%

 

Net Offering Proceeds

 

$

1,770,000

 

88.5%

 

$

1,327,500,000

 

88.5%

 

Less:

 

 

 

 

 

 

 

 

 

Acquisition Fees(4)

 

$

30,000

 

1.5%

 

$

22,500,000

 

1.5%

 

Acquisition Expenses(5)

 

$

10,000

 

0.5%

 

$

7,500,000

 

0.5%

 

NET PROCEEDS AVAILABLE FOR INVESTMENT(6):

 

$

1,730,000

 

86.5%

 

$

1,297,500,000

 

86.5%

 

 


(1)

We will reimburse Inland Securities and participating soliciting dealers for bona fide out-of-pocket, itemized and detailed due diligence expenses incurred by these entities, in amounts up to 0.5% of the gross offering proceeds from shares sold in the “best efforts” offering.  These expenses may, in our sole discretion, be reimbursed from amounts paid or reallowed to these entities as a marketing contribution, or may be reimbursed from issuer costs.  If these expenses are reimbursed from issuer costs, we will pay $7.5 million in the aggregate if we sell the maximum number of 150,000,000 shares in our “best efforts” offering.  If these expenses are reimbursed from amounts paid or reallowed as a marketing contribution, there will be no additional costs to us. 

 

 

(2)

Issuer costs may not exceed 1.5% of the gross offering proceeds.  Issuer costs include amounts for SEC registration fees, FINRA filing fees, certain bona fide itemized and detailed due diligence expenses, printing and mailing expenses, blue sky fees and expenses, legal fees and expenses, accounting fees and expenses, advertising and sales literature, transfer agent fees, data processing fees, bank fees and other administrative expenses of the offering. 

 

 

(3)

We have voluntarily limited our total organization and offering expenses to 11.5% of the gross offering proceeds. 

 

 

(4)

We will pay our Business Manager or its affiliates a fee equal to 1.5% of the contract purchase price of each asset acquired.  See “Compensation Table” for the definition of “contract purchase price.”  Assuming aggregate borrowings equivalent to a 75% loan-to-asset value ratio, we will pay acquisition fees in an amount equal to approximately $90 million.

 

 

(5)

Acquisition expenses were estimated by us, for illustrative purposes, based on the prior experience of IREIC, our sponsor, in sponsoring five other REIT programs.  The actual amount of acquisition expenses cannot be determined at the present time and will depend on numerous factors including the aggregate purchase price paid to acquire the real estate asset, the aggregate amount borrowed, if any, to acquire the real estate asset and the number of properties acquired.  Assuming that we sell the maximum number of shares in our “best efforts” offering and that we reimburse the maximum amount of acquisition expenses permitted under our charter, we will reimburse approximately $30 million assuming maximum aggregate borrowings equivalent to a 75% loan-to-asset value ratio. 

 

 

(6)

Pending the acquisition of properties, we may invest proceeds in cash and short-term, highly liquid investments.   Further, we may use proceeds to pay operating expenses or to fund reserves. 

 

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PRIOR PERFORMANCE OF IREIC AFFILIATES

 

Prior Investment Programs

 

During the ten year period ended June 30, 2011, IREIC and its affiliates sponsored four other REITs, ninety-nine real estate exchange private placement limited partnerships and limited liability companies, which altogether have raised more than $16.2 billion from over 370,000 investors in offerings for which Inland Securities has served as dealer manager. During that period, IRRETI, Inland Western, Inland American and Inland Diversified raised approximately $15.2 billion from over 362,000 investors.  These REITs have, or, with respect to IRRETI, had, investment objectives similar to ours in that they seek to invest in real estate that produces both current income and long-term capital appreciation for stockholders.  The monies raised by IREIC-sponsored REITs, including IRC, a REIT previously sponsored by IREIC prior to this ten year period, represent approximately 95% of the aggregate amount raised in offerings for which Inland Securities has served as dealer manager, approximately 99% of the aggregate number of investors, approximately 95% of properties purchased and approximately 93% of the aggregate cost of the properties purchased by the prior programs sponsored by IREIC and its affiliates.

 

Inland Private Capital Corporation, or “IPCC,” offers real estate exchange transactions, on a private basis, designed, among other things, to provide replacement properties for persons wishing to complete an IRS Section 1031 real estate exchange. Thus, these private placement programs do not have investment objectives similar to ours. However, these private placement programs have owned real estate assets similar to those that we may seek to acquire, including industrial/distribution buildings, shopping centers, office buildings and other retail buildings.

 

We pay fees to, and reimburse expenses incurred by, Inland Securities and our Business Manager, Real Estate Managers, TIREG and their affiliates, as described in more detail in the section of this prospectus captioned “Prospectus Summary — Compensation Paid to Affiliates of IREIC.”  The other five REITs previously sponsored by IREIC have similarly compensated IREIC and each of their respective business managers, real estate managers and affiliates, although Inland American and Inland Diversified also may pay oversight fees to their real estate managers.  The private placement programs sponsored by IPCC and IREIC pay some of the same types of fees and expenses that we pay, such as selling commissions, marketing contributions, bona fide due diligence expenses, business management fees and real estate management fees. However, because the business conducted by, and the underlying investment objectives of, these private placement programs are substantially different than our business and investment objectives, other fees and expenses paid by the private placement programs are not directly comparable to ours.

 

The following discussion and the Prior Performance Tables, included in this prospectus as Appendix A, provide information on the prior performance of the real estate programs sponsored by IREIC and IPCC  Past performance is not necessarily indicative of future performance.  With respect to the disclosures set forth herein, we have not provided information for IRRETI as of June 30, 2011. On February 27, 2007, all of the outstanding common stock of IRRETI was acquired in a merger with Developers Diversified Realty Corporation (“DDR”).  Pursuant to the merger agreement, DDR acquired IRRETI for a total merger consideration of $14.00 per share plus accrued but unpaid dividends for the month of February 2007 in cash, prorated in accordance with the agreement. DDR elected to pay the merger consideration to the IRRETI stockholders through a combination of $12.50 in cash and $1.50 in common shares of DDR, which equated to a 0.021569 common share of DDR. The transaction had a total enterprise value of approximately $6.2 billion. No further information regarding IRRETI following completion of the merger is available.

 

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Summary Information

 

The following table provides summarized information concerning prior programs sponsored by IREIC or its affiliates, with the exception of IRRETI, for the ten year period ending June 30, 2011, and is qualified in its entirety by reference to the introductory discussion above and the detailed information appearing in the Prior Performance Tables in Appendix A. With respect to IRRETI, information is presented for the ten year period ended September 30, 2006. This information set forth in this table, and in the narrative that follows, represents capital raised by these prior programs only through offerings for which Inland Securities has served as dealer manager and, where noted, through their respective distribution reinvestment plans. All information regarding the REITs previously sponsored by IREIC is derived from the public filings by these entities. WE ARE NOT, BY INCLUDING THESE TABLES, IMPLYING THAT WE WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN THE TABLES BECAUSE OUR YIELD ON INVESTMENTS, CASH AVAILABLE FOR DISTRIBUTION AND OTHER FACTORS MAY BE SUBSTANTIALLY DIFFERENT. ACQUIRING OUR SHARES WILL NOT GIVE YOU ANY INTEREST IN ANY PRIOR PROGRAM.

 

 

 

Inland
Real Estate
Corporation
as of
June 30, 2011
(1)(2)

 

Inland Retail
Real Estate
Trust,

Inc.
as of
September 30,
2006

 

Inland Western
Retail
Real Estate
Trust, Inc.
as of
June 30, 2011

 

Inland
American
Real
Estate Trust,
Inc.
as of
June 30, 2011

 

Inland
Diversified
Real Estate
Trust, Inc.

as of
June 30, 2011

 

Inland Private
Capital
Corporation
Private
Placement
Offerings

as of
June 30, 2011

 

Inland Private
Placement
LLC Offering
as of

June 30, 2011

 

Number of programs sponsored

 

1

 

1

 

1

 

1

 

1

 

99

 

1

 

Number of public “best efforts” offerings

 

4

 

2

 

2

 

2

 

1

 

0

 

0

 

Aggregate amount raised from investors (3)

 

$

747,428,000

 

4,484,593,000

 

4,473,652,000

 

8,526,737,000

 

418,834,000

 

1,009,651,000

 

30,909,202

 

Approximate aggregate number of investors

 

22,000

 

57,600

 

112,000

 

187,472

 

10,689

 

2,759

 

447

 

Number of properties purchased

 

216

(4)

287

 

319

 

999

 

44

 

131

 

14

 

Aggregate cost of properties

 

$

1,599,841,593

 

8,647,632,000

 

8,640,037,000

 

11,190,554,000

 

785,897,690

 

1,941,471,000

 

56,096,621

 

Number of mortgages receivable and notes receivable

 

2

 

0

 

2

 

5

 

0

 

0

 

3

 

Principal amount of mortgages receivable and notes receivable

 

$

3,215,000

 

8,270,000

 

8,290,000

 

34,025,000

(5)

0

 

0

 

3,923,000

 

Number of investments in unconsolidated entities

 

6

 

4

 

4

 

12

 

2

 

0

 

0

 

Investment in unconsolidated entities (6)

 

$

86,204,000

 

31,725,000

 

31,498,000

 

552,773,000

 

154,551

 

0

 

0

 

Investment in securities

 

13,291,000

 

19,248,000

 

36,268,000

 

279,796,000

 

7,637,788

 

3,180,769

 

3,099,749

 

Percentage of properties (based on cost) that were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

71

%

89

%

76

%

27

%

85

%

28

%

10

%

Single-user net lease

 

29

%

11

%

24

%

28

%

12

%

16

%

56

%

Nursing homes

 

0

%

0

%

0

%

0

%

0

%

0

%

0

%

Offices

 

0

%

0

%

0

%

8

%

0

%

45

%

0

%

Industrial

 

0

%

0

%

0

%

3

%

0

%

11

%

10

%

Health clubs

 

0

%

0

%

0

%

0

%

0

%

0

%

0

%

Mini-storage

 

0

%

0

%

0

%

0

%

0

%

0

%

0

%

 

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Multi-family residential

 

0

%

0

%

0

%

8

%

3

%

0

%

22

%

Lodging

 

0

%

0

%

0

%

26

%

0

%

0

%

0

%

Total commercial

 

100

%

100

%

100

%

100

%

100

%

100

%

98

%

Land

 

0

%

0

%

0

%

0

%

0

%

0

%

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of properties (based on cost) that were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Newly constructed (within a year of acquisition)

 

36

%

39

%

37

%

13

%

19

%

29

%

30

%

Existing construction

 

64

%

61

%

63

%

87

%

81

%

71

%

70

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of properties sold in whole or in part

 

53

(4)

13

 

36

 

18

 

0

 

5

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of properties exchanged

 

0

 

0

 

0

 

0

 

0

 

1

 

0

 

 


(1)

 

With respect to Inland Real Estate Corporation, or “IRC,” the table provides summary information for the entire duration of the program, from its inception in 1994. However, any information relating to IRC’s offerings reflects only those public offerings conducted prior to the listing of its shares on the New York Stock Exchange, plus the ongoing issuance of shares under IRC’s distribution reinvestment program.

(2)

 

This table does not include any information regarding: (1) the equity offering of IRC’s common shares completed in May 2009; (2) the sale of any shares under the Sales Agency Agreement with BMO Capital Markets Corp.; (3) the issuance of IRC’s 4.625% convertible senior notes due in 2026; or (4) the issuance of IRC’s 5.0% convertible senior notes due in 2029. Neither Inland Securities nor any Inland affiliate received any fees in connection with these transactions. See “— Publicly Registered REITs — Inland Real Estate Corporation” for additional information regarding these transactions.

(3)

 

Includes proceeds from the issuance of shares under each program’s distribution reinvestment plan.

(4)

 

IRC’s joint venture with Inland Private Capital Corporation has offered tenant-in-common or Delaware Statutory Trust (together referred to herein as “TIC”) interests in properties to investors in private placements exempt from registration under the Securities Act of 1933, as amended. Included in the amounts above are all properties purchased for this joint venture.

(5)

 

Exclusive of notes receivable discount, impairment and related amortization.

(6)

 

These entities are owned by the applicable Inland REIT and other unaffiliated parties in joint ventures. Net income, cash flow from operations and capital transactions for these properties are allocated to the applicable Inland REIT and its joint venture partners in accordance with the respective partnership agreements. The applicable Inland REIT’s partners manage the day-to-day operations of the properties and hold key management positions. These entities are not consolidated by the applicable Inland REITs, and the equity method of accounting is used to account for these investments. Under the equity method of accounting, the net equity investment of the applicable Inland REIT and its share of net income or loss from the unconsolidated entity are reflected in the consolidated balance sheets and the consolidated statements of operations.

 

During the three years ended June 30, 2011, IRC directly purchased two properties and purchased thirty-one properties through its joint ventures, Inland Western purchased five properties, Inland American purchased 116 properties, excluding development properties, and Inland Diversified purchased forty-four properties. During the three years ended September 30, 2006, IRRETI purchased sixty-eight commercial properties. Upon written request, you may obtain, without charge, a copy of Table VI filed with the Securities and Exchange Commission in Part II of our registration statement. Table VI provides more information about these acquisitions. In addition, upon written request, you may obtain, without charge, a copy of the most recent Form 10-Q annual report filed with the Securities and Exchange Commission by any of these REITs within the last twenty-four months. We will provide exhibits to each such Form 10-Q upon payment of a reasonable fee for copying and mailing expenses.

 

Publicly Registered REITs

 

The information set forth below regarding IRC, Inland Western, Inland American and IRRETI is derived from the reports filed by these entities with the Securities and Exchange Commission under the Exchange Act, including without limitation the Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed by IRC on August 9, 2011 (referred to herein as the “IRC 10-Q”), the Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed by Inland Western on August 8, 2011 (referred to

 

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herein as the “Western 10-Q”), the Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed by Inland American on August 12, 2011 (referred to herein as the “American 10-Q”) and the Quarterly Report on Form 10-Q for the period ended June 30, 2011 filed by Inland Diversified on August 12, 2011 (referred to herein as the “Diversified 10-Q”)

 

Inland Real Estate Corporation is a self-administered REIT formed in May 1994. IRC’s shares have been listed on the New York Stock Exchange under the ticker “IRC” since June 9, 2004. IRC acquires, owns, operates and develops, directly or through its unconsolidated entities, open-air neighborhood, community and power shopping centers and single-tenant retail properties located in the upper Midwest markets.  As of June 30, 2011, the properties owned by IRC were generating sufficient cash flow to pay operating expenses, debt service requirements and current distributions.

 

As of June 30, 2011, IRC owned interests in 163 investment properties for an aggregate purchase price of approximately $1.6 billion.  These properties were purchased in part with proceeds received from the offerings of shares of its common stock, borrowings secured by its properties, draws on its line of credit or sales proceeds from previous sales of properties.  As of June 30, 2011, IRC had total debt of approximately $834.2 million.  Approximately $498.1million of this debt is secured by its properties.  The remaining $336 million is comprised of an unsecured line of credit and borrowings under a term loan and the face value of IRC convertible notes.

 

On August 31, 2011, the closing price of the IRC common stock on the New York Stock Exchange was $8.11 per share.

 

Investor Update.  IRC currently pays monthly distributions.  As stated in the IRC 10-Q, IRC declared monthly cash distributions to stockholders in an amount equal to $0.0475 per common share for the six months ended June 30, 2011.  These distributions were funded from cash flow from operations, distributions from joint ventures and dispositions of properties.  IRC has stated that future distributions will be determined by its board of directors, and that it expects to continue paying distributions to maintain its status as a REIT.

 

Capital Raise.  Through a total of four public offerings, for which Inland Securities served as dealer manager, the last of which was completed in 1998, IRC sold a total of 51.6 million shares of common stock.  Through June 30, 2011, IRC had issued approximately 17.8 million shares of common stock through its dividend reinvestment program and repurchased approximately 5.3 million shares of common stock through its share repurchase program, which was terminated in 2004.    Further, in May 2009, IRC completed an underwritten equity offering of approximately 17.1 million common shares at a price of $6.50 per share.  Net of underwriting fees, the offering generated net proceeds of approximately $106.4 million, excluding offering costs.  On November 10, 2009, IRC entered into a Sales Agency Agreement with BMO Capital Markets Corp. (“BMO”) to offer and sell shares of its common shares having an aggregate offering price of up to $100.0 million from time to time through BMO, acting as sales agent.  As of June 30, 2011, IRC had issued approximately 3.8 million common shares pursuant to the Sales Agency Agreement and generated net proceeds of approximately $31.7 million, after deducting selling commissions paid to BMO.  Approximately $67.5 million remained available for sale under this program.  As a result of all offerings, as of June 30, 2011, IRC had realized total net offering proceeds of approximately $841.9 million.

 

In addition, in November 2006, IRC issued $180.0 million aggregate principal amount of its 4.625% convertible senior notes due in 2026.  Through this private placement, IRC received net proceeds of approximately $177.3 million after deducting selling discounts and commissions.  Through a tender/exchange offer that expired August 5, 2010, IRC purchased for cash $15.0 million of the $125.0 million aggregate principal amount of outstanding notes, and exchanged $29.2 million of the notes for a

 

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new series of 5.0% convertible senior notes due 2029.  As of June 30, 2011, a combined total of $110.0 million in principal remained outstanding.  The earliest date holders of the 4.625% convertible senior notes may require IRC to repurchase their notes in whole or in part is November 15, 2011.

 

Portfolio Update.  In the IRC 10-Q, IRC reported that the effect of the current economic downturn is continuing to impact many retailers in its portfolio but that it has been able to re-lease much of the space vacated by various “big-box” tenants and is negotiating leases to fill more of these vacancies during 2011.  IRC also reported however, that these new leases are at rates generally lower than the original leases.  During the six months ended June 30, 2011, IRC executed twenty-five new, seventy-four renewal and thirty-eight non-comparable leases (expansion square footage or spaces for which no former tenant was in place for one year or more), aggregating approximately 821,000 square feet.  As of June 30, 2011, eighty-five leases in IRC’s consolidated portfolio, which comprise approximately 512,000 square feet and account for approximately 4.2% of its annualized base rent, were scheduled to expire during the remainder of 2011.

 

According to the IRC 10-Q, scheduled maturities for IRC’s outstanding mortgage indebtedness had various due dates through June 2021, and approximately $45.4 million of its mortgages payable mature prior to July 2012.  IRC stated in the IRC 10-Q that it will negotiate refinancing the remaining secured debt maturing in 2011 with lenders or will repay the debt using draws on its unsecured line of credit facility.  If IRC’s attempts to refinance are successful, it expects the average rates on the new borrowings will be approximately 50 basis points above average expiring rates.

 

Certain of IRC’s joint venture commitments require it to invest cash in properties under development.  IRC initially stated that it delayed completion of its development projects from the original 2010 and 2011 completion dates for one to two years due to challenging conditions.  However, according to the IRC 10-Q, there has been minimal activity at these development properties and IRC will not estimate the revised project completion dates until activity resumes.  Accordingly, approximately $13.6 million in development projects will be committed longer than anticipated.  Additionally, IRC stated that it has guaranteed approximately $11.3 million of unconsolidated joint venture debt as of June 30, 2011.  These guarantees are in effect for the entire term of each respective loan.  IRC would be required to make payments related to these guarantees upon the default of any of the provisions in the loan documents, unless the default is otherwise waived.

 

According to the IRC 10-Q, IRC has deferred certain capital expenditures in recent years in order to conserve capital.  IRC stated that, as a result of significant leasing activity during the last half of 2010, IRC anticipates making significant capital expenditures related to capital improvements, tenant improvements and leasing commissions, and that the capital expenditures will be more than $10.0 million higher than average expended in previous years. During the six months ended June 30, 2011, IRC incurred approximately $16.1 million in costs for tenant improvements, as compared to approximately $6.9 million for the six months ended June 30, 2010.  Also during the six months ended June 30, 2011, IRC incurred approximately $2.6 million in costs for leasing commissions, as compared to approximately $1.4 million for the six months ended June 30, 2010.  The numbers for the three months ended June 30, 2011 were lower than for the three months ended March 31, 2011 due to the timing of payments due under the respective leases.  According to the IRC 10-Q, IRC does not expect this trend to carry forward into future years, but expects to complete these deferred capital projects and the work related to its new leases in 2011.  Although IRC expects to fund these types of projects in the future, it expects the amount of spending on these items will return to levels comparable to years prior to 2011.

 

Impairments.  IRC’s policies with respect to impairments, and the impairments recorded for the six months ended June 30, 2011 and the year ended December 31, 2010, are explained in more detail below.

 

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Investment Properties.  IRC assesses the carrying values of its investment properties, whenever events or changes in circumstances indicate that the carrying amounts of these investment properties may not be fully recoverable.  Recoverability of the investment properties is measured by comparison of the carrying amount of the investment property to the estimated future undiscounted cash flows.  In order to review its investment properties for recoverability, IRC considers current market conditions, as well as its intent with respect to holding or disposing of the asset.  If IRC’s analysis indicates that the carrying value of the investment property is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.  IRC did not record any impairment losses for the six months ended June 30, 2011 or for the year ended December 31, 2010.

 

Marketable Securities.  IRC evaluates its securities investments for impairment quarterly.  IRC’s policy for assessing near term recoverability of its “available for sale” securities is to record a charge against net earnings when it determines that a decline in the fair value of a security drops below the cost basis and it believes it to be other than temporary.  At June 30, 2011 and December 31, 2010, investment in securities included approximately $12.3 million and $9.1 million, respectively, of perpetual preferred securities and common securities classified as available-for-sale securities, which are recorded at fair value and $1.0 million in each period of preferred securities not classified as available-for-sale securities and therefore, recorded at cost.  IRC determined that these securities should be held at cost because the fair value is not readily determinable and there is no active market for these securities.  No impairment losses were required or recorded for the six months ended June 30, 2011 or the year ended December 31, 2010. During the six months ended June 30, 2011 and the year ended December 31, 2010, IRC realized gains on sales of securities equal to approximately $1.2 million and $2.3 million, respectively.

 

Joint Ventures. If circumstances indicate a potential loss in value of an equity method investment, IRC evaluates the investment for impairment by estimating its ability to recover its investments from future expected cash flows. If IRC determines the loss in value is other than temporary, it will recognize an impairment charge to reflect the investment at fair value.  During the six months ended June 30, 2011, the total impairment losses recorded by IRC’s unconsolidated joint ventures were approximately $17.4 million, at the joint venture level, and IRC’s pro rata share of these losses was approximately $7.8 million.  During the year ended December 31, 2010, the total impairment losses recorded by IRC’s unconsolidated joint ventures were approximately $5.6 million, at the joint venture level, and IRC’s pro rata share of these losses was approximately $2.5 million.  In addition, during the six months ended June 30, 2011, and the year ended December 31, 2010, IRC recorded $5.2 million and $18.2 million, respectively, in impairment losses to reflect certain investments at fair value.

 

Sale of Assets.  During the six months ended June 30, 2011, IRC sold one investment property, with an aggregate gain on sale of approximately $0.2 million.

 

Merger to Become Self-Administered.  On July 1, 2000, IRC became a self-administered REIT by acquiring, through merger, Inland Real Estate Advisory Services, Inc., its advisor, and Inland Commercial Property Management, Inc., its property manager. As a result of the merger, IREIC, the sole stockholder of the advisor, and The Inland Property Management Group, Inc., the sole stockholder of its property manager, received an aggregate of approximately 6.2 million shares of IRC’s common stock valued at $11.00 per share, or approximately 10% of its common stock at the time of the transaction.

 

Current Litigation.  IRC reported that, as of June 30, 2011, it was not party to, and none of its properties was subject to, any material pending legal proceedings.

 

Inland Western Retail Real Estate Trust, Inc. is a self-administered REIT formed in March 2003. Inland Western acquires, manages and develops a diversified portfolio of real estate, primarily

 

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multi-tenant shopping centers.  As of June 30, 2011, Inland Western owned 283 consolidated operating properties acquired for an aggregate purchase price of approximately $7.3 billion.  These properties were purchased with proceeds received from its securities offerings and financings. Inland Western also has invested in twenty retail operating properties held by three joint ventures that it does not consolidate; and five   retail properties under development.  As of June 30, 2011, Inland Western had borrowed approximately $3.42 billion secured by its properties.

 

Investor Update.  Inland Western currently pays quarterly distributions.  Inland Western’s board of directors declared a first quarter 2011 distribution equal to $0.06 per share equal to a 2.375% annualized yield assuming a purchase price of $10.00 per share or a 3.467% annualized yield based upon the December 31, 2009 estimated value of $6.85 per share, and a second quarter 2011 distribution equal to $0.0625 per share, equal to a 2.5% annualized yield assuming a purchase price of $10.00 per share or a 3.6% annualized yield based upon the new estimated per-share value of $6.95.

 

On June 14, 2011, Inland Western’s board of directors established an estimated per-share value of its common stock equal to $6.95.  Inland Western stated in a Current Report on Form 8-K that this estimated per-share value was provided solely to assist broker dealers in connection with their obligations under applicable FINRA rules with respect to customer account statements and to assist fiduciaries in discharging their obligations under ERISA reporting requirements.  In connection with the estimate of share value, Inland Western amended its distribution reinvestment program (referred to herein as the “Western DRP”), effective August 31, 2011, to modify the purchase price of shares of Inland Western stock purchased under the Western DRP on or after August 31, 2011 to $6.95 per share.  Inland Western suspended its share repurchase program, until further notice, effective November 19, 2008.

 

On February 14, 2011, Inland Western filed a registration statement on Form S-11 with the SEC regarding a proposed public offering of its common stock.  It subsequently filed its first amendment to the registration statement on Form S-11/A with the SEC on April 29, 2011and its second amendment to the registration statement on Form S-11/A with the SEC on July 25, 2011.  Inland Western stated in the registration statement that it intends to apply to have the common stock listed on the NYSE.

 

On February 24, 2011, Inland Western held a special meeting of stockholders, at which its stockholders voted in favor of a proposal to approve an amendment and restatement of Inland Western’s charter.  The changes are contingent on the occurrence of the above-referenced listing.  Inland Western stated in its public filings that the amendment and restatement of the charter was primarily intended to accomplish two objectives in connection with the listing of its common stock: (1) to permit the company to implement a phased-in liquidity program in connection with the listing; and (2) to more closely align the charter to those of its peers with publicly listed securities.

 

Capital Raise.  Through a total of two public primary offerings, the last of which was completed in 2005, Inland Western sold a total of approximately 459.5 million shares of its common stock. In addition, through June 30, 2011, Inland Western had issued approximately 73.8 million shares through its distribution reinvestment program and had repurchased approximately 43.8 million shares through its share repurchase program. As a result, Inland Western has realized total net offering proceeds, before offering costs, of approximately $4.9 billion as of June 30, 2011.

 

Portfolio Update.  As of June 30, 2011, Inland Western reported that its retail operating portfolio was 88.7% leased, including leases signed but not commenced.  However, as a result of Borders declaring Chapter 11 bankruptcy in February 2011 and receiving approval on July 21, 2011 for the liquidation of its remaining store assets, Inland Western expects that the Borders’ stores at the five remaining Inland Western locations,  representing approximately 105,000 square feet of gross leasable area, will likely be closed in the next several months.  Inland Western also stated that during the three and six months ended

 

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June 30, 2011, it had signed 110 and 240 new and renewal leases, respectively, for a total of approximately 933,000 and 2,004,000 square feet, respectively.

 

Inland Western reported that during the six months ended June 30, 2011, it obtained mortgage payable proceeds of approximately $70.4 million, made mortgages payable repayments of $415.2 million and received debt forgiveness of $14.4 million.   The new mortgages payable that Inland Western entered into during the six months ended June 30, 2011 have interest rates ranging from 4.54% to 5.50% and maturities up to thirty years.  The stated interest rates of the loans repaid during the six months ended June 30, 2011 ranged from 4.44% to 8.00% per annum.  In addition, Inland Western also entered into modifications of two existing loan agreements which extended the maturities of $16.2 million of mortgages payable to May 1, 2014. Inland Western also reported in the Western 10-Q that as of June 30, 2011, approximately $63.9 million of mortgages payable had matured and not been repaid or refinanced, and it had approximately $193.6 million of mortgages payable, excluding principal amortization, maturing in the remainder of 2011.  In addition, Inland Western reported that, as of June 30, 2011, it had approximately $766.9 million of debt scheduled to mature through the end of 2012.  Inland Western had repaid or received debt forgiveness for approximately $ 28.8 million of that debt.  For substantially all of the remaining approximately $738.1 million of debt, Inland Western plans on satisfying its obligations by refinancing this debt using either its senior secured credit facility or other new long-term borrowings.  In certain circumstances, for non-recourse mortgage indebtedness, Inland Western noted that it may seek to negotiate a discounted payoff amount or satisfy its obligation by delivering the property to the lender.

 

On February 4, 2011, Inland Western amended and restated its existing credit agreement to provide for a senior secured credit facility in the aggregate amount of $585.0 million, consisting of a $435.0 million senior secured revolving line of credit and a $150.0 million secured term loan from a number of financial institutions.

 

Impairments.  Inland Western’s policies with respect to impairments, and the impairments recorded for the six months ended June 30, 2011 and the year ended December 31, 2010, are explained in more detail below.

 

Investment Properties.  Inland Western’s investment properties, including developments in progress, are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Impairment indicators are assessed separately for each property and include, but are not limited to, the property’s low occupancy rate, difficulty in leasing space and financially troubled tenants.  Impairment indicators for developments in progress are assessed by project and include, but are not limited to, significant changes in project completion dates, development costs and market factors.  If an indicator of potential impairment exists, the asset would be tested for recoverability by comparing its carrying value to the estimated future undiscounted operating cash flows, which is based upon many factors which require Inland Western to make difficult, complex or subjective judgments.  These assumptions include, but are not limited to, projecting vacancy rates, rental rates, operating expenses, lease terms, tenant financial strength, economic factors, demographics, property location, capital expenditures, holding period, capitalization rates and sales value.  An investment property is considered to be impaired when the estimated future undiscounted operating cash flows are less than its carrying value.  Inland Western recorded asset impairment charges in an aggregate amount equal to approximately $30.4 million and $23.1 million for the six months ended June 30, 2011 and the year ended December 31, 2010, respectively.

 

Marketable Securities.  Inland Western classifies its investments in marketable securities as “available-for-sale” and they accordingly are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders’ equity.  Declines in the value of these investments in marketable securities that Inland Western determines are other-than-temporary are recorded as recognized

 

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loss on marketable securities.  To determine whether an impairment is other-than-temporary, Inland Western considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary, among other things.  Evidence considered in this assessment includes the nature of the investment, the reasons for the impairment (i.e. credit or market related), the severity and duration of the impairment, changes in value subsequent to the end of the reporting period and forecasted performance of the investee.  All available information is considered in making this determination with no one factor being determinative.  As of June 30, 2011 and December 31, 2010, the carrying values of Inland Western’s investments in marketable securities were equal to approximately $36.3 million, which included approximately $24.2 million of accumulated unrealized gain, and $34.2 million, respectively.  Inland Western did not record any other-than-temporary impairments on its marketable securities during the six months ended June 30, 2011 or the year ended December 31, 2010.   During the six months ended June 30, 2011 and the year ended December 31, 2010, Inland Western realized gains on sales of securities of approximately $277,000 and $4.0 million, respectively.

 

Notes Receivable.  Inland Western’s notes receivable relate to real estate financing arrangements and bear interest at market rates based on the borrower’s credit quality and are initially recorded at face value.  A note is impaired if it is probable that Inland Western will not collect all principal and interest contractually due. The impairment is measured based on the present value of expected future cash flows discounted at a current market rate or on the fair value of the collateral when foreclosure is probable. Inland Western does not accrue interest when a note is considered impaired. Inland Western did not report any note receivable impairments for the six months ended June 30, 2011 or the year ended December 31, 2010.

 

Joint Ventures. Inland Western’s investments in unconsolidated joint ventures are reviewed for potential impairment, in addition to impairment evaluations of the individual assets underlying these investments, whenever events or changes in circumstances warrant such an evaluation.  To determine whether an impairment is other-than-temporary, Inland Western considers whether it has the ability and intent to hold the investment until the carrying value is fully recovered.  Inland Western reported that it determined that the carrying values of its investments in unconsolidated joint ventures were fully recoverable as of June 30, 2011 and December 31, 2010.

 

Sale of Assets.   According to the Western 10-Q, during the six months ended June 30, 2011, Inland Western sold four assets, aggregating  1,338,400 square feet, for a total sales price of approximately $58.8 million.  The aggregated sales resulted in net sales proceeds totaling $57.1 million.  Inland Western stated in the Western 10-Q that it plans to pursue opportunistic dispositions of  non-retail properties and free-standing triple net retail properties to maintain the focus of its portfolio on  well located, high quality shopping centers.  See also “Appendix A — Table V” for additional information regarding Inland Western’s sales.

 

Merger to Become Self-Administered.  On November 15, 2007, Inland Western became a self-administered REIT by acquiring, through merger, Inland Western Retail Real Estate Advisory Services, Inc., its business manager and advisor, and Inland Southwest Management Corp., Inland Northwest Management Corp., and Inland Western Management Corp., its property managers. As a result of the merger, Inland Western issued to IREIC, the sole stockholder of the business manager and advisor, and the stockholders of the property managers, an aggregate of approximately 37.5 million shares of Inland Western’s common stock, valued at $10.00 per share for purposes of the merger agreement, or approximately 7.8% of its common stock.

 

Litigation.  Inland Western has disclosed that it was party to a lawsuit filed against Inland Western and nineteen other defendants by City of St. Clair Shores General Employees Retirement System

 

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and Madison Investment Trust in the United States District Court for the Northern District of Illinois.  The plaintiffs in that lawsuit alleged that all the defendants violated the federal securities laws, and certain defendants breached fiduciary duties owed to Inland Western and its stockholders, in connection with its merger with its business manager/advisor and property managers, as reflected in its proxy statement dated September 12, 2007.  On July 14, 2010, the lawsuit was settled by Inland Western and the other defendants, and on November 8, 2010, the court granted final approval of the settlement.

 

Pursuant to the terms of the settlement, 9.0 million (of the 32.5 million) shares of Inland Western’s common stock were transferred to Inland Western from shares issued to the owners of certain entities that were acquired by Inland Western in its internalization transaction.  Pursuant to the settlement, Inland Western paid the fees and expenses of counsel for class plaintiffs in an amount equal to $10.0 million.  Inland Western was reimbursed approximately $2.0 million by its insurance carrier for a portion of such fees and expenses.  The owners of certain entities that were acquired by Inland Western have also agreed to provide a limited indemnification to certain defendants who are directors and officers of Inland Western if any class members opt out of the settlement and bring claims against them, but only after these defendants have pursued and exhausted from Inland Western and its insurance carriers all recovery of damages caused by opt out claims.  Inland Western stated that, to its knowledge, none of the seven class members who opted out of the settlement have filed claims against Inland Western or its directors and officers.

 

Tax.  On June 17, 2011, Inland Western entered into a closing agreement with the Commissioner of the Internal Revenue Service (the “Commissioner”) whereby the Commissioner agreed that the terms and administration of the Western DRP will not result in Inland Western’s dividends paid during the taxable years 2004 through 2006 being treated as preferential dividends. In order to obtain this closing agreement, IREIC was required to pay a fee of approximately $70,000, including interest, to the Commissioner. Inland Western incurred no liability in connection with the closing agreement.

 

Inland American Real Estate Trust, Inc. is an externally managed REIT formed in October 2004.  The Inland American business manager is an affiliate of our sponsor.  Inland American focuses on acquiring and developing a diversified portfolio of commercial real estate including retail, multi-family, industrial, lodging and office properties, located in the United States.  The company also invests in joint ventures, development projects, real estate loans and real estate-related securities, and has selectively acquired REITs and other real estate operating companies. As stated in the American 10-Q, as of June 30, 2011, Inland American owned, directly or indirectly through joint ventures in which it has a controlling interest, 981 properties, representing approximately 48.4 million square feet of retail, industrial and office properties, 9,790 multi-family units and 15,564 lodging rooms.  As of June 30, 2011, Inland American had borrowed approximately $5.5 billion secured by its properties.

 

Capital Raise. Inland American completed its initial public offering on July 31, 2007 and completed its follow-on offering on April 6, 2009.  Through June 30, 2011, Inland American had sold a total of approximately 852.9 million shares of its common stock through its “best efforts” offering.  In addition, through June 30, 2011, Inland American had issued approximately 101 million shares through its distribution reinvestment plan and had repurchased approximately 33.2 million shares through its share repurchase program. As a result, Inland American has realized total net offering proceeds, before offering costs, of approximately $8.8 billion as of June 30, 2011.

 

Investor Update. Inland American currently pays monthly distributions in an amount equal to $0.50 per share on an annualized basis, which equates to a 5% annualized yield on a purchase price of $10.00 per share.  The distributions paid during the six months ended June 30, 2011 were funded from cash flow from operations, distributions from unconsolidated entities and retained earnings.

 

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Inland American reported that, on September 21, 2010, it had established an estimated value per share of its common stock equal to $8.03.  Concurrent with establishing an estimated value, Inland American amended and restated its distribution reinvestment plan.  Under the amended and restated plan, after September 21, 2010, distributions are reinvested in shares of Inland American’s common stock at a price equal to $8.03 per share.

 

Inland American also reported that it had adopted an amended and restated share repurchase program, which became effective on April 11, 2011 and was subsequently amended effective August 12, 2011.  Under the amended program, Inland American will repurchase shares, on a quarterly basis, only upon the death of a beneficial owner.  Inland American will have $5 million available each calendar quarter to repurchase shares at a price per share of $7.23, which is equal to 90% of its most recently estimated per share value of $8.03.  Inland American reported that during the three months ended June 30, 2011, it repurchased 691,563 shares of common stock for $5 million, and an additional 1,194,651 shares will be included with all other shares for which it has received repurchase requests in the next calendar quarter in which funds are available (unless withdrawn).

 

Portfolio Update.  In the American 10-Q, Inland American reviewed the occupancy rates of each of its property segments at June 30, 2011.  As of June 30, 2011, the economic occupancy of Inland American’s retail segment was 93%.  As of June 30, 2011, Inland American’s retail portfolio had not experienced bankruptcies or receivable write-offs that would have a material adverse effect on its results of operations, financial condition and ability to pay distributions.  With respect to Inland American’s lodging segment, as of June 30, 2011, the revenue per available room (or “Rev/Par”) was $85, the average daily rate (“ADR”) was $119 and the occupancy was 71%.  As stated in the American 10-Q, Inland American believes that its Rev/Par will increase 5%-8% in 2011 as compared to 2010.  As of June 30, 2011, the economic occupancy of its office segment was 92%, the industrial segment was 90% and the multi-family segment was 92%.

 

Inland American stated in the American 10-Q that it borrowed approximately $310 million secured by mortgages on its properties and approximately $4 million against its portfolio of marketable securities for the six months ended June 30, 2011.  As of June 30, 2011, Inland American had approximately $301.6 million and $705.4 million in mortgage debt maturing in 2011 and 2012, respectively.  As stated in the American 10-Q, as of June 30, 2011, $10.1 million of the debt maturing in 2011 reflects joint venture debt that is consolidated on Inland American’s balance sheet.  Inland American reported that it is currently negotiating refinancing the remaining debt with the existing lenders at terms that will most likely be at higher interest rates, but that it currently anticipates that it will be able to repay or refinance all of the debt on a timely basis.

 

Impairments.  Inland American’s policies with respect to impairments, and the impairments recorded for the six months ended June 30, 2011 and the year ended December 31, 2010, are explained in more detail below.

 

Assets.  Inland American assesses the carrying values of its respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Recoverability of the assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review its assets for recoverability, Inland American considers current market conditions, as well as its intent with respect to holding or disposing of the asset. If Inland American’s analysis indicates that the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, Inland American recognizes an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.  Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third party appraisals, where considered necessary.  For the six months

 

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ended June 30, 2011, Inland American recognized impairments of $58.2 million and for the year ended December 31, 2010, Inland American recognized impairments of $46.6 million and $0.9 million, reflected in discontinued operations.

 

Marketable Securities.  Inland American classifies its investment in securities in one of three categories: trading, available-for-sale, or held-to-maturity.  Trading securities are bought and held principally for the purpose of selling them in the near term.  Held-to-maturity securities are those securities which Inland American has the ability and intent to hold until maturity.  Available-for-sale securities are all securities other than trading securities and held-to-maturity securities.  Declines in the market value of any available-for-sale security below cost that Inland American deems to be other-than-temporary are recorded as impairments and reduce the carrying amount to fair value.  To determine whether an impairment is other-than-temporary, Inland American determines whether: (1) it intends to sell the debt security; and (2) it is more likely than not that it will be required to sell the debt security before its anticipated recovery.  The carrying values of Inland American’s investments in marketable securities were equal to approximately $279.8 million and $268.7 million as of June 30, 2011 and December 31, 2010, respectively.  For the six months ended June 30, 2011, Inland American recorded no other-than-temporary impairments against its marketable securities portfolio.  For the year ended December 31, 2010, Inland American recorded $1.9 million in other-than-temporary impairments against its marketable securities portfolio.

 

Joint Ventures.  On a periodic basis, Inland American’s management assesses whether there are any indicators that the carrying value of the company’s investments in unconsolidated entities may be other than temporarily impaired. To the extent impairment has occurred, the loss is measured as the excess of the carrying value of the investment over the fair value of the investment.  Inland American had investments in unconsolidated entities equal to approximately $552.7 million and $573.2 million as of June 30, 2011 and December 31, 2010, respectively.  Inland American recorded no impairments during the six months ended June 30, 2011.  For the year ended December 31, 2010, Inland American recorded approximately $11.2 million.

 

Sale of Assets.  Inland American reported in the American 10-Q that, for the six months ended June 30, 2011, it disposed of two investment properties, with an aggregate gain on the sale of approximately $1.2 million.

 

Litigation.  On June 17, 2011, Crockett Capital Corporation and the Company agreed to a mutual customary release of all claims arising from or related to pending litigation, upon which the Company made a payment of $5.1 million.

 

Inland Diversified Real Estate Trust, Inc. is an externally managed REIT formed in June 2008.  The Inland Diversified business manager is an affiliate of our sponsor.  Inland Diversified focuses on acquiring and developing a diversified portfolio of commercial real estate including retail, multi-family, industrial, lodging and office properties, located in the United States and Canada.  The company also invests in joint ventures, development projects, real estate loans and real estate-related securities. As stated in the Diversified 10-Q, as of June 30, 2011, Inland Diversified owned, directly or indirectly through joint ventures in which it has a controlling interest, 44 properties, representing approximately 4.8 million square feet of retail and office properties and 300 multi-family units.  As of June 30, 2011, Inland Diversified had borrowed approximately $442.5 million secured by its properties.

 

Capital Raise. Inland Diversified commenced its initial, on-going public offering on August 24, 2009.  Through June 30, 2011, Inland Diversified had sold a total of approximately 41.0 million shares of its common stock through its “best efforts” offering.  In addition, through June 30, 2011, Inland Diversified had issued approximately 1.1 million shares through its distribution reinvestment plan and

 

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had repurchased approximately 86,515 shares through its share repurchase program. As a result, Inland Diversified has realized total net offering proceeds, before offering costs, of approximately $418.2 million as of June 30, 2011.

 

Investor Update. Inland Diversified currently pays monthly distributions in an amount equal to $0.60 per share on an annualized basis, which equates to a 6% annualized yield on a purchase price of $10.00 per share.  The distributions paid during the six months ended June 30, 2011 were fully funded from cash flow from operations.

 

Portfolio Update.  As of June 30, 2011, the weighted average economic occupancy of Inland Diversified’s properties was 97.2%.  As of June 30, 2011, Inland Diversified’s retail portfolio had not experienced bankruptcies or receivable write-offs that would have a material adverse effect on its results of operations, financial condition and ability to pay distributions.

 

As of June 30, 2011, Inland Diversified had approximately $24.1 million and $56.9 million in mortgage debt maturing in 2011 and 2012, respectively.

 

Impairments.  Inland Diversified’s policies with respect to impairments are explained in more detail below.  Inland Diversified recognized no impairments for the six months ended June 30, 2011 or the year ended December 31, 2010.

 

Assets.  Inland Diversified assesses the carrying values of its respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Recoverability of the assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review its assets for recoverability, Inland Diversified considers current market conditions, as well as its intent with respect to holding or disposing of the asset. If Inland Diversified’s analysis indicates that the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, Inland Diversified recognizes an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.  Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third party appraisals, where considered necessary.

 

Marketable Securities.  Inland Diversified classifies its investment in securities in one of three categories: trading, available-for-sale, or held-to-maturity.  Declines in the market value of any available-for-sale security below cost that Inland Diversified deems to be other-than-temporary are recorded as impairments and reduce the carrying amount to fair value.  To determine whether the impairment is other-than-temporary, Inland Diversified determines whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.  The carrying values of Inland Diversified’s investments in marketable securities were equal to approximately $7.6 million and $5.8 million as of June 30, 2011 and December 31, 2010, respectively.

 

Joint Ventures.  On a periodic basis, Inland Diversified’s management assesses whether there are any indicators that the carrying value of the company’s investments in unconsolidated entities may be other than temporarily impaired. To the extent impairment has occurred, the loss is measured as the excess of the carrying value of the investment over the fair value of the investment.  Inland Diversified had investments in unconsolidated entities equal to approximately $0.2 million of June 30, 2011 and December 31, 2010.

 

Sale of Assets.  Inland Diversified reported in the Diversified 10-Q that, for the six months ended June 30, 2011, it did not dispose of any investment properties.

 

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Litigation.  Inland Diversified reported that, as of June 30, 2011, it was not party to, and none of its properties was subject to, any material pending legal proceedings.

 

Inland Retail Real Estate Trust, Inc. was a self-administered REIT formed in September 1998.  IRRETI focused on purchasing shopping centers located east of the Mississippi River in addition to single-user retail properties in locations throughout the United States. IRRETI sought to provide investors with regular cash distributions and a hedge against inflation through capital appreciation. As of September 30, 2006, the properties owned by IRRETI were generating sufficient cash flow to pay operating expenses and an annual cash distribution of $0.83 per share, a portion of which was paid monthly.

 

As of September 30, 2006, IRRETI owned 287 properties for an aggregate purchase price of approximately $4.1 billion. These properties were purchased with proceeds received from the above described offerings of shares of its common stock, financings sole of properties and the line of credit. As of September 30, 2006, IRRETI had borrowed approximately $2.3 billion secured by its properties.

 

Capital Raise.  Through a total of three public offerings, the last of which was completed in 2003, IRRETI sold a total of approximately 213.7 million shares of its common stock. In addition, through September 30, 2006, IRRETI had issued approximately 41.1 million shares through its distribution reinvestment program, and repurchased a total of approximately 11.4 million shares through the share reinvestment program. As a result, IRRETI had realized total net offering proceeds of approximately $2.4 billion as of September 30, 2006. On December 29, 2004, IRRETI issued approximately 19.7 million shares as a result of a merger with its advisor and property managers, as described below.

 

Merger to Become Self-Administered. On December 29, 2004, IRRETI became a self-administered REIT by acquiring, through merger, Inland Retail Real Estate Advisory Services, Inc., its business manager and advisor, and Inland Southern Management Corp., Inland Mid-Atlantic Management Corp., and Inland Southeast Property Management Corp., its property managers. As a result of the merger, IRRETI issued to our sponsor, IREIC, the sole stockholder of the business manager and advisor, and the stockholders of the property managers, an aggregate of approximately 19.7 million shares of IRRETI’s common stock, valued at $10.00 per share for purposes of the merger agreement, or approximately 7.9% of its common stock.

 

Sale.  As noted above, on February 27, 2007, IRRETI and DDR completed a merger.

 

Distributions by Publicly Registered REITs

 

The following tables summarize distributions paid by IRC, Inland Western, Inland American and Inland Diversified through June 30, 2011, and by IRRETI through September 30, 2006. The rate at which each company raises capital, acquires properties and generates cash from all sources determines the amount of cash available for distribution. As described in more detail below, IREIC or its affiliates agreed, from time to time, to either forgo or defer all or a portion of the business management and advisory fees due them to increase the amount of cash available to pay distributions while each REIT raised capital and acquired properties.  With respect to IRC, from 1995 through 2000, IREIC or its affiliates agreed to forgo approximately $10.5 million in advisor fees. With respect to IRRETI, from 1999 through 2004, IREIC or its affiliates agreed to forgo approximately $3.2 million and deferred an additional $13.1 million in advisor fees. As of December 31, 2004, IRRETI had paid IREIC or its affiliates all deferred advisor fees. With respect to Inland Western, through June 30, 2011, IREIC or its affiliates received approximately $84.0 million in advisor fees and agreed to forgo an additional $129.0 million.  In addition, IREIC also advanced approximately $5.9 million to Inland Western to pay distributions.  Inland Western had repaid approximately $3.5 million of this advancement and IREIC

 

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forgave approximately $2.4 million.  Through June 30, 2011, Inland American incurred aggregate business management fees of approximately $20.0 million, which in each year was less than the full 1% fee that the business manager could be paid.  With respect to Inland Diversified, through June 30, 2011, Inland Diversified incurred aggregate business management fees of approximately $3.3 million, of which approximately $2.2 million has been permanently waived.  In addition, IREIC contributed approximately $2.9 million to fund payment of distributions.  Subsequently, IREIC forgave $1.5 million in liabilities related to non-interest bearing advances that were previously funded to Inland Diversified.

 

In each case, if IREIC or its affiliates had not agreed to forgo or defer all or a portion of the advisor fee, or, in the case of Inland Western and Inland Diversified, advance monies to pay distributions, the aggregate amount of distributions made by each REIT may have been reduced or the REIT would have likely had to decrease the number of properties acquired or the pace at which it acquired properties.  See “Risk Factors — Risks Related to Our Business” for a discussion of risks associated with the availability and timing of our cash distributions.

 

Inland Real Estate Corporation — Last Offering By Inland Securities Completed In 1998

 

 

 

Total
Distribution

 

Ordinary
Income(1)

 

Non Taxable
Distribution(2)

 

Capital Gain
Distribution(3)

 

Total
Distributions
per Share(4)

 

 

 

$

 

$

 

$

 

$

 

$

 

1998

 

35,443,213

 

27,015,143

 

8,428,070

 

 

.88

 

1999

 

48,379,621

 

35,640,732

 

12,738,889

 

 

.89

 

2000

 

52,964,010

 

40,445,730

 

12,518,280

 

 

.90

 

2001

 

58,791,604

 

45,754,604

 

12,662,414

 

374,586

 

.93

 

2002

 

60,090,685

 

41,579,944

 

18,315,640

 

195,101

 

.94

 

2003

 

61,165,608

 

47,254,096