UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

 

Form 10-K

 

 

Commission File No. 001-32365

FELDMAN MALL PROPERTIES, INC.

(Exact name of registrant as specified in its charter)

 

 

1010 Northern Boulevard, Suite 314, Great Neck, NY 11021

(Address of principal executive offices — zip code)

 

(516) 684-1239

Registrant’s telephone number, including area code

 

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

 

 

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes þ     No o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

As of April 4, 2008 there were 13,018,811 shares of the Registrant’s common stock outstanding. The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant (12,545,926 shares) as of that date was $34,375,837. The aggregate market value was calculated by using the closing price of the common stock as of that date on the New York Stock Exchange.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s proxy statement for the 2008 annual stockholders’ meeting to be held on May 28, 2008 and to be filed within 120 days after the close of the registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

FELDMAN MALL PROPERTIES, INC.

 

FORM 10-K

 

TABLE OF CONTENTS

 

STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

When used within this Annual Report on Form 10-K, the words “believes,” “anticipates,” “projects,” “should,” “estimates,” “expects,” and similar expressions are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results, performance or achievements of our company to be materially different from those expressed or implied in the forward-looking statements. Such factors include, but are not limited to, the following changes in general economic conditions and in the markets in which our company operates:

 

 

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock.

 

We do not intend and disclaim any duty or obligation to update or revise any forward-looking statements set forth in this Annual Report on Form 10-K to reflect new information, future events or otherwise.

 

 

General

 

Feldman Mall Properties, Inc. is a real estate investment trust, or REIT, formed in July 2004 to continue the business of Feldman Equities of Arizona to acquire, renovate and reposition retail shopping malls. We completed our initial public offering on December 15, 2004, or the Offering Date.

 

Our investment strategy is to opportunistically acquire underperforming malls and transform them into physically attractive and profitable Class A or near Class A malls through comprehensive renovation and repositioning efforts aimed at increasing shopper traffic and tenant sales. Through these renovation and repositioning efforts, we expect to raise occupancy levels, rental income and property cash flow. We currently qualify as a REIT for federal income tax purposes.

 

On December 31, 2007, our portfolio consisted of (i) four wholly owned malls, identified as the Stratford Square Mall located in Bloomingdale, Illinois, the Tallahassee Mall located in Tallahassee, Florida, the Northgate Mall located in the northern suburbs of Cincinnati, Ohio and the Golden Triangle Mall, located in the northern suburbs of Dallas, Texas, totaling 4.1 million square feet, (ii) a 25% interest in each of two joint ventures that own the Harrisburg Mall, located in Harrisburg, Pennsylvania (totaling 0.9 million square feet) and the Colonie Center Mall, located in Albany, New York (totaling 1.2 million square feet), and (iii) a 30.8% interest in the Foothills Mall located in Tucson, Arizona (totaling 0.7 million square feet).

 

Unless the context otherwise requires or indicates, “we,” “our company,” “our” and “us” refer to Feldman Mall Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Feldman Equities Operating Partnership, LP, a Delaware limited partnership, which we refer to in this Annual Report on Form 10-K as our “operating partnership,” and Feldman Equities of Arizona, LLC, an Arizona limited liability company, together with its subsidiaries and affiliates, which we refer to collectively herein as “Feldman Equities of Arizona,” the “predecessor” or “our predecessor.” We conduct substantially all of our business through our operating partnership in which we hold approximately a 90% ownership interest as of December 31, 2007. We control all major decisions regarding the activities and management of our operating partnership. Our operating partnership enables us to complete tax deferred acquisitions of additional malls using its units of limited partnership interests, or OP units, as an alternative acquisition currency.

 

Corporate Structure

 

IPO and Formation Transactions

 

On the Offering Date, we sold 10,666,667 shares of our common stock and contributed the net proceeds to our operating partnership. Subsequently, on January 15, 2005, we sold an additional 1,600,000 shares of our common stock upon the underwriters’ full exercise of their over-allotment option.

 

Prior to the completion of our initial public offering, we conducted our business through (i) our predecessor, which owned a 25% capital interest in the joint venture that owns the Harrisburg Mall and a 67% capital interest in the joint venture that owned the Foothills Mall and (ii) two corporations that owned interests in these joint ventures. Through the formation transactions outlined below, we acquired 100% of the economic and legal interests in the Foothills Mall. We refer to the ownership interest in the contributed entities collectively as the ownership interests and we refer to the holders of these ownership interests who are members of our senior management team and their respective affiliates as the contributors.

 

At or prior to the closing of our initial public offering, we engaged in various transactions, which include the following:

 

 

 

Our Industry

 

Our property redevelopment activities are focused on underperforming regional and super-regional malls. The following tables describe these property types and contain certain comparable information relating to other retail properties:

 

Types of Retail Properties

 

 

 

 

Malls

 

Regional malls generally contain in excess of 400,000 square feet of enclosed and climate controlled space and offer a variety of fashion merchandise, hard goods, services, restaurants, entertainment and convenient parking. Regional malls are typically anchored by two or more department stores or large big box retail stores, which are called anchor tenants. These anchor tenants act as the main draw to a typical mall and are normally located within the mall at the ends of the common corridors. Super-regional malls have the same characteristics as regional malls but are generally larger than 800,000 square feet and have three or more anchor tenants. We refer to regional and super-regional malls as malls.

 

Malls typically contain numerous diversified smaller retail stores, which we refer to as shops or shop tenants. Shop tenants are mostly national or regional retailers, typically located along common corridors, which connect to the anchor tenants. Shop tenants typically account for a substantial majority of the revenues of a mall.

Malls have different strategies with regard to price, merchandise offered and tenant mix, and are generally tailored to meet the needs of their trade areas. Malls draw from their trade areas by providing an array of shops, restaurants and entertainment facilities and often serve as the town center and a preferred gathering place for community, charity, and promotional events. In many communities, the mall is an important engine of economic activity, providing a range of employment opportunities to local residents and sales and property tax revenues to local governments.

 

Investment Classes

 

According to the International Council of Shopping Centers, the United States has approximately 1,100 malls. We generally classify malls into one of the following three rating categories based upon the average annual sales per square foot of shop tenants:

 

Classes of Malls

 

 

Mall Renovation Opportunities

 

We believe that more than half of the approximately 1,100 malls in the United States fall into the Class B and Class C categories. We believe a significant number of these malls are potential candidates for renovation and repositioning. The best candidates are those that are situated in good locations within favorable retail markets but are underperforming due to mismanagement, changing retail trends, weak or closed anchor tenants, poor shop tenant mixes, non-optimal layouts or outdated designs and appearances.

 

The implementation of a successful renovation and repositioning effort, which targets the causes of a property’s underperformance, normally requires the investment of a substantial amount of efficiently priced capital to fund the demolition, reconstruction, tenant improvements and other costs associated with the project. The ability to implement these projects is therefore heavily dependent on capital availability for real estate companies in general and for development projects in particular.

 

The recovery in U.S. credit markets anticipated to commence in the early part of 2008 has yet not materialized. As a result, capital to fund renovation projects is harder to find and financing terms are far less attractive compared to prior periods. In addition, declining home prices in many regions has also impacted consumer spending, which in turn has caused a slow start to the 2008 retailing season. Some retailers have reduced their growth plans for 2008 and 2009 while others have announced store closures or delays in new store openings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Trends Which May Influence Our Business and Results of Operations.” As a result, for the balance of 2008, we do not anticipate market conditions will be favorable for acquiring new properties or commencing major redevelopment efforts.

 

Our Business Strategy

 

Our primary business objectives are to increase the occupancy, tenant sales, rental income, and cash flow from each of our properties. Our business strategies, which are aimed at achieving these objectives, include the following elements:

 

 

 

Our Financing Strategies

 

While our charter does not limit the amount of debt we can incur, our business plan is to maintain a flexible financing position by maintaining a prudent level of leverage consistent with our business strategy. We will consider a number of factors in evaluating our actual level of indebtedness, both fixed and variable rate, in making financial decisions. We intend to finance our renovation and repositioning projects with the most advantageous source of capital available to us at the time, including traditional floating rate construction financing. We expect that once we have completed our renovation and repositioning of a specific mall asset we will replace short-term financing with medium to long-term fixed rate financing. We may also finance our activities through any combination of sales of preferred shares or debt securities, additional secured or unsecured borrowings and our line of credit.

 

In addition, we may also finance our renovation and repositioning projects through joint ventures with institutional investors. Through these joint ventures, we will seek to enhance our returns by supplementing the cash flow we receive from our properties with additional management, leasing, development and incentive fees from the joint ventures. As discussed above, the current conditions of the U.S. credit markets have negatively impacted our ability to access capital and thus making debt financing in particular less available and more expensive than in prior years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends Which May Influence Our Business and Results of Operations.”

 

Competition

 

We may compete with other owners and operators of malls in all of our markets. We believe that the primary competition for potential tenants at any of our malls comes from other malls or lifestyle shopping centers within a three to 15-mile radius of that mall.

 

Excluding our company, there are other publicly traded mall REITs and several large private mall companies, any of which under certain circumstances could compete against us for anchor tenants or shop tenants. However, in some cases we may compete with other REITs for shop tenants or anchor tenants to occupy space.

Employees

 

Currently, all of our employees are employed by Feldman Equities Management, LLC, a wholly owned subsidiary, as well as Feldman Equities Management, Inc., our wholly owned taxable REIT subsidiary, both of which perform various property management, maintenance, acquisition, renovation and management functions. As of December 31, 2007, we had 167 employees. None of our employees are represented by a union. We consider our relations with our employees to be good.

 

Segment Information

 

Our Company is a REIT engaged in owning, managing, leasing, renovating and repositioning Class B regional malls and has one reportable segment, retail mall real estate.

 

Available Information

 

Our corporate headquarters is located at 1010 Northern Boulevard, Suite 314, Great Neck, New York 11021. We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (the “SEC”). You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s Web site at www.sec.gov. Our website is www.feldmanmall.com. Our reports on Forms 10-K, 10-Q, and 8-K and all amendments to those reports are posted on our website as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. We also make available on our website our audit committee charter, compensation committee charter, corporate governance and nominating committee charter, code of business conduct and ethics and corporate governance principles. The contents of our website are not incorporated by reference.

 

Recent Developments

 

 

Convertible Preferred Equity Financing

 

Effective April 10, 2007, we entered into an agreement to issue, at a price of $25 per share, up to $50 million 6.85% Series A Cumulative Convertible Preferred Stock, or the Series A Preferred Stock, to Inland American Real Estate Trust, Inc., or Inland American, a public non-listed REIT sponsored by an affiliate of the Inland Real Estate Group of Companies. As of December 31, 2007, all 2,000,000 shares of the Series A Preferred Stock have been issued and sold to Inland American for an aggregate purchase price of $50 million. The net proceeds from the offering are being applied to fund the redevelopment of our malls, and for general corporate purposes.

 

Under the terms of this transaction, and in accordance with New York Stock Exchange rules, we were required to obtain shareholder approval to permit conversion of the Series A Preferred Stock into shares of our common stock. At our annual meeting held on December 28, 2007, our shareholders voted to approve the convertibility of the Series A Preferred Stock to common stock. As of June 30, 2009, each share of Series A Preferred Stock will be convertible, in whole or in part, at the option of the holder thereof, into shares of our common stock, at a conversion ratio of 1.77305 common shares for each share of Series A Preferred Stock. This conversion ratio is based upon a common share price of $14.10 per share.

 

Under the terms of the Articles Supplementary relating to the Series A Preferred Stock, at all times during which the Series A Preferred Stock is outstanding, the holders of the Series A Preferred Stock have the right to elect one person to serve as a director of our company. In addition, in the event that beginning on March 31, 2008 (upon public release of the unaudited interim financial statements for such date) and each March 31 thereafter, if our fixed charge coverage ratio measured on a trailing 12 month basis shall be less than 1.20 to 1.00 or our capitalization ratio shall be less than 0.75 to 1.00, the holders of the Series A Preferred Stock shall have the right to elect one additional member to our board of directors. We do not expect to meet the fixed charge coverage ratio of 1.20 to 1.00 as of March 31, 2008.

$25 Million Credit Facility

 

On April 16, 2007, we announced that we had entered into a debt financing facility, or the Note, providing for up to $25 million of borrowings from Kimco Capital Corp., or Kimco. Loan draws under the Note are optional and will bear interest at the rate of 7% per annum, payable monthly. Any outstanding principal amount will be due and payable on April 10, 2008, provided that the maturity of the Note may be extended to April 10, 2009 if we deliver to Kimco, on or before March 17, 2008, a notice of extension and further provided that we comply with certain financial covenants. We may prepay the outstanding principal amount under the Note in whole or in part at any time. In addition to the interest on the Note, Kimco will be paid a variable fee equal to (i) $500,000, multiplied by (ii) (a) the volume weighted average price of our common stock as of a five-day period chosen by Kimco, minus (b) $13.00 per common share. If Kimco does not select a date for determination of the fee prior to termination of the Note, we will instead pay to Kimco $250,000 in additional interest. We have not exercised our option to extend the Note and the Note is no longer available to us.

 

Secured Line of Credit

 

On April 5, 2006, in connection with the acquisition of the Golden Triangle Mall, we entered into a $24.6 million secured line of credit, or the Line, which bears interest at 140 basis points over LIBOR. The Line was fully drawn on the date we acquired the Golden Triangle Mall. The Line contains certain financial covenants requiring us to, among other requirements, maintain certain financial coverage ratios.

 

On April 20, 2007, we increased the Line from $24.6 million to $30.0 million. The maturity date of the Line is April 2009. The Line is secured by the Golden Triangle Mall and the $5.4 million increase to the Line is recourse to us. As of December 31, 2007, the debt coverage ratio was above 1.4. As of December 31, 2007, we were not in compliance with a quarterly debt coverage constant of 10.5%. We are currently negotiating a waiver of this covenant, however, if we are unable to obtain a waiver, we would be required to reduce the current outstanding balance by $1.0 million.

 

Colonie Center Financing

 

On February 13, 2007, one of our joint ventures closed on our previously announced first mortgage loan financing secured by the Colonie Center Mall. On February 27, 2007, we increased the first mortgage loan financing by $6.5 million to $116.3 million. Proceeds from the increased loan were used to repay certain preferred equity loans made by our Company to the joint venture.

 

Stratford Square Financing

 

On May 8, 2007, we closed on a $104.5 million first mortgage refinancing of the Stratford Square Mall. The first mortgage has an initial term of 36 months and bears interest at 115 basis points over LIBOR. The loan has two one-year extension options. On the closing date, $78.2 million of the loan proceeds were used to retire the Stratford Square Mall’s two outstanding first mortgages. The balance of the proceeds was placed into escrow and will be released to fund the completion of the redevelopment project.

 

 

In July 2007, we acquired the building occupied by JCPenney and related acreage at the Northgate Mall for a price of $2.0 million.

 

 

Common Dividends

 

Our board of directors declared a quarterly dividend of $0.2275 per common share for the quarter ending March 31, 2007. The dividend was paid on May 25, 2007 to shareholders of record at the close of business on May 18, 2007.

On October 26, 2007, we announced the suspension of our common stock dividend and we do not expect to declare any additional common stock dividends in the foreseeable future except as may be required to maintain our REIT status.

 

Preferred Dividends

 

Our board of directors has declared quarterly dividends of $0.4281 per preferred share for the quarters ended September 30, 2007 and December 31, 2007.

 

 

Stock Repurchase

 

On November 12, 2007, we announced that our board of directors authorized the repurchase of up to 3,000,000 shares of our issued and outstanding common stock, par value $0.01 per share. The shares are expected to be acquired from time to time at prevailing prices through open-market transactions or through negotiated block purchases, which will be subject to restrictions related to volume, price, timing, market conditions and applicable Securities and Exchange Commission rules.

 

The repurchase program does not require us to repurchase any specific number of shares and may be modified, suspended or terminated by our board of directors at any time without prior notice. At this time, based on the current market conditions, we do not plan on using our current liquidity to repurchase any shares.

 

Executive Management Restructuring

 

Effective April 17, 2007, we entered into an agreement with Lloyd Miller, executive vice president of leasing since November 2005, pursuant to which he agreed to resign. We made a severance payment to Mr. Miller in the amount of $147,000 and also repurchased 15,500 of Mr. Miller’s shares of our common stock at a price of $12.50 per share. Subsequent to the execution of this agreement, Mr. Miller notified us that he had exercised his right to rescind the agreement. He also threatened to make a claim against us alleging breach of his employment contract with us. On October 31, 2007, we entered into an agreement with Mr. Miller whereby we paid him $325,000 in cash in addition to his severance and the repurchase of his shares and he waived his rights to any future claims against us.

 

On October 26, 2007, we announced the following management restructuring:

 

 

On December 21, 2007, we announced that we are concentrating on expense reduction both at the property and corporate levels and that we initiated programs, including outsourcing, to achieve certain cost reductions. In this regard, we have determined to close our Phoenix office, except for a minimal leasing staff. In addition, James Bourg, our former executive vice president and chief operating office and a director, resigned from our company. Mr. Bourg left in the first quarter of 2008 and the closure of the Phoenix office is expected to take place during the second quarter of 2008. In connection with Mr. Bourg’s departure, we incurred a severance charge of approximately $1.3 million that was accrued in the fourth quarter of 2007. In connection with the closing of our Phoenix Office, we expect to incur additional restructuring charges during the first half of 2008.

Outsourcing of Accounting and Management Functions

 

As part of our efforts aimed at expense reduction, on April 1, 2008, we entered into an agreement with Brandywine Financial Services Corporation, a Pennsylvania corporation (“Brandywine”), and a member of The Brandywine Companies, for which Bruce E. Moore, one of our directors, is the chairman and chief executive officer. The Brandywine Companies are privately held, with offices in Chadds Ford, Pennsylvania, Clearwater, Florida and Orlando, Florida. Since its origins in the early 1970’s, Brandywine has developed expertise in all aspects of ownership and management of commercial and residential real estate. Historically, Mr. Moore managed, and Brandywine performed similar services for, a New York Stock Exchange traded company. In addition, in connection with a joint venture with another New York Stock Exchange retail REIT, Brandywine provides property management and accounting services.

 

Pursuant to this agreement, effective as of April 1, 2008, Brandywine agreed to provide us various accounting and management services relating to certain of our properties (the “Projects”), such as supervision of our operations, maintenance and development of certain of our properties, lease administration, bookkeeping, accounting, our compliance with FASB 141 and FASB 13, as amended, financial statement preparation, coordination of our compliance with Sarbanes-Oxley Act of 2002, as amended, and our financial statement audits (collectively, the “Project Services”). In addition, Brandywine agreed to provide us certain corporate accounting and administrative services, including, among other things, information technology user support, financial statement preparation and audits, reports to joint venture partners, periodic reports to lenders, payroll preparation and filing coordination, human resources management, cash management, general ledger accounting, accounts payable, accounts receivable, cost allocation, inter-company billing and funding and FASB 109 compliance (collectively, the “Corporate Services”). As compensation to Brandywine for the Project Services (with certain exceptions) and the Corporate Services, we agreed to pay Brandywine a fee equal to (a) with respect to the Project Services, 1.50% of our gross revenue generated by the Projects, payable monthly, plus (b) with respect to the Corporate Services, $60,000 per month, plus (c) travel and other out-of-pocket expenses incurred by Brandywine in connection with such services. This agreement has an initial term through June 30, 2009 and can be renewed on a year-to-year basis but is subject to termination by the parties at any time starting June 30, 2008 upon no less than 90 days prior to written notice. As a result of this transaction, Bruce E. Moore will no longer be deemed independent from our management, as such term is defined by the rules of the New York Stock Exchange and the Securities and Exchange Commission.

 

Appointment of Two New Board Members

 

In connection with the Series A Preferred Stock transaction with Inland American, Mr. Thomas H. McAuley is expected to join our board of directors. Mr. McAuley, age 61, has been a Director of Inland Real Estate Corp. since 2004. Mr. McAuley is also currently the president of Inland Capital Markets Group, Inc., which is an advisor on real estate investments, including public REITs, to various entities within The Inland Real Estate Group of Companies, Inc.

 

In addition, we do not expect to comply with the financial covenant set forth under the terms of the Series A Preferred Stock as of March 31, 2008 and therefore, we expect that the holders of the Series A Preferred will have the right to appoint an additional member to our board of directors. As a result, Inland American has notified us that it intends to elect one additional member to our board of directors. Therefore, we have been in discussions with Inland American relating to this development and have agreed with Inland American to appoint Mr. Thomas McGuinness to our board of directors. Mr. McGuinness, age 51, is the president and chief executive officer of Inland American Retail Management LLC.

 

Consideration of Strategic Alternatives

 

On June 5, 2007, we announced that we retained Friedman, Billings, Ramsey & Co., Inc. to assist us in exploring strategic alternatives in order to enhance shareholder value. These strategic alternatives included an assessment of a variety of potential capital raising and disposition transactions. These efforts, which required a substantial amount of management time and attention during the latter part of 2007, did not lead to the completion of any significant transaction. We believe the deterioration of U.S. credit markets, which coincided with our exploration of strategic alternatives, played a role in this outcome. In addition, the hoped-for recovery in these

markets has not yet materialized and it remains a highly challenging environment in which to execute any of the transactions of the type that we were exploring during 2007.

 

Nevertheless, our board of directors remains committed to exploring options to enhance the value of the investments held by our stockholders. While we focus on enhancing operating efficiencies, improving the performance of our properties, and lowering our general and administrative costs, we will also be diligently pursuing a range of capital raising options, which include new borrowings, joint venture arrangements and selected property dispositions. In addition, we will also consider larger portfolio assets sales and transactions involving the sale or merger of our company in its entirety. However, given the current credit environment, there can be no assurances that any such transactions will be completed.

 

 

Risks Related to Our Properties and Operations

 

Our investments in underperforming or distressed malls could be subject to higher than anticipated costs and unexpected redevelopment delays, which would adversely affect our investment returns, harm our operating results and reduce funds available for distributions to our stockholders.

 

A key component of our growth strategy is pursuing renovation and repositioning opportunities in underperforming or distressed malls. These renovation and repositioning projects may (i) be abandoned after funds have been expended, (ii) not be completed on schedule or within budgeted amounts, or (iii) encounter delays or refusals in obtaining all necessary zoning, land use, building, occupancy and other required governmental permits and authorizations. Any of the foregoing circumstances could result in our failing to realize any return on our investment or a lower return than expected. Such an outcome could reduce our revenue, harm our operating results and reduce funds available for distributions to our stockholders.

 

The assumptions we make in evaluating a renovation or repositioning opportunity may not prove to be correct and, as a result, our investment returns may be adversely impacted.

 

In deciding whether to renovate and reposition a particular property, we make certain assumptions regarding the expected future performance of that property and the projected costs and expenses to be incurred. We may underestimate the costs or time necessary to bring the property up to the standards established for its intended market position or may be unable to increase occupancy at a newly acquired property as quickly as expected or at all. Any substantial unanticipated delays or expenses could adversely affect the investment returns from these projects and harm our operating results, liquidity and financial performance.

 

Our properties are limited to seven geographic areas leaving us exposed to economic downturns in those areas.

 

Our properties are located in areas of or surrounding Harrisburg, Pennsylvania; Tucson, Arizona; Bloomingdale, Illinois; Albany, New York; Tallahassee, Florida; Cincinnati, Ohio; and Dallas, Texas. We are particularly exposed to downturns in these local economies or other changes in local real estate market conditions. As a result of economic changes in these markets, our business, financial condition, operating results, cash flow, the trading price of our common stock, our ability to satisfy our debt service obligations and our ability to pay distributions could be materially adversely affected.

 

We have a limited operating history and might not be able to operate our business or implement our strategies successfully.

 

We were organized in July 2004 and have only a limited operating history as a publicly traded mall REIT dedicated to the acquisition, renovation and repositioning of retail shopping malls. Our lack of a long operating history provides a limited basis to evaluate the likelihood that we will be able to successfully implement our mall renovation and repositioning strategies. We cannot assure you that our past experience will be sufficient to successfully operate our company as a publicly traded mall REIT.

Management’s Internal Control Assessment

 

As of December 31, 2007, we determined that our controls over financial reporting contained material weaknesses. We continue to lack the necessary personnel with adequate technical accounting expertise to ensure the financial statements were prepared accurately and on a timely basis. As a result, we were unable to adequately complete our necessary procedures, such as proper review and approval of supporting documents and journal entries, to prepare our financial statements on a timely basis in accordance with regulatory guidelines. In addition, due to lack of the necessary personnel, we lack adequate segregation of duties related to the review, approval and recording of financial transactions. Due to these material weaknesses, there is a reasonable possibility that a material misstatement in our financial statements would not be prevented or detected on a timely basis.

 

Any tenant bankruptcies or leasing delays we encounter, particularly with respect to our anchor tenants, could adversely affect our operating results and financial condition.

 

We receive a substantial portion of annualized base rent from long-term leases, which we define as having an initial term of more than five years. At any time, any of our tenants may experience a downturn in their business that may weaken their financial condition. As a result, our tenants may delay lease commencement, fail to make rental payments when due or declare bankruptcy. Any leasing delays, tenant failure to make rental payments when due or tenant bankruptcies could result in the termination of the tenant’s lease and, particularly in the case of a key anchor tenant, material losses to us and harm to our results of operations. Some of our tenants may occupy stores at multiple locations in our portfolio, and the impact of a bankruptcy of those tenants may be more significant to us than to other mall operators. If tenants are unable to comply with the terms of our leases, we may modify lease terms in ways that are unfavorable to us. In addition, under many of our leases, our tenants may be required to pay rent based on a percentage of their sales or other operating results. Accordingly, declines in these tenants’ operating performance would reduce the income produced by our properties.

 

Any bankruptcy filings by or relating to one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from that tenant, the lease guarantor or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant or lease guarantor bankruptcy could also delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a tenant affirms the lease while in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. However, if a tenant rejects the lease while in bankruptcy, we would have only a general unsecured claim for prepetition damages. Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. It is possible that we may recover substantially less than the full value of any unsecured claims we hold, which may harm our financial condition.

 

Certain provisions of our leases with some of our tenants may harm our operating performance.

 

We have entered into leases with some of our tenants that allow the tenant to terminate its lease, or to pay reduced rent, if certain tenants fail to open or subsequently cease operating, if certain percentages of the shop space in the applicable mall are not leased, if we violate exclusives and/or restrictions imposed under the leases on the types and sizes of certain tenants or uses or if the tenant fails to achieve certain minimum sales levels. If any of these events occur, we may be unable to re-lease the vacated space which would reduce our rental revenue.

 

In addition, in many cases, our tenant leases contain provisions giving the tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular mall, or limit the ability of other tenants within that mall to sell that merchandise or provide those services. When re-leasing space after a vacancy by one of these other tenants, these provisions may limit the number and types of prospective tenants for the vacant space. The failure to re-lease on satisfactory terms could harm our operating results.

 

Joint venture investments could be subject to additional risks as a result of our lack of sole decision-making authority.

 

We hold various capital interests in the Harrisburg Mall, Foothills Mall and Colonie Center Mall through joint ventures. We may selectively enter into additional joint ventures as part of our strategy. In the event that we enter into a joint venture, we would not be in a position to exercise sole decision-making authority regarding the property,

partnership, joint venture or other entity. Although major decisions affecting our current joint ventures are shared equally by us and our joint venture partners, some of the decision-making authority in other joint ventures may be vested exclusively with our joint venture partners or be subject to a majority vote of the joint venture partners. In addition, investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives or which may have an adverse tax impact on us. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and efforts on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third party partners or co-venturers.

 

Adverse economic or other conditions in the markets in which we do business could negatively affect our occupancy levels and rental rates and therefore our operating results.

 

Our operating results are dependent upon our ability to maximize occupancy levels and rental rates in our properties. Adverse economic or other conditions in the markets in which we operate may lower our occupancy levels and limit our ability to increase rents or require us to offer rental discounts. If our properties fail to generate sufficient revenues to meet our cash requirements, including operating and other expenses, debt service and capital expenditures, our net income, funds from operations, cash flow, financial condition and ability to make distributions to stockholders could be adversely affected. The following factors, among others, may adversely affect the operating performance of our properties:

 

 

Competition may impede our ability to renew leases or re-let space as leases expire and require us to undertake unbudgeted capital improvements, which could harm our operating results.

 

We face competition from the following retail centers that are near our malls with respect to the renewal of leases and re-letting of space as leases expire. For example:

 

 

 

Any additional competitive properties that are developed close to our existing properties also may impact our ability to lease space to creditworthy tenants. Increased competition for tenants may require us to make capital improvements to properties that we would not have otherwise planned to make. Any unbudgeted capital improvements may negatively impact our financial position. Also, to the extent we are unable to renew leases or re-let space as leases expire, we could experience decreased cash flow from tenants and a reduction in the income produced by our properties. Excessive vacancies (and related reduced shopper traffic) at one of our properties may hurt sales of other tenants at that property and may discourage them from renewing leases.

 

Our leases do not allow us to pass on all real estate related costs to our tenants and, if such costs increase, they could reduce our cash flow and funds available for distributions.

 

Our properties and any properties we acquire in the future are and will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds for that property’s operating expenses, including real estate and other taxes, utility costs, operating expenses, insurance costs, repair and maintenance costs and administrative expenses. To the extent we lease properties on a basis not requiring tenants to pay all or some of the expenses associated with the property, or if tenants fail to pay required expenses, we could be required to pay those costs, which could reduce our results of operations and cash flow.

 

We may seek to acquire, renovate and reposition a property in a new, less familiar geographic area, and such an expansion may not prove successful or achieve expected performance even if successfully completed.

 

We may in the future renovate and reposition malls in geographic regions where we do not currently have a presence and where we do not possess the same level of familiarity with redevelopment as we do in other geographic areas. Our ability to redevelop such properties successfully or at all or to achieve expected performance depends, in part, on our familiarity with local demographic trends and potential competition from new development. There can be no assurance that we will make any investments in any other properties that meet our investment criteria.

We may not be successful in identifying and consummating suitable acquisitions that meet our investment criteria, which may impede our long-term growth and negatively affect our long-term results of operations.

 

Our ability to expand through acquisitions requires us to identify suitable acquisition candidates or investment opportunities that meet our investment criteria and are compatible with our growth strategy. We analyze potential acquisitions on a property-by-property and market-by-market basis. We may not be successful in identifying suitable acquisition candidates or investment opportunities or in consummating acquisitions or investments on satisfactory terms. Failures in identifying or consummating acquisitions could reduce the number of acquisitions we complete and slow our growth, which could adversely affect our results of operations.

 

Our ability to acquire properties on favorable terms may be adversely affected by the following significant risks:

 

 

We may not be successful in integrating and operating acquired properties which could adversely affect our results of operations.

 

We may make future acquisitions of underperforming or distressed malls. We will be required to integrate them into our existing portfolio. The acquired properties may turn out to be less compatible with our growth strategy than originally anticipated, may require expenditures of excessive time and cash to make necessary improvements or renovations and may cause disruptions in our operations and divert management’s attention away from our other operations, which could impair our results of operations as a whole.

 

Uninsured losses or losses in excess of our insurance coverage could result in a loss of our investment, anticipated profits and cash flow from a property.

 

We maintain comprehensive liability, fire, flood, earthquake, wind (as deemed necessary or as required by our lenders), extended coverage and rental loss insurance with respect to our properties with policy specifications, limits and deductibles customarily carried for similar properties. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to riots, acts of war or terrorism. Should an uninsured loss occur, we could lose our investment in, as well as anticipated profits and cash flow from, a property. In addition, even if any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss.

 

Increases in taxes and regulatory compliance costs may reduce our revenue.

 

Increases in income, service or other taxes generally are not passed through to tenants under leases and may reduce our net income, cash flow, financial condition and ability to pay or refinance our debt obligations and ability to make distributions to stockholders. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which could similarly adversely affect our business and results of operations.

Risks Related to the Real Estate Industry

 

Recent disruptions in the financial markets could have adverse effects on us.

 

The U.S. credit markets have recently experienced significant dislocations and liquidity disruptions. Continued uncertainty in the credit markets have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These disruptions in the financial markets also may have other unknown adverse effects on us or the economy generally. Based on these conditions, we may have more difficulty in replacing our maturing debt, including the debt of our joint ventures.

 

Any negative perceptions of the mall industry generally by the investing public may result in a decline in our stock price.

 

We own and operate indoor malls and may continue to focus on acquiring, renovating and repositioning indoor malls in the future. Consequently, we are subject to risks inherent in investments in a single industry. To the extent that the investing public has a negative perception of indoor mall properties, the value of our common stock may be negatively impacted, which would result in our common stock trading at a discount below the inherent value of our assets as a whole.

 

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties.

 

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. Decreases in market rents, negative tax, real estate and zoning law changes and changes in environmental protection laws may also increase our costs, lower the value of our investments and decrease our income, which would adversely affect our business, financial condition and operating results. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

 

We may be required to expend funds to correct defects or to make improvements before a property can be sold. There is no assurance that we will have funds available to correct those defects or to make those improvements. In acquiring a property, we may agree to transfer restrictions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These lockout provisions may restrict our ability to sell a property even if we deem it necessary or appropriate.

 

We could incur significant costs related to environmental matters.

 

Under various U.S. federal, state and local laws, ordinances and regulations, owners and operators of real estate may be liable for the costs of removal or remediation of certain hazardous substances or other regulated materials on or in such property. These laws often impose strict liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous substances or materials. The presence of such hazardous substances or materials, or the failure to properly remediate such substances, may adversely affect the owner’s or operator’s ability to lease, sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous substances or other regulated materials may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials.

Certain environmental laws also impose liability, without regard to knowledge or fault, for removal or remediation of hazardous substances or other regulated materials upon owners and operators of a contaminated property even after they no longer own or operate the property. Moreover, the past or present owner or operator from which a release emanates could be liable for any personal injuries or property damages that may result from such releases, as well as any damages to natural resources that may arise from such releases. The cost of investigation, remediation or removal of these substances may be substantial.

 

Certain environmental laws impose compliance obligations on owners and operators of real property with respect to the management of hazardous materials and other regulated substances. For example, environmental laws govern the management of asbestos-containing materials and lead-based paint. Failure to comply with these laws can result in penalties or other sanctions.

 

Phase I Environmental Reports were completed more than two years ago in connection with our predecessor’s investments in the Harrisburg Mall and the Foothills Mall. Phase I Environmental Reports were completed for Stratford Square Mall, Colonie Center, Northgate Mall (including the JCPenney building acquired in July 2007), Tallahassee Mall and Golden Triangle Mall. The Phase I Environmental Report for each of the properties did not reveal any existing material environmental conditions. In connection with our acquisition of the JCPenney building at Northgate Mall, we incurred approximately $1.4 million of asbestos abatement in connection with the subsequent demolition of this building.

 

Existing environmental reports with respect to any of our properties may not reveal (i) all environmental liabilities, (ii) that any prior owner or operator of our properties did not create any material environmental condition not known to us, or (iii) that a material environmental condition does not otherwise exist as to any one or more of our properties. There also exists the risk that material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future. Finally, future laws, ordinances or regulations and future interpretations of existing laws, ordinances or regulations may impose additional material environmental liability.

 

Costs associated with complying with the Americans with Disabilities Act of 1990 may result in unanticipated expenses.

 

Under the Americans with Disabilities Act of 1990, or ADA, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state and local laws may also require modifications to our properties, or restrict certain further renovations of the properties, with respect to access thereto by disabled persons. Non-compliance with the ADA could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures. We have not conducted an audit or investigation of all of our properties to determine our compliance and we cannot predict the ultimate cost of compliance with the ADA or other legislation. If one or more of our properties is not in compliance with the ADA or other legislation, then we would be required to incur additional costs to bring the facility into compliance. If we incur substantial costs to comply with the ADA or other legislation, our financial condition, our results of operations, our cash flow, the per share trading price of our common stock and our ability to satisfy our debt service obligations and to make distributions to our stockholders could be adversely affected.

 

Risks Related to Our Organization and Structure

 

Our management team received material benefits upon completion of our IPO, including a 9.8% equity stake in our Company which could allow them to exercise significant influence over matters submitted to our stockholders.

 

Our management team received material benefits upon completion of our IPO, and holds an equity stake of 9.8% in our Company on a fully diluted basis as of December 31, 2007. Management’s equity stake includes 389,382 shares of common stock and 966,454 OP units being held by Larry Feldman, our Chairman, and his affiliates, 9,615 shares of common stock and 233,504 OP units being held by Jim Bourg, our former Executive Vice President and Chief Operating Officer, 9,615 shares of common stock and 233,504 OP units being held by Scott Jensen, our Senior Vice President of

Leasing, and 9,615 shares of common stock and 76,923 shares of restricted stock (or other equity-based compensation of equivalent value) issued under the 2004 equity incentive plan held by Thomas Wirth, our President and Chief Financial Officer. Consequently, those stockholders, individually or to the extent their interests are aligned, collectively, may be able to influence the outcome of matters submitted for stockholder consideration, including the election of our board of directors, the approval of significant corporate transactions, including business combinations, consolidations and mergers, and the determination of our day-to-day corporate and management policies. Therefore, those stockholders have substantial influence over us and could exercise their influence in a manner that is not in the best interests of our other stockholders.

 

Conflicts of interest could arise as a result of our relationship with our operating partnership and the resolution of such conflicts may not be in our favor.

 

Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any holder of OP units, on the other hand. For example, in connection with a proposed sale or refinancing of a property that has been contributed by a holder of OP units, that holder may have different and more adverse tax consequences with respect to that sale as compared to our stockholders. Our directors and officers have duties to our company and our stockholders under applicable Maryland law in connection with their management of our company. At the same time, we, through our wholly owned business trust subsidiary, as a general partner, have fiduciary duties to our operating partnership and to its limited partners under Delaware laws. To the extent that conflicts exist between the interests of our company and our stockholders, on the one hand, and our operating partnership and holders of OP units, on the other hand, the duties of our directors and officers to our company and to our stockholders may conflict with our duties as general partner to our operating partnership and its partners. The partnership agreement of our operating partnership does not require us to resolve such conflicts in favor of either our stockholders or the limited partners in our operating partnership.

 

Unless otherwise provided for in the relevant partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest.

 

Potential conflicts of interest exist between our directors and executive officers and our Company as described below.

 

We entered into tax protection agreements with the contributors which may limit our ability to sell certain of our properties (the Foothills and Harrisburg malls).

 

Larry Feldman, our Chairman, Jim Bourg, our former Executive Vice President and Chief Operating Officer and Scott Jensen, our Senior Vice President of Leasing, have direct or indirect ownership interests in certain entities contributed to our operating partnership in the formation transactions. Accordingly, to the extent these individuals are parties to any of our contribution agreements, we may pursue less vigorous enforcement of the terms of these agreements.

 

Additionally, the partnership agreement of our operating partnership expressly limits our liability by providing that neither we, our direct wholly owned business trust subsidiary, as the general partner of the operating partnership, nor any of our or their trustees, directors or officers, will be liable or accountable in damages to our operating partnership, the limited partners or assignees for errors in judgment, mistakes of fact or law or for any act or omission if we, or such trustee, director or officer, acted in good faith. In addition, our operating partnership is required to indemnify us, our affiliates and each of our respective trustees, officers, directors, employees and agents to the fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several), expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, that relate to the operations of the operating partnership, provided that our operating partnership will not indemnify a person for (1) willful misconduct or a knowing violation of the law, (2) any transaction for which such person received an improper personal benefit in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful.

The provisions of Delaware law that allow the common law fiduciary duties of a general partner to be modified by a partnership agreement have not been resolved in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties that would be in effect under common law were it not for the partnership agreement.

 

Conflicts of interest between management and our stockholders may arise that could impact potential dispositions.

 

Members of our senior management team may suffer adverse tax consequences upon the sale or refinancing of our properties. Therefore, certain members of our senior management team may have different objectives than our stockholders regarding the pricing, timing and other material terms of any sale or refinancing of our properties.

 

Our management’s right to receive OP units upon the achievement of certain performance thresholds relating to the Harrisburg Mall may cause them to devote a disproportionate amount of time to such performance thresholds, which could cause our overall operating performance to suffer.

 

Feldman Partners, LLC (an entity controlled by Larry Feldman and owned by him and his family), Jim Bourg, our former Executive Vice President and Chief Operating Officer, and Scott Jensen, our Senior Vice President of Leasing, acquired the right to receive additional OP units for ownership interests contributed by them as part of the formation transactions in connection with the initial public offering, only upon the achievement of the internal rate of return relating to the Harrisburg Mall. The aggregate value of the additional OP units that may be issued with respect to the Harrisburg Mall is equal to 50% of the amount, if any, that the internal rate of return achieved by us from the joint venture exceeds 15% on or prior to December 31, 2009.

 

As a result, Larry Feldman and Scott Jensen may have an incentive to devote a disproportionately large amount of their time and a disproportionate amount of our resources to achieving these performance thresholds in comparison with our other objectives, which could harm our operating results.

 

We may pursue less vigorous enforcement of terms of contribution, merger and other related agreements because of conflicts of interest with certain of our officers.

 

Larry Feldman and Scott Jensen, who serve as directors and/or officers have direct or indirect ownership interests in certain entities that were contributed to our operating partnership in the formation transactions related to the initial public offering. We are entitled to indemnification and damages in the event of breaches of representations or warranties made by the contributors. We may choose not to enforce, or to enforce less vigorously, our rights under these contribution, merger and related agreements because of our desire to maintain our ongoing relationships with the individuals party to these agreements.

 

Our organizational documents, including the stock ownership limit imposed by our charter, may inhibit market activity in our stock and could delay, defer or prevent a change in control transaction.

 

Our charter authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and, subject to certain exceptions, limits any person to actual or constructive ownership of no more than 9.0% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock or 9.0% (by value or by number of shares, whichever is more restrictive) of our outstanding capital stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any proposed transferee whose ownership, direct or indirect, in excess of 9.0% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock or 9.0% (by value or by number of shares, whichever is more restrictive) of our outstanding capital stock could jeopardize our status as a REIT. These restrictions on ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT. The ownership limit may delay, defer or prevent a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

Certain provisions of Maryland law could inhibit changes in control.

 

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares. We are subject to the “business combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares, or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations. However, we have, by resolution, exempted business combinations (1) between us and Larry Feldman, his affiliates and associates and people acting in concert with any of the foregoing and (2) between us and any person who has not otherwise become an interested stockholder, provided that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person), from the provisions of the Maryland Business Combination Act. Consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between us and any person described above. We have determined to opt out of the so-called “control share” provisions of the MGCL that provide that “control shares” of a Maryland corporation (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. We may in the future elect to become subject to the control share provisions of the MGCL. The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of our company under the circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then current market price.

 

Our board of directors has the power to issue additional shares of our stock in a manner that may not be in your best interests.

 

Our charter authorizes our board of directors to issue additional authorized but unissued shares of common stock or preferred stock and to increase the aggregate number of authorized shares or the number of shares of any class or series without stockholder approval. In addition, our board of directors may classify or reclassify any unissued shares of common stock or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. Our board of directors could issue additional shares of our common stock or establish a series of preferred stock that could have the effect of delaying, deferring or preventing a change in control or other transaction that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders. As of December 31, 2007, we have 186,844,938 authorized but unissued shares of common stock, 13,018,831 shares of common stock issued and outstanding, 50,000,000 authorized shares of preferred stock and 2,000,000 shares of preferred stock issued and outstanding.

 

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

 

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our bylaws require us to

indemnify our directors and officers for liability resulting from actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

 

Our business could be harmed if key personnel with long standing business relationships in the real estate business terminate their employment with us.

 

Our success depends, to a significant extent, on the continued services of our senior management team. Although we will have employment agreements with some members of our senior management team, there is no guarantee that any of them will remain employed by us. We do not maintain key-person life insurance on any of our officers. The loss of services of one or more members of our senior management team could harm our business and our prospects.

 

Risks Related to Our Organization and Operation as a REIT

 

To maintain our REIT status, we may be forced to borrow funds on a short-term basis during unfavorable market conditions.

 

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our net taxable income each year. In addition, we will be subject to a 4% non-deductible excise tax under certain circumstances if we fail to make sufficient and timely distributions of our taxable income. In order to maintain our REIT status and avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis to meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from a difference in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

 

Distributions payable by REITs do not qualify for the reduced tax rates under recently enacted tax legislation.

 

The maximum tax rate for dividends payable by domestic corporations to individual U.S. stockholders (as such term is defined under “U.S. Federal Income Tax Considerations” below) has been reduced to 15% (through 2008). Distributions payable by REITs, however, are generally not eligible for the reduced rates (though distributions paid by a taxable REIT subsidiary or other corporation are generally eligible for the reduced rates). Consequently, the more favorable rates applicable to regular corporate dividends could cause stockholders who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

 

In addition, the relative attractiveness of real estate in general may be adversely affected by the newly favorable tax treatment given to corporate dividends, which could negatively affect the value of our properties.

 

Possible legislative or other actions affecting REITs could reduce our total return to our stockholders or cause us to terminate our REIT status.

 

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. Changes to tax laws (which may have retroactive application) could adversely affect our stockholders. It cannot be predicted whether, when, in what forms, or with what effective dates, the tax laws applicable to us or our stockholders will be changed.

 

The power of our board of directors to revoke our REIT status without stockholder approval may cause adverse consequences to our stockholders. Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interests to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to U.S. federal income

tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

 

If we fail to qualify as a REIT, our distributions will not be deductible by us and we will be subject to corporate level tax on our taxable income. This would reduce the cash available to make distributions to our stockholders and may have significant adverse consequences on the value of our stock.

 

We operate in a manner that will allow us to elect to qualify as a REIT for U.S. federal income tax purposes under the Internal Revenue Code. If we fail to qualify as a REIT or lose our status as a REIT at any time, we will face serious tax consequences that would substantially reduce the funds available for distribution to shareholders for each of the years involved because:

 

 

In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders, and all distributions to stockholders will be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means that our stockholders who are taxed as individuals would be taxed on our distributions at capital gains rates, and our corporate stockholders generally would be entitled to deductions with respect to such distributions, subject, in each case, to applicable limitations under the Internal Revenue Code. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

 

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the composition of our assets and sources of our gross income. Also, we must make distributions to stockholders aggregating annually at least 90% of our net taxable income, excluding capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect our investors, our ability to qualify as a REIT for U.S. federal income tax purposes, or the desirability of an investment in a REIT relative to other investments.

 

We will pay some taxes which will reduce the amount of funds available to make distributions to our stockholders.

 

Even though we qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some U.S. federal, state and local taxes on our income and property. We elected that Feldman Equities Management, Inc. and certain corporations that held small interests in the Foothills Mall, be treated as a “taxable REIT subsidiary” of our company for U.S. federal income tax purposes. A taxable REIT subsidiary is a fully taxable corporation and may be limited in its ability to deduct interest payments made to us. In addition, we will be subject to a 100% penalty tax on certain amounts if the economic arrangements among our tenants, our taxable REIT subsidiaries and us are not comparable to similar arrangements among unrelated parties or if we receive payments for inventory or property held for sale to tenants in the ordinary course of business. To the extent that we or our taxable REIT subsidiaries (or additional taxable REIT subsidiaries we may form in the future) are required to pay U.S. federal, state or local taxes, we will have less cash available for distribution to stockholders.

Risks Related to Our Debt Financings

 

The current dislocations in the real estate sector and the current weakness in the broader financial market, could affect our ability to obtain debt financing on favorable terms (or at all) and have other adverse effects on us.

 

The continuing dislocations in the real estate sector and the current weakness in the broader financial market have caused the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt financing. Continued uncertainty in the credit markets may adversely impact our ability to access additional debt financing or to refinance existing debt maturities on favorable terms (or at all), which may negatively affect our ability to fund current and future development projects. A prolonged downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These disruptions in the real estate and financial markets may have other adverse effects on us or the economy generally and, more specifically, on the retail sector.

 

Required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties or to pay the distributions currently contemplated or necessary to maintain our qualification as a REIT and may expose us to the risk of default under our debt obligations.

 

As of December 31, 2007, we had approximately $273.0 million of outstanding indebtedness in our consolidated subsidiaries, $243.6 million (or 89%) of which is secured by our properties. This indebtedness does not include our proportionate share of indebtedness incurred by any of our unconsolidated joint ventures. We may borrow new funds to renovate our current properties.

 

Limitations on our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

 

Our organizational documents contain no limitations on the amount of indebtedness we may incur, and our cash flow and ability to make distributions could be adversely affected if we become highly leveraged.

 

Our organizational documents contain no limitations on the amount of indebtedness that we or our operating partnership may incur. As of December 31, 2007, we had approximately $273.0 million of outstanding

indebtedness. We could alter the balance between our total outstanding indebtedness and the value of our portfolio at any time. If we become more highly leveraged, then the resulting increase in debt service could adversely affect our ability to make payments on our outstanding indebtedness and to pay our anticipated distributions and/or the distributions required to maintain our REIT status, and could harm our financial condition.

 

Increases in interest rates may increase our interest expense and reduce our cash flow and impair our ability to service our indebtedness and make distributions to our stockholders.

 

We had approximately $273.0 million of outstanding indebtedness as of December 31, 2007, of which $151.0 million bears interest at fixed rates ranging from 6.60% to 8.70% and $122,0 million bears interest on a floating rate basis at LIBOR plus 1.15% to 1.40%. Upon the maturity of our debt, there is a market rate risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affects the fair market value of our debt but it has no impact on interest expense incurred or cash flow. A 100 basis point increase or decrease in interest rates on our floating/fixed rate debt would increase or decrease our annual interest expense by approximately $2.7 million, as the case may be.

 

In addition to the fixed rate debt outlined above, we have entered into cash flow hedges that will effectively fix the rate for $75.0 million of LIBOR-based floating rate debt at 5.0% per annum through January 2008 and at 4.91% per annum for the period January 2008 to January 2011.

 

Our cash flow is not assured. If our cash flow is reduced, we may not be able to make distributions to our stockholders.

 

We intend to distribute to our stockholders all or substantially all of our REIT taxable income each year in order to comply with the distribution requirements of the federal tax laws and to avoid federal income tax and the nondeductible excise tax. We have not established a minimum distribution payment level. Our ability to make distributions may be adversely affected by the risks described in this Form 10-K. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT status and other factors that our board of directors may deem relevant from time to time. We cannot assure you that we will be able to make distributions in the future. Our ability to make distributions is based on many factors, including efficient management of our properties.

 

The Harrisburg Mall joint venture’s construction loan with Commerce Bank provides that loan advances are reduced by the amount of the joint venture’s net cash flow after operating expenses and debt service. The construction loan with Commerce Bank was due to mature in March 2008. We have extended this loan through April 14, 2008 and plan to further extend the loan through December 31, 2009 at a borrowing rate of 200 basis points over LIBOR. However, there can be no assurance that we will be able to extend the loan for this period or at this rate.

 

We also cannot assure you that the level of our distributions will continue or increase over time or the receipt of rental revenue in connection with future acquisitions of properties will increase our cash available for distribution to stockholders. In the event of defaults or lease terminations by our tenants, rental payments could decrease or cease, which would result in a reduction in cash available for distribution to our stockholders. If our cash available for distributions generated by our assets is less than our expected dividend distributions, or if such cash available for distribution decreases in future periods from expected levels, our ability to make the expected distributions would be adversely affected. We may be required either to fund future distributions from borrowings under our line of credit or to reduce such distributions. If we need to borrow funds on a regular basis to meet our distribution requirements or if we reduce the amount of our distribution or fail to make expected distributions, our stock price may decline.

 

 

As of December 31, 2007, we did not have any unresolved comments with the staff of the SEC.

 

As of December 31, 2007, we had wholly owned interests in four malls encompassing approximately 2.5 million rentable square feet. Our portfolio also included ownership interests in three unconsolidated joint ventures encompassing approximately 2.1 million rentable square feet. The tables below set forth information with respect to these properties (square feet and annualized base rent in thousands).

 

Wholly Owned Properties

 

 

 

 

Joint Venture Properties

 

 

 

In the table above:

 

 

Tenant Diversification

 

We have approximately 500 leases, many of which are with nationally recognized retailers. The following table sets forth information regarding the 10 largest tenants in our portfolio (including wholly-owned and joint venture properties) based on annualized base rent as of December 31, 2007.

 

Top 10 Tenants by Annualized Base Rent

 

 

 

 

Lease Expiration

 

The following table sets forth information regarding lease expirations at our properties, including joint venture properties, based on executed and occupied leases as of December 31, 2007.

 

Lease Expiration Table — Total Portfolio

 

 

 

 

Wholly Owned Properties

 

Stratford Square Mall

 

Overview

 

On December 30, 2004, we acquired Stratford Square Mall for a base purchase price of $93.1 million. We are investing an additional $46.8 million in the renovation and repositioning plan for Stratford Square Mall, of which $37.8 million was incurred through December 31, 2007, for an estimated total project cost of approximately $139.9 million.

 

Stratford Square Mall is a 1.3 million square-foot, super-regional mall located in Bloomingdale, Illinois. Located in DuPage County, a northwestern suburb of Chicago, the mall has five non-owned anchor tenants: Kohl’s, Sears, Carson Pirie Scott (a unit of the Saks Department Store Group), Marshall Fields and Burlington Coat Factory. We have entered into an operating agreement with these five anchor tenants to share certain operating expenses based on allocated amounts per square foot. The agreements will terminate in March 2031. We acquired the sixth anchor location in 2006 which is leased to JCPenney.

 

The mall’s anchor tenants are complemented by nationally recognized retailers such as Forever 21, Abercrombie & Fitch, Pacific Sun, American Eagle, Claire’s, Bath & Body Works, The Children’s Place, The Gap, f.y.e., Limited Too and Victoria’s Secret. The shops are comprised of approximately 450,000 square feet and are accessed on two levels, with a central food court.

Renovation and Repositioning Plan

 

Our opportunity, with respect to Stratford Square, is to take advantage of the mall’s six anchor tenants to leverage the draw from such anchor tenants into higher shop sales. In addition, with approximately 123,000 square feet of shop space available, there is an opportunity to enhance the net operating income from this property through an ongoing leasing program. The following is an outline of our strategic plan to accomplish this goal:

 

 

We expect these renovation and repositioning efforts will help draw more shoppers into the mall, which we expect will increase the average sales per square foot of existing tenants and to encourage new tenants to lease space at the mall.

 

Financing

 

On May 8, 2007, we closed on a $104.5 million first mortgage refinancing of the Stratford Square Mall. The first mortgage has an initial term of 36 months and bears interest at 115 basis points over LIBOR. The loan has two one-year extension options. On the closing date, $78.2 million of the loan proceeds were used to retire the Stratford Square Mall’s two outstanding first mortgages. The balance of the proceeds was placed into escrow, pending completion of the redevelopment project. As of December 31, 2007, approximately $12.9 million remains available to be released from the escrow. We believe that the balance of the funds held in the escrow account will be sufficient to complete the redevelopment of this project.

 

Location and Demographics

 

Stratford Square is located in Bloomingdale, Illinois, a suburb of Chicago. The following are the key demographic and other information that we expect will benefit Stratford Square:

 

 

Competition

 

The primary competitors of Stratford Square include two super-regional shopping centers situated within Stratford Square Mall’s trade region. In addition, there are two smaller malls that compete to a lesser degree with the subject property. A summary of Stratford Square’s competitors are as follows:

 

 

Average Occupancy Rate and Base Rent — Stratford Square(1)

 

 

 

 

Tallahassee Mall

 

Overview

 

In June 2005, we acquired the Tallahassee Mall for a purchase price of $61.5 million. The purchase price consisted of the assumption of the existing mortgage loan of approximately $45.8 million plus cash in the amount of approximately $16.2 million. The property is subject to a long-term ground lease that expires in the year 2063 (assuming the exercise of an extension option).

 

In December 2005, we issued 369,375 shares of our common stock to an affiliate of Kimco Realty Corporation in connection with acquiring a long-term lease located at the Tallahassee Mall.

 

Tallahassee Mall is a 966,000 square-foot, super-regional mall serving Tallahassee, Florida and its surrounding areas. The Tallahassee Mall is anchored by four major tenants: AMC Theaters, Burlington Coat Factory and Belk’s. In addition, the mall has Old Navy, Sports Authority, Goody’s Family Clothing, Ross Dress for Less, Shoe Carnival and Barnes & Noble and junior anchor tenants. The mall’s anchor tenants are complemented by numerous nationally recognized retailers such as Victoria’s Secret and Express. The 85 shops comprise approximately 204,000 square feet and are accessed on one level, with a central food court, restaurants and cafés. One of our anchors, Dillard’s, did not renew its lease at the mall and vacated its space on January 31, 2008. We have not yet found a tenant to occupy this vacant space. As a result of this vacancy, certain tenant leases allow for them to pay lower rental income.

The city of Tallahassee is the state capital of Florida and is located in northwestern Florida, 20 miles north of the Gulf of Mexico and only 13 miles south of Georgia. The mall itself is located minutes from the center of the capital district, Interstate 10 and three college campuses with a combined population of 65,000 students: Florida State University, Florida Agriculture and Mechanical University and Tallahassee Community College. The population within a 10-mile radius has experienced a 7.7% increase from 2000 to 2006 and employment has consistently increased each year for all industry sectors.

 

Financing

 

The property is currently encumbered by a $45.9 million first mortgage. The mortgage bears interest at 8.6% and with an anticipated repayment date in July 2009. If we do not repay the loan by July 2009, the interest rate on this loan will be reset to the greater of (i) 8.6% plus 5% or (ii) the then current treasury rate plus 5% through the final maturity date in July 2029.

 

Renovation and Repositioning Plan

 

Our goal, with respect to the Tallahassee Mall, is to take advantage of the market’s unusually strong population growth and solid in-place tenant base. In addition, with approximately 35,000 square feet of vacant space available, there is an opportunity to create value for our stockholders through an ongoing leasing program. Our plan contemplates a renovation and repositioning plan for the Tallahassee Mall. The following is a preliminary outline of our strategic plan to accomplish this goal:

 

 

The commencement of this redevelopment effort will, however, depend on our securing additional financing proceeds to re-tenant the vacant anchor space and complete the project. We do not anticipate securing additional financing proceeds and commencing our redevelopment plans until 2009.

 

Location and Demographics

 

The following are key demographic and other information that we expect will benefit the Tallahassee Mall:

 

 

Competition

 

The primary competitor of the Tallahassee Mall is:

 

 

Average Occupancy Rate and Base Rent — Tallahassee Mall(1)

 

 

 

 

Northgate Mall

 

Overview

 

In July 2005, we acquired the Northgate Mall (“Northgate”) for a purchase price of $110.0 million. The purchase price consisted of the assumption of the existing mortgage loan of $79.6 million and $30.4 million of cash. We also plan to invest an additional $18.4 million in the renovation and repositioning plan for Northgate, of which $13.2 million was incurred through December 31, 2007, for an estimated total project cost of $128.4 million.

 

Northgate is an enclosed single-level, three-anchor, super-regional mall with a total gross leasable area (“GLA”) of approximately 1.1 million square feet of which 577,000 square feet are owned by one of our wholly owned subsidiaries (including approximately 84,000 square feet of free-standing retail space). We own the Macy’s anchor store. Northgate is anchored by Dillard’s, Macy’s and Sears and has a mix of national in-line tenants, including American Eagle, Aeropostale, The Children’s Place, Finish Line, The Disney Store, Express, Victoria’s Secret and Zales. Northgate also has outparcels that are occupied by Borders Books, TGI Friday’s and Burger King. Northgate opened in 1972 and was expanded in 1993 as part of a $50 million expansion/renovation.

 

In July 2007, we acquired the building occupied by JCPenney and related acreage for a purchase price of $2.0 million. JCPenney has vacated and we have demolished the building. On October 9, 2007, we entered into a lease with a prospective tenant to develop a stadium-seating movie theater on this parcel. However, we have been unable to finalize a construction plan and budget with this tenant for this project. On March 31, 2008, we sent a termination notice to this tenant and are currently evaluating our options for this space.

 

Financing

 

The property is currently secured by a first mortgage with a balance at December 31, 2007 of $77.1 million. The first mortgage bears interest at 6.6% and has an anticipated repayment date in September 2012. We may refinance the mortgage on or before 2012. We also may elect to defease the debt prior to the final maturity date in 2032.

 

Renovation and Repositioning Plan

 

Our long-term goal, with respect to the Northgate Mall, is to build on the mall’s anchor tenant mix to enhance increase shop tenant sales. In addition, with approximately 35,000 square feet of vacant shop space available, there

is an opportunity to create value for our stockholders through an ongoing leasing program. The following is a preliminary outline of our strategic plan to accomplish this goal:

 

 

We expect these renovation and repositioning efforts will impact the financial performance of the Northgate Mall. We expect our revenues to grow as more shoppers spend more time in the mall, which we expect will increase shop tenant sales per square foot. The overall objective will be to convert this mall from a Class B mall to a Class A or near Class A mall. We are currently seeking financing to commence our redevelopment project, however we do not anticipate securing the financing and commencing the redevelopment during 2008.

 

Location and Demographics

 

Northgate is located in the northwest Cincinnati suburbs and benefits from the residential and business development occurring in its trade area. Northgate is located on Colerain Avenue, less than one mile south of I-275, the primary highway serving the metropolitan Cincinnati area. Colerain Township is a densely populated suburb of the Cincinnati city limits which is 10 miles to the south.

 

The following are key demographic and other information that we expect will benefit the Northgate Mall:

 

 

Competition

 

The primary competitors of the Northgate Mall include three super-regional malls described below that comprise approximately 3.9 million square feet of shop space. Additional retail competition totals an additional 2.4 million square feet, including one power center. Competitors of Northgate include:

 

 

 

Average Occupancy Rate and Base Rent — Northgate Mall(1)

 

 

 

 

Golden Triangle Mall

 

Overview

 

On April 5, 2006, we acquired the Golden Triangle Mall (“Golden Triangle”) for a base purchase price of $40.2 million. The purchase price was subsequently increased by $2.1 million, in accordance with the purchase agreement, as the seller was able to complete the opening of a Hollister store (unit of Abercrombie and Fitch) in January 2007. We plan to fund an additional investment in the renovation and repositioning plan for Golden Triangle Mall.

 

Golden Triangle is a 765,000 square-foot, super-regional mall located in Denton, Texas. Located in Denton County, a northern suburb of Dallas. The mall has four non-owned anchor tenants — Macy’s, Dillard’s, JC Penney and Sears — and three junior anchors, which are DSW, Ross and Barnes & Noble. The mall’s anchor and junior anchor tenants are complemented by nationally recognized retailers such as Victoria’s Secret, American Eagle Outfitters, Hollister, Pacific Coast Sun Wear and Bath & Body Works. The shops are comprised of approximately 252,000 square feet and are accessed on one level.

 

As previously reported, two anchor tenants at the Golden Triangle Mall, Dillard’s and JCPenney, have signed letters of intent to relocate to a new competitive life style center known as Rayzor Ranch, which may be located

approximately five miles north of the property. If Rayzor Ranch is built, we believe the anchors may move in 2010. We are assessing our options with regard to this property in light of these developments.

 

Renovation and Repositioning Plan

 

Our opportunity, with respect to Golden Triangle, is to take advantage of the trade area’s unusually strong growth in order to attract new anchors and key shop tenants. Ultimately, the plan is to increase occupancy and drive up shop sales. In addition, with approximately 151,000 square feet of shop space available, there is an opportunity to create value for our stockholders through an ongoing leasing program. The following is a preliminary outline of our strategic plan to accomplish this goal.

 

We expect that our renovation and repositioning efforts will impact the financial performance of Golden Triangle by drawing the anchor tenant shoppers into the main mall and attracting more shoppers. By combining an entertainment theme including numerous restaurants and the existing Barnes & Noble, we expect our shop tenant revenues to grow as more shoppers spend more time in the main mall, which we expect will increase shop tenant sales per square foot. The overall objective will be to convert this mall from a Class B mall to a Class A or near Class A mall.

 

Financing

 

On April 5, 2006, in connection with the acquisition of the Golden Triangle Mall, we entered into a $24.6 million secured line of credit (the “line”). On April 20, 2007, we increased the line from $24.6 million, to $30.0 million. The maturity date of the line is April 2009 and up to $5.5 million of the line is recourse to us. The line contains customary covenants that require us to, among other things, maintain certain financial coverage ratios. As of December 31, 2007, we were not in compliance with a quarterly debt coverage constant of 10.50%. We are currently negotiating a waiver of this covenant; however, if we are unable to obtain a waiver, we would be required to reduce the current outstanding balance by $1.0 million.

 

Loan draws and repayments are at our option. Interest is payable monthly at a rate equal to LIBOR plus a margin ranging from 1.40% to 2.00% or, at our option, the prime rate plus a margin ranging from zero to 0.25%. The applicable margins depend on our debt coverage ratio as specified in the loan agreement. Commitment fees are paid monthly at the rate of 0.125% to 0.25% of the average unused borrowing capacity.

 

In October 2006, we entered into a modification agreement that provides for the issuance of letters of credit in the aggregate amount of up to $13.0 million for a fee of 0.5% of the face amount. As of December 31, 2007, letters of credit outstanding under this agreement amounted to $10.25 million and are renewable through the maturity date of the line.

 

The outstanding balance on the line as of December 31, 2007 was $17.5 million with interest rates on the tranches ranging from 6.59% to 7.25%.

 

Location and Demographics

 

Golden Triangle is located in Denton, Texas, which is in the Dallas/Ft. Worth metropolitan area. The following are the key demographic and other information that we expect will benefit Golden Triangle:

 

 

 

Dallas is a major site for high-income employment sectors such as professional and business services, financial services and high-technology industries. Together these high wage-earning industries are expected to continue to drive the area’s economic growth over the next five years. Dallas benefits from a labor force that is skilled, educated and dependable and from a relatively affordable housing market.

 

Competition

 

The Golden Triangle Mall has several competitors, which include the following:

 

 

Average Occupancy Rate and Base Rent — Golden Triangle(1)

 

 

 

 

Joint Venture Properties

 

Foothills Mall

 

Overview

 

The Foothills Mall is located in the suburbs of Tucson, Arizona and is a single level, enclosed regional mall containing approximately 711,000 square feet originally built in 1983. In addition, Wal-Mart occupies and owns a 210,000 square-foot super center that shares a common parking lot and road entrance with the Foothills Mall. The Foothills Mall is anchored by a series of “big box” anchor tenants, including Barnes & Noble, Linens ’N Things, a Loews/AMC Cineplex 15-screen stadium theatre, Ross Dress For Less, Old Navy, Saks Off 5th and a large Nike Factory Outlet store. In addition, we have entered into a 15,000 square-foot lease with Sega World Sports Bar and Grill, which is expected to take occupancy in the second quarter of 2008. The Foothills Mall’s specialty stores include Bath & Body Works, Claire’s, Haggar, Levi’s, PacSun, Quiksilver, Samsonite and Sunglass Hut. In addition, the Foothills Mall includes numerous restaurants such as Applebee’s, Gavi Italian Restaurant, Keatons Restaurant, Melting Pot, Outback Steakhouse and Thunder Canyon Brewery.

 

On June 26, 2006, we contributed the Foothills Mall to a joint venture with a subsidiary of Kimco at an agreed value of $104 million, plus certain closing costs (the “Foothills JV”). We accounted for the transaction as a partial sale of real estate, which resulted in us recognizing a gain of $29.4 million. Pursuant to the terms of the contribution agreement, we received approximately $38.9 million in net proceeds from the transaction.

 

Simultaneous with the formation of the joint venture, Kimco contributed cash in the amount of $14.8 million to the Foothills JV. Kimco will receive a preferred return of 8.0% on its capital from the Foothills Mall’s cash flow. Kimco may be required to make additional capital contributions to the Foothills JV for additional tenant improvements and leasing commissions, as defined in the limited liability company agreement, which in the aggregate shall not exceed $2 million. Upon the first to occur of a sale of the property or June 2010, Kimco will make an additional capital contribution to the Foothills JV in an amount equal to the unfunded portion (if any), which will be distributed to us. Upon a sale or refinancing of the Foothills Mall, Kimco is also entitled to receive a priority return of its capital together with any unpaid accrued preferred return. After certain adjustments, we are next entitled to receive an 8% preferred return on and a return of capital. Thereafter, all surplus proceeds will be split 20% to Kimco and 80% to us. Additionally, we agreed to serve as the managing member of the Foothills JV and will retain primary management, leasing and construction oversight, for which we will receive customary fees. We have determined that the Foothills JV is not a variable interest entity and account for our investment in the joint venture under the equity method. The Foothills JV agreement includes “buy-sell” provisions commencing in June 2008 for us and after May 2010 allowing either Foothills JV partner to acquire the interests of the other. Either partner to the Foothills JV may initiate a “buy-sell” proceeding, which may enable it to acquire the interests of the other partner. However, the partner receiving an offer to be bought out will have the right to buy out such offering partner at the same price offered. The Foothills JV agreement does not limit our ability to enter into real estate ventures or co-investments with other third parties.

In connection with the formation transactions, we entered into agreements with Messrs. Feldman, Bourg and Jensen that indemnify them with respect to certain tax liabilities intended to be deferred in the formation transactions, if those liabilities are triggered either as a result of a taxable disposition of a property (Harrisburg Mall or Foothills Mall) by our company, or if we fail to offer the opportunity for the contributors to guarantee or otherwise bear the risk of loss, with respect to certain amounts of our debt for tax purposes (the “contributor-guaranteed debt”). With respect to tax liabilities arising out of property sales, the indemnity will cover 100% of any such liability (approximately $5.2 million at December 31, 2007) until December 31, 2009 and will be reduced by 20% of the aggregate liability on each of the five following year-ends thereafter.

 

Renovation and Repositioning

 

We have substantially completed the renovation and repositioning project for the Foothills Mall.

 

Financing

 

On the closing date, the Foothills JV extinguished the existing first mortgage loan totaling $54.75 million and refinanced the property with an $81.0 million non-recourse first mortgage loan. The $81.0 million first mortgage loan matures in July 2016 and bears interest at 6.08%. The loan may not be prepaid until the earlier of three years from the first interest payment or two years from date of loan syndication and has no principal payments for the first five years and then loan principal amortizes on a 30-year basis thereafter.

 

Location and Demographics

 

The Foothills Mall is located in the greater Tucson, Arizona market and is near a busy thoroughfare which makes it accessible to significant local and tourist traffic. The following are key demographic and other information that we expect will benefit the Foothills Mall:

 

 

Competition

 

The primary competitors of the Foothills Mall include three regional malls described below that jointly comprise approximately 3.5 million square feet of shop space. Seven power centers that comprise approximately 2.5 million square feet are located within ten miles of the property. Tucson’s expanding economy, tourism and strong population growth have created a strong retail market, including the regional mall sector. Accordingly, there is a strong demand for retail property in the Tucson area as evidenced by a 90% occupancy level for shop space. We expect the construction of new retail properties to increase modestly and in proportion to demand so that vacancy levels remain low. We believe the Foothills Mall is the only value and entertainment oriented mall in its trade area. Competitors of the Foothills Mall include:

 

 

 

Average Occupancy Rate and Base Rent — Foothills Mall(1)

 

 

 

 

Colonie Center

 

Overview

 

In February 2005, we acquired the Colonie Center Mall for a base purchase price of $82.2 million. We paid additional consideration of $2.4 million in connection with the execution of certain pending leases that increased the purchase price to $84.6 million. We have nearly completed a $110 million renovation and repositioning plan for Colonie Center, of which we incurred $92.8 million through December 31, 2007, for an estimated total project cost of $192 million.

 

Colonie Center is a 1.2 million square-foot, super-regional mall serving Albany, New York and its surrounding areas. Colonie Center is anchored by four major department stores: Macy’s, Sears, Boscov’s and Christmas Tree Shops (a wholly owned subsidiary of Bed Bath & Beyond). The mall’s anchor tenants are complemented by numerous nationally recognized retailers such as Abercrombie & Fitch, American Eagle, Bath & Body Works, The Children’s Place, Steve & Barry’s The Gap, Limited Too and Victoria’s Secret. The 110 shops are comprised of approximately 381,000 square feet and are accessed on two levels, with a central food court, restaurants and cafés.

 

Joint Venture with Heitman

 

On September 29, 2006, we completed a joint venture with a subsidiary of Heitman LLC (“Heitman”) in connection with the Colonie Center Mall whereby we entered into a contribution agreement (the “Contribution Agreement”) with a subsidiary of Heitman. Under the terms of the Contribution Agreement, we contributed the mall to FMP Colonie LLC, a new Delaware limited liability company. Heitman’s contribution to the venture was approximately $47 million in order to purchase approximately 75% of the equity in Colonie Center. Our contribution to the venture was valued at approximately $15 million, representing approximately 25% of the equity in Colonie Center. In addition, we have made preferred capital contributions of approximately $10.3 million as of December 31, 2007 and subsequently have made additional contributions totaling $6.8 million that were used

primarily to fund construction costs. We have also agreed to a cost guarantee related to certain “hard” redevelopment costs of the property’s redevelopment project totaling $56.0 million. To the extent these costs exceed $56.0 million, our preferred equity contributions will be recharacterized as subordinated capital contributions. We estimate that this project will experience approximately $15 million of hard cost overruns. We have secured the balance of these cost overruns with a $10.25 million letter of credit drawn from our line of credit which is secured by our ownership of the Golden Triangle Mall. These subordinated equity contributions may not be distributed to us until Heitman receives a 15% return on and return of its invested equity capital.

 

The LLC Agreement between us and Heitman allows a buy-sell process to be initiated by us at any time on or after January 30, 2010 or by Heitman, at any time on or after November 1, 2010. There are additional provisions regarding disputes, defaults and change in management that allow Heitman to initiate a buy-sell process. The member initiating the buy-sell must specify a total purchase price for the property and the amount of the purchase price that would be distributed to each of the two members, with the allocation of the total purchase price being subject to arbitration if the parties disagree. The member receiving the buy-sell notice must elect within 60 days to either allow the initiating member to purchase the recipient’s interest in the Colonie JV for the price stated in the notice or to purchase the initiating member’s interest in the joint venture.

 

Financing

 

In June 2005, we completed a $50.8 million first mortgage bridge financing collateralized by the Colonie Center Mall. Subsequently, in September 2006, we refinanced the bridge loan with a new construction loan that currently has a maximum borrowing capacity of approximately $116.3 million and matures in October 2008. A portion of this loan, in the amount of $50.8 million, has a fixed interest rate of 6.84%. The rate on the balance of this loan is floating at 180 basis points over LIBOR. The loan may be extended beyond October 2008, subject to satisfaction of certain financial covenants and other customary requirements for up to two additional years. The loan requires that we maintain a minimum debt service coverage ratio during the initial term of the loan and, if we fail to meet the required ratio, cash flow to us is restricted. As of December 31, 2007, we did not meet the debt service coverage ratio and certain cash flow is currently unavailable, however if and when we satisfy the ratio, the cash flow will be released to us. Based upon the mall’s current performance, we do not believe these financial covenants will be satisfied and therefore we will not satisfy the conditions to extend the loan. We will attempt to negotiate a modification or waiver of the covenants and loan extension with the current lender prior to the maturity date. We continue to manage the property and receive customary management, construction and leasing fees in accordance with our joint venture agreement with Heitman.

 

Renovation and Repositioning Plan

 

We are putting the finishing touches on the new movie theater for Colonie Center and upon completion of this part of the project our redevelopment project for this mall will be substantially complete. The following is an outline of our strategic plan for this mall:

 

 

We expect these renovation and repositioning efforts will ultimately impact the financial performance of Colonie Center by drawing more affluent shoppers to the mall. We expect our revenues to grow as more shoppers spend more time in the main mall, which we expect will increase shop tenant sales per square foot.

Location and Demographics

 

Colonie Center is located in the greater Albany, New York area adjacent to major thoroughfares including Interstate 87. The following are key demographic and other information that we expect will benefit Colonie Center:

 

 

Competition

 

The primary competitors of Colonie Center include three regional malls described below that comprise approximately 3.2 million square feet of shop space. Four power centers that comprise approximately 2.2 million square feet are located within five miles of the property. With four established anchor tenants, two unique junior anchor tenants and a well-balanced mix of shop tenants, Colonie Center is one of the dominant, super-regional malls in its trade area. Competitors of Colonie Center include:

 

 

Average Occupancy Rate and Base Rent — Colonie Center(1)

 

 

 

Harrisburg Mall

 

Overview

 

The Harrisburg Mall is located in Swatara Township, three miles from downtown Harrisburg, Pennsylvania. The property was originally built in 1969 and is a two-story, enclosed, regional mall containing 922,000 square feet. It is the largest mall in the Harrisburg market and has approximately 83 shop spaces. It is anchored by three large anchor tenants: Bass Pro Shops, Boscov’s and Macy’s. The Harrisburg Mall’s specialty shop tenants include Disney Store, Foot Locker, The Limited and Victoria’s Secret. In addition, the Harrisburg Mall has a food court that includes such national tenants as Arby’s, Cosimos Pizza and McDonald’s.

 

Renovation and Repositioning

 

The Phase II renovation of this property is targeted for completion in the fourth quarter of 2008. The plan includes the addition of upscale restaurants on the exterior of the mall in order to create a streetscape look and feel for the property, as well as the construction of a new movie theater (which has been completed) and up to two large “big-box” junior anchor tenants. We estimate the costs of these renovations will total $36.8 million, of which we incurred $24.4 million through December 31, 2007. The total renovation and repositioning plan for this mall, which is designed to convert the mall from a Class C mall to a Class A mall, includes the following:

 

 

 

As a result of our renovation and repositioning efforts at the Harrisburg Mall, leased square footage will have grown from 850,000 to 995,000 as of December 31, 2007, after giving effect to executed anchor leases as of such date. Given the attractiveness of the new anchor tenants at the Harrisburg Mall and the next phase of renovation projected to be completed in 2008, additional revenue growth from the property is expected as occupancy levels and rental rates rise above current levels.

 

One of our tenants at this property, Panera Bread, which has executed a new lease to cover approximately 4,200 square feet of newly developed restaurant space, has notified us that it is considering sub-letting this space to another retailer. Under its lease, Panera Bread has the right to sublet this space, subject to our reasonable approval. The subletting of this space could delay the opening of the restaurant that will ultimately occupy this space. Under the lease with Barnes & Noble at this property, a delay in the opening of a suitable restaurant in the Panera Bread location could result in Barnes & Noble exercising its right under its lease to convert its fixed rate rent into a percentage rent formula and ultimately could give this tenant the right to terminate its lease at this property. We are in the process of assessing our options with regard to this space in the event that Panera Bread moves forward with its sub-let plan.

 

Joint Venture and Financing

 

In September 2003, our predecessor acquired an ownership interest in the Harrisburg Mall through Feldman Lubert Adler Harrisburg LP, a joint venture with affiliates of the Lubert Adler Funds based in Philadelphia. The joint venture paid $17.5 million, or approximately $20.00 per square foot, for the property, which was financed through both equity capital and a loan. Our joint venture partner provided approximately $10.8 million, or 75%, of the equity capital and our predecessor provided approximately $3.6 million, or 25%, of the equity capital. The remaining $3.1 million of the purchase price was financed through a construction loan with Commerce Bank.

 

As of December 31, 2007, the joint venture had spent approximately $62.1 million (net of government grant funding) on the renovation and repositioning of this property and we estimate that the total additional investment required to renovate and reposition the property is approximately $12.4 million. The joint venture intends to fund the additional $12.4 million investment from additional partner contributions and cash flow from operations.

 

The construction loan with Commerce Bank contained an initial maximum funding commitment of $46.9 million. During July 2005, the loan was amended and the commitment increased to $50 million with no principal payments due until the maturity date in March 2008. The interest rate is LIBOR plus 1.625% per annum. During July 2005, the borrowings were increased to $49.8 million and a distribution of $6.5 million was made to the partners on a pro rata basis of which we received $1.625 million. We extended the loan through April 14, 2008 at a borrowing rate of 200 basis points over LIBOR. We plan to extend the loan through December 31, 2009 at the same borrowing rate. However, there can be no assurances that we will be able to extend the loan for this period or at this rate.

 

This loan presently has a limited recourse of $5.0 million, of which affiliates of the Lubert Adler Funds are liable for $3.2 million, or 63% and we are liable for $1.8 million, or 37%. In addition, pursuant to the terms of this loan, at any time the joint venture is entitled to receive a loan advance, the lender shall reduce the amount of such advance by the amount of the joint venture’s net cash flow after operating expenses and debt service.

 

Under the terms of the limited partnership agreement of Feldman Lubert Adler Harrisburg LP, the general partner (one of our wholly owned subsidiaries) manages the day-to-day operations of the property. The general partner and limited partners share equally in decision-making authority over major decisions affecting the property, including property sales and financings, leasing and budget approval and amendments.

 

We and our joint venture partner each have the right to receive on a pro rata basis the operating cash flow of the property equal to 12%, computed on an annual compounded basis, on invested capital. Once operating cash

flow exceeds 12%, we will be entitled to receive an additional 20% of the excess cash flow. Upon a sale of the property and after both partners receive a return of their capital contributions to the joint venture (an aggregate of approximately $27.4 million as of December 31, 2007) plus a 12% cumulative, compounded return thereon, we will have the right to receive an additional 20% of the available cash, if any, plus our 25% share of the remaining 80% interest. In addition, in the event that a sale of the property produces an overall return in excess of 20% to our joint venture partner, we will be entitled to a 30% share of such excess, if any, plus our 25% share of the remaining 70% interest. To the extent that the partners are required to make additional capital contributions to the joint venture, the amount of the 12% preferred return, which operating cash flow must exceed in order for the partners to receive the additional 20% of excess cash flow, will increase.

 

Under the terms of the joint venture, we are generally responsible for funding 25% of the capital contributions required for the venture. As of December 31, 2007, we had funded $10.6 million and our joint venture partner $16.8 million of the capital contributions made to the joint venture. As of December 31, 2007, we estimate that completion of the redevelopment project for this property will require total additional capital contributions of approximately $12.4 million. We are currently attempting to resolve a dispute with our joint venture partner relating to the scope of the redevelopment plan for this project. Our joint venture partner has notified us that it believes that certain aspects of the last phase of the development plan were not approved in accordance with the joint venture agreement and as a result has claimed that we are responsible for 100% of the funding required for this part of the project. We are continuing to negotiate with our joint venture partner relating to this dispute and are seeking to develop a mutually acceptable solution for this issue. Through December 31, 2007, we have funded $4.0 million above our 25% capital contribution requirement for these redevelopment projects.

 

The contribution, merger and related agreements further provide that Feldman Partners, LLC (an entity controlled by Larry Feldman and owned by him and his family), Jim Bourg and Scott Jensen will receive additional OP units relating to the performance of the joint venture that owns the Harrisburg Mall. The aggregate value of the additional OP units that may be issued with respect to the Harrisburg Mall is equal to 50% of the amount, if any, that the internal rate of return achieved by us from the joint venture exceeds 15% on our investment on or prior to December 31, 2009. The estimated fair value of these additional OP units was zero at December 31, 2007.

 

The fees we are entitled to earn as manager of the Harrisburg Mall include a management fee of 3.5% of annual gross revenues paid monthly, a construction management fee of 3% of the amount of capital improvements and customary leasing fees for a mall leasing agent.

 

The joint venture agreement includes a “buy-sell” provision allowing either joint venture partner to acquire the interests of the other beginning on September 30, 2005. Either partner to the joint venture may initiate a “buy-sell” proceeding, which may enable it to acquire the interests of the other partner. However, the partner receiving an offer to be bought out will have the right to buy out such offering partner at the same price offered.

 

Location and demographics

 

The property is located east of the Harrisburg capital region in Pennsylvania adjacent to major thoroughfares, including Interstate 83. The following are key demographic and other information that we expect will benefit the Harrisburg Mall:

 

 

Competition

 

The primary competitors of the Harrisburg Mall include two regional malls that jointly comprise approximately 1.4 million square feet of shop space. Four power centers that comprise approximately 1.7 million square feet are located within seven miles of the property. In addition we expect to compete with a new lifestyle center within four miles of the property. We believe there are no major regional mall projects under construction or planned for the near future. No competitor has a unique anchor tenant similar to Bass Pro Shops. The significant competitors within a 10-mile radius include:

 

 

Average Occupancy Rate and Base Rent — Harrisburg Mall(1)

 

 

 

 

 

Regulation

 

Generally, the ownership and operation of real properties are subject to various laws, ordinances and regulations, including regulations relating to lien sale rights and procedures. Changes in any of these laws or regulations, such as the Comprehensive Environmental Response and Compensation Liability Act, increasing the potential liability for environmental conditions or circumstances existing or created by tenants or others on properties or laws affecting development, construction, operation, upkeep, safety and taxation requirements may result in significant unanticipated expenditures, loss of regional mall sites or other impairments to operations, which would adversely affect our cash flows from operating activities.

 

Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. A number of additional U.S. federal, state and local laws also exist that may require modifications to the properties, or restrict certain further renovations thereof, with respect to access thereto by disabled persons. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants and could also result in an order to correct any non-complying feature and in substantial capital expenditures. To the extent our properties are not in compliance, we are likely to incur additional costs to comply with the ADA.

 

Insurance activities are subject to state insurance laws and regulations as determined by the particular insurance commissioner for each state in accordance with the McCarran-Ferguson Act, as well as subject to the Gramm-Leach-Bliley Act and the privacy regulations promulgated by the Federal Trade Commission pursuant thereto.

 

Property management activities are often subject to state real estate brokerage laws and regulations as determined by the particular real estate commission for each state.

 

Changes in any of the laws governing our conduct could have an adverse impact on our ability to conduct our business or could materially affect our financial position, operating income, expense or cash flow.

 

Environmental Matters

 

Pursuant to U.S. federal, state and local environmental laws and regulations, a current or previous owner or operator of real property may be required to investigate, remove and/or remediate a release of hazardous substances or other regulated materials at or emanating from such property. Further, under certain circumstances, such owners or operators of real property may be held liable for property damage, personal injury and/or natural resource damage resulting from or arising in connection with such releases. Certain of these laws have been interpreted to impose joint and several liability unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The failure to properly remediate the property may also adversely affect the owner’s ability to lease, sell or rent the property or to borrow using the property as collateral.

 

In connection with the ownership, operation and management of our current or past properties and any properties that we may acquire and/or manage in the future, we could be legally responsible for environmental liabilities or costs relating to a release of hazardous substances or other regulated materials at or emanating from such property. In order to assess the potential for such liability, we conduct an environmental assessment of each property prior to acquisition and manage our properties in accordance with environmental laws while we own or operate them. We and our predecessor engaged qualified, reputable and adequately insured environmental consulting firms to perform environmental site assessments of all of our properties and we are not aware of any environmental issues that are expected to materially impact the operations of any property.

 

Insurance

 

We believe that our properties are covered by adequate fire, flood, earthquake, wind (as deemed necessary or as required by our lenders) and property insurance as well as commercial liability insurance provided by reputable companies and with commercially reasonable deductibles and limits. Furthermore, we believe our businesses and

business assets are likewise adequately insured against casualty loss and third-party liabilities. Changes in the insurance market since September 11, 2001 have caused increases in insurance costs and deductibles and have led to more active management of our insurance component.

 

 

As of December 31, 2007, we were not involved in any material litigation nor, to management’s knowledge, is any material litigation threatened against us or our portfolio other than routine litigation arising in the ordinary course of business or litigation that is adequately covered by insurance.

 

 

We held our annual meeting of stockholders on December 28, 2007 at which the following matters were voted upon:

 

1. To elect four directors of our company to serve until the 2008 annual meeting of stockholders and until their successors are duly elected and qualified.

 

2. To ratify the selection of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007.

 

3. To approve the convertibility feature of the Series A Preferred Stock into our common stock, in accordance with the terms of the Series A Preferred Stock.

 

4. To consider a stockholder proposal if it is properly presented to the meeting.

 

The results of the meeting were as follows:

 

 

 

 

 

 

 

 

Our common stock began trading on the New York Stock Exchange (“NYSE”) on December 16, 2004 under the symbol “FMP.” On April 4, 2008, the reported closing sale price per share of common stock on the NYSE was $2.74 and there were approximately 44 holders of record of our common stock.

 

 

Generally, if dividends are declared in a quarter, those dividends will be paid during the subsequent quarter.

 

On December 31, 2007, there were 1,414,618 operating partnership units of limited partnership interest of our operating partnership outstanding. These units receive distributions per unit in the same manner as dividends per share were distributed to common stockholders.

 

On May 14, 2007, we declared a dividend of $0.2275 per common share for the period January 1, 2007 to March 31, 2007 to shareholders of record on May 18, 2007. This dividend was paid on May 25, 2007.

 

On October 26, 2007, we announced the suspension of our common stock dividend and we do not expect to declare any additional common stock dividends in the foreseeable future except as may be required to maintain REIT status.

 

The following table summarizes information, as of December 31, 2007, relating to our equity compensation plans pursuant to which shares of our common stock or other equity securities may be granted from time to time.

 

 

 

 

Recent Sale of Unregistered Securities

 

Our contribution, merger and related agreements provide that Feldman Partners, LLC (an entity controlled by Larry Feldman and owned by him and his family), Jim Bourg and Scott Jensen will receive additional OP units that may be issued with respect to the Harrisburg Mall equal to 50% of the amount, if any, that the internal rate of return achieved by us from the joint venture exceeds 15% on or prior to December 31, 2009. The issuance of such shares of common stock and OP units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act.

 

We issued 5,000 shares of our common stock in 2007 for deferred stock-based compensation, none of which were issued in connection with employment contracts and we issued 3,000 shares of our common stock to our

directors. The issuance of these shares of our common stock was affected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act.

 

On April 10, 2007, we entered into a purchase agreement with Inland American to sell to Inland American, in one or more private placements, up to 2,000,000 shares of the Series A Preferred Stock. Inland American subsequently purchased 600,000 shares of the Series A Preferred Stock for an aggregate purchase price of $15 million.

 

On October 22, 2007, Inland American purchased from us 800,000 additional shares of the Series A Preferred Stock for an aggregate purchase price of $20 million. In addition, on December 17, 2007, Inland American purchased from us 600,000 shares of Series A Preferred Stock for an aggregate purchase price of $15 million. The sales to Inland American were made in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended, as transactions not involving any public offering. No commissions or fees were paid in connection with these sales.

 

See note 2 to the Consolidated Financial Statements in Item 8 for a description of our deferred compensation plan and other compensation arrangements.

 

The following table shows selected consolidated financial data for our company and historical financial data for our predecessor for the periods indicated. You should read the following selected historical financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and historical consolidated financial statements and related notes thereto. The following selected consolidated historical financial data have been derived from financial statements audited by KPMG LLP, an independent registered public accounting firm. Consolidated balance sheets as of December 31, 2007 and 2006 and the related consolidated statements of operations for the years ended December 31, 2007 and 2006 and cash flows for each of the years in the three-year period ended December 31, 2007 and the related notes thereto appear in Item 8.