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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

 

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 May 25, 2007 there were 13,114,870 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 (12,559,272 shares) as of the last business day of the Registrant’s most recently completed second quarter was $137,649,621. 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

 

None

 

 

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 fully integrated, self-administered and self-managed real estate company 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 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 real estate investment trust, or REIT, for federal income tax purposes.

 

At December 31, 2006, our portfolio consisted of (i) four wholly owned malls, including 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 held approximately a 90% ownership interest as of December 31, 2006. 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 December 15, 2004, 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 acquisitions and 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

 

 

 

  Source: International Council of Shopping Centers

 

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 had approximately 1,104 malls in 2005. The median sales per square foot of shop tenants in a sample of malls studied by the International Council of Shopping Centers in 2006 was $396. 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

 

 

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. Our strategy is to acquire Class B malls or Class C malls, which we refer to as underperforming or distressed malls. We believe that through our renovation and repositioning strategies, we can substantially increase shopper traffic and tenant sales, which will result in higher occupancy, rents and, ultimately, cash flow. We believe that the successful implementation of our strategy can result in the transformation of a Class B or Class C mall into a Class A or near Class A mall. Currently, Stratford Square Mall, Colonie Center Mall, Northgate Mall, Tallahassee Mall, Golden Triangle Mall and Foothills Mall fall into the Class B category and Harrisburg Mall falls into the Class C category. We expect, however, that upon completion of our renovation and repositioning efforts, each of these malls will fall into the Class A or near Class A mall category.

 

The Market Opportunity

 

We believe there are a significant number of malls in the United States that are potential candidates for acquisition, renovation and repositioning by our Company. These malls are typically located in favorable markets that are experiencing positive overall retail sales trends and often have excellent access to transportation but, due to mismanagement or changing retail trends, may lack one or more of the key characteristics of successful malls. These malls tend to have weak or closed anchor tenants, poor shop tenant mixes, non-optimal layouts and outdated designs and appearances.

 

We also believe that many owners of underperforming malls may prefer to sell such properties because they may be unable to respond to the forces that have eroded the competitive positions of their properties. These owners may lack the experience, expertise, capital or management resources necessary to successfully renovate and reposition their facilities. We believe that these factors may allow us to acquire and redevelop malls at total project costs that are significantly below the cost of new mall construction.

Notwithstanding the increase in national retail sales and the favorable characteristics of malls, the rate of new U.S. mall construction continues to decrease. We believe that the low rate of new mall construction is caused by high barriers to entry, such as:

 

 

Unlike new mall development that may encounter strong opposition from local community and/or local government, our renovation efforts are usually strongly supported by local communities and therefore can be completed in a much shorter time frame. In many communities, the mall is a highly important economic driver and a significant source of employment and local government tax revenue. Therefore, underperforming malls threaten a community with a significant loss of economic activity, jobs and tax revenues. As a result, strong support can generally be found in local communities and from local governments for renovation and repositioning plans, including tax incentives and/or government grants.

 

Our Business and Growth Strategies

 

Our primary business objectives are to increase the occupancy, tenant sales, rental income, and cash flow from each of our properties resulting in increased cash available for distribution to our stockholders and growth in net asset value per share. Our business and growth 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, we intend 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 acquisition, 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 common or 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.

 

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 25-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 an acquisition, an anchor tenant or a shop tenant. In most cases, we do not expect to compete with publicly traded REITs during our acquisition process. However, in some cases we may compete with other REITs for shop tenants or anchor tenants to occupy space.

 

We believe that because we are the only publicly traded REIT solely focused on the renovation and repositioning of underperforming or distressed malls, we have less competition in acquiring these properties. According to the International Council of Shopping Centers, in 2005 REITs owned or had an interest in 593 malls. The typical REIT strategy is to purchase assets with predictable cash flow and to consolidate such assets into a portfolio of similar quality assets. Accordingly, we believe that the existing REITs are not primarily focused on the acquisition, renovation and repositioning of underperforming or distressed malls.

We also may compete with numerous other potential private buyers when pursuing a possible property for acquisition or redevelopment and this can cause an increase in the potential cost of an acquisition. Some of these entities may seek financing through similar sources.

 

In contrast, we believe that some mall REITs may sell their distressed malls in order to re-deploy capital in alternative investments. We expect that this tendency for a REIT to increase the percentage of stable, fully valued Class A malls in its portfolio creates opportunities for us and reduces our competition from established REITs for future acquisitions. Since other REITs are usually not competing against us for the purchase of underperforming malls, we believe there are few buyers that can offer a tax deferred sale to private sellers through use of our OP units as an acquisition currency. This may be a way for private owners to sell us their older, fully depreciated malls with a low tax basis.

 

We believe that our senior management team’s experience and reputation in the industry, coupled with our unique turnaround strategies, will enable us to effectively compete against other mall companies.

 

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, 2006, we had 207 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 and Class C 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 450 Fifth Street, N.W., 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

 

 

Junior Subordinated Notes

 

During March 2006, we completed the issuance and sale in a private placement of $29.4 million in aggregate principal amount of junior subordinated debt obligations (the “Notes”). The Notes require quarterly interest payments calculated at a fixed interest rate equal to 8.70% per annum through April 2011 and subsequently at a variable interest rate equal to LIBOR plus 3.45% per annum. The Notes mature in April 2036 and may be redeemed, in whole or in part, at par, at our option, beginning after April 2011.

 

Convertible Preferred Equity Financing

 

Effective April 10, 2007, we entered into an agreement to issue up to $50 million of convertible preferred stock through the private placement of 2 million shares of 6.85% Series A Cumulative Convertible Preferred Shares to

Inland American Real Estate Trust, Inc., a public non-listed REIT sponsored by an affiliate of the Inland Real Estate Group of Companies. We issued $15 million in preferred stock on April 30, 2007. We are required to issue a total of $50 million by the end of the 12-month period following the close of this transaction.

 

Under the terms of this transaction, and in accordance with New York Stock Exchange rules, we will seek shareholder approval to permit conversion of the preferred shares into common stock. Assuming an affirmative vote of our shareholders, Inland American Real Estate Trust will have the option after June 30, 2009 to convert some or all of its outstanding preferred shares. Each preferred share is being issued at a price of $25.00 per share and, assuming an affirmative vote of our shareholders, will be convertible, in whole or in part, at a conversion ratio of 1.77305 common shares to preferred shares. This conversion ratio is based upon a common share price of $14.10 per share.

 

We intend to utilize the net proceeds from the offering to provide capital for the redevelopment of our malls, to repay borrowings under our line of credit and for general corporate purposes.

 

$25 Million Credit Facility

 

On April 16, 2007, we announced the execution of a promissory note (the “Note”) providing for loans aggregating up to $25 million from Kimco Capital Corp. (“Kimco”). No amount has yet been borrowed under the note.

 

Loan draws under the Note are optional and will bear interest at the rate of seven percent 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 performance criteria. 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 intend to utilize the net proceeds from the offering to provide capital for the redevelopment of our malls, to repay borrowings under our line of credit and for general corporate purposes.

 

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 (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. As of December 31, 2006, the outstanding balance was zero.

 

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 increase to the Line is recourse to us if the fixed charge ratio, related to the Golden Triangle Mall, is higher than 1.5.

 

Colonie Center Financing

 

On February 13, 2007, we 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, $75 million of the loan proceeds were used to retire the Stratford Square Mall’s outstanding $75 million first mortgage. The balance of the proceeds was placed into escrow and will be released to fund the completion of the redevelopment project.

 

 

Golden Triangle Acquisition

 

On April 5, 2006, we acquired the Golden Triangle Mall in the Northeastern Dallas suburb of Denton, Texas, for approximately $42.3 million. Including non-owned anchors, the Golden Triangle Mall is a 765,000 square-foot regional mall. At December 31, 2006, excluding temporary tenants, the mall’s occupancy was 66.0%.

 

JCPenney Building Acquisition

 

On April 7, 2006, we acquired the building occupied by JCPenney and related acreage at Stratford Square Mall for a price of $6.7 million. The purchase price included assumption of a loan secured by the property and had a principal balance of approximately $3.5 million. The loan is self amortizing, bears interest at a 5.15% fixed rate and matures in November 2013.

 

Foothills Joint Venture

 

On June 29, 2006, we contributed the Foothills Mall to a joint venture and retained a 30.8% interest. In connection with this transaction, the joint venture refinanced the existing $54.8 million first mortgage with an $81.0 million first mortgage. As a result of these transactions, we received approximately $38.9 million and recognized a $29.4 million gain on the partial sale of the property as reported on the condensed consolidated statement of operations. A portion of the proceeds from the transaction was used to repay $24.6 million outstanding on our secured line of credit and $5.0 million outstanding to extinguish our credit facility provided by Kimco Realty Corp.

 

Colonie Center Joint Venture

 

On September 29, 2006, we contributed the Colonie Center Mall to a joint venture and retained a 25% interest. In connection with this transaction, the joint venture refinanced the existing $50.8 million first mortgage bridge loan with a first mortgage and construction facility with a maximum capacity commitment of $109.8 million. As a result of these transactions, we received approximately $41.2 million and recorded a $3.5 million deferred gain. A portion of the proceeds from the transaction were used to repay $4.0 million outstanding on our secured line of credit on October 2, 2006.

 

 

We announced that our board of directors has 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.

 

 

Appointment of New Board Member

 

In connection with the Inland transaction, Mr. Thomas H. McAuley will be joining the Company’s 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 order for the Company’s Board of Directors to comply with the director independence rules of the New York Stock Exchange, Jim Bourg will resign his board seat prior to Mr. McAuley joining the Company’s board. Jim Bourg will continue to be the Company’s Chief Operating Officer and will attend all future board meetings.

Lloyd Miller — EVP of Leasing

 

Effective April 17, 2007, we entered into an agreement with Lloyd Miller, our former Executive Vice President of Leasing since November 2005, pursuant to which he agreed to resign from the Company and 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 the Company. We believe that Mr. Miller’s potential claims are without merit and plan to vigorously defend any claim that is made by Mr. Miller in the future relating to this issue. To date, we have not named a replacement for Mr. Miller.

 

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 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 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, 2006, we determined that our controls over financial reporting contained a material weakness. We lacked 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. Management has commenced hiring and training additional personnel to correct this material weakness.

 

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.

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 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.

 

Integral to our business strategy is continuing acquisitions of underperforming or distressed malls. 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 expect to 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.

 

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 expect to 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.

Risks Related to the Real Estate Industry

 

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 expect to 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, Tallahassee Mall and Golden Triangle Mall. The Phase I Environmental Report for each of the properties did not reveal any existing material environmental conditions.

 

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 the Company’s initial public offering, including an 11.7% 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 the Company’s initial public offering, and holds an equity stake of 11.7% in our Company on a fully diluted basis as of May 31, 2007. Management’s equity stake includes 172,481 shares of common stock and 966,454 OP units being held by Larry Feldman, our Chairman and Chief Executive Officer, and his affiliates, 9,615 shares of common stock and 233,504 OP units being held by Jim Bourg, our 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 Executive Vice 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.

 

Larry Feldman, our Chairman and Chief Executive Officer, Jim Bourg, our 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 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, Jim Bourg 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, Jim Bourg 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.

 

None of the contribution agreements was the result of arm’s-length negotiations and may not reflect terms comparable to those that could have been obtained from unaffiliated third parties.

 

The contribution, merger and related agreements that were executed in connection with the formation transactions were not negotiated on an arm’s-length basis. As a consequence, these agreements may not reflect terms comparable to those that could have been obtained from unaffiliated third parties and, therefore, may not be as favorable to us as they may otherwise have been.

 

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, 2006, we have 186,844,938 authorized but unissued shares of common stock, 13,155,062 shares of common stock issued and outstanding, 50,000,000 authorized but unissued shares of preferred stock and no 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 Larry Feldman, our Chairman and Chief Executive Officer, and the other members of our senior management team. Although we will have an employment agreement with Larry Feldman and some other 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, particularly Larry Feldman, 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

 

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, 2006, we had approximately $230.9 million of outstanding indebtedness in our consolidated subsidiaries, 100% of which is secured. We expect to incur additional debt in connection with future acquisitions. We may borrow under our secured line of credit or borrow new funds to acquire these future properties. Further, we may need to borrow funds to make distributions required to maintain our REIT status or to meet our expected distributions.

 

If we are required to utilize our line of credit for purposes other than acquisition activity, this will reduce the amount available for acquisitions and could slow our growth. 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, 2006, we had approximately $230.9 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 $230.9 million of outstanding indebtedness as of December 31, 2006, of which $155.9 million bears interest at fixed rates ranging from 5.15% to 8.70% and $75.0 million bears interest on a floating rate basis at LIBOR plus 1.25%. 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 $2.3 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 February 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. As a result, the joint venture will not have cash from operations to distribute to the joint venture partners during the period that it is taking advances under this loan because any net cash flow will be used in lieu of the advances. The construction loan with Commerce Bank was amended and the maturity date extended to March 2008. As a result, our net cash provided by operations may, during the term of this loan, be reduced by the limitation on our joint venture’s ability to pay distributions to us and our operating partnership.

 

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, 2006, we did not have any unresolved comments with the staff of the SEC.

 

As of December 31, 2006, 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 based on annualized base rent as of December 31, 2006.

 

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, 2006.

 

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 $45.8 million in the renovation and repositioning plan for Stratford Square Mall, of which $16.1 million was incurred through December 31, 2006, for an estimated total project cost of approximately $138.9 million.

 

Stratford Square Mall is a 1.3 million square-foot, super-regional mall located in Bloomingdale, Illinois. Located in the rapidly growing and affluent DuPage County, a northwestern suburb of Chicago, the mall had an overall occupancy of 90.6% as of December 31, 2006 with shop tenant occupancy of 66.4% (excluding temporary and anchor tenants). The mall has six non-owned anchor tenants: Kohl’s, Sears, Carson Pirie Scott (a unit of the Saks Department Store Group), Marshall Fields, JCPenney and Burlington Coat Factory.

 

Average mall shop sales for 2006 were approximately $286 per square foot, an amount that we intend to increase through capital expenditures focused on improving shopper traffic and tenant sales. Plans to boost shopper traffic and tenant sales include building a new multi-screen cineplex with stadium seating (estimated to be completed in the third quarter 2007), adding one or more junior anchor tenants, multiple sit-down restaurants, outdoor cafes and streetscape retail, new property signage and other general capital improvements.

 

The mall’s anchor tenants are complemented by numerous 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.

Anchor Tenant Sales Versus Shop Tenant Sales

 

Shop sales at Stratford Square in calendar 2006 were $286 per square foot, which categorizes this mall as a Class B mall.

 

We believe that in 2006 the Stratford Square Macy’s had approximately $19 million in sales, Sears had approximately $20 million in sales, JCPenney had sales of $20 million, Carson Pirie Scott had sales of $20 million, Kohl’s had sales of $20 million and Burlington Coat Factory had sales of $15 million. These six anchors will continue to operate as strong shopper draws. We believe that there is an opportunity to sharply increase shop tenant sales per square foot and thereby grow the property’s rental revenue.

 

We have entered into an operating agreement with these six anchor tenants to share certain operating expenses based on allocated amounts per square foot. The agreement terminates in March 2031.

 

Renovation and Repositioning Plan

 

Our opportunity, with respect to Stratford Square, is to take advantage of the mall’s unusually strong number of 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 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 Stratford Square by drawing the anchor tenant shoppers into the main mall and attracting more shoppers. 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 mall.

 

Financing

 

In January 2005, we obtained a $75 million, three-year floating rate first mortgage loan secured by the property. The mortgage loan bears interest at a rate of LIBOR plus 125 basis points and has two, one-year extension options. The loan is interest-only and is prepayable in whole, but not in part. We used a swap arrangement to convert this loan to a fixed interest rate of 5.0% per annum through January 2008.

 

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, $75 million of the loan proceeds were used to retire the Stratford Square Mall’s outstanding $75 million first mortgage. The balance of the proceeds was placed into escrow and will be released to fund the completion of the redevelopment project.

 

Location and Demographics

 

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

 

 

The Chicago area thrives on its strong, diverse, and growing economy in manufacturing, wholesale and retail trade, communications, publishing, banking, finance, insurance, law, advertising, accounting, medicine, and high technology. The Chicago area also enjoys one of the finest transportation systems of any urban area, a highly skilled labor pool, and an appreciation of and devotion to cultural and recreational activities that attract corporations and tourists from around the world.

 

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). We also plan to invest an additional $22.7 million in the renovation and repositioning plan for the Tallahassee Mall, of which $1.5 million was incurred through December 31, 2006, for an estimated total project cost of $84.2 million.

 

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 stores: AMC Theaters, Burlington Coat Factory, Dillard’s and Belk’s. In addition, the mall has six important “junior anchors,” which are Old Navy, Sports Authority, Goody’s Family Clothing, Ross Dress for Less, Shoe Carnival and Barnes & Noble. The mall’s anchor tenants are complemented by numerous nationally recognized retailers such as Victoria’s Secret and Express. The 85 shops are comprised of approximately 204,000 square feet and are accessed on one level, with a central food court, restaurants and cafés.

 

The Tallahassee Mall features a very successful 20-screen AMC Theater with annual sales volumes of nearly $10 million. The mall features attractive, well-maintained improvements, a successful anchor tenant line-up, a convenient location on Route 27 and is approximately one mile from Interstate 10.

 

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.

 

Anchor Tenant Sales and Shop Tenant Sales

 

Shop tenant sales for the Tallahassee Mall in 2006 were $320 per square foot, which categorizes this mall as a Class B mall. The rent roll also includes 25 retailers that have sales over $400 per square foot.

 

We believe that there is an opportunity to increase shop tenant sales per square foot and thereby grow the property’s rental revenue by aggressively targeting young adult retailers in an effort to better service the 65,000 students on the nearby college campuses and we intend to lease to multiple restaurant chains in order to supplement the highly successful AMC movie theater.

Financing

 

The property is currently encumbered by a $45.1 million first mortgage. The mortgage bears interest at 8.6% and is due in July 2029. We intend to refinance the mortgage on or before 2009. We plan to refinance the existing debt during 2007 or 2008 in order to replace it with lower rate debt.

 

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. The following is a preliminary outline of our strategic plan to accomplish this goal:

 

 

We expect that these renovation and repositioning efforts will impact the financial performance of the Tallahassee Mall by drawing from the already high volume of young adult shopper traffic generated by the successful theater. We expect our revenue 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 mall.

 

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 $36.4 million in the renovation and repositioning plan for Northgate, of which $6.4 million was incurred through December 31, 2006, for an estimated total project cost of $146.4 million.

 

Northgate is an enclosed single-level, four-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 83,851 square feet of free-standing retail space). We own the Macy’s anchor store. Northgate is anchored by Dillard’s, Macy’s, Sears and JC Penney and has an excellent 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.

 

Anchor Tenant Sales versus Shop Tenant Sales

 

Northgate tenants and anchors generate approximately $174 million in annual sales. Northgate includes four stable anchors, which generate strong sales of approximately $90 million. The in-line tenants less than 10,000 square feet include an excellent mix of nation, regional and local tenants and generate $308 in sales per square foot, or approximately $66 million total. Total in-line sales were $62 million, or $304 per square foot.

 

Financing

 

The property is currently secured by a first mortgage with a balance at December 31, 2006 of $78.2 million. The first mortgage bears interest at 6.6% and has an anticipated prepayment date in September 2012. We intend to 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 goal, with respect to the Northgate Mall, is to take advantage of the mall’s strong anchor tenant sales and leverage such sales into higher 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 mall.

 

Location and Demographics

 

Northgate is located in the northwest Cincinnati suburbs and benefits from the strong 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 invest an additional $32.3 million in the renovation and repositioning plan for Golden Triangle Mall, of which $131,000 was incurred through December 31, 2006, for an estimated total project cost of $74.6 million.

 

Golden Triangle is a 765,000 square-foot, super-regional mall located in Denton, Texas. Located in the rapidly growing Denton County, a northern suburb of Dallas, the mall had an overall occupancy of 99.0% as of December 31, 2006 with permanent shop tenant occupancy of 66.0% (excluding temporary and anchor tenants). The mall has four nonowned anchor tenants — Macy’s, Dillard’s, JC Penney and Sears — and three junior anchors, which are DSW, Ross and Barnes & Noble.

 

Average mall shop sales for 2006 were approximately $280 per square foot, an amount that we intend to increase through capital expenditures focused on improving shopper traffic and tenant sales. Plans to boost shopper traffic and tenant sales include building a new multi-screen IMAX cineplex with stadium seating, adding one or more junior anchor tenants, multiple sit-down restaurants, outdoor cafes and streetscape retail, new property signage and other general capital improvements.

 

The mall’s anchor and junior anchor tenants are complemented by numerous 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.

Anchor Tenant Sales Versus Shop Tenant Sales

 

Shop sales at Golden Triangle Mall in calendar 2006 were $280 per square foot, which categorizes this mall as a Class B mall.

 

We believe that in 2006 the Golden Triangle Dillard’s and Dillard’s Men combined had approximately $17 million in sales, Sears had approximately $13 million in sales, JCPenney had sales of $11 million, DSW had sales of $9 million and Macy’s had sales of $13 million. We believe that there is an opportunity to sharply increase shop tenant sales per square foot and thereby grow the property’s rental revenue.

 

We have recently learned that 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 is located approximately five miles north of the property. The anchors are expected to move in 2009 and we anticipate acquiring those vacated stores in 2009. Negotiations have commenced with replacement anchors.

 

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 a new IMAX movie theatre with 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 mall.

 

Financing

 

In April 2006, we obtained a $24.6 million line of credit secured by the Golden Triangle Mall. The secured line of credit has a three-year term and bears interest at 140 basis points over LIBOR. The loan is interest-only. In addition, during April 2007, we increased the secured line of credit to $30 million and extended the maturity to April 2009.

 

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 5^th and a large Nike Factory Outlet store. In addition, the Company has entered into a 15,000 square-foot lease with Sega World Sports Bar and Grill, which is expected to take occupancy in the fourth quarter of 2007. 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, J. Nippon, Outback Steakhouse and Thunder Canyon Brewery.

 

During February 2006, we entered into a contribution agreement with a subsidiary of Kimco Realty Corp. (“Kimco”) in connection with the Foothills Mall, located in the suburbs of Tucson, Arizona. Under the terms of the contribution agreement, we contributed the Foothills Mall to a limited liability company at an agreed value of $104 million, plus certain closing costs (the “Foothills JV”). The transaction closed on June 29, 2006. 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. Because we received cash in excess of our net basis contributed to the Foothills JV, we recorded negative carrying value of our investment in the amount of $4.5 million.

 

Simultaneous with the refinancing, 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 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.

 

Renovation and Repositioning

 

We are near completion of the renovation and repositioning project for the Foothills Mall. We estimate that the remaining repositioning costs for new tenants, including a new junior anchor tenant, will total approximately $3.9 million. As of December 31, 2006, we had spent approximately $0.1 million on these tenant projects. The renovation and repositioning is being financed through a combination of debt and equity financing. The renovation and repositioning plan, which is designed to convert the mall from a Class B mall to a Class A mall, includes the following:

 

 

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. The mortgage loan contains financial covenants requiring the Foothills JV to maintain certain financial debt service coverage ratios, among other requirements.

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 plan to invest an additional $108.1 million in the renovation and repositioning plan for Colonie Center, of which we incurred $40.5 million through December 31, 2006, for an estimated total project cost of $192.7 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). In addition, the mall has two important “junior anchors”, which are Steve & Barry’s and an f.y.e. super store. The mall’s anchor tenants are complemented by numerous nationally recognized retailers such as Abercrombie & Fitch, American Eagle, Bath & Body Works, Bombay Company, The Children’s Place, 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.

 

Colonie Center features Albany’s only Christmas Tree Shops store and Steve & Barry’s store, each of which distinguishes it from its competitors and attracts a large number of visitors. The mall features attractive, well-maintained improvements, a successful anchor tenant lineup and a highly convenient location with immediate access to Interstate 87.

 

Colonie Center’s user-friendly design enables it to successfully target the more affluent, mature, professional and family-oriented shopper. The communities bordering the property in all directions provide a growing and loyal shopper base and as Albany is the seat of New York state government, Colonie Center benefits from a stable and growing employment pool.

 

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 $9.9 million as of December 31, 2006 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 redevelopment costs of the property’s redevelopment project totaling $46.0 million. To the extent these costs exceed $46.0 million, our preferred equity contributions will be recharacterized as subordinated capital contributions. 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.

 

Recent Developments At Colonie Center

 

During the course of 2005 and 2006, our leasing efforts resulted in five significant new leases aggregating approximately 137,000 square feet. One of these newly signed leases was executed with Regal Cinemas. The new Regal Theater at Colonie will be a 60,000 square-foot, luxury and state-of-the-art stadium-seated 14-screen movie theater. The theater will raise nearly 10 stories in height and will be situated over the existing roof of the mall. The height of the theater is expected to create dramatic sight lines to Interstate 87. We expect to open the theater during the fourth quarter of 2007.

 

Another of the newly signed leases is with Cheesecake Factory. Cheesecake Factory is widely known for its unusually high sales volumes and powerful draw. The average Cheesecake Factory has annual sales of over $11.0 million. Typical wait times at a Cheesecake Factory are one to two hours. As a result of this unusually long waiting time, a significant amount of additional mall traffic is anticipated. Cheesecake Factory opened for business during August 2006.

 

In addition, a lease was executed with PF Chang’s China Bistro for approximately 7,000 square feet. PF Chang’s is also widely known for its unusually high sales volumes and powerful draw with typical annual sales volumes of $6.0 million. We expect the store to open during the fourth quarter of 2007.

 

A lease was also executed with Barnes & Noble for a 33,000 square-foot store including an exterior entrance facing Wolf Road, as well as an entrance fronting onto the main mall corridor. We expect the store to open during the fourth quarter of 2007.

 

A lease was also executed with L.L. Bean for an approximately 30,000 square-foot store. This will be L.L. Bean’s first store in the state of New York. We expect the store to open during the fourth quarter of 2007.

 

Anchor Tenant Sales Versus Shop Tenant Sales

 

Shop tenant sales for Colonie Center in 2006 were $302 per square foot, which categorizes this mall as a Class B mall. However, the mediocre shop sales are in sharp contrast to the mall’s strong anchor tenant sales.

 

We believe that in 2006, the Colonie Center Macy’s had approximately $61.5 million in sales and Sears had approximately $51 million in sales. We also believe that each will continue to operate as anchor tenant strongholds for Colonie Center. Boscov’s had annual sales of $28 million in 2006. In addition, Christmas Tree Shops reported sales in 2006 of $21 million, which equates to sales of over $379 per square foot. Collectively, the Colonie Center anchor tenants reported approximately $163 million in combined sales in 2006. We believe that there is an opportunity to increase shop tenant sales per square foot and thereby grow the property’s rental revenue.

 

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 million. The new construction loan 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 2008, subject to certain customary requirements for up to two additional years. We will continue to manage the property and will receive customary management, construction and leasing fees in accordance with our joint venture agreement with Heitman.

 

Renovation and Repositioning Plan

 

Our goal with respect to Colonie Center is to take advantage of the mall’s unusually strong anchor tenant sales and leverage such sales into higher shop tenant sales. In addition, with approximately 380,000 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 these renovation and repositioning efforts will impact the financial performance of Colonie Center by drawing the already high volume of anchor tenant shoppers into the main mall and attracting more affluent shoppers. 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. The overall objective will be to convert this mall from a Class B mall to a Class A mall.

 

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.

 

The Harrisburg Mall was at one time considered a dominant mall in its marketplace. However, due to anchor tenant vacancies and the bankruptcy of its former owner, the mall’s sales began to decline in the late 1990’s. Prior to our predecessor’s acquisition of a joint venture interest in the property in September 2003, the Harrisburg Mall had an effective occupancy rate of 50% because two key anchor tenants, Lord & Taylor and JCPenney, had either completely ceased operations or had indicated an intention to do so. As a result of our predecessor’s leasing efforts,

the Harrisburg Mall is now nearly 90% leased. Our intention is to focus our leasing efforts on national and regional shop tenants as mall traffic increases.

 

Renovation and Repositioning

 

The renovation plans for this property include 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 a new movie theater and up to two large “big-box” junior anchor tenants. Given the expected increase in shopper traffic from Bass Pro Shops, we believe demand for casual dining and movie theater traffic will increase. We estimate the costs of these renovations will total $34.3 million, of which we incurred $3.2 million through December 31, 2006. We will be responsible for funding 25% of that portion of the costs not funded by construction loans.

 

The 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 the initial renovation and repositioning efforts at the Harrisburg Mall, leased square footage has grown from 429,000 at acquisition to 798,000 as of December 31, 2006, 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.

 

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, 2006, the joint venture had spent approximately $38.0 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 $31.2 million. The joint venture intends to fund the additional $31.2 million investment from additional partner contributions, additional construction loan proceeds, government grant funding 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. 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.

 

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 a preferred return from 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 $10.3 million as of December 31, 2006) plus a 12% preferred 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.

 

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 fair value of the right to receive these additional OP Units was approximately $5.0 million at the Offering Date and is approximately $3.9 million at December 31, 2006.

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. For the years ended December 31, 2006 and 2005, these fees totaled approximately $0.6 million and $0.4 million, respectively.

 

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 (“CERCLA”), 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, 2006, 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.

 

No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2006.

 

Our common stock began trading on the New York Stock Exchange (“NYSE”) on December 16, 2004 under the symbol “FMP.” On June 1, 2007, the reported closing sale price per share of common stock on the NYSE was $11.30 and there were approximately 50 holders of record of our common stock.

 

 

 

 

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

 

At December 31, 2006, 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.

 

The following table summarizes information, as of December 31, 2006, 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.

 

 

 

 

Sale of Registered and 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 135,530 shares of our common stock in 2006 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.

 

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, 2006 and 2005 and the related consolidated statements of operations for the years ended December 31, 2006 and 2005 and the period December 16, 2004 to December 31, 2004 and the period January 1, 2004 to December 15, 2004 and cash flows for each of the years in the three-year period ended December 31, 2006 and the related notes thereto appear in Item 8. The selected financial data includes the consolidated financial statements of our predecessor for the periods up to and including December 15, 2004 and the financial statements of the Company for the period after December 15, 2004.