Unassociated Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010
 
Commission File Number 1-12928

AGREE REALTY CORPORATION
(Exact name of Registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)
38-3148187
 (I.R.S. Employer
Identification No.)
   
31850 Northwestern Highway
Farmington Hills, Michigan
 (Address of principal executive offices)
48334
(Zip code)
   
(248) 737-4190
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $.0001 par value
Name of each exchange on which registered
New York Stock Exchange

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 ¨ No x
 
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 ¨ No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨           Accelerated filer x            Non-accelerated filer ¨             Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x
 
The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $227,469,436 as of June 30, 2010, based on the closing price of $23.32 on the New York Stock Exchange on that date.
 
At February 28, 2011, there were 9,857,314 shares of common stock, $.0001 par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2011 are incorporated by reference into Part III of this Form 10-K as noted herein.
 
 
 

 
 
TABLE OF CONTENTS
 
Part I
 
Item 1.
Business
1
     
Item 1A.
Risk Factors
5
     
Item 1B.
Unresolved Staff Comments
18
     
Item 2.
Properties
18
     
Item 3.
Legal Proceedings
26
     
Item 4.
[Removed and Reserved]
26
     
Part II
 
Item 5.
Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of  Equity Securities
26
     
Item 6.
Selected Financial Data
28
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
     
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
35
     
Item 8
Financial Statements and Supplementary Data
36
     
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
36
     
Item 9A
Controls and Procedures
36
     
Item 9B
Other Information
37
     
Part III
 
Item 10.
Directors, Executive Officers and Corporate Governance
37
     
Item 11.
Executive Compensation
37
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
37
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
38
     
Item 14.
Principal Accountant Fees and Services
38
     
Part IV
 
Item 15.
Exhibits and Financial Statement Schedules
38
     
Signatures
42

 
 

 
 
PART I
 
FORWARD LOOKING STATEMENTS
 
          Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Securities Exchange Act”). These forward-looking statements represent our expectations, plans or beliefs concerning future events and may be identified by terminology such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “will,” “seek,” “could,” and similar expressions. Although the forward-looking statements made in this report are based on good faith beliefs, reasonable assumptions and our best judgment reflecting current information, certain factors could cause actual results to differ materially from such forward-looking statements, including but not limited to: the ongoing U.S. recession, the existing global credit and financial crisis and other changes in general economic, financial and real estate market conditions; risks that our acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms or at all; the level and volatility of interest rates; loss or bankruptcy of one or more of our major retail tenants; a failure of our properties to generate additional income to offset increases in operating expenses; and other factors discussed in Item 1A. “Risk Factors” and elsewhere in this report and in subsequent filings with the Securities and Exchange Commission (“SEC”).  Given these uncertainties, you should not place undue reliance on our forward-looking statements.  Except as required by law, we assume no obligation to update these forward–looking statements, even if new information becomes available in the future.
 
Item 1.    BUSINESS
 
General
 
Agree Realty Corporation, a Maryland corporation, is a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”).  The terms “Registrant”, “Company”, “we”, “our” or “us” refer to Agree Realty Corporation and/or its majority owned operating partnership, Agree Limited Partnership (“Operating Partnership”), and/or its majority owned and controlled subsidiaries, including its qualified taxable REIT subsidiaries (“TRS”), as the context may require.  Our assets are held by and all of our operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and in which we held a 96.56% interest as of December 31, 2010.  Under the partnership agreement of the Operating Partnership, we, as the sole general partner, have exclusive responsibility and discretion in the management and control of the Operating Partnership.
 
We are focused primarily on the ownership, development, acquisition and management of retail properties net leased to national tenants.  We were incorporated in December 1993 to continue and expand the business founded in 1971 by our current Chief Executive Officer and Chairman, Richard Agree.  We specialize in developing retail properties for national tenants who have executed long-term net leases prior to the commencement of construction.  As of December 31, 2010, approximately 89% of our annualized base rent was derived from national tenants.  As of December 31, 2010, approximately 62% of our annualized base rent was derived from our top three tenants:  Walgreen Co. (“Walgreen”) – 31%; Borders Group, Inc. (“Borders”) – 20%; and Kmart Corporation (“Kmart”) - 11%.
 
At December 31, 2010, our portfolio consisted of 81 properties, located in 17 states containing an aggregate of approximately 3.8 million square feet of gross leasable area (“GLA”).  Included in our 81 properties are two properties leased to Borders and located in Tulsa, Oklahoma that are classified as held for sale as of December 31, 2010.  As of December 31, 2010, our portfolio included 69 freestanding net leased properties and 12 community shopping centers that were 99.2% leased with a weighted average lease term of approximately 11.6 years remaining.  All of our freestanding property tenants and the majority of our community shopping center tenants have triple-net leases, which require the tenant to be responsible for property operating expenses including property taxes, insurance and maintenance.  We believe this strategy provides a generally consistent source of income and cash for distributions.  See Item 2. “Properties” for a summary of our developments and acquisitions in 2010, as well as other information regarding our tenants, leases and properties as of December 31, 2010.
 
 
 

 
 
We expect to continue to grow our asset base primarily through the development and acquisition of retail properties that are leased on a long-term basis to national tenants.  Historically we have focused on development because we believe, based on our historical returns we have been able to achieve, it generally provided us a higher return on investment than the acquisition of similarly located properties.  However, during 2010, we commenced an aggressive acquisition program to acquire retail properties net leased to national tenants.  Since our initial public offering in 1994, we have developed 61 of our 81 properties, including 49 of our 69 freestanding properties and all 12 of our community shopping centers.  As of December 31, 2010, the properties that we developed accounted for approximately 76% of our annualized base rent.  We expect to continue to expand our tenant relationships and diversify our tenant base to include other quality national tenants.
 
Growth Strategy
 
Development.  Our growth strategy is to develop retail properties that are pre-leased on a long-term basis to national tenants.  We believe that this strategy produces superior risk adjusted returns.  Our development process commences with the identification of land parcels that we believe are situated in an attractive retail location. The location must be in a concentrated retail corridor, have high traffic counts, good visibility and demographics compatible with the desires of a targeted retail tenant.  After assessing site feasibility we propose long-term net leases that commence prior to the development of the site.
 
Upon the execution of the lease, we acquire the land and pursue all necessary approvals to commence development.  We direct all aspects of the development process, including due diligence, design, construction, lease negotiation and management.  Asset management and the majority of the leasing activities are handled directly by our personnel.  We believe that this approach enhances our ability to maximize the long-term value of our properties and results in an efficient use of our capital resources.
 
Acquisitions.  We selectively acquire single tenant properties when we have determined that a potential acquisition meets our return on investment criteria and such acquisition will diversify our rental income.
 
Financing Strategy
 
The majority of our mortgage indebtedness is long-term, fixed rate and non-recourse in nature.  Whenever feasible, we enter into long-term financing for our properties to match the underlying long-term leases.  We intend to limit our floating rate debt to borrowings under our credit facilities, which are primarily used to finance development and acquisition activities.  Once project development is complete, we typically consider refinancing this floating rate debt with fixed rate, non-recourse debt.  As of December 31, 2010, our total mortgage debt was approximately $71.6 million with a weighted average maturity of 7.7 years.  Of this total mortgage indebtedness, approximately $47.9 million is fixed rate, self–amortizing debt with a weighted average interest rate of 6.56% and a weighted average maturity of 10.4 years.  The remaining mortgage debt of approximately $23.7 million bears interest at 150 basis points over LIBOR or 1.76% as of December 31, 2010 and has a maturity date of July 14, 2013, which can be extended at our option for two additional years.  In January 2009, we entered into an interest rate swap agreement that fixes the interest rate during the initial term of the variable interest mortgage at 3.744%.   In addition to our mortgage debt, we had $28.4 million outstanding under our credit facilities as of December 31, 2010 with a weighted average interest rate of 1.48%.  We intend to maintain a ratio of total indebtedness (including construction and acquisition financing) to market capitalization of 65% or less.  At December 31, 2010, our ratio of indebtedness to market capitalization assuming the conversion of units of limited partnership interest in our Operating Partnership (“OP units”), was approximately 37.7%.  The decrease in our ratio of indebtedness to market capitalization from 2009 to 2010 was primarily the result of our completion of an offering of 1,495,000 shares of our common stock and an increase in the market price of our common stock.
 
We are evaluating our borrowing policies on an on-going basis in light of current economic conditions, relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other factors.  There is no contractual limit or any limit in our organizational documents on our ratio of total indebtedness to total market capitalization, and accordingly, we may modify our borrowing policy and may increase or decrease our ratio of debt to market capitalization without stockholder approval.
 
 
2

 
 
Asset Management
 
We maintain a proactive leasing and capital improvement program that, combined with the quality and locations of our properties, has made our properties attractive to tenants.  We intend to continue to hold our properties for long-term investment and, accordingly, place a strong emphasis on the quality of construction and an on-going program of regular maintenance.  Our properties are designed and built to require minimal capital improvements other than renovations or expansions paid for by tenants.  At our 12 community shopping centers properties, we sub contract on site functions such as maintenance, landscaping, snow removal and sweeping. The cost of these functions is generally reimbursed by our tenants.  Personnel from our corporate headquarters conduct regular inspections of each property and maintain regular contact with major tenants.
 
We have a management information system designed to provide management with the operating data necessary to make informed business decisions on a timely basis.  This system provides us rapid access to lease data, tenants’ sales history, cash flow budgets and forecasts.  Such a system enables us to maximize cash flow from operations and closely monitor corporate expenses.
 
Major Tenants
 
As of December 31, 2010, approximately 57% of our GLA was leased to Walgreen, Borders, and Kmart and approximately 62% of our total annualized base rent was attributable to these tenants.  At December 31, 2010, Walgreen occupied approximately 11% of our GLA and accounted for approximately 31% of our annualized base rent.  At December 31, 2010, Borders occupied approximately 19% of our GLA and accounted for approximately 20% of our annualized base rent.  At December 31, 2010, Kmart occupied approximately 26% of our GLA and accounted for approximately 11% of our annualized base rent.  No other tenant accounted for more than 10% of gross leasable area or annualized base rent in 2010.  The loss of any of these anchor tenants or a significant number of their stores, or the inability of any of them to pay rent, would have a material adverse effect on our business.
 
On February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy Code.  The Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court, Southern District of New York.  Borders announced that it has received commitments for $505 million in Debtor-In-Possession financing led by GE Capital, Restructuring Finance.  Borders also announced it plans to undertake a strategic Store Reduction Program to facilitate reorganization and has identified certain underperforming stores, equivalent to approximately 30% of the company’s national store network, that are expected to close in the next several weeks.  Borders disclosed an intention to close stores at five locations where it leases space from us, representing approximately $2.6 million of our annualized base rent as of December 31, 2010.
 
Tax Status
 
We have operated and intend to operate in a manner to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).  In order to maintain qualification as a REIT, we must, among other things, distribute at least 90% of our REIT taxable income and meet certain asset and income tests.  Additionally, our charter limits ownership of our Company, directly or constructively, by any single person to 9.8% of the value of our outstanding common stock and preferred stock, subject to certain exceptions.  As a REIT, we are not subject to federal income tax with respect to that portion of our income that meets certain criteria and is distributed annually to the stockholders.
 
We established TRS entities pursuant to the provisions of the REIT Modernization Act.  Our TRS entities are able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations.  As a result, certain activities of our Company which occur within our TRS entities are subject to federal and state income taxes.
 
 
3

 
 
Competition
 
The U.S. commercial real estate investment market continues to be a highly competitive industry.  We actively compete with many other entities engaged in the development, acquisition and operation of commercial properties.  As such, we compete for a limited supply of properties and financing for these properties.  Investors include large institutional investors, insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs, many of which have greater financial and other resources than we do.  There can be no assurance that we will be able to compete successfully with such entities in our development, acquisition and leasing activities in the future.
 
Potential Environmental Risks
 
Investments in real property create a potential for environmental liability on the part of the owner or operator of such real property.  If hazardous substances are discovered on or emanating from a property, the owner or operator of the property may be held strictly liable for all costs and liabilities relating to such hazardous substances.  We have obtained a Phase I environmental study (which involves inspection without soil sampling or ground water analysis) conducted by independent environmental consultants on each of our properties.  Furthermore, we have adopted a policy of conducting a Phase I environmental study on each property we acquire and if necessary conducting additional investigation as warranted.
 
During 2010, we conducted Phase I environmental studies on the four properties we developed and the nine properties that we acquired. The results of the Phase I studies indicated that in three of our developments no further action was required, including no further soil sampling or ground water analysis.  On the remaining one development, in addition to the Phase I environmental study, we conducted additional investigation including a Phase II environmental assessment including a base line environmental assessment.  The results of the Phase I investigations of the acquired properties indicated that no further action was required.  In addition, we have no knowledge of any hazardous substances existing on any of our properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of the properties.  We carry no insurance coverage for the types of environmental risks described above.
 
We believe that we are in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances.  Furthermore, we have not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the properties.
 
Employees
 
As of February 26, 2011, we employed 11 persons.  Employee responsibilities include accounting, construction, leasing, property coordination and administrative functions for the properties.  Our employees are not covered by a collective bargaining agreement, and we consider our employee relations to be satisfactory.
 
Financial Information About Industry Segments
 
We are in the business of development, acquisition and management of freestanding net leased properties and community shopping centers.  We consider our activities to consist of a single industry segment.  See the Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.
 
Available Information
 
Our headquarters are located at 31850 Northwestern Highway, Farmington Hills, MI  48334 and our telephone number is (248) 737-4190.  Our website address is www.agreerealty.com.  Our reports electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act can be accessed through this site, free of charge, as soon as reasonably practicable after we electronically file or furnish such reports.  These filings are also available on the SEC’s website at www.sec.gov.  Our website also contains copies of our corporate governance guidelines and code of business conduct and ethics as well as the charters of our audit, compensation and nominating and corporate governance committees.  The information on our website is not part of this report.
 
 
4

 
 
ITEM 1A.
RISK FACTORS
 
Risks Related to Our Business and Operations
 
The recent global economic and financial market crisis has had and may continue to have a negative effect on our business and operations.  
 
The recent global economic and financial market crisis has caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and business spending, and lower consumer confidence and net worth, all of which has had and may continue to have a negative effect on our business, results of operations, financial condition and liquidity.  Many of our tenants have been affected by the current economic turmoil.  Current or potential tenants may delay or postpone entering into long-term net leases with us which could continue to lead to reduced demand for commercial real estate.  We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs and commitments associated with our operations.
 
The timing and nature of any recovery in the credit and financial markets remains uncertain, and there can be no assurance that market conditions will improve in the near future or that our results will not continue to be materially and adversely affected.  Such conditions make it very difficult to forecast operating results, make business decisions and identify and address material business risks.  The foregoing conditions may also impact the valuation of certain long-lived or intangible assets that are subject to impairment testing, potentially resulting in impairment charges which may be material to our financial condition or results of operations.
 
Capital markets are currently experiencing a period of dislocation and instability, which has had and could continue to have a negative impact on the availability and cost of capital.  
 
The general disruption in the U.S. capital markets has impacted the broader worldwide financial and credit markets and reduced the availability of debt and equity capital for the market as a whole.  These conditions could persist for a prolonged period of time or worsen in the future.  Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions.  The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations and our ability to obtain and manage our liquidity.  In addition, the cost of debt financing and the proceeds of equity financing may be materially adversely impacted by these market conditions.
 
Single tenant leases involve significant risks of tenant default.  
 
We focus our development and investment activities on ownership of real properties that are leased to a single tenant.  Therefore, the financial failure of, or other default in payment by, a single tenant under its lease is likely to cause a significant reduction in our operating cash flows from that property and a significant reduction in the value of the property, and could cause a significant reduction in our revenues and a significant impairment loss.  We may also experience difficulty or a significant delay in re-leasing such property.  The current economic conditions and the credit crisis may put financial pressure on and increase the likelihood of the financial failure of, or other default in payment by, one or more of the tenants to whom we have exposure.
 
Failure by any major tenant with leases in multiple locations to make rental payments to us, because of a deterioration of its financial condition or otherwise, would have a material adverse effect on us.
 
We derive substantially all of our revenue from tenants who lease space from us at our properties.  Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants.  At any time, our tenants may experience a downturn in their business that may significantly weaken their financial condition, particularly during periods of economic uncertainty.  As a result, our tenants may delay lease commencements, decline to extend or renew leases upon expiration, fail to make rental payments when due, close a number of stores or declare bankruptcy.  Any of these actions could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases.  In addition, lease terminations by a major tenant or a failure by that major tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases.  In that event, we may be unable to re-lease the vacated space at attractive rents or at all.  The occurrence of any of the situations described above would have a material adverse effect on our results of operations and our financial condition.   See “—We rely significantly on three major tenants, and therefore, are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants” below.
 
 
5

 
 
We rely significantly on three major tenants, and therefore, are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.  
 
As of December 31, 2010, we derived approximately 62% of our annualized base rent from three major tenants:
 
 
·
approximately 31% of our annualized base rent was from Walgreen;
 
 
·
approximately 20% of our annualized base rent was from Borders; and
 
 
·
approximately 11% of our annualized base rent was from Kmart.
 
In addition, a significant portion of our 2009 and 2010 development projects were for Walgreen.  In the event of a default by any of these tenants under their leases, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment.  Any bankruptcy, insolvency or failure to make rental payments by, or any adverse change in the financial condition of, one or more of these tenants, or any other tenant to whom we may have a significant credit concentration now or in the future, would likely result in a material reduction of our cash flows or material losses to our company.
 
As discussed in more detail below under Item 2. “Properties—Development and Acquisition Summary,” Borders reported a net (loss) for its 2009 fiscal year ended January 31, 2010 of approximately ($109 million).   In addition, on February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy Code.  The Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court, Southern District of New York.  Borders has announced that it has received commitments for $505 million in Debtor-In-Possession financing led by GE Capital, Restructuring Finance.  Borders also announced it plans to undertake a strategic Store Reduction Program to facilitate reorganization and has identified certain underperforming stores, equivalent to approximately 30% of the company’s national store network, that are expected to close in the next several weeks.  Borders disclosed an intention to close stores at five locations where it leases space from us, representing approximately $2.6 million of our annualized base rent as of December 31, 2010.
 
The Chapter 11 bankruptcy will allow Borders to assume or reject any of its leases with us (including the leases for the five properties on the store closing list recently published by Borders).  The rejection of any of the leases would have a negative effect on our rental revenues and cash flows.  Borders may also propose rent reductions under any of the leases, which if accepted by us would have a negative effect on our rental revenues and cash flows.  It is also possible that Borders may assume leases for some locations, which would require Borders to abide by the existing lease terms.  Until Borders determines its plan under Chapter 11, we cannot determine the impact on our rental revenues and cash flows.

In addition, because Borders is a significant tenant, negative information about its performance, financial condition and business prospects (including its bankruptcy filing) may adversely affect the market and price of our common stock.
 
Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects the lease.
 
If a tenant becomes bankrupt or insolvent, that could diminish the income we receive from that tenant’s leases.  We may not be able to evict a tenant solely because of its bankruptcy.  On the other hand, a bankruptcy court might authorize the tenant to terminate its leasehold with us.  If that happens, our claim against the bankrupt tenant for unpaid future rent would be an unsecured prepetition claim subject to statutory limitations, and therefore such amounts received in bankruptcy are likely to be substantially less than the remaining rent we otherwise were owed under the leases.  In addition, any claim we have for unpaid past rent could be substantially less than the amount owed.  
 
 
6

 
 
Certain of our tenants at our community shopping centers have the right to terminate their leases if other tenants cease to occupy a property.  
 
In the event that certain tenants cease to occupy a property, although under most circumstances such a tenant would remain liable for its lease payments, such an action may result in certain other tenants at our community shopping centers having the right to terminate their leases at the affected property, which could adversely affect the future income from that property.  As of December 31, 2010, each of our 12 community shopping centers had tenants with those provisions in their leases.
 
Our portfolio has limited geographic diversification, which makes us more susceptible to adverse events in these areas.  
 
Our properties are located primarily in the mid-western United States and in particular, the State of Michigan (with 43 properties).  An economic downturn or other adverse events or conditions such as terrorist attacks or natural disasters in these areas, or any other area where we may have significant concentration now or in the future, could result in a material reduction of our cash flows or material losses to our company.
 
Risks associated with our development and acquisition activities.
 
We intend to continue the development of new properties and to consider possible acquisitions of existing properties.  We anticipate that our new developments will be financed under lines of credit or other forms of construction financing that will result in a risk that permanent financing on newly developed projects might not be available or would be available only on disadvantageous terms.  In addition, new project development is subject to a number of risks, including risks of construction delays or cost overruns that may increase project costs, risks that the properties will not achieve anticipated occupancy levels or sustain anticipated rental projections and new project commencement risks such as receipt of zoning, occupancy and other required governmental permits and authorizations and the incurrence of development costs in connection with projects that are not pursued to completion.  If permanent debt or equity financing is not available on acceptable terms to refinance new development or acquisitions undertaken without permanent financing, further development activities or acquisitions might be curtailed or cash available for distribution might be adversely affected.  Acquisitions entail risks that investments will fail to perform in accordance with expectations and that judgments with respect to the costs of improvements to bring an acquired property up to standards established for the market position intended for that property will prove inaccurate, as well as general investment risks associated with any new real estate investment.
 
Properties that we acquire or develop may be located in new markets where we may face risks associated with investing in an unfamiliar market.
 
We may acquire or develop properties in markets that are new to us.  When we acquire or develop properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures.
 
We own several of our properties subject to ground leases that expose us to the loss of such properties upon breach or termination of the ground leases and may limit our ability to sell these properties.
 
We own several of our properties through leasehold interests in the land underlying the buildings and we may acquire additional buildings in the future that are subject to similar ground leases.  As lessee under a ground lease, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the ground lease, which may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock.
 
 
7

 
 
Our ground leases contain certain provisions that may limit our ability to sell certain of our properties.  In order to assign or transfer our rights and obligations under certain of our ground leases, we generally must obtain the consent of the landlord which, in turn, could adversely impact the price realized from any such sale.
 
Joint venture investments will expose us to certain risks.
 
We may from time to time enter into joint venture transactions for portions of our existing or future real estate assets.  Investing in this manner subjects us to certain risks, among them the following:
 
 
·
We will not exercise sole decision-making authority regarding the joint venture’s business and assets and, thus, we may not be able to take actions that we believe are in our company’s best interests.
 
 
·
We may be required to accept liability for obligations of the joint venture (such as recourse carve-outs on mortgage loans) beyond our economic interest.
 
 
·
Our returns on joint venture assets may be adversely affected if the assets are not held for the long-term.
 
The availability and timing of cash distributions is uncertain.
 
We expect to continue to pay quarterly distributions to our stockholders.  However, we bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders.  In addition, our board of directors, in its discretion, may retain any portion of such cash for working capital.  We cannot assure our stockholders that sufficient funds will be available to pay distributions.
 
We depend on our key personnel.  
 
Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our executive officers, each of whom would be difficult to replace.  If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our executive officers or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market.  The loss of services from key members of the management group or a limitation in their availability could adversely impact our future development or acquisition operations, our financial condition and cash flows.  Further, such a loss could be negatively perceived in the capital markets.  We have not obtained and do not expect to obtain key man life insurance on any of our key personnel.
 
We face significant competition.  
 
We face competition in seeking properties for acquisition and tenants who will lease space in these properties from insurance companies, credit companies, pension or private equity funds, private individuals, investment companies, other REITs and other industry participants, many of which have greater financial and other resources than we do.  There can be no assurance that we will be able to successfully compete with such entities in our development, acquisition and leasing activities in the future.
 
General Real Estate Risk
 
Our performance and value are subject to general economic conditions and risks associated with our real estate    assets.
 
There are risks associated with owning and leasing real estate.  Although many of our leases contain terms that obligate the tenants to bear substantially all of the costs of operating our properties, investing in real estate involves a number of risks.  Income from and the value of our properties may be adversely affected by:
 
 
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·
changes in general or local economic conditions;
 
 
·
the attractiveness of our properties to potential tenants;
 
 
·
changes in supply of or demand for similar or competing properties in an area;
 
 
·
bankruptcies, financial difficulties or lease defaults by our tenants;
 
 
·
changes in operating costs and expense and our ability to control rents;
 
 
·
our ability to lease properties at favorable rental rates;
 
 
·
our ability to sell a property when we desire to do so at a favorable price;
 
 
·
unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;
 
 
·
changes in or increased costs of compliance with governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder; and
 
 
·
unanticipated expenditures to comply with the Americans with Disabilities Act and other similar regulations.
 
The global economic and financial market crisis has exacerbated many of the foregoing risks.  If a tenant fails to perform on its lease covenants, that would not excuse us from meeting any mortgage debt obligation secured by the property and could require us to fund reserves in favor of our mortgage lenders, thereby reducing funds available for payment of cash dividends on our shares of common stock.
 
The fact that real estate investments are relatively illiquid may reduce economic returns to investors.  
 
We may desire to sell a property in the future because of changes in market conditions or poor tenant performance or to avail ourselves of other opportunities.  We may also be required to sell a property in the future to meet secured debt obligations or to avoid a secured debt loan default.  Real estate properties cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price, especially in light of the current global economic and financial market crisis.  We may be required to invest in the restoration or modification of a property before we can sell it.  This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on our common stock.
 
Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our business.  
 
We are subject to the risks that, upon expiration of leases for space located in our properties, the premises may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than current lease terms.  If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no assurance we could obtain a substitute tenant on acceptable terms.  If we cannot obtain another tenant with comparable structural needs, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in re-leasing the property.  Further, if we are unable to re-let promptly all or a substantial portion of our retail space or if the rental rates upon such re-letting were significantly lower than expected rates, our net income and ability to make expected distributions to stockholders would be adversely affected.  There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases.
 
 
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A property that incurs a vacancy could be difficult to sell or re-lease.
 
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases.  Certain of our properties may be specifically suited to the particular needs of a tenant.  We may have difficulty obtaining a new tenant for any vacant space we have in our properties.  If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to stockholders.  In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
 
Potential liability for environmental contamination could result in substantial costs.  
 
Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or actual responsibility, simply because of our current or past ownership or operation of the real estate.  If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our stockholders.  This potential liability results from the following:
 
 
·
As owner we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination.
 
 
·
The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination.
 
 
·
Even if more than one person is responsible for the contamination, each person who shares legal liability under environmental laws may be held responsible for all of the clean-up costs.
 
 
·
Governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.
 
These costs could be substantial and in extreme cases could exceed the value of the contaminated property.  The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property.  In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.
 
A majority of our leases require our tenants to comply with environmental laws and to indemnify us against environmental liability arising from the operation of the properties. However, we could be subject to strict liability under environmental laws because we own the properties.  There is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases.  Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our secured lenders and reduce our ability to service our secured debt and pay dividends to stockholders and any debt security interest payments.  Environmental problems at any properties could also put us in default under loans secured by those properties, as well as loans secured by unaffected properties.
 
Uninsured losses relating to real property may adversely affect our returns.  
 
Our leases require tenants to carry comprehensive liability and extended coverage insurance on our properties.  However, there are certain losses, including losses from environmental liabilities, terrorist acts or catastrophic acts of nature, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so.  If there is an uninsured loss or a loss in excess of insurance limits, we could lose both the revenues generated by the affected property and the capital we have invested in the property.  In the event of a substantial unreimbursed loss, we would remain obligated to repay any mortgage indebtedness or other obligations related to the property.

 
 
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Risks Related to Our Debt Financings
 
Leveraging our portfolio subjects us to increased risk of loss, including loss of properties in the event of a foreclosure.  
 
At December 31, 2010, our ratio of indebtedness to market capitalization (assuming conversion of OP units) was approximately 38%.  The use of leverage presents an additional element of risk in the event that (1) the cash flow from lease payments on our properties is insufficient to meet debt obligations, (2) we are unable to refinance our debt obligations as necessary or on as favorable terms or (3) there is an increase in interest rates.  If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the property could be foreclosed upon with a consequent loss of income and asset value to us.  Under the “cross-default” provisions contained in mortgages encumbering some of our properties, our default under a mortgage with a lender would result in our default under mortgages held by the same lender on other properties resulting in multiple foreclosures.
 
As discussed in more detail below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have seven mortgaged properties leased to Borders that serve as collateral for seven non-recourse loans, including four mortgages that are cross-defaulted and cross-collateralized.  The balances on the non-recourse loans amount to approximately $18.5 million as of December 31, 2010, including $9.6 million under the cross-collateralized loans. As of the date of this filing, and based on the Chapter 11 bankruptcy filing of Borders, we are now in default on three mortgage loans amounting to approximately $8.9 million secured by a total of three properties with 366,000 square feet of GLA representing $1.3 million of annualized base rents as of December 31, 2010.  While the Chapter 11 bankruptcy filing of Borders is not a direct event of default under the cross-collateralized mortgage loans, we anticipate that the remaining loans will go into default as a result of the scheduled store closures.  These four mortgage loans amounting to approximately $9.6 million are secured by four properties with 103,000 square feet of GLA representing $2.1 million of annualized base rents as of December 31, 2010.  We are in the process of commencing negotiations with lenders for all seven loans regarding an appropriate course of action.  We can provide no assurance that our negotiations with the lenders will result in favorable outcomes to us.  Failure to restructure our mortgage obligations could result in default and foreclosure actions and loss of the mortgaged properties.  In addition, as a result of cross-collateralization or cross-default provisions contained in certain of our mortgage loans, a default under one mortgage loan could result in a default on other indebtedness and cause us to lose other better performing properties, which could materially and adversely affect our financial condition and results of operations.

We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to market capitalization of 65% or less.  Nevertheless, we may operate with debt levels which are in excess of 65% of market capitalization for extended periods of time.  Our organization documents contain no limitation on the amount or percentage of indebtedness which we may incur.  Therefore, our board of directors, without a vote of the stockholders, could alter the general policy on borrowings at any time.  If our debt capitalization policy were changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow and our ability to make expected distributions to stockholders, and could result in an increased risk of default on our obligations.
 
Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.
 
The terms of our credit facilities and other indebtedness require us to comply with a number of customary financial and other covenants.  These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations.  Our credit facility contains certain cross-default provisions which are triggered in the event that our other indebtedness is in default.  These cross-default provisions may require us to repay or restructure the credit facility in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.  We have provided substitute borrowing base properties to replace Borders stores under the Credit Facility, and the banks have acknowledged that the financial condition of Borders and any default under any of the non-recourse loans secured by a property leased to Borders shall not be deemed a default under the Credit Facility.
 
 
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Credit market developments may reduce availability under our credit agreements.  
 
Due to the current volatile state of the credit markets, there is risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and/or honoring loan commitments.  If our lender(s) fail to honor their legal commitments under our credit facilities, it could be difficult in the current environment to replace our credit facilities on similar terms.  The failure of any of the lenders under our credit facility may impact our ability to finance our operating or investing activities.
 
Risks Related to Our Corporate Structure
 
Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.
 
Our charter contains a 9.8% ownership limit. Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than 9.8% of the value of our outstanding shares of common stock and preferred stock, except that the any member of the Agree-Rosenberg Group (as defined in our charter) (the “Agree-Rosenberg Group”) may own up to 24%.  Our board of directors, in its sole discretion, may exempt, subject to the satisfaction of certain conditions, any person from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any person whose ownership, direct or indirect, in excess of 9.8% of the value of our outstanding shares of common stock and preferred stock could jeopardize our status as a REIT.  These restrictions on transferability and 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 or impede, and we may use the ownership limit deliberately to delay or impede, a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
 
We have a staggered board.  Our directors are divided into three classes serving three-year staggered terms.  The staggering of our board of directors may discourage offers for our company or make an acquisition more difficult, even when an acquisition is in the best interest of our stockholders.
 
We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value.  This would substantially reduce the value and influence of the stock owned by the acquiring person.  Our board of directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company.
 
We could issue stock without stockholder approval. Our board of directors could, without stockholder approval, issue authorized but unissued shares of our common stock or preferred stock.  In addition, our board of directors could, without stockholder approval, classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares.  Our board of directors could establish a series of stock that could, depending on the terms of such series, delay, defer or prevent a transaction or change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
 
Provisions of Maryland law may limit the ability of a third party to acquire control of our company.  Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under certain 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, including:
 
 
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·
“business combination” provisions 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 thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter would require the recommendation of our board of directors and impose special appraisal rights and special stockholder voting requirements on these combinations; and
 
 
·
“control share” provisions that provide that “control shares” of our company (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.
 
The business combination statute permits various exemptions from its provisions, including business combinations that are approved or exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder.  Our board of directors has exempted from the business combination provisions of the MGCL any business combination with Mr. Richard Agree or any other person acting in concert or as a group with Mr. Richard Agree.
 
In addition, our bylaws contain a provision exempting from the control share acquisition statute any members of the Agree-Rosenberg Group, our other officers, our employees, any of the associates or affiliates of the foregoing and any other person acting in concert of as a group with any of the foregoing. 
 
Additionally, Title 3, Subtitle 8 of the Maryland General Corporation Law, or MGCL, permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses.  These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under 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 charter, our bylaws, the limited partnership agreement of our operating partnership and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
 
Our board of directors can take many actions without stockholder approval.
 
Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility.  For example, our board of directors can do the following:
 
 
·
change our investment and financing policies and our policies with respect to certain other activities, including our growth, debt capitalization, distributions, REIT status and investment and operating policies;
 
 
·
within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;
 
 
·
issue additional shares without obtaining stockholder approval, which could dilute the ownership of our then-current stockholders;
 
 
·
classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval;
 
 
·
employ and compensate affiliates;
 
 
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·
direct our resources toward investments that do not ultimately appreciate over time;
 
 
·
change creditworthiness standards with respect to third-party tenants; and
 
 
·
determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.
 
Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving our stockholders the right to vote.
 
Future offerings of debt and equity may not be available to us or may adversely affect the market price of our common stock.
 
We expect to continue to increase our capital resources by making additional offerings of equity and debt securities in the future, which would include classes of preferred stock, common stock and senior or subordinated notes.  Our ability to raise additional capital may be adversely impacted by market conditions, and we do not know when market conditions will stabilize or improve.  All debt securities and other borrowings, as well as all classes of preferred stock, will be senior to our common stock in a liquidation of our company.  Additional equity offerings could dilute our stockholders’ equity, reduce the market price of shares of our common stock, or be of preferred stock having a distribution preference that may limit our ability to make distributions on our common stock.  Continued market dislocations could cause us to seek sources of potentially less attractive capital.  Our ability to estimate the amount, timing or nature of additional offerings is limited as these factors will depend upon market conditions and other factors.
 
The market price of our stock may vary substantially.
 
The market price of our common stock could be volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects.  Among the market conditions that may affect the market price of our common stock are the following:
 
 
·
our financial condition and operating performance and the performance of other similar companies;
 
 
·
actual or anticipated variations in our quarterly results of operations;
 
 
·
the extent of investor interest in our company, real estate generally or commercial real estate specifically;
 
 
·
the reputation of REITs generally and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;
 
 
·
changes in expectations of future financial performance or changes in estimates of securities analysts;
 
 
·
fluctuations in stock market prices and volumes; and
 
 
·
announcements by us or our competitors of acquisitions, investments or strategic alliances.
 
Certain officers and directors may have interests that conflict with the interests of stockholders.
 
Certain of our officers and members of our board of directors own OP units in our Operating Partnership.  These individuals may have personal interests that conflict with the interests of our stockholders with respect to business decisions affecting us and our Operating Partnership, such as interests in the timing and pricing of property sales or refinancings in order to obtain favorable tax treatment.  As a result, the effect of certain transactions on these unit holders may influence our decisions affecting these properties.
 
 
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Federal Income Tax Risks
 
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
 
To qualify as a REIT for federal income tax purposes and to maintain our exemption from the 1940 Act, we must continually satisfy numerous income, asset and other tests, thus having to forgo investments we might otherwise make and hindering our investment performance.
 
Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.
 
We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax purposes.  Although we believe that we are organized and operate in such a manner so as to qualify as a REIT under the Internal Revenue Code, no assurance can be given that we will remain so qualified.  Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations.  The complexity of these provisions and applicable Treasury Regulations is also increased in the context of a REIT that holds its assets in partnership form.  The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT.  A REIT generally is not taxed at the corporate level on income it distributes to its stockholders, as long as it distributes annually at least 100% of its taxable income to its stockholders.  We have not requested and do not plan to request a ruling from the Internal Revenue Service that we qualify as a REIT.
 
If we fail to qualify as a REIT, we will face tax consequences that will substantially reduce the funds available for payment of cash dividends:
 
 
·
We would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates.
 
 
·
We could be subject to the federal alternative minimum tax and possibly increased state and local taxes.
 
 
·
Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we were disqualified.
 
In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends (other than any mandatory dividends on any preferred shares we may offer).  As a result of these factors, our failure to qualify as a REIT could adversely effect the market price for our common stock.
 
Changes in tax laws may prevent us from maintaining our qualification as a REIT.  
 
As we have previously described, we intend to maintain our qualification as a REIT for federal income tax purposes. However, this intended qualification is based on the tax laws that are currently in effect. We are unable to predict any future changes in the tax laws that would adversely affect our status as a REIT. If there is a change in the tax laws that prevent us from qualifying as a REIT or that requires REITs generally to pay corporate level income taxes, we may not be able to make the same level of distributions to our stockholders.
 
An investment in our stock has various tax risks that could affect the value of your investment, including the   treatment of distributions in excess of earnings and the inability to apply “passive losses” against distributions.
 
An investment in our stock has various tax risks. Distributions in excess of current and accumulated earnings and profits, to the extent that they exceed the adjusted basis of an investor’s stock, will be treated as long-term capital gain (or short-term capital gain if the shares have been held for less than one year). Any gain or loss realized upon a taxable disposition of shares by a stockholder who is not a dealer in securities will be treated as a long-term capital gain or loss if the shares have been held for more than one year, and otherwise will be treated as short-term capital gain or loss. Distributions that we properly designate as capital gain distributions will be treated as taxable to stockholders as gains (to the extent that they do not exceed our actual net capital gain for the taxable year) from the sale or disposition of a capital asset held for greater than one year. Distributions we make and gain arising from the sale or exchange by a stockholder of shares of our stock will not be treated as passive income, meaning stockholders generally will not be able to apply any “passive losses” against such income or gain.
 
 
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Excessive non-real estate asset values may jeopardize our REIT status.  
 
In order to qualify as a REIT, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents, and government securities. Therefore, the value of any properties we own that are not considered real estate assets for federal income tax purposes must represent in the aggregate less than 25% of our total assets. In addition, under federal income tax law, we may not own securities in any one issuer (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the voting securities or 10% of the value of all securities of any one issuer, or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a value in excess of 25% of our total assets.  We may invest in securities of another REIT, and our investment may represent in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT. If the other REIT were to lose its REIT status during a taxable year in which our investment represented in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT as of the close of a calendar quarter, we may lose our REIT status.
 
Compliance with the asset tests is determined at the end of each calendar quarter. Subject to certain mitigation provisions, if we fail to meet any such test at the end of any calendar quarter, we will cease to qualify as a REIT.
 
We may have to borrow funds or sell assets to meet our distribution requirements.  
 
Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable income.  For the purpose of determining taxable income, we may be required to accrue interest, rent and other items treated as earned for tax purposes but that we have not yet received. In addition, we may be required not to accrue as expenses for tax purposes some items which actually have been paid, including, for example, payments of principal on our debt, or some of our deductions might be disallowed by the Internal Revenue Service. As a result, we could have taxable income in excess of cash available for distribution. If this occurs, we may have to borrow funds or liquidate some of our assets in order to meet the distribution requirement applicable to a REIT.
 
Future distributions may include a significant portion as a return of capital.
 
Our distributions may exceed the amount of our income as a REIT. If so, the excess distributions will be treated as a return of capital to the extent of the stockholder’s basis in our stock, and the stockholder’s basis in our stock will be reduced by such amount. To the extent distributions exceed a stockholder’s basis in our stock, the stockholder will recognize capital gain, assuming the stock is held as a capital asset.
 
Our ownership of and relationship with any TRS which we recently formed or acquire in the future will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
 
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT.  Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.  A TRS will typically pay federal, state and local income tax at regular corporate rates on any income that it earns.  In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.  The TRS that we recently formed will pay federal, state and local income tax on its taxable income, and its after-tax net income will be available for distribution to us but will not be required to be distributed to us.  There can be no assurance that we will be able to comply with the 25% limitation discussed above or to avoid application of the 100% excise tax discussed above.
 
 
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Liquidation of our assets may jeopardize our REIT qualification.
 
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any gain if we sell assets in transactions that are considered to be “prohibited transactions,” which are explained in the risk factor below.
 
We may be subject to other tax liabilities even if we qualify as a REIT.
 
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property.  For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income (including capital gains).  Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.  Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax.  In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business.  The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale.  While we will undertake sales of assets if those assets become inconsistent with our long-term strategic or return objectives, we do not believe that those sales should be considered prohibited transactions, but there can be no assurance that the IRS would not contend otherwise.  The need to avoid prohibited transactions could cause us to forego or defer sales of properties that might otherwise be in our best interest to sell.
 
In addition, any net taxable income earned directly by our TRS, or through entities that are disregarded for federal income tax purposes as entities separate from our TRS, will be subject to federal and possibly state corporate income tax.  To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
 
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.
 
The maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates were reduced in recent years to 15% (through 2012). Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates 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 stock.
 
Our ownership limit contained in our charter may be ineffective to preserve our REIT status.
 
In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year (the “5/50 Rule”).  Individuals for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts.  In order to preserve our REIT qualification, our charter generally prohibits (i) any member of the Agree-Rosenberg Group from directly or indirectly owning more than 24% of the value of our outstanding stock and (ii) any other person from directly or indirectly owning more than 9.8% of the value of our outstanding common stock and preferred stock, subject to certain exceptions.  Because of the way our ownership limit is written, including because of the limit on persons other than a member of the Agree-Rosenberg Group is not less than 9.8%, our charter limitation may be ineffective to ensure that we do not violate the 5/50 Rule.
  
 
17

 
 
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
 
The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute qualifying income for purposes of income tests that apply to us as a REIT.  To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the income tests.  As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2.
PROPERTIES
 
Our properties consist of 69 freestanding net leased properties and 12 community shopping centers that, as of December 31, 2010, were 99.2% leased, with a weighted average lease term of 11.6 years.  Two freestanding net leased properties were classified as held for sale as of December 31, 2010.  Approximately 89% of our annualized base rent was attributable to national retailers.  Among these retailers are Walgreen, Borders and Kmart which, at December 31, 2010, collectively represented approximately 62% of our annualized base rent.  A majority of our properties were built for or are leased to national tenants who require a high quality location with strong retail characteristics.  We developed 49 of our 69 freestanding properties and all 12 of our community shopping centers.  Properties we have developed (including our community shopping centers) account for approximately 76% of our annualized base rent as of December 31, 2010.  Our 69 freestanding properties are comprised of 68 retail locations and Borders’ corporate headquarters.  See Notes 6 and 7 to the Consolidated Financial Statements included herein for information regarding mortgage debt and other debt related to our properties.
 
A substantial portion of our income consists of rent received under net leases.  A majority of our leases provide for the payment of fixed base rentals monthly in advance and for the payment by tenants of a pro rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping center as well as payment to us of a percentage of the tenant’s sales.  We received percentage rents of $34,518, $15,366 and $15,396 for the fiscal years 2010, 2009 and 2008, respectively.  Leases with Borders do not contain percentage rent provisions.  Leases with Walgreen and Kmart do contain percentage rent provisions; however, no percentage rent was received from these tenants during these periods.  Some of our leases require us to make roof and structural repairs, as needed.
 
Development and Acquisition Summary
 
During 2010, we completed the following developments and redevelopments:
 
Tenant(s)
 
Location
 
Cost
 
Walgreen (drug store)
 
Ann Arbor, Michigan
  $ 3.1 million  
Walgreen (drug store)
 
Atlantic Beach, Florida
  $ 3.6 million  
Walgreen (drug store)
 
St. Augustine Shores, Florida
  $ 3.7 million  
Dick’s Sporting Goods (retail store)
 
Boynton Beach, Florida
  $ 3.7 million  
 
 
18

 
 
During 2010, we completed the following acquisitions:
 
Tenant(s)
 
Location
 
Cost
 
CVS Caremark (drug store)
 
Atchison, Kansas
  $ 4.2 million  
CVS Caremark (drug store)
 
Johnstown, Ohio
  $ 3.5 million  
CVS Caremark (drug store)
 
Lake in the Hills, Illinois
  $ 5.8 million  
PNC Bank (retail bank)
 
Antioch, Illinois
  $ 2.8 million  
Lowes (retail store)
 
Concord, North Carolina
  $ 9.9 million  
CVS Caremark (drug store)
 
Mansfield, Connecticut
  $ 3.3 million  
Kohl’s (department store)
 
Tallahassee, Florida
  $ 2.2 million  
JP Morgan Chase (retail bank)
 
Spring Grove, Illinois
  $ 2.9 million  
Walgreen (drug store)
 
Shelby Township, Michigan
  $ 2.2 million  
 
During 2010, we completed the following dispositions:
 
Tenant(s)
 
Location
 
Sales price
 
Borders (book store)
 
Santa Barbara, California
  $ 9.8 million  
Walgreen (drug store)
 
Marion Oaks, Florida
  $ 4.1 million  
Borders (book store)
 
Aventura, Florida
  $ .5 million  

Major Tenants
 
The following table sets forth certain information with respect to our major tenants:
 
   
Number
of Leases
   
Annualized Base
Rent as of
December 31, 2010
   
Percent of Total
Annualized Base Rent as
of December 31, 2010
 
Walgreen
  30     $ 11,299,499       31 %
Borders
  14       7,357,947       20  
Kmart
  12       3,847,911       11  
Total
  56     $ 22,505,357       62 %
 
Walgreen is a leader of the U.S. chain drugstore industry and trades on the New York Stock Exchange under the symbol “WAG”.  Walgreen operated 8,133 locations in 50 states, the District of Columbia, Puerto Rico and Guam and had total assets of approximately $26.3 billion as of August 31, 2010.  As of February 11, 2011, Walgreen’s long-term debt had a Standard and Poor’s rating of A and a Moody’s rating of A2. For its fiscal year ended August 31, 2010, Walgreen reported that its annual net sales were $67.4 billion, its annual net income was $2.1 billion and it had stockholders’ equity of $14.4 billion.
 
Borders trades on the New York Stock Exchange under the symbol “BGP”.  Borders is a specialty retailer of books as well as other educational and entertainment items.  Borders employs approximately 19,500 employees throughout the United States, primarily in its Borders and Waldenbooks stores.  At November 30, 2010, Borders operated 518 superstores under the Borders name.  Borders has reported that its annual revenues for its 2009 fiscal year ended January 30, 2010 were approximately $2.8 billion, its annual net (loss) for 2009 was approximately ($109 million) and its total stockholders’ equity at fiscal year end 2009 was approximately $158 million.  On February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the Bankruptcy Code.  The Chapter 11 petition for relief was filed in the U.S. Bankruptcy Court, Southern District of New York.  Borders announced that it has received commitments for $505 million in Debtor-In-Possession financing led by GE Capital, Restructuring Finance.  Borders also announced it plans to undertake a strategic Store Reduction Program to facilitate reorganization and has identified certain underperforming stores, equivalent to approximately 30% of the company’s national store network, that are expected to close in the next several weeks.  As part of this reorganization process, Borders disclosed an intention to close stores at five locations where it leases space from us, representing approximately $2.6 million of our annualized base rent as of December 31, 2010.
 
 
19

 
 
Kmart is a wholly-owned subsidiary of Sears Holdings Corporation (“Sears”), which trades on the Nasdaq stock market under the symbol “SHLD”.   Kmart is a mass merchandising company that offers customers quality products through a portfolio of brands and labels. As of January 30, 2010, Kmart operated approximately 1,327 stores across 49 states, Guam, Puerto Rico and the U.S. Virgin Islands.  Sears is a broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the United States.  As of October 30, 2010, Sears had total assets of $26.0 billion, total liabilities of $17.6 billion and stockholders equity of $8.4 billion.  All of our Kmart properties are in the traditional Kmart format and these Kmart properties average 85,000 square feet per property.
 
The financial information set forth above with respect to Walgreen, Borders and Kmart was derived from the annual reports on Form 10-K filed by Borders and Walgreen with the SEC with respect to their 2009 fiscal years and the quarterly report on Form 10-Q filed by Sears Holdings Corporation with the SEC with respect to the third quarter of 2010.  Additional information regarding Walgreen, Borders or Kmart may be found in their respective public filings.  These filings can be accessed at www.sec.gov.  We are unable to confirm, and make no representations with respect to, the accuracy of these reports and therefore you should not place undue reliance on such information as it pertains to our operations.
 
Location of Properties in the Portfolio
 
The following table presents information about our properties as of December 31, 2010.
 
State
 
Number
of
Properties
 
Total GLA
(Sq. feet)
   
Percent of Total GLA
Leased on December 31,
2010
 
Connecticut
 
1
    10,125       100 %
Florida
 
8
    396,648       99 %
Georgia
 
1
    14,820       100 %
Illinois
 
4
    40,740       100 %
Indiana
 
2
    15,844       100 %
Kansas
 
3
    58,225       100 %
Kentucky
 
1
    116,212       100 %
Maryland
 
2
    53,503       100 %
Michigan
 
43
    2,178,811       99 %
Nebraska
 
2
    61,500       100 %
New Jersey
 
1
    10,118       100 %
New York
 
2
    27,626       100 %
North Carolina
 
1
    170,393       100 %
Ohio
 
2
    34,225       100 %
Oklahoma (1)
 
4
    99,634       100 %
Pennsylvania
 
1
    37,004       100 %
Wisconsin
 
3
    523,036       98 %
Total/Average
 
81
    3,848,464       99 %
 
 
20

 
 
(1) Includes two properties leased to Borders containing 50,352 square feet that were classified as held for sale as of December 31, 2010 and subsequently sold in January 2011.
 
Lease Expirations
 
The following table shows lease expirations for our community shopping centers and wholly-owned freestanding properties, assuming that none of the tenants exercise renewal options.
 
       
December 31, 2010
 
       
Gross Leasable Area
   
Annualized Base Rent
 
Expiration Year
 
Number
of Leases
Expiring
 
Square
Footage
   
Percent
of Total
   
Amount
   
Percent
of Total
 
2011
 
12
    111,563       3.0 %   $ 781,944       2.1 %
2012
 
29
    281,356       7.5 %     1,457,922       4.0 %
2013
 
21
    330,063       8.8 %     1,805,397       5.0 %
2014
 
15
    213,570       5.7 %     1,162,160       3.2 %
2015
 
21
    827,135       21.9 %     4,464,549       12.3 %
2016
 
13
    150,641       4.0 %     2,138,456       5.9 %
2017
 
5
    38,944       1.0 %     371,995       1.0 %
2018
 
11
    200,235       5.3 %     3,392,318       9.3 %
2019
 
6
    70,170       1.9 %     1,741,879       4.8 %
2020
 
6
    170,718       4.5 %     2,068,701       5.7 %
Thereafter
 
47
    1,374,254       36.4 %     17,015,402       46.7 %
Total
 
186
    3,768,649       100.0 %   $ 36,400,723       100.0 %
 
We have made preliminary contact with the 12 tenants whose leases expire in 2011.  Of those tenants, two tenants, at their option, have the right to extend their lease term, two tenants have extended their lease term and eight tenants have leases expiring in 2011.  We expect two tenants to terminate their leases in 2011 and six tenants to extend their leases or enter into lease extensions
 
Annualized Base Rent of our Properties
 
The following table sets forth annualized base rent as of December 31, 2010 for each type of retail tenant:
 
Type of Tenant
 
Annualized
Base Rent
   
Percent of
Annualized
Base Rent
 
National(1)
  $ 32,556,399       89 %
Regional(2)
    2,720,342       8  
Local
    1,123,982       3  
Total
  $ 36,400,723       100 %
 

(1)
Includes the following national tenants:  Walgreen, Borders, Kmart, Wal-Mart, CVS, Lowe’s, Dick’s Sporting Goods, PNC Bank, Kohl’s, Fashion Bug, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack, Super Value, Maurices, Payless Shoes, Blockbuster Video, Family Dollar, H&R Block, Sally Beauty, Jo Ann Fabrics, Staples, Best Buy, Dollar Tree, TGI Friday’s and Pier 1 Imports.
 
 
21

 
 
(2)
Includes the following regional tenants: Roundy’s Foods, Meijer, Dunham’s Sports, Christopher Banks and Beall’s Department Stores.
 
Freestanding Properties
 
At December 31, 2010, our 67 operating freestanding properties were leased to Walgreen (29), Borders (14),  Rite Aid (7), CVS Caremark (4), Kmart (2), JP Morgan Chase (2), Los Tres Amigos (1), Citizens Bank (1), Dick’s Sporting Goods (1), Lake Lansing RA Associates, LLC (1),  Meijer (1), Wal-Mart (Sam’s Club) (1), Kohl’s (1), PNC Bank (1) and Lowe’s (1). Our freestanding properties provided $26,260,862, or approximately 72.2%, of our annualized base rent as of December 31, 2010, at an average base rent per square foot of $13.60.  These properties contain, in the aggregate, 1,935,456 square feet of GLA or approximately 51% of our total GLA as of December 31, 2010.  Our freestanding properties tend to have high traffic counts, are generally located in densely populated areas and are leased to a single tenant on a long term basis.  Of our 67 operating freestanding properties, 47 were developed by us.  Our freestanding properties had a weighted average lease term of 14.2 years as of December 31, 2010.
 
Our freestanding properties range in size from 4,426 to 330,322 square feet of GLA and are located in the following states: Connecticut (1), Florida (7), Georgia (1), Illinois (3), Indiana (2), Kansas (3), Maryland (2), Michigan (37), Nebraska (2), New Jersey (1), New York (2), North Carolina (1), Ohio (2), Oklahoma (4) and Pennsylvania (1).
 
The following table sets forth more information about our freestanding properties as of December 31, 2010.
 
Tenant
 
Location
 
Year
Completed/
Expanded
   
Total
GLA
 
Lease Expiration(2)
(Option expiration)
Borders
 
Columbus, OH
(10)
 
1996
      21,000  
Jan 23, 2016 (2036)
Borders and TGI Fridays
 
Monroeville, PA
(10)
 
1996
      37,004  
Nov 8, 2016 (2036)
Borders
 
Norman, OK
   
1996
      24,641  
Sep 20, 2016 (2036)
Borders and Chili’s  (8)
 
Omaha, NE
   
1995
      36,500  
Nov 3, 2015 (2035)
Borders (8)
 
Wichita, KS
(10)
 
1995
      25,000  
Nov 10, 2015 (2035)
Borders (8)
 
Lawrence, KS
(10)
 
1997
      20,000  
Oct 16, 2022 (2042)
Borders
 
Tulsa, OK
(9)
 
1998
      25,579  
Sep 30, 2018 (2038)
Borders (8)
 
Oklahoma City, OK
(10)
 
2002
      24,641  
Jan 31, 2018 (2038)
Borders (8)
 
Omaha, NE
   
2002
      25,000  
Jan 31, 2018 (2038)
Borders (8)
 
Indianapolis, IN
(11)
 
2002
      15,844  
Dec 31, 2017 (2038)
Borders (8)
 
Columbia, MD
   
1999
      28,000  
Jan 31, 2018 (2038)
Borders (8)
 
Germantown, MD
   
2000
      25,503  
Jan 31, 2018 (2038)
Borders Headquarters (8)
 
Ann Arbor, MI
    1996/1998       330,322  
Jan 29, 2023 (2043)
Borders
 
Tulsa, OK
(9)
  1996       24,773  
Sep 30, 2018 (2038)
Borders (8)
 
Boynton Beach, FL
(11)
  1996       20,745  
July 20, 2024 (2044)
Borders (8)
 
Ann Arbor, MI
    1996       110,000  
Jan 31, 2025 (2045)
Chase Bank (7)
 
Southfield, MI
    2009       4,270  
Oct 31, 2029 (2059)
Chase Bank
 
Spring Grove, IL
    2010       4,300  
Apr 20, 2038 (2067)
Citizens Bank
 
Flint, MI
    2003       4,426  
Apr 15, 2023
CVS Pharmacy
 
Atchison, KS
    2010       13,225  
Jan 31, 2036 (2065)
CVS Pharmacy
 
Johnstown, OH
    2010       13,225  
Jan 31, 2035 (2059)
CVS Pharmacy
 
Lake in the Hills, IL
    2010       13,225  
Jan 31, 2035 (2084)
CVS Pharmacy
 
Mansfield, CT
    2010       10,125  
Jan 31, 2027 (2046)
Dick’s Sporting Goods
 
Boynton Beach, FL
    2010       43,790  
Oct 31, 2021 (2040)

 
22

 
 
Tenant
 
Location
 
Year
Completed/
Expanded
   
Total
GLA
 
Lease Expiration(2)
(Option expiration)
Kmart
 
Grayling, MI
 
1984
      52,320  
Sep 30, 2012 (2059)
Kmart
 
Oscoda, MI
  1984/1990       90,470  
Sep 30, 2012 (2059)
Kohl’s (1)
 
Tallahassee, FL
  2010       102,381  
Jan 31, 2028 (2057)
Lake Lansing RA Associates, LLC (4)
 
East Lansing, MI
  2004       14,564  
Dec 31, 2028 (2078)
Los Tres Amigos (3)
 
Lansing, MI
  2004       5,448  
Aug 31, 2014 (2032)
Lowe’s Home Centers
 
Concord, NC
  2010       170,393  
Oct 31, 2028 (2058)
Meijer
 
Plainfield, IN
  2007    
Note (5)
 
Nov 5, 2027 (2047)
PNC Bank
 
Antioch, IL
  2010       3,215  
Mar 31, 2039 (2088)
Rite Aid (8)
 
Webster, NY
  2004       13,813  
Feb 24, 2024 (2044)
Rite Aid (8)
 
Albion, NY
  2004       13,813  
Oct 12, 2024 (2044)
Rite Aid (8)
 
Canton Twp, MI
  2003       11,180  
Oct 31, 2019 (2049)
Rite Aid (8)
 
Roseville, MI
  2005       11,060  
June 30, 2025 (2050)
Rite Aid
 
Mt Pleasant, MI
  2005       11,095  
Nov 30, 2025 (2065)
Rite Aid
 
N Cape May, NJ
  2005       10,118  
Nov 30, 2025 (2065)
Rite Aid (8)
 
Summit Twp, MI
  2006       11,060  
Oct 31, 2019 (2039)
Sam’s Club (6)
 
Roseville, MI
  2002       132,332  
Aug 4, 2022 (2082)
Walgreen (8)
 
Waterford, MI
  1997       13,905  
Feb 28, 2018 (2058)
Walgreen (8)
 
Chesterfield, MI
  1998       13,686  
July 31, 2018 (2058)
Walgreen (8)
 
Pontiac, MI
  1998       13,905  
Oct 31, 2018 (2058)
Walgreen (8)
 
Grand Blanc, MI
  1998       13,905  
Feb 28, 2019 (2059)
Walgreen (8)
 
Rochester, MI
  1998       13,905  
June 30, 2019 (2059)
Walgreen and Auto Zone (8)
 
Ypsilanti, MI
  1999       21,620  
Dec 31, 2019 (2059)
Walgreen (1) (8)
 
Petoskey, MI
  2000       13,905  
Apr 30, 2020 (2060)
Walgreen (8)
 
Flint, MI
  2000       14,490  
Dec 31, 2020 (2060)
Walgreen (8)
 
Flint, MI
  2001       15,120  
Feb 28, 2021 (2061)
Walgreen (8)
 
New Baltimore, MI
  2001       14,490  
Aug 31, 2021 (2061)
Walgreen (8)
 
Flint, MI
  2002       14,490  
Apr 30, 2027 (2077)
Walgreen
 
Big Rapids, MI
  2003       13,560  
Apr 30, 2028 (2078)
Walgreen (8)
 
Flint, MI
  2004       14,560  
Feb 28, 2029 (2079)
Walgreen (8)
 
Flint, MI
  2004       13,650  
Oct 31, 2029 (2079)
Walgreen
 
Midland, MI
  2005       14,820  
July 31, 2030 (2080)
Walgreen (8)
 
Grand Rapids, MI
  2005       14,820  
Aug 30, 2030 (2080)
Walgreen (8)
 
Delta Township, MI
  2005       14,559  
Nov 30, 2030 (2080)
Walgreen and Retail space (8)
 
Livonia, MI
  2007       19,390  
June 30, 2032 (2082)
Walgreen
 
Barnesville, GA
  2007       14,820  
Nov 30, 2032 (2082)
Walgreen and Chase Bank (8)
 
Macomb Township, MI
  2008       19,090  
Mar 31, 2033 (2083)
Walgreen
 
Ypsilanti, MI
  2008       13,650  
Mar 31, 2032 (2082)
Walgreen (8)
 
Shelby Township, MI
  2008       14,820  
Jul 31, 2033 (2083)
Walgreen
 
Brighton, MI
  2009       14,550  
Jan 31, 2034 (2084)
Walgreen
 
Silver Springs Shores, FL
  2009       14,550  
Dec 31, 2033 (2083)
Walgreen
 
Port St John, FL
  2009       14,550  
Apr 30, 2034 (2084)
Walgreen
 
Lowell, MI
  2009       13,650  
Sep 30, 2034 (2084)
 
 
23

 

Tenant
 
Location
 
Year
Completed/
Expanded
   
Total
GLA
 
Lease Expiration(2)
(Option expiration)
Walgreen (1)
 
Ann Arbor, MI
 
2010
      13,650  
Aug 31, 2035 (2085)
Walgreen
 
Atlantic Beach, FL
 
2010
      14,478  
Aug 31, 2035 (2085)
Walgreen
 
St. Augustine Shores, FL
 
2010
      14,820  
Jan 31, 2036 (2086)
                     
Total
              1,985,808    
 

 
(1)
Properties subject to long-term ground leases where a third party owns the underlying land and has leased the land to us to construct or operate freestanding properties. We pay rent for the use of the land and we are generally responsible for all costs and expenses associated with the building and improvements. At the end of the lease terms, as extended (Petoskey, MI 2074, Tallahassee, FL 2032 and Ann Arbor, MI 2035), the land together with all improvements revert to the land owner. We have an option to purchase the Petoskey property after August 7, 2019 and the Ann Arbor property after June 3, 2012.
 
(2)
At the expiration of tenant’s initial lease term, each tenant (except Citizens Bank) has an option, subject to certain requirements, to extend its lease for an additional period of time.
 
(3)
This 2.03 acre property is leased from us by Los Tres Amigos pursuant to a ground lease.  The tenant occupies a 5,448 square foot building.
 
(4)
This 11.3 acre property is leased from us by Lake Lansing RA Associates, LLC pursuant to a ground lease.  The ground lesssee has constructed a 14,564 square foot building.
 
(5)
This 32.5 acre property is leased from us by Meijer pursuant to a ground lease.  Meijer expects to construct an estimated 210,000 square foot super center.
 
(6)
This 12.68 acre property is leased from us by Wal-Mart pursuant to a ground lease.  Wal-Mart has constructed a Sam’s Club retail building containing approximately 132,332 square feet.
 
 (7)
This 1.0 acre property is leased from us by JP Morgan Chase Bank pursuant to a ground lease.  JP Morgan Chase has constructed a retail bank branch containing approximately 4,270 square feet.
 
(8)
Properties subject to a mortgage/debt or pledged pursuant to our credit facilities
 
(9)
Classified as held for sale as of December 31, 2010
 
(10)
Borders has disclosed its intention to close their store at this location
 
(11)
Borders sub-leases their space at these locations to another tenant
 
Community Shopping Centers
 
Our 12 community shopping centers range in size from 20,000 to 241,458 square feet of GLA. The community shopping centers are located in five states as follows: Florida (1), Illinois (1), Kentucky (1), Michigan (6) and Wisconsin (3). Our community shopping centers tend to be located in high traffic, market dominant centers in which customers of our tenants purchase day-to-day necessities. Our community shopping centers are anchored by national tenants.
 
The location, general character and primary occupancy information with respect to the community shopping centers as of December 31, 2010 are set forth below:

 
24

 
 
Property Location
 
Location
 
Year
Completed/
Expanded
 
GLA
Sq. Ft.
 
Annualized
Base Rent (2)
 
Average
Base
Rent per
Sq. Ft.(3)
 
Percent
Occupied
at
December
31,
2010
   
Percent
Leased at
December
31,
2010 (4)
   
Anchor Tenants (Lease
expiration/Option period
expiration) (5)
Capital Plaza (1)
 
Frankfort, KY
  1978/ 2006   116,212   $ 599,000   $ 5.15     100 %     100  
Kmart(2013/2053)
                                           
Walgreen (2031/2052)
Charlevoix Commons
 
Charlevoix, MI
 
1991
  137,375     686,495     5.00     100 %     100 %  
Kmart (2015/2065)
                                           
Roundy’s (2011)
Family Farm (2016)
Chippewa Commons (6)
 
Chippewa Falls, WI
 
1991
  168,311     959,823     5.76     99 %     99 %  
Kmart (2014/2064)
                                           
Roundy’s (2010/2030)
                                           
Fashion Bug (2014/2024)
Ironwood Commons
 
Ironwood, MI
 
1991
  185,535     937,643     5.005     100 %     100 %  
Kmart (2015/2065)
                                           
Super Value (2011/2036)
Marshall Plaza
 
Marshall, MI
 
1990
  119,279     646,959     5.42     100 %     100 %  
Kmart (2015/2065)
                                             
Central Michigan Commons
 
Mt. Pleasant, MI
  1973/ 1997   241,458     1,039,018     4.39     98 %     98 %  
Kmart (2013/2048)
                                           
J.C. Penney Co. (2015/2035)
                                           
Staples, Inc. (2015/2030)
North Lakeland Plaza (6)
 
Lakeland, FL
  1987   171,334     1,306,574     7.71     99 %     99 %  
Best Buy (2013/2028)
                                           
Beall’s (2020/2035)
Petoskey Town Center (6)
 
Petoskey, MI
  1990   174,870     998,273     5.90     97 %     97 %  
Kmart (2015/2065)
                                           
Roundy’s (2010/2030)
                                           
Fashion Bug (2012/2022)
Plymouth Commons
 
Plymouth, WI
  1990   162,031     809,869     5.14     97 %     97 %  
Kmart (2015/2065)
                                           
Roundy’s (2015/2030)
Ferris Commons
 
Big Rapids, MI
  1990   173,557     1,016,836     5.86     100 %     100 %  
Kmart (2015/2065)
                                           
MC Sports (2018/2033)
                                           
Peebles (2019/2039)
Shawano Plaza (6)
 
Shawano, WI
  1990   192,694     983,371     5.21     98 %     98 %  
Kmart (2014/2064)
                                           
Roundy’s (2015/2030)
                                           
J.C. Penney Co. (2015/2035)
                                           
Fashion Bug (2012/2019)
West Frankfort Plaza
 
West Frankfort, IL
  1982   20,000     136,000     6.80     100 %     100 %  
Fashion Bug (2012)
                                             
Total/Average
          1,862,656   $ 10,119,861   $ 5.52     98 %     98 %     
 

 
(1)
All community shopping centers except Capital Plaza (which is subject to a long-term ground lease expiring in 2053 from a third party) are wholly-owned by us.
 
(2)
Total annualized base rents of our Company as of December 31, 2010.
 
(3)
Calculated as total annualized base rents, divided by gross leaseable area actually leased as of December 31, 2010.
 
(4)
Roundy’s has sub-leased the space it leases at Charlevoix Commons (35,896 square feet, rented at a rate of $5.97 per square foot). The lease with Roundy’s will expire on December 31, 2011.  We have entered into a lease with Family Farm and Home, Inc (the Roundy’s sub-tenant).  The Family Farm lease commences January 1, 2012, has a term of 5 years and a rental rate of $2.00 per square foot.
 
(5)
The option to extend the lease beyond its initial term is only at the option of the tenant.
 
(6)
Properties subject to a mortgage/debt or pledged pursuant to our credit facilities.
 
 
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ITEM 3.
LEGAL PROCEEDINGS
 
From time to time, we are involved in legal proceedings in the ordinary course of business.  We are not presently involved in any litigation nor, to our knowledge, is any other litigation threatened against us, other than routine litigation arising in the ordinary course of business, which is expected to be covered by our liability insurance and all of which collectively is not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
 
ITEM 4. 
[REMOVED AND RESERVED]
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is traded on the New York Stock Exchange under the symbol “ADC”.  The following table sets forth the high and low closing prices of our common stock, as reported on the New York Stock Exchange, and the dividends declared per share of common stock by us for each calendar quarter in the last two fiscal years.  Dividends were paid in the periods immediately subsequent to the periods in which such dividends were declared.
 
Quarter Ended
 
High
   
Low
   
Dividends Declared Per
Common Share
 
                   
March 31, 2010
  $ 24.67     $ 19.56     $ 0.51  
June 30, 2010
  $ 26.80     $ 21.73     $ 0.51  
September 30, 2010
  $ 26.74     $ 21.52     $ 0.51  
December 31, 2010
  $ 28.63     $ 24.79     $ 0.51  
                         
March 31, 2009
  $ 19.32     $ 9.31     $ 0.50  
June 30, 2009
  $ 18.66     $ 14.89     $ 0.50  
September 30, 2009
  $ 24.61     $ 17.10     $ 0.51  
December 31, 2009
  $ 24.94     $ 21.01     $ 0.51  
 
On March 3, 2011, the reported closing sale price per share of common stock on the New York Stock Exchange was $24.60.
 
At February 15, 2011, there were 9,857,314 shares of our common stock issued and outstanding which were held by approximately 200 stockholders of record.  The number of stockholders of record does not reflect persons or entities who held their shares in nominee or “street” name.  In addition, at December 31, 2010 there were 347,619 OP units outstanding held by a limited partner other than our Company.  The OP units are exchangeable into shares of common stock on a one for one basis.
 
For 2010, we paid $2.04 per share of common stock in dividends. Of the $2.04, 90.0% represented ordinary income, and 10.0% represented return of capital, for tax purposes. For 2009, we paid $2.02 per share of common stock in dividends. Of the $2.02, 100.0% represented ordinary income, and 0.0% represented return of capital, for tax purposes.
 
 
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We intend to continue to declare quarterly dividends to our stockholders.  However, our distributions are determined by our board of directors and will depend on a number of factors, including the amount of our funds from operations, the financial and other condition of our properties, our capital requirements, restrictions in our debt instruments, our annual distribution requirements under the provisions of the Internal Revenue Code applicable to REITs and such other factors as our board of directors deems relevant.  We have historically paid cash dividends, although we may choose to pay a portion in stock dividends in the future.  To qualify as a REIT, we must distribute at least 90% of our REIT taxable income prior to net capital gains to our stockholders, as well as meet certain other requirements. We must pay these distributions in the taxable year the income is recognized, or in the following taxable year if they are declared during the last three months of the taxable year, payable to stockholders of record on a specified date during such period and paid during January of the following year. Such distributions are treated as paid by us and received by our stockholders on December 31 of the year in which they are declared. In addition, at our election, a distribution for a taxable year may be declared in the following taxable year if it is declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration. These distributions qualify as dividends paid for the 90% REIT distribution test for the previous year and are taxable to holders of our capital stock in the year in which paid.
 
During the year ended December 31, 2010, we did not sell any unregistered securities.  During the fourth quarter of 2010, we did not repurchase any of our equity securities.
 
 For information about our equity compensation plan, please see Part III, Item 12 of this report.
 
 
27

 
 
ITEM 6.
SELECTED FINANCIAL DATA
 
The following table sets forth our selected financial information on a historical basis and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and notes thereto included elsewhere in this Form 10-K.  Certain amounts have been reclassified to conform to the current presentation of discontinued operations.  The balance sheet for the periods ending December 31, 2006 through 2010 and operating data for each of the periods presented were derived from our audited financial statements.
 
Selected Financial Data
(in thousands, except per share, number of properties, and percentage leased information)
 
   
Year Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Operating Data
                             
                               
Total Revenues
  $ 36,112     $ 34,402     $ 32,919     $ 31,887     $ 30,329  
Expenses
                                       
                                         
Property Expense (1)
    3,848       3,891       3,975       3,838       3,747  
General and Administrative
    5,003       4,559       4,361       4,462       4,019  
Interest
    4,712       4,635       5,179       4,896       4,625  
Depreciation and amortization
    5,687       5,359       5,064       4,725       4,559  
Impairment charge
    7,700       -       -       -       -  
                                         
Total Expenses
    26,950       18,444       18,579       17,921       16,950  
                                         
Other Income (Expense)  (2)
    -       -       -       1,044       -  
                                         
Income From Continuing Operations
    9,162       15,958       14,340       15,010       13,379  
                                         
Gain on Sale of Asset From Discontinued Operations
    4,738       -       -       -       -  
Income From Discontinued Operations
    1,728       2,036       1,942       1,817       1,815  
                                         
Net Income
    15,628       17,994       16,282       16,827       15,194  
                                         
Less Net Income Attributable to Non-Controlling Interest
    561       950       1,265       1,345       1,220  
                                         
Net Income Attributable to Agree Realty Corporation
  $ 15,067     $ 17,044     $ 15,017     $ 15,482     $ 13,974  
                                         
Number of Properties
    81       73       68       64       60  
                                         
Number of Square Feet
    3,848       3,492       3,439       3,385       3,355  
                                         
Percentage Leased
    99 %     98 %     99 %     99 %     99 %
                                         
Per Share Data – Diluted
                                       
Net Income
  $ 1.64     $ 2.14     $ 1.95     $ 2.01     $ 1.83  
                                         
Weighted Average of Common Shares Outstanding – Diluted
    9,191       7,966       7,719       7,716       7,651  
                                         
Cash Dividends
  $ 2.04     $ 2.02     $ 2.00     $ 1.97     $ 1.96  
                                         
Balance Sheet Data
                                       
Real Estate (before accumulated depreciation)
  $ 338,221     $ 320,444     $ 311,343     $ 290,074     $ 268,248  
Total Assets
  $ 285,042     $ 261,789     $ 256,897     $ 239,348     $ 223,515  
Total Debt, including accrued interest
  $ 100,128     $ 104,814     $ 101,069     $ 82,889     $ 69,031  

(1)
Property expense includes real estate taxes, property maintenance, insurance, utilities and land lease expense.
 
(2)
Other income is composed of gain on land sales.
 
(3)
Net income per share has been computed by dividing the net income by the weighted average number of shares of common stock outstanding and the effect of dilutive securities outstanding.
 
 
28

 
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We were established to continue to operate and expand the retail property business of our predecessor.  We commenced our operations in April 1994.  Our assets are held by and all operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and held a 96.56% interest as of December 31, 2010.  We are operating so as to qualify as a REIT for federal income tax purposes.
 
The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included elsewhere in this Form 10-K.
 
Recent Accounting Pronouncements
 
Effective January 1, 2010, companies are required to separately disclose the amounts of significant transfers of assets and liabilities into and out of Level 1, Level 2 and Level 3 of the fair value hierarchy and the reasons for those transfers.  Companies must also develop and disclose their policy for determining when transfers between levels are recognized.  In addition companies are required to provide fair value disclosures of each class rather than each major category of assets and liabilities.  For fair value measurements using significant other observable inputs (Level 2) or significant unobservable inputs (Level 3), companies are required to disclose the valuation technique and the inputs used in determining fair value for each class of assets and valuation technique and the inputs used in determining fair value for each class of assets and liabilities.  Adoption of this standard did not have a material effect on our consolidated results of operations or financial position.

Effective January 1, 2010, companies are required to separately disclose purchases, sales, issuances and settlements on a gross basis in the reconciliation of recurring Level 3 fair value measurements.  Adoption of this standard did not have a material effect on our consolidated results of operations or financial position.

Critical Accounting Policies
 
Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments.  For example, significant estimates and assumptions have been made with respect to revenue recognition, capitalization of costs related to real estate investments, potential impairment of real estate investments, operating cost reimbursements, and taxable income.
 
Minimum rental income attributable to leases is recorded when due from tenants.  Certain leases provide for additional percentage rents based on tenants’ sales volumes.  These percentage rents are recognized when determinable by us.  In addition, leases for certain tenants contain rent escalations and/or free rent during the first several months of the lease term; however, such amounts are not material.
 
Real estate assets are stated at cost less accumulated depreciation.  All costs related to planning, development and construction of buildings prior to the date they become operational, including interest and real estate taxes during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed.  The viability of all projects under construction or development are regularly evaluated under applicable accounting requirements, including requirements relating to abandonment of assets or changes in use. To the extent a project, or individual components of the project, are no longer considered to have value, the related capitalized costs are charged against operations.  Subsequent to completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized.  Depreciation of the buildings is recorded on the straight-line method using an estimated useful life of forty years.
 
 
29

 

We evaluate real estate for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets.  When any such impairment exists, the related assets will be written down to fair value and such excess carrying value is charged to income.  The expected cash flows of a project are dependent on estimates and other factors subject to change, including (1) changes in the national, regional, and/or local economic climates, (2) competition from other shopping centers, stores, clubs, mailings, and the internet, (3) increases in operating costs, (4) bankruptcy and/or other changes in the condition of third parties, including tenants, (5) expected holding period, and (6) availability of credit. These factors could cause our expected future cash flows from a project to change, and, as a result, an impairment could be considered to have occurred.  During 2010 we recorded impairment charges of $8.14 million related to the carrying value of our real estate assets.

Substantially all of our leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses (“operating cost reimbursements”) such as real estate taxes, repairs and maintenance, insurance, etc.  The related revenue from tenant billings is recognized in the same period the expense is recorded.
 
We have elected to be taxed as a REIT under the Internal Revenue Code, commencing with our 1994 tax year.  As a result, we are not subject to federal income taxes to the extent that we distribute annually at least 90% of our REIT taxable income to our stockholders and satisfy certain other requirements defined in the Internal Revenue Code.
 
We established TRS entities pursuant to the provisions of the REIT Modernization Act.  Our TRS entities are able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations.  As a result, certain activities of our Company which occur within our TRS entities are subject to federal and state income taxes.  As of December 31, 2010 and 2009, we had accrued a deferred income tax amount of $705,000.  In addition, we have recorded an income tax liability of $17,000 and $62,000 as of December 31, 2010 and 2009 respectively.
 
Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009
 
Minimum rental income increased $1,487,000, or 5%, to $32,787,000 in 2010, compared to $31,300,000 in 2009.  The increase was the result of the development of a Walgreen drug store in Ann Arbor, Michigan in September 2010, the development of a Walgreen drug store located in Atlantic Beach, Florida in October 2010, the development of a Walgreen drug store in St Augustine Shores, Florida in November 2010, the development of a Walgreen drug store in Brighton, Michigan in February 2009, the development of a Walgreen drug store in Port St. John, Florida in June 2009, the development of a Walgreen drug store in Lowell, Michigan in September 2009 and the development of a Chase bank branch land lease in Southfield, Michigan in October 2009. Our revenue increases from these developments amounted to $787,000.  In addition, rental income increased $702,000 as a result of the nine property acquisitions that were completed during 2010 and a decrease of $2,000 from other rental income adjustments.
 
Percentage rents increased from $15,000 in 2009 to $35,000 in 2010.
 
Operating cost reimbursements decreased $43,000, or 2%, to $2,604,000 in 2010, compared to $2,647,000 in 2009.  Operating cost reimbursements decreased due to the net decrease in property operating expenses as explained below.
 
We earned development fee income of $590,000 in 2010 related to a project we have completed in Oakland, California.  We recognized $410,000 of development fee income in 2009 related to the Oakland, California project.
 
Other income increased $68,000 to $98,000 in 2010, compared to $30,000 in 2009.
 
Real estate taxes decreased $25,000, or 1%, to $1,913,000 in 2010 compared to $1,938,000 in 2009.  The decrease is the result of the capitalization of $50,000 of real estate taxes related to the Dick’s Sporting Goods re-development and $25,000 of general assessment increases on the properties.
 
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) decreased $108,000, or 7%, to $1,458,000 in 2010 compared to $1,566,000 in 2009.  The decrease was the result of an increase in shopping center maintenance expenses of $65,000; decreased snow removal costs of ($131,000); decreased utility costs of ($15,000); and decreased insurance costs of ($27,000) in 2010 versus 2009.
 
 
30

 
 
Land lease payments increased $90,000, or 23%, to $477,000 in 2010 compared to $387,000 for 2009.  The increase is the result of our leasing of land for our Shelby Township, Michigan development.
 
General and administrative expenses increased $444,000, or 10%, to $5,003,000 in 2010 compared to $4,559,000 in 2009.  The increase in general and administrative expenses was primarily the result of increased employee costs of $288,000, increased income tax expenses in our TRS entities of $32,000, increased professional fees of $57,000 and an increase in other costs of $67,000.  General and administrative expenses as a percentage of rental income increased to 14.8% for 2010 from 14.1% in 2009.
 
Depreciation and amortization increased $328,000, or 6%, to $5,687,000 in 2010 compared to $5,359,000 in 2009.  The increase was the result the development of five properties in 2009, the development of four properties in 2010 and the acquisition of nine properties in 2010.
 
We incurred an impairment charge of $7,700,000 in 2010 as a result of writing down the carrying value of our real estate assets to fair value for four properties leased to Borders and that Borders has indicated they plan to close as part of their bankruptcy restructuring plan.  There was no impairment charge in 2009.
 
Interest expense increased $77,000, or 2%, to $4,712,000 in 2010, from $4,635,000 in 2009.  The increase in interest expense resulted from the development and acquisition of additional properties during 2010.
 
We recognized a gain on sale of assets of $4,738,000 in 2010.  The gain pertains to the sale of three properties during 2010.  The disposed properties were located in Santa Barbara, California, Marion Oaks, Florida and Aventura, Florida.  There were no property sales in 2009.
 
Income from discontinued operations decreased $308,000, or 15%, to $1,728,000 in 2010 compared to $2,036,000 in 2009.
 
Our net income decreased $2,366,000, or 13%, to $15,628,000 in 2010, from $17,994,000 in 2009 as a result of the foregoing factors.
 
Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
 
Minimum rental income increased $1,183,000, or 4%, to $31,300,000 in 2009, compared to $30,117,000 in 2008.  The increase was the result of the development of a Walgreen drug store and a bank land lease in Macomb Township, Michigan in March 2008, the development of a Walgreen drug store located in Ypsilanti, Michigan in May 2008, the development of a Walgreen drug store in Shelby Township, Michigan in July 2008, the development of a Walgreen drug store in Silver Springs Shores, Florida in January 2009, the development of a Walgreen drug store in Brighton, Michigan in February 2009, the development of a Walgreen drug store in Port St John, Florida in June 2009, the development of a Walgreen drug store in Lowell, Michigan in September 2009 and the development of a Chase bank branch land lease in Southfield, Michigan in October 2009. Our revenue increases from these developments amounted to $1,570,000.  In addition, rental income from our Big Rapids, Michigan shopping center increased by $182,000 as a result of redevelopment activities and rental income decreased ($569,000) as a result of the closing of a Circuit City store in Boynton Beach, Florida and other rental adjustments.
 
Operating cost reimbursements decreased $136,000, or 5%, to $2,647,000 in 2009, compared to $2,782,000 in 2008.  Operating cost reimbursements decreased due to the net decrease in property operating expenses as explained below.
 
We earned development fee income of $410,000 in 2009 related to a project we have commenced in Oakland, California.  There was no development fee income in 2008.
 
Other income increased $26,000 to $30,000 in 2009, compared to $4,000 in 2008.
 
 
31

 
 
Real estate taxes increased $71,000, or 4%, to $1,938,000 in 2009 compared to $1,867,000 in 2008.  The increase is the result of general assessment increases on the properties.
 
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) decreased $247,000, or 14%, to $1,566,000 in 2009 compared to $1,813,000 in 2008.  The decrease was the result of a decrease in shopping center maintenance expenses of ($73,000); decreased snow removal costs of ($175,000); increased utility costs of $29,000; and decreased insurance costs of ($28,000) in 2009 versus 2008.
 
Land lease payments increased $92,000, or 31%, to $387,000 in 2009 compared to $295,000 for 2008.  The increase is the result of our leasing of land for our Shelby Township, Michigan development.
 
General and administrative expenses increased $198,000, or 5%, to $4,559,000 in 2009 compared to $4,361,000 in 2008.  The increase was primarily the result of increased dead deal costs related to property searches in Michigan and Florida and compensation related expenses.  General and administrative expenses as a percentage of rental income remained at 13.3% for 2009 and 2008.
 
Depreciation and amortization increased $295,000, or 6%, to $5,359,000 in 2009 compared to $5,064,000 in 2008.  The increase was the result the development and acquisition of four properties in 2008 and five properties in 2009.
 
Interest expense decreased $544,000, or 11%, to $4,635,000 in 2009, from $5,179,000 in 2008.  The decrease in interest expense resulted from substantial reductions in interest rates in 2009 as compared to 2008.
 
Income from discontinued operations increased $94,000, or 5%, to $2,036,000 in 2010 compared to $1,942,000 in 2009.
 
Our net income increased $1,712,000, or 11%, to $17,994,000 in 2009, from $16,282,000 in 2008 as a result of the foregoing factors.
 
Liquidity and Capital Resources
 
Our principal demands for liquidity are operations, distributions to our stockholders, debt repayment, development of new properties, redevelopment of existing properties and future property acquisitions.  We intend to meet our short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the properties, through cash flow provided by operations and the Line of Credit and the Credit Facility (as defined below).  We believe that adequate cash flow will be available to fund our operations and pay dividends in accordance with REIT requirements for at least the next 12 months.  We may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of common stock, although market conditions have limited the availability of new sources of financing and capital, which may have an impact on our ability to obtain financing for planned new development projects in the near term.  We believe that these financing sources will enable us to generate funds sufficient to meet both our short-term and long-term capital needs.

We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to market capitalization of 65% or less.  Nevertheless, we may operate with debt levels which are in excess of 65% of market capitalization for extended periods of time.  At December 31, 2010, our ratio of indebtedness to market capitalization was approximately 38%.  This ratio decreased from 53% as of December 31, 2009 as a result of an increase in the market value of our common stock and the issuance of additional common shares.

During the quarter ended December 31, 2010, we declared a quarterly dividend of $.51 per share.  The cash dividend was paid on January 4, 2011 to holders of record on December 20, 2010.
 
Our cash flows from operations increased $2,531,000 to $26,111,000 in 2010, compared to $23,580,000 in 2009.  Cash used in investing activities increased $24,071,000 to $32,820,000 in 2010, compared to $8,749,000 in 2009.  Cash provided by financing activities increased $21,424,000 to $6,613,000 in 2010, compared to $(14,811,000) in 2009.  Our cash and cash equivalents decreased by $95,000 to $593,000 as of December 31, 2010 as a result of the foregoing factors.
 
 
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As of December 31, 2010, we had total mortgage indebtedness of $71,526,780.  Of this total mortgage indebtedness, $47,859,952 is fixed rate, self-amortizing debt with a weighted average interest rate of 6.56% and the remaining mortgage debt of $23,666,828 has a maturity date of July 14, 2013, can be extended at our option for two additional years and bears interest at 150 basis points over LIBOR (or 1.76% as of December 31, 2010).  In January 2009, we entered into an interest rate swap agreement that fixes the interest rate during the initial term of the mortgage at 3.744%.
 
We have seven mortgaged properties leased to Borders that serve as collateral for seven non-recourse loans, including four mortgages that are cross-defaulted and cross-collateralized.  The balances on the non-recourse loans amount to approximately $18.5 million as of December 31, 2010, including $9.6 million under the cross-collateralized loans. As of the date of this filing, and based on the Chapter 11 bankruptcy filing of Borders, we are now in default on three mortgage loans amounting to approximately $8.9 million secured by a total of three properties with 366,000 square feet of GLA representing $1.3 million of annualized base rents as of December 31, 2010.  While the Chapter 11 bankruptcy filing of Borders is not a direct event of default under the cross-collateralized mortgage loans, we anticipate that the remaining loans will go into default as a result of the scheduled store closures.  These four mortgage loans amounting to approximately $9.6 million are secured by four properties with 103,000 square feet of GLA representing $2.1 million of annualized base rents as of December 31, 2010.   We are in the process of commencing negotiations with the lenders for all seven loans regarding an appropriate course of action.  We can provide no assurance that our negotiations with the lenders will result in favorable outcomes to us.  
 
In addition, the Operating Partnership has in place a $55 million secured credit facility (the “Credit Facility”) with Bank of America, as the agent, which is guaranteed by our Company.  The Credit Facility matures in November 2011.  Advances under the Credit Facility bear interest within a range of one-month to 12-month LIBOR plus 100 basis points to 150 basis points or the lender’s prime rate, at our option, based on certain factors such as the ratio of our indebtedness to the capital value of our properties.  The Credit Facility generally is used to fund property acquisitions and development activities.  As of February 15, 2011, $25,380,254 was outstanding under the Credit Facility bearing a weighted average interest rate of 1.26%.  We have provided substitute borrowing base properties to replace Borders stores under the Credit Facility, and the banks have acknowledged that the financial condition of Borders and any default under any of the non-recourse loans secured by a property leased to Borders shall not be deemed a default under the Credit Facility.
 
We also have in place a $5 million line of credit (the “Line of Credit”), which matures in November 2011. The Line of Credit bears interest at the lender’s prime rate less 75 basis points or 150 basis points in excess of the one-month to 12-month LIBOR rate, at our option.  The purpose of the Line of Credit is to generally provide working capital and fund land options and start-up costs associated with new projects.  As of February 15, 2011, $2,000,000 was outstanding under the Line of Credit bearing a weighted average interest rate of 2.50%.
 
The following table outlines our contractual obligations (in thousands) as of December 31, 2010:
 
   
Total
   
Yr 1
   
2-3 Yrs
   
4-5 Yrs
   
Over 5 Yrs
 
Mortgages Payable
  $ 71,527     $ 4,296     $ 31,493     $ 9,514     $ 26,224  
Notes Payable
    28,380       28,380       -       -       -  
Land Lease Obligations
    18,784       712       1,425       1,425       15,222  
Other Long-Term Liabilities
    -       -       -       -       -  
Estimated Interest Payments on Mortgages and Notes Payable
    21,099       4,324       6,666       4,100       6,009  
                                         
Total
  $ 139,790     $ 37,712     $ 39,584     $ 15,039     $ 47,455  
 
Estimated interest payments are based on stated rates for Mortgages Payable, and for Notes Payable the interest rate in effect for the most recent quarter is assumed to be in effect through the respective maturity date.
 
 
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We plan to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility and Line of Credit.  We will periodically refinance short-term construction and acquisition financing with long-term debt, medium term debt and/or equity.
 
Off-Balance Sheet Arrangements
 
We do not engage in any off-balance sheet arrangements with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, that have or are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources.
 
Inflation
 
Our leases generally contain provisions designed to mitigate the adverse impact of inflation on net income.  These provisions include clauses enabling us to pass through to our tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing our exposure to cost increases and operating expenses resulting from inflation.  Certain of our leases contain clauses enabling us to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the term of the leases.  In addition, expiring tenant leases permit us to seek increased rents upon re-lease at market rates if rents are below the then existing market rates.
 
Funds from Operations
 
Funds From Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) to mean net income computed in accordance with U.S. generally accepted accounting principles (“GAAP”), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.  Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income by itself as the primary measure of our operating performance.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.  Since real estate values instead have historically risen or fallen with market conditions, management believes that the presentation of operating results for real estate companies that use historical cost accounting is insufficient by itself.
 
FFO should not be considered as an alternative to net income as the primary indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.  Further, while we adhere to the NAREIT definition of FFO, our presentation of FFO is not necessarily comparable to similarly titled measures of other REITs due to the fact that not all REITS use the same definition.
 
 
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The following table provides a reconciliation of FFO and net income for the years ended December 31, 2010, 2009 and 2008:
 
   
Year ended December 31,
 
   
2010
   
2009
   
2008
 
                   
Net income
  $ 15,627,834     $ 17,994,036     $ 16,282,038  
Depreciation of real estate assets
    5,759,599       5,574,084       5,257,391  
Amortization of leasing costs
    92,972       65,977       58,771  
Amortization of lease intangibles
    50,479       -       -  
Gain on sale of assets
    (4,737,968 )     -       -  
                         
Funds from operations
  $ 16,792,916     $ 23,634,097     $ 21,598,200  
Weighted average shares and OP units outstanding
                       
Basic
    9,503,278       8,396,597       8,364,366  
                         
Diluted
    9,539,119       8,416,696       8,376,259  
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to interest rate risk primarily through our borrowing activities.  There is inherent roll-over risk for borrowings as they mature and are renewed at current market rates.  The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements.
 
Our interest rate risk is monitored using a variety of techniques.  The table below presents the principal payments (in thousands) and the weighted average interest rates on outstanding debt, by year of expected maturity, to evaluate the expected cash flows and sensitivity to interest rate changes.
 
   
2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
Fixed rate debt
  $ 3,779     $ 4,035     $ 4,308     $ 4,601     $ 4,913     $ 26,224     $ 47,860  
Average interest rate
    6.56 %     6.56 %     6.56 %     6.56 %     6.56 %     6.56 %     -  
                                                         
Variable rate mortgage
  $ 517     $ 548     $ 22,602       -       -       -     $ 23,667  
                                                         
Average interest rate
    3.74 %     3.74 %     3.74 %     -       -       -       -  
                                                         
Variable rate debt
  $ 28,380       -       -       -       -       -     $ 28,380  
                                                         
Average interest rate
    1.48 %     -       -       -       -       -       -  
 
The fair value (in thousands) is estimated at $48,012, $22,255 and $28,380 for fixed rate mortgages, variable rate mortgage and other variable rate debt, respectively, as of December 31, 2010.
 
The table above incorporates those exposures that exist as of December 31, 2010; it does not consider those exposures or positions, which could arise after that date.  As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.
 
We entered into an interest rate swap agreement to hedge interest rates on $24.5 million in variable-rate borrowings outstanding.  Under the terms of the interest rate swap agreement, we will receive from the counterparty interest on the notional amount based on 1.50% plus one-month LIBOR and will pay to the counterparty a fixed rate of 3.744%.  This swap effectively converted $24.5 million of variable-rate borrowings to fixed-rate borrowings.  As of December 31, 2010, the interest rate swap was valued at $793,211.  We do not use derivative instruments for trading or other speculative purposes and we did not have any other derivative instruments or hedging activities as of December 31, 2010.
 
 
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As of December 31, 2010, a 100 basis point increase in interest rates on the portion of our debt bearing interest at variable rates would result in an increase in interest expense of approximately $284,000.
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements and supplementary data are listed in the Index to Financial Statements and Financial Statement Schedules appearing on Page F-1 of this Form 10-K and are included in this Form 10-K following page F-1.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.
 
ITEM 9A.
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act).  Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.  Our internal control over financial reporting includes those policies and procedures that
 
 
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company;
 
 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Under the supervision of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our assessment and those criteria, our management believes that we maintained effective internal control over financial reporting as of December 31, 2010.
 
 
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Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has mat