UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-Q
 
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____ to ____
 
Commission file number 001-33749
 
RETAIL OPPORTUNITY INVESTMENTS CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
26-0500600
(I.R.S. Employer
Identification No.)
   
3 Manhattanville Road
Purchase, New York
(Address of principal executive offices)
10577
(Zip code)

(914) 272-8080
(Registrant's telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [ ]
Accelerated filer [x]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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]
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:  41,804,675 shares of common stock, par value $0.0001 per share, outstanding as of November 4, 2010.

 
 

 
TABLE OF CONTENTS
 
     
Page
 
   
   
   
   
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 

 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
RETAIL OPPORTUNITY INVESTMENTS CORP.
CONSOLIDATED BALANCE SHEETS
 
   
September 30,
2010
(unaudited)
   
December 31,
2009
 
ASSETS
           
Real Estate Investments:
           
Land
  $ 71,590,660     $ 6,346,871  
Building and improvements
    141,280,265       10,218,422  
      212,870,925       16,565,293  
Less: accumulated depreciation
    1,519,541       20,388  
      211,351,384       16,544,905  
Mortgage notes receivable
    7,838,500        
Investment in and advances to unconsolidated joint ventures
    3,664,530        
Real Estate Investments, net
    222,854,414       16,544,905  
                 
Cash and cash equivalents
    180,723,373       383,240,827  
Restricted cash
    431,836        
Tenant and other receivables
    1,121,883        
Notes Receivables
    1,043,640        
Deposits
    3,000,000        
Acquired lease intangible asset, net of accumulated amortization
    12,233,719       1,820,151  
Income taxes receivable
    1,236,375       1,236,375  
Prepaid expenses
    175,039       147,634  
Deferred charges, net of accumulated amortization
    5,416,609       870,769  
Other
    66,691       12,852  
Total assets
  $ 428,303,579     $ 403,873,513  
                 
LIABILITIES AND EQUITY
               
                 
Liabilities:
               
Mortgage notes payable
  $ 19,750,436     $  
Acquired lease intangibles liability, net of accumulated amortization
    11,917,585       1,121,187  
Accounts payable and accrued expenses
    3,901,106       4,434,586  
Due to related party
    5,556       5,556  
Tenants' security deposits
    662,543       22,946  
Other liabilities
    3,101,546       94,463  
Total liabilities
    39,338,772       5,678,738  
                 
Equity:
               
Preferred stock, $.0001 par value 50,000,000 shares authorized; none issued and outstanding
           
Common stock, $.0001 par value 500,000,000 shares authorized; 41,569,675 shares issued and outstanding
    4,156       4,156  
Additional paid-in-capital
    403,871,752       403,184,312  
Accumulated deficit
    (12,844,134 )     (4,993,693 )
Accumulated other comprehensive loss
    (2,069,356 )      
Total Retail Opportunity Investments Corp. shareholders' equity
    388,962,418       398,194,775  
Noncontrolling interests
    2,389        
Total equity
    388,964,807       398,194,775  
Total liabilities and equity
  $ 428,303,579     $ 403,873,513  
 
The accompanying notes to consolidated financial statements are an integral part of these statements

 
-1-

 
RETAIL OPPORTUNITY INVESTMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
2010
   
September 30,
2009
   
September 30,
2010
   
September 30,
2009
 
Revenues
                       
Base rents
  $ 3,624,215     $     $ 7,081,686     $  
Recoveries from tenants
    833,938             1,640,020        
Mortgage receivable
    618,154             636,354        
Total revenues
    5,076,307             9,358,060        
                                 
Operating expenses
                               
Property operating
    624,393             1,359,779        
Property taxes
    465,236             945,499        
Depreciation and amortization
    1,638,057             2,920,286        
General & Administrative
    2,132,811       3,605,262       6,347,101       5,213,489  
Acquisition transaction costs
    475,605             1,478,586        
Total operating expenses
    5,336,102       3,605,262       13,051,251       5,213,489  
                                 
Operating loss
    (259,795 )     (3,605,262 )     (3,693,191 )     (5,213,489 )
Non-operating income (expenses)
                               
Interest Expense
    (76,837 )           (76,837 )      
Interest Income
    234,030       64,494       936,147       221,082  
Benefit for Income Taxes
          1,204,247             1,697,419  
Net Loss Attributable to Retail Opportunity Investments Corp.
  $ (102,602 )   $ (2,336,521 )   $ (2,833,881 )   $ (3,294,988 )
                                 
Weighted average shares outstanding
Basic and diluted:
    41,569,675       51,750,000       41,569,675       51,750,000  
                                 
Basic loss per share:
  $     $ (0.05 )   $ (0.07 )   $ (0.06 )
                                 
Diluted loss per share
  $     $ (0.05 )   $ (0.07 )   $ (0.06 )
                                 
Dividends per common share
  $ 0.06     $     $ 0.12     $  
 
The accompanying notes to consolidated financial statements are an integral part of these statements

 
-2-

 
RETAIL OPPORTUNITY INVESTMENTS CORP.
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
 
   
Common Stock
                               
   
Shares
   
Amount
   
Additional
paid-in capital
   
Retained
earnings
(accumulated
deficit)
   
Accumulated
other
comprehensive
(loss) income
   
Noncontrolling
Interests
   
Equity
 
Balance at December 31, 2009
    41,569,675     $ 4,156     $ 403,184,312     $ (4,993,693 )   $     $     $ 398,194,775  
Compensation expense related to options granted
                120,340                         120,340  
Compensation expense related to restricted stock grants
                567,100                         567,100  
Cash dividends ($.012 per share)
                      (5,016,560 )                 (5,016,560 )
Contributions
                                  2,389       2,389  
Comprehensive income (loss)
                                                       
Net Loss Attributable to Retail Opportunity Investments Corp.
                      (2,833,881 )                 (2,833,881 )
Unrealized gain (loss) on swap  derivative
                            (2,069,356 )           (2,069,356 )
Total other comprehensive loss
                                                    (4,903,237 )
                                                         
Balance at September 30, 2010
    41,569,675     $ 4,156     $ 403,871,752     $ (12,844,134 )   $ (2,069,356 )   $ 2,389     $ 388,964,807  
 
The accompanying notes to consolidated financial statements are an integral part of these statements

 
-3-

 
RETAIL OPPORTUNITY INVESTMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the Nine Months Ended
 
   
September 30,
2010
   
September 30,
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (2,833,881 )   $ (3,294,988 )
Adjustments to reconcile loss to cash provided by operating activities:
               
Depreciation and amortization
    2,920,286        
Straight-line rent adjustment
    (654,465 )      
Amortization of above and below market rent
    (329,703 )      
Amortization relating to stock based compensation
    687,440        
Provisions for tenant credit losses
    450,952        
Change in operating assets and liabilities
               
Mortgage escrows
    (255,483 )      
Tenant and other receivables
    (918,370 )      
Prepaid expenses
    (27,405 )     37,032  
Interest on investments held in trust
          (344,228 )
Income taxes receivable
          (397,440 )
Deferred tax asset
          (1,248,550 )
Due to related party
          5,567  
Deferred interest payable
          123,146  
Accounts payable and accrued expenses
    (571,684 )     2,891,182  
Other asset and liabilities, net
    1,535,690        
Net cash provided by (used) in operating activities
    3,377       (2,228,279 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Withdrawal of funds from investments placed in trust
          2,407,309  
Investments in real estate
    (180,739,795 )      
Investments in mortgage notes
    (7,838,500 )      
Investments in unconsolidated joint ventures
    (3,664,530 )      
Improvements to properties and deferred charges
    (1,025,791 )      
Deposits on real estate acquisitions
    (3,000,000 )      
Disbursements relating to notes receivable
    (1,043,640 )      
Construction escrows and other
    (176,353 )      
Net cash (used in) provided by investing activities
    (197,488,609 )     2,407,309  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Principal repayments on mortgages
    (18,051 )      
Noncontrolling interests:
               
Contributions from consolidated joint venture minority interests, net
    2,389        
Dividends  paid to common stockholders
    (5,016,560 )      
Net cash used in financing activities
    (5,032,222 )      
Net (decrease) increase  in cash and cash equivalents
    (202,517,454 )     179,030  
Cash and cash equivalents at beginning of period
    383,240,827       4,222  
Cash and cash equivalents at end of period
  $ 180,723,373     $ 183,252  
 
The accompanying notes to consolidated financial statements are an integral part of these statements.

 
-4-

 
RETAIL OPPORTUNITY INVESTMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
September 30, 2010
(unaudited)
 

 
1.
Organization, Basis of Presentation and Summary of Significant Accounting Policies
 
Business
 
Retail Opportunity Investments Corp. (the "Company"), formerly known as NRDC Acquisition Corp., was incorporated in Delaware on July 10, 2007 for the purpose of acquiring through a merger, capital stock exchange, stock purchase, asset acquisition or other similar business combination with one or more assets or control of one or more operating businesses (the "Business Combination").  On August 7, 2009, the Company entered into the Framework Agreement (the "Framework Agreement") with NRDC Capital Management, LLC (the "Sponsor") which, among other things, sets forth the steps to be taken by the Company to continue the business as a corporation that will elect to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with its taxable year ending December 31, 2010.  ; On October 20, 2009, the Company's stockholders and warrantholders approved each of the proposals presented at the special meetings of stockholders and warrantholders, respectively, in connection with the transactions contemplated by the Framework Agreement (the "Framework Transactions"), including to provide that the consummation of substantially all of the Framework Transactions also constitutes a Business Combination under the Company's second amended and restated certificate of incorporation, as amended (the "certificate of incorporation").  Following the consummation of the Framework Transactions, the Company has been primarily focused on investing in, acquiring, owning, leasing, repositioning and managing a diverse portfolio of necessity-based retail properties, including, primarily, well located community and neighborhood shopping centers, anchored by national or regional supermarkets and drugstores.
 
As of September 30, 2010, the Company owned fourteen properties containing a total of approximately 1.3 million square feet of gross leasable area ("GLA").
 
The Company is organized in a traditional umbrella partnership real estate investment trust ("UpREIT") format pursuant to which Retail Opportunity Investments GP, LLC, its wholly-owned subsidiary, serves as the general partner of, and the Company conducts substantially all of its business through, its wholly-owned operating partnership subsidiary, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (the "operating partnership"), and its subsidiaries.
 
Principles of Consolidation and Use of Estimates
 
The consolidated financial statements include the accounts and those of its subsidiaries, which are wholly-owned or controlled by the Company.  Entities which the Company does not control through its voting interest and entities which are variable interest entities (“VIEs”), with respect to which it is not the primary beneficiary, are accounted for under the equity method.  All significant intercompany balances and transactions have been eliminated.
 
In June 2009, the Financial Accounting Standards Board (“FASB”) amended the guidance for determining whether an entity is a VIE and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. Under this guidance, an entity would be required to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Adoption of this guidance on January 1, 2010 did not have a material impact the Company’s consolidated financial statements.
 
 
-5-

 
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent.  Non-controlling interests are required to be presented as a separate component of equity in the consolidated balance sheet and modifies the presentation of net income by requiring earnings and other comprehensive income to be attributed to controlling and non-controlling interests.
 
The Company assesses the accounting treatment for each joint venture. This assessment includes a review of each joint venture or limited liability company agreement to determine which party has what rights and whether those rights are protective or participating. For all VIEs, the Company reviews such agreements in order to determine which party has the power to direct the activities that most significantly impact the entity’s economic performance. In situations where the Company or its partner approves, among other things, the annual budget, receives a detailed monthly reporting package, meets on a quarterly basis to review the results of the joint venture, reviews and approves the joint venture’s tax return before filing, and approves all leases that cover more than a nomin al amount of space relative to the total rentable space at each property, the Company does not consolidate the joint venture as it considers these to be substantive participation rights that result in shared power of the activities that most significantly impact the performance of the joint venture. The Company’s joint venture agreements also contain certain protective rights such as the requirement of partner approval to sell, finance or refinance the property and the payment of capital expenditures and operating expenditures outside of the approved budget or operating plan.  The Company does not have VIEs.
 
Federal Income Taxes
 
Commencing with the Company's taxable year ending December 31, 2010, the Company intends to elect to qualify as a REIT under Sections 856-860 of the Internal Revenue Code (the "Code").  Under those sections, a REIT that, among other things, distributes at least 90% of REIT taxable income and meets certain other qualifications prescribed by the Code will not be taxed on that portion of its taxable income that is distributed.
 
The Company follows the FASB guidance that defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The FASB also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The Company records interest and penalties relating to unrecognized tax benefits, if any, as interest expense.  As of September 30, 2010, the tax years 2007 through and including 2009 remain open to examination by the Internal Revenue Service (“IRS”) and state taxing authorities.  There are currently no examinations in progress.
 
Real Estate Investments
 
All capitalizable costs related to the improvement or replacement of real estate properties are capitalized.  Additions, renovations and improvements that enhance and/or extend the useful life of a property are also capitalized.  Expenditures for ordinary maintenance, repairs and improvements that do not materially prolong the normal useful life of an asset are charged to operations as incurred.  The Company expenses transaction costs associated with business combinations in the period incurred.  During the three and nine months ended September 30, 2010, the capitalized costs related to the improvements or replacement of real estate properties were $350,000 and $681,000, respectively.
 
Upon the acquisition of real estate properties, the fair value of the real estate purchased is allocated to the acquired tangible assets (consisting of land, buildings and improvements), and acquired intangible assets and liabilities (consisting of above-market and below-market leases and acquired in-place leases).  Acquired lease intangible assets include above market leases and acquired in-place leases in the accompanying consolidated balance sheet.  The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management's determination of the relative fair values of these assets.  In valuing an acquired property's intangibles, factors considered by management include a n estimate of carrying costs during the expected lease-up periods, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand.  Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.  Leasing commissions, legal and other related costs ("lease origination costs") are classified as deferred charges in the accompanying balance sheet.
 
 
-6-

 
The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant.  Above-market and below-market lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management's estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of acquisition.  Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal period(s).  The fair values associated with below m arket rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions.  The value of the above-market and below-market leases associated with the original lease term is amortized to rental income, over the terms of the respective leases.  The value of below market rental lease renewal options is deferred until such time as the renewal option is exercised and subsequently amortized over the corresponding renewal period.  The value of in-place leases are amortized to expense, and the above-market and below-market lease values are amortized to rental income, over the remaining non-cancelable terms of the respective leases.  If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time.  If, up to one year from the acquisition date, information regarding fair value of a ssets acquired and liabilities assumed is received and estimates are refined, appropriate property adjustments are made to the purchase price allocation on a retrospective basis.
 
In conjunction with the Company’s pursuit and acquisition of real estate investments, the Company expensed acquisition transaction costs during the three and nine months ended September 30, 2010 of $475,605 and $1.5 million, respectively.  No acquisition transaction costs were incurred during the three and nine months ended September 30, 2009.
 
Regarding the Company's 2010 property acquisitions (see Note 2), the fair values of in-place leases and other intangibles have been allocated to intangible assets and liability accounts.  Such allocations are preliminary and may be adjusted as final information becomes available.
 
The Company is currently in the process of evaluating the fair value of the in-place leases for the properties Grand Mart Plaza Property and Sycamore Creek Property (see Note 2).  Consequently, no value has been assigned to the leases.  Accordingly, the purchase price allocation is preliminary and may be subject to change.
 
For the three and nine months ended September 30, 2010, the net amortization of acquired lease intangible assets and acquired lease intangible liabilities was $163,000 and $330,000 respectively, which amounts are included in base rents in the accompanying consolidated statements of operations.  For the three and nine months ended September 30, 2009, the net amortization of acquired lease intangible assets and acquired lease intangible liabilities was $0.
 
Asset Impairment
 
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to aggregate future net cash flows (undiscounted and without interest) expected to be generated by the asset.  If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value.  Management does not believe that the value of any of its real estate investments is impaired at September 30, 2010.
 
Cash and Cash Equivalents
 
Cash and cash equivalents consist of cash held in banks and money market depository accounts with U.S financial institutions with original maturities of less than ninety days.  These balances in the United States may exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits.
 
 
-7-

 
Restricted Cash
 
                The terms of several of the Company’s mortgage loans payable require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established and is not available to fund other property-level or Company-level obligations.
 
Revenue Recognition
 
Management has determined that all of the Company's leases with its various tenants are operating leases.  Rental income is generally recognized based on the terms of leases entered into with tenants.  In those instances in which the Company funds tenant improvements and the improvements are deemed to be owned by the Company, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant.  When the Company determines that the tenant allowances are lease incentives, the Company commences revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin.  Minimum rental income from leases with scheduled rent increases is recognized on a straight-line basis over t he lease term.  Percentage rent is recognized when a specific tenant's sales breakpoint is achieved.  Property operating expense recoveries from tenants of common area maintenance, real estate taxes and other recoverable costs are recognized in the period the related expenses are incurred.  Lease incentives are amortized as a reduction of rental revenue over the respective tenant lease terms.
 
Termination fees (included in rental revenue) are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration date.  The Company recognizes termination fees in accordance with Securities and Exchange Commission Staff Accounting Bulletin 104, "Revenue Recognition," when the following conditions are met: (a) the termination agreement is executed; (b) the termination fee is determinable; (c) all landlord services pursuant to the terminated lease have been rendered, and (d) collectivity of the termination fee is assured.  Interest income is recognized as it is earned.  Gains or losses on disposition of properties are recorded when the criteria for recognizing such gains or losses under generally acc epted accounting principles have been met.
 
The Company must make estimates as to the collectability of its accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues.  Management analyzes accounts receivable and the allowance for bad debts by considering tenant creditworthiness, current economic trends, and changes in tenants' payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable.  The Company also provides an allowance for future credit losses of the deferred straight-line rents receivable.  The provision for doubtful accounts was $269,000 and $451,000 for the three and nine months ended September 30, 2010, respectively.  The provision for doubtful accounts was $0 for the three and nine months ended September 30, 2009.
 
Depreciation and Amortization
 
The Company uses the straight-line method for depreciation and amortization.  Buildings are depreciated over the estimated useful lives which the Company estimates to be 35-40 years.  Property improvements are depreciated over the estimated useful lives that range from 10 to 20 years.  Furniture and fixtures are depreciated over the estimated useful lives that range from 3 to 10 years.  Tenant improvements are amortized over the shorter of the life of the related leases or their useful life.
 
Deferred Charges
 
Deferred charges consist principally of leasing commissions and acquired lease origination costs (which are amortized ratably over the life of the tenant leases).  Deferred charges in the accompanying consolidated balance sheets are shown at cost, net of accumulated amortization of $418,000 and $0 as of September 30, 2010 and December 31, 2009, respectively.
 
 
-8-

 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and tenant receivables.  The Company places its cash and cash equivalents in excess of insured amounts with high quality financial institutions.  The Company performs ongoing credit evaluations of its tenants and requires tenants to provide security deposits.
 
Earnings (Loss) Per Share
 
Basic earnings (loss) per share ("EPS") excludes the impact of dilutive shares and is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock and then shared in the earnings of the Company.
 
As of September 30, 2010 and September 30, 2009, the effect of the 41,400,000 warrants issued in connection with the initial Public Offering (the "Public Offering"), the 8,000,000 warrants (the “Private Placement Warrants”) purchased simultaneously by the Sponsor with the consummation of the Public Offering, and the restricted stock and options granted in 2009 were not included in the calculation of diluted EPS since the effect would be anti-dilutive.
 
Stock-Based Compensation
 
The Company has a stock-based employee compensation plan, which is more fully described in Note 5.
 
The Company accounts for its stock-based compensation plans based on the FASB guidance which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures.  It is the Company's policy to grant options with an exercise price equal to the quoted closing market price of stock on the grant date.  Awards of stock options and restricted stock are expensed as compensation on a current basis over the benefit period.
 
Derivatives
 
The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.  Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.&# 160; Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
 
Segment Reporting
 
The Company operates in one industry segment which involves, investing in, acquiring, owning, and managing commercial real estate in the United States.  Accordingly, the Company has a single reportable segment for disclosure purposes.
 
Accounting Standards Updates
 
Effective January 1, 2010 the Company adopted the accounting guidance related to noncontrolling interests in the consolidated financial statements, which clarifies that a noncontrolling interest in a subsidiary (minority interests or certain limited partners' interest, in the case of the Company), subject to the classification and measurement of redeemable securities, is an ownership interest in a consolidated entity which should be reported as
 
 
-9-

 
equity in the parent company's consolidated statements.  The guidance requires a reconciliation of the beginning and ending balances of equity attributable to noncontrolling interests and disclosure, on the face of the consolidated statement of operations, of those amounts of consolidated statement of operations attributable to the noncontrolling interests, eliminating the past practice of reporting these amounts as an adjustment in arriving at consolidated statement of operations.  The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
 
Effective January 1, 2010 the Company adopted the FASB guidance which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets.  The guidance eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures.  The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
 
Effective January 1, 2010 the Company adopted the FASB guidance which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The guidance clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance.  The guidance requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE.  The guidance also requires additional disclosures about a company's involvement in VIE’s and any significant changes in risk exposure due to that involvement.  60;The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
 
In June 2009, the FASB issued updated accounting guidance for determining whether an entity is a VIE, and requires the performance of a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE. The updated guidance requires an entity to consolidate a VIE if it has (i) the power to direct the activities that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. This guidance is effective for fiscal years beginning after November 15, 2009 and early adoption is not permitted. The Company adopted the updated guidance as of January 1, 2010. The adoption of this guidance did not have a material effect on the consolidated financial st atements.
 
Supplemental consolidated statements of cash flow information
 
   
For the Nine Months Ended
 
   
September 30,
2010
   
September 30,
2009
 
Supplemental disclosure of cash activities:
           
     Interest paid
  $ 43,481     $  
                 
Supplemental disclosure of non-cash  activities:
               
Assumption of mortgage loans payables - acquisitions
    18,794,888        
Purchase accounting allocations:
               
Intangible lease liabilities
    11,318,863        
Net valuation increase in assumed mortgage loan payable (a)
    973,599        
Other non-cash investing and financing activities:
               
Accrued interest rate swap liabilities
    2,069,356        
Accrued real estate improvement costs
    36,176        
Accrued financing costs and other
    2,028        
Capitalization of deferred financing costs
    (186,574 )      
 
(a)  
The net valuation increase in the assumed mortgage loan payables resulted from adjusting the contract rate of interest for Cascade Summit Loan (7.25% per annum) and Heritage Market Loan (7.1% per annum) to a market rate of interest (3.62% and 3.31% per annum, respectively).

2.
Real Estate Investments
 
The following real estate investment transactions have occurred during the nine months ended September 30, 2010.
 
 
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Property Acquisitions
 
On January 26, 2010, the Company acquired a shopping center located in Santa Ana, California (the "Santa Ana Property"), for a purchase price of approximately $17.3 million.  The Santa Ana Property is a shopping center of approximately 100,306 square feet.  The Santa Ana Property has two major anchor tenants, including Food 4 Less and FAMSA Furniture Store.  The acquisition of the property was funded from available cash.
 
On February 1, 2010, the Company acquired a shopping center located in Kent, Washington (the "Meridian Valley Property"), for an aggregate purchase price of approximately $7.1 million.  The Meridian Valley Property is a fully leased shopping center of approximately 51,566 square feet, anchored by a QFC (Kroger) Grocery store.  The acquisition of the property was funded from available cash.
 
On February 2, 2010, the Company purchased a 99.97% membership interest in ROIC Phillips Ranch, LLC, (the "Phillips Ranch, LLC") which owns and manages the Grand Mart Plaza Shopping Center formerly known as the Phillips Ranch Shopping Center (the "Grand Mart Plaza Property"), a neighborhood center located in Pomona, California, for an aggregate purchase price of approximately $7.4 million.  The Grand Mart Plaza Property is approximately 125,554 square feet.  The investment in the Phillips Ranch, LLC was funded from available cash.
 
As the managing member of the Phillips Ranch, LLC, a subsidiary of the Company has the authority to oversee the day-to-day operations of the Phillips Ranch, LLC.  The Phillips Ranch, LLC has hired an affiliate (the "Phillips Ranch Manager") of the third party member of the Phillips Ranch, LLC which holds a 0.03% membership interest in the Phillips Ranch, LLC to assist in managing and operating the Grand Mart Plaza Property as specified in that certain Management Services Agreement dated February 2, 2010 between Phillips Ranch, LLC and the Phillips Ranch Manager.  The Company receives a management fee based on 4% of collected revenue.  The Phillips Ranch Manager is to receive a monthly asset management fee of $8,000.  Effective July 1, 2010, the Management Services Agreement dated February 2 , 2010, was terminated.
 
On March 11, 2010, the Company acquired a shopping center located in Lake Stevens, Snohomish County, Washington (the "Lake Stevens Property"), for an aggregate purchase price of approximately $16.2 million.  The Lake Stevens Property is a shopping center of approximately 74,130 square feet and anchored by Haggen Food & Pharmacy.  The acquisition of the property was funded from available cash.
 
On April 5, 2010, the Company acquired a shopping center located in Sacramento, California (the "Norwood Property"), for an aggregate purchase price of $13.5 million.  The Norwood Property is approximately 90,000 square feet and is anchored by Viva Supermarket, Rite Aid and Citi Trends.  The acquisition of the property was funded from available cash.
 
On April 8, 2010, the Company acquired a shopping center located in Pleasant Hill, California (the "Pleasant Hill Marketplace Property"), for an aggregate purchase price of $13.7 million.  The Pleasant Hill Marketplace Property is approximately 71,000 square feet and is anchored by Office Depot and Basset Furniture, and shadow anchored by Best Buy.  The acquisition of the property was funded from available cash.
 
On June 17, 2010, the Company acquired a shopping center located in Vancouver, Washington (the "Vancouver Market Center Property"), for an aggregate purchase price of $11.2 million.  The Vancouver Market Center Property is approximately 118,500 square feet and is anchored by Albertsons and Portland Habitat for Humanity, and shadow anchored by Taco Bell, Subway, Carl’s Jr and Blockbuster.  The acquisition of the property was funded from available cash.
 
On July 14, 2010, the Company acquired a shopping center located in Happy Valley, Oregon (the “Happy Valley Town Center Property”), for an aggregate purchase price of $39.4 million.  The Happy Valley Town Center Property is approximately 135,422 square feet and is anchored by New Season Market Inc.  The acquisition of the property was funded from available cash.
 
On July 14, 2010, the Company acquired a shopping center located in Oregon City, Oregon (the “Oregon City Point Property”), for an aggregate purchase price of $11.6 million.  The Oregon City Point Property is
 
 
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approximately 35,305 square feet and consists of 19 shop tenants.  The acquisition of the property was funded from available cash.
 
On August 20, 2010, the Company acquired a shopping center located in West Linn, Oregon (the “Cascade Summit Town Square Property”), for an aggregate purchase price of $17.1 million.  The Cascade Summit Town Square Property is approximately 94,924 square feet and is anchored by Safeway Inc.  The acquisition was funded in part from available cash of $9.9 million and the assumption of an existing mortgage of $7.2 million (the “Cascade Summit Loan”).
 
On September 23, 2010, the Company acquired a shopping center located in Vancouver, Washington (the “Heritage Market Center Property”), for an aggregate purchase price of $20.0 million.  The Heritage Market Center Property is approximately 107,471 square feet and is anchored by Safeway Inc.  The acquisition was funded in part from available cash of $8.4 million and the assumption of an existing mortgage of $11.6 million (the “Heritage Market Loan”).
 
On May 18, 2010, the Company acquired a mortgage note from a financial institution for an aggregate purchase price of $7.3 million, which represents a 68.2% discount to face value of $23 million at the time of acquisition. The note matured in July 2009 and the borrowers were in default.  The note was secured by a shopping center located in Claremont, California (the “Claremont Center Property”).  On September 20, 2010, the Company entered into a conveyance in lieu of foreclosure agreement (the “Conveyance Agreement”) with the borrower to acquire the Claremont Center Property.  Pursuant to the Conveyance Agreement, a subsidiary of the Company, as the holder of the note, agreed not to bring any action against the borrowers or the guarantors, subject to certain exceptions, a nd the borrowers agreed to transfer the Claremont Center Property to a subsidiary of the Company. The conveyance was completed on September 23, 2010. The Claremont Center Property is a neighborhood shopping center of approximately 91,000 square feet.
 
On September 30, 2010, the Company acquired a shopping center located in Corona, California (the “Sycamore Creek Property”), for an aggregate purchase price of approximately $17.3 million.  The Sycamore Creek Property is approximately 74,198 square feet and is anchored by Safeway Inc. (Vons).  The acquisition of the property was funded from available cash.
 
Mortgage Notes Receivable
 
On June 28, 2010, the Company through a 50/50 joint venture with Winthrop Realty Trust acquired from John Hancock Life Insurance Company a newly created B participation interest, represented by a B-note of an existing promissory note secured by Riverside Plaza Shopping Center (“Riverside Plaza”).  The Company’s equity investment is $7.8 million.  Riverside Plaza is located in Riverside, California and is approximately 407,952 square feet and approximately 99% occupied.  The Participation Agreement also includes a buy-out provision of the A participation of the promissory note upon monetary or maturity default.  The A participation has an original principal balance of $54.4 million.  If the Company declines to purchase the A participation, the only rights ret ained by the B participation will be for residual proceeds above the A participation.  The acquisition of the B-note was funded from available cash.
 
On July 9, 2010, the Company acquired a defaulted first mortgage note for an aggregate purchase price of $9.2 million.  The note matured in May 2010 and was secured by a shopping center located in Downey, California known as Gallatin Plaza.  The acquisition of the mortgage note was funded from available cash. On August 20, 2010, the borrower paid to the Company the principal balance and unpaid interest in the amount of $9.4 million in full satisfaction of the note.
 
Unconsolidated Joint Ventures
 
On July 13, 2010, the Company through a wholly owned subsidiary entered into an Operating Agreement (the "Operating Agreement") of Wilsonville OTS LLC (“Joint Venture”) with Gramor Wilsonville OTS LLC ("Gramor"), with respect to the purchase of a 5.8 acre parcel of land known as Wilsonville Old Town Square ("Wilsonville Old Town Square") in Wilsonville, Oregon and the development of a 50,613 square feet shopping
 
 
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center on such land.  The Company expects that Wilsonville Old Town Square will be shadow anchored by a 145,000 square foot Fred Meyer (The Kroger Co.) which is to be developed.
 
Pursuant to the Operating Agreement, the Company and Gramor have each agreed to make capital contributions, on a 95%/5% basis, respectively, up to approximately $4.15 million in connection with the acquisition and development of Wilsonville Old Town Square. The Joint Venture plans on funding the remaining development costs by obtaining a construction loan from a third party.
 
 The members will receive a 9% preferred return on their respective capital contributions and, following a return of the members' capital contributions, all distributions thereafter will be made on a 50%/50% basis to the members.
 
On July 19, 2010 and July 22, 2010, in two separate transactions, the Company contributed a total of $3.7 million into Wilsonville OTS LLC, pursuant to the Operating agreement.  The Contributions were funded from available cash.
 
Pursuant to the Operating Agreement the members appointed Gramor as the managing member to oversee the day-to day operations of the Joint Venture.
 
The Company accounts for its investment in the Joint Venture under the equity method of accounting since it exercises significant influence over, but does not control the Joint Venture. The other member in the Joint Venture has substantial participation rights in the financial decisions and operations of the Joint Venture. The Company has evaluated its investment in the Joint Venture and has concluded that the Joint Venture is not a VIE.
 
3.
Mortgage Notes Payables
 
On August 20, 2010, the Company assumed an existing mortgage loan with an outstanding principal balance of approximately $7.2 million as part of the acquisition of the Cascade Summit Town Square Property. The fair market value was determined to be $7.7 million.  The Cascade Summit Loan bears interest at a rate of 7.25% per annum and has a maturity date of July 2012.
 
On September 23, 2010, the Company assumed an existing mortgage loan with an outstanding principal balance of approximately $11.6 million as part of acquisition of the Heritage Market Center Property. The fair market value was determined to be $12.1 million. The Heritage Market Loan bears interest at a rate of 7.1% per annum and has a maturity date of December 2011.
 
4.
Preferred Stock
 
The Company is authorized to issue 50,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2010 and December 31, 2009, there were no shares of preferred stock outstanding.
 
5.
Common Stock and Warrants
 
On October 23, 2007, the Company sold 41,400,000 units ("Units") in the Public Offering at a price of $10 per Unit, including 5,400,000 Units sold by the underwriters in their exercise of the full amount of their over-allotment option.  Each Unit consists of one share of the Company's common stock and one warrant.
 
Simultaneously with the consummation of the Public Offering, the Sponsor purchased 8,000,000 Private Placement Warrants at a purchase price of $1.00 per warrant.  The Private Placement Warrants were identical to the warrants sold in the Public Offering except that the Private Placement Warrants are exercisable on a cashless basis as long as they are still held by the Sponsor or its permitted transferees.  In addition, the Private Placement and Public placement warrants have different prices that the stock must trade before the Company is able to redeem the warrants.   The purchase price of the Private Placement Warrants approximated the fair value of such warrants at the purchase date.
 
 
-13-

 
The Company has the right to redeem all of the warrants it issued in the Public Offering and the Private Placement Warrants, at a price of $0.01 per warrant upon 30 days' notice while the warrants are exercisable, only in the event that the last sale price of the common stock is at least a specified price.  The terms of the warrants are as follows:
 
 
·
The exercise price of the warrants is $12.00.
 
 
·
The expiration date of the warrants is October 23, 2014.
 
 
·
The price at which the Company's common stock must trade before the Company is able to redeem the warrants it issued in the Public Offering is $18.75.
 
 
·
The price at which the Company's common stock must trade before the Company is able to redeem the Private Placement Warrants is (x) $22.00, as long as they are held by the Sponsor or its members, members of its members' immediate families or their controlled affiliates, or (y) $18.75.
 
 
·
A warrantholder's ability to exercise warrants is limited to ensure that such holder's "Beneficial Ownership" or "Constructive Ownership," each as defined in the Company's certificate of incorporation, does not exceed the restrictions contained in the certificate of incorporation limiting the ownership of shares of the Company's common stock.
 
The Company has reserved 53,400,000 shares for the exercise of warrants issued during the Public Offering and the Private Placement Warrants, and issuance of shares under the Company's 2009 Equity Incentive Plan (the "2009 Plan").
 
Warrant Repurchase
 
In May 2010, the Company's Board of Directors authorized a warrant repurchase program to repurchase up to a maximum of $40 million of the Company's warrants.  To date, the Company has not repurchased warrants under such program.
 
6.
Stock Compensation and Other Benefit Plans
 
The Company follows the FASB guidance related to stock compensation which establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer's stock.  The guidance also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
 
During 2009, the Company adopted the 2009 Plan.  The 2009 Plan provides for grants of restricted common stock and stock option awards up to an aggregate of 7.5% of the issued and outstanding shares of the Company's common stock at the time of the award, subject to a ceiling of 4,000,000 shares.
 
Restricted Stock
 
During the nine months ended September 30, 2010, the Company did not award any shares of restricted stock.  As of September 30, 2010 there remained a total of $1.7 million of unrecognized restricted stock compensation related to outstanding nonvested restricted stock grants awarded under the 2009 Plan. Restricted stock compensation is expected to be expensed over a remaining weighted average period of 2.25 years.  For the three and nine months ended September 30, 2010, amounts charged to compensation expense totaled $189,000 and $567,100, respectively.  For the three and nine months ended September 30, 2009, amounts charged to compensation expense totaled $0.
 
 
-14-

 
A summary of the status of the Company's nonvested restricted stock awards as of September 30, 2010, and changes during the nine months ended September 30, 2010 are presented below:
 
   
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Nonvested at December 31, 2009
    235,000     $ 10.27  
Granted
           
Vested
           
Forfeited
           
Nonvested at September 30, 2010
    235,000     $ 10.27  

Stock Options
 
A summary of options activity as of September 30, 2010, and changes during the nine months ended September 30, 2010 is presented below:
 
   
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2009
    235,000     $ 10.25  
Granted
           
Exercised
           
Expired
           
Outstanding at September 30, 2010
    235,000     $ 10.25  
Exercisable at September 30, 2010
           

For the three and nine months ended September 30, 2010, amounts charged to compensation expense totaled $40,113 and $120,340, respectively.  For the three and nine months ended September 30, 2009, amounts charged to compensation expense totaled $0.  The total unearned compensation at September 30, 2010 was $362,000.  The shares vest over an average period of 2.75 years.
 
7.
Fair Value of Financial Instruments
 
The Company follows the FASB guidance that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
 
The guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. 0; In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
 
-15-

 
Derivative Financial Instruments
 
Currently, the Company uses one interest rate swap to manage its interest rate risk.   The valuation of this instrument is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative.  This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities.  The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). & #160;The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
 
To comply with the guidance the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contract for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
 
Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of September 30, 2010 the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative.  As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
 
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2010
 
   
Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable Inputs
(Level 3)
   
Balance at
September 30,
2010
 
Assets
                       
Derivative financial instruments
  $     $     $     $  
Liabilities
                               
Derivative financial instruments
  $     $ (2,069,000 )   $     $ (2,069,000 )
 
The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies as discussed in Note 2.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts realizable upon disposition of the financial instruments.  The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
 
The carrying values of cash and cash equivalents, restricted cash, tenant and other receivables, deposits, income tax receivable, prepaid expenses, other assets and accounts payable and accrued expenses are reasonable estimates of their fair values because of the short-term nature of these instruments.  Notes receivable is based on actual payments made on the note and includes accrued interest.  Mortgage notes receivable are based on the actual disbursements incurred for these recent acquisitions. Mortgage notes payable were recorded at their fair value at the time the mortgages were assumed which occurred during the three months ended September 30, 2010.
 
Disclosure about fair value of financial instruments is based on pertinent information available to us as of September 30, 2010.  Although the Company is not aware of any factors that would significantly affect the

 
-16-

 
reasonable fair value amount, such amount have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
 
8.
Accounts Payble and Accrued Expenses
 
Accounts payable and accrued expenses consist of the following:
 
   
September 30,
2010
   
December 31,
2009
 
Framework Transaction costs
  $     $ 2,440,060  
Professional fees
    982,040       896,928  
Payroll and related costs
    1,590,937       521,598  
Costs related to the acquisition of properties and mortgage notes
    336,820       328,485  
Property taxes
    546,321        
Property operating
    146,270        
Landlord costs
    49,550        
Other
    249,168       247,515  
    $ 3,901,106     $ 4,434,586  

9.
Derivative and Hedging Activities
 
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
 
In June 2010, the Company entered into a $25 million forward starting interest rate swap with Wells Fargo Bank, N.A.  The forward starting swap is being used to hedge the anticipated variable cash flows associated with the Company’s variable-rate debt that is planned to be issued between October 15, 2010 and December 31, 2011.  The effective portion of changes in the fair value of the derivative that is  designated as a cash flow hedge is being recorded in accumulated other comprehensive income and will be subsequently reclassified into earnings during the period in which the hedged forecasted transaction affects earnings.  Ineffectiveness, if any, related to the Company’s changes in estimates about the debt issuance related to the forward starting swap would be recogn ized directly in earnings.  During the period ended September 30, 2010, the Company realized no ineffectiveness as a result of the hedging relationship.
 
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest expense is recognized on the hedged debt.  During the next twelve months, the Company estimates that $194,000 will be reclassified as an increase to interest expense.
 
As of September 30, 2010, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
Interest Rate Derivative
 
Number of instruments
                          
Notional
 
Interest rate swap
    1     $ 25,000,000  

As of December 31, 2009, the Company had no outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk.
 
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2010:
 
Derivatives designed as hedging instruments
Balance sheet location
Fair Value(liability)
 
Interest rate products
Other liabilities
  $ (2,069,000 )
 
 
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Derivatives in Cash Flow Hedging Relationships
 
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three months and nine months ended September 30, 2010.  The Company had no derivatives outstanding as of December 31, 2009.
 
   
Three Months
Ended
September 30,
2010
   
Nine Months
Ended
September 30,
2010
 
Amount of loss recognized in accumulated  other comprehensive income as interest rate derivatives (effective portion)
  $ (1,200,000 )   $ (2,069,000 )
Amount of  loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
  $     $  
Amount of gain recognized in income on derivative as gain on derivative instruments (ineffective portion and amount excluded from effectiveness testing)
  $     $  

10.
Commitments and Contingencies
 
In the normal course of business, from time to time, the Company is involved in legal actions relating to the ownership and operations of its properties.  In management's opinion, the liabilities, if any, that ultimately may result from such legal actions are not expected to have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.
 
11.
Related Party Transactions
 
During the year ended December 31, 2009, the Company entered into a Transitional Shared Facilities and Services Agreement with NRDC Real Estate Advisors, LLC, an entity wholly owned by four of the Company's directors, which replaced the original agreement with the Sponsor.  Pursuant to the Transitional Shared Facilities and Services Agreement, NRDC Real Estate Advisors, LLC provides the Company with access to, among other things, their information technology, office space, personnel and other resources necessary to enable the Company to perform its business, including access to NRDC Real Estate Advisors, LLC's real estate teams, who will work with the Company to source, structure, execute and manage properties for a transitional period.  As of September 30, 2010, the Company paid NRDC Real Estate Advisors , LLC a monthly fee of $7,500 pursuant to the Transitional Shared Facilities and Services Agreement.  For the three and nine months ended September 30, 2010, the Company has incurred $22,500 and $67,500, respectively, of expenses relating to this agreement which is included in general and administrative expenses in the accompanying consolidated statements of operations.  For the three and nine months ended September 30, 2009, the Company has incurred $22,500 and $67,500, respectively, of expenses relating to this agreement which is included in general and administrative expenses in the accompanying consolidated statements of operations.
 
In May 2010, the Company entered into a Shared Facilities and Service Agreement effective January 1, 2010 with an officer of the Company.  Pursuant to the Shared Facilities and Service Agreement the Company is provided the use of office space and other resources for a monthly fee of $1,938.  For the three and nine months ended September 30, 2010, the Company has incurred $5,814 and $17,442, respectively, of expenses relating to this agreement which is included in general and administrative expenses in the accompanying consolidated statements of operations.  For the three and nine months ended September 30, 2009, the Company did not incur expenses relating to this agreement.
 
The related party payable at September 30, 2010 and December 31, 2009 was related to expenses paid by Hudson Bay Trading Company, an affiliate of the Sponsor, on the Company's behalf.
 
12.
Subsequent Events
 
In determining subsequent events, the Company reviewed all activity from October 1, 2010 to the date the financial statements are issued and discloses the following items:
 
 
-18-

 
On October 6, 2010, the Company contributed $737,000 into the Joint Venture Wilsonville OTS LLC, pursuant to the Operating Agreement.  The contribution was funded from available cash.

On October 15, 2010, the Company entered into an agreement for the purchase and sale of real property and joint venture escrow instruction with Pinole Vista LLC, the seller, to acquire a property known as the Pinole Vista Shopping Center, located in Pinole, California.  In accordance with the terms of this agreement, $250,000 was deposited into an interest-bearing escrow account with the Title Company on October 15, 2010.
 
On November 2, 2010, the Company’s Board of Directors declared a cash dividend on its common stock of $.06 per share, payable on December 15, 2010 to holders of record on November 26, 2010.
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS
 
In this Quarterly Report on Form 10-Q, we refer to Retail Opportunity Investments Corp. as "we," "us," "Company," or "our," unless we specifically state otherwise or the context indicates otherwise.
 
When used in this discussion and elsewhere in this Quarterly Report on Form 10-Q, the words "believes," "anticipates," "projects," "should," "estimates," "expects," and similar expressions are intended to identify forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and in Section 21F of the Securities and Exchange Act of 1934, as amended (the "Exchange Act").  Actual results may differ materially due to uncertainties including:
 
 
·
the Company’s ability to identify and acquire retail real estate and real estate-related debt investments that meet its investment standards in its target markets and the time period required for it to acquire its initial portfolio of target assets;
 
 
·
the level of rental revenue and net interest income the Company achieve from its target assets;
 
 
·
the market value of the Company’s assets and the supply of, and demand for, retail real estate and real estate-related debt investments in which the Company invests;
 
 
·
the length of the current economic downturn;
 
 
·
the conditions in the local markets in which the Company operates, as well as changes in national economic and market conditions;
 
 
·
consumer spending and confidence trends;
 
 
·
the ability to enter into new leases or to renew leases with existing tenants at the properties the Company acquire at favorable rates;
 
 
·
the ability to anticipate changes in consumer buying practices and the space needs of tenants;
 
 
·
the competitive landscape impacting the properties the Company acquires and their tenants;
 
 
·
the Company’s relationships with its tenants and their financial condition;
 
 
·
the use of debt as part of the Company’s financing strategy and the Company’s ability to make payments or to comply with any covenants under any borrowings or other debt facilities the Company obtains;
 
 
·
the level of the Company’s operating expenses, including amounts the Company is required to pay to its management team and to engage third party property managers;
 
 
-19-

 
 
 
·
changes in interest rates that could impact the market price of the Company’s common stock and the cost of its borrowings; and
 
 
·
legislative and regulatory changes (including changes to laws governing the taxation of real estate investment trusts ("REITs")).
 
Forward-looking statements are based on estimates as of the date of this report.  The Company disclaims any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.
 
The risks included here are not exhaustive.  Other sections of this report may include additional factors that could adversely affect the Company’s business and financial performance.  Moreover, the Company operates in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
 
Overview
 
Retail Opportunity Investments Corp., formerly known as NRDC Acquisition Corp., was formed on July 10, 2007 as a special purpose acquisition corporation for the purpose of acquiring, through a merger, capital stock exchange, stock purchase, asset acquisition, or other similar business combination, one or more assets or control of one or more operating businesses.  Through October 19, 2009, the Company’s efforts had been limited to organizational activities and activities relating to its initial public offering; the Company had neither engaged in any operations nor generated any revenues.  On October 20, 2009, the Company completed the transactions contemplated by the Framework Agreement with NRDC Capital Management, LLC, which, among other things sets forth the steps taken by the Company to con tinue its business as a corporation that will elect to qualify as a REIT for U.S. federal income tax purposes, commencing with its taxable year ending December 31, 2010 (collectively, the "Framework Transactions").
 
Following the consummation of the Framework Transactions, the Company’s business has been primarily focused on investing in, acquiring, owning, leasing, repositioning and managing a diverse portfolio of necessity-based retail properties, including, primarily, well located community and neighborhood shopping centers, anchored by national or regional supermarkets and drugstores.  Although not the Company’s primary focus, the Company may also acquire other retail properties, including power centers, regional malls, lifestyle centers and single-tenant retail locations, that are leased to national, regional and local tenants.  The Company targets properties strategically situated in densely populated, middle and upper income markets in the eastern and western regions of the United States.  In addit ion, the Company may supplement its direct purchases of retail properties with first mortgages or second mortgages, mezzanine loans, bridge or other loans and debt investments related to retail properties, which are referred to collectively as "real estate-related debt investments," in each case provided that the underlying real estate meets the Company’s criteria for direct investments.  The Company’s primary focus with respect to real estate-related debt investments is to capitalize on the opportunity to acquire controlling positions that will enable the Company to obtain the asset should a default occur.  The Company refers to the properties and investments it targets as its target assets.  The Company is organized in a traditional umbrella partnership real estate investment trust ("UpREIT") format pursuant to which Retail Opportunity Investments GP, LLC, the Company’s wholly-owned subsidiary, serves as the general partner of, and the Company conducts substa ntially all of its business through, its operating partnership subsidiary, Retail Opportunity Investments Partnership, LP, a Delaware limited partnership (its "operating partnership"), and its subsidiaries.
 
Since the consummation of the Framework Transactions, the Company has been actively seeking to invest the amounts released from its trust account established in connection with its initial public offering (the "Trust Account") in its target assets.  As of September 30, 2010, its portfolio consisted of fourteen shopping centers in California, Oregon and Washington, a development joint venture and a mortgage notes receivable. At September 30, 2010, the Company’s portfolio contained approximately 1.3 million net rentable square feet and the properties in its portfolio were approximately 84.0 % leased.
 
 
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Subsequent Events
 
In determining subsequent events, the Company reviewed all activity from October 1, 2010 to the date the financial statements are issued and discloses the following items:
 
On October 6, 2010, the Company contributed $737,000 into the Joint Venture Wilsonville OTS LLC, pursuant to the Operating Agreement.  The contribution was funded from available cash.
 
On October 15, 2010, the Company entered into an agreement for the purchase and sale of real property and joint venture escrow instruction with Pinole Vista LLC, the seller, to acquire a property known as the Pinole Vista Shopping Center, located in Pinole, California.  In accordance with the terms of this agreement, $250,000 was deposited into an interest-bearing escrow account with the Title Company on October 15, 2010.
 
On November 2, 2010, the Company’s Board of Directors declared a cash dividend on its common stock of $.06 per share, payable on December 15, 2010 to holders of record on November 26, 2010.
 

Factors Impacting the Company’s Operating Results
 
The results of the Company’s operations are affected by a number of factors and primarily depend on, among other things, the following:
 
 
·
The Company’s ability to identify and acquire retail real estate and real estate-related debt investments that meet our investment standards and the time period required for the Company to acquire its initial portfolio of its target assets;
 
 
·
The level of rental revenue and net interest income the Company achieves from its target assets;
 
 
·
The market value of the Company’s assets and the supply of, and demand for, retail real estate and real estate-related debt investments in which the Company invests;
 
 
·
The length of the current economic downturn;
 
 
·
The conditions in the local markets in which the Company operates, as well as changes in national economic and market conditions;
 
 
·
Consumer spending and confidence trends;
 
 
·
The Company’s ability to enter into new leases or to renew leases with existing tenants at the properties the Company acquires at favorable rates;
 
 
·
The Company’s ability to anticipate changes in consumer buying practices and the space needs of tenants;
 
 
·
The competitive landscape impacting the properties we acquire and their tenants;
 
 
·
The Company’s relationships with its tenants and their financial condition;
 
 
·
The Company’s use of debt as part of its financing strategy and its ability to make payments or to comply with any covenants under any borrowings or other debt facilities the Company obtains;
 
 
·
The level of the Company’s operating expenses, including amounts the Company is required to pay to its management team and to engage third party property managers and loan servicers; and
 
 
·
Changes in interest rates that could impact the market price of the Company’s common stock and the cost of its borrowings.
 
 
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Report on Operating Results
 
Funds from operations ("FFO"), is a widely-recognized non-GAAP financial measure for REIT's that the Company believes when considered with financial statements determined in accordance with GAAP, provides additional and useful means to assess our financial performance.  FFO is frequently used by securities analysts, investors and other interested parties to evaluate the performance of REITs, most of which present FFO along with net income as calculated in accordance with GAAP.
 
We compute FFO in accordance with the "White Paper" on FFO published by the National Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income attributable to common shareholders (determined in accordance with GAAP) excluding gains or losses from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for partnerships and unconsolidated joint ventures.
 
In accordance with the Financial Accounting Standards Board (“FASB”) guidance relating to business combinations, the Company expenses all acquisition transaction costs related to the acquisitions. These costs which reduce FFO will vary based on each specific acquisition and the volume of acquisitions. Acquisition costs for the three and nine months ended September 30, 2010, were $475,605 and $1.5 million, respectively.
 
The Company considers FFO a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of its real estate assets diminishes predictably over time and industry analysts have accepted it as a performance measure.
 
However, FFO:
 
 
·
does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); and
 
 
·
should not be considered an alternative to net income as an indication of our performance.
 
FFO as defined by us may not be comparable to similarly titled items reported by other real estate investment trusts due to possible differences in the application of the NAREIT definition used by such REITs.  The table below provides a reconciliation of net income applicable to stockholders in accordance with GAAP to FFO for the three and nine months ended September 30, 2010.  FFO for the three and nine months ended September 30, 2009 is not provided, since no real estate assets were owned by us during this period.
 
   
For the Three
Months Ended
September 30, 2010
   
For the Nine
Months Ended
September 30, 2010
 
             
Net Loss for period
  $ (102,602 )   $ (2,833,881 )
                 
Plus: Real property depreciation
    696,305       1,277,764  
Amortization of tenant improvements and allowances
    133,563       210,102  
Amortization of deferred leasing costs
    808,190       1,432,420  
Funds from operations
  $ 1,535,456     $ 86,405  
                 
Net Cash Provided by (Used in):
               
Operating Activities
  $ 3,661,235     $ 3,377  
Investing Activities
  $ (92,680,356 )   $ (197,488,609 )
Financing Activities
  $ (2,526,328 )   $ (5,032,222 )

Results of Operations
 
The Company’s entire activity prior to the consummation of the Framework Transactions was limited to organizational activities, activities relating to its initial public offering and, after the initial public offering, activities
 
 
-22-

 
relating to identifying and evaluating prospective acquisition targets.  During that period, the Company neither engaged in any operations nor generated any revenues, other than interest income earned on the proceeds of the initial public offering.  Prior to the consummation of the Framework Transactions, the majority of its operating income is derived from interest earned from the Trust Account previously held.
 
The Company had fourteen properties in its portfolio at September 30, 2010.  The Company believes, because of the location of the properties in densely populated areas, the nature of its investment provides for relatively stable revenue flows even during difficult economic times.  The Company has a strong capital structure with manageable debt as of the quarter just ended.  The Company expects to continue to explore acquisition opportunities that might present themselves during this economic downturn consistent with its business strategy.
 
Results of Operations for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009
 
During the nine months ended September 30, 2010, the Company incurred a net loss of approximately $2.8 million compared to a net loss of approximately $3.3 million incurred during the nine months ended September 30, 2009.  The net loss during the nine months ended September 30, 2009 was due to costs related to the active pursuit of a viable business plan as well as costs related to the consummation of the Framework Transactions on October 20, 2009, which commenced the Company’s business plan of acquiring and managing retail properties.  In addition, during the nine months ended September 30, 2009, the Company realized a deferred tax asset which gave rise to a reduction of $1.7 million to the Company’s operating loss.  During the nine months ended September 30, 2010, th e Company generated net operating income of approximately $3.5 million from the fourteen properties in its portfolio at September 30, 2010.  In addition, during the nine months ended September 30, 2010, the Company generated interest income of $636,000 from several mortgage notes receivables acquired during 2010.  General and administrative expenses increased to approximately $6.3 million for the nine months ended September 30, 2010 from approximately $5.2 million during the nine months ended September 30, 2009 most of which was due to higher payroll costs incurred since key personnel were hired following the consummation of the Framework Transactions.  The Company incurred acquisition transaction costs during the nine months ended September 30, 2010 of approximately $1.5 million associated with its pursuit and acquisition of real estate properties.  During the nine months ended September 30, 2010 interest income recognized was $715,000 higher than the corresponding period in 2009 due to (i) the deferral during the nine months ended September 30, 2009 of a portion of interest income earned on investments while awaiting the consummation of the Company’s business plan (ii) the Company earned a higher interest rate in 2010 which was partially offset by lower cash balances in 2010.
 
Results of Operations for the three months ended September 30, 2010 compared to the three months ended September 30, 2009
 
During the three months ended September, 30 2010, the Company incurred a net loss of $102,602 compared to a net loss of approximately $2.3 million incurred during the three months ended September 30, 2009.  The net loss during the three months ended September 30, 2009 was due to costs related to the active pursuit of a viable business plan as well as costs related to the consummation of the Framework Transactions on October 20, 2009, which commenced the Company’s business plan of acquiring and managing retail properties.  In addition, during the three months ended September 30, 2009, the Company realized a deferred tax asset which gave rise to a reduction of $1.2 million to the Company’s operating loss.  During the three months ended September 30, 2010, the Company generate d net operating income of approximately $1.7 million from the fourteen properties in its portfolio at September 30, 2010.  In addition, during the three months ended September 30, 2010, the Company generated interest income of $618,000 from several mortgage notes receivables acquired during 2010.  General and administrative expenses reduced to approximately $2.1 million for the three months ended September 30, 2010 compared to approximately $3.6 million during the three months ended September 30, 2009 most of which was due to costs related to the consummation of the Framework Transactions.  The Company incurred acquisition transaction costs during the three months ended September 30, 2010 of $476,605 associated with its pursuit and acquisition of real estate investments.  During the three months ended September 30, 2010 interest income recognized was $170,000 higher than the corresponding period in 2009 due to (i) the deferral du ring the three months ended September 30, 2009 of a portion of interest income earned on investments while awaiting the consummation of the Company’s business plan (ii) the Company earned a higher interest rate in 2010 which was partially offset by lower cash balances in 2010.
 
 
-23-

 
Critical Accounting Policies
 
Critical accounting policies are those that are both important to the presentation of the Company’s financial condition and results of operations and require management's most difficult, complex or subjective judgments.  Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements.  This summary should be read in conjunction with the more complete discussion of the Company’s accounting policies included in Note 1 to its consolidated financial statements for the year ended December 31, 2009 included in its Annual Report on Form 10-K for the year ended December 31, 2009.
 
Revenue Recognition
 
The Company records base rents on a straight-line basis over the term of each lease.  The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in tenant and other receivables on the accompanying balance sheets.  Most leases contain provisions that require tenants to reimburse a pro-rata share of real estate taxes and certain common area expenses.  Adjustments are also made throughout the year to tenant and other receivables and the related cost recovery income based upon our best estimate of the final amounts to be billed and collected.  In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.
 
Allowance for Doubtful Accounts
 
The allowance for doubtful accounts is established based on a quarterly analysis of the risk of loss on specific accounts.  The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivables, the payment history of the tenants or other debtors, the financial condition of the tenants and any guarantors and management's assessment of their ability to meet their lease obligations, the basis for any disputes and the status of related negotiations, among other things.  Management's estimates of the required allowance is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on tenants, particularly those at retail properties.  Estimates are used to establish reimbursements from tenants for c ommon area maintenance, real estate tax and insurance costs.  The Company analyzes the balance of its estimated accounts receivable for real estate taxes, common area maintenance and insurance for each of its properties by comparing actual recoveries versus actual expenses and any actual write-offs.  Based on its analysis, the Company may record an additional amount in its allowance for doubtful accounts related to these items.  In addition, the Company also provides an allowance for future credit losses in connection with the deferred straight-line rent receivable.
 
Real Estate
 
Land, buildings, property improvements, furniture/fixtures and tenant improvements are recorded at cost.  Expenditures for maintenance and repairs are charged to operations as incurred.  Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.
 
The amounts to be capitalized as a result of an acquisition and the periods over which the assets are depreciated or amortized are determined based on estimates as to fair value and the allocation of various costs to the individual assets.  The Company allocates the cost of an acquisition based upon the estimated fair value of the net assets acquired.  The Company also estimates the fair value of intangibles related to its acquisitions.  The valuation of the fair value of intangibles involves estimates related to market conditions, probability of lease renewals and the current market value of in-place leases.  This market value is determined by considering factors such as the tenant's industry, location within the property and competition in the specific region in which the property operates. 60; Differences in the amount attributed to the intangible assets can be significant based upon the assumptions made in calculating these estimates.
 
The Company is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation.  These assessments have a direct impact on its net income.
 
 
-24-

 
Properties are depreciated using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives are as follows:
 
Buildings                                                                                          
35-40 years
Property Improvements                                                                                          
10-20 years
Furniture/Fixtures                                                                                          
3-10 years
Tenant Improvements                                                                                          
Shorter of lease term or their useful life

Asset Impairment
 
On a continuous basis, management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  A property value is considered impaired when management's estimate of current and projected operating cash flows (undiscounted and without interest) of the property over its remaining useful life is less than the net carrying value of the property.  Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors.  To the extent impairment has occurred, the loss is measured as the excess of the net carrying amount of the property over the fair value of the asset.  Changes in estimated future cash flows d ue to changes in our plans or market and economic conditions could result in recognition of impairment losses which could be substantial.  Management does not believe that the value of its rental properties is impaired at September 30, 2010.
 
REIT Qualification Requirements
 
The Company intends to elect and qualify to be taxed as a REIT under the Internal Revenue Code (the “Code”), commencing with its taxable year ending December 31, 2010.  The Company believes that it has been organized and intends to operate in a manner that will allow it to qualify for taxation as a REIT under the Code commencing with its taxable year ending December 31, 2010.
 
Liquidity and Capital Resources
 
Liquidity is a measure of the Company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain its assets and operations, make distributions to its stockholders and meet other general business needs.  Currently the Company’s primary sources of cash generally consist of the funds released from its Trust Account upon consummation of the Framework Transactions that occurred during the year ended December 31, 2009, cash generated from its operating results and interest it receives on its cash investments.  The Company will use its current cash to purchase its target assets, make distributions to its stockholders and fund its operations.  The Company expects to fund long-term liquidity requirements for property acquisitions, developmen t, and capital improvements through a combination of unsecured and secured debt financing, assumption of existing mortgage debt on acquired properties and the sale of equity securities.  As of September 30, 2010, the Company had cash and cash equivalents of approximately $180.7 million, compared to approximately $383.2 million at December 31, 2009.
 
While the Company generally intends to hold its target assets as long term investments, certain of its investments may be sold in order to manage the Company interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions.  The timing and impact of future sales of its investments, if any, cannot be predicted with any certainty.
 
Potential future sources of capital include proceeds from the sale of real estate or real estate-related debt investments, proceeds from unsecured or secured financings from banks or other lenders and undistributed funds from operations.  In addition, the Company anticipates raising additional capital from future equity financings and if the value of its common stock exceeds the exercise price of its warrants through the sale of common stock to the holders of its warrants from time to time.
 
During the three months ended September 30, 2010, the Company assumed two mortgage loans in connection with two separate real estate acquisitions.  The assumptions of these loans were deemed to be cost beneficial when compared to the defeasance fees that would have been incurred to prepay the loans on behalf of the seller of each applicable property.  As of September 30, 2010, the Company has
 
 
-25-

 
determined that it has adequate working capital to meet its debt obligations and operating expenses for the next twelve months.
 
Net Cash Flows from:
 
Operating Activities
 
Net cash flows provided by operating activities amounted to $3,400 in the nine months ended September 30, 2010, compared to approximately $2.2 million used in the comparable period in 2009.  The net increase in operating cash flows during the nine months ended September 30, 2010 was due primarily to an increase in net operating income of approximately $3.5 million due to the acquisition of fourteen properties compared to the corresponding period. The operating income generated from the new acquisitions was partially offset by higher general and administrative expenses of approximately $1.1 million incurred following the approval of the Framework Transaction. During the nine months ended September 30, 2009, the Company had not commenced operations as the search for a viable business plan was ongoing.
 
Investing Activities
 
Net cash flows used by investing activities amounted to approximately $197.5 million in the nine months ended September 30, 2010 compared to net cash provided by investing activities of approximately $2.4 million in the comparable period in 2009 due to the acquisition of fourteen properties, one mortgage note receivable and deposits placed on several potential acquisitions during the nine months ended September 30, 2010.  During the nine months ended September 30, 2009, the Company had not commenced operations as the search for a viable business plan was ongoing.
 
Financing Activities
 
Net cash flows used by financing activities amounted to approximately $5 million for the nine months ended September 30, 2010 compared to $0 in the comparable period in 2009.  The change in financing activities during the nine months ended September 30, 2010 was due primarily to the payment of dividends to common stockholders of approximately $5 million.  No dividends were paid during the nine months ended September 30, 2009.
 
Contractual Obligations
 
As of September 30, 2010, the Company did not have any capital lease obligations, operating lease obligations, or purchase obligations.  Upon consummation of the Framework Transactions, the Company entered into a Transitional Shared Facilities and Services Agreement (“Agreement”) with NRDC Real Estate Advisors, LLC, pursuant to which NRDC Real Estate Advisors, LLC will provides access to, among other things, their information technology, office space, personnel and other resources necessary to enable the Company to perform its business, including access to NRDC Real Estate Advisors, LLC's real estate teams, who will work with the Company to source, structure, execute and manage properties for a transitional period.  The Company will pay NRDC Real Estate Advisors, LLC a monthly fee of $7,500 pursuan t to the Agreement.  The Agreement has an initial one-year term and has been renewed effective October 20, 2010, by the Company for an additional one-year term.
 
In May 2010, the Company entered into a Shared Facilities and Service Agreement effective January 1, 2010 with an officer of the Company.  Pursuant to the Shared Facilities and Service Agreement the Company is provided the use of office space and other resources for a monthly fee of $1,938.
 
Off-Balance Sheet Arrangements
 
The Company has issued warrants in conjunction with its initial public offering and private placement, and has also granted incentive stock options.  These options and warrants may be deemed to be equity linked derivatives and, accordingly, represent off balance sheet arrangements.  See Note 5 and 6 to the accompanying consolidated financial statements.  The Company accounts for these warrants as stockholders' equity and not as derivatives.

 
-26-

 
The Company’s investment in the Wilsonville OTS LLC development project is an off-balance sheet investment in real estate property. This investment is an unconsolidated joint venture and accounted for under the equity method of accounting as the Company has the ability to exercise significant influence, but does not control the operating and financial decisions of this investment. The Company’s off-balance sheet arrangement is more fully discussed in Note 2, “Real Estate Investments” in the accompanying consolidated financial statements.

Real Estate Taxes
 
The Company’s leases generally require the tenants to be responsible for a pro rata portion of the real estate taxes.
 
Inflation
 
The Company’s long-term leases contain provisions to mitigate the adverse impact of inflation on its operating results. Such provisions include clauses entitling the Company to receive (a) scheduled base rent increases and (b) percentage rents based upon tenants’ gross sales which generally increase as prices rise. In addition, many of the Company’s non-anchor leases are for terms of less than ten years, which permits the Company to seek increases in rents upon renewal at then current market rates if rents provided in the expiring leases are below then existing market rates.  Most of the Company’s leases require tenants to pay a share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.
 
Leverage Policies
 
The Company intends, when appropriate, to employ prudent amounts of leverage and use debt as a means of providing additional funds for the acquisition of its target assets and the diversification of its portfolio.  The Company intends to use traditional forms of financing, including mortgage financing and credit facilities.  In addition, in connection with the acquisition of properties, the Company may assume all or a portion of the existing debt on such properties.  In addition, the Company may acquire retail property indirectly through joint ventures with institutional investors as a means of increasing the funds available for the acquisition of properties.
 
The Company may borrow on a non-recourse basis or at the corporate level or operating partnership level.  Non-recourse indebtedness means the indebtedness of the borrower or its subsidiaries is secured only by specific assets without recourse to other assets of the borrower or any of its subsidiaries.  Even with non-recourse indebtedness, however, a borrower or its subsidiaries will likely be required to guarantee against certain breaches of representations and warranties such as those relating to the absence of fraud, misappropriation, misapplication of funds, environmental conditions and material misrepresentations.  Because non-recourse financing generally restricts the lender's claim on the assets of the borrower, the lender generally may only proceed against the asset securing the debt.  Th is protects the Company’s other assets.
 
The Company plans to evaluate each investment opportunity and determine the appropriate leverage on a case-by-case basis and also on a Company-wide basis.  The Company may seek to refinance indebtedness, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase the investment.  In the future, the Company may also seek to raise further equity capital or issue debt securities in order to fund its future investments.
 
Dividends
 
The Company intends to make regular quarterly distributions to holders of its common stock.  U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay U.S. federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income.  The Company intends to pay regular quarterly dividends to its stockholders in an amount not less than its net taxable income, if and to the extent authorized by its board of directors.  If the Company’s cash available for distribution is
 
 
-27-

 
less than its net taxable income, the Company could be required to sell assets or borrow funds to make cash distributions or the Company may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
 
Recently Issued Accounting Pronouncements
 
See Note 1 to the accompanying consolidated financial statements.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As of September 30, 2010, the Company had no variable rate debt outstanding.  Currently, it uses a fixed-rate debt and a forward starting interest rate swap to manage its interest rate risk. See the discussion under Note 9 of the accompanying consolidated financial statements for certain quantitative details related to the interest rate swap.
 
The Company entered into the forward starting interest rate swap in order to economically hedge against the risk of rising interest rates that would affect the Company’s interest expense related to its future anticipated debt issuance. The sensitivity analysis table presented below shows the estimated instantaneous parallel shift in the yield curve up and down by 50 and 100 basis points, respectively, on the market value of its interest rate derivative as of September 30, 2010.
 
Less 100
basis points
Less 50
basis points
September 30, 2010
Value
Increase 50
basis points
Increase 100
basis points
$    (4,750,547)
$     (3,406,492)
$       (2,168,107)
$            (1,016,698)
$           73,120
 
See Note 7 of the accompanying consolidated financial statements for a discussion on how the Company values derivative financial instruments.  The Company calculates the value of its interest rate swaps based upon the present value of the future cash flows expected to be paid and received on each leg of the swap. The cash flows on the fixed leg of the swap are agreed to at inception and the cash flows on the floating leg of a swap change over time as interest rates change. To estimate the floating cash flows at each valuation date, the Company utilizes a forward curve which is constructed using LIBOR, Eurodollar futures, and swap rates, which are observable in the market. Both the fixed and floating legs’ cash flows are discounted at market discount factors. For purposes of adjusting its derivative values, the Company i ncorporates the nonperformance risk for both itself and its counterparties to these contracts based upon management’s estimates of credit spreads, credit default swap spreads (if available) or Moody’s KMV ratings in order to derive a curve that considers the term structure of credit.
 
As a corporation that will elect to qualify as a REIT for U.S. federal income tax purposes, commencing with its taxable year ending December 31, 2010, the Company’s future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates.  Market risk refers to the risk of loss from adverse changes in market prices and interest rates.  The Company will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make real estate-related debt investments.  The Company’s interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, the Company expects to bo rrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates.  In addition, the Company uses derivative financial instruments to manage interest rate risk.  The Company will not use derivatives for trading or speculative purposes and will only enter into contracts with major financial institutions based on their credit rating and other factors.  Currently, the Company uses one interest rate swap to manage its interest rate risk.  See Note 9 of the accompanying consolidated financial statements.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
The Company's Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to give reasonable
 
 
-28-

 
assurances to the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.
 
During the three months ended September 30, 2010, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 

 
-29-

 
PART II.  OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
The Company is not involved in any material litigation nor, to its knowledge, is any material litigation pending or threatened against it, other than routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and not expected to harm its business, financial condition or results of operations.
 
ITEM 1A.  RISK FACTORS
 
See the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  There have been no significant changes to its risk factors during the three months ended September 30, 2010.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The Company did not sell any equity securities during the three months ended September 30, 2010 that were not registered under the Securities Act.
 
On October 23, 2007, the Company consummated a private placement of 8,000,000 warrants with NRDC Capital Management, LLC, an entity owned and controlled by certain of its executive officers and directors, and its initial public offering of 41,400,000 units, each consisting of one share of common stock and one warrant exercisable for an additional share of common stock, including 5,400,000 units pursuant to the underwriters' over-allotment option.  The Company received net proceeds of approximately $384.0 million and also received $8.0 million of proceeds from the private placement sale of 8,000,000 insider warrants to NRDC Capital Management, LLC.  Banc of America Securities, LLC served as the sole bookrunning manager for the initial public offering.  The securities sold in the initial publ ic offering were registered under the Securities Act on a registration statement on Form S-1 (No. 333-144871).  The SEC declared the registration statement effective on October 17, 2007.
 
Upon the closing of the initial public offering and private placement, $406.5 million including $14.5 million of the underwriters' discounts and commissions was held in the Trust Account and invested in U.S. "government securities" within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended (the "1940 Act"), having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act until the earlier of (i) the consummation of the Company’s initial "business combination" and (ii) its liquidation.  On October 20, 2009, the Company consummated the Framework Transactions, which constituted its initial business combination.  Stockholders representing an aggregate of 5,325 shares of com mon stock that the Company issued in its initial public offering elected to exercise conversion rights, while holders representing an aggregate of 41,394,675 shares the Company issued in its initial public offering did not exercise conversion rights, resulting in such shares remaining outstanding upon completion of the Framework Transactions.  As a result, the Company had approximately $405 million released to it (after payment of deferred underwriting fees) from the Trust Account established in connection with the Company’s initial public offering to invest in its target assets and to pay expenses arising out of the Framework Transactions.
 
As of September 30, 2010, the Company applied approximately $5.6 million of the net proceeds of the initial public offering and the private placement toward consummating a "business combination," including the Framework Transactions and paid approximately $210.4 million to acquire real estate properties and mortgage notes receivables.  For more information see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q.
 
No portion of the proceeds of the initial public offering was paid to directors, officers or holders of 10% or more of any class of the Company’s equity securities or their affiliates.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.
 
 
-30-

 
ITEM 4.  (REMOVED AND RESERVED)
 
ITEM 5.  OTHER INFORMATION
 
                None.
 
ITEM 6.  EXHIBITS
 
3.1
Second Amended & Restated Certificate of Incorporation(1)
3.2
Second Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation(2)
3.3
Third Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation(2)
3.4
Fourth Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation(2)
3.5
Amended and Restated Bylaws(2)
4.1
Specimen Unit Certificate(2)
4.2
Specimen Common Stock Certificate(2)
4.3
Specimen Warrant Certificate(2)
4.4
Form of Warrant Agreement(3)
4.5
Supplement and Amendment to Warrant Agreement dated as of October 20, 2009(2)
10.1
Operating Agreement of Wilsonville OTS LLC, dated  as of July 14, 2010, between Gramor Wilsonville OTS LLC and ROIC Oregon, LLC
10.2
Purchase and Sale Agreement, dated as of July 21, 2010, by and between O'Hearn/Hillcrest Properties, LLC and the Company
10.3
Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of September 16, 2010, by and among Grand Gateway I, LLC, Grand Gateway II, LLC, Grand Gateway III, LLC, and the Company
10.4
Conveyance in Lieu of Foreclosure Agreement, dated as of September 20, 2010, by and between DKVCMT, LLC, DLVCMT, LLC, Donald P. Knapp, Dale K. Lenington and ROIC Claremont Center, LLC
10.5
Purchase and Sale Agreement dated as of September 27, 2010 between the Company and Shops at Sycamore Creek, LLC(4)
31.1
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(1)
Incorporated by reference to the Company's registration statement on Form S-1/A filed on September 27, 2007 (File No. 333-144871).
(2) 
Incorporated by reference to the Company's current report on Form 8-K filed on October 26, 2009.
 
 
-31-

 
(3)
Incorporated by reference to the Company's registration statement on Form S-1/A filed on September 7, 2007 (File No. 333-144871).
(4) 
Incorporated by reference to the Company's current report on Form 8-K filed on October 1, 2010 (File No. 001-33749).

 
 

 

 

 
-32-

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
RETAIL OPPORTUNITY INVESTMENTS CORP.
Registrant
 
Date:  November 4, 2010
/s/ Stuart A. Tanz
Stuart A. Tanz
President and Chief Executive Officer
 
Date:  November 4, 2010
/s/ John B. Roche
John B. Roche
Chief Financial Officer

EXHIBIT 10.1




 
OPERATING AGREEMENT

OF

WILSONVILLE OTS LLC


BETWEEN

GRAMOR WILSONVILLE OTS LLC

AND

ROIC OREGON, LLC

 
 

 
 
 

 
TABLE OF CONTENTS
 
   
Page
     
ARTICLE 1
ORGANIZATION AND PURPOSES OF COMPANY
1
1.1
Organization
1
1.2
Purposes and Powers
1
1.3
Partnership Tax Status; No Personal Liability
1
1.4
Real Estate Investment Trust
1
ARTICLE 2
MANAGEMENT
2
2.1
Management by Manager
2
2.2
Authority of Manager
2
2.3
Responsibilities of the Manager
2
2.4
Authority and Duties of the Manager
2
2.5
Major Decisions
3
2.6
ROIC Approval
4
2.7
Unanimous Decisions
5
2.8
Construction Financing
5
2.9
Development Agreement
5
2.10
Property Management Agreement
6
2.11
Failure of Closing to Occur
6
2.12
Resignation or Removal of Manager
6
2.13
Compensation and Reimbursement of Manager
7
2.14
Indemnification
7
2.15
Signature Authority
8
ARTICLE 3
RIGHTS OF MEMBERS
8
3.1
Voting Rights
8
3.2
Approval of Members
8
3.3
Meetings; Other Action by Members
8
3.4
Withdrawal
9
ARTICLE 4
CONFLICTS OF INTEREST
9
4.1
Duty of Loyalty
9
4.2
Loans and Other Transactions with Company
9
 
 

 
ARTICLE 5
CONTRIBUTIONS; CAPITAL ACCOUNTS
9
5.1
Initial and Additional Contributions
9
5.2
Effect of Failure to Contribute
10
5.3
Guarantees
11
5.4
Maintenance of Capital Accounts
12
5.5
Tax Matters Partner
13
5.6
Subchapter K
13
5.7
Section 754
13
5.8
Depreciation
13
5.9
Return of Contributions, etc
13
5.10
Taxes of Taxing Jurisdictions
13
ARTICLE 6
ALLOCATIONS
14
6.1
Allocation of Profits and Losses
14
6.2
Limitation on Allocation of Losses
14
6.3
Special Allocations
14
6.4
Curative Allocations
16
6.5
Other Allocation Rules
16
6.6
Tax Allocations:  Code Section 704(c)
17
ARTICLE 7
DISTRIBUTIONS
18
7.1
Non-Liquidating Distributions
18
7.2
Liquidating Distributions
19
7.3
General
19
7.4
Amounts Withheld
19
ARTICLE 8
ADDITIONAL MEMBERS
19
8.1
Admission of Additional Member
19
8.2
Accounting
19
ARTICLE 9
TRANSFERS OF INTERESTS
20
9.1
Restriction on Transfers
20
9.2
Permitted Transfers
20
 
ii

 
9.3
Conditions to Permitted Transfers
20
9.4
Rights and Obligations of Assignees and Assignors
20
9.5
Admission of Assignee as Substitute Member
21
9.6
Effect of Admission of Substitute Member
22
9.7
Gramor Buyout Right; ROIC Option to Purchase
22
9.8
Distributions and Allocations to Transferred Interests
23
ARTICLE 10
DISSOLUTION AND WINDING UP
24
10.1
Exercise of Voting Rights
24
10.2
Dissolution Events
24
10.3
Winding Up
24
10.4
Establishment of Trust or Reserves
25
10.5
Notices of Dissolution Event, etc
25
ARTICLE 11
BOOKS, RECORDS AND ACCOUNTINGS
25
11.1
Books and Records
25
11.2
Reports
26
11.3
Rights of Members; Inspection
27
ARTICLE 12
ADOPTION AND AMENDMENT
28
ARTICLE 13
MISCELLANEOUS
28
13.1
Application of Oregon Law
28
13.2
Construction
28
13.3
Counterparts; Facsimiles
28
13.4
Waiver of Partition
28
13.5
Execution of Additional Instruments
28
13.6
Headings
28
13.7
Heirs, Successors and Assigns
29
13.8
Notices and Consents, etc
29
13.9
Severability
29
13.10
Waivers
29
13.11
Arbitration of Disputes
29
 
iii

 
 
13.12
Entire Agreement
29
 
 
 
 
 
 
 
 
 

 
 
iv

 
OPERATING AGREEMENT
OF
WILSONVILLE OTS LLC


OPERATING AGREEMENT of WILSONVILLE OTS LLC, an Oregon limited liability company (“Company”), entered into by each of the Members of the Company identified on Exhibit A, and any other Persons that may hereafter become Members or successors to interests in the Company, effective as of July 14, 2010.  Capitalized terms used in this Agreement shall have the meanings ascribed thereto in Schedule A.
 
ARTICLE 1
ORGANIZATION AND PURPOSES OF COMPANY
 
1.1 Organization.  The Company was created by the execution and filing of the Articles under the Act on March 9, 2009. The Members hereby agree to conduct the Company’s business and affairs consistent with this Agreement, the Act and the Articles.
 
1.2 Purposes and Powers.  The primary purpose of the Company shall be to acquire, own, develop, operate, manage, lease, rent, dispose of and otherwise deal with the real property (“Project”) to be purchased by the Company pursuant to that certain Real Estate Purchase and Sale Agreement dated August 20, 2009 with Fred Meyer Stores, Inc. (“Seller”), as amended, attached hereto as Exhibit E (“Purchase Agreement”).  The Company also may engage in any other lawful business that is permitted by the Act or the laws of any jurisdiction in which the Company may do business and is approved by a Majority of the Members.  The Company shall have all powers provided for in the Act.
 
1.3 Partnership Tax Status; No Personal Liability.  Although the Members intend for the Company to be a partnership for state and federal income tax purposes, the Company is an Oregon limited liability company and not a general or limited partnership.  No Member or Manager shall have personal liability for any Company operations, debts, obligations or liability merely as a result of being a Member or Manager.
 
1.4 Real Estate Investment Trust.  The Members and Manager agree and acknowledge that one of the Members, or an affiliated related entity, is a real estate investment trust under applicable law (the “REIT Member”).  Each Member, other than the REIT Member, shall (and each shall cause each of its Affiliates to) take any action (and refrain from taking any action) as reasonably requested by the REIT Member, that the REIT Member, in good faith, believes is necessary or advisable in order to protect the status of the REIT Investor as a REIT; it being agreed by each such Member that the REIT Investor and its Affiliates are third-part y beneficiaries of the provisions of this Section 1.4, and accordingly shall have, and be permitted to enforce, all corresponding rights, interest and claims under and pursuant to this Section 1.4 and be entitled to any and all benefits under and pursuant to this Section 1.4.
 
 
 

 
ARTICLE 2
MANAGEMENT
 
2.1 Management by Manager.  Pursuant to the Articles, the Company is manager-managed.  The Company shall have one Manager, who may but need not be a Member.  The Members hereby appoint Gramor as the initial Manager.  The Manager shall devote to the Company and apply to the accomplishment of Company purposes so much of the Manager’s time and attention as in the judgment of the Manager is reasonably necessary to manage and operate properly and prudently the business and affairs of the Company.
 
2.2 Authority of Manager.  Except for Major Decisions, or as otherwise provided in this Agreement, the management of the business and affairs of the Company, including all of its day-to-day activities, shall be undertaken exclusively by the Manager.  No Member in the capacity of member shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable for any purpose.
 
2.3 Responsibilities of the Manager.  The Manager shall do all things reasonably necessary to finance, market, operate and maintain the Project.
 
2.4 Authority and Duties of the Manager.  Subject to Sections 2.5, 2.6 and 2.7, the following matters shall be considered day-to-day activities that may be approved and undertaken by the Manager without a vote of the Members:
 
(a) Acquire the Property on behalf of the Company and negotiate, finalize and execute documents necessary to acquire the Property on the terms and conditions set forth in the Purchase Agreement;
 
(b) Following substantial completion of construction of the Project, prepare and submit annual Operating Budgets to the Members for approval as provided in Section 2.5;
 
(c) Manage the land use and entitlement process for the Property and the Project;
 
(d) Prepare budgets and undertake action in accordance with the terms of an Approved Budget, including without limitation the payment of all obligations of the Company;
 
(e) Except as otherwise provided in this Agreement, engage in making contracts, incurring liabilities with respect to the Project in accordance with an Approved Budget;
 
(f) Engage in the management of all marketing and leasing and sales efforts with respect to the Project or any portion thereof;
 
(g) Establish and manage the Company’s bank accounts;
 
 
2

 
(h) Obtain and maintain policies of insurance that are commercially reasonable, both during the construction of the Project and thereafter during the operations of the Project, including general liability insurance, casualty loss replacement cost insurance in the full replacement cost of the Project (including earthquake coverage), with commercially reasonable coverage limits, inflation protection endorsement and deductibles;
 
(i) Cause the Company’s certified public accountants to prepare the Company’s tax returns (or any extensions thereof), including any Federal, State of local tax returns required to be filed by the Company; the Manager shall furnish each Member within forty-five (45) days of the end of each fiscal year or as soon thereafter as such information is available from the Company a copy of the Federal tax returns, all State returns, and such information as may be needed to enable such Member to file its Federal income tax return and any required State income tax return; the Manager shall cause the Company to pay, out of available cash flow and other assets of the Company, any taxes payable by the Company; and
 
(j) Sell the residential parcel of approximately one acre in accordance with the Approved Budget; provided, however, that the Manager shall consult with the Members regarding the terms of sale prior to entering into an agreement to sell such property.
 
2.5 Major Decisions.  The Manager shall use diligent efforts to keep the Members fully informed regarding all material matters relating to the Company and its operation and assets and shall promptly inform the Members of any major or significant or material Company matters including all Major Decisions so that the Members may exercise their rights under this Agreement. Notwithstanding any other provisions of this Agreement, each of the following matters (“Major Decisions”) shall require the approval of a Majority of the Members, and in any event the consent of ROIC, unless a greater percentage is set forth below:
 
(a) Approval of acquisition, construction or permanent financing for the Project;
 
(b) Any distribution of cash or property to Members except in accordance with ARTICLE 7;
 
(c) Admission of any Additional Member or Substitute Member to the Company;
 
(d) Engaging in any transaction between the Company, on one hand, and the Manager or a Member, or any Affiliate of the Manager or a Member, on the other hand, except as expressly contemplated by this Agreement or approved by the Members in accordance with this Agreement;
 
(e) Except as provided in Section 2.6, commence any lawsuit or other dispute resolution procedure, including arbitration, on behalf of the Company, or settle or take any other significant action in a lawsuit or other dispute resolution procedure to which the Company is a
 
 
3

 
party, except in any such case for lawsuits or other dispute resolution procedures in the ordinary course to enforce tenant leases, collect rents and the like.
 
(f) Any changes or modification with respect to the zoning, development or use of the Property that would materially change the scope and design of the Project;
 
(g) Entry into any partnership, joint venture, limited liability company or any other entity;
 
(h) Assuming or incurring any debt or liability not in accordance with an Approved Budget, including without limitation, any Project financing not contemplated in an Approved Budget;
 
(i) Any modification of the Development Budget that results in an overall increase in the “hard costs” set forth in the Development Budget, provided, however, that changes and reallocations to line items in the Approved Budget to reflect actual savings or use of the contingency shall not require Member approval;
 
(j) Approval of annual Operating Budgets or any material modification of any Approved Budget;
 
(k) Approval of all leases and the form lease to be used for the Project tenants; provided, however, that if ROIC fails to respond to a request for approval of a lease within ten (10) days after receipt, ROIC shall be deemed to have approved such lease;
 
(l) Call for any Additional Contributions to the Company; and
 
(m) Any action in contravention of this Agreement, unless a higher level of consent is required (in which case the consent required to approve such action shall be required to approve the contravening act); and
 
2.6 ROIC Approval.  ROIC shall be solely responsible for making decisions and approving the following items on behalf of the Company:
 
(a) The decision to terminate the Manager for Cause under this Agreement;
 
(b) the decision to pursue a claim against the Manager;
 
(c) appointment of a replacement Manager;
 
(d) Approval of any amendment to the Development Agreement, the Management Agreement or any agreement with an Affiliate of the Manager;
 
 
4

 
(e) the decision to enforce the Company’s rights under the Development Agreement, pursue a claim against the Developer or to terminate the Developer pursuant to the terms of the Development Agreement;
 
(f) the decision to enforce the Company’s rights under the Management Agreement, pursue a claim against the property manager or to terminate the property manager pursuant to the terms of the Management Agreement; and
 
(g) the decision to enforce the Company’s rights under any other agreement with the Manager or an affiliate of the Manager.
 
2.7 Unanimous Decisions.  Notwithstanding any other provision of this Agreement, each of the following matters shall be submitted to a vote of Members for approval.  Approval shall require the affirmative vote of all Members as to:
 
(a) Dissolution or liquidation of the Company;
 
(b) Merging or consolidating the Company with any other entity;
 
(c) Any action that would change the nature of the business of the Company or make it impossible for the Company to operate in the ordinary course of business;
 
(d) Approval of any loans that will be recourse to all of the Members;
 
(e) Executing or delivering any general assignment of assets for the benefit of creditors of the Company; and
 
(f) Filing or consenting to the filing of any proceeding under any state or federal bankruptcy or debt-release statute for the Company.
 
2.8 Construction Financing.  ROIC, or an Affiliate of ROIC, shall have a first right to provide construction financing to the Company on commercially reasonable terms acceptable to the Manager and the other Member, (ii) if ROIC or its Affiliate does not propose the terms of any construction financing for the Company in a timely manner, the Members shall not unreasonably withhold their approval of any construction loan or refinancing loan that is thereafter proposed by the Manager that is on commercially reasonable terms, (iii) each Member shall promptly respond (meaning within not more than 10 Business Days) in writing to any request for approval of any construction loan or any refinancing loan and (iv) the failure by ROIC to comply with the requirements of clauses (ii) and (iii) with respect to any construction loan proposed by the Manager in accordance with clause (iii) shall constitute a “Construction Loan Impasse”;
 
2.9 Development Agreement.  The Company will enter into a Development Agreement with Gramor Development, Inc., an Affiliate of Gramor, substantially in the form attached as Exhibit B (“Development Agreement”), pursuant to which Gramor Development,
 
 
5

 
Inc. will proceed with the development of the Project in accordance with the Development Budget attached as Exhibit C.  Pursuant and subject to the conditions contained in the Development Agreement, Gramor Development, Inc. will be entitled to $500,000 in development management fees payable in $33,333 increments over a fifteen (15)-month period as provided therein and to the payment to it by the Company of an additional $200,000 of development management fees in a lump sum either (a) immediately following the distribution by the Company of all accrued and previously undistributed Preferential Return on Capital in accordance with Section 7.1 or (b) immediately prior to and in connection with the closing of any purchase by ROIC under the option provided for in Section 9.7(b), whichever is earlier.
 
2.10 Property Management Agreement.  The Manager or an Affiliate shall act as the property manager of the Project on the terms and subject to the conditions contained in a Property Management Agreement substantially in the form attached as Exhibit D.
 
2.11 Failure of Closing to Occur.  In the event that the closing of the acquisition of the Real Estate shall not occur, subject to extension as agreed upon between the Company (which extension shall require the approval of ROIC to any date after December 31, 2010) and Seller, then:  (1) the Company shall engage in no other activities, (2) Gramor shall cause the dissolution and orderly liquidation of the Company (subject to enforcing the Company’s rights under the Purchase Agreement for the return of any deposit), and (3) each of Gramor and ROIC shall bear its own out-of-pocket costs; provided, however, that, notwithstan ding the foregoing (x) if the failure to close is caused by facts or circumstances that constitute a breach or default of a Member or an Affiliate under this Agreement or the Development Agreement, then such Member shall reimburse the other Member for its costs and expenses under or in connection with this Agreement, and, without limitation on the foregoing, shall bear 100% of any forfeited deposit under the Purchase Agreement and neither such defaulting Member nor any Affiliate thereof shall pursue the acquisition of any interest in the Property for the 24-month period after the dissolution of the Company, and (y) if clause (x) does not apply and if a Member or an Affiliate acquires an interest in the Property without the other Member or an Affiliate, or assigns or sells rights to acquire an interest in the Property to a third party, on or before the date that is twelve (12) months after the dissolution of the Operating Company and the Company, then the acquiring or assigning Member shall bear 100% of all a cquisition costs and all legal costs of formation and shall promptly reimburse the other Member and its Affiliates for any such costs paid or incurred by them.
 
2.12 Resignation or Removal of Manager.  The Manager shall serve until the Manager resigns as Manager by written notice to the Members or is removed for Cause pursuant to Section 2.6(a).  The resignation of the Manager shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice.  Unless otherwise specified in any notice of resignation, the acceptance of such resignation shall not be necessary to make it effective.  The resignation or removal of a Manager who is also a Member shall not affect the Manager’s rights as a Member and shall not constitute a withdrawal o f the Manager in any capacity as a Member.
 
 
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Any vacancy in the position of Manager shall be filled by appointment by ROIC except as otherwise provided in Article 12.  “Cause” shall mean:
 
(a) fraud, deceit, breach of trust, misappropriation of any funds of the Project or of the Company, comingling of any such funds with Manager’s own Funds or funds held by others, or breach of its fiduciary duties as Manager under this Agreement;
 
(b) failure to comply with the terms, conditions, covenants or provisions of this Agreement within fifteen (15) days after written notice from Company stating with reasonable particularity the failure of performance by Manager or if such failure cannot be fully cured in such fifteen (15) day period, failure to commence cure within such fifteen (15) day period and thereafter diligently and promptly to proceed to cure as soon as possible but in no event longer than ninety (90) days after the effective date of the notice;
 
(c) filing of a voluntary petition in bankruptcy or the filing of an involuntary petition of bankruptcy and the failure to secure a dismissal of such petition within thirty (30) days after filing.
 
2.13 Compensation and Reimbursement of Manager.  Except as may otherwise be agreed from time to time by a Majority of the Members, the Manager shall not receive any compensation for services provided with respect to the Project pursuant to this Agreement.  Provided that the expenses are included in the Approved Budget, the Manager shall be reimbursed on a monthly basis, or such other basis as the Manager may reasonably determine, for all out-of-pocket expenses the Manager incurs on behalf of the Company, including without limitation in connection with the formation and organization of the Company and amounts paid by the Manager to any Perso n to perform services for the benefit of the Company.  To the extent that the expenses are included in the amounts paid to Gramor pursuant to Section 5.1(b) they shall not be eligible for reimbursement under this Section 2.13.
 
2.14 Indemnification.  To the fullest extent provided or allowed by the laws of Oregon, the Company shall indemnify the organizer, the Manager, the tax matters partner and each Member from and against all costs, losses, liabilities, damages, claims and expenses (including, without limitation, attorneys’ fees and costs as incurred on trial and on appeal) incurred in the capacity of organizer, manager (or as an agent thereof), tax matters partner or member or in any other capacity on behalf of the Company, including, without limitation, claims arising from any such Person’s actions or inactions taken or omitted as an organizer, manager (or an agent thereof), tax matters partner or a member or in any other capacity in furtherance of the business or affairs of the Company, whether taken prior to or subsequent to the formation of the Company; provided that the foregoing shall not eliminate or limit the Manager’s or a Member’s liability for:
 
(a)           Any breach of the duty of loyalty to the Company or the Members as described in this Agreement;

 
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(b)           Acts or omissions not in good faith which involve intentional misconduct or a knowing violation of law;

(c)           Any unlawful distribution under the Act; or

(d)           Any transaction not expressly approved or ratified by a Majority of the Members or permitted under this Agreement from which the Manager derives an improper personal benefit.

2.15 Signature Authority.  The signature of the Manager shall be necessary and sufficient to bind the Company, and a copy of this Agreement may be shown to the appropriate parties in order to confirm the same.
 
ARTICLE 3
RIGHTS OF MEMBERS
 
3.1 Voting Rights.  All Members with a voting interest (other than a Member that, pursuant to Section 5.2(b) or Section 9.4(b), has ceased to be entitled to vote) shall be entitled to vote on or consent to any matter submitted to a vote of, or requiring consent from, the Members.  A Member entitled to vote may exercise by vote or consent that number of votes set forth with respect to such Member on Exhibit A.
 
3.2 Approval of Members.  Any action or transaction that requires the approval of the Members under the Act, the Articles or this Agreement shall be authorized upon the affirmative vote, implementing action or written consent of a Majority of the Members, unless either this Agreement or the Articles expressly imposes a higher standard for approval by the Members, in which case the specified approval of the Members shall be required for such action or transaction. Any Member (including the Manager) that has an interest in the outcome of a matter submitted to the Members for a vote may vote and have such vote as a Member counted upon such matter.
 
3.3 Meetings; Other Action by Members.  Any Member or Manager may call a meeting of the Members on at least 10 and not more than 30 days’ prior written notice specifying the time and place.  The latter shall be either the principal executive office of the Company or such other place within the Portland metropolitan area as is specified in the notice of such meeting given by such Member or Manager.  Members may participate in or conduct meetings through telephonic or other means of communication by which all Members (or proxy holders) participating may simultaneously communicate with each other.  Members may ta ke any action without a meeting, either by written consent describing the action taken or by implementing action (including but not limited to execution of documents), effective as of the date of signature by the necessary Members or such other date as is set forth therein.  Any such consent or evidence of implementing action shall be maintained in the Company records. The attendance of a Member at a meeting shall constitute a waiver of objection to lack of notice or defective notice of the meeting, unless the Member objects at the beginning of the meeting to holding the meeting
 
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or transacting business at the meeting.  A waiver of notice by a Member, given either before or after a meeting, shall be equivalent to the giving of notice of the meeting to such Member.  There shall be no quorum requirement for any meeting of Members but any action that requires a vote of Members shall be approved at a meeting only upon receiving the vote of a Majority of the Members or such other vote as is required under the Articles or this Agreement.  Action not within the purposes described in a meeting notice may be taken at the meeting provided that such action is approved at the meeting by a Majority of the Members or such other greater vote as is required under the Articles or this Agreement.
 
3.4 Withdrawal.  Notwithstanding any provision of the Act to the contrary, no Member has the power to withdraw voluntarily from the Company.  A Member that purports to withdraw voluntarily from the Company prior to any dissolution of the Company shall be in breach of this Agreement, shall be liable to the Company for any damages arising directly or indirectly from such purported withdrawal, shall cease to be a Member but shall continue to hold Economic Rights in the Company as an Assignee, and shall not be entitled to any distribution from the Company by reason of such withdrawal.
 
ARTICLE 4
CONFLICTS OF INTEREST
 
4.1 Duty of Loyalty.  The Manager and each Member may engage in other business activities and may pursue business opportunities competitive with the business and operations of the Company without presenting any such opportunity to the Company or the Members, and the Company, the Manager and each Member hereby waives any right or claim to participate therein. Notwithstanding the foregoing, however, unless otherwise expressly approved or ratified by a Majority of the Members or otherwise permitted under this Agreement, the Manager and each Member shall account to the Company and hold as trustee for the Company any benefit or any profits derived by such Member or Manager from any transaction connected with the formation, conduct or winding up of the Company or from any use of Company Property by such Member or Manager not permitted under this Agreement, including, without limitation, any information developed for the Company or any opportunity expressly offered to the Company.
 
4.2 Loans and Other Transactions with Company.  The Company may borrow money or transact other business with the Manager or a Member as permitted under this Agreement or, if not expressly permitted, with the approval of a Majority of the Members. The rights and obligations of a Member or Manager that lends money to or transacts business with the Company in accordance with the foregoing shall be the same as those of a Person that is not a Member or Manager, subject to other applicable law.  No transaction with the Company shall be voidable solely because a Member or a Manager has a direct or indirect interest in the transaction if the t ransaction is expressly permitted by this Agreement or is approved or ratified as provided either in this Agreement or in the Act.
 
 
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ARTICLE 5
CONTRIBUTIONS; CAPITAL ACCOUNTS
 
5.1 Initial and Additional Contributions.  The Members will have the following Contribution obligations to the Company:
 
(a) In connection with Gramor’s execution and delivery of this Agreement, Gramor is assigning its right to purchase the real estate pursuant to the Purchase Agreement.  Gramor has conducted the due diligence on the real estate to be acquired for the Project and represents and warrants that the statements set forth on Schedule 5.1(a) are true and correct as of the date of this Agreement and will be true and correct as of the closing date for the acquis ition of the real property pursuant to the terms of the Purchase Agreement.
 
(b) In connection with ROIC’s execution and delivery of this Agreement, ROIC shall contribute to the Company the amount set forth on Exhibit A as the amount of ROIC’s beginning Contribution and initial Capital Account, which is an amount equal to 95% of the out-of-pocket costs and expenses incurred by Gramor for purposes of the Company and the Project prior to the date of this Agreement, it being agreed that upon such Contribution the Company shall distribute such amount to Gramor in reimbursement for 95% of such costs and expenses.  Schedule 5.1(b) sets forth the detail of the out-of –pocket costs and expenses incurred and paid by Gramor for the purposes of the Company.  ROIC shall not become a Member or have any interest under this Agreement unless and until ROIC makes such Contribution.  Following such Contribution by ROIC and distribution to Gramor, the Members shall have the initial Capital Accounts set forth on Exhibit A reflecting the 5% of such costs and expenses funded by Gramor (which shall be deemed to be a beginning Contribution by Gramor) and the 95% of such costs and expenses funded by ROIC.  The Preferential Return on Capital shall be calculated on Gramor’s Contribution from the date of this Agreement rather than the date of the expenditure of such funds for pre-development costs and expenses.
 
(c) Upon any call of the Manager from time to time under this Section 5.1(b), the Members will make cash Contributions to the Company in the proportions of 95% from ROIC and 5% from Gramor of the amount specified by the Manager; provided that the aggregate amount called for and contributed by the Members under this Section 5.1(b) shall not exceed $5,000,000 minus the amount of the beginning Contributions made as provided in Section 5.1(a).  All Contributions by the Members under Section 5.1(a) and this Section 5.1(b) shall constitute “Initial Contributions.”  In connection with any call by the Manager under this Section 5. 1(b), the Manager shall give notice to each Member of the amount called at least 10 Business Days before the date specified in such notice as the due date for such Contribution.
 
(d) After the completion of the funding of the Initial Contributions, the Manager may, with the approval of a Majority of the Members, call for additional Contributions by the Members by a notice given to each Member at least 10 Business Days before the date the called-for Contribution is specified in such notice to be due.  Any such Contributions shall be
 
 
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made in the proportions of 95% by ROIC and 5% by Gramor and shall constitute “Additional Contributions.”
 
(e) Except as otherwise provided in Section 5.2(b), if applicable, a Preferential Return on Capital will accrue on all Contributions for purposes of determining amounts allocable and distributable to the Members in accordance with Articles 6 and 7.
 
5.2 Effect of Failure to Contribute.  If any Member fails to contribute such Member’s proportionate share of any Initial Contributions or Additional Contributions called for by the Manager in accordance with Section 5.1(b) or Section 5.1(c) within the time period for making the same specified in the capital call, such Member shall be in default and any fully contributing Member with respect to such Contribution may, but shall not be required to, make up any or all of such shortfall.  Any Member so contributing more than its percentage share of any such Contribution may elect in writing at the time of funding any portion of the shortfa ll to treat the amount funded by the contributing Member either as a Contribution to the Company or as a loan to the defaulting Member, with the following consequences:
 
(a)           If such Member elects Contribution treatment, a Preferential Return on Capital but at a rate of eighteen percent (18%) per annum will apply to the portion of the Contribution made by such Member to cover any of the shortfall; or

(b)           If such Member elects loan treatment, the amount contributed to the Company on behalf of the defaulting Member shall be treated as a loan to the defaulting Member and a deemed Contribution by such Member and shall not bear any Preferential Return on Capital.  Any such loan shall bear interest at a rate per annum equal to eighteen percent (18%) per annum and shall be secured by a grant to the fully contributing Members of a security interest in the defaulting Member’s interest in the Company, which security interest (i) is hereby granted without more, effective in each case as of the date of each and every such loan, and (ii) may be evidenced by a UCC filing made by the fully contributing Member with a copy to the defaulting Member.  The default ing Member may repay such loan at any time in whole or in part without penalty but with accrued and unpaid interest thereon.  During the term of any such loan, all distributions of cash from the Company allocable to the defaulting Member shall, on behalf of the defaulting Member, be distributed to the fully contributing Member until such time as all principal and interest on the loan has been paid in full.  During such loan term, the voting rights of the defaulting Member under this Agreement or the Act shall be suspended as contemplated by Section 3.1.

5.3 Guarantees.  ROIC and Gramor and, if required by any third-party lender, Barry Cain, will provide any necessary guarantees of both the construction financing and the carve-outs from any permanent non-recourse financing.  Any such financing shall contemplate the possible purchase of the interest of Gramor by ROIC or its designee pursuant to the option provided for in Section 9.7(b) and provide for a release of Gramor and any Affiliate from any guarantee provided by the same if and when any such purchase occurs.  In the event of any call on any such guarantee, ROIC shall be responsible for paying 95% of the amount called on the guarantee and
 
 
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Gramor (with, if applicable, Barry Cain) shall be responsible for paying 5% of the amount called on the guarantee.  If either ROIC or Gramor pays more than its percentage share under the guarantee, the other will have a right of contribution with respect to excess amount paid.  Any amount paid by ROIC or Gramor either under the guarantee or under the contribution arrangement provided for in the foregoing sentence will be treated as an Additional Contribution by the Member obligated to pay the same and shall accrue a Preferential Return on Capital when paid thereby either directly under the guarantee or pursuant to the right of contribution provided for in this Section 5.3.
 
5.4 Maintenance of Capital Accounts.  The Company shall establish and maintain Capital Accounts with respect to each Member in accordance with the following:
 
(a)           Each Member’s Capital Account shall be increased by such Member’s Contributions, such Member’s distributive share of Profits and any items in the nature of income or gain that are specially allocated pursuant to IRC § 704(b) and the amount of any Company liabilities assumed by such Member or that are secured by any Property distributed to such Member.

(b)           Each Member’s Capital Account shall be decreased by the amount of cash and the Gross Asset Value of any Company Property (other than cash) distributed to such Member pursuant to any provision of this Agreement, such Member’s distributive share of Losses and any items in the nature of expenses or losses that are specially allocated pursuant to IRC § 704(b) and the amount of any liabilities of such Member assumed by the Company or secured by any property contributed by such Member to the Company if not otherwise taken into account in computing the amount of any Contribution by the Member.

(c)           If the Company at any time distributes any of its assets in-kind to any Member, the Capital Accounts shall be adjusted to account for that Member’s allocable share (as determined under Article 6) of the Profits or Losses that would have been realized by the Company had it sold the assets that were distributed at their respective fair market values immediately prior to their distribution.

(d)           Upon a Transfer of all or a portion of a Member’s Economic Rights in accordance with the terms of this Agreement, the Assignee shall succeed to the Capital Account of the Member to the extent such Capital Account relates to the Transferred interest.

(e)           The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulation § 1.704-1(b) and shall be interpreted and applied in a manner consistent therewith.  If the Manager shall determine that it is prudent to modify the manner in which the Capital Accounts, or any adjustments thereto (including, without limitation, adjustments relating to liabilities secured by Contributions or distributed property or to liabilities assumed by the Company or Members), are computed in order to comply therewith, the Manager may make any such modifications but only if such modifications are not likely to have a material effect on the
 
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amounts distributed to any Member pursuant to Article 10 upon the dissolution of the Company.  The Company may with the approval of the Manager also make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Regulation § 1.704-1(b)(2)(iv)(q), and make any appropriate modifications if unanticipated events might otherwise cause this Agreement not to comply with Regulation § 1.704-1(b).  In determining the amount of any liability for purposes of Sections 5.4(a) and 5.4(b), there shall be taken into account IRC § 752(c) and any other applicable federal tax provisions.  Notwithstanding anything herein to the contrary, this Agreement shall not be construed as creating a deficit restoration obligation or as otherwise personally obligating any Member to make any contribution not expressly provided for by this Agreement or called for in accordance with this Agreement.
 
5.5 Tax Matters Partner.  The Manager shall from time to time designate one of the Members to act as the tax matters partner of the Company pursuant to IRC § 6231(a)(7).  Gramor shall be the tax matters partner until any subsequent appointment in accordance herewith. Any Member designated as tax matters partner shall take such action as may be necessary to cause each other Member to become a notice partner within the meaning of IRC § 6223 and shall otherwise act in compliance with the provisions of this Agreement.  Gramor shall deliver all tax returns to the Members for their review prior to filing.
 
5.6 Subchapter K.  No election shall be made by the Manager or any Member to cause the Company to be excluded from the application of the provisions of IRC Subchapter K.
 
5.7 Section 754.  The Manager may cause the Company to file an election under IRC § 754 to cause the basis of Company Property to be adjusted for federal income tax purposes as provided in IRC §§ 734 and 743.
 
5.8 Depreciation.  The Company shall use for federal and state income tax purposes any reasonable method of depreciation selected by the Manager.
 
5.9 Return of Contributions, etc.  No Member shall have the right to withdraw or be repaid any Contribution except as provided in this Agreement.  Each Member shall look solely to the assets of the Company for the return of Contributions and shall have no right or power to demand or receive any specific Property from the Company in any case in which the Member is entitled to any Company Property.  No Member shall have priority over any other Member as to the return of Contributions or the receipt of distributions or allocations.  The Members shall be entitled to the Preferential Return on Capital in accordance with the t erms of this Agreement but no interest shall accrue on any Contribution or the balance in any Capital Account.
 
5.10 Taxes of Taxing Jurisdictions.  To the extent that the laws of any taxing jurisdiction require, each Member requested to do so by the Manager or any other Member will submit an agreement indicating that the Member will make timely income tax payments to the taxing jurisdiction and that the Member accepts personal jurisdiction of the taxing jurisdiction
 
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with regard to the collection of income taxes attributable to the Member’s income and any interest and penalties assessed on such income.  If the Member fails to provide such agreement, the Company may withhold and pay over to such taxing jurisdiction the amount of tax, penalty and interest determined under the laws of the taxing jurisdiction with respect to such income.  Any such payments with respect to the income of a Member shall be treated as a distribution for purposes of Article 7.  The Company may, where permitted by the rules of any taxing jurisdiction, file a composite, combined or aggregate tax return reflecting the income of the Company and pay the tax, interest and penalties of some or all of the Members on such income to the taxing jurisdiction, in which case the Company shall inform the Members affected thereby of the amount of such tax interest and penalties so paid.
 
ARTICLE 6
ALLOCATIONS
 
6.1 Allocation of Profits and Losses.  Except as provided in Section 6.2 and after giving effect to any special allocations under IRC § 704(b) and Sections 6.3 through 6.6, to the extent applicable, Profits and Losses for any Fiscal Year shall be allocated to the Members as follows:
 
(a) First, to the extent that cash is distributed to a Member with respect to accrued Preferential Return on Capital, there shall be allocated to such Member, in the Fiscal Year of the distribution or as soon thereafter as is possible, Profits in an amount up to but not exceeding the amount of Distributed but Unmatched Preferential Return (as hereinafter defined) as of the end of such Fiscal Year.  Each allocation of Profits shall be made in proportion to the Distributed but Unmatched Preferential Return as of the end of the Fiscal Year of the Members entitled to receive the allocation.  For purposes of this Section 6.1(a), the term “Distributed but Unmat ched Preferential Return” means Preferential Return on Capital that has been distributed but has not at any time been matched by a allocation under this Section 6.1(a); and
 
(b) Second, in the case of Profits, to each Member in an amount up to, but not exceeding, the aggregate amount of Losses previously allocated to that Member in accordance with the second sentence of Section 6.2; and
 
(c) Third, in the case of Profits or Losses, to each Member in accordance with Percentage Interests
 

6.2 Limitation on Allocation of Losses.  Losses allocated to a Member pursuant to Section 6.1(c) shall not exceed the maximum amount of Losses that can be so allocated without causing that Member to have an Adjusted Capital Account Deficit at the end of any Fiscal Year.  If some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 6.1(c), the foregoing limitation shall
 
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be applied on a Member-by-Member basis so as to allocate the maximum permissible Losses to each Member under Regulation § 1.704-1(b)(2)(ii)(d).
 
6.3 Special Allocations
 
(a)           Minimum Gain Chargeback.  Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this ARTICLE 6, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Person’s share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations.  This Section 6.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith.
 
(b)           Member Minimum Gain Chargeback.  Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this ARTICLE 6, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Fiscal Year, each Person who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Person’s share of the net decrease in Member Nonrecourse Debt Minimu m Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations.  This Section 6.3(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith.
 
(c)           Qualified Income Offset.  In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), Section 1.704-1(b)(2)(ii)(d)(5) or Section 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Capital Account of such Member as quickly as possible, provided that an allocation pursuant to this Section 6.3(c) shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for
 
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in this ARTICLE 6 have been tentatively made as if this Section 6.3(c) were not in the Agreement.
 
(d)           Gross Income Allocation.  In the event any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of
 
(1)           the amount such Member is obligated to restore pursuant to any provision of this Agreement, and
 
(2)           the amount such Member is deemed to be obligated to restore pursuant to the next to the last sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 6.3(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this ARTICLE 6 have been made as if Section 6.3(c) hereof and this Section 6.3(d) were not in the Agreement.
 
(e)           Nonrecourse Deductions.  Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Members in proportion to their Percentage Interests.
 
(f)           Member Nonrecourse Deductions.  Any Member Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1).
 
(g)           Allocations Relating to Taxable Issuance of Company Interests.  Any income, gain, loss or deduction realized as a direct or indirect result of the issuance of an interest by the Company to a Member (the “Issuance Items”) shall be allocated among the Members so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Member, shall be equal to the net amount that would have been allocated to each such Member if the Issuance Items had not been realized.
 
6.4 Curative Allocations.  The allocations set forth in this Agreement (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations.  It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 6.4.  Therefore, notwithstanding any other provision of this ARTICLE 6 (other than the Regulatory Allocations), the Manager shall make such offsetting special allocations of Company income, ga in, loss or deduction in whatever manner the Manager determines appropriate so that, after such offsetting allocations are made, each Member’s Capital Account is, to the extent possible, equal to the Capital Account such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to this Agreement.  In exercising discretion under this Section 6.4, the Manager shall take into account future Regulatory
 
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Allocations under this Agreement, although not yet made, that are likely to offset other Regulatory Allocations previously made under this Agreement.
 
6.5 Other Allocation Rules.
 
(a)           For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly, quarterly or other basis, as determined by the Manager using any permissible method under Code Section 706 and the Regulations thereunder.
 
(b)           In making any allocation among the Members of income or gain from the sale or other disposition of Company Property, the ordinary income portion, if any, of such income and gain resulting from the recapture of cost recovery or other deductions shall be allocated among those Members who were previously allocated (or whose predecessors-in-interest were previously allocated) the cost recovery deductions or other deductions resulting in the recapture items, in proportion to the amount of such cost recovery deductions or other deductions previously allocated to them.
 
(c)           The Members are aware of the income tax consequences of the allocations made by this ARTICLE 6 and hereby agree to be bound by the provisions of this ARTICLE 6 in reporting their shares of Company income and loss for income tax purposes.
 
(d)           Solely for purposes of determining a Member’s proportionate share of the “excess nonrecourse liabilities” of the Company within the meaning of Regulations Section 1.752-3(a)(3), the Members’ interests in Company Profits are equal to their respective Percentage Interests.
 
(e)           To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Managers shall endeavor to treat distributions of Net Cash From Operations or Net Cash From Sales or Refinancings as having been made from the proceeds of a Nonrecourse Liability or a Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member.
 
6.6 Tax Allocations:  Code Section 704(c).  In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any Property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such Property to the Company for federal income tax purposes and its initial Gross Asset Value.
 
In the event the Gross Asset Value of any Company asset is adjusted as provided on Schedule A, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder.
 
 
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Any elections or other decisions relating to such allocations shall be made by the Manager in any manner that reasonably reflects the purpose and intention of this Agreement.  Allocations pursuant to this Section 6.6 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Person’s Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement.
 
ARTICLE 7
DISTRIBUTIONS
 
7.1 Non-Liquidating Distributions.  The Company shall from time to time distribute Net Operating Cash Flow or Net Cash From Sales or Refinancings to the Members in accordance with the following at such times and in such amounts as the Manager determines to be appropriate; provided that before making any distribution under either Section 7.1(a)(iii) or Section 7.1(b)(iii), the Company shall first have paid Gramor Development, Inc. all development management fees owed it under the Development Agreement (except the Final Fee), as provided in and subject to Section 4.1 thereof:
 
(a)           In the case of Net Operating Cash Flow:

 
(i)
First, to the Members, pro rata, up to the amount of accrued but previously undistributed Preferential Return on Capital on unreturned Initial Capital Contributions;

 
(ii)
Second, to the Members, pro rata, up to the amount of accrued but previously undistributed Preferential Return on Capital on unreturned Additional Contributions;

 
(iii)
Third, to the Members, pro rata, in return of their Additional Contributions to the extent not previously returned through distributions hereunder; and

 
(iv) 
Fourth, to the Members in accordance with their Percentage Interests.

(b)           In the case of Net Cash From Sales or Refinancings:

 
(i)
First, to the Members, pro rata, up to the amount of accrued but previously undistributed Preferential Return on Capital on unreturned Initial Capital Contributions;

 
(ii)
Second, to the Members, pro rata, up to the amount of accrued but previously undistributed Preferential Return on Capital on unreturned Additional Contributions;

 
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(iii)
Third, to the Members, pro rata, in return of their Additional Contributions to the extent not previously returned through distributions hereunder;

 
(iv)
Fourth, to the Members, pro rata, in return of their Initial Contributions to the extent not previously returned through distributions hereunder; and

 
(v) 
Fifth, to the Members in accordance with their Percentage Interests.

7.2 Liquidating Distributions.  Notwithstanding the provisions of Section 7.1, if the Company is dissolved and its business and affairs are wound up, distributions shall be made pursuant to Section 10.3.
 
7.3 General.  No Member shall have the right or power to demand or receive a distribution in a form other than cash, and no Member shall be required or compelled to accept a distribution of any asset in kind to the extent that the interest distributed would exceed the Member’s pro rata share of operating or liquidating distributions, as the case may be.  No Member shall have the right to receive interest on any distribution to the Member by the Company.  Notwithstanding anything contained in this Agreement or the Articles to the contrary, no distribution shall be made to a Member in violation of the Act.
 
7.4 Amounts Withheld.  All amounts withheld pursuant to any provision of any federal, state or local tax law with respect to any payment, distribution or allocation to the Members shall be treated as amounts distributed to the Members pursuant to this Article 7 for all purposes under this Agreement.  The Company is authorized to withhold from distributions, or with respect to allocations, and to pay over to any federal, state or local government any amounts required to be so withheld pursuant to any federal, state or local law and shall allocate any such amounts to the Members with respect to which such amount was withheld.
 
ARTICLE 8
ADDITIONAL MEMBERS
 
8.1 Admission of Additional Member.  One or more Additional Members may be admitted if the Manager and a Majority of the Members consent to any such admission. Any Additional Member shall make such Contribution as is agreed upon in writing by the Company and the Additional Member, which writing shall specify the value of the Additional Member’s Contribution, the time for making such Contribution and the respective Percentage Interest of each Member following such Contribution.  Each of the Members acknowledges and agrees that it is intended that any dilution of Percentage Interests arising out of the admission of any Additional M ember will be proportionate among the Members based on their Percentage Interests immediately preceding such admission.  Notwithstanding the foregoing, a Person shall not become an Additional Member unless and until such Person becomes a party to this Agreement as a Member by signing a counterpart signature page to this Agreement and executing such documents and instruments as the Manager may reasonably request to confirm such Person
 
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as a Member in the Company and such Person’s agreement to be bound by the terms and conditions of this Agreement.
 
8.2 Accounting.  No Additional Member shall be entitled to any retroactive allocation of any income, gain, loss or deduction of the Company.  The Company may at the time an Additional Member is admitted close the Company books (as though the Company’s tax year had ended) or make pro rata allocations of income, gain, loss or deduction to an Additional Member for that portion of the Company’s tax year in which such Member was admitted in accordance with the provisions of IRC § 706(d) and the federal tax regulations thereunder.
 
ARTICLE 9
TRANSFERS OF INTERESTS
 
9.1 Restriction on Transfers.  Except as otherwise permitted by Section 9.2, no Member or Assignee shall Transfer all or any portion of such Person’s interest in the Company. Any purported Transfer not permitted under Section 9.2 shall be null and void and of no force or effect whatsoever.
 
9.2 Permitted Transfers.  Subject to the conditions and restrictions set forth in Sections 9.3 and 9.4, a Member or Assignee may at any time Transfer all or any portion of such Person’s interest in the Company either (a) to any other Member or as otherwise permitted under Section 9.7 or (b) with the consent of a Majority of the Members (which may be withheld in the sole and absolute discretion of any Member), to any other transferee.
 
9.3 Conditions to Permitted Transfers.  A Transfer shall not be permitted under Section 9.2 unless and until the following conditions are satisfied:
 
(a)           The Assignor and Assignee have executed and delivered to the Company such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Company to effect such Transfer and to confirm the agreement of the Assignee to be bound by the provisions of this Agreement.

(b)           The Assignor and/or Assignee have reimbursed the Company for all costs and expenses that the Company reasonably incurs in connection with the Transfer.

(c)           The Assignor and Assignee have provided to the Company the Assignee’s taxpayer identification number, sufficient information to determine the Assignee’s initial tax basis in the interest Transferred and any other information reasonably necessary to permit the Company to file all required federal and state tax returns and other legally required information statements or returns.  Without limiting the generality of the foregoing, the Company shall not be required to make any distribution otherwise provided for in this Agreement with respect to any interest Transferred until it has received such information.

 
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9.4 Rights and Obligations of Assignees and Assignors.
 
(a)           A Transfer by any Member or other Person shall not itself dissolve the Company or, except as otherwise provided in this Agreement, entitle the Assignee to become a Member or exercise any rights of a Member, including, without limitation, any Management Rights.

(b)           A Transfer by any Member, including, without limitation, any involuntary Transfer, shall eliminate the Member’s power and right to vote (in proportion to the extent of the interest Transferred) on any matter submitted to the Members, and, for voting purposes, such interest shall not be counted as outstanding in proportion to the extent of the interest Transferred. The Transfer shall also eliminate the Member’s entitlement to any Management Rights associated with the Transferred interest, including without limitation rights to information, but shall not cause the Member to be released from any liability to the Company solely as a result of the Transfer.

(c)           An Assignee not admitted as a Substitute Member shall be entitled only to the Economic Rights with respect to the interest Transferred and shall have no Management Rights (including, without limitation, rights to any information or accounting of the affairs of the Company or to inspect the books or records of the Company) with respect to the interest Transferred, other than the right to receive such information as the Assignee may reasonably require for tax purposes.  If the Assignee becomes a Substitute Member, the voting rights associated with the interest Transferred shall be restored and be held by the Substitute Member along with all other Management Rights with respect to the interest Transferred.  ; The Assignee shall have no liability as a Member solely as a result of the Transfer.

(d)           If a court of competent jurisdiction charges an interest in the Company with the payment of an unsatisfied amount of a judgment, to the extent so charged the judgment creditor shall be treated as an Assignee.

9.5 Admission of Assignee as Substitute Member.  Any transferee already a Member shall be automatically admitted as a Substitute Member with respect to the interest in the Company transferred to such Member.  Any other transferee shall be admitted to the Company as a Substitute Member with the Management Rights of a Member only upon satisfaction of all of the following conditions:
 
(a)           A Majority of the Members consent to such admission, which consent may be given or arbitrarily withheld in the sole and absolute discretion of each Member;

(b)           The Assignee becomes a party to this Agreement as a Member by executing a counterpart signature page to this Agreement and executing such documents and instruments as the Manager may reasonably request as necessary or appropriate to confirm such Assignee as a Member in the Company and such Assignee’s agreement to be bound by the terms and conditions of this Agreement;

 
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(c)           The Assignee pays or reimburses the Company for all reasonable legal, filing and publication costs that the Company incurs in connection with the admission of the Assignee as a Member with respect to the interest Transferred; and

(d)           If the Assignee is not a natural person of legal majority, the Assignee provides the Company with evidence reasonably satisfactory to counsel for the Company of the authority of the Assignee to become a Member and to be bound by the terms and conditions of this Agreement.

9.6 Effect of Admission of Substitute Member.  A Substitute Member shall have, to the extent of the interest Transferred, the rights and powers, and be subject to the restrictions and liabilities, of a Member and shall be liable for any obligations of the Assignor to make Contributions but shall not be obligated for liabilities unknown to the Substitute Member at the time of becoming a Member and not ascertainable from the Articles.  Notwithstanding the admission of a Substitute Member, the Assignor shall not be released from any liability the Assignor may have to the Company.
 
9.7 Gramor Buyout Right; ROIC Option to Purchase.
 
(a) In the event of any Construction Loan Impasse, Gramor shall have the right but not the obligation to give a “Buyout Notice” to ROIC under this Section 9.7(a) electing to purchase either directly or through a designee, or to have the Company purchase and liquidate, all, but not less than all, of ROIC’s interest in the Company for an amount equal to all unreturned Contributions of ROIC to the Company plus all accrued and undistributed Preferential Return on Capital on such Contributions.  Any acquisition or liquidation under this Section 9.7(a) of the interest of ROIC shall be closed on the date specified by Gramor in a notice to ROIC that is within 60 days after Gramor’s delivery of the Buyout Notice by the payment or distribution to ROIC in cash of the Buyout Amount.  In connection with the purchase, if applicable, Gramor shall have obtained and shall deliver on the Closing Date a release of ROIC and any Affiliates from any guarantees provided by ROIC or its Affiliates in connection with the Project, in form and content reasonably satisfactory to Gramor and all affected Affiliates.
 
(b) ROIC shall have an option to purchase the interest in the Company of Gramor in accordance with this Section 9.7(b).  By notice given by ROIC to Gramor within 30 days after notice from Gramor to ROIC of the Stabilization of the Project, ROIC shall have the right to elect to purchase all but not less than all of the interest in the Company of Gramor in accordance with the following:
 
(i)           The option shall be exercisable for an amount (“Option Price”) equal to the amount that Gramor would receive upon a sale of the Project and accompanying dissolution and liquidation of the Company in accordance with Article 10 assuming a sale of all Company Property for an amount equal to the value of the Project determined by capitalizing the Scheduled Net Operating Income at a 7.75% capitalization rate.  Upon any notice of exercise of
 
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the option given by ROIC to Gramor, the Manager shall calculate the value of the Project in accordance with the foregoing and determine the Option Price in accordance with the methodology described above.  For purposes of such calculation, deductions or discounts sometimes taken into account for valuation purposes, including without limitation for lack of marketability, for minority interest, for prepayment penalties under the terms of any indebtedness and for brokerage commissions, shall not be taken into account in determining the Option Price but, if applicable, the Option Price shall be reduced by the amount of any deemed loan payable by Gramor under Section 5.2(b) as provided therein.  The term “Stabilization of the Project” shall mean the achievement by the Project of a 90% occupancy rate based on signed leases of the leasable square footage of the Project.  The term “Scheduled Net Operating Income” shall mean at the time calculated scheduled annual rents under signed leases and pro forma annual rents for unleased leaseable square footage in the Project (in each case ignoring any free rent periods) less 5% vacancy.  Upon any exercise of the option by notice given by ROIC, ROIC shall be bound to purchase and Gramor shall be bound to sell for the Option Price.
 
(ii)           The closing of a purchase pursuant to the option shall occur on a date that is not more than 30 days after the date of the determination of the Option Price in accordance with Section 9.7(b)(i) (“Closing Date”) and is specified by notice given by ROIC or, if ROIC has not specified such a date within 20 days after the date of determination of the Option Price, in a notice given by Gramor.
 
(iii)           At the closing on the Closing Date, ROIC or is designee shall pay Gramor the Option Price in cash and Gramor shall deliver an assignment, in form and content reasonably satisfactory to ROIC (or its designee), warranting to good and unencumbered title to the interest being transferred, subject only to the restrictions and provisions of this Agreement and if applicable, any liens on Gramor’s interest in the Company required to have been granted to lenders to the Company.  In connection with the purchase, ROIC shall have obtained and shall deliver on the Closing Date a release of Gramor and any Affiliates from any guarantees provided by Gramor or its Affiliates (including, if applicable, Barry Cain) in conn ection with the Project, in form and content reasonably satisfactory to Gramor and all affected Affiliates.  Gramor may choose to receive, in lieu of cash consideration, all or part of Gramor’s net proceeds in ROIC’s affiliate REIT, Retail Opportunity Investments Corp, ticker (ROIC).  In such event, ROIC shall, at Gramor’s sole cost and expense, prepare all necessary documents and otherwise cooperate with Gramor to enable such portion of the transaction contemplated by this Agreement to be consummated as a tax deferred UPREIT Exchange.  ROIC shall (i) refrain from taking any action that could impair the tax deferred status of the transaction contemplated by this Section 9.7(b)(iii) (the “Transaction”) for a period of five (5) years after closing and (ii) guaranty for a period of five (5) years after closing the tax free nature of the portion of the Transaction that Gramor elects to consummate as a tax deferred UPREIT Exchange.  The lock up period for the Operating Partnership Units involved in said portion of the Transaction shall be one (1) year from closing.  For all purposes with respect to the Transaction, the value of ROIC stock shall be the average daily market price for said stock between the effective date of the purchase and sale agreement and close of business of the New York Stock Exchange on the day before closing of the Transaction.  Gramor shall be solely responsible to pay any and all attorney fees and all other
 
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fees and costs incurred by ROIC and Gramor with respect to the preparation of the documents and additional steps necessary under this provision.  Since ROIC has no issuable warrants, it is understood that Gramor, at any time before or after the closing of this transaction, may purchase warrants on the open market for resale or retention for the purpose of exercising such warrants, or portion thereof at such time and under such conditions as are provided in such warrants.  Gramor shall, with ROIC’s guidance, comply with all applicable SEC and other regulations relating to such transactions and disclosure thereof.
 
9.8 Distributions and Allocations to Transferred Interests.  Upon any Transfer during any Fiscal Year made in compliance with the provisions of this Article 9, Profits, Losses, each item thereof and all other items attributable to such interest for such Fiscal Year shall be divided and allocated between the Assignor and the Assignee by taking into account their varying interests during such Fiscal Year in accordance with IRC § 706(d), using any conventions permitted by law and selected by the Company.  All distributions on or before the date of such Transfer shall be made to the Assignor and all distributions thereafter shall be made to the Assignee.  In furtherance and not in limitation of the foregoing, if Gramor’s interest is purchased by ROIC pursuant to the option provided for in Section 9.7(b), Gramor shall participate in all allocations and distributions to the Members through the Closing Date.
 
ARTICLE 10
DISSOLUTION AND WINDING UP
 
10.1 Exercise of Voting Rights.  Each Member may, in the sole discretion of such Member, vote as the Member sees fit with respect to any matter requiring a vote of the Members under this Agreement or the Act, including, without limitation, a dissolution of the Company.
 
10.2 Dissolution Events.  Notwithstanding that, pursuant to the Articles, the duration of the Company is perpetual, the Members intend and agree that the Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (each, a ”Dissolution Event”):
 
(a)           Any sale of all or substantially all of the Company Property; or
 
(b)           The vote of a Majority of the Members to dissolve, wind up and liquidate the Company.
 
Notwithstanding anything in the Act to the contrary, to the maximum extent permitted by law, the Dissolution Events are the exclusive events that may cause the Company to dissolve, and the Company shall not dissolve prior to the occurrence of a Dissolution Event notwithstanding the occurrence of any event specified in the Act or any other event that might otherwise cause a dissolution.
 
 
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10.3 Winding Up.  Upon the occurrence of a Dissolution Event, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, satisfying the claims of its creditors and Members and liquidating or distributing its assets to the extent necessary therefor.  Neither the Manager nor any Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the orderly winding up of the Company’s business and affairs.  The Manager (or, if there is none then serving, a Majority of the Members, acting as Manager) shall oversee the winding up and dissolution of the Company, cause the Company Property to be distributed in kind or to be liquidated as promptly as is consistent with obtaining the fair value thereof and, subject to Section 10.4, cause the proceeds therefrom and any remaining Property, to the extent sufficient therefor, to be applied and distributed in the following order:
 
(a)           First, to the payment and discharge of all of the Company’s debts and liabilities to creditors, including any Member to the extent permitted under the Act;
 
(b)           Second, to the payment and discharge of any remaining debts or liabilities of the Company to any Member; and
 
(c)           Third, to the Members in accordance with positive balances in their Capital Accounts, after giving effect to all Contributions, distributions and allocations for all periods, in each case after the Capital Accounts have been adjusted as provided in Article 6 and no later than the earlier of (i) the end of the taxable year in which the date of the liquidation of the Company occurs or (ii) 90 days after the date of the liquidation of the Company.
 
The Manager or a Member that performs more than de minimis services in completing the winding up and termination of the Company pursuant to this Article 10 shall be entitled to receive reasonable compensation for the services performed.
 
10.4 Establishment of Trust or Reserves.  In the reasonable discretion of the Manager a pro rata portion of the distributions that would otherwise be made to the Members pursuant to this Article 10 may be:
 
(a) Distributed to a trust established for the benefit of the Members for the purposes of liquidating Company assets, collecting amounts owed to the Company and paying any contingent or unforeseen liabilities or obligations of the Company.  The assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the Manager (or a Majority of the Members if there is no Manager then serving) in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to Section 10.3; or
 
(b) Withheld to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations
 
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owed to the Company; provided that such withheld amounts shall be distributed to the Members as soon as practicable.
 
10.5 Notices of Dissolution Event, etc.  If any Dissolution Event occurs, the Manager shall, within 30 days thereafter, provide notice thereof to each Member and take such other actions as the Manager determines to be necessary or appropriate.
 
ARTICLE 11
BOOKS, RECORDS AND ACCOUNTINGS
 
11.1 Books and Records.  At the expense of the Company, the Manager shall maintain records and accounts of all operations and expenditures of the Company.  Records and accounts shall be kept on the accrual method of accounting.  The fiscal year of the Company shall be the calendar year.  At a minimum the Company shall keep at its principal place of business the following records:
 
(a)           A current list of the full name and last known business, residence or mailing address of each Member and Manager, both past and present;
 
(b)           A copy of the Articles and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any amendment has been executed;
 
(c)           Copies of the Company’s federal, state and local income tax returns and reports, if any, for the three most recent years;
 
(d)           Copies of the Company’s currently effective written Operating Agreement and all amendments thereto, copies of any writings permitted or required under the Act and copies of any financial statements of the Company for the three most recent years;
 
(e)           Minutes of any meetings of the Members and any consents obtained from Members for actions taken without a meeting; and
 
(f)           To the extent not contained in this Agreement, a statement prepared and certified as accurate by the Manager that describes (i) the amount of cash and a description and statement of the agreed value of other Property or consideration contributed by each Member or that each Member has agreed to contribute in the future, (ii) the times at which or events on the occurrence of which any additional Contributions agreed to be made by each Member, if any, are to be made and (iii) if agreed upon, the time at which or the events upon which the Company is to be dissolved and its affairs wound up.
 
11.2 Reports.
 
 
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(a) Within 45 days after the end of each Fiscal Year of the Company or as soon thereafter as is reasonably practicable, the Company shall furnish to each Member an annual report consisting of at least the following to the extent applicable:
 
(i)           A copy of the Company’s federal, state and local income tax return for that Fiscal Year;
 
(ii)           A set of audited financial statements for the Company for the Fiscal Year prepared in accordance with generally accepted accounting principles; drafts thereof shall be provided to ROIC for review within thirty (30) days of the end of each fiscal year; and
 
(iii)           Any additional information that the Members may require for the preparation of their individual federal and state income tax returns.
 
(b) Within 15 days after the end of each calendar month, the Company shall furnish to each Member a monthly and year-to-date balance sheet and profit and loss statement prepared in accordance with generally accepted accounting principles and a statement of changes in the Member’s capital accounts, a variance report comparing actual costs and revenues with budgeted costs and expenses and revenues on a category basis, along with a reasonably detailed explanation of all material with significant variances and all changes in any timetables related thereto, a leasing report that shall describe in reasonable detail all leasing efforts and leasing prospects, letters of intent and leases made, identified, or entered into during su ch period, a rent roll, a bank statement with reconciliations, if applicable, a calculation by Manager of the amount of Net Operating Cash flow for the preceding calendar year and a calculation by Manager of the anticipated distributions, if any, to Members pursuant to ARTICLE 7, including a calculation of the undistributed Preferential Return on Capital Amounts, if any, and any additional information that the Members may require as supporting schedules to the above.
 
(c) The Manager shall provide the Members with copies of construction progress reports delivered by the general contractor, at regular intervals, but in any event not less frequently than monthly,
 
(d) Within 15 days after the end of each calendar month, the Manager shall provide the Members with monthly status reports which shall include the following:  (a) an operating statement and report of financial condition of the Company for such period; (b) a variance report, comparing actual costs and expenses and revenues with budgeted costs and expenses and revenues on a category basis along with a reasonably detailed explanation of all material or significant variances and all changes in any time schedules relating thereto; (c) a leasing report, which shall describe in reasonable detail all leasing efforts and leasing prospects, letters of intent and leases made, identified or entered into during such perio d, and a current rent roll; (d) bank statements and bank reconciliations, (e) if applicable, a calculation by Manager of the amount of Net Operating Cash Flow for the preceding calendar month and a calculation by Manager of the respective distributions if any, to Members pursuant to ARTICLE 7, including a
 
 
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calculation of the undistributed Preferential Return on Capital amounts, if any, and (f) any additional information that the Members may require as supporting schedules to the foregoing.
 
(e) In addition, if the Company indemnifies or advances expenses to a Manager or Member in connection with a proceeding by or in the right of the Company, the Company shall report the indemnification or advance in writing to the Members.
 
(f) The Manager shall pay from gross cash proceeds from Company operations any taxes payable by the Company.
 
(g) The Manager will also provide to its Members any additional financial information and materials reasonably requested by the Members or their auditors.
 
11.3 Rights of Members; Inspection.  Each Member shall have the right to receive the reports and information required to be provided by the Act, the Articles or this Agreement. Upon reasonable request, each Member, and any authorized representative of any Member, shall have the right, during ordinary business hours, to inspect and copy, at the requesting Member’s expense, the books and records that the Company is required to maintain and keep by the Act, the Articles or this Agreement.
 
ARTICLE 12
ADOPTION AND AMENDMENT
 
This Agreement shall be adopted and be effective only upon execution by all of the Members shown as signatories hereto.  This Agreement and the Articles may be amended, restated or modified from time to time by a Majority of the Members then entitled to vote, consent to or otherwise decide any matter submitted to the Members, as determined pursuant to this Agreement; provided that any amendment that would change the number of managers of the Company shall require the affirmative vote of all Members then entitled to vote.  Subject to the foregoing, neither the Manager nor any Member shall have any vested rights under this Agreement that may not be modified from time to time through an amendment to this Agreement.
 
ARTICLE 13
MISCELLANEOUS
 
13.1 Application of Oregon Law.  This Agreement, and the application or interpretation hereof, shall be governed exclusively by its terms and by the laws of Oregon, and specifically the Act, without regard to choice of law rules.
 
13.2 Construction.  Whenever required by the context in this Agreement, the singular number shall include the plural and vice versa, and any gender shall include the masculine, feminine and neuter genders.  The term “Member” when used in any provision relating to
 
 
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Capital Accounts or any other tax or financial matter shall be deemed to include any Person having Economic Rights under this Agreement.
 
13.3 Counterparts; Facsimiles.  This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.  Facsimile signatures of the parties on this Agreement or any amendment of this Agreement shall be deemed original signatures, and each Member or other party shall forward the original signed version of such document promptly following facsimile transmission.
 
13.4 Waiver of Partition.  Each Member specifically waives any direct or indirect right of partition such Member may have or may hereafter acquire that would enable such Member to cause any Company Property to be the subject of a suit for partition.
 
13.5 Execution of Additional Instruments.  Each Member hereby agrees to execute such other and further statements of interest and holdings, designations, powers of attorney and other instruments necessary to effectuate the purposes of this Agreement or comply with any laws, rules or regulations applicable to the Company.
 
13.6 Headings.  The headings in this Agreement are inserted for convenience only and do not describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof.
 
13.7 Heirs, Successors and Assigns.  Each and all of the covenants, terms, provisions and agreements contained in this Agreement shall be binding upon and inure to the benefit of the parties and, to the extent permitted by this Agreement, their respective heirs, legal representatives and permitted successors and assigns.
 
13.8 Notices and Consents, etc.  Any notice, demand or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be deemed to have been sufficiently given or served for all purposes if delivered personally to the party or to an executive officer of the party to which the same is directed or, if sent by registered or certified mail, postage and charges prepaid, addressed to the Manager’s, Member’s or Company’s address, as shown in the records of the Company.  Except as otherwise provided herein, any such notice shall be deemed to be given 5 Business Days after the date on which the same was deposited in the United States mails.
 
13.9 Severability.  If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid, illegal or unenforceable to any extent, the remainder of this Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law.
 
13.10 Waivers.  The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not prevent a
 
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subsequent act, which would have originally constituted a violation, from having the effect of an original violation.
 
13.11 Arbitration of Disputes.  Any action to enforce or interpret this Agreement, or to resolve disputes with respect to this Agreement as between:  the Company and a Member, or between or among the Members or between the Manager and Members or between the Company and the Manager, will be settled by arbitration in accordance with the rules of the Arbitration Services of Portland.  Any party may commence arbitration by sending a written demand for arbitration to the other parties.  Such demand will set forth the nature of the matter to be resolved by arbitration.  The arbitration will be in Portland, Oregon. 60; The substantive law of the State of Oregon will be applied by the arbitrator to the resolution of the dispute.  The parties will share equally all costs of arbitration.  The prevailing party will be entitled to reimbursement of attorney fees, costs and expenses incurred in connection with the arbitration.  All decisions of the arbitrator will be final, binding and conclusive on all parties.  Judgment may be entered upon any such decision in accordance with applicable law in any court having jurisdiction thereof.  The arbitrator (if permitted under applicable law) or such court may issue a writ of execution to enforce the arbitrator’s decision.
 
13.12 Entire Agreement.  The Articles, this Agreement and any other document to be furnished pursuant to the provisions hereof embody the entire agreement and understanding of the parties as to the subject matter contained herein.  There are no restrictions, promises, representations, warranties, covenants or undertakings other than those expressly set forth or referred to in such documents.  This Agreement and such documents supersede all prior agreements and understandings among the parties with respect to the subject matter hereof.
 
[signature page follows]
 
 
 
 
30

 
IN WITNESS WHEREOF, the Members have executed this Agreement effective as of the date first set forth above.
 
Members:
GRAMOR WILSONVILLE OTS LLC,
 
an Oregon limited liability company
   
 
By:  Gramor Investments, Inc.,
 
an Oregon corporation
   
 
By  /s/ Barry A. Cain
 
Barry A. Cain, President
   
   
 
ROIC OREGON, LLC
   
   
 
By  /s/ Stuart A. Tanz
 
[Name/Title]
 
Stuart A. Tanz
 
CEO


Manager Acknowledged and Appointment Accepted:

GRAMOR WILSONVILLE OTS LLC,
an Oregon limited liability company

By:  Gramor Investments, Inc.,
an Oregon corporation

By  /s/ Barry A. Cain
Barry A. Cain, President
 
 
31

 
TABLE OF DEFINITIONS

Schedule A
 
 
Page
Act
i
Additional Contributions
i
Additional Member
i
Adjusted Capital Account Deficit
i
Affiliate
i
Agreement
i
Articles
i
Assignee
i
Assignor
ii
Business Day
ii
Buyout Notice
ii
Capital Account
ii
Cause
ii
Closing Date
ii
Company
ii
Company Property
ii
Construction Loan Impasse
ii
Contribution
ii
Depreciation
ii
Development Agreement
ii
Dissolution Event
ii
Distributed but Unmatched Preferential Return
ii
Economic Rights
iii
Fiscal Year
iii
Gramor
iii
Gross Asset Value
iii
Initial Contributions
iv
IRC
iv
Majority of the Members
iv
Management Rights
iv
Manager
iv
Member
iv
Net Cash From Sales or Refinancings
iv
Net Operating Cash Flow
iv
Option Price
v
Percentage Interest
v
Person
v
Preferential Return on Capital
v
Profits and Losses
v
Project
vi
Property
vi</