The following discussion and analysis should be read in conjunction with our
accompanying consolidated financial statements and the notes thereto. Also see
"Forward-Looking Statements" and "Summary Risk Factors" preceding Part I and
Part I, Item 1A, "Risk Factors."
Overview
We were formed on July 12, 2007 as a Maryland corporation that elected to be
taxed as a real estate investment trust ("REIT") beginning with the taxable year
ended December 31, 2008 and we intend to continue to operate in such a manner.
We conduct our business primarily through our Operating Partnership, of which we
are the sole general partner. Subject to certain restrictions and limitations,
our business is managed by our advisor, KBS Capital Advisors LLC, pursuant to an
advisory agreement. Our advisor owns 20,000 shares of our common stock. We have
no paid employees.
As of December 31, 2022, we owned one office property, which we sold on March
30, 2023.
As of December 31, 2022, we had 183,346,918 shares of common stock issued and
outstanding.
On November 13, 2019, in connection with a review of potential strategic
alternatives available to us, a special committee composed of all of our
independent directors (the "Special Committee") and our board of directors
unanimously approved the sale of all of our assets and our dissolution pursuant
to the terms of the plan of complete liquidation and dissolution (the "Plan of
Liquidation"). The principal purpose of the Plan of Liquidation is to provide
liquidity to our stockholders by selling our assets, paying our debts and
distributing the net proceeds from liquidation to our stockholders. On March 5,
2020, our stockholders approved the Plan of Liquidation. The Plan of Liquidation
is included as an exhibit to this Annual Report on Form 10-K.
Plan of Liquidation
In accordance with the Plan of Liquidation, our objectives are to pursue an
orderly liquidation of our company by selling all of our assets, paying our
debts and our known liabilities, providing for the payment of unknown or
contingent liabilities, distributing the net proceeds from liquidation to our
stockholders and winding up our operations and dissolving our company.
Pursuant to the Plan of Liquidation, our board of directors has authorized the
following liquidating distributions:
Record Date Payment Date Liquidating Distribution Per Share
March 5, 2020 March 10, 2020 $ 0.75
August 3, 2020 August 7, 2020 $ 0.25
December 24, 2020 December 30, 2020 $ 0.40
October 1, 2021 October 5, 2021 $ 0.50
December 9, 2021 December 14, 2021 $ 0.20
We completed the sale of our last remaining real estate property on March 30,
2023. See "-Subsequent Events." We anticipate to distribute substantially all of
the remaining proceeds from liquidation in the second quarter of 2023.
Our completion of the Plan of Liquidation and the amount of any additional
liquidating distributions that we will pay to our stockholders and when we will
pay them are subject to risks and uncertainties and are based on certain
estimates and assumptions, one or more of which may prove to be incorrect. As a
result, the actual amount of any additional liquidating distributions we pay to
stockholders may be less than we estimate and the liquidating distributions may
be paid later than we predict. There are many factors that may affect the amount
of liquidating distributions we will ultimately pay to our stockholders. If we
underestimate our existing obligations and liabilities or the amount of taxes,
transaction fees and expenses relating to the liquidation and dissolution, or if
unanticipated or contingent liabilities arise, the amount of liquidating
distributions ultimately paid to our stockholders could be less than estimated.
We can give no assurance regarding the amount or timing of liquidating
distributions to be received by our stockholders.
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Real Estate and Real Estate Finance Markets
The combination of the continued economic slowdown, rapidly rising interest
rates and significant inflation as well as a lack of lending activity in the
debt markets have contributed to considerable weakness in the commercial real
estate markets, including the demand for office space in downtown Los Angeles,
where our last remaining property was located, which demand significantly
declined as a result of the COVID-19 pandemic, with employees continuing to work
from home. During 2021 and 2022, the usage of our assets remained lower than
pre-pandemic levels. In addition, we experienced a significant reduction in
leasing interest and activity when compared to pre-pandemic levels. Our
completion of the Plan of Liquidation has been delayed as a result of these
factors.
During the year ended December 31, 2022, we reduced the estimated liquidation
value of our last remaining real estate property ("Union Bank Plaza") by $82.6
million (after estimated closing costs and disposition fees) as the liquidation
value was adjusted based on the contractual sales price less estimated closing
credits as the property was under contract to sell as of December 31, 2022. With
rising interest rates, prospective buyers were challenged to obtain favorable
financing, which along with the lower demand for office space, impacted the
projected cash flows of the property and the purchase price prospective buyers
were willing to pay for the property. On March 30, 2023, we completed the sale
of Union Bank Plaza for $104.0 million, before third-party closing costs of
approximately $1.1 million and excluding disposition fees payable to our
advisor. See "-Subsequent Events."
Liquidity and Capital Resources
As described above under "- Overview - Plan of Liquidation," on March 5, 2020,
our stockholders approved the sale of all of our assets and our dissolution
pursuant to the terms of the Plan of Liquidation. We expect to sell all of our
assets, pay all of our known liabilities, provide for unknown liabilities and
distribute the net proceeds from liquidation to our stockholders. Our principal
demands for funds through the completion of our liquidation will be for: the
payment of operating expenses and general and administrative expenses, including
expenses in connection with the Plan of Liquidation; and payments of
distributions to stockholders pursuant to the Plan of Liquidation. Through the
completion of our liquidation, we intend to use our cash on hand and proceeds
from the sale of real estate properties as our primary sources of liquidity.
Our investment in real estate generated cash flow in the form of rental revenues
and tenant reimbursements, which were reduced by operating expenditures, the
payment of asset management fees and corporate general and administrative
expenses. Cash flow from operations from our real estate investment was
primarily dependent upon the occupancy level of the property, the net effective
rental rates on our leases, the collectibility of rent and operating recoveries
from our tenants and how well we managed our expenditures. As of December 31,
2022, our remaining real estate property was 57% occupied. We completed the sale
of our last remaining real estate property on March 30, 2023. See "Subsequent
Events."
For the year ended December 31, 2022, our cash needs for capital expenditures
were met with cash on hand. Operating cash needs during the same period were met
with cash flow generated by our real estate investment. We believe that our cash
on hand and proceeds from the sale of our remaining real estate property will be
sufficient to meet our liquidity needs through the completion of our
liquidation.
Through the completion of our liquidation, we intend to maintain adequate cash
reserves for liquidity and other future capital needs.
We anticipate to distribute substantially all of the remaining proceeds from
liquidation in the second quarter of 2023. At the time of adopting the Plan of
Liquidation, we had anticipated completing the orderly liquidation of our
company and paying substantially all of our liquidating distributions from the
net proceeds from liquidation within 24 months after stockholder approval of the
Plan of Liquidation, which occurred on March 5, 2020. Given the continued
disruptions in the financial markets and continued economic uncertainty, our
completion of the Plan of Liquidation has been delayed. Although we were not
able to complete our liquidation within the 24-month period described above, we
do not anticipate any material unfavorable tax consequences to our stockholders
or to our status as a REIT. For U.S. federal income tax purposes, (i) we did not
have any current and accumulated earnings and profits (including any gain) or
taxable income or gain for the taxable years ended December 31, 2020, 2021 and
2022 and (ii) we do not anticipate any current and accumulated earnings and
profits (including any gain) or taxable income or gain in the future. Our
expectations about the amount of any additional liquidating distributions that
we will pay and when we will pay them are subject to risks and uncertainties and
are based on certain estimates and assumptions, one or more of which may prove
to be incorrect. As a result, the actual amount of any additional liquidating
distributions we pay to our stockholders may be less than our estimate and the
liquidating distributions may be paid later than we predict. We do not expect to
pay regular monthly distributions during the liquidating process.
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We also use our capital resources to make certain payments to our advisor. We
paid our advisor fees in connection with the acquisition and origination of our
assets and paid our advisor fees in connection with the management and
disposition of our assets and we reimburse our advisor for certain costs
incurred by our advisor in providing services to us. Among the fees payable to
our advisor was an asset management fee. With respect to investments in real
estate, we paid our advisor a monthly asset management fee equal to one-twelfth
of 0.75% of the amount paid or allocated to acquire the investment, plus the
cost of any subsequent development, construction or improvements to the
property. This amount includes any portion of the investment that was debt
financed and is inclusive of acquisition fees and expenses related thereto. We
also continue to reimburse our advisor and our dealer manager for certain
stockholder services.
During the year ended December 31, 2022, cash and cash equivalents increased by
$1.3 million primarily as a result of the net inflows from investment in our
remaining real estate property of $7.1 million and $10.5 million of
non-refundable extension fees funded by the purchaser of Union Bank Plaza under
the purchase and sale agreement for the property, which fees were credited
towards the sale price upon closing, offset by $10.1 million of capital
expenditure payments and $5.1 million of corporate expenditures. On March 30,
2023, we completed the sale of Union Bank Plaza for $104.0 million, before
third-party closing costs of approximately $1.1 million and excluding
disposition fees payable to our advisor. See "-Subsequent Events."
Pursuant to our stockholders' approval of the Plan of Liquidation, we adopted
the liquidation basis of accounting as of February 1, 2020 (as the approval of
the Plan of Liquidation by our stockholders became imminent within the first
week of February 2020 based on the results of our solicitation of proxies from
our stockholders for their approval of the Plan of Liquidation) and for the
periods subsequent to February 1, 2020 in accordance with GAAP. Accordingly, on
February 1, 2020, assets were adjusted to their estimated net realizable value,
or liquidation value, which represents the estimated amount of cash that we will
collect through the disposal of our assets as we carry out our Plan of
Liquidation. The liquidation value of our operating property is presented on an
undiscounted basis as of December 31, 2022. Estimated costs to dispose of assets
and estimated capital expenditures through the disposition date of the property
have been presented separately from the related assets. Liabilities are carried
at their contractual amounts due or estimated settlement amounts.
Changes in Net Assets in Liquidation
For the Year Ended December 31, 2022
Net assets in liquidation decreased by approximately $72.1 million from $205.5
million on December 31, 2021 to $133.4 million on December 31, 2022. The primary
reason for the decrease in net assets in liquidation was due to a decrease in
the liquidation value of Union Bank Plaza, our remaining real estate property
located in Los Angeles, California. We sold this property on March 30, 2023. The
estimated net proceeds from the sale of Union Bank Plaza decreased by
approximately $82.6 million (after estimated closing costs and disposition fees)
as the liquidation value was adjusted based on the contractual sales price less
estimated closing credits as the property was under contract to sell as of
December 31, 2022. However, the decrease in the estimated net realizable value
of real estate and the corresponding impact to net assets in liquidation was
partially offset by an increase in estimated cash flow of $3.1 million and a
decrease in estimated capital expenditures of $7.9 million primarily due to a
reduction in tenant improvement costs projected through the date of sale of
Union Bank Plaza. See "- Subsequent Events - Disposition of Union Bank Plaza."
As of December 31, 2022, Union Bank Plaza was 57% occupied. Demand for office
space in downtown Los Angeles significantly declined as a result of the COVID-19
pandemic, with employees continuing to work from home. In addition, with rising
interest rates, prospective buyers were challenged to obtain favorable
financing, which along with the lower demand for office space, impacted the
projected cash flows of the property and the purchase price prospective buyers
were willing to pay for the property.
There is inherent uncertainty with these estimates and projections.
Results of Operations
In light of the adoption of liquidation basis accounting as of February 1, 2020
and our liquidation pursuant to the Plan of Liquidation, the results of
operations for the current year period are not comparable to the prior year
period. The sale of assets under the Plan of Liquidation has a significant
impact on our operations. Changes in liquidation values of our assets are
discussed above under "- Changes in Net Assets in Liquidation." See "- Overview
- Plan of Liquidation" and "- Real Estate and Real Estate Finance Markets."
Due to the adoption of the Plan of Liquidation, we are no longer reporting funds
from operations and modified funds from operations as we no longer consider
these to be key performance measures.
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Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies that management considers
critical in that they involve significant management judgments and assumptions,
require estimates about matters that are inherently uncertain and because they
are important for understanding and evaluating our reported financial results.
These judgments affect the reported amounts of assets and liabilities and our
disclosure of contingent assets and liabilities as of the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. With different estimates or assumptions, materially different amounts
could be reported in our financial statements. Additionally, other companies may
utilize different estimates that may impact the comparability of our results to
those of companies in similar businesses.
Subsequent to the adoption of the liquidation basis of accounting, we are
required to estimate all costs and income we expect to incur and earn through
the end of liquidation including the estimated amount of cash we expect to
collect through the disposal of our assets and the estimated costs to dispose of
our assets.
Pursuant to our stockholders' approval of the Plan of Liquidation, we adopted
the liquidation basis of accounting as of and for the periods subsequent to
February 1, 2020 (as approval of the Plan of Liquidation became imminent within
the first week of February 2020 based on the results of our solicitation of
proxies from our stockholders for their approval of the Plan of Liquidation).
Accordingly, on February 1, 2020, assets were adjusted to their estimated net
realizable value, or liquidation value, which represents the estimated amount of
cash that we will collect through the disposal of our assets as we carry out our
Plan of Liquidation. The liquidation value of our real estate property is
presented on an undiscounted basis. Estimated costs to dispose of our assets and
estimated capital expenditures through the disposition date of our real estate
property have been presented separately from the related assets. Liabilities are
carried at their contractual amounts due or estimated settlement amounts.
We accrue costs and income that we expect to incur and earn through the
completion of our liquidation, including the estimated amount of cash we expect
to collect through the disposal of our assets and the estimated costs to dispose
of our assets, to the extent we have a reasonable basis for estimation. These
amounts are classified as a liability for estimated costs in excess of estimated
receipts during liquidation on the Consolidated Statement of Net Assets. Actual
costs and income may differ from amounts reflected in the financial statements
because of the inherent uncertainty in estimating future events. These
differences may be material. See Note 2, "Plan of Liquidation" and Note 4,
"Liabilities for Estimated Costs in Excess of Estimated Receipts During
Liquidation" for further discussion. Actual costs incurred but unpaid as of
December 31, 2022 are included in accounts payable and accrued liabilities, due
to affiliate and other liabilities on the Consolidated Statement of Net Assets.
Revenue Recognition - Operating Leases
Under the liquidation basis of accounting, we have accrued all income that we
expect to earn through the completion of our liquidation to the extent we have a
reasonable basis for estimation. Revenue from tenants is estimated based on the
contractual in-place leases and projected leases through the disposition date of
the property. These amounts are classified in liabilities for estimated costs in
excess of estimated receipts during liquidation on the Consolidated Statement of
Net Assets.
Real Estate
As of February 1, 2020, our investments in real estate were adjusted to their
estimated net realizable value, or liquidation value, to reflect the change to
the liquidation basis of accounting. The liquidation value represents the
estimated amount of cash that we will collect through the disposal of our
assets, including any residual value attributable to lease intangibles, as we
carry out the Plan of Liquidation. As of December 31, 2022, we estimated the
liquidation value of our remaining real estate property based on the contractual
sales price less estimated closing credits as the property was under contract to
sell as of December 31, 2022. The liquidation value of our investment in real
estate is presented on an undiscounted basis and the investment in real estate
is no longer depreciated. Estimated costs to dispose of this investment are
carried at their contractual amounts due or estimated settlement amounts and are
presented separately from the related assets. Subsequent to February 1, 2020,
all changes in the estimated liquidation value of the investments in real estate
are reflected as a change to our net assets in liquidation.
Rents and Other Receivables
In accordance with the liquidation basis of accounting, as of February 1, 2020,
rents and other receivables were adjusted to their net realizable value. We
periodically evaluate the collectibility of amounts due from tenants. Any
changes in the collectibility of the receivables are reflected as a change to
our net assets in liquidation.
Accrued Liquidation Costs
We accrue for certain estimated liquidation costs to the extent we have a
reasonable basis for estimation. These consist of legal fees, dissolution costs,
final audit/tax costs, insurance, and distribution processing costs.
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Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code. To
continue to qualify as a REIT, we must meet certain organizational and
operational requirements, including a requirement to distribute at least 90% of
our annual REIT taxable income to stockholders (which is computed without regard
to the dividends-paid deduction or net capital gain and which does not
necessarily equal net income as calculated in accordance with GAAP). As a REIT,
we generally will not be subject to federal income tax on income that we
distribute as dividends to our stockholders. If we fail to qualify as a REIT in
any taxable year, we will be subject to federal income tax on our taxable income
at regular corporate income tax rates and generally will not be permitted to
qualify for treatment as a REIT for federal income tax purposes for the four
taxable years following the year during which qualification is lost, unless the
Internal Revenue Service grants us relief under certain statutory provisions.
Such an event could materially and adversely affect our net income and net cash
available for distribution to stockholders. However, we believe that we are
organized and operate in such a manner as to qualify for treatment as a REIT.
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial
statements are issued.
Disposition of Union Bank Plaza
As previously disclosed, on July 20, 2022, we, through an indirect wholly owned
subsidiary, entered into a purchase and sale agreement and escrow instructions
(the "Agreement") for the sale of Union Bank Plaza to WB Union Plaza Holdings
LLC (the "Purchaser"), an affiliate of Waterbridge Capital. Union Bank Plaza is
a 40story office building located in Los Angeles, California containing 701,888
rentable square feet on approximately 3.7 acres of land. The Purchaser is
unaffiliated with us or our advisor. Pursuant to the Agreement, the sale price
for Union Bank Plaza was $155.0 million, subject to prorations and adjustments
as provided in the Agreement.
As previously disclosed on Form 8-K, we and the Purchaser amended the Agreement
on October 14, 2022, November 23, 2022, December 9, 2022, December 29, 2022,
January 12, 2023, January 26, 2023, February 10, 2023, February 17, 2023,
February 27, 2023, March 6, 2023, March 16, 2023 and March 21, 2023. On March
30, 2023, we, through an indirect wholly owned subsidiary, entered into a
thirteenth amendment to the Agreement (the "Thirteenth Amended Agreement") with
the Purchaser to extend the closing date to March 30, 2023. Pursuant to the
Thirteenth Amended Agreement, if the sale closed by March 30, 2023, then the
sale price for Union Bank Plaza was $104.0 million. In addition, pursuant to the
Thirteenth Amended Agreement, we were no longer obligated to provide, and the
Purchaser was no longer entitled to receive, credits towards the purchase price
for outstanding capital expenditures, leasing commissions, tenant improvement
allowances and free rent which was estimated to be approximately $5.7 million.
On March 30, 2023, we completed the sale of Union Bank Plaza to the Purchaser
for $104.0 million, before third-party closing costs of approximately
$1.1 million and excluding disposition fees payable to the our advisor.
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