Business Context and Reporting Period
This Form 8-K is filed by Inland American Real Estate Trust, Inc. (the "Registrant") on May 29, 2009, reporting an event that occurred on May 22, 2009. The filing concerns a legal dispute regarding a joint venture investment in Concord Debt Holdings LLC ("Concord"), a subsidiary created in 2008 to hold a minority preferred equity interest in commercial real estate-related debt instruments and REIT shares.
Key Financial Metrics and Investment Status
- Ownership Stake: Registrant holds approximately 23.5% of Concord; Defendant Lex-Win Concord LLC holds approximately 76.5% and acts as the managing member.
- Capital Contribution: Registrant has contributed a total of $76 million in cash to Concord as of the filing date, against an initial commitment of $20 million and a potential total commitment of $100 million under specified conditions.
- Disputed Capital Call: Lex-Win issued a capital call requiring the Registrant to pay $24 million by May 26, 2009.
- Intended Use of Funds: The disputed funds are intended to satisfy lender concerns regarding Concord's ability to perform under existing credit facilities (Advance Rate Paydown or "ARP").
- Financial Performance: The filing text does not provide specific revenue, profit, cash flow, or margin data for the Registrant or Concord.
Material Changes and Legal Action
On May 22, 2009, the Registrant filed an action in Delaware Chancery Court against Lex-Win Concord LLC. The lawsuit seeks a declaration that the Joint Venture Agreement does not require the Registrant to meet capital calls directed toward satisfying lender concerns about Concord's credit facilities. The Registrant argues that such calls are "Advance Rate Paydowns" (ARPs) and that the decision to fund them is discretionary for the Registrant. If the Registrant declines to fund, Lex-Win is allegedly required to fund 100% of the call.
The Registrant further alleges that Lex-Win's attempt to impose the $24 million call constitutes a breach of contract and the covenant of good faith and fair dealing. The complaint also seeks clarification on the minimum equity capital Lex-Win must maintain and the circumstances under which Lex-Win may obtain distributions.
Outlook, Risks, and Management Commentary
- Management Position: The Registrant believes Lex-Win is acting in contravention of the Joint Venture Agreement. The Registrant asserts that "Permitted Investments" are for generating returns, whereas the current call is to satisfy debt obligations.
- Counterparty Status: According to May 7, 2009 earnings calls by Lexington Realty and Winthrop Realty Trust (indirect owners of Lex-Win), Lex-Win has not invested capital in Concord since 2007 and is determined not to do so. Lex-Win reportedly views Concord as being in an "orderly liquidation" or "liquidation state" as of May 2009.
- Risks: The primary risk is the potential loss of the $76 million investment if the joint venture fails or if the legal dispute results in unfavorable terms. There is also a risk regarding the enforceability of the capital call and the liquidity of Concord's assets.
- Contingencies: The outcome of the Delaware Chancery Court action will determine the Registrant's obligation to fund the $24 million call and the future governance of the joint venture.
Key Facts for Investor Verification
- Verify the status of the $24 million capital call and whether the Registrant has made the payment.
- Monitor the Delaware Chancery Court proceedings for rulings on the interpretation of the Joint Venture Agreement regarding Advance Rate Paydowns.
- Assess the liquidity and solvency of Concord Debt Holdings LLC given the reported "liquidation state" comments by Lex-Win.
- Confirm the total exposure of the Registrant to Concord, including the $76 million already invested and any potential future obligations.
- Review subsequent filings for updates on the legal dispute and any impact on the Registrant's consolidated financial statements.