GBE Grubb & Ellis Company Common Stock

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2011

OR

o		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 1-8122

GRUBB & ELLIS COMPANY

(Exact name of registrant as specified in its charter

Delaware		94-1424307
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)

(714) 667-8252
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s common stock as of August 10, 2011 was 69,818,327 shares.

 

 

GRUBB & ELLIS COMPANY

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010			3
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010			4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			47
PART II — OTHER INFORMATION			47
Item 1. Legal Proceedings			47
Item 1A. Risk Factors			47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults Upon Senior Securities			48
Item 4. [Removed and Reserved]			48
Item 5. Other Information			48
Item 6. Exhibits			48
Signatures			49
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part I — FINANCIAL INFORMATION

Item 1.		Financial Statements.

GRUBB & ELLIS COMPANY

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

		June 30,				December 31,
		2011				2010
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents (including $244 and $307 from VIEs, respectively)		$	14,722			$	30,919
Restricted cash			4,267				3,836
Investment in marketable equity securities			2,034				1,948
Accounts receivable from related parties — net			5,976				3,460
Service fees receivable — net (including $555 and $915 from VIEs, respectively)			32,302				31,048
Professional service contracts — net			3,040				3,468
Prepaid expenses and other assets			12,851				11,842
Assets held for sale (including $15,923 and $14,943 from VIEs, respectively, and $24,055 and $24,992 from related parties, respectively)			90,930				100,314
Total current assets			166,122				186,835
Professional service contracts — net			3,892				5,750
Property, equipment and leasehold improvements — net			10,796				10,110
Identified intangible assets — net			78,680				80,698
Other assets — net (including $21 and $7 from VIEs, respectively)			2,494				2,030
Goodwill			1,521				1,521
Total assets		$	263,505			$	286,944
LIABILITIES AND SHAREOWNERS’ DEFICIT
Current liabilities:
Accounts payable and accrued expenses (including $727 and $916 from VIEs, respectively)		$	63,951			$	69,470
Credit facility (includes accrued interest)			17,747				—
Notes payable and capital lease obligations			584				1,041
Liabilities held for sale (including $837 and $822 from VIEs, respectively, and $1,617 and $2,178 from related parties, respectively)			116,884				122,478
Total current liabilities			199,166				192,989
Long-term liabilities:
Convertible notes			30,291				30,133
Notes payable and capital lease obligations			452				566
Other long-term liabilities			9,339				7,065
Deferred tax liabilities			25,234				25,070
Total liabilities			264,482				255,823
Commitment and contingencies (Note 11)
Preferred stock: 12% cumulative participating perpetual convertible; $0.01 par value; 1,000,000 shares authorized as of June 30, 2011 and December 31, 2010; 965,700 shares issued and outstanding as of June 30, 2011 and December 31, 2010			95,874				90,080
Shareowners’ deficit:
Preferred stock: $0.01 par value; 19,000,000 shares authorized as of June 30, 2011 and December 31, 2010; no shares issued and outstanding as of June 30, 2011 and December 31, 2010			—				—
Common stock: $0.01 par value; 200,000,000 shares authorized as of June 30, 2011 and December 31, 2010; 69,853,467 and 70,076,451 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively			698				701
Additional paid-in capital			406,347				409,943
Accumulated deficit			(511,503	)			(478,881	)
Other comprehensive income			240				148
Total Grubb & Ellis Company shareowners’ deficit			(104,218	)			(68,089	)
Noncontrolling interests (including $7,367 and $9,130 from VIEs, respectively)			7,367				9,130
Total deficit			(96,851	)			(58,959	)
Total liabilities and shareowners’ deficit		$	263,505			$	286,944

The abbreviation VIEs above means Variable Interest Entities.

See accompanying notes to consolidated financial statements.

GRUBB & ELLIS COMPANY

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
REVENUE
Management services		$	57,913			$	70,110			$	116,958			$	142,558
Transaction services			72,814				54,684				123,266				96,917
Investment management			7,228				2,265				9,989				3,893
Total revenue			137,955				127,059				250,213				243,368
OPERATING EXPENSE
Compensation costs			121,215				119,495				230,641				237,736
General and administrative			18,333				15,515				36,480				31,741
Provision for doubtful accounts			2,569				673				3,807				1,802
Depreciation and amortization			1,980				1,709				4,062				3,314
Interest			915				458				1,688				504
Total operating expense			145,012				137,850				276,678				275,097
OPERATING LOSS			(7,057	)			(10,791	)			(26,465	)			(31,729	)
OTHER INCOME (EXPENSE)
Equity in earnings (losses) of unconsolidated entities			235				(190	)			71				(383	)
Interest income			28				85				66				110
Total other income (expense)			263				(105	)			137				(273	)
Loss from continuing operations before income tax benefit (provision)			(6,794	)			(10,896	)			(26,328	)			(32,002	)
Income tax benefit (provision)			23				(80	)			23				(218	)
Loss from continuing operations			(6,771	)			(10,976	)			(26,305	)			(32,220	)
Discontinued operations
Loss from discontinued operations — net of taxes			(7,946	)			(8,219	)			(7,096	)			(11,027	)
Total loss from discontinued operations			(7,946	)			(8,219	)			(7,096	)			(11,027	)
NET LOSS			(14,717	)			(19,195	)			(33,401	)			(43,247	)
Net loss attributable to noncontrolling interests			(384	)			(1,736	)			(779	)			(2,007	)
NET LOSS ATTRIBUTABLE TO GRUBB & ELLIS COMPANY			(14,333	)			(17,459	)			(32,622	)			(41,240	)
Preferred stock dividends			(2,897	)			(2,897	)			(5,794	)			(5,794	)
NET LOSS ATTRIBUTABLE TO GRUBB & ELLIS COMPANY COMMON SHAREOWNERS		$	(17,230	)		$	(20,356	)		$	(38,416	)		$	(47,034	)
Basic loss per share
Loss from continuing operations attributable to Grubb & Ellis Company common shareowners		$	(0.14	)		$	(0.18	)		$	(0.47	)		$	(0.56	)
Loss from discontinued operations attributable to Grubb & Ellis Company common shareowners			(0.12	)			(0.13	)			(0.11	)			(0.17	)
Net loss per share attributable to Grubb & Ellis Company common shareowners		$	(0.26	)		$	(0.31	)		$	(0.58	)		$	(0.73	)
Diluted loss per share
Loss from continuing operations attributable to Grubb & Ellis Company common shareowners		$	(0.14	)		$	(0.18	)		$	(0.47	)		$	(0.56	)
Loss from discontinued operations attributable to Grubb & Ellis Company common shareowners			(0.12	)			(0.13	)			(0.11	)			(0.17	)
Net loss per share attributable to Grubb & Ellis Company common shareowners		$	(0.26	)		$	(0.31	)		$	(0.58	)		$	(0.73	)
Basic weighted average shares outstanding			65,928				64,644				65,798				64,503
Diluted weighted average shares outstanding			65,928				64,644				65,798				64,503

See accompanying notes to consolidated financial statements.

GRUBB & ELLIS COMPANY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Six Months Ended
		June 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(33,401	)		$	(43,247	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in losses of unconsolidated entities			(327	)			606
Depreciation and amortization (including amortization of signing bonuses)			9,753				9,557
(Recovery) impairment of real estate			(9,858	)			1,823
Impairment of intangible assets			480				1,639
Share-based compensation			2,378				5,797
Allowance for uncollectible accounts			6,052				3,301
Other			1,211				1,255
Changes in operating assets and liabilities:
Accounts receivable from related parties			(5,542	)			867
Prepaid expenses and other assets			(6,993	)			5,873
Accounts payable and accrued expenses			(85	)			(5,021	)
Other liabilities			1,012				(2,491	)
Restricted cash			384				—
Net cash used in operating activities			(34,936	)			(20,041	)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash effect from deconsolidation of VIE			—				(184	)
Purchases of property and equipment			(3,036	)			(1,297	)
Tenant improvements and capital expenditures			(513	)			(517	)
Purchases of marketable equity securities, net			44				(936	)
Notes and advances to related parties			(291	)			(365	)
Proceeds from repayment of notes and advances to related parties			739				4,610
Proceeds from sale of note receivable			6,126				—
Investments in unconsolidated entities, net			(27	)			(243	)
Sale of tenant-in-common interest in unconsolidated entities			—				391
Payments of real estate deposits and pre-acquisition costs, net			—				(422	)
Acquisition of business			(100	)			(200	)
Restricted cash			1,308				2,002
Net cash provided by investing activities			4,250				2,839
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing on credit facility			18,000				—
Repayments of mortgage notes and capital lease obligations, net			(581	)			(514	)
Other financing costs			(946	)			(489	)
Proceeds from the issuance of convertible notes, net			—				29,925
Dividends paid to preferred stockholders			—				(5,794	)
Contributions from noncontrolling interests			14				321
Distributions to noncontrolling interests			(998	)			(3,244	)
Restricted cash			(1,000	)			—
Net cash provided by financing activities			14,489				20,205
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(16,197	)			3,003
Cash and cash equivalents — Beginning of period			30,919				39,101
Cash and cash equivalents — End of period		$	14,722			$	42,104
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Accrued preferred stock dividends		$	5,794			$	—
Issuance of warrants		$	741			$	—
Consolidation of assets held by VIEs		$	—			$	15,389
Consolidation of liabilities held by VIEs		$	—			$	651
Consolidation of noncontrolling interests held by VIEs		$	—			$	14,740
Deconsolidation of assets held by VIEs		$	—			$	338
Deconsolidation of liabilities held by VIEs		$	—			$	411
Deconsolidation of noncontrolling interests held by VIEs		$	—			$	73
Consolidation of assets related to sponsored mutual fund		$	—			$	823
Consolidation of noncontrolling interests related to sponsored mutual fund		$	—			$	823
Acquisition of business		$	—			$	1,009

The abbreviation VIEs above means Variable Interest Entities.

See accompanying notes to consolidated financial statements.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview

Grubb & Ellis Company and its consolidated subsidiaries are referred to herein as “the Company,” “Grubb & Ellis,” “we,” “us,” and “our.” Grubb & Ellis, a Delaware corporation founded over 50 years ago, is a commercial real estate services and investment company. With over 5,000 professionals in more than 100 company-owned and affiliate offices throughout the United States (“U.S.”), our professionals draw from a platform of real estate services, practice groups and investment products to deliver comprehensive, integrated solutions to real estate owners, tenants, investors, lenders and corporate occupiers. Our range of services includes tenant representation, property and agency leasing, commercial property and corporate facilities management, property sales, appraisal and valuation and commercial mortgage brokerage and investment management. Our transaction, management, consulting and investment services are supported by proprietary market research and extensive local expertise. Through our investment management business, we are a sponsor of real estate investment programs, including public non-traded real estate investment trusts (“REITs”).

Recent Strategic and Financing Initiatives

Credit Facility

On March 21, 2011, we announced that we had retained JMP Securities LLC as an advisor to explore strategic alternatives for the Company, including a potential merger or sale transaction. On March 30, 2011, we entered into a commitment letter and exclusivity agreement with Colony Capital Acquisitions, LLC, pursuant to which, as discussed more fully below, (i) Colony Capital Acquisitions, LLC and one or more of its affiliates (collectively, “Colony”) agreed to provide an $18.0 million senior secured multiple draw term loan credit facility, and (ii) Colony obtained the exclusive right for 60 days, commencing on March 30, 2011, to evaluate the possibility of making a larger strategic transaction with the Company. See Note 6 for further information on the credit facility.

Sale of Daymark

On February 10, 2011, we announced the creation of Daymark Realty Advisors, Inc. (“Daymark”), a wholly owned and separately managed subsidiary that is responsible for the management of our tenant-in-common portfolio. Subsequent thereto we announced that we had retained FBR Capital Markets & Co. to explore strategic alternatives with respect to Daymark and its portfolio, which includes over 8,700 multi-family units and approximately 30.0 million square feet of real estate. Daymark provides specialized services to our tenant-in-common (“TIC”) portfolio, which we believe requires unique expertise and client focus, especially as the commercial real estate industry begins to recover from the significant downturn of the past few years. Daymark will provide strategic asset management, property management, structured finance, accounting and loan advisory services to our existing TIC portfolio.

On August 10, 2011, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) by and between us and IUC-SOV, LLC (the “Purchaser”), an entity affiliated with Sovereign Capital Management and Infinity Real Estate. Pursuant to the Purchase Agreement, we sold to Purchaser all of the shares of common stock of Daymark. The closing (the “Closing”) of the transactions contemplated by the Purchase Agreement (the “Transactions”) was completed on August 10, 2011.

Pursuant to the Purchase Agreement, we sold to Purchaser all of the outstanding shares of Daymark in exchange for (1) a cash payment of $0.5 million (the “Estimated Closing Cash Payment”) from Purchaser and (2) the assumption by Purchaser of $10.7 million of the net intercompany balance payable from us to NNN Realty Advisors, Inc. (“NNNRA”), a wholly-owned subsidiary of Daymark. We expect to record a gain on sale related to the disposition of Daymark in the third quarter of 2011, after writing off all of the net assets and liabilities associated with Daymark and recognizing the transactions costs related to such transaction.

Pursuant to the Purchase Agreement, immediately after the completion of the sale of the Daymark shares (and after NNNRA had become a wholly-owned subsidiary of the Purchaser), the Company (1) paid NNNRA a $0.5 million cash payment and (2) issued to NNNRA a $5.0 million promissory note (the “Promissory Note”) in full satisfaction of the remaining portion of the Company’s net intercompany balance payable to NNNRA that was not assumed by Purchaser.

Pursuant to the Purchase Agreement, we have agreed to indemnify, subject to various limitations, Purchaser and its affiliates against any losses incurred or suffered by them as a result of (1) the breach of any representation or warranty made by us in the Purchase Agreement (subject to applicable survival limitations); (2) the breach of any covenant or agreement made by us in the Agreement; (3) any claim for brokerage or finder’s fees payable by Daymark or any of its subsidiaries in connection with the Transactions; (4) any liabilities or claims to the extent arising from the actions or omissions of (A) the Seller and its subsidiaries (other than Daymark and its subsidiaries) and (B) Daymark and its subsidiaries prior to the Closing, in each case, related to the office building at 7551 Metro Center Drive in Austin Texas (“Met Center 10”) (provided that indemnification for Met Center 10 (x) shall not cover any legal fees and expenses that were paid prior to Closing and (y) shall not cover any legal fees and expenses that have not been paid prior to the Closing except to the extent (and only to the extent) that they exceed $0.65 million); (5) certain liabilities under various employment agreements, plans and policies; or (6) fraud by Seller or any of its subsidiaries (other than Daymark or any of its subsidiaries).

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Pursuant to the Purchase Agreement, the Purchaser has agreed to indemnify, subject to limitations, us and our affiliates against any losses incurred or suffered by them as a result of (1) the breach of any representation or warranty made by Purchaser in the Purchase Agreement (subject to applicable survival limitations); (2) the breach of any covenant or agreement made by Purchaser in the Purchase Agreement; (3) any liabilities of, obligations of or claims against us or any of our subsidiaries related to or arising from the business or operations of Daymark or any of its subsidiaries (whether relating to matters that occurred, arose or were asserted prior to the Closing or relating to matters that occur, arise or are asserted after the Closing), including existing and future litigation and claims, non-recourse carve-out guarantees and other guaranty obligations of us and our subsidiaries (provided that Purchaser shall not be obligated to indemnify Seller or its affiliates for losses of Seller or its affiliates that are the result of (x) a certain litigation matter or (y) fraud by Seller); (4) the first $0.65 million of legal fees and expenses relating to Met Center 10 that have not been paid prior to the Closing; and (5) fraud by Purchaser or any of its subsidiaries. Among other indemnification limitations, the liability of Purchaser for indemnifying us and our affiliates for liabilities, obligations or claims related to or arising from the business or operations of Daymark or its subsidiaries as described in clause (3) above (if related solely to any fact, event or circumstances prior to the Closing) shall not exceed $7.5 million in the aggregate.

The $5.0 million principal amount of the Promissory Note issued by us to NNNRA becomes due and payable on August 10, 2016 (the “Maturity Date”). Interest accrues on the unpaid principal of the Promissory Note at a rate equal to 7.95% per annum. Accrued and unpaid interest on the Promissory Note is payable on the last day of each calendar quarter (commencing on September 30, 2011) and on the Maturity Date. We may prepay all or any portion of the Promissory Note at any time without premium or penalty.

Upon a change of control of the Company or certain Company recapitalization events, we will be obligated to prepay, within 10 business days following the date of such event, an amount equal to the sum of (A) an amount of principal (the “Mandatory Principal Prepayment Amount”) equal to the lesser of (i) $3.0 million and (ii) the then-outstanding principal amount of the Promissory Note plus (B) all accrued and unpaid interest on the Mandatory Principal Prepayment Amount.

Events of default under the Promissory Note include (i) a default by us in the payment of any interest or principal on the Promissory Note when due and such default continues for a period of 10 days after written notice from the holder and (ii) we become subject to any final and non-appealable writ, judgment, warrant of attachment, execution or similar process that would cause a material adverse effect on the financial condition of us and our subsidiaries, taken as a whole. Upon the occurrence of an event of default, the holder of the Promissory Note may declare and demand the Promissory Note immediately due and payable.

In connection with the closing of the Transactions, we, Daymark and each of Daymark’s subsidiaries entered into an Intercompany Balance Settlement and Release Agreement dated August 10, 2011 (the “IBSRA”). Pursuant to the IBSRA, Daymark and its subsidiaries released us from any and all claims, obligations, contracts, agreements, debts and liabilities that Daymark and its subsidiaries now have, have ever had or may in the future have against us arising at the time of or prior to the Closing or on account of or arising out of any matter, fact or event occurring at the time of or prior to the Closing, including (1) all rights and obligations under that certain Services Agreement dated as of January 1, 2011 by and among us, Daymark and other parties thereto (the “Services Agreement”), (2) all other contracts and arrangements between Daymark or any of its subsidiaries and us, (3) all intercompany payables and any other financial obligations or amounts owed to Daymark or any of its subsidiaries by us and (4) rights to indemnification or reimbursement from us, subject to various exceptions. Daymark and its subsidiaries also waived rights to coverage under D&O insurance policies maintained by us.

Pursuant to the IBSRA, we released Daymark and each of its subsidiaries from any and all claims, obligations, contracts, agreements, debts and liabilities that we now have, have ever had or may in the future have against Daymark or any of its subsidiaries arising at the time of or prior to the Closing or on account of or arising out of any matter, fact or event occurring at the time of or prior to the Closing, including (1) all rights and obligations under the Services Agreement, (2) all other contracts and arrangements between us and Daymark or any of its subsidiaries, (3) all intercompany payables and any other financial obligations or amounts owed to us by Daymark or any of its subsidiaries and (4) rights to indemnification or reimbursement from Daymark or any of its subsidiaries, subject to various exceptions.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Sale of Alesco

On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of the assets of our real estate investment fund business, Alesco Global Advisors (“Alesco”), to Lazard Asset Management LLC. Closing of the transaction is subject to customary approvals and is expected to occur in the third quarter of 2011. We anticipate recognizing a loss on the sale of Alesco of approximately $3.0 million in the third quarter of 2011 due to the deficit balance in noncontrolling interests.

Basis of Presentation

Our accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these financial statements.

On March 21, 2011, the Company announced that it had engaged an external advisor to explore strategic alternatives, including the potential sale or merger of the Company. During this period, the board of directors also determined, as permitted, not to declare the March 31, 2011 or June 30, 2011 quarterly dividends to holders of its 12% Cumulative Participating Perpetual Convertible Preferred Stock.

On April 15, 2011, we entered into an $18.0 million credit facility with ColFin GNE Loan Funding, LLC, an affiliate of Colony Capital LLC (“Colony”), as further described in Commitments, Contingencies and Other Contractual Obligations below. The Colony credit facility, which addressed the Company’s liquidity needs resulting from operating losses relating to the seasonal nature of the real estate services businesses, investments made in growth initiatives and increased legal expenses related to its Daymark subsidiary, matures on March 1, 2012.

On August 10, 2011 we completed the sale of our Daymark subsidiary. Due in part to operating losses prior to the sale of Daymark and expenses incurred to complete the sale, we may seek additional financing prior to the completion of our review of strategic alternatives. It is anticipated that any strategic alternative would include provisions to retire or refinance the Colony credit facility at or prior to maturity. If the Company is unable to retire or refinance the Colony credit facility prior to maturity, it could create substantial doubt about the Company’s ability to continue as a going concern for the twelve month period following the date of these financial statements. We believe that upon completion of our strategic alternative process we will have sufficient liquidity to operate in the normal course over the next twelve month period.

The consolidated financial statements include our accounts and those of our wholly owned and majority-owned controlled subsidiaries, variable interest entities (“VIEs”) in which we are the primary beneficiary, and partnerships/limited liability companies (“LLCs”) in which we are the managing member or general partner and the other partners/members lack substantive rights. All significant intercompany accounts and transactions are eliminated in consolidation.

Pursuant to the requirements of Accounting Standards Codification (“ASC”) Topic 810, Consolidation , (“Consolidation Topic”), we consolidate entities that are VIEs when we are deemed to be the primary beneficiary of the VIE. We are deemed to be the primary beneficiary of the VIE if we have a significant variable interest in the VIE that provides us with a controlling financial interest in the VIE. Our variable interest provides us with a controlling financial interest if we have both (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. There is subjectivity around the determination of power and which activities of the VIE most significantly impact the entity’s economic performance. As reconsideration events occur, we will reconsider our determination of whether an entity is a VIE and who the primary beneficiary is to determine if there is a change in the original determinations and will report such changes on a quarterly basis. In addition, we will continuously evaluate our VIE’s primary beneficiary as facts and circumstances change to determine if such changes warrant a change in an enterprise’s status as primary beneficiary of the VIEs. For entities in which (i) we are not deemed to be the primary beneficiary, (ii) our ownership is 50.0% or less and (iii) we have the ability to exercise significant influence, we use the equity method of accounting (i.e. at cost, increased or decreased by our share of earnings or losses, plus contributions less distributions). We also use the equity method of accounting for jointly controlled tenant-in-common interests.

Interim Unaudited Financial Data

Our accompanying consolidated financial statements have been prepared by us in accordance with generally accepted accounting principles (“GAAP”) in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable.

In preparing our accompanying consolidated financial statements, management has evaluated subsequent events through the financial statement issuance date.

We believe that although the disclosures contained herein are adequate to prevent the information presented from being misleading, our accompanying consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 31, 2011.

Use of Estimates

The financial statements have been prepared in conformity with GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including disclosure of contingent assets and liabilities) as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Reclassifications

Certain reclassifications have been made to prior year and prior period amounts in order to conform to the current period presentation. These reclassifications have no effect on reported net loss.

Restricted Cash

Restricted cash is comprised primarily of cash reserve accounts held for the benefit of various insurance providers and lenders. As of June 30, 2011 and December 31, 2010, the restricted cash balance was $4.3 million and $3.8 million, respectively.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures , (“Fair Value Measurements and Disclosures Topic”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Fair Value Measurements and Disclosures Topic 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 Fair Value Measurements and Disclosures Topic 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 Fair Value Measurements and Disclosures Topic 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 are the highest priority and are quoted prices in active markets for identical assets or liabilities Level 2 inputs reflect other than quoted prices included in Level 1 that are observable directly or through corroboration with observable market data. 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, due to little or no market activity for the asset or liability, such as internally-developed valuation models. If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or 3 even though there may be some significant inputs that are readily observable. 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. Our 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.

We generally use a discounted cash flow model to estimate the fair value of our consolidated real estate investments, unless better market comparable data is available. Management uses its best estimate in determining the key assumptions, including the expected holding period, future occupancy levels, capitalization rates, discount rates, rental rates, lease-up periods and capital expenditure requirements. The estimated fair value is further adjusted for anticipated selling expenses. Generally, if a property is under contract, the contract price adjusted for selling expenses is used to estimate the fair value of the property.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The following table presents financial and nonfinancial assets and liabilities measured at fair value on either a recurring or nonrecurring basis for the six months ended June 30, 2011:

																		Total
																		Impairment
																		Recoveries
																		(Losses)
																		Incurred
																		During the
																		Six Months
(In thousands)		June 30,																Ended June 30,
Assets		2011				Level 1				Level 2				Level 3				2011
Investments in marketable equity securities		$	2,034			$	2,034			$	—			$	—			$	—
Assets under management		$	848			$	848			$	—			$	—			$	—
Life insurance contracts		$	371			$	—			$	371			$	—			$	—
Contingent liability — TIC program exchange		$	(10,861	)		$	—			$	—			$	(10,861	)		$	9,024
Warrant derivative liability		$	(239	)		$	—			$	(239	)		$	—			$	—

The following table presents financial and nonfinancial assets measured at fair value on either a recurring or nonrecurring basis for the year ended December 31, 2010:

																		Total
																		Impairment
																		Losses
																		Incurred
																		During the
																		Year Ended
(In thousands)		December 31,																December 31,
Assets		2010				Level 1				Level 2				Level 3				2010
Investments in marketable equity securities		$	1,948			$	1,948			$	—			$	—			$	—
Assets under management		$	901			$	901			$	—			$	—			$	—
Property held for sale		$	45,572			$	—			$	—			$	45,572			$	—
Investments in unconsolidated entities		$	5,178			$	—			$	—			$	5,178			$	(646	)
Life insurance contracts		$	1,062			$	—			$	1,062			$	—			$	—

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments , (“Financial Instruments Topic”) requires disclosure of fair value of financial instruments, whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value. The Financial Instruments Topic defines fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. The fair value estimates are made at the end of the reporting period based on unobservable assumptions categorized in Level 3 of the hierarchy, including available market information and judgments about the financial instrument, such as estimates of timing and amount of expected future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.

The fair value of our mortgage notes, notes payable, senior notes, convertible notes and preferred stock is estimated using borrowing rates available to us for debt instruments with similar terms and maturities. The amounts recorded for accounts receivable, notes receivable, advances, accounts payable and accrued liabilities and capital lease obligations approximate fair value due to their short-term nature.

The following table presents the fair value and carrying value of our mortgage notes, notes payable, NNN senior notes, credit facility, convertible notes and preferred stock as of June 30, 2011 and December 31, 2010:

		June 30, 2011								December 31, 2010
(In thousands)		Fair Value				Carrying Value				Fair Value				Carrying Value
Mortgage notes — held for sale		$	59,803			$	70,000			$	59,624			$	70,000
Notes payable		$	620			$	711			$	747			$	884
NNN senior notes — held for sale		$	16,235			$	16,277			$	16,054			$	16,277
Credit facility(1)		$	17,747			$	17,747			$	—			$	—
Convertible notes(2)		$	27,515			$	30,291			$	28,832			$	30,133
Preferred stock(3)		$	49,917			$	95,874			$	91,828			$	90,080

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Litigation

We routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue and an analysis of historical experience. Therefore, we have recorded reserves related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be estimated. With respect to other matters, we have concluded that a loss is only reasonably possible or remote, or is not estimable and, therefore, no liability is recorded. Assessing the likely outcome of pending litigation, including the amount of potential loss, if any, is highly subjective. Our judgments regarding likelihood of loss and our estimates of probable loss amounts may differ from actual results due to difficulties in predicting the outcome of jury trials, arbitration hearings, settlement discussions and related activity, and various other uncertainties. Due to the number of claims which are periodically asserted against us, and the magnitude of damages sought in those claims, actual losses in the future could significantly exceed our current estimates.

2. MARKETABLE SECURITIES

We apply the provisions of the Fair Value Measurements and Disclosures Topic to our financial assets recorded at fair value, which consists of available-for-sale marketable securities. Level 1 inputs, the highest priority, are quoted prices in active markets for identical assets are used by us to estimate the fair value of our available-for-sale marketable securities.

The historical cost and estimated fair value of the available-for-sale marketable securities held by us are as follows:

		As of June 30, 2011																As of December 31, 2010
														Fair																Fair
		Historical				Gross Unrealized								Market				Historical				Gross Unrealized								Market
(In thousands)		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
		(Unaudited)
Equity securities		$	1,793			$	241			$	—			$	2,034			$	1,800			$	148			$	—			$	1,948

There were no sales of marketable equity securities, or other than temporary impairments recorded, during the three and six month periods ended June 30, 2011 or 2010.

3. RELATED PARTIES

Accounts Receivable

Accounts receivable from related parties consisted of the following:

		June 30,				December 31,
(In thousands)		2011				2010
Accrued property and asset management fees		$	313			$	156
Accrued real estate acquisition fees			2,063				—
Other accrued fees			607				563
Organizational, offering and operating costs from sponsored REIT			2,993				2,741
Total		$	5,976			$	3,460

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

4. IDENTIFIED INTANGIBLE ASSETS

Identified intangible assets consisted of the following:

				June 30,				December 31,
(In thousands)		Useful Life		2011				2010
Non-amortizing intangible assets:
Trade name		Indefinite		$	64,100			$	64,100
Amortizing intangible assets:
Identified intangible assets
Affiliate agreements		20 years			10,600				10,600
Customer relationships		5 to 7 years			8,725				8,725
Internally developed software		4 years			6,200				6,200
Customer backlog		1 year			746				746
					26,271				26,271
Accumulated amortization					(11,691	)			(9,673	)
Total identified intangible assets, net				$	78,680			$	80,698

Amortization expense recorded for the identified intangible assets was approximately $1.0 million and $2.0 million for the three and six months ended June 30, 2011, respectively. Amortization expense recorded for the identified intangible assets was approximately $0.8 million and $1.6 million for the three and six months ended June 30, 2010, respectively. Amortization expense is included as part of operating expense in the accompanying consolidated statement of operations.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

		June 30,				December 31,
(In thousands)		2011				2010
Accrued liabilities		$	12,952			$	9,353
Salaries and related costs			20,757				23,321
Accounts payable			10,036				15,332
Broker commissions			13,229				10,519
Bonuses			4,721				8,701
Property management fees and commissions due to third parties			2,256				2,244
Total		$	63,951			$	69,470

6. CREDIT FACILITY

On April 15, 2011, we entered into a credit agreement (the “Credit Agreement”), by and among us, Grubb & Ellis Management Services, Inc. (“GEMS”) and Colony, for an $18.0 million secured credit facility (the “Credit Facility”). The terms of the Credit Facility included a payment to Colony of (i) a closing fee equal to 1.00% of the Credit Facility amount and (ii) warrants (the “Warrants”) exercisable to purchase 6,712,000 shares of our common stock, valued at $0.7 million. The Credit Facility was fully drawn upon as of May 16, 2011.

The Credit Facility matures on March 1, 2012 and has an initial interest rate of 11.00% per annum, increasing by an additional 0.50% at the end of each three-month period subsequent to the closing date of the Credit Facility for so long as any loans are outstanding. In lieu of making a cash interest payment, we have the option to accrue any due and payable interest under the Credit Facility and issue additional warrants (the “Additional Warrants”) based on a formula calculation. The loan is not subject to any required principal amortization payments during the term. As of June 30, 2011, we have issued 62,120 Additional Warrants.

The Credit Agreement contains customary representations and warranties, as well as customary events of default, in certain cases subject to negotiated periods to cure and exceptions, including but not limited to: failure to make certain payments when due, breach of covenants, breach of representations and warranties, certain insolvency proceedings, judgments and attachments and any change of control.

The Credit Agreement also contains various customary covenants that, in certain instances, restrict the ability of us and our subsidiaries to: (i) incur indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) engage in dispositions of assets; (v) make investments, loans, guarantees or advances; (vi) pay dividends and distributions with respect to, or repurchase, its outstanding capital stock; (vii) enter into sale and leaseback transactions; (viii) engage in transactions with affiliates; and (ix) change the nature of our business. In addition, the Credit Agreement requires (i) GEMS and its subsidiaries to maintain, as on the last day of each fiscal quarter, a minimum net worth as defined in the agreement of $20.0 million and (ii) the outstanding loan to remain in compliance with the defined borrowing base at the end of each fiscal month (subject to periods to cure). As of June 30, 2011, we were in compliance with all covenants, as amended.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

As a condition to the entering into of the Credit Agreement, we, GEMS and certain of our other subsidiaries simultaneously entered into a Guarantee and Collateral Agreement, dated as of April 15, 2011 with Colony, in its capacity as administrative agent (the “Guarantee and Collateral Agreement”), pursuant to which each of our subsidiaries party thereto (other than GEMS) guaranteed the obligations of us and GEMS under the Credit Agreement and each of us and our subsidiaries party thereto granted a first priority security interest in substantially all of our assets.

The Warrants have an exercise price equal to $0.01 per share and a maturity date of three years from the date of issuance (the “Expiration Date”), but are exercisable prior to the Expiration Date upon the satisfaction of certain events as set forth in the Warrants, including, but not limited to, if the volume weighted average price of our common stock equals or exceeds $1.10 for any consecutive 30 calendar day period prior to the date of exercise or upon the occurrence of a fundamental change in which the consideration received for each share of our common stock equals or exceeds $1.10. The Warrants are exercisable, at the option of the holder of such Warrant, (a) by paying the exercise price in cash, (b) pursuant to a “cashless exercise” of the Warrant or (iii) by reduction of the principal amount of loans under the Credit Facility payable to the holder of such Warrant, or by a combination of the foregoing methods. The number of shares of our common stock issuable upon exercise of the Warrants or Additional Warrants is subject to adjustment in certain cases. All Additional Warrants issued pursuant to the Credit Agreement shall contain the same terms as the Warrants. We accounted for the Warrants in accordance with the requirements of ASC 815, Derivatives and Hedging , (“Derivatives and Hedging Topic”) and ASC Topic 480, Distinguishing Liabilities from Equity , (“Distinguishing Liabilities from Equity Topic”). Pursuant to those topics, we determined that the Warrants should be accounted for as a derivative liability as the Warrant Agreement allows for the number of warrants issuable upon exercise of the warrant to be adjusted under certain scenarios including an adjustment if we issue shares of common stock without consideration or for consideration per share less than either: (i) the per share market value or (ii) the trigger price. The Warrants were recorded as a discount to the Credit Facility at fair market value as of April 15, 2011 with a corresponding derivative liability. The derivative liability is adjusted to fair market value at each period end date and the debt discount is amortized over the term of the Credit Facility.

On July 22, 2011, each of us and our wholly-owned subsidiary, GEMS, entered into an amendment and consent agreement (the “Credit Facility Amendment”) with respect to our Credit Facility, an amendment to the commitment letter for the Credit Facility, between Colony and the Company (the “Credit Facility Commitment Letter Amendment”) and amendments to the outstanding common stock purchase warrants issued to Colony pursuant to the terms of the Credit Agreement (the “Warrant Agreement Amendments”, and together with the Credit Facility Amendment and the Commitment Letter Amendment, collectively, the “Amendment Documents”).

Pursuant to the Amendment Documents, among other things, Colony expressly acknowledged and consented to our currently anticipated sale of Daymark, our wholly-owned subsidiary, and each of its wholly-owned (direct and indirect) subsidiaries and the restructuring of the outstanding intercompany debt obligations owing by us to Daymark. The Amendment Documents also clarified the definition of net worth to include any loans included in such net worth calculation. The Amendment Documents also permanently eliminated Colony’s right of first offer to provide us with debt financing prior to it consummating or endeavoring to consummate any similar financing with a third-party. Additionally, the Amendment Documents amended the price at which any common stock purchase warrants issuable to Colony in lieu of cash interest from time to time payable under the Credit Agreement and the common stock purchase warrants previously issued to Colony pursuant to the Credit Agreement, become exercisable from $1.10 per share to $0.71 per share. In addition, if in connection with any financing arrangement, we issue any options, or other equity linked securities to purchase our common stock, with an exercise condition that is based on a share price that is lower than $0.71 per share (“Trigger Price”), then the Trigger Price shall be adjusted downward (but not upward) to such lower price without any further action on the part of any party.

We also entered into a Registration Rights Agreement (“Registration Rights Agreement”) with the holder of the Warrants, pursuant to which holders of the Warrants have the right to require us, subject to certain limitations, to effect the registration under the Securities Act of 1933, as amended (the “Securities Act”), of all or any portion of the shares of our common stock issued as a result of the exercise of all or a portion of the Warrants or the Additional Warrants. The Registration Rights Agreement contains piggy-back registration rights and demand registration rights with respect to the shares underlying the Warrants and the Additional Warrants.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Notes payable and capital lease obligations consisted of the following:

		June 30,				December 31,
(In thousands)		2011				2010
Note payable in connection with business acquisition in November 2010. The note requires monthly principal and interest payments, has a fixed interest rate of 4.0% per annum and matures in November 2012.		$	344			$	459
Note payable in connection with business acquisition in December 2010. The note requires monthly principal and interest payments, has a fixed interest rate of 2.0% per annum and matures in December 2013.			367				425
Capital lease obligations			325				723
Total			1,036				1,607
Less portion classified as current			(584	)			(1,041	)
Non-current portion		$	452			$	566

8. CONVERTIBLE NOTES

During the second quarter of 2010, we completed our offering (“Offering”) of $31.5 million of unsecured convertible notes (“Convertible Notes”) to qualified institutional buyers pursuant to Section 144A of the Securities Act of 1933, as amended. The Convertible Notes pay interest at a rate of 7.95% per year semi-annually in arrears on May 1 and November 1 of each year, beginning November 1, 2010. The Convertible Notes mature on May 1, 2015.

We received net proceeds from the Offering of approximately $29.4 million after deducting all estimated offering expenses. We used the net proceeds from the Offering to fund growth initiatives, short-term working capital and for general corporate purposes.

Holders of the Notes may convert notes into shares of our common stock at the initial conversion rate of 445.583 shares per $1,000 principal amount of the Notes (equal to a conversion price of approximately $2.24 per share of our common stock), subject to adjustment in certain events (but not for accrued interest) at any time prior to the close of business on the scheduled trading day before the stated maturity date. In addition, following certain corporate transactions, we will increase the conversion rate for a holder who elects to convert in connection with such corporate transaction by a number of additional shares of our common stock as set forth in the Indenture. As of June 30, 2011, the maximum number of shares of common stock that could be required to be issued upon conversion of the Convertible Notes was 14,035,865 shares of common stock.

No holder of the Notes will be entitled to acquire shares of common stock delivered upon conversion to the extent (but only to the extent) such receipt would cause such converting holder to become, directly or indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) of more than 14.99% of the shares of our common stock outstanding at such time.

We may not redeem the Convertible Notes prior to May 6, 2013. On or after May 6, 2013 and prior to the maturity date, we may redeem for cash all or part of the Convertible Notes at 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, up to but excluding the redemption date.

Under certain circumstances following a fundamental change, which is substantially similar to a fundamental change with respect to our preferred stock, we will be required to make an offer to purchase all of the Convertible Notes at a purchase price of 100% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase.

The Convertible Notes are our unsecured senior obligations that:

•

rank equally with all of our other unsecured senior indebtedness;

•

effectively rank junior to any of our existing and future secured indebtedness to the extent of the assets securing such indebtedness; and

•

will be structurally subordinated to any indebtedness and other liabilities of our subsidiaries.

The Indenture provides for customary events of default, including our failure to pay any indebtedness for borrowed money, other than non-recourse mortgage debt, when due in excess of $1.0 million.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Registration Rights Agreement

In connection with the Offering, we entered into a registration rights agreement pursuant to which we agreed to file with the SEC a shelf registration statement registering the resale of the notes and the shares of common stock issuable upon conversion of the Convertible Notes no later than June 30, 2010, and to use commercially reasonable efforts to cause the shelf registration statement to become effective within 85 days of May 7, 2010, or within 115 days of the closing date of the Offering if the registration statement is reviewed by the SEC. The shelf registration statement was filed on June 25, 2010 and became effective on July 19, 2010.

We have an obligation to continue to keep the shelf registration statement effective for a certain period of time, subject to certain suspension periods under certain circumstances. In the event that we fail to keep the registration statement effective in excess of such permissible suspension periods, we will be obligated to pay additional interest to holders of the Convertible Notes in an amount equal to 0.25% of the principal amount of the outstanding Convertible Notes to and including the 90th day following any such registration default and 0.50% of the principal amount of the outstanding Convertible Notes from and after the 91st day following any such registration default. Such additional interest will accrue until the date prior to the day the default is cured, or until the Convertible Notes are converted.

9. SEGMENT DISCLOSURE

Management has determined the reportable segments identified below according to the types of services offered and the manner in which operations and decisions are made. We operate in the following reportable segments:

Management Services — Management Services provides property management and related services for owners of investment properties and facilities management services for corporate owners and occupiers.

Transaction Services — Transaction Services advises buyers, sellers, landlords and tenants on the sale, leasing, financing and valuation of commercial property and includes our national accounts group and national affiliate program operations.

Investment Management — Investment Management includes services for acquisition, financing and disposition with respect to our REITs, asset management services related to our REITs, and dealer-manager services by our securities broker-dealer, which facilitates capital raising transactions for our REITs.

We also have certain corporate-level activities including legal administration, accounting, finance, human resources and management information systems which are not considered separate operating segments.

As a result of reclassifying our Daymark subsidiary to discontinued operations in the second quarter of 2011, our segment disclosure no longer includes a Daymark segment as all of the Daymark segment is included in discontinued operations. In addition, our Daymark subsidiary historically provided some Investment Management services. Accordingly, all revenues and expenses related to our Investment Management segment that were provided by Daymark are also included in discontinued operations.

We evaluate the performance of our segments based upon operating (loss) income. Operating (loss) income is defined as operating revenue less compensation and general and administrative costs and excludes other rental related, rental expense, interest expense, depreciation and amortization and certain other operating and non-operating expenses. The accounting policies of the reportable segments are the same as those described in our summary of significant accounting policies (See Note 1).

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2011				2010				2011				2010
Management Services
Revenue		$	57,913			$	70,110			$	116,958			$	142,558
Compensation costs			10,192				9,756				18,872				19,310
Transaction commissions and related costs			2,846				4,212				6,624				10,395
Reimbursable salaries, wages and benefits			38,289				49,021				77,843				99,379
General and administrative			2,758				2,543				5,949				4,790
Provision for doubtful accounts			859				448				1,330				789
Segment operating income			2,969				4,130				6,340				7,895
Transaction Services
Revenue			72,814				54,684				123,266				96,917
Compensation costs			15,024				11,210				30,492				22,175
Transaction commissions and related costs			48,715				35,399				81,953				62,398
General and administrative			10,794				8,667				20,690				17,515
Provision for doubtful accounts			1,209				224				1,968				1,029
Segment operating loss			(2,928	)			(816	)			(11,837	)			(6,200	)

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2011				2010				2011				2010
Investment Management
Revenue			7,228				2,265				9,989				3,893
Compensation costs			2,030				2,514				4,164				5,130
Transaction commissions and related costs			892				867				1,755				1,351
General and administrative			1,753				1,441				3,578				2,729
Provision for doubtful accounts			(22	)			—				(14	)			—
Segment operating income (loss)			2,575				(2,557	)			506				(5,317	)
Reconciliation to net loss attributable to Grubb & Ellis Company:
Total segment operating income (loss)			2,616				757				(4,991	)			(3,622	)
Non-segment:
Corporate overhead (compensation, general and administrative costs)			(5,953	)			(6,484	)			(12,390	)			(15,723	)
Stock based compensation			(686	)			(2,778	)			(2,378	)			(5,797	)
Severance and other charges			(139	)			(119	)			(956	)			(2,769	)
Depreciation and amortization			(1,980	)			(1,709	)			(4,062	)			(3,314	)
Interest			(915	)			(458	)			(1,688	)			(504	)
Other income (expense)			263				(105	)			137				(273	)
Loss from continuing operations before income tax benefit (provision)			(6,794	)			(10,896	)			(26,328	)			(32,002	)
Income tax benefit (provision)			23				(80	)			23				(218	)
Loss from continuing operations			(6,771	)			(10,976	)			(26,305	)			(32,220	)
Loss from discontinued operations			(7,946	)			(8,219	)			(7,096	)			(11,027	)
Net loss			(14,717	)			(19,195	)			(33,401	)			(43,247	)
Net loss attributable to noncontrolling interests			(384	)			(1,736	)			(779	)			(2,007	)
Net loss attributable to Grubb & Ellis Company		$	(14,333	)		$	(17,459	)		$	(32,622	)		$	(41,240	)

10. DISCONTINUED OPERATIONS

On December 30, 2010, we completed the sale of NNN/SOF Avallon LLC (“Avallon”), a commercial office property located in Austin, Texas, for $37.0 million. We recognized a gain on sale of $1.3 million.

On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of the assets of our real estate investment fund business, Alesco, to Lazard Asset Management LLC. Closing of the transaction is subject to customary approvals and is expected to occur in the third quarter of 2011. We anticipate recognizing a loss on the sale of Alesco of approximately $3.0 million in the third quarter of 2011 due to the deficit balance in noncontrolling interests.

On August 10, 2011, we completed the sale of Daymark for (1) a cash payment of $0.5 million, (2) a $5.0 million promissory note provided to NNNRA, and (3) the assumption by the purchaser of $10.7 million of the net intercompany balance payable from us to NNNRA. We expect to record a gain on sale related to the disposition of Daymark in the third quarter of 2011, after writing off all of the net assets and liabilities associated with Daymark (included in summarized balance sheet below) and recognizing the transactions costs related to such transaction.

In instances when we expect to have significant ongoing cash flows or significant continuing involvement in the component beyond the date of sale, the income (loss) from certain properties and businesses held for sale continue to be fully recorded within continuing operations through the date of sale.

The net results of discontinued operations of Daymark and Alesco (which includes the net results of the Avallon property sold during the year ended December 31, 2010), in which we have no significant ongoing cash flows or significant continuing involvement, are reflected in the consolidated statements of operations as discontinued operations. We will receive certain fee income from Daymark on an ongoing basis that is not considered significant when compared to the operating results of Daymark.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The following table summarizes the assets held for sale and liabilities held for sale as of June 30, 2011 and December 31, 2010:

		June 30,				December 31,
(In thousands)		2011				2010
Restricted cash		$	3,528			$	4,652
Assets under management			848				901
Accounts receivable from related parties — net			13,395				12,718
Notes receivable — net			—				6,126
Notes and advances to related parties — net			10,660				12,275
Prepaid expenses and other assets			767				682
Investments in unconsolidated entities			5,224				5,178
Property held for sale			45,159				45,858
Property, equipment and leasehold improvements — net			906				1,096
Identified intangible assets — net			6,127				7,398
Other assets — net			4,316				3,430
Total assets		$	90,930			$	100,314
Accounts payable and accrued expenses		$	13,518			$	8,098
Due to related parties			1,617				2,178
Other liabilities			15,423				25,704
NNN senior notes			16,277				16,277
Mortgage notes			70,000				70,000
Capital lease obligations			13				22
Deferred tax liabilities			36				199
Total liabilities		$	116,884			$	122,478

From August 1, 2006 to January 2007, NNN Collateralized Senior Notes, LLC (the “NNN Senior Notes Program”), a wholly owned subsidiary of Daymark, issued $16.3 million of notes which mature on August 29, 2011 and bear interest at a rate of 8.75% per annum. Interest on the notes is payable monthly in arrears on the first day of each month, commencing on the first day of the month occurring after issuance. The notes mature five years from the date of first issuance of any of such notes, with two one-year options to extend the maturity date of the notes at the Senior Notes Program’s option. The interest rate will increase to 9.25% per annum during any extension. The Senior Notes Program has the right to redeem the notes, in whole or in part, at par value. The notes are the NNN Senior Notes Program’s senior obligations, ranking pari passu in right of payment with all other senior debt incurred and ranking senior to any subordinated debt it may incur. The notes are effectively subordinated to all present or future debt secured by real or personal property to the extent of the value of the collateral securing such debt. The notes are secured by a pledge of the NNN Senior Notes Program’s membership interest in NNN Series A Holdings, LLC, which is the Senior Notes Program’s wholly owned subsidiary for the sole purpose of making the investments. Each note is guaranteed by Grubb & Ellis Realty Investors, LLC (“GERI”). The guarantee is secured by a pledge of GERI membership interest in the NNN Senior Notes Program. The guarantee requires GERI to maintain at all times during the term the notes are outstanding a net worth of at least $0.5 million. As of June 30, 2011, GERI met the net worth requirement.

On May 13, 2011, pursuant to the terms of the indenture underlying the NNN Senior Notes, the NNN Senior Notes Program notified the trustee and holders of the NNN Senior Notes that the maturity date of the NNN Senior Notes shall be extended by one year, effective as of August 29, 2011 (the “Extension Effective Date”). Accordingly, the maturity date of the NNN Senior Notes is August 29, 2012. In accordance with the terms and provisions of the indenture, the NNN Senior Notes shall bear interest at 8.75% per annum until the Extension Effective Date, and thereafter at 9.25% per annum until the maturity date. The NNN Senior Notes Program may extend the maturity date for an additional year, through August 29, 2013, in accordance with the terms and provisions of the indenture and the NNN Senior Notes.

The following table summarizes the income (loss) and (expense) components — net of taxes that comprised discontinued operations for the three and six months ended June 30, 2011 and 2010:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands)		2011				2010				2011				2010
Revenue		$	7,088			$	6,101			$	11,058			$	14,544
Rental related revenue			3,346				7,585				7,206				15,299
Compensation costs			(6,762	)			(5,807	)			(11,645	)			(12,311	)
General and administrative			(6,709	)			(2,731	)			(11,409	)			(4,509	)
Provision for doubtful accounts			(1,158	)			(962	)			(2,245	)			(1,500	)
Depreciation and amortization			(900	)			(1,661	)			(2,287	)			(3,314	)
Rental related			(2,263	)			(5,463	)			(4,607	)			(10,851	)
Interest			(1,599	)			(2,272	)			(3,143	)			(4,544	)
Real estate related recoveries (impairments)			834				(1,553	)			9,858				(1,823	)
Intangible asset impairment			—				(1,025	)			(480	)			(1,639	)
Equity in earnings (losses) of unconsolidated entities			163				(202	)			256				(223	)
Interest income			37				31				78				51
Other income (expense)			28				(283	)			315				(238	)
Income tax benefit (provision)			(51	)			23				(51	)			31
Loss from discontinued operations — net of taxes		$	(7,946	)		$	(8,219	)		$	(7,096	)		$	(11,027	)

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

11. COMMITMENTS AND CONTINGENCIES

Operating Leases — We have non-cancelable operating lease obligations for office space and certain equipment ranging from one to ten years, and sublease agreements under which we act as a sublessor. The office space leases often times provide for annual rent increases, and typically require payment of property taxes, insurance and maintenance costs.

Rent expense under these operating leases was approximately $5.8 million and $5.4 million for the three months ended June 30, 2011 and 2010, respectively, and approximately $11.9 million and $11.6 million for the six months ended June 30, 2011 and 2010, respectively. Rent expense is included in general and administrative expense in the accompanying consolidated statements of operations.

TIC Program Exchange Provision — Prior to the merger, Triple Net Properties, LLC (now known as GERI), a subsidiary of Daymark, entered into agreements providing certain investors the right to exchange their investments in certain TIC programs for investments in a different TIC program or in substitute replacement properties. The agreements containing such rights of exchange and repurchase rights pertain to initial investments in TIC programs totaling $31.6 million. In the fourth quarter of 2010, GERI was released from certain obligations relating to $6.2 million in initial investments. In addition, we were released from certain obligations totaling $2.0 million as a result of the sale of a TIC program’s property during the year ended December 31, 2010. In July 2009, we received notice on behalf of certain investors stating their intent to exercise rights under one of those agreements with respect to an initial investment totaling $4.5 million. Subsequently, in February 2011, an action was filed in the Superior Court of Orange County, California on behalf of those same investors against GERI alleging breach of contract and breach of the implied covenant of good faith and fair dealing, and seeking damages of $26.5 million with respect to initial cash investments totaling $22.3 million, which is inclusive of the $4.5 million for which we received the notice in July 2009. While the outcome of that action is uncertain, GERI will vigorously defend those claims. See TIC Program Exchange Litigation disclosure under Claims and Lawsuits below for further information.

We deferred revenues relating to these agreements of $0 and $0.1 million for the three months ended June 30, 2011 and 2010, respectively. We deferred revenues relating to these agreements of $0 and $0.1 million for the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011, pursuant to the Real Estate — General Topic, we reduced an obligation by $9.0 million related to the re-measurement of our maximum exposure to loss related to certain obligations at the time the February 2011 action was filed. No additional potential losses related to these agreements were incurred during the three months ended June 30, 2011 and 2010, and additional potential losses of $0 and $0.2 million related to these agreements were incurred during the six months ended June 30, 2011 and 2010, respectively, to record a liability underlying the agreements with investors. As of June 30, 2011, we had recorded liabilities totaling $10.9 million related to such agreements, which is included in other current liabilities, consisting of $3.6 million of cumulative deferred revenues and $7.3 million of additional potential losses related to these agreements as a result of estimated declines in the value of the properties. In addition, we are joint and severally liable on the non-recourse mortgage debt related to these TIC programs with exchange provisions totaling $276.1 million as of June 30, 2011 and December 31, 2010. This mortgage debt is not consolidated as the LLCs account for the interests in our TIC investments under the equity method and the non-recourse mortgage debt does not meet the criteria under the Transfers and Servicing Topic for recognizing the share of the debt assumed by the other TIC interest holders for consolidation. We consider the third-party TIC holders’ ability and intent to repay their share of the joint and several liability in evaluating the recoverability of our investment in the TIC program.

Capital Lease Obligations — We lease computers, copiers and postage equipment that are accounted for as capital leases.

Claims and Lawsuits — We and our Daymark affiliate have been named as defendants in multiple lawsuits relating to certain of its investment management offerings, in particular, its TIC programs. These lawsuits allege a variety of claims in connection with these offerings, including mismanagement, breach of contract, negligence, fraud, breach of fiduciary duty and violations of state and federal securities laws, among other claims. Plaintiffs in these suits seek a variety of remedies, including rescission, actual and punitive damages, injunctive relief, and attorneys’ fees and costs. In many instances, the damages being sought are unspecified and to be determined at trial. It is difficult to predict the ultimate disposition of these lawsuits and our ultimate liability with respect to such claims and lawsuits. It is also difficult to predict the cost of defending these matters and to what extent claims will be covered by our existing insurance policies. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our cash flows, financial position and results of operations.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Met Center 10 — One such matter relates to a TIC property known as Met Center 10, located in Austin, Texas. The Company and its subsidiaries have been involved in multiple legal proceedings relating to Met Center 10, including three actions pending in state court in Austin, Texas and an arbitration proceeding being conducted in California. The arbitration proceeding involves Grubb & Ellis Realty Investors, LLC (“GERI”), a subsidiary of Daymark, and is pending before the American Arbitration Association in Orange County, California captioned NNN Met Center 10 1, LLC, et al. v. Grubb & Ellis Realty Investors, LLC , No. 73 115 Y 00140 HLT (the “Met 10 Arbitration”). A state court action involving GERI is pending in the District Court of Travis County, Texas captioned NNN Met Center 10, LLC v. Met Center Partners-6, Ltd., et al. , No. D-1-GN-08-002104 (the “Met 10 Main Action”). Two additional state court actions involving the Company, GERI, and Grubb & Ellis Management Services, Inc. are pending in the District Court for Travis County, Texas captioned NNN Met Center 10-1, LLC v. Lexington Insurance Company, et al. , No. D-1-GN-10-004495 and NNN Met Center 10, LLC v. Lexington Insurance Company, et al. , No. D-1-GN-11-000848 (together, the “Met 10 Lexington Actions”).

In the Met 10 Arbitration, TIC investors asserted, among other things, that GERI should bear responsibility for alleged diminution in the value of the property and their investments as a result of ground movement. The Met 10 Arbitration was bifurcated into two phases. In the first phase, the arbitrator ruled in favor of the TIC investors, finding, among other things, that the TIC investors had properly terminated the property management agreement for cause. In Phase 2 of the arbitration, the TICs asserted claims for damages against GERI arising from alleged breaches of the management agreement and other alleged wrongful acts in connection with the management of the Met Center 10 property and other alleged breaches of duty.

Before the beginning of the Phase 2 hearing, the TICs, GERI, and Lexington Insurance Company reached a settlement, which has been documented and executed by the parties, and which is awaiting court approval. The settlement is for $0.1 million, net of insurance recoveries. Among other things, under the terms of the settlement, GERI must pay $0.1 million to the TICs shortly after the settlement is approved by the court, and may be obligated to subsequently pay up to approximately $0.6 million in addition to the initial $0.1 million payment, depending upon the resolution of claims relating to Met Center 10 against parties other than GERI and its affiliates. The TICs are releasing all claims relating to Met Center 10 against, among others, GERI and its affiliates.

In the Met 10 Texas Action, GERI and NNN Met Center 10, LLC were pursuing claims against the developers and sellers of the property (the “Sellers”), the due diligence firm retained by GERI in connection with the purchase of the Met Center 10 property, and the engineering, construction, and design professionals who performed work relating to the Met Center 10 property (together with the due diligence firm, the “Professionals”) to recover damages arising from, among other things, ground movement. The Sellers and the Professionals were asserting counterclaims against GERI and NNN Met Center 10, LLC. GERI and NNN Met Center 10, LLC, on the one hand, and the Sellers, on the other, have reached a settlement resolving all claims between them, which has been documented and executed by the parties. Under that settlement, GERI, its affiliates, and NNN Met Center 10, LLC are being released from all claims by the Sellers relating to Met Center 10. Neither GERI nor its affiliates (or NNN Met Center 10, LLC) are required to make any payments pursuant to the settlement with the Sellers. In addition, GERI and NNN Met Center 10, LLC, on the one hand, and the Professionals, on the other hand, have reached a tentative settlement resolving all claims between them, which is in the process of being documented and approved. Under that settlement, GERI, its affiliates, and NNN Met Center 10, LLC are being released from all claims by the Professionals relating to Met Center 10. Neither GERI nor its affiliates (or NNN Met Center 10, LLC) are required to make any payments pursuant to the tentative settlement with the Professionals.

In the Met 10 Lexington Actions, the TIC investors were asserting claims against former officers and employees of the Company and other defendants in connection with the negotiation and documentation of an insurance settlement relating to the Met Center 10 property, and an alleged misallocation and/or misappropriation of the proceeds of that settlement. In addition, Lexington Insurance Company asserted claims against NNN Met Center 10, LLC, the Company, GERI, and GEMS arising of the insurance settlement. Pursuant to the settlement of the Met 10 Arbitration described above, the TICs are releasing and dismissing certain claims against the former officers and employees of the Company, including claims that were being asserted in the Met 10 Lexington Actions, and Lexington is releasing and dismissing its claims against the Company, GERI, GEMS, and NNN Met Center 10, LLC, including the claims Lexington was asserting in the Met 10 Lexington Actions.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

TIC Program Exchange Litigation — GERI and Grubb & Ellis Company are defendants in an action filed on or about February 14, 2011 in the Superior Court of Orange County, California captioned S. Sidney Mandel, et al. v. Grubb & Ellis Realty Investors, LLC, et al, Case No. 00449598. The plaintiffs allege that, in order to induce the plaintiffs to purchase $22.3 million in TIC investments that GERI (formerly known as Triple Net Properties, LLC) was syndicating, GERI offered to subsequently “repurchase” those investments and provide certain “put” rights under certain terms and conditions pursuant to a letter agreement executed between GERI and the plaintiffs. The plaintiffs allege that GERI has failed to honor its purported obligations under the letter agreement and have initiated suit for breach of contract, breach of the implied covenant of good faith and fair dealing and declaratory relief as to the rights and obligations of the parties under the letter agreement. By way of a first amended complaint, the plaintiffs are alleging that GERI is merely an inadequately capitalized instrumentality of Grubb & Ellis Company and that Grubb & Ellis Company should be held liable for acts and omissions of GERI. The plaintiffs are seeking damages totaling $26.5 million, attorneys’ fees and costs. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of possible loss for this matter.

Britannia II Office Park — Various Daymark subsidiaries are defendants in an action filed on or about July 22, 2010 in Superior Court of Alameda County, California captioned NNN Britannia Business Center II — 17, LLC, et al. v. Grubb & Ellis Company, et al., Case No. RG10-527282. Plaintiffs invested more than $14 million for TIC interests in a commercial real estate project in Pleasanton, California, known as Britannia Business Center II, which ultimately was foreclosed upon. Plaintiffs claim that they were induced to invest with misrepresentations concerning the financial projections and risks for the project, and allege various mismanagement claims. Plaintiffs’ current claim is for breach of the implied covenant of good faith and fair dealing. Plaintiffs seek compensatory and exemplary damages in an unspecified amount, along with costs and attorneys’ fees. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of possible loss for this matter.

Durham Office Park — We and various Daymark subsidiaries are defendants in an action filed on or about July 21, 2010 in North Carolina Business Court, Durham County Superior Court Division, captioned NNN Durham Office Portfolio I, LLC, et al. v. Grubb & Ellis Company, et al., Case No. 10 CVS 4392. Plaintiffs invested more than $11 million for TIC interests in a commercial real estate project in Durham, North Carolina. Plaintiffs claim, among other things, that information regarding the intentions of the property’s anchor tenant to remain in occupancy was withheld and misrepresented. Plaintiffs have asserted claims for breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty, fraud, unfair and deceptive trade practices and conspiracy. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of possible loss for this matter.

We are involved in various claims and lawsuits arising out of the ordinary conduct of our business, many of which may not be covered by our insurance policies. In the opinion of management, in the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our cash flows, financial position and results of operations. At this time it is not possible to estimate a range of possible loss for these matters.

Guarantees — Historically our Daymark subsidiary provided non-recourse carve-out guarantees or indemnities with respect to loans for properties now owned or under the management of Daymark. As of June 30, 2011, there were 126 properties under management with non-recourse carve-out loan guarantees or indemnities of approximately $3.0 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.1 billion. As of December 31, 2010, there were 133 properties under management with non-recourse carve-out loan guarantees or indemnities of approximately $3.1 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.3 billion. In addition, the consolidated VIEs and unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to the interests in our TIC investments as further described in Note 4.

Our guarantees consisted of the following as of June 30, 2011 and December 31, 2010:

		June 30,				December 31,
(In thousands)		2011				2010
Daymark non-recourse/carve-out guarantees of debt of properties under management(1)		$	2,782,390			$	2,944,311
Grubb & Ellis Company non-recourse/carve-out guarantees of debt of properties under management(1)		$	78,217			$	78,363
Daymark and Grubb & Ellis Company non-recourse/carve-out guarantees of debt of properties under management(2)		$	31,125			$	31,271
Daymark non-recourse/carve-out guarantees of debt of Company owned property(1)		$	60,000			$	60,000
Daymark recourse guarantees of debt of properties under management		$	11,650			$	12,900
Grubb & Ellis Company recourse guarantees of debt of properties under management(3)		$	11,998			$	11,998
Daymark recourse guarantees of debt of Company owned property(4)		$	10,000			$	10,000

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

•

a voluntary bankruptcy or similar insolvency proceeding of any borrower;

•

a “transfer” of the property or any interest therein in violation of the loan documents;

•

a violation by any borrower of the special purpose entity requirements set forth in the loan documents;

•

any fraud or material misrepresentation by any borrower or any guarantor in connection with the loan;

•

the gross negligence or willful misconduct by any borrower in connection with the property, the loan or any obligation under the loan documents;

•

the misapplication, misappropriation or conversion of (i) any rents, security deposits, proceeds or other funds, (ii) any insurance proceeds paid by reason of any loss, damage or destruction to the property, and (iii) any awards or other amounts received in connection with the condemnation of all or a portion of the property;

•

any waste of the property caused by acts or omissions of borrower of the removal or disposal of any portion of the property after an event of default under the loan documents; and

•

the breach of any obligations set forth in an environmental or hazardous substances indemnity agreement from borrower.

Certain acts (typically the first three listed above) may render the entire debt balance recourse to the guarantor or indemnitor, while the liability for other acts is typically limited to the damages incurred by the lender. Notice and cure provisions vary between guarantees and indemnities. Generally the guarantor or indemnitor irrevocably and unconditionally guarantees or indemnifies the lender the payment and performance of the guaranteed or indemnified obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration or maturity or otherwise, and the guarantor or indemnitor covenants and agrees that it is liable for the guaranteed or indemnified obligations as a primary obligor. As of June 30, 2011, to the best of our knowledge, there was no debt owed by us as a result of the borrowers engaging in prohibited acts, despite the prohibited acts that occurred as more fully described below.

(2)

We and Daymark are each joint and severally liable on such non-recourse/carve-out guarantees.

(3)

We have $1.0 million held as collateral by a lender related to one of our recourse guarantees that, upon the occurrence of any triggering event or condition under the guarantee, will be used to cover all or a portion of the amounts due under the guarantee.

(4)

In addition to the $10.0 million principal guarantee, Daymark has guaranteed any shortfall in the payment of interest on the unpaid principal amount of the mortgage debt on one owned property.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

If property values and performance decline, the risk of exposure under these guarantees increases. We initially evaluate these guarantees to determine if the guarantee meets the criteria required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees , (“Guarantees Topic”). Any such liabilities were insignificant upon execution of the guarantees. In addition, on an ongoing basis, we evaluate the need to record an additional liability in accordance with the requirements of ASC Topic 450, Contingencies , (“Contingencies Topic”). As of June 30, 2011 and December 31, 2010, we had recourse guarantees of $23.6 million and $24.9 million, respectively relating to debt of properties under management (of which $12.0 million is recourse back to Grubb & Ellis Company, the remainder of which is recourse to our Daymark subsidiary). As of June 30, 2011 and December 31, 2010, approximately $9.5 million of these recourse guarantees relate to debt that has matured, is in default, or is not currently in compliance with certain loan covenants (of which $2.0 million is recourse back to Grubb & Ellis Company, the remainder of which is recourse to our Daymark subsidiary). In addition, as of June 30, 2011, and December 31, 2010, we had $8.0 million of recourse guarantees related to debt that will mature in the next twelve months (of which $8.0 million is recourse back to Grubb & Ellis Company). In connection with the sale of Daymark, the purchaser indemnified us up to $7.5 million for liabilities, obligations and claims related to or arising from the business or operations of Daymark or its subsidiaries. Our evaluation of the potential liability under these guarantees may prove to be inaccurate and liabilities may exceed estimates. In the event that actual losses materially exceed estimates, individual investment management subsidiaries may not be able to pay such obligations as they become due. Failure of any of our subsidiaries to pay its debts as they become due would likely have a materially negative impact on our ongoing business, and the investment management operations in particular. In evaluating the potential liability relating to such guarantees, we consider factors such as the value of the properties secured by the debt, the likelihood that the lender will call the guarantee in light of the current debt service and other factors. As of June 30, 2011 and December 31, 2010, we recorded a liability of $0 and $0.8 million which is included in other current liabilities, related to our estimate of probable loss related to recourse guarantees of debt of properties under management and previously under management.

Two unaffiliated, individual investor entities (the “TIC debtors”), who are minority owners in two TIC programs located in Texas, Met Center 10 and 2400 West Marshall, which were originally sponsored by GERI, filed chapter 11 bankruptcy petitions in January 2011. The principal balance of the mortgage debt for these two properties was approximately $29.4 million and $6.6 million, respectively, at the time of the bankruptcy filings. On February 1, 2011, the special servicer for each of these loans foreclosed on all of the undivided TIC ownership interests in these properties, except those owned by the unaffiliated investor entities which effected the bankruptcy filings. The automatic stay imposed following the bankruptcy filings by each of these investor entities prevented the special servicer from foreclosing on 100% of the TIC ownership interests. The special servicers for each of the TIC debtors’ loans filed motions for relief from the automatic stay to foreclose upon the remaining TIC ownership interests. In the Met Center 10 case, by order dated May 2, 2011, the bankruptcy court continued the automatic stay, subject to certain conditions, to November 1, 2011. The May 2, 2011 order also established a procedure by which the special servicer would be required to reconvey the foreclosed upon interests to the Met Center 10 debtor and the other investor entities following payment of an “amount due” as that term is defined in the May 2, 2011 Order. In the 2400 West Marshall case, by order dated June 15, 2011, the bankruptcy court continued the automatic stay, subject to certain conditions, to December 1, 2011. The June 15, 2011 order also established a procedure by which the special servicer would be required to reconvey the foreclosed upon interests to the 2400 West Marshall debtor and the other investor entities following payment of an “amount due” as that term is defined in the June 15, 2011 Order.

GERI executed a non-recourse carve-out guarantee in connection with the mortgage loan for the Met 10 property, and a non-recourse indemnity for the 2400 West Marshall property. As discussed in the “ Guarantees ” disclosure above, such “non-recourse carve-out” guarantees and indemnities only impose liability on GERI if certain acts prohibited by the loan documents take place. Liability under these non- recourse carve-out guarantees and indemnities may be triggered by the voluntary bankruptcy filings made by the two unaffiliated, individual investor entities. As a consequence of these bankruptcy filings, the TIC debtors’ mortgage lenders may assert that GERI is liable under the guarantee and indemnity. While GERI’s ultimate liability under these agreements is uncertain as a result of numerous factors, including, without limitation, whether the bankruptcy filings of the TIC debtors triggered GERI’s obligations under the guaranty and the indemnification, the amount of the lender’s credit bids at the time of foreclosure, events in the individual bankruptcy proceedings and the ultimate disposition of those bankruptcy proceedings, and the defenses GERI may raise under the guarantee and indemnity, such liability may be in an amount in excess of the net worth of NNNRA and its subsidiaries, including GERI. NNNRA and GERI intend to vigorously dispute any imposition of any liability under any such guarantee or indemnity obligation. As of June 30, 2011, we did not have any liabilities accrued related to such guarantees or indemnity obligations.

Investment Program Commitments — In 2009, we revised the offering terms related to certain investment programs which we sponsor, including the commitment to fund additional property reserves and the waiver or reduction of future management fees and disposition fees. Such future funding commitments have been made in the form of guaranteeing the collectability of advances that one of our consolidated VIEs has made to these investment programs. As of June 30, 2011 and December 31, 2010, the future funding commitments under the guarantee totaled approximately $1.5 million and $2.0 million, respectively.

Environmental Obligations — In our role as property manager, we could incur liabilities for the investigation or remediation of hazardous or toxic substances or wastes at properties we currently or formerly managed or at off-site locations where wastes were disposed of. Similarly, under debt financing arrangements on properties owned by sponsored programs, we have agreed to indemnify the lenders for environmental liabilities and to remediate any environmental problems that may arise. We are not aware of any environmental liability or unasserted claim or assessment relating to an environmental liability that we believe would require disclosure or the recording of a loss contingency.

Alesco Seed Capital — On November 16, 2007, we completed the acquisition of a 51.0% membership interest in Alesco from Jay P. Leupp. Pursuant to the Intercompany Agreement between us and Alesco, dated as of November 16, 2007, we committed to invest up to $20.0 million in seed capital into certain real estate funds that Alesco planned to launch. Additionally, upon achievement of certain earn-out targets, we were required to purchase up to an additional 27% interest in Alesco for $15.0 million. To date those earn-out targets have not been achieved. We are allowed to use $15.0 million of seed capital to fund the earn-out payments. As of June 30, 2011, we have invested $1.5 million into the three funds that Alesco has launched to date (the “Existing Alesco Funds”) and our unfunded seed capital commitments with respect to the Existing Alesco Funds totaled $2.5 million. As of February 14, 2011, our obligation to make further seed capital investments under the Intercompany Agreement terminated, except for the remaining commitments under the Existing Alesco Funds. On June 1, 2011, we entered into a definitive agreement for the sale of substantially all of the assets of Alesco to Lazard Asset Management LLC. Closing of the transaction is subject to customary approvals and is expected to occur in the third quarter of 2011.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Deferred Compensation Plan — During 2008, we implemented a deferred compensation plan that permits employees and independent contractors to defer portions of their compensation, subject to annual deferral limits, and have it credited to one or more investment options in the plan. As of June 30, 2011 and December 31, 2010, $3.1 million and $3.4 million, respectively, reflecting the non-stock liability under this plan were included in accounts payable and accrued expenses. We have purchased whole-life insurance contracts on certain employee participants to recover distributions made or to be made under this plan and as of June 30, 2011 and December 31, 2010 have recorded the cash surrender value of the policies of $0.4 million and $1.1 million, respectively, in prepaid expenses and other assets.

In addition, we award “phantom” shares of our stock to participants under the deferred compensation plan. These awards vest over three to five years. Vested phantom stock awards are also unfunded and paid according to distribution elections made by the participants at the time of vesting and will be settled by issuing shares of our common stock from our treasury share account or issuing unregistered shares of our common stock to the participant. As of June 30, 2011 and December 31, 2010, an aggregate of 3.9 million and 4.1 million phantom share grants were outstanding, respectively. Generally, upon vesting, recipients of the grants are entitled to receive the number of phantom shares granted, regardless of the value of the shares upon the date of vesting; provided, however, as of June 30, 2011 grants with respect to 816,000 phantom shares had a guaranteed minimum share price ($2.8 million in the aggregate) that will result in us paying additional compensation to the participants should the value of the shares upon vesting be less than the grant date value of the shares. We account for additional compensation relating to the “guarantee” portion of the awards by measuring at each reporting date the additional payment that would be due to the participant based on the difference between the then current value of the shares awarded and the guaranteed value. This award is then amortized on a straight-line basis as compensation expense over the requisite service (vesting) period, with an offset to deferred compensation liability.

12. PREFERRED STOCK

During the fourth quarter of 2009, we completed a private placement of 965,700 shares of 12% cumulative participating perpetual convertible preferred stock, par value $0.01 per share (“Preferred Stock”), to qualified institutional buyers and other accredited investors, including our directors and management.

Each share of Preferred Stock is convertible, at the holder’s option, into our common stock, par value $.01 per share at a conversion rate of 60.606 shares of common stock for each share of Preferred Stock, which represents a conversion price of approximately $1.65 per share of common stock, a 10.0% premium to the closing price of the common stock on October 22, 2009. As of June 30, 2011, the maximum number of shares of common stock that could be required to be issued upon conversion of the Preferred Stock was 58,527,214 shares of common stock.

The terms of the Preferred Stock provide for cumulative dividends from and including the date of original issuance in the amount of $12.00 per share each year. Dividends on the Preferred Stock will be payable when, as and if declared, quarterly in arrears, on March 31, June 30, September 30 and December 31, beginning on December 31, 2009. In addition, in the event of any cash distribution to holders of the Common Stock, holders of Preferred Stock will be entitled to participate in such distribution as if such holders had converted their shares of Preferred Stock into Common Stock.

During the year ended December 31, 2010, the Board of Directors declared four quarterly dividends of $3.00 per share on our Preferred Stock, which were paid on March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010. The Board of Directors determined, as permitted, not to declare a dividend on our 12% Preferred Stock, for the quarters ending March 31, 2011 and June 30, 2011. Since we have missed two consecutive quarterly dividend payments, the dividend rate will automatically be increased by 0.50% of the initial liquidation preference per share per quarter (up to a maximum amount of increase of 2% of the initial liquidation preference per share) until cumulative dividends have been paid in full. In addition, subject to certain limitations, in the event the dividends on the Preferred Stock are in arrears for six or more quarters, whether or not consecutive, holders representing a majority of the shares of Preferred Stock voting together as a class with holders of any other class or series of preferred stock upon which like voting rights have been conferred and are exercisable will be entitled to nominate and vote for the election of two additional directors to serve on the board of directors until all unpaid dividends with respect to the Preferred Stock and any other class or series of preferred stock upon which like voting rights have been conferred or are exercisable have been paid or declared and a sum sufficient for payment has been set aside therefore. Since the terms of the Preferred Stock provide for cumulative dividends, we have accrued the unpaid first and second quarter 2011 dividend payments of $3.00 per share per quarter on our Preferred Stock, which is included in Preferred Stock on our consolidated balance sheet as of June 30, 2011. As of June 30, 2011, the amount of accrued and unpaid dividends totaled $5.8 million.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

Holders of Preferred Stock may require us to repurchase all, or a specified whole number, of their Preferred Stock upon the occurrence of a “Fundamental Change” (as defined in the Certificate of Designations) with respect to any Fundamental Change that occurs (i) prior to November 15, 2014, at a repurchase price equal to 110% of the sum of the initial liquidation preference plus accumulated but unpaid dividends, and (ii) from November 15, 2014 until prior to November 15, 2019, at a repurchase price equal to 100% of the sum of the initial liquidation preference plus accumulated but unpaid dividends. On or after November 15, 2014 we may, at our option, redeem the Preferred Stock, in whole or in part, by paying an amount equal to 110% of the sum of the initial liquidation preference per share plus any accrued and unpaid dividends to and including the date of redemption.

In the event of certain events that constitute a “Change in Control” (as defined in the Certificate of Designations) prior to November 15, 2014, the conversion rate of the Preferred Stock will be subject to increase. The amount of the increase in the applicable conversion rate, if any, will be based on the date in which the Change in Control becomes effective, the price to be paid per share with respect to the Common Stock and the transaction constituting the Change in Control.

Except as otherwise provided by law, the holders of the Preferred Stock vote together with the holders of common stock as one class on all matters on which holders of common stock vote. Holders of the Preferred Stock when voting as a single class with holders of common stock are entitled to voting rights equal to the number of shares of common stock into which the Preferred Stock is convertible, on an “as if” converted basis. Holders of Preferred Stock vote as a separate class with respect to certain matters.

Upon any liquidation, dissolution or winding up of the Company, holders of the Preferred Stock will be entitled, prior to any distribution to holders of any securities ranking junior to the Preferred Stock, including but not limited to the common stock, and on a pro rata basis with other preferred stock of equal ranking, a cash liquidation preference equal to the greater of (i) 110% of the sum of the initial liquidation preference per share plus accrued and unpaid dividends thereon, if any, from November 6, 2009, the date of the closing of the Offering, and (ii) an amount equal to the distribution amount each holder of Preferred Stock would have received had all shares of Preferred Stock been converted to common stock.

We accounted for the Preferred Stock transaction in accordance with the requirements of the Derivatives and Hedging Topic and the Distinguishing Liabilities from Equity Topic. Pursuant to those topics, we determined that the Preferred Stock should be accounted for as a single instrument as the terms of the Preferred Stock do not include any embedded derivatives that would require bifurcation from the host instrument. Pursuant to the Distinguishing Liabilities from Equity Topic, we determined that the Preferred Stock should not be classified as a liability as the characteristics of the Preferred Stock are more closely related to equity as there is no mandatory redemption date. According to the terms of the Preferred Stock, the Preferred Stock will only become redeemable at the option of the holder upon a Fundamental Change. In addition, we determined that there are various events and circumstances that would allow for redemption of the Preferred Stock at the option of the holders, however, several of these redemption events are not within our control and, therefore, the Preferred Stock should be classified outside of permanent equity in accordance with the Distinguishing Liabilities from Equity Topic as these events were assessed as not probable of becoming redeemable. We will continuously assess the probability of the Preferred Stock becoming redeemable as facts and circumstances change to determine if such changes warrant a reclassification from outside of permanent equity to a liability.

13. EARNINGS (LOSS) PER SHARE

We compute earnings (loss) per share in accordance with the requirements of the Earnings Per Share Topic. Under the Earnings Per Share Topic, basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed using the weighted-average number of common and common equivalent shares of stock outstanding during the periods utilizing the treasury stock method for stock options and unvested restricted stock.

GRUBB & ELLIS COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

The following is a reconciliation between weighted-average shares used in the basic and diluted earnings (loss) per share calculations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(In thousands, except per share amounts)		2011				2010				2011				2010
Numerator for loss per share — basic:
Loss from continuing operations		$	(6,771	)		$	(10,976	)		$	(26,305	)		$	(32,220	)
Less: Preferred dividends			(2,897	)			(2,897	)			(5,794	)			(5,794	)
Loss from continuing operations attributable to Grubb & Ellis Company common shareowners			(9,668	)			(13,873	)			(32,099	)			(38,014	)
Loss from discontinued operations attributable to Grubb & Ellis Company common shareowners			(7,946	)			(8,219	)			(7,096	)			(11,027	)
Net loss attributable to noncontrolling interests			384				1,736				779				2,007
Net loss attributable to Grubb & Ellis Company common shareowners		$	(17,230	)		$	(20,356	)		$	(38,416	)		$	(47,034	)
Denominator for loss per share — basic:
Weighted-average number of common shares outstanding			65,928				64,644				65,798				64,503
Loss per share — basic:
Loss from continuing operations attributable to Grubb & Ellis Company common shareowners		$	(0.14	)		$	(0.18	)		$	(0.47	)		$	(0.56	)
Loss from discontinued operations attributable to Grubb & Ellis Company common shareowners			(0.12	)			(0.13	)			(0.11	)			(0.17	)
Net loss per share attributable to Grubb & Ellis Company common shareowners		$	(0.26	)		$	(0.31	)		$	(0.58	)		$	(0.73	)
Loss per share — diluted(1):
Loss from continuing operations attributable to Grubb & Ellis Company common shareowners		$	(0.14	)		$	(0.18	)		$	(0.47	)		$	(0.56	)
Loss from discontinued operations attributable to Grubb & Ellis Company common shareowners			(0.12	)			(0.13	)			(0.11	)			(0.17	)
Net loss per share attributable to Grubb & Ellis Company common shareowners		$	(0.26	)		$	(0.31	)		$	(0.58	)		$	(0.73	)
Total participating shareowners: (as of the end of the period used to allocate earnings)
Preferred shares (as if converted to common shares)			58,527				58,527				58,527				58,527
Unvested restricted stock			4,113				5,184				4,113				5,184
Unvested phantom stock			3,668				4,839				3,668				4,839
Total participating shares			66,308				68,550				66,308				68,550
Total vested common shares outstanding			65,982				64,741				65,982				64,741