UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
 x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2010
 
 OR
 
 o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _________ to _________
 
 Commission file number 000-51962
 COLE CREDIT PROPERTY TRUST, INC.
 (Exact name of registrant as specified in its charter)
 
 Maryland

20-0939158(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)2555 East Camelback Road, Suite 400Phoenix, Arizona 85016

(602) 778-8700(Address and zip code of principal executive offices)

(Registrant’s telephone number, including area code)
 
 Not Applicable
 (Former name, former address and former fiscal year, if changed since last report)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes 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 definition 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  oNon-accelerated filer (Do not check if smaller reporting company)  o

Smaller reporting company  x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
 As of November 10, 2010, there were 10,090,951 shares of common stock, par value $0.01, of Cole Credit Property Trust, Inc. outstanding.
 
  
  
 COLE CREDIT PROPERTY TRUST, INC.
 INDEX
 
 PART I — FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Unaudited Balance Sheets as of September 30, 2010 and December 31, 2009


4Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended September 30, 2010 and 2009


5Condensed Consolidated Unaudited Statement of Stockholders’ Equity for the nine months ended September 30, 2010


6Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended September 30, 2010 and 2009


7Notes to Condensed Consolidated Unaudited Financial Statements


8Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


14Item 3. Quantitative and Qualitative Disclosures About Market Risk


22Item 4. Controls and Procedures


22PART II — OTHER INFORMATIONItem 1. Legal Proceedings


23Item 1A. Risk Factors


23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


23Item 3. Defaults Upon Senior Securities


23Item 4. [Removed and Reserved]


23Item 5. Other Information


23Item 6. Exhibits


23Signatures


24
 
  2
  
 PART I
 FINANCIAL INFORMATION
 
 The accompanying condensed consolidated unaudited interim financial statements as of and for the three and nine months ended September 30, 2010 have been prepared by Cole Credit Property Trust, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  The financial statements herein should also be read in conjunction with the notes to the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q.  The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the operating results expected for the full year.  The information furnished in our accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, stockholders’ equity, and cash flows reflects all adjustments that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements.  Such adjustments are of a normal recurring nature.
 
 Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false.  We caution investors not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
   3
  
 COLE CREDIT PROPERTY TRUST, INC.
 CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
 (Dollar amounts in thousands, except share and per share amounts)
 
 
 September 30,

2010

December 31,

2009ASSETS:Investment in real estate assets:Land

$
54,233

$
55,317Buildings and improvements, less accumulated depreciation of $19,344 and $17,273, respectively


101,844


106,278Acquired intangible lease assets, less accumulated amortization of $10,612 and $9,170, respectively


17,726


19,168Total investment in real estate assets, net


173,803


180,763Cash and cash equivalents


744


1,907Restricted cash


727


—Rents and tenant receivables, less allowance for doubtful accounts of $51 and $167, respectively


2,302


2,478Prepaid expenses and other assets


123


84Deferred financing costs, less accumulated amortization of $822 and $1,518, respectively


2,563


770Total assets

$
180,262

$
186,002LIABILITIES AND STOCKHOLDERS’ EQUITY:Notes payable and line of credit

$
118,710

$
118,738Lines of credit with affiliate


1,935


—Accounts payable and accrued expenses


851


878Due to affiliates


48


41Acquired below market lease intangibles, less accumulated amortization of $1,158 and $1,018, respectively


1,039


1,221Distributions payable


415


589Deferred rent and other liabilities


171


615Total liabilities


123,169


122,082Commitments and contingenciesSTOCKHOLDERS’ EQUITY:Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding


—


—Common stock, $0.01 par value; 90,000,000 shares authorized, 10,090,951 shares issued and outstanding


101


101Capital in excess of par value


90,424


90,424Accumulated distributions in excess of earnings


(33,432
)

(26,605
)Total stockholders’ equity


57,093


63,920Total liabilities and stockholders’ equity

$
180,262

$
186,002
 
 
  The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
  4
  
 COLE CREDIT PROPERTY TRUST, INC.
 CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
 (Dollar amounts in thousands, except share and per share amounts)
 
 
 Three Months Ended September 30,

Nine Months Ended September 30,2010

2009

2010

2009Revenues:Rental and other property income

$
3,956

$
3,944

$
11,843

$
12,001Tenant reimbursement income


101


99


293


305Total revenue


4,057


4,043


12,136


12,306Expenses:General and administrative expenses


152


94


449


454Property operating expenses


390


138


654


398Property management expenses


115


118


362


354Depreciation


922


922


2,764


2,764Amortization


450


450


1,351


1,351Impairment of real estate assets


2,835


—


2,835


—Total operating expenses


4,864


1,722


8,415


5,321Operating (loss) income


(807
)

2,321


3,721


6,985Other expense:Interest expense, net


(2,129
)

(1,838
)

(6,154
)

(5,446
)Loss on early extinguishment of debt


—


—


(259
)

—Total other expense


(2,129
)

(1,838
)

(6,413
)

(5,446
)Net (loss) income

$
(2,936
)
$
483

$
(2,692
)
$
1,539Weighted average number of common shares outstanding:Basic and diluted


10,090,951


10,090,951


10,090,951


10,090,951Net (loss) income per common share:Basic and diluted

$
(0.29
)
$
0.05

$
(0.27
)
$
0.15Distributions declared per common share:Basic and diluted

$
0.13

$
0.17

$
0.41

$
0.52
 
 
 
 
  The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
  5
  
 COLE CREDIT PROPERTY TRUST, INC.
 CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY
 (Dollar amounts in thousands, except share amounts)
 
 
 Common Stock

Capital in Excess in Par Value

Accumulated Distributions in Excess of Earnings

Total Stockholders’ EquityNumber of Shares

Par ValueBalance, January 1, 2010

10,090,951

$
101

$
90,424

$
(26,605
)
$
63,920Distributions

—


—


—


(4,135
)

(4,135
)Net loss

—


—


—


(2,692
)

(2,692
)Balance, September 30, 2010

10,090,951

$
101

$
90,424

$
(33,432
)
$
57,093
 
  
  The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.
  6
  
 COLE CREDIT PROPERTY TRUST, INC.
 CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
 (Dollar amounts in thousands)
 
 Nine Months Ended September 30,2010


2009Cash flows from operating activities:Net (loss) income

$
(2,692
)

$
1,539Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation


2,764



2,764Amortization of intangible lease assets and below market lease intangibles, net


1,260



1,290Amortization of deferred financing costs


337



298Bad debt expense


200



12Loss on early extinguishment of debt


259



—Impairment of real estate assets


2,835



—Gain on sale of assets


—



(9
)Changes in assets and liabilities:Rents and tenant receivables


(24
)


(484
)Prepaid expenses and other assets


(39
)


(4
)Accounts payable and accrued expenses


(27
)


(75
)Due to affiliates


7



(127
)Deferred rent and other liabilities


(444
)


(398
)Net cash provided by operating activities


4,436



4,806Cash flows from investing activities:Capitalized expenditures


(81
)


—Change in restricted cash


(727
)


—Proceeds from sale of easement


—



13Net cash (used in) provided by investing activities


(808
)


13Cash flows from financing activities:Distributions to investors


(4,309
)


(5,298
)Payment of loan deposits


(433
)


—Refund of loan deposits


433



—Proceeds from notes payable and line of credit


51,625



750Repayment of notes payable and line of credit


(51,653
)


—Proceeds from lines of credit with affiliates


1,935



—Deferred financing costs paid


(2,177
)


—Payment of costs related to the early extinguishment of debt


(212
)


—Net cash used in financing activities


(4,791
)


(4,548
)Net (decrease) increase in cash and cash equivalents


(1,163
)


271Cash and cash equivalents, beginning of period


1,907



923Cash and cash equivalents, end of period

$
744


$
1,194Supplemental Disclosures of Non-Cash Investing and Financing Activities:Dividends declared and unpaid

$
415


$
589Supplemental Cash Flow Disclosures:Interest paid

$
5,799


$
5,178
   The accompanying notes are an integral part of these condensed consolidatedunaudited financial statements.
 
  7
 COLE CREDIT PROPERTY TRUST, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 September 30, 2010
  NOTE1 —ORGANIZATION AND BUSINESS
 
 Cole Credit Property Trust, Inc. (the “Company”) is a Maryland corporation that was formed on March 29, 2004 that is organized and operates as a real estate investment trust (“REIT”) for federal income tax purposes.  Substantially all of the Company’s business is conducted through Cole Operating Partnership I, LP (“Cole OP I”), a Delaware limited partnership.  The Company is the sole general partner of and owns a 99.99% partnership interest in Cole OP I.  Cole REIT Advisors, LLC (“Cole Advisors”), the affiliate advisor to the Company, is the sole limited partner and owner of an insignificant noncontrolling partnership interest of less than 0.01% of Cole OP I.
 
 As of September 30, 2010, the Company owned 42 properties comprising 1.0 million square feet of single-tenant, retail space located in 19 states.  As of September 30, 2010, these properties were 100% leased.
 
 The Company’s stock is not currently listed on a national securities exchange.  The Company may seek to list its common stock for trading on a national securities exchange only if the board of directors believes listing would be in the best interest of its stockholders.  The Company does not intend to list its shares at this time.  The Company does not anticipate that there would be any market for its common stock until its shares are listed on a national securities exchange.  In the event it does not obtain listing prior to February 1, 2016, its charter requires that it either: (1) seek stockholder approval of an extension or amendment of this listing deadline; or (2) seek stockholder approval to adopt a plan of liquidation of the corporation.
 
 NOTE2 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of Consolidation and Basis of Presentation
 
 The condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the instructions to Form 10-Q and Article 8 of Regulation S-X, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.  In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary to present a fair presentation of the results for such periods.  Results for these interim periods are not necessarily indicative of full year results.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2009 and related notes thereto set forth in the Company’s Annual Report on Form 10-K.
 
 The accompanying condensed consolidated unaudited financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.
 
 Valuation of Real Estate and Related Assets
 
 The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable.  Impairment indicators that the Company considers include, but are not limited to, bankruptcy of a property’s major tenant, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances.  When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and their eventual disposition.  In the event that such expected undiscounted future cash flows do not exceed the carrying value, the Company will adjust the real estate and any related intangible assets to their fair value and recognize an impairment loss.
  8
 COLE CREDIT PROPERTY TRUST, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 September 30, 2010
  During the three months ended September 30, 2010, the Company identified one property with impairment indicators.  The tenant at this property declared bankruptcy, rejected the original lease and entered into a short-term lease with the Company that can be terminated with a 30-day written notice provided by the tenant or the Company.  As a result of this, the undiscounted future operating cash flows expected from the use of the property and its eventual disposition were determined to be less than the carrying value of the real estate assets.  Therefore, the Company reduced the carrying value of the real estate assets related to the property to their estimated fair value and recorded an impairment loss of $2.8 million during the three and nine months ended September 30, 2010.  In addition, the Company wrote off the unamortized below market lease intangible liability related to the original lease agreement of $31,000 during the three and nine months ended September 30, 2010.  No impairment losses or related write offs were recorded during the three and nine months ended September 30, 2009.
  Projections of expected future cash flows require the Company to use estimates such as future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the number of months it takes to re-lease the property, required tenant improvements and the number of years the property is expected to be held for investment.  The use of alternative assumptions in the future cash flow analysis could result in a different assessment of the property’s future cash flow and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the fair value of the Company’s real estate and related assets.
 
 Restricted Cash and Escrows
 
 The Company had $556,000 in restricted cash as of September 30, 2010, held by lenders in escrow accounts for tenant and capital improvements, leasing commissions, repairs and maintenance and other lender reserves for certain properties, in accordance with the respective lender’s loan agreement.  In addition, the Company had $171,000 in restricted cash held by lenders in a lockbox account.  As part of the debt refinancing transaction discussed in Note 4 below, rents collected by the encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess funds are disbursed to the Company.
 
 Redemptions of Common Stock
 
 In accordance with the Company’s share redemption program, effective January 1, 2010, the purchase price paid for the redeemed shares will equal the lesser of (1) the price actually paid for those shares or (2) either (i) $8.50 per share or (ii) 90.0% of the net asset value per share as determined by the Company’s board of directors.  Therefore, the share redemption price would be $6.89 per share based on the most recently disclosed estimated value of $7.65 per share as determined by the Company’s board of directors.  However, the Company’s share redemption program provides that the Company’s board of directors must determine at the beginning of each fiscal year the maximum amount of shares that the Company may redeem during that year.  The Company’s board of directors has determined that no amounts are to be made available for redemption during the year ending December 31, 2010.
 
 NOTE 3 – FAIR VALUE MEASUREMENTS
 
 As discussed in Note 2 above, during the three and nine months ended September 30, 2010, real estate assets related to one property with a carrying amount of $7.0 million were deemed to be impaired and their carrying values were reduced to their estimated fair value of $4.2 million, resulting in an impairment charge of $2.8 million, which is included in impairment of real estate assets on the condensed consolidated statements of operations for the three and nine months ended September 30, 2010.
 
 The Company used a discounted cash flow analysis and recent comparable sales transactions to estimate the fair value of real estate assets.  The discounted cash flow analysis utilized internally prepared probability-weighted cash flow estimates, including discount ranges and terminal capitalization rates, which were within historical average ranges and gathered for specific geographic areas based on available information obtained from third-party service providers.
 
 
 9
 COLE CREDIT PROPERTY TRUST, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 September 30, 2010
 
  A summary of the Company's real estate assets measured at fair value on a non-recurring basis during the nine months ended September 30, 2010 is as follows (in thousands):
 
 Fair Value Measurements of Reporting Date UsingDescription:

Re-measured Balance

Level 1

Level 2

Level 3

Total LossesInvestment in real estate assets

$
4,166

$
—

$
—

$
4,166

$
(2,835)
 
 The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities on a recurring basis:
 
 Cash and cash equivalents, restricted cash, rents and tenant receivables, prepaid expenses, and accounts payable and accrued expenses – The Company considers the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.
 
 Notes payable and lines of credit – The fair value is estimated using a discounted cash flow technique based on estimated borrowing rates available to the Company as of September 30, 2010 and December 31, 2009.  The fair value of the notes payable and lines of credit with affiliate was $117.4 million and $2.0 million, respectively, as of September 30, 2010, as compared to the carrying value of $118.7 million and $1.9 million, respectively.  The fair value of the notes payable and line of credit was $113.2 million and $720,000, respectively, as of December 31, 2009, as compared to the carrying value of $118.0 million and $750,000, respectively.
 
 Considerable judgment is necessary to develop estimated fair values of certain financial instruments.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.
 
 NOTE4 —NOTES PAYABLE AND LINES OF CREDIT
 
 During the nine months ended September 30, 2010, the Company refinanced $50.7 million of mortgage notes payable, including $750,000 outstanding under the revolving line of credit, through loan agreements with two lenders, in the aggregate principal amount of $51.6 million (the “Loans”), and two revolving line of credit agreements that provide for an aggregate of $2.9 million of available borrowings from Series C, LLC (“Series C”), which is an affiliate of the Company’s advisor, on which the Company had borrowed $1.9 million under one of the revolving lines of credit (the “Revolving Loans”).  The Loans are collateralized by the Company’s direct and indirect interest in 22 single-tenant commercial properties with an aggregate purchase price of $87.3 million.  The Loans bear interest at a weighted average fixed rate of 6.96% per annum and principal and interest payments are due monthly, with any remaining principal amounts due on the maturity date, April 11, 2015.  The Revolving Loans are collateralized by the Company’s direct and indirect interest in two single-tenant commercial properties with an aggregate purchase price of $10.8 million.  The Revolving Loans have a fixed interest rate of 5.75% with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest due on March 31, 2012.  The Company recorded a loss on early extinguishment of debt related to the refinancing transaction of $259,000, consisting of $212,000 of prepayment costs and the write-off of $47,000 of unamortized deferred financing costs related to the refinanced mortgage notes payable.
 
 
 10
 COLE CREDIT PROPERTY TRUST, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 September 30, 2010
 As of September 30, 2010, the Company had $120.6 million outstanding in mortgage notes payable and lines of credit borrowings, with fixed interest rates ranging from 5.27% to 6.96% and a weighted average interest rate of 6.48%, and which mature on various dates from June 2011 through September 2017, with a weighted average remaining term of 4.6 years.  Each of the mortgage notes payable and lines of credit are secured by the respective properties on which the debt was placed.  The mortgage notes and lines of credit are generally non-recourse to the Company and Cole OP I, but both are liable for customary non-recourse carve-outs.  The mortgage notes and lines of credit are collateralized by all of the Company’s real estate assets.  The mortgage notes payable and lines of credit contain customary default provisions and may generally be prepaid subject to meeting certain requirements and payment of a prepayment premium as specified in the respective loan or line of credit agreement. Generally, upon the occurrence of an event of default, interest on the mortgage notes will accrue at an annual default interest rate equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the then-current interest rate plus a percentage specified in the respective loan agreement.  Certain mortgage notes payable contain customary affirmative, negative and financial covenants, including requirements for minimum net worth and debt service coverage ratios, in addition to limits on leverage ratios and variable rate debt.  The Company believes it was in compliance with the covenants as of September 30, 2010.
 
 NOTE5 —COMMITMENTS AND CONTINGENCIES
 
 Litigation
 
 In the ordinary course of business, the Company may become subject to litigation or claims.  There are no material legal proceedings pending, or known to be contemplated, against the Company.
 
 Environmental Matters
 
 In connection with the ownership and operation of real estate, the Company may be potentially liable for costs and damages related to environmental matters.  The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and the Company is not aware of any other environmental condition that it believes will have a material adverse effect on its consolidated financial statements.
 
 NOTE6 —RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
 
 Certain affiliates of the Company received fees and compensation in connection with the Company’s private placement of shares of its common stock, and receive fees and compensation in connection with the acquisition, management and sale of the assets of the Company.
 
 If Cole Advisors provides substantial services, as determined by the Company, in connection with the origination or refinancing of any debt financing obtained by the Company that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors a financing coordination fee equal to 1% of the amount available under such financing; provided, however, that Cole Advisors shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which Cole Advisors received such a fee.  Financing coordination fees payable on loan proceeds from permanent financing will be paid to Cole Advisors as the Company acquires such permanent financing.  However, no fees will be paid on loan proceeds from any line of credit until such time as all net offering proceeds have been invested by the Company.  No such fees were incurred by the Company during the three months ended September 30, 2010.  During the nine months ended September 30, 2010, the Company incurred $516,000 for financing coordination fees in connection with the refinancing of its mortgage notes payable described in Note 4 above, however, none were incurred related to the borrowings on the Revolving Loans.  No such fees were incurred by the Company during the three and nine months ended September 30, 2009.
 11
 COLE CREDIT PROPERTY TRUST, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 September 30, 2010
  The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (“Cole Realty”), its affiliated property manager, fees for the management and leasing of the Company’s properties.  Property management fees are equal to 3% of gross revenues, and leasing fees are at prevailing market rates, not to exceed the greater of $4.50 per square foot or 7.5% of the total lease obligation.  During the three months ended September 30, 2010 and 2009, the Company incurred $115,000 and $118,000 for property management fees, respectively.  During the nine months ended September 30, 2010 and 2009, the Company incurred $362,000 and $354,000 for property management fees, respectively.  As of September 30, 2010 and December 31, 2009, $39,000 and $41,000, respectively, of such costs had been incurred by Cole Realty but not paid by the Company, and are included in due to affiliates on the condensed consolidated unaudited financial statements.
 
 Cole Realty, or its affiliates, also receives acquisition and advisory fees of up to 3% of the contract purchase price of each property.  No such fees were incurred by the Company during each of the three and nine months ended September 30, 2010 and 2009.
 
 The Company is obligated to pay Cole Advisors an annualized asset management fee of up to 0.75% of the aggregate asset value of the Company’s assets.  Pursuant to a waiver of the fee by Cole Advisors, no asset management fees were incurred by the Company during each of the three and nine months ended September 30, 2010 and 2009.  The Company is not obligated to pay any amounts for such periods.  However, Cole Advisors may elect to charge asset management fees in future periods up to the 0.75% fee.
 
 If Cole Advisors, or its affiliates, provides a substantial amount of services, as determined by the Company, in connection with the sale of one or more properties, the Company will pay Cole Advisors an amount equal to 3% of the contract price of each asset sold.  In no event will the combined disposition fee paid to Cole Advisors, its affiliates and unaffiliated third parties exceed the reasonable, customary and competitive amount for such services.  In addition, after investors have received a return of their net capital contributions and a 7.5% annual cumulative, non-compounded return, then Cole Advisors is entitled to receive 20% of the remaining net sale proceeds.  No such fees were incurred by the Company during each of the three and nine months ended September 30, 2010 and 2009 relating to the sale of properties.
 
 In the event the Company’s common stock is listed in the future on a national securities exchange, a subordinated incentive listing fee equal to 20% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate a 7.5% annual cumulative, non-compounded return to investors will be paid to Cole Advisors.
 
 The Company may reimburse Cole Advisors for expenses it incurs in connection with its provision of administrative services, including related personnel costs.  The Company does not reimburse for personnel costs in connection with services for which Cole Advisors receives acquisition fees or disposition fees.  No such costs were incurred by the Company during each of the three and nine months ended September 30, 2010 and 2009.
 
 During the nine months ended September 30, 2010, the Company entered into two revolving line of credit agreements that provide for an aggregate of $2.9 million of available borrowings from Series C, on which the Company borrowed $1.9 million.  No financing coordination fee was paid, or will be paid, to Cole Advisors or its affiliates in connection with these revolving lines of credit.  The line of credit agreements bear a fixed interest rate of 5.75% and mature in March 2012.  During the three and nine months ended September 30, 2010, the Company incurred $28,000 and $57,000, respectively, of interest expense related to the aforementioned lines of credit with Series C.  As of September 30, 2010, $9,000 of such expense had been incurred by Series C but not paid by the Company, and is included in due to affiliates on the condensed consolidated unaudited financial statements.
 12
 COLE CREDIT PROPERTY TRUST, INC.
 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS – (Continued)
 September 30, 2010
  NOTE7 —ECONOMIC DEPENDENCY
 
 Under various agreements, the Company has engaged or will engage Cole Advisors and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations.  As a result of these relationships, the Company is dependent upon Cole Advisors and its affiliates.  In the event that these companies were unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.
  
 13
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto, and the other unaudited financial data included elsewhere in this Quarterly Report on Form 10-Q.  The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.  The terms “we,” “us,” “our” and the “Company” refer to Cole Credit Property Trust, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.
 
 Forward-Looking Statements
 
 Except for historical information, this section contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters.  These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry.  Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” or comparable words, variations and similar expressions are intended to identify forward-looking statements.  All statements not based on historical fact are forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements.
 
 Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false.  Investors are cautioned not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, inability to obtain new tenants upon the expiration or termination of existing leases, inability to obtain financing or refinance existing debt, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows.
 
 Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates.  These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.
 
 Overview
 
 We were formed on March 29, 2004 to acquire and operate commercial real estate primarily consisting of net leased, freestanding, single-tenant, income-generating retail properties located throughout the United States.  We have no paid employees and are externally managed by Cole Advisors, an affiliate of ours.  We currently qualify, and intend to continue to elect to qualify, as a REIT for federal income tax purposes.
 
 As of September 30, 2010, we owned 42 properties, which were 100% leased, comprising 1.0 million square feet of single-tenant retail space located in 19 states.  We do not anticipate acquiring any additional properties, unless we were to dispose of any of our properties in the ordinary course of business, in which case we would expect to reinvest the sales proceeds in additional properties, unless the sale proceeds were necessary to meet our short or long-term liquidity requirements.  Although we continue to evaluate certain properties for sale, we currently have no formal plans to dispose of any of our properties.
  14
  
 Our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property acquisition indebtedness.  Rental and other property income accounted for 98% of total revenue during the three and nine months ended September 30, 2010 and 2009.  As 100% of our properties are under lease, with an average remaining lease term of 10 years, our exposure to changes in commercial rental rates and contractual lease expirations is substantially mitigated, except for any vacancies caused by tenant bankruptcies, rent reductions or other factors.  Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenant’s financial results, credit rating agency reports (if any) on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment and other information for changes and possible trends.  If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease.
 
 As of September 30, 2010, our debt leverage ratio, which is the ratio of debt to total gross real estate assets net of gross intangible lease liabilities, was 60%.  All of our debt is subject to fixed interest rates, ranging from 5.27% to 6.96%, with a weighted average remaining term of 4.6 years.  As we have no outstanding variable rate debt, our exposure to short-term changes in interest rates is limited.  However, we will be subject to changes in interest rates as we refinance our debt as it matures.  See our contractual obligations table in the section captioned “Long-term Liquidity and Capital Resources.”
 
 Recent Market Conditions
 
 Beginning in late 2007, domestic and international financial markets experienced significant disruptions that were brought about in large part by challenges in the world-wide banking system.  These disruptions severely impacted the availability of credit and have contributed to rising costs associated with obtaining credit.  Recently, the, volume of mortgage lending for commercial real estate has increased and lending terms have improved; however, such lending activity is significantly less than previous levels.  Although lending market conditions have improved, we have experienced, and may continue to experience, more stringent lending criteria, which may affect our ability to refinance our debt at maturity.  Additionally, if we are able to refinance our existing debt as it matures it may be at lower leverage levels or at rates and terms which are less favorable than our existing debt or, if we elect to extend the maturity dates of the mortgage notes in accordance with the hyper-amortization provisions, the interest rates charged to us will be higher, each of which may adversely affect our results of operations and the distribution rate we are able to pay to our investors.  If we are required to sell any of our properties to meet our liquidity requirements, such sale will result in lower rental revenue and may be at a price less than our acquisition price for the property, each of which would adversely impact our results of operations and the distribution rate we are able to pay to our investors.
 
 The economic downturn has led to high unemployment rates and a decline in consumer spending.  These economic trends have adversely impacted the retail and real estate markets, causing higher tenant vacancies, declining rental rates and declining property values.  Recently the economy has improved and continues to show signs of recovery.  Additionally, the real estate markets have recently observed an improvement in occupancy rates; however, occupancy and rental rates continue to be below those previously experienced before the economic downturn.  As of September 30, 2010, 100% of our rentable square feet was under lease, of which 4.4% is under a short-term lease at reduced rental rates.  However, if the current economic uncertainty persists, we may experience vacancies or be required to further reduce rental rates on occupied space.  If we do experience vacancies, our advisor will actively seek to lease our vacant space; however, such space may be leased at lower rental rates and for shorter lease terms than previously experienced.  In addition, as many retailers and other tenants have been delaying or eliminating their store expansion plans, the amount of time required to re-lease a property may increase as a result.
 
 
 15
 
  Results of Operations
 
 Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009
 
 Revenue. Revenue remained relatively constant, increasing less than 1% to $4.1 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.  Our revenue primarily consisted of rental income from net leased commercial properties, which accounted for 98% of total revenue during each of the three months ended September 30, 2010 and 2009.
 
 General and Administrative Expenses.General and administrative expenses increased $58,000, or 62% to $152,000 for the three months ended September 30, 2010, compared to $94,000 for the three months ended September 30, 2009.  The increase was primarily due to an increase in accounting fees and licenses and fees expense recorded during the three months ended September 30, 2010.  The primary general and administrative expense items are legal and accounting fees, state franchise and income taxes, transfer agent fees and other licenses and fees.
 
 Property Operating Expenses.Property operating expenses increased $252,000, or 183%, to $390,000 for the three months ended September 30, 2010, compared to $138,000 for the three months ended September 30, 2009.  The increase was primarily due to an increase in bad debt expense and property taxes recorded during the three months ended September 30, 2010, related to the bankruptcy of one tenant as discussed in Note 2 of our condensed consolidated unaudited financial statements.  The primary property operating expense items are bad debt expense, property taxes, insurance and repairs and maintenance.
 
 Property Management Expenses.Property management expenses decreased $3,000, or 3%, to $115,000 for the three months ended September 30, 2010, compared to $118,000 for the three months ended September 30, 2009.  The decrease was primarily due to a decrease in gross cash received for rental and property related income, due to the bankruptcy of one tenant as discussed in Note 2 of our condensed consolidated unaudited financial statements, during the three months ended September 30, 2010.
 
 Depreciation and Amortization Expenses.Depreciation and amortization expenses remained constant at $1.4 million for the three months ended September 30, 2010 and 2009.
 
 Impairment of Real Estate Assets.Impairment of real estate assets was $2.8 million for the three months ended September 30, 2010, compared to no impairment of real estate assets for the three months ended September 30, 2009.  The impairment during the three months ended September 30, 2010 related to one property for which the tenant declared bankruptcy, as described in Note 2 of our condensed consolidated unaudited financial statements.
 
 Net Interest Expense.Net interest expense increased $291,000, or 16%, to $2.1 million for the three months ended September 30, 2010, compared to $1.8 million for the three months ended September 30, 2009.  The increase was primarily due to an increase in the weighted average interest rate on outstanding debt to 6.48% at September 30, 2010, compared to 5.76% at September 30, 2009, which was due to the refinancing of certain mortgage notes payable during 2010 at higher interest rates.  The primary net interest expense items are interest expense, amortization of deferred financing costs and interest income.
 
 Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
 
 Revenue. Revenue decreased $170,000, or 1%, to $12.1 million for the nine months ended September 30, 2010, compared to $12.3 million for the nine months ended September 30, 2009.  The decrease was primarily due to additional rental income recorded during the nine months ended September 30, 2009 related to the recognition of a cumulative consumer price index adjustment for one tenant in accordance with the lease terms.  Our revenue primarily consists of rental income from net leased commercial properties, which accounted for 98% of total revenue during each of the nine months ended September 30, 2010 and 2009.
 
 
 16
 
  General and Administrative Expenses.General and administrative expenses remained relatively constant, decreasing $5,000, or 1%, to $449,000 for the nine months ended September 30, 2010, compared to $454,000 for the nine months ended September 30, 2009.  The primary general and administrative expense items are legal and accounting fees, state franchise and income taxes, transfer agent fees and other licenses and fees.
 
 Property Operating Expenses.Property operating expenses increased $256,000, or 64%, to $654,000 for the nine months ended September 30, 2010, compared to $398,000 for the nine months ended September 30, 2009.  The increase was primarily due to an increase in bad debt expense and property taxes recorded during the nine months ended September 30, 2010, related to the bankruptcy by one tenant as discussed in Note 2 of our condensed consolidated unaudited financial statements.  The primary property operating expense items are property taxes, bad debt expense, insurance and repairs and maintenance.
 
 Property Management Expenses.Property management expenses increased $8,000, or 2%, to $362,000 for the nine months ended September 30, 2010, compared to $354,000 for the nine months ended September 30, 2009.  The increase was primarily due an increase in gross cash received for rental and property related income during the nine months ended September 30, 2010.
 
 Depreciation and Amortization Expenses.Depreciation and amortization expenses remained constant at $4.1 million for the nine months ended September 30, 2010 and 2009.
 
 Impairment of Real Estate Assets.Impairment of real estate assets was $2.8 million for the nine months ended September 30, 2010, compared to no impairment of real estate assets for the nine months ended September 30, 2009.  The impairment during the nine months ended September 30, 2010 related to one property for which the tenant declared bankruptcy, as described in Note 2 of our condensed consolidated unaudited financial statements.
 
 Net Interest Expense.Net interest expense increased $708,000, or 13%, to $6.2 million for the nine months ended September 30, 2010, compared to $5.5 million for the nine months ended September 30, 2009.  The increase was primarily due to an increase in the weighted average interest rate on outstanding debt to 6.48% at September 30, 2010, compared to 5.76% at September 30, 2009, which was due to the refinancing of certain mortgage notes payable in 2010 at higher interest rates.  The increase was also due to higher interest rates on seven mortgage notes payable for which the Company elected to extend the maturity dates in accordance with the hyper-amortization provisions, prior to refinancing.  The primary net interest expense items are interest expense, amortization of deferred financing costs and interest income.
 
 Loss on Early Extinguishment of Debt.Loss on early extinguishment of debt was $259,000 for the nine months ended September 30, 2010, compared to no loss for the nine months ended September 30, 2009.  The loss during the nine months ended September 30, 2010 was due to the refinancing of 22 mortgage notes payable and one line of credit.
 
 Funds From Operations and Modified Funds From Operations
 
 Funds from Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) widely recognized by investors and analysts as one measure of operating performance of a real estate company.  FFO excludes items such as real estate depreciation and amortization, and gains and losses on the sale of real estate assets.  Depreciation and amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the historical cost accounting alone is insufficient.  In addition, FFO excludes gains and losses from the sale of real estate, which we believe provides management and investors with a helpful additional measure of the historical performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs.
 
 
 17
 
  In addition to FFO, we use Modified Funds from Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the historical operating performance of our real estate portfolio.  MFFO, as defined by our company, excludes from FFO real estate impairment charges, which are required to be expensed in accordance with GAAP.  In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses.  Impairment charges are items that management does not include in its evaluation of the historical operating performance of its real estate investments, as management believes that the impact of these items will be reflected over time through changes in rental income or other related costs.  As many other non-traded REITs exclude impairments in reporting their MFFO, we believe that our calculation and reporting of MFFO will assist investors and analysts in comparing our performance versus other non-traded REITs.
 
 For all of these reasons, we believe FFO and MFFO, in addition to net income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding one of the ways in which our management evaluates the performance of our real estate portfolio.  However, FFO and MFFO should not be considered as alternatives to net income or to cash flows from operating activities, and are not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.
 
 Our calculation of FFO and MFFO, and reconciliation to net income (loss), which is the most directly comparable GAAP financial measure, is presented in the following table for the periods as indicated (in thousands):
 
 Three Months Ended September 30,

Nine Months Ended September 30,2010

2009

2010

2009NET (LOSS) INCOME

$
(2,936)

$
483

$
(2,692)

$
1,539Depreciation of real estate assets


922


922


2,764


2,764Amortization of lease related costs


450


450


1,351


1,351Gain on sale of easement


—


—


—


(9)Funds from Operations (FFO)


(1,564)


1,855


1,423


5,645Impairment of real estate assets


2,835


—


2,835


—Modified Funds from Operations (MFFO)

$
1,271

$
1,855

$
4,258

$
5,645
 
 Set forth below is additional information (often considered in conjunction with FFO) that may be helpful in assessing our operating results:
 
 •
In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of $34,000 and $116,000 during the three and nine months ended September 30, 2010, respectively, and $72,000 and $226,000 during the three and nine months ended September 30, 2009, respectively.•
Amortization of deferred financing costs totaled $140,000 and $337,000 during the three and nine months ended September 30, 2010, respectively, and $98,000 and $298,000 during the three and nine months ended September 30, 2009, respectively.•
Loss on the early extinguishment of debt totaled $259,000 during the nine months ended September 30, 2010, which includes the write-off of $47,000 of unamortized deferred financing costs related to the refinanced mortgage notes payable.  There were no losses on the early extinguishment of debt during the three months ended September 30, 2009 and 2010 and during the nine months ended September 30, 2009.
 
 
 
 18
 
  Liquidity and Capital Resources
 
 Short-term Liquidity and Capital Resources
 
 We expect to meet our short-term liquidity requirements through net cash provided by operations.  As of September 30, 2010, we had one fixed rate note payable in the amount of $7.8 million maturing in June 2011.  The remaining $112.8 million of our outstanding debt has a weighted average remaining term of 4.9 years.  We are currently evaluating the possible financing or refinancing of the $7.8 million maturing in June 2011.  If we are unable to finance or refinance any portion of the amount maturing, we expect to pay down any such amount through a combination of the use of net cash provided by operations, available borrowings under our $2.9 million revolving lines of credit, short-term borrowings from an affiliate of our advisor and/or the potential sale of certain properties, or we may elect to extend the maturity date in accordance with the hyper-amortization provisions.  If we are able to refinance our existing debt as it matures, it may be at rates and terms that are less favorable than our existing debt or, if we elect to extend the maturity date of the mortgage note in accordance with the hyper-amortization provisions, the interest rates charged to us will be higher, each of which may adversely affect our results of operations and the dividend rate we are able to pay to our investors.  As of September 30, 2010, we had $1.0 million of available borrowings under our revolving lines of credit.
 
 Long-term Liquidity and Capital Resources
 
 We expect to meet our long-term liquidity requirements through proceeds from available borrowings under our revolving lines of credit, secured or unsecured financings or refinancings from banks and other lenders, the selective and strategic sale of properties and net cash flows from operations.  We expect that our primary uses of capital will be for the payment of operating expenses, including interest expense on our outstanding indebtedness, for the payment of tenant improvements, leasing commissions and repairs and maintenance, for the possible reinvestment of proceeds from the strategic sale of properties in replacement properties and for the payment of distributions to our stockholders.
 
 We expect that substantially all net cash generated from operations will be used to pay distributions to our stockholders after payments of principal on our outstanding indebtedness and certain capital or leasing expenditures are made; however, we may use other sources to fund distributions, as necessary, such as proceeds from available borrowings under our revolving line of credit.  To the extent that cash flows from operations are lower than our current expectations due to lower returns on the properties, distributions paid to our stockholders may be reduced.
 
 During the nine months ended September 30, 2010, we paid distributions of $4.3 million, which were funded entirely by cash flows from operations.  During the nine months ended September 30, 2009, we paid distributions of $5.3 million, which were funded by cash flows from operations of $4.8 million, excess cash flows from operations from previous periods of $332,000 and proceeds from our line of credit of $160,000.
 
 We expect that substantially all net cash resulting from any debt financing will be used to fund certain repayments of outstanding debt, the purchase of possible replacement properties, the payment of certain capital or leasing expenditures or the payment of distributions to our stockholders.  We did not have any material commitments for capital or leasing expenditures as of September 30, 2010.
  As of September 30, 2010, we had cash and cash equivalents of $744,000, which we expect to be used primarily to pay operating expenses, interest on our indebtedness and stockholder distributions.  In addition, we had restricted cash of $556,000 held by lenders in escrow accounts for tenant and capital improvements, leasing commissions, repairs and maintenance and other lender reserves for certain properties and $171,000 held by lenders in a lockbox account from which the monthly debt service payment will be disbursed to the lender and the excess funds will be disbursed to the Company.
 
 
 19
 
  As of September 30, 2010, we had $120.6 million of fixed rate debt outstanding, including $1.9 million which was outstanding under one of our revolving lines of credit.  The outstanding debt is subject to fixed interest rates ranging from 5.27% to 6.96%, with a weighted average interest rate of 6.48%, and matures on various dates from June 2011 through September 2017.  Our debt leverage ratio, which is the ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 60%, with a weighted average remaining term to maturity of 4.6 years.
 
 Our contractual obligations are as follows (in thousands):
 
 Payments due by period (1)Total

Less than 1 year

1-3 years

4-5 years

More than 5 yearsPrincipal payments – notes payable

$
118,710

$
8,441

$
2,115

$
106,477

$
1,677Interest payments – notes payable


36,300


7,590


21,471


7,138


101Principal payments – lines of credit


1,935


—


1,935


—


—Interest payments – lines of credit


170


111


59


—


—Total

$
157,115

$
16,142

$
25,580

$
113,615

$
1,778
 
 (1)
The table above does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable.
 
 Cash Flow Analysis
 
 Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009
 
 Operating Activities.  Net cash provided by operating activities decreased $370,000, or 8%, to $4.4 million for the nine months ended September 30, 2010 compared to $4.8 million for the nine months ended September 30, 2009.  The decrease was primarily due to a decrease in net income of $4.2 million offset by an impairment on real estate assets of $2.8 million, a loss on the early extinguishment of debt of $259,000 and increases in the change in rents and tenant receivables, allowance for doubtful accounts and due to affiliates of $460,000, $188,000 and $134,000, respectively.  See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.
 
 Investing Activities.Net cash used in investing activities was $808,000 for the nine months ended September 30, 2010, compared to $13,000 of net cash provided by investing activities for the nine months ended September 30, 2009.  The change was primarily due to the deposit of cash into required lender reserves related to the debt refinancing transaction as discussed in Note 4 of our condensed consolidated unaudited financial statements during the nine months ended September 30, 2010.
 
 Financing Activities.Net cash used in financing activities increased $243,000, or 5%, to $4.8 million for the nine months ended September 30, 2010, compared to $4.5 million for the nine months ended September 30, 2009.  The increase was primarily due to the repayment of $51.7 million of notes payable and line of credit borrowings, the payment of deferred financing costs of $2.2 million and the payment of costs related to the early extinguishment of debt of $212,000, offset by $53.6 million of notes payable proceeds and line of credit borrowings.
 
 Election as a REIT
 
 We currently qualify as and are taxed as a REIT under the Internal Revenue Code of 1986, as amended.  To qualify as a REIT, we must meet, and continue to meet, certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping.  As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction excluding capital gains).
 
 
 20
 
  If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates.  We will not be able to deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT.  We will also be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions.  Such an event could materially adversely affect our net income and net cash available for distribution to stockholders.  However, we believe that we are organized and operate in such a manner as to qualify for treatment as a REIT for federal income tax purposes.  No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements.  We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying financial statements.
 
 Inflation
 
 We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations.  There are provisions in certain of our tenant leases that will help protect us from, and mitigate the risk of, the impact of inflation.  These provisions may include rent steps and clauses enabling us to receive payment of additional rent calculated as a percentage of the tenants’ gross sales above pre-determined thresholds.  In addition, most of our leases require the tenant to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, which would also help protect us from the impact of inflation.  However, due to the long-term nature of the leases, the leases may not reset frequently enough to adequately offset the effects of inflation.
 
 Critical Accounting Policies and Estimates
 
 Our accounting policies have been established to conform to GAAP.  The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions.  These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements.  Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.  We consider our critical accounting policies to be the following:
 
 •

Investment in and Valuation of Real Estate and Related Assets;•

Allocation of Purchase Price of Real Estate and Related Assets;•

Revenue Recognition; and•

Income Taxes.
 
 A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2009, and our critical accounting policies have not changed during the nine months ended September 30, 2010.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2009, and related notes thereto.
 
 Commitments and Contingencies
 
 We are subject to certain contingencies and commitments with regard to certain transactions.  Refer to Note 5 of our condensed consolidated unaudited financial statements accompanying this Quarterly Report on Form 10-Q for further explanations.
 
 
 21
 
  Related-Party Transactions and Agreements
 
 We have entered into agreements with Cole Advisors and its affiliates, whereby we have paid, and expect to continue to pay, certain fees to or reimburse certain expenses of, Cole Advisors or its affiliates such as acquisition and advisory fees and expenses, financing coordination fees, asset and property management fees and reimbursement of certain operating costs.   See Note 6 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements and fees.
 
 New Accounting Pronouncements
 
 There are no accounting pronouncements that have been issued but not yet adopted by us that will have a material impact on our consolidated financial statements.
 
 Off Balance Sheet Arrangements
 
 As of September 30, 2010 and December 31, 2009, we had no off balance sheet arrangements.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not required for smaller reporting companies.
 
 Item 4. Controls and Procedures
 
 As required by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of September 30, 2010, were effective in all material respects to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
 No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
  22
  
 PART II
 OTHER INFORMATION
 
 
 Item 1. Legal Proceedings
 
 We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
 
 Item 1A. Risk Factors
 
 Not required for smaller reporting companies.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 We did not sell any unregistered securities during the three months ended September 30, 2010.  No shares were redeemed during the three months ended September 30, 2010.
 
 Item 3. Defaults Upon Senior Securities
 
 No events occurred during the three months ended September 30, 2010 that would require a response to this item.
 
 Item 4. [Removed and Reserved]
 
 Item 5. Other Information
 
 No events occurred during the three months ended September 30, 2010 that would require a response to this item.
 
 Item 6. Exhibits
 
 The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated by reference.
   23
  
 SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 Cole Credit Property Trust, Inc.

(Registrant)By:

/s/ Simon J. MisselbrookSimon J. MisselbrookVice President of Accounting

(Principal Accounting Officer)
 
 Date: November 10, 2010
   24
  
 EXHIBIT INDEX
 
 The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010 (and are numbered in accordance with Item 601 of Regulation S-K).
 
 Exhibit No.

Description3.1

Articles of Incorporation.  (Incorporated by reference to the Company’s Registration Statement on Form 10-SB (File No. 000-51962) filed on May 1, 2006).3.2

Amended and Restated Bylaws.  (Incorporated by reference to the Company’s Registration Statement on Form 10-SB (File No. 000-51962) filed on May 1, 2006).10.1

Loan Agreement, dated April 1, 2010, by and between Cole Credit Property Trust, Inc., and certain of its wholly-owned subsidiaries, collectively as Borrower, and The Royal Bank of Scotland PLC as lender. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q (File No. 000-51962) file on May 14, 2010).10.2

Loan Agreement, dated April 1, 2010, by and between Cole Mezzco CCPT I, LLC as Borrower, and IVC Cole Mezz, LLC as lender.  (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q (File No. 000-51962) file on May 14, 2010).31.1

Certification of the Chief Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2

Certification of the Chief Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1*

Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 * In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
 
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