**UNITED        STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form        10-K**

 

| (Mark One) |   |                                                                                                                        |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                        |
| **x**      |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                        SECURITIES EXCHANGE ACT OF 1934**             |
|       |
|       |   | **For the fiscal year ended December 31,                        2007**                                                      |
|       |
| **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 000-51962**

 

**COLE        CREDIT PROPERTY TRUST, INC.**

*(Exact        name of registrant as specified in its charter)*

 

| **Maryland**                                                                                                                                                                      |   | **20-1676382**                                                                                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
| *(State or other jurisdiction of incorporation or                        organization)*                                                                                           |   | *(I.R.S. EmployerIdentification Number)*                                                                |
| **2555 East Camelback Road,                        Suite** **400**

**Phoenix, Arizona, 85016**

*(Address of principal executive offices; zip                        code)* |   | **(602) 778-8700**

*(Registrant’s telephone number, including area                        code)* |

 

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

 

| **Title of Each Class** |   | **Name of Exchange on Which Registered** |
|-------------------------|--------|------------------------------------------|
|                    |   |                                     |
| None                    |   | None                                     |

 

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

 

| **Title of Each Class**                 |
|-----------------------------------------|
|                                    |
| Common Stock, par value $0.01 per share |

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as        defined in Rule 405 of the Securities Act.  Yes o   No **x**

         

Indicate by check mark if the registrant is not required to file reports        pursuant to Section 13 or Section 15(d) of the Act.  Yes o   No **x**

         

Indicate by check mark whether the registrant (1) has filed all reports        required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during        the preceding 12 months (or for such shorter period that the registrant was required        to file such reports), and (2) has been subject to such filing requirements for the past 90        days.    Yes **x**          No o

         

Indicate by check mark if disclosure of delinquent filers pursuant to        Item 405 of Regulation S-K is not contained herein, and will not be contained, to        the best of registrant’s knowledge, in definitive proxy or information statements        incorporated by reference in Part III of this annual report on Form 10-K or any        amendment to this annual report on Form 10-K.    **x**

         

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

| Large accelerated filer o   | Accelerated filer o   | Non-accelerated filer 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**

         

The aggregate market value of the voting stock held by non-affiliates as of        June 30, 2007: approximately $100.9 million assuming a market value of $10.00 per        share.

         

The number of shares of common stock outstanding as of March 24, 2008 was        10,090,951.

         

**Documents Incorporated by Reference:**

 

The Registrant incorporates by reference portions of the Cole Credit        Property Trust, Inc. Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders        (into Items 10, 11, 12, 13 and 14 of Part III).

**TABLE OF CONTENTS**

 

|                                                                           |                                                                         |   |   |                                                                                                                                                             |   |
|--------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                           |                                                                         |   |   |                                                                                                                                                             |   |
| CAUTIONARY                        NOTE REGARDING FORWARD LOOKING STATEMENTS    | 2                                                                            |
|                                                                           |                                                                         |   |   |                                                                                                                                                             |   |
| PART                        I                                                  |                                                                         |   |   |
|                                                                           | ITEM                        1.                                               |   |   | BUSINESS                                                                                                                                                         | 3      |
|                                                                           | ITEM                        1A.                                              |   |   | RISK                        FACTORS                                                                                                                              | 11     |
|                                                                           | ITEM                        1B.                                              |   |   | UNRESOLVED STAFF                        COMMENTS                                                                                                                 | 11     |
|                                                                           | ITEM                        2.                                               |   |   | PROPERTIES                                                                                                                                                       | 11     |
|                                                                           | ITEM                        3.                                               |   |   | LEGAL                        PROCEEDINGS                                                                                                                         | 15     |
|                                                                           | ITEM                        4.                                               |   |   | SUBMISSION OF MATTERS                        TO A VOTE OF SECURITY HOLDERS                                                                                       | 15     |
|                                                                           |                                                                         |   |   |                                                                                                                                                             |   |
| PART                        II                                                 |                                                                         |   |   |
|                                                                           | ITEM                        5.                                               |   |   | MARKET FOR                        REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER                        PURCHASES OF EQUITY SECURITIES | 16     |
|                                                                           | ITEM                        6.                                               |   |   | SELECTED FINANCIAL                        DATA                                                                                                                   | 18     |
|                                                                           | ITEM                        7.                                               |   |   | MANAGEMENT’S                        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF                        OPERATIONS                        | 19     |
|                                                                           | ITEM                        7A.                                              |   |   | QUANTITATIVE AND                        QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                                                                               | 26     |
|                                                                           | ITEM                        8.                                               |   |   | FINANCIAL STATEMENTS                        AND SUPPLEMENTARY DATA                                                                                               | 26     |
|                                                                           | ITEM                        9.                                               |   |   | CHANGES IN AND                        DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL                        DISCLOSURE                               | 26     |
|                                                                           | ITEM                        9A.                                              |   |   | CONTROLS AND                        PROCEDURES                                                                                                                   | 26     |
|                                                                           | ITEM                        9B.                                              |   |   | OTHER                        INFORMATION                                                                                                                         | 27     |
|                                                                           |                                                                         |   |   |                                                                                                                                                             |   |
| PART                        III                                                |                                                                         |   |   |                                                                                                                                                             |
|                                                                           | ITEM                        10.                                              |   |   | DIRECTORS, EXECUTIVE                        OFFICERS AND CORPORATE GOVERNANCE                                                                                    | 28     |
|                                                                           | ITEM                        11.                                              |   |   | EXECUTIVE                        COMPENSATION                                                                                                                    | 28     |
|                                                                           | ITEM                        12.                                              |   |   | SECURITY OWNERSHIP                        OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER                        MATTERS                     | 28     |
|                                                                           | ITEM                        13.                                              |   |   | CERTAIN                        RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR                        INDEPENDENCE                                           | 28     |
|                                                                           | ITEM                        14.                                              |   |   | PRINCIPAL ACCOUNTING                        FEES AND SERVICES                                                                                                    | 28     |
|                                                                           |                                                                         |   |   |                                                                                                                                                             |   |
| PART                        IV                                                 |                                                                         |   |   |
|                                                                           | ITEM                        15.                                              |   |   | EXHIBITS AND                        FINANCIAL STATEMENT SCHEDULES                                                                                                | 29     |
| SIGNATURES                                                                     | 30                                                                           |
| REPORT OF                        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2                                                                          |
|                                                                           | CONSOLIDATED                        BALANCE SHEETS                           | F-3    |
|                                                                           | CONSOLIDATED                        STATEMENTS OF OPERATIONS                 | F-4    |
|                                                                           | CONSOLIDATED                        STATEMENTS OF STOCKHOLDERS’ EQUITY | F-5    |
|                                                                           | CONSOLIDATED                        STATEMENTS OF CASH FLOWS                 | F-6    |
|                                                                           | NOTES TO                        CONSOLIDATED FINANCIAL STATEMENTS            | F-7    |
| EX-31.1                        SECTION 302, CERTIFICATION OF THE CEO           |                                                                         |
| EX-31.2                        SECTION 302, CERTIFICATION OF THE CFO           |                                                                         |
| EX-32.1                        SECTION 906, CERTIFICATION OF THE CEO AND CFO   |                                                                         |

 

 

 

 

 

 

1

**CAUTIONARY NOTE** **REGARDING FORWARD LOOKING STATEMENTS**

 

Certain statements contained in this Annual Report on Form 10-K of Cole        Credit Property Trust, Inc. other than historical facts may be considered forward-looking        statements within the meaning of Section 27A of the Securities Act of 1933, as amended        (the “Securities Act”), and Section 21E of the Securities Exchange Act of        1934, as amended (the “Exchange Act”). We intend for all such forward-looking        statements to be covered by the safe harbor provisions for forward-looking statements        contained in Section 27A of the Securities Act and Section 21E of the Exchange        Act, as applicable by law. Such statements include, in particular, statements about our        plans, strategies, and prospects and are subject to certain risks and uncertainties, as        well as known and unknown risks, which could cause actual results to differ materially from        those projected or anticipated. Therefore, such statements are not intended to be a        guarantee of our performance in future periods. Such forward-looking statements can        generally be identified by our use of forward-looking terminology such as        “may,” “will,” “would,” “could,”        “should,” “expect,” “intend,” “anticipate,”        “estimate,” “believe,” “continue,” or other similar        words. Readers are cautioned not to place undue reliance on these forward-looking        statements, which speak only as of the date this Annual Report is filed with the Securities        and Exchange Commission (“SEC”). We make no representation or warranty (express        or implied) about the accuracy of any such forward-looking statements contained in this        Annual Report on Form 10-K, and we do not undertake to publicly update or revise any        forward-looking statements, whether as a result of new information, future events, or        otherwise.

 

Any forward-looking statements are subject to unknown risks, uncertainties,        and other factors and are based on a number of assumptions involving judgments with respect        to, among other things, future economic, competitive, and market conditions, all of which        are difficult or impossible to predict accurately. To the extent that our assumptions        differ from actual results, our ability to meet such forward-looking statements, including        our ability to generate positive cash flow from operations, provide distributions to        stockholders, and maintain the value of our real estate properties, may be significantly        hindered.

 

2

**PART        I**

 

| **ITEM 1.** | **BUSINESS** |
|-------------|--------------|

         

**Formation**

 

Cole Credit Property Trust, Inc. (the “Company,”        “we,” “our,” or “us”) is a Maryland corporation formed        on March 29, 2004, that elected to be taxed, and currently qualifies, as a real estate        investment trust (“REIT”). We were organized to acquire and operate commercial        real estate primarily consisting of high quality, freestanding, single-tenant , retail        properties net leased to investment grade and other creditworthy tenants located throughout        the United States. As of December 31, 2007, we owned 42 properties located in 19        states, comprising approximately 1.0 million rentable square feet. At        December 31, 2007, these properties were approximately 100% leased.

 

Substantially all of our business is conducted through our operating        partnership, Cole Operating Partnership I, LP, a Delaware limited partnership        organized in 2004 (“Cole OP I”). We own a 99.99% interest in Cole        OP I as its general partner. The remaining 0.01% of Cole OP I is held as a        limited partner’s interest by Cole REIT Advisors, LLC (“Cole Advisors”),        which is our affiliated advisor.

 

Cole Advisors acts as our advisor pursuant to an advisory agreement. Cole        Advisors is responsible for managing our affairs on a day-to-day basis, identifying and        making acquisitions and investments on our behalf and making recommendations as to        dispositions of assets. Our board of directors exercises its fiduciary duties in reviewing        these recommendations and determining to approve or reject proposed transactions. Our        advisor also provides asset management, marketing, investor relations and other        administrative services on our behalf. Our agreement with Cole Advisors is for a one-year        term and is reconsidered on an annual basis by our board of directors. We have no employees        and rely upon our advisor to provide substantially all of our services.

         

On April 6, 2004, we commenced a private placement of shares of common stock        offered at a price of $10.00 per share, subject to certain volume and other discounts        (the “Offering”). We completed the Offering on September 16, 2005, after having        raised aggregate gross proceeds of $100,331,320 through the sale of an aggregate of        10,097,251 shares of our common stock. As of March 24, 2008, 10,090,951 shares of our        common stock were issued and outstanding and held by 1,466 stockholders of        record.

         

We issued our common stock in the Offering in reliance upon exemptions from        the registration requirements of the Securities Act and state securities laws. As a result,        our stockholders may not transfer the shares of common stock except pursuant to an        effective registration statement or pursuant to an exemption from registration. Our common        stock is not currently listed on a securities exchange and there currently is no market for        our common stock. We do not intend to list our shares at this time. We do not anticipate        that there will be any market for our common stock until our shares are listed. However,        once a stockholder has held our shares for at least one year, he or she may be able to have        the shares repurchased by us pursuant to our share redemption program.

 

As of December 31, 2006, we owned 41 freestanding, single-tenant, retail        properties with an aggregate purchase price of approximately $195.5 million, exclusive of        closing costs. During 2007, we acquired one additional freestanding, single-tenant property        for a purchase price of approximately $3.1 million, exclusive of closing costs. The        acquisition was funded with available cash and an approximately $1.7 million loan secured        by the property. 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. We currently have no        plans to dispose of any of our properties.

         

We expect to hold our properties for approximately six to eight years, and        return to our stockholders all or a portion of their capital contributions in connection        with the sale of our properties or our company.

         

         

         

         

         

 

3

         

Alternatively, our board of directors may determine to list our shares of        common stock on a national securities exchange. Pursuant to our charter, if we do not list        our shares of common stock on a national securities exchange on or before February 1, 2016,        we will be required to either:

 

|   | **•** | seek stockholder approval of an extension or amendment to                        this listing deadline; or |
|--------|------------|------------------------------------------------------------------------------------------------------------|
|   | **•** | seek stockholder approval to adopt a plan of                        liquidation.                           |   |

         

If we do not list the shares by such date, and do not obtain stockholder        approval of an extension or amendment to the listing deadline, we then would be required to        seek stockholder approval of our plan of liquidation. If we seek and fail to obtain        stockholder approval of our plan of liquidation, our charter would not require us to list        or liquidate and we could continue to operate as before. If we seek and obtain stockholder        approval of our plan of liquidation, we would begin an orderly sale of our properties and        distribute our net proceeds from liquidation to our stockholders.

         

Our principal executive offices are located at 2555 East Camelback Road,        Suite 400, Phoenix, Arizona 85016. Our telephone number is (602) 778-8700.

         

**Investment Objectives and Policies**

 

***General***

 

Our primary investment objectives are:

 

|   | **•** | to provide current income for our stockholders through the                        payment of cash distributions;   |   |
|--------|------------|--------------------------------------------------------------------------------------------------------------------|--------|
|   | **•** | to preserve and return our stockholders’ capital                        contributions; and                   |   |
|   | **•** | to realize growth in the value of our properties upon the                        ultimate sale of such properties. |

 

Our board of directors may revise our investment policies, which we describe        in more detail below, without the concurrence of our stockholders. Our board reviews our        investment policies at least annually to determine that our policies are in the best        interest of our stockholders.

 

***Primary Investment Focus***

 

We primarily own and invest in net leased, freestanding, single-tenant,        income-generating retail properties located throughout the United States. Our current        investments are indirect investments in such properties through wholly-owned subsidiaries        of Cole OP I. We may also invest in other entities that own or invest in, directly or        indirectly, interests in such properties. We seek to own and maintain a portfolio of real        estate that is diversified by geographical location and by type and size of retail centers.        Our properties consist of real estate primarily improved for use as retail establishments        and principally are freestanding, single-tenant retail properties. However, we are not        limited to investments in single-tenant retail properties. Many of our properties are        leased to tenants in the chain or franchise retail industry, including but not limited to        convenience stores, drug stores**,**home        improvement stores, automobile dealerships and sporting goods properties. Our advisor        monitors industry trends and invests in properties that we believe to provide the most        favorable return balanced with risk. Our management targets primarily retail businesses        with established track records.

         

We believe that our focus on the acquisition of net leased, freestanding,        single-tenant, income-generating retail properties located throughout the United States        presents lower investment risks and greater stability than other sectors of today’s        commercial real estate market. Unlike funds that invest in a limited number of large        investments in large, multi-tenant properties, our portfolio is diversified into a larger        number of assets, with the result that lower than expected results of operations from one        or a few investments will not preclude our ability to realize our investment objectives of        cash flow, preservation of capital and capital appreciation from our overall portfolio. Our        management believes that freestanding retail properties, as opposed to investments in        shopping centers, malls or other large retail complexes as a whole, offer a distinct        investment advantage since these properties generally offer superior locations that are        less dependent on the financial stability of adjoining tenants. In addition, since we        acquired properties that are geographically diverse, we will reduce the potential adverse        impact of economic downturns in local markets.

 

 

 

 

4

         

We apply credit underwriting criteria to the tenants of existing properties        and when re-leasing properties in our portfolio. Tenants of our properties typically are        large national or super-regional retail chains that have significant net worth and        operating income. Generally these tenants and/or the lease guarantors are experienced        multi-unit operators with a history of success as measured by profitable unit-level store        performance and positive cash from operations.

         

Our tenants include investment grade tenants, non-investment grade tenants        and non-rated tenants. Our policy does not limit the percentage of our assets that may        consist of properties rented to non-investment grade and non-rated tenants. A tenant is        considered “investment grade” when the tenant has a debt rating by        Moody’s Investor Services of Baa3 or better or a credit rating by Standard &        Poor’s of BBB- or better, or its payments are guaranteed by a company with such a        debt rating. As of March 24, 2008, approximately 29% of all scheduled lease payments were        projected to be derived from tenants that maintain an investment grade credit rating, while        approximately 24% and 47% of scheduled lease payments are projected to be derived from        non-investment grade tenants and non-rated tenants, respectively. Changes in tenant credit        ratings, coupled with future acquisition and disposition activity, may increase or decrease        our concentration of investment grade tenants in the future.

         

A tenant is considered "non-investment grade" when the tenant has a debt        rating by either Moody's or Standard & Poor's that is below investment grade. A tenant        is considered "non-rated" if it has not been rated by a credit rating agency. Generally,        our non-investment grade tenants have significant net worth and operating income and        financial profiles that our advisor believes meet our investment objectives of cash flow,        preservation of capital and capital appreciation. In evaluating the credit worthiness of a        tenant or prospective tenant, our advisor does not use specific quantifiable standards, but        does consider many factors, including the proposed terms of the acquisition. The factors        that our advisor considers include the financial condition of the tenant and/or guarantor,        credit agency reports (if any), the operating history of the property with such tenant, the        trade area demographics surrounding the property, the tenant’s market share and track        record within its industry segment, the general health and outlook of the tenant’s        industry segment, and the lease length and terms at the time of the acquisition.

 

***Other        Possible Investments***

 

Although most of our property acquisitions are of the type described above,        we have made, and may continue to make, other investments. For example, we are not limited        to investments in single-tenant retail properties or properties leased to investment grade        tenants. Our policy does not limit the percentage of our assets that may consist of        properties rented to non-investment grade and non-rated tenants. We have invested, or may        in the future invest, in other commercial properties, such as shopping centers, business        and industrial parks, manufacturing facilities, office buildings and warehouse and        distribution facilities in order to reduce overall portfolio risks or enhance overall        portfolio returns. We made such investments only after our advisor determined that it would        be advantageous to do so. It is our policy to limit our investments in non-freestanding,        single-tenant retail properties and mortgage loans to 20% of the aggregate value of our        investment portfolio at the time of the investment in such property or mortgage. We may        exceed this policy limit with the approval of the board of directors.

         

We have not made, and do not intend to make, loans to other persons, to        underwrite securities of other issuers or to engage in the purchase and sale of any types        of investments other than interests in real estate.

 

***Investment Decisions***

 

Cole Advisors has substantial discretion with respect to the selection of        specific investments and the purchase and sale of our properties, subject to the approval        of our board of directors. In pursuing our investment objectives and making investment        decisions for us, Cole Advisors evaluates the proposed terms of the purchase against all        aspects of the transaction, including the condition and financial performance of the        property, the terms of existing leases and the creditworthiness of the tenant and/or lease        guarantor, and property and location characteristics. Because the factors considered,        including the specific weight we place on each factor, vary for each investment, we do not,        and are not able to, assign a specific weight or level of importance to any particular        factor.

 

 

 

 

 

5

 

In addition to procuring and reviewing an independent valuation estimate and        property condition report, our advisor also considers the following:

 

|   | •  | unit level store performance;                                                                                                                                                                                                                                                                                                    |   |
|--------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | •  | property location, visibility and access;                                                                                                                                                                                                                                                                                        |   |
|   | •  | age of the property, physical condition and curb                        appeal;                                                                                                                                                                                                                                                  |   |
|   | •       | the prospects for long-range appreciation and                        liquidity;                                                                                                                                                                                                                                                  |   |
|   | •       | suitability of the property for any development contemplated                        or in progress;                                                                                                                                                                                                                              |   |
|   | •       | the property’s income producing capacity;                                                                                                                                                                                                                                                                                  |   |
|   | •       | tax considerations;                                                                                                                                                                                                                                                                                                              |   |
|   | •  | neighboring property uses;                                                                                                                                                                                                                                                                                                       |   |
|   | •  | local market conditions including vacancy rates;                                                                                                                                                                                                                                                                                 |   |
|   | •  | area demographics, including trade area population and                        average household income;                                                                                                                                                                                                                          |   |
|   | •  | neighborhood growth patterns and economic                        conditions;                                                                                                                                                                                                                                                     |   |
|   | •  | presence of nearby properties that may positively impact                        store sales at the subject property; and                                                                                                                                                                                                    |   |
|   | •  | lease terms including length of lease term, scope of                        landlord responsibilities, presence and frequency of contractual rental                        increases, renewal option provisions, exclusive and permitted use                        provisions, co-tenancy requirements and termination options. |   |

         

Our advisor considers properties leased and/or guaranteed by companies that        maintain an investment grade rating by either Standard & Poor’s or Moody’s        Investor Services. Our advisor also considers non-rated and non-investment grade rated        tenants that we believe have significant net worth and operating income.

 

***Conditions to Closing Our Acquisitions***

 

Generally, we condition our obligation to close the purchase of any        investment on the delivery and verification of certain documents from the seller or        developer, including, where appropriate:

         

|   | • | plans and specifications;                                                                                                       |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|--------|
|   | • | surveys;                                                                                                                        |   |
|   | • | evidence of marketable title, subject to such liens and                        encumbrances as are acceptable to Cole Advisors; |
|   | • | financial statements covering recent operations of                        properties having operating histories;                |   |
|   | • | title and liability insurance policies; and                                                                                     |   |
|   | • | tenant estoppel certificates.                                                                                                   |   |

 

We generally will not purchase, and have not purchased, any property unless        and until we obtain what is generally referred to as a “Phase I” environmental        site assessment and are generally satisfied with the environmental status of the property.        However, we may purchase a property without obtaining such an assessment if our advisor        determines it is not warranted. A Phase I environmental site assessment basically consists        of a visual survey of the building and the property in an attempt to identify areas of        potential environmental concerns, visually observing neighboring properties to assess        surface conditions or activities that may have an adverse environmental impact on the        property, and contacting local governmental agency personnel who perform a regulatory        agency file search in an attempt to determine any known environmental concerns in the        immediate identity of the property. A Phase I environmental site assessment does not        generally include any sampling or testing of soil, ground water or building materials from        the property and may not reveal all environmental hazards on the property. We currently do        not own any properties that are in development and do not intend to acquire any properties        that are in development.

 

 

 

 

 

 

 

6

 

***Ownership Structure***

 

Our investment in real estate generally takes the form of holding fee title        or a long-term leasehold estate. We acquire such interests either directly through our        operating partnership or indirectly through limited liability companies that are        wholly-owned by our operating partnership. In addition, in certain cases we purchased        properties and leased them back to the sellers of such properties and we may engage in        these types of sale-leaseback transactions in the future. While we use our best efforts to        structure any such sale-leaseback transaction such that the lease is characterized as a        “true lease” so that we will be treated as the owner of the property for        federal income tax purposes, the Internal Revenue Service could challenge such        characterization. In the event that any such sale-leaseback transaction is re-characterized        as a financing transaction for federal income tax purposes, deductions for depreciation and        cost recovery relating to such property would be disallowed.

 

***Borrowing Policies***

 

We believe that utilizing borrowing is consistent with our investment        objective of maximizing the return to investors. The number of different properties that we        acquired has been affected by the amount of funds available to us. Accordingly, utilizing        borrowings allowed us to increase the number of our acquisitions and our diversification.        There is no limitation on the amount we can borrow for the purchase of any property or        other investment. However, we intend to limit our borrowings so that we generally will not        borrow in the aggregate in excess of 60% of the value of our real estate related assets. As        of December 31, 2007, we had approximately $118.0 million in aggregate principle amount of        borrowings outstanding, which represented approximately 57% of the aggregate value of our        real estate related assets (based on the purchase price of the assets). See “Item 2.        Properties – Mortgage Information” below.

         

***Disposition Policies***

         

We intend to hold each property we acquire for an extended period of time,        generally six to eight years. However, circumstances might arise that could result in the        early sale of some properties. We may sell a property before the end of the expected        holding period if we believe the sale of the property would be in the best interests of our        company and our stockholders. As of December 31, 2007, we had not sold any        properties.

         

The determination of whether a particular property should be sold or        otherwise disposed of will be made after consideration of relevant factors, including        prevailing economic conditions and current tenant creditworthiness, with a view to        achieving maximum capital appreciation. We cannot assure you that this objective will be        realized. The selling price of a property that is net leased will be determined in large        part by the amount of rent payable remaining under the lease. In connection with our sales        of properties we may lend the purchaser all or a portion of the purchase price. In these        instances, our taxable income may exceed the cash received in the sale. The terms of        payment will be affected by custom in the area in which the property being sold is located        and the then-prevailing economic conditions.

 

***Conflicts of Interest***

 

We are subject to various conflicts of interest arising out of our        relationship with Cole Advisors, our advisor, and its affiliates, including conflicts        related to the arrangements pursuant to which Cole Advisors and its affiliates will be        compensated by us. Additionally, each of our directors is an affiliate of Cole Advisors as        well as other Cole-sponsored real estate programs.

         

The agreements and compensation arrangements between us and our advisor and        its affiliates were not determined by arm’s-length negotiations. Some of the        conflicts of interest in our transactions with our advisor and its affiliates, and the        limitations on our advisor adopted to address these conflicts, are described        below.

         

Our advisor and its key personnel and affiliates try to balance our        interests with their duties to other Cole-sponsored programs. However, to the extent that        our advisor or its key personnel and affiliates take actions that are more favorable to        other entities than to us, these actions could have a negative impact on our financial        performance and, consequently, on distributions to our stockholders and the value of our        stock. In addition, our directors, officers and certain of our stockholders may engage for        their own account in business activities of the types conducted or to be conducted by our        subsidiaries and us.

         

 

 

 

 

7

 

***Interests in Other Real Estate Programs***

 

An affiliate of our directors and our advisor acts as an advisor to, and our        officers and a director act as officers and a director of, Cole Credit Property        Trust II, Inc., which is a real estate investment trust that has similar investment        objectives to us. Affiliates of our directors and officers and entities owned or managed by        such affiliates also may acquire or develop real estate for their own accounts, and have        done so in the past. Furthermore, affiliates of our directors and officers and entities        owned or managed by such affiliates intend to form additional real estate investment        entities in the future, whether public or private, which can be expected to have the same        or similar investment objectives and policies as we do and which may be involved in the        same geographic area. Our advisor, its affiliates and affiliates of our directors and        officers are not obligated to present to us any particular investment opportunity that        comes to their attention, even if such opportunity is of a character that might be suitable        for investment by us. Our advisor and its affiliates, as well as our officers and        directors, likely will experience conflicts of interest as they simultaneously perform        services for us and other affiliated real estate programs. Any affiliated entity, whether        or not currently existing, could compete with us in the sale or operation of the        properties. We will seek to achieve any operating efficiency or similar savings that may        result from affiliated management of competitive properties. However, to the extent that        affiliates own or acquire property that is adjacent, or in close proximity, to a property        we own, our property may compete with the affiliate’s property for tenants or        purchasers.

 

Every transaction that we enter into with our advisor or its affiliates is        subject to an inherent conflict of interest. Our board of directors may encounter conflicts        of interest in enforcing our rights against any affiliate in the event of a default by or        disagreement with an affiliate or in invoking powers, rights or options pursuant to any        agreement between us and our advisor or any of its affiliates.

 

***Other        Activities of Cole Advisors and its Affiliates***

 

We rely on Cole Advisors for the day-to-day operation of our business        pursuant to an advisory agreement. As a result of the interests of members of its        management, as well as the interests of our directors and officers, in other Cole-sponsored        programs and the fact that they have also engaged and will continue to engage in other        business activities, Cole Advisors and its key personnel and affiliates, as well as our        directors and officers, have conflicts of interest in allocating their time between us and        other Cole-sponsored programs and other activities in which they are involved. However,        Cole Advisors believes that it and its affiliates have sufficient personnel to discharge        fully their responsibilities to all of the Cole-sponsored programs and other ventures in        which they are involved.

         

Each of our directors and executive officers, including Christopher H. Cole,        who also serves as the chairman of our board of directors, also serves as an officer of our        advisor, our property manager, our dealer manager and other affiliated entities. As a        result, these individuals owe duties to these other entities that may conflict with the        duties that they owe to us and our stockholders.

         

We have purchased, and in the future may purchase properties or interests in        properties from affiliates of Cole Advisors. The prices we pay to affiliates of our advisor        for these properties will not be the subject of arm’s-length negotiations, which        could mean that the acquisitions may be on terms less favorable to us than those negotiated        with unaffiliated parties.

 

***Competition in Acquiring, Leasing and Operating of        Properties***

 

Conflicts of interest will exist to the extent that we have acquired, and in        the future may acquire, properties in the same geographic areas where properties owned by        other Cole-sponsored programs are located. In such a case, a conflict could arise in the        leasing of properties in the event that we and another Cole-sponsored program were to        compete for the same tenants in negotiating leases, or a conflict could arise in connection        with the resale of properties in the event that we and another Cole-sponsored program were        to attempt to sell similar properties at the same time. Conflicts of interest may also        exist at such time as we or our affiliates managing property on our behalf seek to employ        developers, contractors or building managers, as well as under other circumstances. Cole        Advisors seeks to reduce conflicts relating to the employment of developers, contractors or        building managers by making prospective employees aware of all such properties seeking to        employ such persons. In addition, Cole Advisors seeks to reduce conflicts that may arise        with respect to properties available for sale or rent by making prospective purchasers or        tenants aware of all such properties. However, these conflicts cannot be fully avoided in        that there may be established differing compensation arrangements for employees at        different properties or differing terms for resale or leasing of the various        properties.

 

 

 

8

 

***Affiliated Dealer Manager***

 

Cole Capital Corporation (“Cole Capital”), an affiliate of Cole        Advisors, acted as the dealer manager in our Offering. As a result, we did not have the        benefit of an independent due diligence review and investigation of the type normally        performed by an unaffiliated, independent underwriter in connection with our Offering.        During the period from inception (March 29, 2004) to September 16, 2005, when we completed        our Offering, we paid an aggregate of approximately $6,427,000 in commissions and        approximately $2,527,000 in dealer manager fees in connection with our Offering. Cole        Capital reallowed all of the commissions and approximately $597,000 of the dealer manager        fees to non-affiliated third party broker-dealers in connection with the sale of shares in        the Offering.

 

***Affiliated Property Manager***

 

Our properties are, and we anticipate that properties we acquire in the        future, if any, will be, managed and leased by our affiliated property manager, Cole Realty        Advisors, Inc. (“Cole Realty”), pursuant to a property management and leasing        agreement. Cole Realty also serves as property manager for properties owned by Cole        affiliated real estate programs, some of which may be in competition with our properties.        Management fees to be paid to our property manager are based on a percentage of the rental        income received by the managed properties.

         

***Lack        of Separate Representation***

 

Morris, Manning & Martin, LLP acts, and may in the future act, as        counsel to us, Cole Advisors, and certain of our respective affiliates. There is a        possibility that in the future the interests of the various parties may become adverse, and        under the Code of Professional Responsibility of the legal profession, Morris, Manning        & Martin, LLP may be precluded from representing any one or all of such parties. In the        event that a dispute were to arise between us, Cole Advisors, or any of our respective        affiliates, separate counsel for such matters will be retained as and when        appropriate.

 

***Receipt of Fees and Other Compensation by Cole Advisors and Its        Affiliates***

 

We paid, and will continue to pay, fees to Cole Advisors and its affiliates        in connection with our operation, purchases and sales of properties, commissions, fees and        other compensation, including acquisition and advisory fees, the dealer manager fee,        property management and leasing fees, real estate brokerage commissions and participation        in nonliquidating net sale proceeds. However, the fees and compensation payable to Cole        Advisors and its affiliates relating to the net sale proceeds from the sale of properties        will only be payable after the return to the stockholders of their capital contributions        plus cumulative returns on such capital. Subject to oversight by our board of directors,        Cole Advisors will have considerable discretion with respect to all decisions relating to        the terms and timing of all transactions. Therefore, Cole Advisors may have conflicts of        interest concerning certain actions taken on our behalf, particularly due to the fact that        such fees will generally be payable to Cole Advisors and its affiliates regardless of the        quality of the properties acquired or the services provided to us.

 

***Policies With Respect to Conflicts of Interest***

 

In order to reduce or eliminate certain potential conflicts of interest, we        adopted certain policies relating to transactions we enter into with our affiliates and        allocation of investment opportunities among affiliated entities.

         

*Transactions with Affiliates*. Our policy is        that the terms on which our relationships are conducted with our advisor or any of its        affiliates will be fair to us and on terms and conditions no less favorable to us than can        be obtained from independent third parties for comparable services in the same        location.

         

*Conflict Resolution Procedures with Respect to Acquisition of        Properties*. We and our advisor and its affiliates have agreed on        certain steps to eliminate potential conflicts in connection with selecting properties for        purchase when the property is suitable, under all of the factors considered by our advisor,        for us and one or more other entities affiliated with our advisor. The affiliated parties        will first consider which programs have funds for investment and will offer the property        first to the program that has had the largest period of time elapse since it was offered an        investment opportunity. In determining suitability, the factors that will be considered        include cash requirements of each program, the effect of the acquisition on diversification        by type of property, geographic area and type of tenant, anticipated cash flow, purchase        price, and size of the investment. We and our advisor reserve the right to make adjustments        in such determinations if delays occur and an acquisition does not close when        anticipated.

 

 

9

 

***Employees***

 

We have no direct employees. The employees of Cole Advisors and other        affiliates of our advisor provide services for us related to acquisition, property        management, asset management, accounting, investor relations, and all other administrative        services.

         

We are dependent on our advisor and its affiliates for services that are        essential to us, including asset acquisition and disposition decisions, property management        and other general administrative responsibilities. In the event that these companies were        unable to provide these services to us, we would be required to obtain such services from        other sources.

         

We may reimburse Cole Advisors and its affiliates for expenses incurred in        connection with its provision of administrative services to us, including personnel costs,        subject to certain limitations. During the years ended December 31, 2007 and 2006, no        amounts were reimbursed to Cole Advisors and its affiliates for such services.

 

***Insurance***

 

Generally, our leases require each tenant to procure, at its own expense,        commercial general liability insurance, as well as property insurance covering the building        for the full replacement value and naming the ownership entity and the lender, if        applicable, as the additional insured on the policy. As a precautionary measure, our        advisor may obtain, to the extent available, secondary liability insurance, as well as loss        of rents insurance that covers one year of annual rent in the event of a rental loss. The        secondary insurance coverage names the ownership entity as the named insured on the        policy.

         

Some leases require that we procure the insurance for both commercial        general liability and property damage insurance; however, the premiums are fully        reimbursable from the tenant. In the event we procure such insurance, the policy lists us        as the named insured on the policy and the tenant as the additional insured.

         

Tenants are required to provide proof of insurance by furnishing a        certificate of insurance to our advisor on an annual basis. The insurance certificates are        tracked and reviewed for compliance by our property manager.

 

***Competition***

 

As we purchase properties for our portfolio, we are in competition with        other potential buyers for the same properties, and may have to pay more to purchase the        property then we would if there were no other potential acquirers or will have to locate        another property that meets our investment criteria. Although our properties currently are        100% leased and we have acquired, and intend to continue to acquire, properties subject to        existing leases, the leasing of real estate is highly competitive in the current market,        and we may experience competition for tenants from owners and managers of competing        projects. As a result, we may have to provide free rent, incur charges for tenant        improvements, or offer other inducements, or we might not be able to timely lease the        space, all of which may have an adverse impact on our results of operations. At the time we        elect to dispose of our properties, we will also be in competition with sellers of similar        properties to locate suitable purchasers for its properties.

 

***Concentration of Credit Risk***

 

At December 31, 2007, we had cash on deposit in two financial institutions,        which were approximately $229,000 and $442,000 in excess of federally insured levels,        respectively; however, we have not experienced any losses in such accounts. We limit        investment of cash investments to financial institutions with high credit standing;        therefore, we believe we are not exposed to any significant credit risk on cash.

 

As of December 31, 2007, three tenants in the drugstore industry, one tenant        in the auto sales industry and one tenant in the home improvement industry accounted for        approximately 36%, 10%, and 10%, respectively, of our 2007 gross annualized base rental        revenues. Additionally we have certain geographic concentration in our property holdings.        In particular, as of December 31, 2007, eight of our properties were located in Texas and        five of our properties were located in Kansas, accounting for approximately 24% and 17%,        respectively, of our 2007 gross annualized base rental revenues.

 

 

 

 

10

 

***Litigation***

 

In the ordinary course of business, we may become subject to litigation or        claims. There are no material pending legal proceedings, or known to be contemplated,        against us.

 

***Environmental Matters***

 

In connection with the ownership and operation of real estate, we may be        potentially liable for costs and damages related to environmental matters. We have not been        notified by any governmental authority of any non-compliance, liability or other claim, and        we are not aware of any other environmental condition that we believe will have a material        adverse effect on the consolidated results of operations.

         

***Available Information***

 

We electronically file an annual report on Form 10-K, quarterly reports        on Form 10-Q, current reports on Form 8-K and all amendments to those reports        with the SEC. We have also filed a registration statement on Form 10-SB, as amended. Copies        of our filings with the SEC may be obtained from the SEC’s website, athttp://www.sec.gov. Access to these filings is        free of charge.

 

***Requirements for Qualification as a REIT***

 

We qualified as a REIT commencing with the taxable year ended December 31,        2004. To continue to qualify as a REIT, we must meet, and we must continue to meet, certain        requirements relating to our organization, sources of income, nature of assets,        distributions of income to our stockholders and recordkeeping. Accordingly, to the extent        we continue to meet the REIT qualifications, we generally will not be subject to federal        corporate income tax so long as we distribute at least 90% of our REIT taxable income to        our stockholders.

         

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 also will 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.

 

| **ITEM 1A.** | **RISK FACTORS** |
|--------------|------------------|

         

Not required for a smaller reporting company.

 

| **ITEM 1B.** | **UNRESOLVED STAFF COMMENTS** |
|--------------|-------------------------------|

         

Not required for a smaller reporting company.

 

| **ITEM 2.** | **PROPERTIES** |
|-------------|----------------|

 

**Overview**

 

As of December 31, 2007, we owned 42 freestanding, single-tenant, retail        properties with an aggregate purchase price of approximately $198.5 million, exclusive of        closing costs. During 2007, we purchased one investment property for a purchase price of        approximately $3.1 million, exclusive of closing costs. 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. We currently have no plans to dispose of any of our        properties.

         

We have included a description of the types of real estate in which we may        invest, and our investment policies and limitations on investment and the competitive        conditions in which we operate under “Item 1. Business” above. We believe our        properties are suitable for their intended use and are adequately insured. We have no plans        for renovation or improvement of such properties.

         

         

 

11

         

As of December 31, 2007, through separate wholly-owned subsidiaries of our        operating partnership, we owned a 100% fee simple interest in the following properties,        each of which is 100% leased to single tenants with an average remaining lease term of        approximately 12 years:

         

| **Property**               |   | **Acquisition Date** |   | **Location**        |   | **Square Feet** |   | **Purchase Price** |        | **2007 Annualized Gross Base Rent** |   | **2007 Rent Per Square Foot** |   | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|----------------------------|--------|----------------------|--------|---------------------|--------|-----------------|--------|--------------------|-------------|-------------------------------------|--------|-------------------------------|--------|--------------------------------------------------------------------------------|--------|
| Wawa convenience store     |   | July 2004            |   | Vineland, NJ        |   | 5,603           |   | $                  | 4,499,389   |                                | $      | 361,262                       |   | $                                                                              | 64.48  |   | 2.28 | % |
| Wawa convenience store     |   | July 2004            |   | Newark, DE          |   | 5,600           |   |               | 4,496,177   |                                |   | 399,513                       |   |                                                                           | 71.34  |   | 2.52 | % |
| Wawa convenience store     |   | July 2004            |   | Clifton Heights, PA |   | 4,694           |   |               | 3,769,433   |                                |   | 361,262                       |   |                                                                           | 76.96  |   | 2.28 | % |
| Walgreens drugstore        |   | August 2004          |   | Houston, TX         |   | 12,851          |   |               | 2,195,000   |                                |   | 177,804                       |   |                                                                           | 13.84  |   | 1.12 | % |
| Walgreens drugstore        |   | September 2004       |   | Lawrence, KS        |   | 12,885          |   |               | 2,721,000   |                                |   | 217,750                       |   |                                                                           | 16.90  |   | 1.37 | % |
| Rite Aid drugstore         |   | October 2004         |   | Memphis, TN         |   | 11,064          |   |               | 3,400,000   |                                |   | 329,691                       |   |                                                                           | 29.80  |   | 2.08 | % |
| Rite Aid drugstore         |   | October 2004         |   | Warren, OH          |   | 11,267          |   |               | 3,255,000   |                                |   | 300,208                       |   |                                                                           | 26.64  |   | 1.89 | % |
| CarMax auto dealership     |   | November 2004        |   | Merriam, KS         |   | 55,466          |   |               | 18,350,000  |                                |   | 1,630,094                     |   |                                                                           | 29.39  |   | 10.28 | % |
| Walgreens drugstore        |   | November 2004        |   | Cahokia, IL         |   | 13,422          |   |               | 2,373,500   |                                |   | 192,890                       |   |                                                                           | 14.37  |   | 1.22 | % |
| Walgreens drugstore        |   | November 2004        |   | Cleveland, OH       |   | 13,500          |   |               | 2,225,000   |                                |   | 178,600                       |   |                                                                           | 13.23  |   | 1.13 | % |
| Lowe's home improvement    |   | December 2004        |   | Texas City, TX      |   | 130,497         |   |               | 11,000,000  |                                |   | 862,585                       |   |                                                                           | 6.61   |   | 5.44 | % |
| Lowe's home improvement    |   | January 2005         |   | Jonesboro, AR       |   | 126,405         |   |               | 10,400,000  |                                |   | 754,637                       |   |                                                                           | 5.97   |   | 4.76 | % |
| CVS drugstore              |   | March 2005           |   | Whiteville, NC      |   | 10,055          |   |               | 2,670,000   |                                |   | 186,150                       |   |                                                                           | 18.51  |   | 1.17 | % |
| Rite Aid drugstore         |   | April 2005           |   | Bangor, ME          |   | 13,100          |   |               | 4,250,000   |                                |   | 354,715                       |   |                                                                           | 27.08  |   | 2.24 | % |
| Tractor Supply specialty   |   | April 2005           |   | Woodstock, VA       |   | 22,670          |   |               | 3,015,000   |                                |   | 232,398                       |   |                                                                           | 10.25  |   | 1.47 | % |
| Sherwin Williams specialty |   | May 2005             |   | Angola, IN          |   | 5,010           |   |               | 1,091,500   |                                |   | 86,129                        |   |                                                                           | 17.19  |   | 0.54 | % |
| Sherwin Williams specialty |   | May 2005             |   | Ashtabula, OH       |   | 5,400           |   |               | 758,560     |                                |   | 60,177                        |   |                                                                           | 11.14  |   | 0.38 | % |
| Sherwin Williams specialty |   | May 2005             |   | Boardman, OH        |   | 6,000           |   |               | 915,140     |                                |   | 72,391                        |   |                                                                           | 12.07  |   | 0.46 | % |
| Apria Healthcare medical   |   | May 2005             |   | Indianapolis, IN    |   | 82,750          |   |               | 7,100,000   |                                |   | 547,773                       |   |                                                                           | 6.62   |   | 3.46 | % |
| Gander Mountain sporting   |   | May 2005             |   | Houston, TX         |   | 88,492          |   |               | 12,886,000  |                                |   | 1,147,486                     |   |                                                                           | 12.97  |   | 7.24 | % |
| CVS drugstore              |   | June 2005            |   | Lago Vista, TX      |   | 13,813          |   |               | 4,847,860   |                                |   | 378,133                       |   |                                                                           | 27.38  |   | 2.39 | % |
| CVS drugstore              |   | June 2005            |   | Duncanville, TX     |   | 10,908          |   |               | 3,287,000   |                                |   | 240,162                       |   |                                                                           | 22.02  |   | 1.52 | % |
| CVS drugstore              |   | June 2005            |   | Independence, MO    |   | 10,908          |   |               | 3,878,000   |                                |   | 282,975                       |   |                                                                           | 25.94  |   | 1.79 | % |
| Rite Aid drugstore         |   | June 2005            |   | Murfreesboro, TN    |   | 11,200          |   |               | 3,538,000   |                                |   | 274,584                       |   |                                                                           | 24.52  |   | 1.73 | % |
| CineMagic movie theatre    |   | June 2005            |   | Rochester, MN       |   | 45,455          |   |               | 7,400,000   |                                |   | 677,721                       |   |                                                                           | 14.91  |   | 4.28 | % |
| Rite Aid drugstore         |   | June 2005            |   | Spartanburg, SC     |   | 13,824          |   |               | 5,239,773   |                                |   | 392,983                       |   |                                                                           | 28.43  |   | 2.48 | % |
| Rite Aid drugstore         |   | June 2005            |   | Wheelersburg, OH    |   | 10,650          |   |               | 2,123,000   |                                |   | 178,896                       |   |                                                                           | 16.80  |   | 1.13 | % |
| Rite Aid drugstore         |   | June 2005            |   | Philadelphia, PA    |   | 11,361          |   |               | 4,140,000   |                                |   | 315,459                       |   |                                                                           | 27.77  |   | 1.99 | % |
| Rite Aid drugstore         |   | July 2005            |   | Hayes, VA           |   | 13,813          |   |               | 4,266,000   |                                |   | 319,950                       |   |                                                                           | 23.16  |   | 2.02 | % |
| Rite Aid drugstore         |   | July 2005            |   | Travelers Rest, SC  |   | 13,813          |   |               | 4,826,493   |                                |   | 361,978                       |   |                                                                           | 26.21  |   | 2.28 | % |
| Tractor Supply specialty   |   | July 2005            |   | Paducah, KY         |   | 21,688          |   |               | 2,158,600   |                                |   | 173,406                       |   |                                                                           | 8.00   |   | 1.09 | % |
| Rite Aid drugstore         |   | July 2005            |   | St. Marys, OH       |   | 14,564          |   |               | 3,050,000   |                                |   | 247,690                       |   |                                                                           | 17.01  |   | 1.56 | % |
| Walgreens drugstore        |   | August 2005          |   | Hutchinson, KS      |   | 14,395          |   |               | 5,325,600   |                                |   | 346,164                       |   |                                                                           | 24.05  |   | 2.18 | % |
| Walgreens drugstore        |   | August 2005          |   | Newton, KS          |   | 14,444          |   |               | 4,447,015   |                                |   | 289,056                       |   |                                                                           | 20.01  |   | 1.82 | % |
| Tractor Supply specialty   |   | August 2005          |   | Glasgow, KY         |   | 21,688          |   |               | 2,524,000   |                                |   | 202,421                       |   |                                                                           | 9.33   |   | 1.28 | % |
| Best Buy electronics       |   | August 2005          |   | Tupelo, MS          |   | 20,000          |   |               | 4,164,000   |                                |   | 297,800                       |   |                                                                           | 14.89  |   | 1.88 | % |
| Conns appliance retailer   |   | August 2005          |   | Austin, TX          |   | 24,960          |   |               | 4,800,000   |                                |   | 379,325                       |   |                                                                           | 15.20  |   | 2.39 | % |
| Conns appliance retailer   |   | August 2005          |   | Pecan Park, TX      |   | 24,960          |   |               | 4,675,000   |                                |   | 367,684                       |   |                                                                           | 14.73  |   | 2.32 | % |
| Conns appliance retailer   |   | August 2005          |   | Hurst, TX           |   | 25,230          |   |               | 2,625,000   |                                |   | 206,850                       |   |                                                                           | 8.20   |   | 1.31 | % |
| Vanguard car rental        |   | September 2005       |   | College Park, GA    |   | 23,360          |   |               | 14,375,000  |                                |   | 1,030,590                     |   |                                                                           | 44.12  |   | 6.5 | % |
| Rite Aid drugstore         |   | September 2005       |   | Buxton, ME          |   | 11,180          |   |               | 2,402,000   |                                |   | 204,147                       |   |                                                                           | 18.26  |   | 1.29 | % |
| Tractor Supply specialty   |   | August 2007          |   | Topeka, KS          |   | 24,727          |   |               | 3,050,000   |                                |   | 228,589                       |   |                                                                           | 9.24   |   | 1.44 | % |
|                       |   |                 |   |                |   | 1,033,672       |   | $                  | 198,513,040 |                                | $      | 15,850,078                    |   |                                                                           |   |   | 100 | % |

         

         

         

12

 

**Mortgage        Information**

 

At December 31, 2007, each of our properties was encumbered by a mortgage        note obligation and we had a total of approximately $118.0 million of fixed rate debt        outstanding. The fixed rate mortgage notes require monthly interest-only payments with the        principal balance due on various dates from November 2009 through September 2017. The        weighted average interest rate relating to the fixed rate mortgage notes at each of        December 31, 2007 and 2006 was approximately 5.76% and 5.51%, respectively. Each of the        mortgage notes are secured by the respective property. The mortgage notes are generally        non-recourse to the Company and Cole OP I, but both are liable for customary non-recourse        carve-outs.

         

Generally, the mortgage notes may not be prepaid, in whole or in part,        except under the following circumstances: (i) full prepayment may be made on any of        the three monthly payment dates occurring immediately prior to the maturity date, and        (ii) partial prepayments resulting from the application of insurance or condemnation        proceeds to reduce the outstanding principal balance of the mortgage notes. Notwithstanding        the prepayment limitations, the Company may sell the properties to a buyer that assumes the        respective mortgage loan. The transfer would be subject to the conditions set forth in the        individual property’s mortgage note document, including without limitation, the        lender’s approval of the proposed buyer and the payment of the lender’s fees,        costs and expenses associated with the sale of the property and the assumption of the        loan.

         

In the event that a mortgage note is not paid off on the respective maturity        date, most of our mortgage notes include hyper-amortization provisions. Under the        hyper-amortization provisions, the individual mortgage note maturity date would be extended        by 20 years. During such period, the lender would apply 100% of the rents collected to the        following items in the order indicated: (i) payment of accrued interest at the        original fixed interest rate, (ii) all payments for escrow or reserve accounts, (iii) any        operating expenses of the property pursuant to an approved annual budget, (iv) any        extraordinary expenses and (v) the balance of the rents collected will be applied to the        following in such order as the lender may determine: (1) any other amounts due in        accordance with the loan documents, (2) the reduction of the principal balance of the        mortgage note, and (3) capitalized interest at an interest rate equal to the greater        of (A) the initial fixed interest rate as stated on the respective mortgage note agreement        plus 2.0% per annum or (B) the then current Treasury Constant Maturity Yield Index plus        2.0% per annum.

 

**Property        Statistics**

 

The        following table shows the geographic diversification of our portfolio as of        December 31, 2007:

 

|  

**Location** |   | **Total Number of Properties** |   | **Rentable Square Feet** |   | **2007 Annualized Gross Base Rent** |       | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|----------------------|--------|--------------------------------|--------|--------------------------|--------|-------------------------------------|------------|--------------------------------------------------------------------------------|--------|
| Texas                |   | 8                              |   | 331,711                  |   | $                                   | 3,760,029  |                                                                           | 24     | % |
| Kansas               |   | 5                              |   | 121,917                  |   |                                | 2,711,653  |                                                                           | 17     | % |
| Ohio                 |   | 6                              |   | 61,381                   |   |                                | 1,037,962  |                                                                           | 7      | % |
| Georgia              |   | 1                              |   | 23,360                   |   |                                | 1,030,590  |                                                                           | 7      | % |
| South Carolina       |   | 2                              |   | 27,637                   |   |                                | 754,961    |                                                                           | 5      | % |
| Arkansas             |   | 1                              |   | 126,405                  |   |                                | 754,637    |                                                                           | 5      | % |
| Minnesota            |   | 1                              |   | 45,455                   |   |                                | 677,721    |                                                                           | 4      | % |
| Pennsylvania         |   | 2                              |   | 16,055                   |   |                                | 676,721    |                                                                           | 4      | % |
| Indiana              |   | 2                              |   | 87,760                   |   |                                | 633,902    |                                                                           | 4      | % |
| Tennessee            |   | 2                              |   | 22,264                   |   |                                | 604,275    |                                                                           | 4      | % |
| Maine                |   | 2                              |   | 24,280                   |   |                                | 558,862    |                                                                           | 3      | % |
| Virginia             |   | 2                              |   | 36,483                   |   |                                | 552,348    |                                                                           | 3      | % |
| Delaware             |   | 1                              |   | 5,600                    |   |                                | 399,513    |                                                                           | 3      | % |
| Kentucky             |   | 2                              |   | 43,376                   |   |                                | 375,827    |                                                                           | 2      | % |
| New Jersey           |   | 1                              |   | 5,603                    |   |                                | 361,262    |                                                                           | 2      | % |
| Mississippi          |   | 1                              |   | 20,000                   |   |                                | 297,800    |                                                                           | 2      | % |
| Missouri             |   | 1                              |   | 10,908                   |   |                                | 282,975    |                                                                           | 2      | % |
| Illinois             |   | 1                              |   | 13,422                   |   |                                | 192,890    |                                                                           | 1      | % |
| North Carolina       |   | 1                              |   | 10,055                   |   |                                | 186,150    |                                                                           | 1      | % |
|                 |   | 42                             |   | 1,033,672                |   | $                                   | 15,850,078 |                                                                           | 100    | % |

 

 

 

13

The        following table shows the tenant industry diversification of our portfolio as of        December 31, 2007:

 

|  

**Industry** |   | **Total Number of Leases** |   | **Rentable Square Feet** |   | **2007 Annualized Gross Base Rent** |       | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|----------------------|--------|----------------------------|--------|--------------------------|--------|-------------------------------------|------------|--------------------------------------------------------------------------------|--------|
| Drugstore            |   | 21                         |   | 263,017                  |   | $                                   | 5,769,985  |                                                                           | 36     | % |
| Auto sales           |   | 1                          |   | 55,466                   |   |                                | 1,630,094  |                                                                           | 10     | % |
| Home improvement     |   | 2                          |   | 256,902                  |   |                                | 1,617,222  |                                                                           | 10     | % |
| Sporting goods       |   | 1                          |   | 88,492                   |   |                                | 1,147,486  |                                                                           | 7      | % |
| Convenience store    |   | 3                          |   | 15,897                   |   |                                | 1,122,037  |                                                                           | 7      | % |
| Specialty retail     |   | 7                          |   | 107,183                  |   |                                | 1,055,511  |                                                                           | 7      | % |
| Car rental           |   | 1                          |   | 23,360                   |   |                                | 1,030,590  |                                                                           | 7      | % |
| Appliance store      |   | 3                          |   | 75,150                   |   |                                | 953,859    |                                                                           | 6      | % |
| Theatre              |   | 1                          |   | 45,455                   |   |                                | 677,721    |                                                                           | 4      | % |
| Healthcare           |   | 1                          |   | 82,750                   |   |                                | 547,773    |                                                                           | 4      | % |
| Electronics          |   | 1                          |   | 20,000                   |   |                                | 297,800    |                                                                           | 2      | % |
|                 |   | 42                         |   | 1,033,672                |   | $                                   | 15,850,078 |                                                                           | 100    | % |

 

The        following table shows the tenant diversification of our portfolio as of December 31,        2007:

 

|  

**Tenant**                  |   | **Total Number of Leases** |   | **Rentable Square Feet** |   | **2007 Annualized Gross Base Rent** |       | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|-------------------------------------|--------|----------------------------|--------|--------------------------|--------|-------------------------------------|------------|--------------------------------------------------------------------------------|--------|
| Rite Aid drugstore                  |   | 11                         |   | 135,836                  |   | $                                   | 3,280,301  |                                                                           | 21     | % |
| CarMax auto dealership              |   | 1                          |   | 55,466                   |   |                                | 1,630,094  |                                                                           | 10     | % |
| Lowe’s home improvement       |   | 2                          |   | 256,902                  |   |                                | 1,617,222  |                                                                           | 10     | % |
| Walgreens drugstore                 |   | 6                          |   | 81,497                   |   |                                | 1,402,264  |                                                                           | 9      | % |
| Gander Mountain sporting goods      |   | 1                          |   | 88,492                   |   |                                | 1,147,486  |                                                                           | 7      | % |
| Wawa convenience store              |   | 3                          |   | 15,897                   |   |                                | 1,122,037  |                                                                           | 7      | % |
| CVS drugstore                       |   | 4                          |   | 45,684                   |   |                                | 1,087,420  |                                                                           | 7      | % |
| Vanguard car rental                 |   | 1                          |   | 23,360                   |   |                                | 1,030,590  |                                                                           | 7      | % |
| Conns appliance retailer            |   | 3                          |   | 75,150                   |   |                                | 953,859    |                                                                           | 6      | % |
| Tractor Supply specialty retailer   |   | 4                          |   | 90,773                   |   |                                | 836,814    |                                                                           | 5      | % |
| CineMagic movie theater             |   | 1                          |   | 45,455                   |   |                                | 677,721    |                                                                           | 4      | % |
| Apria medical                       |   | 1                          |   | 82,750                   |   |                                | 547,773    |                                                                           | 4      | % |
| Best Buy electronics retailer       |   | 1                          |   | 20,000                   |   |                                | 297,800    |                                                                           | 2      | % |
| Sherwin Williams specialty retailer |   | 3                          |   | 16,410                   |   |                                | 218,697    |                                                                           | 1      | % |
|                                |   | 42                         |   | 1,033,672                |   | $                                   | 15,850,078 |                                                                           | 100    | % |

 

The following table shows lease expirations of our portfolio as of        December 31, 2007, during each of the next ten years and thereafter, assuming no        exercise of renewal options or termination rights:

 

|  

**Year of Lease Expiration** |   | **Total Number of Leases** |   | **Rentable Square Feet Expiring** |   | **2007 Annualized Gross Base Rent** |       | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|--------------------------------------|--------|----------------------------|--------|-----------------------------------|--------|-------------------------------------|------------|--------------------------------------------------------------------------------|--------|
| 2008 – 2012                    |   | 0                          |   | –                           |   | $                                   | –    |                                                                           | 0      | % |
| 2013                                 |   | 1                          |   | 12,885                            |   |                                | 217,750    |                                                                           | 1      | % |
| 2014                                 |   | 6                          |   | 177,578                           |   |                                | 1,436,499  |                                                                           | 9      | % |
| 2015                                 |   | 3                          |   | 218,257                           |   |                                | 1,496,487  |                                                                           | 9      | % |
| 2016                                 |   | 1                          |   | 20,000                            |   |                                | 297,800    |                                                                           | 2      | % |
| 2017                                 |   | 2                          |   | 49,920                            |   |                                | 747,009    |                                                                           | 5      | % |
| Thereafter                           |   | 29                         |   | 555,032                           |   |                                | 11,654,533 |                                                                           | 74     | % |
|                                 |   | 42                         |   | 1,033,672                         |   | $                                   | 15,850,078 |                                                                           | 100    | % |

 

14

**Leases**

 

Although there are variations in the specific terms of the leases of our        properties, the following is a summary of the general structure of our leases. Generally,        the leases of our properties provide for initial terms of ten to 20 years. As of        December 31, 2007, the average remaining lease term was approximately 12 years. The        properties are generally leased under net leases pursuant to which the tenant bears        responsibility for substantially all property costs and expenses associated with ongoing        maintenance and operation, including utilities, property taxes and insurance. The leases of        our properties provide for annual base rental payments (payable in monthly installments)        ranging from approximately $60,000 to approximately $1.6 million, with an average of        approximately $377,000. Certain leases provide for limited increases in rent as a result of        fixed increases, increases in the consumer price index, and/or increases in the        tenant’s sales volume.

         

Generally, the property leases provide the tenant with one or more        multi-year renewal options, subject to generally the same terms and conditions as the        initial lease term. Certain leases also provide that in the event we wish to sell the        property subject to that lease, we first must offer the lessee the right to purchase the        property on the same terms and conditions as any offer which we intend to accept for the        sale of the property.

 

| **ITEM 3.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

In the ordinary course of business, we may become subject to litigation or        claims. There are no material pending legal proceedings or proceedings known to be        contemplated against us or any of our subsidiaries, or which any of our properties is the        subject.

 

| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY                        HOLDERS** |
|-------------|--------------------------------------------------------------------------------|

 

We did not submit any matters to a vote of our stockholders, through the        solicitation of proxies or otherwise, during the fourth quarter of the year ended December        31, 2007.

 

15

**PART        II**

 

| **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED                        STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY                        SECURITIES** |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Market        Information**

 

On April 26, 2004, we commenced the Offering. We completed the Offering on        September 16, 2005, which raised aggregate gross proceeds of $100,331,320 through the sale        of an aggregate of 10,097,251 shares of our common stock. As of March 24, 2008, 10,090,951        shares of our common stock were issued and outstanding, and were held by 1,466 stockholders        of record. The number of stockholders is based on the records of Phoenix American Financial        Services, Inc., who serves as our registrar and transfer agent.

         

There is no established trading market for our common stock. Therefore,        there is a risk that a stockholder may not be able to sell our stock at a time or price        acceptable to the stockholder, or at all. Pursuant to the Offering, we sold shares of our        common stock to our stockholders generally at a price of $10.00 per share.        Additionally, we provided discounts in our Offering for certain categories of purchasers,        including discounts based on the volume of purchases by single purchasers and certain of        their affiliates. Under our charter, certain restrictions are imposed on the ownership and        transfer of shares. The shares, which are “restricted securities” as defined in        Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act,        must be held indefinitely unless they are subsequently registered under the Securities Act        and any applicable state securities laws or unless, upon the advice of counsel satisfactory        to us, the shares are sold in a transaction that is exempt from the registration        requirements of such laws. Currently, no shares of our common stock are eligible for sale        under Rule 144.

         

We may seek to list our shares of common stock on a securities exchange or        inter-dealer quotation system if our board of directors believes listing would be in the        best interest of our stockholders. In making the decision to apply for listing of our        shares or providing other forms of liquidity, such as selling our properties and other        assets, either on a portfolio basis or individually, or engaging in a business combination        transaction approved by our board of directors, our board of directors will evaluate        whether listing the shares or liquidating would result in greater value for our        stockholders. It cannot be determined at this time the circumstances, if any, under which        the board of directors would determine to list the shares. If we do not list our shares of        common stock on a national securities exchange by February 1, 2016, our charter requires        that we either:

         

|   | **•** | seek stockholder approval of an extension or amendment of                        this listing deadline; or |
|--------|------------|------------------------------------------------------------------------------------------------------------|
|   | **•** | seek stockholder approval to adopt a plan of liquidation of                        the corporation.        |   |

 

If we sought and did not obtain stockholder approval of an extension or        amendment to the listing deadline, we would then be required to seek stockholder approval        of our plan of liquidation. If we sought and failed to obtain stockholder approval of our        plan of liquidation, our charter would not require us to list or liquidate, and we would        continue to operate as before. If we sought and obtained stockholder approval of our plan        of liquidation, we would begin an orderly sale of our properties and distribute our net        proceeds to our investors.

         

Unless and until our shares are listed on a national securities exchange, it        is not expected that a public market for our shares will develop. To assist fiduciaries of        plans subject to the annual reporting requirements of ERISA and IRA trustees or custodians        to prepare reports relating to an investment in our shares, we intend to provide reports of        our quarterly and annual determinations of the current value of our net assets per        outstanding share to those fiduciaries (including IRA trustees and custodians) who identify        themselves to us and request the reports. Until two years after the Offering and, if we        subsequently offer our shares in another offering, until two years after any subsequent        offering of our shares, we intend to use the offering price of shares in our most recent        offering as the per share net asset value. Beginning two years after the last offering of        our shares, the value of our properties and other assets for plan purposes will be based on        valuations of our properties or of our enterprise as a whole as our board determines        appropriate. Such valuations have been performed by our advisor.

 

16

There can be no assurance, however, with respect to any estimate of value        that we prepare, that:

         

|   | **•** | the estimated value per share would actually be realized by                        our stockholders upon liquidation, because these estimates do not                        necessarily indicate the price at which properties can be sold; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | our stockholders would be able to realize estimated net                        asset values if they were to attempt to sell their shares, because no                        public market for our shares exists or is likely to develop; or |
|   | **•** | that the value, or method used to establish value, would                        comply with ERISA or Internal Revenue Code requirements described                        above.                                                             |

 

There are no outstanding options or warrants to purchase, or securities        convertible into, shares of our common stock. The limited partners of our operating        partnership have the right to cause their limited partnership units to be redeemed by the        operating partnership or purchased by us for cash. In either event, the cash amount to be        paid will be equal to the cash value of the number of our shares of common stock that would        be issuable if the limited partnership units were exchanged for our shares of common stock        on a one-for-one basis. Alternatively, we may elect to purchase the limited partnership        units by issuing one share of our common stock for each limited partnership unit exchanged.        These exchange rights may not be exercised, however, if and to the extent that the delivery        of shares upon exercise would (1) result in any person owning shares in excess of our        ownership limits, (2) result in shares being owned by fewer than 100 persons, (3)        cause us to be “closely held” within the meaning of Section 856(h) of the        Internal Revenue Code, (4) cause us to own 10.0% or more of the ownership interests in a        tenant within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code, or (5)        cause the acquisition of shares by a redeemed limited partner to be        “integrated” with any other distribution of our shares for purposes of        complying with the Securities Act. As of March 24, 2008, an aggregate of 9 limited        partnership units in our operating partnership were issued and outstanding, all of which        are held by our advisor. We are the sole general partner of the operating partnership and,        as of March 24, 2008, we owned an approximately 99.99% equity percentage interest in the        operating partnership. Our advisor is the only limited partner and the owner of the other        approximately 0.01% equity percentage interest in the operating partnership.

 

**Share        Redemption Program**

 

In order to provide stockholders with the possibility of liquidity,        stockholders who have held their shares of common stock for at least one year may receive        the benefit of limited interim liquidity by presenting for redemption all or a minimum        portion of their shares to us at any time in accordance with the procedures outlined below.        At that time, we may, subject to the conditions and limitations described below, redeem the        shares presented for redemption for cash to the extent that we have sufficient funds        available to us to fund such redemption.

         

We determine at the beginning of each fiscal year the maximum amount of        shares that we may redeem during that year. For the year ending December 31, 2008, our        board determined that we may use up to 0.5% of our annual cash flow to meet these        redemption needs, including cash proceeds generated from new offerings, operating cash flow        not intended for dividends, borrowings, and capital transactions such as asset sales or        refinancings. We do not anticipate any amounts will be available for redemption during        2008. For the year ended December 31, 2007, our board authorized an amount equal to 0.5% of        our 2007 cash flow to meet these redemption requests of our stockholders. The board        reserved the right to reject any requests for redemption and to amend the terms of the        redemption plan. During the year ended December 31, 2007, we redeemed 1,300 shares at $9.25        per share and 3,500 shares at $10.00 per share under the share redemption program, none of        which occurred during the fourth quarter of the year ended December 31, 2007. During the        year ended December 31, 2006, we redeemed 2,500 shares at $8.50 per share under the share        redemption program.

         

Except as described below for redemptions upon the death of a stockholder,        the purchase price 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 our advisor or another firm we might choose for that        purpose. Our board of directors reserves the right in its sole discretion at any time and        from time to time to (1) waive the one-year holding period in the event of the death or        bankruptcy of a stockholder or other exigent circumstances, (2) reject any request for        redemption, (3) change the purchase price for redemption, or (4) otherwise amend the terms        of our share redemption program.

         

The purchase price for shares redeemed upon the death of a stockholder        generally will be equal to the price the stockholder actually paid for the shares. If, at        the time of redemption, our advisor or another firm we might choose for that purpose, has        made a determination of our net asset value per share, the purchase price for shares        redeemed upon the death of a stockholder will be the net asset value of the shares as so        determined. We will redeem shares upon the death of a stockholder only to the extent that        we have sufficient funds available to us to fund such redemption.

 

17

Redemption of shares, when requested, may generally be made quarterly on a        first-come, first-served basis. We cannot guarantee that we will have sufficient available        cash flow to accommodate any or all requests made in any quarter. If we do not have such        sufficient funds available, at the time when redemption is requested, our stockholders can        (1) withdraw its request for redemption or (2) ask that we honor the request at such time,        if any, when sufficient funds become available. Such pending requests will generally be        honored on a first-come, first-served basis.

         

Stockholders may present to us fewer than all of their shares for        redemption, except that (1) a stockholder must present for redemption at least 2,500 shares        and (2) if the stockholder retains any shares, it must retain at least 2,500 shares. The        shares we redeem under our share redemption program will be cancelled and return to the        status of unauthorized but unissued shares.

         

Our board of directors may amend, suspend or terminate our share redemption        program upon 30 days notice at any time.

 

**Distributions**

 

We qualified as a REIT for federal income tax purposes commencing with our        taxable year ended December 31, 2004. As a REIT, we have made, and intend to make,        distributions each taxable year (not including a return of capital for federal income tax        purposes) equal to at least 90% of our taxable income. One of our primary goals is to pay        regular (monthly) distributions to our stockholders.

         

For income tax purposes, distributions to common stockholders are        characterized as ordinary income, capital gains, or as a return of a stockholder’s        invested capital. To the extent that we make a distribution in excess of our current or        accumulated earnings and profits, the distribution will be treated as a tax-free return of        capital, reducing the tax basis in each U.S. stockholder’s shares, and the amount of        each distribution of a U.S. stockholder’s tax basis in its shares will be taxable as        gain realized from the sales of its shares.

 

The following table reflects the aggregate distributions we declared during        the years ended December 31, 2007 and 2006:

         

|   | **Year** |   | **Total Distributions Declared** |      | **Weighted Average Distributions Declared per Common                        Share** |   | **Return of Capital** |   | **Ordinary Income** |   | **Capital Gain Income** |   |
|--------|----------|--------|----------------------------------|-----------|-------------------------------------------------------------------------------------|--------|-----------------------|--------|---------------------|--------|-------------------------|--------|
|   | 2007     |   | $                                | 7,065,548 |                                                                                | $      | 0.70                  |   | $                   | 0.42   |                    | $      | 0.27 |   | $ | 0.01 |   |
|   | 2006     |   |                             | 7,070,300 |                                                                                |   | 0.70                  |   |                | 0.48   |                    |   | 0.22 |   |   | - |   |

         

 

**Securities Authorized for Issuance Under Equity Compensation        Plans**

 

The Company does not have any compensation plans under which we are        authorized to issue equity securities

 

| **ITEM 6.** | **SELECTED FINANCIAL DATA** |
|-------------|-----------------------------|

         

Not required for a smaller reporting company.

 

 

 

 

 

 

 

 

18

 

| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL                        CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------------------------------------------------------------------------------------------------------------------|

 

The following discussion and analysis should be read in conjunction with the        accompanying consolidated financial statements and notes thereto. See also        “Cautionary Note Regarding Forward Looking Statements” preceding Part        I.

 

**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 advised and managed by Cole Advisors, an affiliate of ours. We qualify as a real        estate investment trust for federal income tax purposes. We commenced our principal        operations on July 1, 2004, when we issued the initial 264,200 shares of our common stock        in the Offering. Prior to such date, we were considered a development stage company. We        acquired our first real estate properties on July 30, 2004.

         

During 2007, we acquired a 100% fee simple interest in one property, located        in Topeka, Kansas, with approximately 25,000 rentable square feet for an aggregate purchase        price of approximately $3.1 million. At December 31, 2007, this property was 100% leased to        a single tenant. To purchase this asset, we used available cash and a mortgage note payable        of approximately $1.7 million.

         

As of December 31, 2007, we owned 42 properties, which were 100% leased,        comprising approximately 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. We currently have no plans        to dispose of any of our properties.

         

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 income accounted for approximately 98% of total revenue during each of        the years ended December 31, 2007 and 2006. As approximately 100% of our properties are        under lease, with an average remaining lease term of approximately 12 years and the        shortest remaining lease term of a single property of approximately six years, our exposure        to changes in commercial rental rates and contractual lease expirations is substantially        mitigated. 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 December 31, 2007, we had a total of approximately $118.0 million of        fixed rate mortgage notes outstanding with a weighted average fixed interest rate of 5.76%,        which mature on various dates from November 2009 through September 2017. As of December 31,        2007, the debt leverage ratio, which is the ratio of mortgage notes payable to total gross        real estate assets, of our portfolio was approximately 57%. As we have no outstanding        variable rate debt, our exposure to short-term changes in interest rates is limited.        Additionally, as we have fully invested the proceeds from our Offering in commercial real        estate, and we do not expect to dispose of any of the properties in the near future, our        results of operations are not exposed to short-term changes in real estate prices, nor are        we exposed to changes in interest rates on future acquisitions.

         

         

 

 

 

 

 

 

19

 

**Application of Critical Accounting Policies**

 

Our accounting policies have been established to conform with generally        accepted accounting principles in the United States (“GAAP”). The preparation        of financial statements in conformity with GAAP requires management 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 management’s        judgment or interpretation of the facts and circumstances relating to 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.

         

*Investment In and Valuation of Real Estate Assets*

 

We are required to make subjective assessments as to the useful lives of our        depreciable assets. We consider the period of future benefit of the asset to determine the        appropriate useful lives. These assessments, which are based on estimates, have a direct        impact on net income. The estimated useful lives of our assets by class are generally as        follows:

 

| Building                |    | 40 years                       |
|-------------------------|--------------|-------------------------------------|
| Tenant improvements     |    | Lesser of useful life or lease term |
| Intangible lease assets |    | Lesser of useful life or lease term |

 

We continually monitor events and changes in circumstances that could        indicate that the carrying amounts of our real estate and related intangible assets may not        be recoverable. When indicators of potential impairment are present that indicate that the        carrying amounts of real estate and related intangible assets may not be recoverable, we        assess 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, we will adjust the real        estate and related intangible assets to the fair value and recognize an impairment        loss.

         

Projections of expected future cash flows require us to estimate future        market rental income amounts subsequent to the expiration of current lease agreements,        property operating expenses, discount rates, the number of months it takes to release the        property and the number of years the property is held for investment. The use of        inappropriate assumptions in the future cash flow analysis would result in an incorrect        assessment of the property’s future cash flow and fair value and could result in the        overstatement of the carrying value of our real estate and related intangible assets and        net income. We have identified one property under an operating lease with impairment        indicators. The undiscounted future operating cash flow scenarios expected from the use of        the property and related intangible assets and its eventual disposition exceeded the        carrying value of the assets as of December 31, 2007.

 

*Allocation of Purchase Price of Acquired Assets*

 

Upon the acquisition of real properties, we allocate the purchase price of        such properties to acquired tangible assets, consisting of land and building, and        identified intangible assets and liabilities, consisting of the value of above-market and        below-market leases, and the value of in-place leases, based in each case on their fair        values. We utilize independent appraisals to assist in the determination of the fair values        of the tangible assets of an acquired property (which includes land and        building).

         

The fair values of above-market and below-market in-place lease values are        recorded based on the present value (using an interest rate which reflects the risks        associated with the leases acquired) of the difference between (i) the contractual amounts        to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates        for the corresponding in-place leases, which is generally obtained from independent        appraisals, measured over a period equal to the remaining non-cancelable term of the lease.        The above-market and below-market lease values are capitalized as intangible lease assets        or liabilities and are amortized as an adjustment of rental income over the remaining terms        of the respective leases.

         

         

         

 

20

         

The fair values of in-place leases include direct costs associated with        obtaining a new tenant, and opportunity costs associated with lost rentals which are        avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant        include commissions, tenant improvements, and other direct costs and are estimated in part        by utilizing information obtained from independent appraisals and management’s        consideration of current market costs to execute a similar lease. These direct costs are        included in intangible lease assets in the accompanying consolidated balance sheet and are        amortized to expense over the lesser of the useful life or the remaining terms of the        respective leases. The value of opportunity costs is calculated using the contractual        amounts to be paid pursuant to the in-place leases over a market absorption period for a        similar lease. These intangibles are included in intangible lease assets in the        accompanying consolidated balance sheet and are amortized to expense over the lesser of the        useful life or the remaining term of the respective leases.

         

The determination of the fair values of the assets and liabilities acquired        requires the use of significant assumptions with regard to the current market rental rates,        rental growth rates, discount rates and other variables. The use of inappropriate estimates        would result in an incorrect assessment of our purchase price allocations, which could        impact the amount of our reported net income.

         

*Revenue        Recognition*

 

Upon the acquisition of real estate, certain properties have leases where        minimum rent payments increase during the term of the lease. We record rental revenue for        the full term of each lease on a straight-line basis. When we acquire a property, the term        of existing leases is considered to commence as of the acquisition date for the purposes of        this calculation. We defer the recognition of contingent rental income, such as percentage        rents, until the specific target that triggers the contingent rental income is achieved.        Expected reimbursements from tenants for recoverable real estate taxes and operating        expenses are included in rental income in the period the related costs are        incurred.

 

*Income        Taxes*

 

We generally will not be subject to federal corporate income tax to the        extent we distribute our taxable income to its stockholders, and so long as we distribute        at least 90% of our taxable income. REITs are subject to a number of other organizational        and operational requirements. Even if we qualify for taxation as a REIT, we may be subject        to certain state and local taxes on our income and property, and federal income and excise        taxes on our undistributed income.

 

**Results        of Operations**

 

*Year        Ended December 31, 2007 Compared to the Year Ended December 31, 2006:*

 

*Revenue*- Revenue increased approximately        $38,000, or less than 1%, to approximately $16.1 million for the year ended December 31,        2007, compared to approximately $16.1 million for the year ended December 31, 2006. The        increase was primarily due to the purchase of one additional property on August 9, 2007,        from which rental income was earned during the year ended December 31, 2007. Our revenue        primarily consists of rental income from net leased commercial properties, which accounted        for approximately 98% of total revenues during each of the years ended December 31, 2007        and 2006.

         

*General and Administrative Expenses -*General        and administrative expenses decreased approximately $85,000, or approximately 14%, to        approximately $534,000 for the year ended December 31, 2007, compared to approximately        $618,000 for the year ended December 31, 2006. The decrease was primarily due to lower        accounting and legal fees during the year ended December 31, 2007, as compared to the year        ended December 31, 2006. Accounting and legal fees were higher during the year ended        December 31, 2006 primarily due to expenses and fees associated with the preparation of our        registration statement and subsequent filings with the Securities and Exchange Commission.        Similar legal and accounting services were not provided during the year ended December 31,        2007. Our primary general and administrative expense items are legal and accounting fees,        organizational costs, state franchise and income taxes, and other licenses and        fees.

         

         

         

         

         

 

21

         

*Property Operating Expenses -*Property        operating expenses decreased approximately $15,000, or approximately 3%, to approximately        $452,000 for the year ended December 31, 2007, compared to approximately $467,000 for the        year ended December 31, 2006. The decrease was primarily due to a decrease in property tax        expense partially offset by the acquisition of one additional property during the year        ended December 31, 2007. The primary property operating expenses items are repairs and        maintenance, property taxes, and insurance.

 

*Property and Asset Management Fees -*Property        and asset management fees increased approximately $15,000, or approximately 2%, to        approximately $960,000 for the year ended December 31, 2007, compared to approximately        $945,000 for the year ended December 31, 2006. The increase is primarily due to rent        increases during the year ended December 31, 2007, compared to the year ended December 31,        2006, and the acquisition of one additional property during the year ended December 31,        2007.

         

*Depreciation and Amortization Expenses -*Depreciation and amortization expenses increased approximately $86,000, or        approximately 2%, to approximately $5.5 million for the year ended December 31, 2007,        compared to approximately $5.4 million for the year ended December 31, 2006. The increase        was primarily due to the acquisition of one additional property during the year ended        December 31, 2007.

         

*Interest Income -*Interest income increased        approximately $3,000, or approximately 4%, to approximately $81,000 for the year ended        December 31, 2007, compared to approximately $78,000 for the year ended December 31, 2006.        The increase was primarily due to earning a higher interest rate on uninvested cash during        the year ended 2007 as compared to the year ended 2006.

         

*Interest Expense -*Interest expense decreased        approximately $481,000, or approximately 6%, to approximately $7.2 million for the year        ended December 31, 2007, compared to approximately $7.7 million for the year ended December        31, 2006. The decrease was primarily due to approximately $448,000 of expense incurred to        refinance three variable rate loans during the year ended December 31, 2006.

         

**Portfolio Information**

 

As of December 31, 2007, we owned 42 properties located in 19 states, all of        which were 100% leased to single tenants with an average lease term remaining of        approximately 12 years.

 

As of        December 31, 2007, our five highest geographic concentrations were as follows:

 

|  

**Location** |   | **Total Number of Properties** |   | **Rentable Square Feet** |   | **2007 Annualized Gross Base Rent** |      | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|----------------------|--------|--------------------------------|--------|--------------------------|--------|-------------------------------------|-----------|--------------------------------------------------------------------------------|--------|
| Texas                |   | 8                              |   | 331,711                  |   | $                                   | 3,760,029 |                                                                           | 24     | % |
| Kansas               |   | 5                              |   | 121,917                  |   |                                | 2,711,653 |                                                                           | 17     | % |
| Ohio                 |   | 6                              |   | 61,381                   |   |                                | 1,037,962 |                                                                           | 7      | % |
| Georgia              |   | 1                              |   | 23,360                   |   |                                | 1,030,590 |                                                                           | 7      | % |
| South Carolina       |   | 2                              |   | 27,637                   |   |                                | 754,961   |                                                                           | 5      | % |
|                 |   | 22                             |   | 566,006                  |   | $                                   | 9,295,195 |                                                                           | 60     | % |

 

As of        December 31, 2007, our five highest tenant industry concentrations were as        follows:

 

|  

**Industry** |   | **Total Number of Properties** |   | **Rentable Square Feet** |   | **2007 Annualized Gross Base Rent** |       | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|----------------------|--------|--------------------------------|--------|--------------------------|--------|-------------------------------------|------------|--------------------------------------------------------------------------------|--------|
| Drugstore            |   | 21                             |   | 263,017                  |   | $                                   | 5,769,985  |                                                                           | 36     | % |
| Auto sales           |   | 1                              |   | 55,466                   |   |                                | 1,630,094  |                                                                           | 10     | % |
| Home improvement     |   | 2                              |   | 256,902                  |   |                                | 1,617,222  |                                                                           | 10     | % |
| Sporting goods       |   | 1                              |   | 88,492                   |   |                                | 1,147,486  |                                                                           | 7      | % |
| Convenience store    |   | 3                              |   | 15,897                   |   |                                | 1,122,037  |                                                                           | 7      | % |
|                 |   | 28                             |   | 679,774                  |   | $                                   | 11,286,824 |                                                                           | 70     | % |

         

         

         

22

         

As of        December 31, 2007, our five highest tenant concentrations were as follows:

 

|  

**Tenant**             |   | **Total Number of Properties** |   | **Rentable Square Feet** |   | **2007 Annualized Gross Base Rent** |      | **Percentage of Total 2007 Annualized Gross Base                        Rent** |   |
|--------------------------------|--------|--------------------------------|--------|--------------------------|--------|-------------------------------------|-----------|--------------------------------------------------------------------------------|--------|
| Rite Aid drugstore             |   | 11                             |   | 135,836                  |   | $                                   | 3,280,301 |                                                                           | 21     | % |
| CarMax auto dealership         |   | 1                              |   | 55,466                   |   |                                | 1,630,094 |                                                                           | 10     | % |
| Lowe’s home improvement  |   | 2                              |   | 256,902                  |   |                                | 1,617,222 |                                                                           | 10     | % |
| Walgreens drugstore            |   | 6                              |   | 81,497                   |   |                                | 1,402,264 |                                                                           | 9      | % |
| Gander Mountain sporting goods |   | 1                              |   | 88,492                   |   |                                | 1,147,486 |                                                                           | 7      | % |
|                           |   | 21                             |   | 618,193                  |   | $                                   | 9,077,367 |                                                                           | 57     | % |

         

For more information on our portfolio diversification and statistics, see        “Item 2. Properties” above.

 

**Funds        From Operations**

 

We believe that funds from operations (“FFO”) is a beneficial        indicator of the performance of a REIT. Because FFO calculations exclude such factors as        depreciation and amortization of real estate assets and gains or losses from sales of        operating real estate assets (which can vary among owners of identical assets in similar        conditions based on historical cost accounting and useful-life estimates), they facilitate        comparisons of operating performance between periods and between other REITs. Our        management believes that accounting for real estate assets in accordance with GAAP        implicitly assumes that the value of real estate assets diminishes predictability over        time. Since real estate values have historically risen or fallen with market conditions,        many industry investors and analysts have considered the presentation of operating results        for real estate companies that use historical cost accounting to be insufficient by        themselves. As a result, we believe that the use of FFO, together with the required GAAP        presentations, provide a more complete understanding of our performance relative to our        competitors and a more informed and appropriate basis on which to make decisions involving        operating, financing, and investing activities. Other REITs may not define FFO in        accordance with the current National Association of Real Estate Investment Trust’s        (“NAREIT”) definition or may interpret the current NAREIT definition        differently than we do.

         

FFO is a non-GAAP financial measure and does not represent net income as        defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining        our operating performance because FFO includes adjustments that investors may deem        subjective, such as adding back expenses such as depreciation and amortization.        Accordingly, FFO should not be considered as an alternative to net income as an indicator        of our operating performance.

         

Our calculation of FFO is presented in the following table for the period        ended as indicated:

 

|                                |   | **Year Ended December 31,** |      |
|-------------------------------------|--------|-----------------------------|-----------|
|                                |   |                        | **2007**  |   |   | **2006** |   |
| Net income                          |   | $                           | 1,548,710 |   | $ | 1,026,984 |   |
| Add:                                |   |                        |      |   |   |   |   |
| Depreciation of real estate assets  |   |                        | 3,670,526 |   |   | 3,616,743 |   |
| Amortization of lease related costs |   |                        | 1,809,147 |   |   | 1,777,329 |   |
| FFO                                 |   | $                           | 7,028,383 |   | $ | 6,421,056 |   |

 

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 approximately $459,000 and approximately                        $470,000 during the years ended December 31, 2007 and 2006,                        respectively. |
|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • |   | Amortization of deferred financing costs totaled                        approximately $384,000 and approximately $490,000 during the years ended                        December 31, 2007 and 2006, respectively.                                                                                                                                                                     |

 

 

 

 

23

 

**Liquidity and Capital Resources**

 

We expect to meet our short-term liquidity requirements through net cash        provided by property operations during the year ending December 31, 2008. We currently do        not have any variable rate debt, nor do we expect to assume any variable rate debt.        Therefore, we are not subject to direct risk relating to rising interest rates.

         

We expect to meet our long-term liquidity requirements through proceeds from        secured or unsecured financings 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 any        outstanding indebtedness, for the payment of tenant improvements 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 certain capital expenditures, including        tenant improvements and leasing commissions, are paid at the properties; however, we may        use other sources to fund distributions as necessary. 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 lower. We expect that substantially all net        cash resulting from debt financing will be used to fund certain capital expenditures,        repayments of outstanding debt, possible replacement properties, or distributions to our        stockholders. We did not have any material commitments for capital expenditures as of        December 31, 2007.

         

As of December 31, 2007, we had cash and cash equivalents of approximately        $913,000, which we expect to be used primarily to pay operating expenses and stockholder        distributions.

         

As of December 31, 2007, we had approximately $118.0 million of debt        outstanding, all of which was pursuant to fixed rate term mortgage loans, with a weighted        average interest rate of approximately 5.76%. Additionally, the debt leverage ratio, which        is the ratio of mortgage notes payable to total gross real estate assets, was approximately        57%, with a weighted average remaining term to maturity of approximately 5.3        years.

         

Our contractual obligations as of December 31, 2007 were as        follows:

 

|                                       |   | **Payments due by period** |                 |
|--------------------------------------------|--------|----------------------------|----------------------|
|                                       |   |                       | **Less than 1 year** |   |   | **1-3 years** |   |   | **4-5 years** |   |   | **More than 5 years** |   |   | **Total** |   |
| Principal payments – fixed rate debt |   | $                          | —              |   | $ | 58,443,500 |   | $ | — |   | $ | 59,533,500 |   | $ | 117,977,000 |   |
| Interest payments – fixed rate debt  |   |                       | 6,892,989            |   |   | 15,983,045 |   |   | 7,314,138 |   |   | 7,714,009 |   |   | 37,904,181 |   |
| Total                                      |   | $                          | 6,892,989            |   | $ | 74,426,545 |   | $ | 7,314,138 |   | $ | 67,247,509 |   | $ | 155,881,181 |   |

 

***Cash        Flow Analysis***

 

*Year        Ended December 31, 2007 Compared to the Year Ended December 31, 2006:*

 

Net cash provided by operating activities increased approximately $206,000,        or approximately 3%, to approximately $6.9 million for the year ended December 31, 2007,        compared to net cash provided by operating activities of approximately $6.7 million for the        year ended December 31, 2006. The increase was primarily due to an increase in net income        of approximately $522,000, offset by a decrease in deferred financing costs, during the        year ended December 31, 2007. See “Results of Operations” for a more complete        discussion of the factors impacting our operating performance.

         

Net cash used in investing activities increased approximately $3.1 million,        to approximately $3.1 million for the year ended December 31, 2007, compared to net cash        used by investing activities of approximately $52,000 for the year ended December 31, 2006.        The increase was primarily due to the acquisition of one property during the year ended        December 31, 2007, compared to no acquisitions during the year ended December 31,        2006.

 

 

 

 

 

24

 

Net cash used in financing activities increased approximately $507,000, or        approximately 10%, to approximately $5.5 million for the year ended December 31, 2007,        compared to net cash used in financing activities of approximately $5.0 million for the        year ended December 31, 2006. The increase was primarily due to a decrease in proceeds from        the issuance of mortgage notes of approximately $4.7 million, as we only issued one new        mortgage note payable during the year ended December 31, 2007, compared to our refinancing        of four mortgage notes payable during the year ended December 31, 2006. The decrease of        approximately $4.7 million was partially offset by a decrease of repayments of mortgage        notes payable of approximately $4.1 million, as we did not repay any mortgage notes payable        during the year ended December 31, 2007, compared to the repayment of five mortgage notes        during the year ended December 31, 2006.

         

During each of the years ended December 31, 2007 and 2006, we declared and        paid distributions of approximately $7.1 million.

 

**Election        as a REIT**

 

We are taxed as a REIT under the Internal Revenue Code of 1986, as amended.        To qualify as a REIT, we must meet certain organizational and operational requirements,        including a requirement to distribute at least 90% of our ordinary taxable income to        stockholders. As a REIT, we generally will not be subject to federal income tax on taxable        income that we distribute to our stockholders. If we fail to qualify as a REIT in any        taxable year, we would then be subject to federal income taxes on our taxable income for        four years following the year during which qualification is lost, unless the Internal        Revenue Service grants us relief under certain statutory provisions. Such an event could        materially 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 consolidated 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 would protect us from the impact of inflation, such as step rental        increases and percentage rent provisions. However, due to the long-term nature of the        leases, the leases may not re-set frequently enough to adequately offset the effects of        inflation on our operation.

 

**Related-Party Transactions and Agreements**

 

We have entered into agreements with Cole Advisors and its affiliates,        whereby we pay certain fees to, or reimburse certain expenses of, Cole Advisors or its        affiliates for acquisition and advisory fees and expenses, organization and offering costs,        sales commissions, dealer manager fees, asset and property management fees and        reimbursement of operating costs. See Note 8 to our consolidated financial statements        included in this annual report on Form 10-K for a discussion of the various related-party        transactions, agreements and fees.

 

**Conflicts of Interest**

 

Affiliates of Cole Advisors act as sponsor, general partner or advisor to        various private real estate limited partnerships and Cole Credit Property Trust II, Inc., a        publicly offered, non-listed REIT. As such, there are conflicts of interest where Cole        Advisors or its affiliates, while serving in the capacity as sponsor, general partner or        advisor for another Cole-sponsored program, may be in competition with us in connection        with property acquisitions, property dispositions, and property management. The        compensation arrangements between affiliates of Cole Advisors and these other Cole real        estate funds could influence its advice to us. See “Item 1. – Business -        Conflicts of Interest” in this annual report on Form 10-K.

         

**Subsequent Events**

 

Certain events subsequent to December 31, 2007 through March 24, 2008, are        discussed in Note 13 to the consolidated financial statements included in this annual        report on Form 10-K.

 

 

 

 

 

25

 

**Impact        of Recent Accounting Pronouncements**

 

Reference is made to Note 2 to the consolidated financial statements        included in this annual report on Form 10-K regarding the impact of recent accounting        pronouncements.

 

**Off        Balance Sheet Arrangements**

 

We had no off balance sheet arrangements as of December 31, 2007.

 

| **ITEM 7A.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET                        RISKS** |
|--------------|----------------------------------------------------------------------------------------|

         

Not required for a smaller reporting company.

 

| **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY                        DATA** |
|-------------|------------------------------------------------------------------------|

 

The financial statements and supplementary data filed as part of this report        are set forth beginning on page F-1 of this report.

 

| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                        ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-----------------------------------------------------------------------------------------------------------------|

         

There were no changes in or disagreements with our independent registered        public accountants during the year ended December 31, 2007.

 

| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

         

In accordance with Rules 13a-15(e) and 15d-15(e) 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) of the Exchange Act) as of the end of the        period covered by this report. Based on that evaluation, our Chief Executive Officer and        Chief Financial Officer concluded that our disclosure controls and procedures, as of        December 31, 2007, were effective in all material respects to ensure that information        required to be disclosed by us in this report 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) in connection with the        foregoing evaluations that occurred during the three months ended December 31, 2007        that has materially affected, or is reasonably likely to materially affect, our internal        controls over financial reporting.

 

**Management’s Report on Internal Controls over Financial        Reporting**

 

Cole Credit Property Trust, Inc.’s management is responsible for        establishing and maintaining adequate internal control over financial reporting, as such        term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting        is a process to provide reasonable assurance regarding the reliability of our financial        reporting and the preparation of financial statements for external purposes in accordance        with accounting principles generally accepted in the United States. Because of its inherent        limitations, internal control over financial reporting is not intended to provide absolute        assurance that a misstatement of our financial statements would be prevented or detected.        Also, projections of any evaluation of internal control effectiveness to future periods are        subject to the risk that controls may become inadequate because of changes in conditions,        or that the degree of compliance with the policies or procedures may        deteriorate.

         

Under the supervision and with the participation of our management,        including our CEO and CFO, we conducted an evaluation of the effectiveness of Cole Credit        Property Trust, Inc.’s internal control over financial reporting based on the        framework in*Internal Control – Integrated Framework        issued*by the Committee of Sponsoring Organizations of the        Treadway Commission.

         

Based on this evaluation, management has concluded that Cole Credit Property        Trust, Inc.’s internal control over financial reporting was effective as of December        31, 2007.

         

 

26

         

This annual report does not include an attestation report of the        company’s registered public accounting firm regarding internal control over financial        reporting. Management’s report was not subject to attestation by the company's        registered public accounting firm pursuant to temporary rules of the Securities and        Exchange Commission that permit the company to provide only management’s report in        this annual report.

         

| **ITEM 9B.** | **OTHER INFORMATION** |
|--------------|-----------------------|

 

None

 

27

**PART        III**

 

| **ITEM 10.** | **DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE                        GOVERNANCE** |
|--------------|------------------------------------------------------------------------------------|

 

The information required by this Item is incorporated by reference to our        definitive proxy statement to be filed with respect to our 2008 annual meeting of        stockholders.

 

| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

The information required by this Item is incorporated by reference to our        definitive proxy statement to be filed with respect to our 2008 annual meeting of        stockholders.

 

| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                        MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|---------------------------------------------------------------------------------------------------------------------------|

 

The information required by this Item is incorporated by reference to our        definitive proxy statement to be filed with respect to our 2008 annual meeting of        stockholders.

 

| **ITEM 13.** | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND                        DIRECTOR** |
|--------------|----------------------------------------------------------------------------------------|

 

The information required by this Item is incorporated by reference to our        definitive proxy statement to be filed with respect to our 2008 annual meeting of        stockholders.

 

| **ITEM 14.** | **PRINCIPAL ACCOUNTING FEES AND SERVICES** |
|--------------|--------------------------------------------|

         

The information required by this Item is incorporated by reference to our        definitive proxy statement to be filed with respect to our 2008 annual meeting of        stockholders.

         

         

         

         

         

         

         

         

         

         

         

         

         

         

         

         

         

28

 

**PART        IV**

 

| **ITEM 15.** | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES** |
|--------------|------------------------------------------------|

 

The following exhibits are filed as a part of this Form 10-K Registration        Statement and numbered in accordance with Part III of Form 10-K.

 

| **Exhibit****Number** | **Description**                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1                   | Articles of Incorporation (Incorporated by reference to                        Exhibit 2.1 to the Company’s Form 10-SB (File No. 000-51962), filed                        on May 1, 2006).                                                                                                                                                                                             |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2                   | Amended and Restated Bylaws (Incorporated by reference to                        Exhibit 2.2 to the Company’s Form 10-SB (File No. 000-51962), filed                        on May 1, 2006).                                                                                                                                                                                           |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1                  | Agreement of Limited Partnership of Cole Operating                        Partnership I, LP, dated April 6, 2004, between Cole Credit Property Trust,                        Inc. and the limited partners thereto (Incorporated by reference to Exhibit                        6.1 to the Company’s Form 10-SB (File No. 000-51962), filed on May 1,                        2006).    |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2                  | Property Management and Leasing Agreement, dated April 6,                        2004, among Cole Credit Property Trust, Inc., Cole Operating Partnership I,                        LP and Cole Realty Advisors, Inc. (Incorporated by reference to Exhibit 6.2                        to the Company’s Form 10-SB (File No. 000-51962), filed on May 1,                        2006). |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3                  | Advisory Agreement, dated April 6, 2004, as amended, between                        Cole Credit Property Trust, Inc. and Cole REIT Advisors, LLC (Incorporated                        by reference to Exhibit 6.3 to the Company’s Form 10-SB (File No.                        000-51962), filed on May 1, 2006).                                                                      |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4                  | Dealer Manager Agreement, dated April 6, 2004, between Cole                        Credit Property Trust, Inc. and Cole Capital Corporation (Incorporated by                        reference to Exhibit 6.4 to the Company’s Form 10-SB (File No.                        000-51962), filed on May 1, 2006).                                                                           |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 21.1*                 | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                        |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                    |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                    |
|                  |                                                                                                                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                       |

 

______________________

 

| * Filed herewith. |   |
|-------------------|--------|

 

 

29

**SIGNATURES**

 

 

Pursuant to the requirements of Section 13 or 15 of the Securities        Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf        by the undersigned, thereunto duly authorized.

 

|   |   |                 |                                 |
|--------|--------|----------------------|--------------------------------------|
|   |   |                 | **Cole Credit Property Trust, Inc.** |
|   |   |                 |                                 |
|   |   | Date: March 27, 2008 |                                 | By:  | /s/ CHRISTOPHER H. COLE |
|   |   |                 |                                 | Name:  | Christopher H. Cole |
|   |   |                 |                                 | Title:  | Chief Executive Officer and President |

 

In accordance with the Exchange Act, this Report has been signed by the        following persons on behalf of the Registrant in the capacities and on the dates        indicated.

 

| **Signature**               |   | **Title**                                                                                                                        |   | **Date**       |
|-----------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|                        |   |                                                                                                                             |   |           |
| /s/ CHRISTOPHER H. COLE     |   | Chief Executive Officer, President, and Director (Principal                        Executive Officer)                            |   | March 27, 2008 |
| Christopher H. Cole         |
|                        |   |                                                                                                                             |   |           |
| /s/ D. KIRK MCALLASTER, JR. |   | Executive Vice President and Chief Financial Officer                        (Principal Financial Officer and Accounting Officer) |   | March 27, 2008 |
| D. Kirk McAllaster, Jr.     |
|                        |   |                                                                                                                             |   |           |
| /s/ JOHN M. PONS            |   | Secretary and Director                                                                                                           |   | March 27, 2008 |
| John M. Pons                |
|                        |   |                                                                                                                             |   |           |

 

 

30

**INDEX        TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

| **Financial Statements**                                                                                                         |   | **Page** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
|                                                                                                                             |   |     |   |
| Report of Independent Registered Public Accounting Firm on                        the Consolidated Financial Statements          |   |     | F-2    |   |
| Consolidated Balance Sheets as of December 31, 2007 and                        2006                                         |   |     | F-3    |   |
| Consolidated Statements of Operations for the Years Ended                        December 31, 2007 and 2006                 |   |     | F-4    |   |
| Consolidated Statements of Stockholders’ Equity for                        the Years Ended December 31, 2007 and 2006 |   |     | F-5    |   |
| Consolidated Statements of Cash Flows for the Years Ended                        December 31, 2007 and 2006                 |   |     | F-6    |   |
| Notes to Consolidated Financial Statements                                                                                       |   |     | F-7    |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-1

 

 

**REPORT        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

To the        Board of Directors and Stockholders of

Cole Credit        Property Trust, Inc.

Phoenix,        Arizona

 

We have audited the accompanying consolidated balance sheet of Cole Credit        Property Trust, Inc. and subsidiaries (the “Company”) as of December 31, 2007        and 2006, and the related consolidated statements of operations, stockholders’        equity, and cash flows for the years then ended. These financial statements are the        responsibility of the Company’s management. Our responsibility is to express an        opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public        Company Accounting Oversight Board (United States). Those standards require that we plan        and perform the audit to obtain reasonable assurance about whether the financial statements        are free of material misstatement. The Company is not required to have, nor were we engaged        to perform, an audit of its internal control over financial reporting. Our audits included        consideration of internal control over financial reporting as a basis for designing audit        procedures that are appropriate in the circumstances, but not for the purpose of expressing        an opinion on the effectiveness of the Company’s internal control over financial        reporting. Accordingly, we express no such opinion. An audit also includes examining, on a        test basis, evidence supporting the amounts and disclosures in the financial statements,        assessing the accounting principles used and significant estimates made by management, as        well as evaluating the overall financial statement presentation. We believe that our audits        provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements presents fairly, in        all material respects, the financial position of Cole Credit Property Trust, Inc. and        subsidiaries as of December 31, 2007 and 2006 and the results of their operations and their        cash flows for the years then ended, in conformity with accounting principles generally        accepted in the United States of America.

 

/s/        DELOITTE & TOUCHE LLP

 

Phoenix,        Arizona

March 26,        2008

 

F-2

**COLE        CREDIT PROPERTY TRUST, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

|                                                                                                                                                                                                           |   | **December 31,****2007** |        | **December 31,****2006** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-------------|--------------------------|--------|
| **ASSETS:**                                                                                                                                                                                                    |   |                     |        |                     |   |   |   |
| Investment in real estate assets:                                                                                                                                                                              |   |                     |        |                     |   |   |   |
| Land                                                                                                                                                                                                           |   | $                        | 55,320,895  |                     | $      | 54,952,528 |   |
| Buildings and improvements, less accumulated depreciation of                        $9,903,730 and $6,233,204 at December 31, 2007 and 2006,                        respectively                               |   |                     | 113,602,209 |                     |   | 114,799,639 |   |
| Acquired intangible lease assets, less accumulated                        amortization of $5,322,109 and $3,386,008 at December 31, 2007 and 2006,                        respectively                         |   |                     | 23,015,500  |                     |   | 24,631,586 |   |
| Total investment in real estate assets                                                                                                                                                                         |   |                     | 191,938,604 |                     |   | 194,383,753 |   |
|                                                                                                                                                                                                           |   |                     |        |                     |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                      |   |                     | 913,356     |                     |   | 2,686,279 |   |
| Rents and tenant receivables, less allowance for doubtful                        accounts of $41,573 and $0 at December 31, 2007 and 2006,                        respectively                                 |   |                     | 1,623,446   |                     |   | 1,159,572 |   |
| Other assets                                                                                                                                                                                                   |   |                     | 65,951      |                     |   | 75,398 |   |
| Deferred financing costs, less accumulated amortization of                        $1,019,793 and $1,040,640 at December 31, 2007 and 2006,                        respectively                                 |   |                     | 1,501,562   |                     |   | 1,810,941 |   |
| Total assets                                                                                                                                                                                                   |   | $                        | 196,042,919 |                     | $      | 200,115,943 |   |
|                                                                                                                                                                                                           |   |                     |        |                     |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’                        EQUITY:**                                                                                                                                         |   |                     |        |                     |   |   |   |
| Mortgage notes payable                                                                                                                                                                                         |   | $                        | 117,977,000 |                     | $      | 116,299,500 |   |
| Accounts payable and accrued expenses                                                                                                                                                                          |   |                     | 737,260     |                     |   | 728,511 |   |
| Acquired below market lease intangibles, less accumulated                        amortization of $609,870 and $404,794 at December 31, 2007 and 2006,                        respectively                      |   |                     | 1,629,003   |                     |   | 1,819,963 |   |
| Distributions payable                                                                                                                                                                                          |   |                     | 588,638     |                     |   | 589,043 |   |
| Deferred rent and other liabilities                                                                                                                                                                            |   |                     | 129,814     |                     |   | 133,859 |   |
| Total liabilities                                                                                                                                                                                              |   |                     | 121,061,715 |                     |   | 119,570,876 |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                    |   |                     |        |                     |   |   |   |
| Preferred stock, $0.01 par value; 10,000,000 shares                        authorized, none issued and outstanding at December 31, 2007 and                        2006                                        |   |                     | —     |                     |   | — |   |
| Common stock, $0.01 par value; 90,000,000 shares authorized,                        10,090,951 and 10,095,751 shares issued and outstanding at December 31,                        2007 and 2006, respectively |   |                     | 100,910     |                     |   | 100,958 |   |
| Capital in excess of par value                                                                                                                                                                                 |   |                     | 90,423,989  |                     |   | 90,470,966 |   |
| Accumulated distributions in excess of earnings                                                                                                                                                                |   |                     | (15,543,695 | )                        |   | (10,026,857 | ) |
| Total stockholders’ equity                                                                                                                                                                               |   |                     | 74,981,204  |                     |   | 80,545,067 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                               |   | $                        | 196,042,919 |                     | $      | 200,115,943 |   |

 

The        accompanying notes are an integral part of these consolidated financial        statements.

 

F-3

**COLE        CREDIT PROPERTY TRUST, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

|                                                                             |   | **Year Ended December 31,** |       |
|----------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                             |   | **2007**                    |       | **2006** |   |
| **Revenues:**                                                                    |   |                        |       |   |   |   |   |
| Rental and other income                                                          |   | $                           | 15,839,230 |   | $ | 15,706,537 |   |
| Tenant reimbursement income                                                      |   |                        | 270,700    |   |   | 365,107 |   |
| Total revenue                                                                    |   |                        | 16,109,930 |   |   | 16,071,644 |   |
|                                                                             |   |                        |       |   |   |   |   |
| **Expenses:**                                                                    |   |                        |       |   |   |   |   |
| General and administrative                                                       |   |                        | 533,554    |   |   | 618,463 |   |
| Property operating expenses                                                      |   |                        | 452,496    |   |   | 467,134 |   |
| Property and asset management fees                                               |   |                        | 959,785    |   |   | 944,814 |   |
| Depreciation                                                                     |   |                        | 3,670,526  |   |   | 3,616,743 |   |
| Amortization                                                                     |   |                        | 1,809,147  |   |   | 1,777,329 |   |
| Total operating expenses                                                         |   |                        | 7,425,508  |   |   | 7,424,483 |   |
| **Real estate operating income**                                                 |   |                        | 8,684,422  |   |   | 8,647,161 |   |
|                                                                             |   |                        |       |   |   |   |   |
| **Other income (expense):**                                                      |   |                        |       |   |   |   |   |
| Interest income                                                                  |   |                        | 81,311     |   |   | 77,882 |   |
| Interest expense                                                                 |   |                        | (7,217,023 | ) |   | (7,698,059 | ) |
| Total other expense                                                              |   |                        | (7,135,712 | ) |   | (7,620,177 | ) |
| **Net income**                                                                   |   | $                           | 1,548,710  |   | $ | 1,026,984 |   |
|                                                                             |   |                        |       |   |   |   |   |
| **Weighted average number of common shares                        outstanding:** |   |                        |       |   |   |   |   |
| Basic and diluted                                                                |   |                        | 10,091,972 |   |   | 10,096,361 |   |
|                                                                             |   |                        |       |   |   |   |   |
| **Net income per common share:**                                                 |   |                        |       |   |   |   |   |
| Basic and diluted                                                                |   | $                           | 0.15       |   | $ | 0.10 |   |

 

The        accompanying notes are an integral part of these consolidated financial        statements.

 

F-4

**COLE        CREDIT PROPERTY TRUST, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

 

|                           |   | **Common Stock** |   | **Capital in Excess in Par Value** |    | **Accumulated Distributions in Excess of                        Earnings** |   | **Total Stockholders’ Equity** |   |
|--------------------------------|--------|------------------|--------|------------------------------------|---------|----------------------------------------------------------------------------|--------|--------------------------------------|--------|
| **Number of Shares**           |   | **Par Value**    |
| **Balance, December 31, 2005** |   | 10,098,251       |   | $                                  | 100,983 |                                                                       | $      | 90,492,191                           |   | $ | (3,983,541 | ) | $ | 86,609,633 |   |
| Common stock redemption        |   | (2,500           | )      |                               | (25     | )                                                                          |   | (21,225                              | )      |   | — |   |   | (21,250 | ) |
| Distributions                  |   | —          |   |                               | — |                                                                       |   | —                              |   |   | (7,070,300 | ) |   | (7,070,300 | ) |
| Net income                     |   | —          |   |                               | — |                                                                       |   | —                              |   |   | 1,026,984 |   |   | 1,026,984 |   |
| **Balance, December 31, 2006** |   | 10,095,751       |   |                               | 100,958 |                                                                       |   | 90,470,966                           |   |   | (10,026,857 | ) |   | 80,545,067 |   |
| Common stock redemption        |   | (4,800           | )      |                               | (48     | )                                                                          |   | (46,977                              | )      |   | — |   |   | (47,025 | ) |
| Distributions                  |   | —          |   |                               | — |                                                                       |   | —                              |   |   | (7,065,548 | ) |   | (7,065,548 | ) |
| Net income                     |   | —          |   |                               | — |                                                                       |   | —                              |   |   | 1,548,710 |   |   | 1,548,710 |   |
| **Balance, December 31, 2007** |   | 10,090,951       |   | $                                  | 100,910 |                                                                       | $      | 90,423,989                           |   | $ | (15,543,695 | ) | $ | 74,981,204 |   |

 

The        accompanying notes are an integral part of these consolidated financial        statements.

 

F-5

**COLE        CREDIT PROPERTY TRUST, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

|                                                                                                     |   | **Year Ended December 31,** |       |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                     |   | **2007**                    |       |   | **2006** |   |   |
|                                                                                                     |   |                        |       |   |   |   |   |   |   |
| **Cash flows from operating activities:**                                                                |   |                        |       |   |   |   |   |   |   |
| Net income                                                                                               |   | $                           | 1,548,710  |   |   | $ | 1,026,984 |   |   |
| Adjustments to reconcile net income to net cash provided by                        operating activities: |   |                        |       |   |   |   |   |   |   |
| Depreciation                                                                                             |   |                        | 3,670,526  |   |   |   | 3,616,743 |   |   |
| Amortization                                                                                             |   |                        | 1,809,147  |   |   |   | 1,777,329 |   |   |
| Amortization of deferred financing costs                                                                 |   |                        | 384,353    |   |   |   | 490,426 |   |   |
| Amortization of above and below market leases                                                            |   |                        | (78,122    | ) |   |   | (79,667 | ) |   |
| Changes in assets and liabilities:                                                                       |   |                        |       |   |   |   |   |   |   |
| Rents and tenant receivables, net of allowance                                                           |   |                        | (463,874   | ) |   |   | (489,422 | ) |   |
| Other assets                                                                                             |   |                        | 9,447      |   |   |   | 438,225 |   |   |
| Accounts payable and accrued expenses                                                                    |   |                        | 8,749      |   |   |   | (10,659 | ) |   |
| Deferred rent and other liabilities                                                                      |   |                        | (4,045     | ) |   |   | (72,844 | ) |   |
| Due to affiliates                                                                                        |   |                        | —    |   |   |   | (18,479 | ) |   |
| Total adjustments                                                                                        |   |                        | 5,336,181  |   |   |   | 5,651,652 |   |   |
| Net cash provided by operating activities                                                                |   |                        | 6,884,891  |   |   |   | 6,678,636 |   |   |
| **Cash flows from investing activities:**                                                                |   |                        |       |   |   |   |   |   |   |
| Investment in real estate and property                        improvements                               |   |                        | (2,841,464 | ) |   |   | (51,592 | ) |   |
| Acquired intangible lease assets                                                                         |   |                        | (320,015   | ) |   |   | — |   |   |
| Acquired below market lease intangibles                                                                  |   |                        | 14,116     |   |   |   | — |   |   |
| Net cash used in investing activities                                                                    |   |                        | (3,147,363 | ) |   |   | (51,592 | ) |   |
| **Cash flows from financing activities:**                                                                |   |                        |       |   |   |   |   |   |   |
| Common stock redemptions                                                                                 |   |                        | (47,025    | ) |   |   | (21,250 | ) |   |
| Proceeds from mortgage notes payable                                                                     |   |                        | 1,677,500  |   |   |   | 6,385,152 |   |   |
| Repayments on mortgage notes payable                                                                     |   |                        | —    |   |   |   | (4,070,000 | ) |   |
| Distributions to investors                                                                               |   |                        | (7,065,952 | ) |   |   | (7,070,390 | ) |   |
| Deferred financing costs paid                                                                            |   |                        | (74,974    | ) |   |   | (227,369 | ) |   |
| Net cash used in financing activities                                                                    |   |                        | (5,510,451 | ) |   |   | (5,003,857 | ) |   |
| **Net (decrease) increase in cash and cash                        equivalents**                          |   |                        | (1,772,923 | ) |   |   | 1,623,187 |   |   |
| **Cash and cash equivalents, beginning of                        year**                                  |   |                        | 2,686,279  |   |   |   | 1,063,092 |   |   |
| **Cash and cash equivalents, end of year**                                                               |   | $                           | 913,356    |   |   | $ | 2,686,279 |   |   |
|                                                                                                     |   |                        |       |   |   |   |   |   |   |
| **Supplemental Disclosures of Non-Cash Investing and                        Financing Activities:**      |   |                        |       |   |   |   |   |   |   |
| Dividends declared and unpaid                                                                            |   | $                           | 588,638    |   |   | $ | 589,043 |   |   |
| **Supplemental Cash Flow Disclosures:**                                                                  |   |                        |       |   |   |   |   |   |   |
| Interest paid                                                                                            |   | $                           | 6,824,170  |   |   | $ | 6,734,714 |   |   |

 

 

The        accompanying notes are an integral part of these consolidated financial        statements.

 

F-6

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE****1 — ORGANIZATION AND        BUSINESS**

 

Cole Credit Property Trust, Inc. (the “Company”) is a Maryland        corporation formed on March 29, 2004 that is organized and operates as a real estate        investment trust (“REIT”) for federal income tax purposes. The Company        commenced active operations on July 1, 2004, when the minimum required offering proceeds        was received and funds were released from escrow pursuant to a private placement of shares        of its common stock (the “Offering”). 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 an approximately 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 0.01% (minority interest) of the partnership interests of        Cole OP I.

         

At December 31, 2007, the Company owned 42 properties comprising        approximately 1.0 million square feet of single-tenant, retail space located in 19        states. At December 31, 2007, these properties were approximately 100% leased.

         

The Company’s stock is not currently listed on a national exchange.        The Company may seek to list its stock for trading on a national securities exchange only        if the board of directors determines that 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 or quoted. 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.

 

**NOTE****2 — SUMMARY OF SIGNIFICANT        ACCOUNTING POLICIES**

 

The summary of significant accounting policies presented below is designed        to assist in understanding the Company’s consolidated financial statements. Such        financial statements and accompanying notes are the representations of its management, who        is responsible for their integrity and objectivity. These accounting policies conform to        generally accepted accounting principles in the United States (“GAAP”), in all        material respects, and have been consistently applied in preparing the accompanying        consolidated financial statements.

 

***Principles of Consolidation and Basis of        Presentation***

 

The consolidated financial statements include the accounts of the Company        and its wholly-owned subsidiaries. All significant intercompany accounts and transactions        have been eliminated in consolidation.

 

***Use        of Estimates***

 

The preparation of financial statements in conformity with GAAP necessarily        requires management to make estimates and assumptions that affect the reported amounts of        assets and liabilities and disclosure of contingent assets and liabilities at the date of        the consolidated financial statements and the reported amounts of revenues and expenses        during the reporting period. Actual results could differ from those estimates.

 

***Investment In and Valuation of Real Estate Assets***

 

Real estate assets are stated at cost, less accumulated depreciation.        Amounts capitalized to real estate assets consist of the cost of acquisition or        construction and any tenant improvements or major improvements and betterments that extend        the useful life of the related asset. All repair and maintenance costs are expensed as        incurred.

 

|                    | All assets are depreciated on a straight line basis. The                        estimated useful lives of our assets by class are as follows: |
|-------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| Building                |                                                                                                                                          | 40 years |
| Tenant improvements     |                                                                                                                                          | Lesser of useful life or lease term |
| Intangible lease assets |                                                                                                                                          | Lesser of useful life or lease term |
|                         |                                                                                                                                               |  |  |

         

 

F-7

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

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. When indicators of potential impairment are present that indicate        that the carrying amounts of real estate and related intangible assets may not be        recoverable, 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 related intangible assets to the fair        value and recognize an impairment loss. The Company identified one property under an        operating lease with impairment indicators. The undiscounted future operating cash flow        scenarios expected from the use of the property and related intangible assets and its        eventual disposition exceeded the carrying value of the assets as of December 31,        2007.

 

***Allocation of Purchase Price of Acquired Assets***

 

Upon the acquisition of real properties, the Company allocates the purchase        price of such properties to acquired tangible assets, consisting of land and building, and        identified intangible assets and liabilities, consisting of the value of above-market and        below-market leases and the value of in-place leases, based in each case on their fair        values. The Company utilizes independent appraisals to assist in the determination of the        fair values of the tangible assets of an acquired property (which includes land and        building).

         

The fair values of above-market and below-market in-place lease values are        recorded based on the present value (using an interest rate which reflects the risks        associated with the leases acquired) of the difference between (i) the contractual        amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market        lease rates for the corresponding in-place leases, which is generally obtained from        independent appraisals, measured over a period equal to the remaining non-cancelable term        of the lease. The above-market and below-market lease values are capitalized as intangible        lease assets or liabilities and amortized as an adjustment of rental income over the lesser        of the useful life or the remaining terms of the respective leases.

         

The fair values of in-place leases include direct costs associated with        obtaining a new tenant, and opportunity costs associated with lost rentals which are        avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant        include commissions, tenant improvements, and other direct costs and are estimated in part        by utilizing information obtained from independent appraisals and management’s        consideration of current market costs to execute a similar lease. These direct costs are        included in intangible lease assets in the accompanying consolidated balance sheet and are        amortized to expense over the lesser of the useful life or the remaining terms of the        respective leases. The value of opportunity costs is calculated using the contractual        amounts to be paid pursuant to the in-place leases over a market absorption period for a        similar lease. These intangibles are included in intangible lease assets in the        accompanying consolidated balance sheet and are amortized to expense over the lesser of the        useful life or the remaining term of the respective leases.

         

The determination of the fair values of the assets and liabilities acquired        requires the use of significant assumptions with regard to the current market rental rates,        rental growth rates, discount rates and other variables. The use of inappropriate estimates        would result in an incorrect assessment of the Company’s purchase price allocations,        which could impact the amount of its reported net income.

         

***Cash        and Cash Equivalents***

 

The Company considers all highly liquid instruments with maturities when        purchased of three months or less to be cash equivalents.

 

 

 

 

 

 

F-8

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

***Rents        and Tenant Receivables***

 

Rents and tenant receivables primarily includes amounts to be collected in        future periods related to the recognition of rental income on a straight-line basis over        the lease term and cost recoveries from tenants. See “Revenue Recognition”        below. The Company makes estimates of the uncollectability of its accounts receivable        related to base rents, expense reimbursements and other revenues. The Company analyzes        accounts receivable and historical bad debt levels, customer credit worthiness and current        economic trends when evaluating the adequacy of the allowance for doubtful accounts. In        addition, tenants in bankruptcy are analyzed and estimates are made in connection with the        expected recovery of pre-petition and post-petition claims. The Company’s reported        net income is directly affected by management’s estimate of the collectability of        accounts receivable. The Company records allowances for those balances that the Company        deems to be uncollectible, including any amounts relating to straight-line rent        receivables.

 

***Other        Assets***

 

Other assets consists primarily of prepaid expenses as of the balance sheet        date that relate to future periods and will be expensed or reclassified to another account        during the period to which the costs relate. Any amounts with no future economic benefit        are charged to earnings when identified.

 

***Deferred Financing Costs***

 

Deferred financing costs are capitalized and amortized on a straight-line        basis over the term of the related financing arrangement, which approximates the effective        interest method. Amortization of deferred financing costs for the years ended December 31,        2007 and 2006 were approximately $384,000 and approximately $490,000, respectively, and was        recorded in interest expense in the consolidated statements of operations.

 

***Revenue Recognition***

 

Upon the acquisition of real estate, certain properties have leases where        minimum rent payments increase during the term of the lease. The Company records rental        revenue for the full term of each lease on a straight-line basis. When the Company acquires        a property, the term of existing leases is considered to commence as of the acquisition        date for the purposes of this calculation. The Company defers the recognition of contingent        rental income, such as percentage rents, until the specific target that triggers the        contingent rental income is achieved. Expected reimbursements from tenants for recoverable        real estate taxes and operating expenses are included in tenant reimbursement income in the        period the related costs are incurred.

 

***Income Taxes***

 

The Company generally will not be subject to federal corporate income tax to        the extent it distributes its REIT taxable income to its stockholders, and so long as it        distributes at least 90% of its REIT taxable income. REITs are subject to a number of other        organizational and operational requirements. Even if the Company qualifies for taxation as        a REIT, it may be subject to certain state and local taxes on its income and property, and        federal income and excise taxes on its undistributed income.

 

***Concentration of Credit Risk***

 

As of December 31, 2007, the Company had cash on deposit in two financial        institutions which was approximately $229,000 and $442,000, respectively, in excess of        federally insured levels, however, the Company has not experienced any losses in such        account. The Company limits investment of cash investments to financial institutions with        high credit standing; therefore, the Company believes it is not exposed to any significant        credit risk on cash.

 

As of December 31, 2007, three tenants in the drugstore industry, one tenant        in the auto sales industry and one tenant in the home improvement industry accounted for        approximately 36%, 10%, and 10% of the Company’s 2007 gross annualized base rental        revenues, respectively. Additionally, as of December 31, 2007, eight of our properties were        located in Texas and five of our properties were located in Kansas, accounting for        approximately 24% and 17% of our 2007 gross annualized base rental revenues,        respectively.

 

F-9

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

 

***Stockholders’ Equity***

 

As of December 31, 2007 and December 31, 2006, the Company was        authorized to issue 90,000,000 shares of common stock and 10,000,000 shares of        preferred stock. All shares of such stock have a par value of $0.01 per share. The        Company’s board of directors may authorize additional shares of capital stock and        amend their terms without obtaining stockholder approval.

 

The par value of investor proceeds raised from the Offering was classified        as common stock, with the remainder allocated to capital in excess of par value. As the        Company’s share redemption program allows the Company’s board of directors to        reject any request for redemption, the Company accounts for the common stock issued in the        Offering as permanent equity, in accordance with Accounting Series Release        No. 268,*“Presentation in Financial Statements of        Redeemable Preferred Stock.”*During the year ended December        31, 2007, the Company redeemed 1,300 shares at $9.25 per share and 3,500 shares at $10.00        per share under the share redemption program. During the year ended December 31, 2006, the        Company redeemed 2,500 shares at $8.50 per share under the share redemption        program.

 

***Earnings Per Share***

 

Earnings per share are calculated based on the weighted average number of        common shares outstanding during each period. The weighted average number of common shares        outstanding is identical for basic and fully diluted earnings per share. The Company has no        stock options issued or outstanding.

 

***Reportable Segments*** 

 

The Financial Accounting Standards Board (“FASB”) issued        SFAS No. 131, “*Disclosures about Segments of an        Enterprise and Related Information,”*which establishes        standards for reporting financial and descriptive information about an enterprise’s        reportable segments. The Company determined that we have one reportable segment, with        activities related to investing in real estate. The Company’s investments in real        estate generate rental revenue and other income through the leasing of properties, which        comprised 100% of our total consolidated revenues for the years ended December 31,        2007 and 2006. Although the Company’s investments in real estate are geographically        diversified throughout the United States, management evaluates operating performance on an        individual property level. The Company’s properties have been aggregated into one        reportable segment.

 

***Interest***

 

Interest is charged to interest expense as it accrues. No interest costs        were capitalized during the years ended December 31, 2007 and 2006.

 

***Distributions Payable and Distribution Policy***

 

In order to maintain its status as a REIT, the Company is required to make        distributions each taxable year equal to at least 90% of its REIT taxable income excluding        capital gains. To the extent funds are available, the Company intends to pay regular        monthly distributions to stockholders. Distributions are paid to those stockholders who are        stockholders of record as of applicable record dates.

On December 13, 2007, the Company’s board of directors declared a        distribution of $0.001918 per share for stockholders of record as of the close of business        on each day of the period commencing on January 1, 2008 ending on March 31, 2008. The        monthly distributions were calculated to be equivalent to the annualized distribution of        seven percent (7.00%) per share, assuming a purchase price of $10.00 per share. As of        December 31, 2007, the Company had distributions payable of approximately $589,000. The        distributions were paid in January 2008.

 

 

 

F-10

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

 

***Fair        Value of Financial Instruments***

 

SFAS No. 107,*“Disclosures About        Fair Value of Financial Instruments”*(“SFAS No.        107”), 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. SFAS No. 107 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 such as discounted cash flow analysis. The fair value estimates are made at the        end of each year based on 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 that 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.

         

Our consolidated balance sheet includes the following financial instruments:        cash and cash equivalents, tenant rent and other receivables, accounts payable and accrued        expenses and notes payable. We consider the carrying values of cash and cash equivalents,        tenant rent and other receivables and accounts payable and accrued expenses to approximate        fair value for these financial instruments because of the short period of time between        origination of the instruments and their expected realization. Based on borrowing rates        available to us as of December 31, 2007, the fair value of the mortgage loans payable        was approximately $122.2 million.

         

***Recent Accounting Pronouncements***

 

In June 2006, the FASB issued FASB Interpretation        No. 48,*“Accounting for Uncertainty in Income Taxes, an        interpretation of SFAS* *No.109”*(“FIN 48”).        FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an        enterprise’s financial statements in accordance with        SFAS No. 109,“*Accounting for        Income Taxes*.” FIN 48 prescribes a recognition        threshold and measurement attribute for the financial statement recognition and measurement        of a tax position taken or expected to be taken in a tax return. FIN 48 also provides        guidance on derecognition, classification, interest and penalties, accounting in interim        periods, disclosure and transition. FIN 48 became effective for the Company on January        1, 2007 and its adoption did not have a material impact on its consolidated financial        statements.

 

In September 2006, the FASB issued        SFAS No. 157,*“Fair Value        Measurements”*(“SFAS No. 157”).        SFAS No. 157 defines fair value, establishes a framework for measuring fair value        in GAAP and expands disclosures about fair value measurements. SFAS No. 157 is        effective for financial statements issued for fiscal years beginning after        November 15, 2007, and interim periods within those fiscal years. In February 2008,        the FASB issued a staff position delaying the effective date of certain non-financial        assets and liabilities to fiscal periods beginning after November 15, 2008. The Company has        not determined what impact, if any, the adoption of SFAS No. 157 will have on its        consolidated financial statements.

         

In February 2007, the FASB issued        SFAS No. 159,*“The Fair Value Option for Financial        Assets and Financial Liabilities”        (*“SFAS No. 159”). SFAS No. 159        allows entities to choose to measure eligible financial instruments at fair value with        changes in fair value recognized in earnings of each subsequent reporting date. The fair        value election is available for most financial assets and liabilities on an        instrument-by-instrument basis and is to be elected on the date of the financial instrument        is initially recognized. SFAS 159 is effective for all entities as of the beginning of        a reporting entity’s first fiscal year that begins after November 15, 2007 (with        earlier application permitted under certain circumstances). The Company did not choose to        take the fair value election allowed by the standard.

         

         

         

         

F-11

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

         

In June 2007, the American Institute of Certified Public Accountants        (“AICPA”) issued Statement of Position 07-1,*“Clarification of the Scope of the Audit and Accounting Guide for        Investment Companies and Accounting by Parent Companies and Equity Method Investors for        Investments in Investment Companies”*(“SOP        07-1”). SOP 07-1 provides guidance for determining whether an entity is within the        scope of the AICPA Audit and Accounting Guide Investment Companies (the        “Guide”). Entities that are within the scope of the Guide are required, among        other things, to carry their investments at fair value, with changes in fair value include        in earnings. In October 2007, the FASB indefinitely deferred the provisions of SOP 07-1.        The Company has not determined what impact, if any, the adoption of SOP 07-1 will have on        its consolidated financial statements.

         

In December 2007, the FASB issued SFAS No. 160,*“Noncontrolling Interests in Consolidated Financial Statements        – an Amendment of ARB 51”*(“SFAS No.        160”). This statement amends ARB 51 and revises accounting and reporting requirements        for noncontrolling interest (formerly minority interest) in a subsidiary and for the        deconsolidation of a subsidiary. Upon its adoption, January 1, 2009 for the Company,        noncontrolling interest will be classified as equity, and income attributed to the        noncontrolling interest will be included in the Company’s income. The provisions of        this standard are applied retrospectively upon adoption. The Company is currently        evaluating the impact of adopting SFAS No. 160 on the consolidated financial statements;        however, the Company does not expect it to have a material impact on the consolidated        results.

         

In December 2007, the FASB issued SFAS No. 141 (revised 2007),*“Business Combinations”*(“SFAS No. 141(R)”). SFAS No. 141(R) clarifies and amends the        accounting guidance for how an acquirer in a business combination recognizes and measurers        the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree.        The provisions of SFAS No. 141(R) are effective for the Company for any business        combinations occurring on or after January 1, 2009. The Company has not determined what        impact, if any, the adoption of SFAS No. 141 (R) will have on its consolidated financial        statements.

 

**NOTE****3 — REAL ESTATE        ACQUISITIONS**

 

On August 9, 2007, the Company acquired a single-tenant retail property in        Topeka, Kansas, consisting of 24,727 rentable square feet, net leased to Tractor Supply        Company, for approximately $3.1 million. The Company financed the acquisition with a        mortgage loan of approximately $1.7 million secured by the property. The Company allocated        the purchase price of this property, including acquisition costs of approximately $95,000        to the fair market value of the assets acquired and liabilities assumed. The Company        allocated approximately $368,000 to land, approximately $2.5 million to building and        improvements, approximately $320,000 to acquired in-place leases, and approximately $14,000        to acquired below-market leases during the year ended December 31, 2007.

 

**NOTE****4 — INTANGIBLE LEASE        ASSETS**

 

Identified        intangible assets consisted of the following:

 

|                                                                                                                                                                                                                                                                                                         |   | **December** **31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                                                                                                                                                                                                                                                         |   | **2007**                  |       |   | **2006** |   |
| Acquired in place leases, net of accumulated amortization of                        $4,906,657 and $3,097,510 at December 31, 2007 and 2006, respectively                        (with a weighted average life of 140 and 155 months for in-place leases,                        respectively).         |   | $                         | 21,338,021 |   |   | $ | 22,827,153 |   |
| Acquired above market leases, net of accumulated                        amortization of $415,452 and $288,498 at December 31, 2007 and 2006,                        respectively (with a weighted average life of 158 and 170 months for                        acquired above market leases, respectively). |   |                      | 1,677,479  |   |   |   | 1,804,433 |   |
|                                                                                                                                                                                                                                                                                                         |   | $                         | 23,015,500 |   |   | $ | 24,631,586 |   |

 

Amortization expense recorded on the identified intangible assets, for each        of fiscal years ended December 31, 2007 and 2006 was approximately $1,936,000 and        approximately $1,899,000 respectively.

         

         

F-12

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

         

Estimated amortization expense of the respective intangible lease assets as        of December 31, 2007 for each of the five succeeding fiscal years is as        follows:

 

|     |   | **Amount** |               |
|----------|--------|------------|--------------------|
| **Year** |   |       | **Lease In-Place** |   |   | **Above Market Lease** |   |
| 2008     |   | $          | 1,801,769          |   | $ | 122,028 |   |
| 2009     |   |       | 1,801,769          |   |   | 122,028 |   |
| 2010     |   |       | 1,801,769          |   |   | 122,028 |   |
| 2011     |   |       | 1,801,769          |   |   | 122,028 |   |
| 2012     |   |       | 1,801,769          |   |   | 122,028 |   |

 

**NOTE****5 — MORTGAGE        NOTES** **PAYABLE**

 

As of        December 31, 2007, the Company had the following indebtedness outstanding:

 

|  

**Property** |   | **Location**        |   | **Amount** |       | **Fixed Interest Rate** |   | **Maturity Date** |              |
|----------------------|--------|---------------------|--------|------------|------------|-------------------------|--------|-------------------|-------------------|
| Wawa                 |   | Vineland, NJ        |   | $          | 2,860,000  |                    | 6.56   | %                 | June 11, 2016     |   |
| Wawa                 |   | Newark, DE          |   |       | 2,860,000  |                    | 6.56   | %                 | June 11, 2016     |   |
| Wawa                 |   | Clifton Heights, PA |   |       | 2,860,000  |                    | 6.56   | %                 | June 11, 2016     |   |
| Walgreens            |   | Houston, TX         |   |       | 1,207,000  |                    | 5.15   | %                 | November 11, 2009 |   |
| Walgreens            |   | Lawrence, KS        |   |       | 1,526,000  |                    | 5.15   | %                 | November 11, 2009 |   |
| Rite Aid             |   | Memphis, TN         |   |       | 1,924,800  |                    | 5.36   | %                 | November 11, 2009 |   |
| Rite Aid             |   | Warren, OH          |   |       | 1,842,700  |                    | 5.36   | %                 | November 11, 2009 |   |
| CarMax               |   | Merriam, KS         |   |       | 14,175,000 |                    | 6.48   | %                 | June 11, 2016     |   |
| Walgreens            |   | Cahokia, IL         |   |       | 1,305,000  |                    | 4.62   | %                 | December 11, 2009 |   |
| Walgreens            |   | Cleveland, OH       |   |       | 1,224,000  |                    | 4.62   | %                 | December 11, 2009 |   |
| Lowe’s         |   | Texas City, TX      |   |       | 6,187,500  |                    | 4.91   | %                 | January 11, 2010  |   |
| Lowe’s         |   | Jonesboro, AR       |   |       | 5,857,500  |                    | 4.87   | %                 | April 11, 2010    |   |
| CVS                  |   | Whiteville, NC      |   |       | 1,736,000  |                    | 5.27   | %                 | March 11, 2015    |   |
| Rite Aid             |   | Bangor, ME          |   |       | 2,763,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| Tractor Supply       |   | Woodstock, VA       |   |       | 1,658,000  |                    | 5.45   | %                 | May 11, 2015      |   |
| Sherwin Williams     |   | Angola, IN          |   |       | 709,000    |                    | 5.40   | %                 | July 11, 2010     |   |
| Sherwin Williams     |   | Ashtabula, OH       |   |       | 493,000    |                    | 5.40   | %                 | July 11, 2010     |   |
| Sherwin Williams     |   | Boardman, OH        |   |       | 595,000    |                    | 5.40   | %                 | July 11, 2010     |   |
| Apria                |   | Indianapolis, IN    |   |       | 4,615,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| Gander Mountain      |   | Houston, TX         |   |       | 7,800,000  |                    | 6.68   | %                 | June 11, 2011     |   |
| CVS                  |   | Lago Vista, TX      |   |       | 3,151,000  |                    | 5.42   | %                 | July 11, 2015     |   |
| CVS                  |   | Duncanville, TX     |   |       | 2,137,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| CVS                  |   | Independence, MO    |   |       | 2,521,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| Eckerd               |   | Murfreesboro, TN    |   |       | 2,303,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| Eckerd               |   | Spartanburg, SC     |   |       | 3,406,000  |                    | 5.55   | %                 | July 11, 2015     |   |
| Rite Aid             |   | Wheelersburg, OH    |   |       | 1,380,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| Eckerd               |   | Philadelphia, PA    |   |       | 2,691,000  |                    | 5.40   | %                 | July 11, 2010     |   |
| Eckerd               |   | Hayes, VA           |   |       | 2,773,000  |                    | 5.55   | %                 | July 11, 2015     |   |

 

 

F-13

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

 

|  

**Property** |   | **Location**         |   | **Amount** |        | **Fixed Interest Rate** |   | **Maturity Date** |               |
|----------------------|--------|----------------------|--------|------------|-------------|-------------------------|--------|-------------------|--------------------|
| Eckerd               |   | Travelers Rest, SC   |   | $          | 3,137,000   |                    | 5.63   | %                 | August 11, 2015    |   |
| Tractor Supply       |   | Paducah, KY          |   |       | 1,187,000   |                    | 5.64   | %                 | August 11, 2015    |   |
| Rite Aid             |   | St. Mary’s, OH |   |       | 1,687,000   |                    | 5.64   | %                 | August 11, 2015    |   |
| Walgreens            |   | Hutchinson, KS       |   |       | 3,462,000   |                    | 5.51   | %                 | August 11, 2015    |   |
| Walgreens            |   | Newton, KS           |   |       | 2,891,000   |                    | 5.51   | %                 | August 11, 2015    |   |
| Tractor Supply       |   | Glasgow, KY          |   |       | 1,388,000   |                    | 5.53   | %                 | September 11, 2015 |   |
| Best Buy             |   | Tupelo, MS           |   |       | 2,707,000   |                    | 5.57   | %                 | September 11, 2010 |   |
| Conns                |   | Austin, TX           |   |       | 2,640,000   |                    | 5.71   | %                 | October 11, 2010   |   |
| Conns                |   | Pecan Park, TX       |   |       | 2,571,000   |                    | 5.71   | %                 | October 11, 2010   |   |
| Conns                |   | Hurst, TX            |   |       | 1,444,000   |                    | 5.71   | %                 | October 11, 2010   |   |
| Vanguard             |   | College Park, GA     |   |       | 8,625,000   |                    | 6.56   | %                 | June 11, 2016      |   |
| Tractor Supply       |   | Topeka, KS           |   |       | 1,677,500   |                    | 5.88   | %                 | September 1, 2017  |   |
|                 |   |                 |   | $          | 117,977,000 |                    |   |              |               |   |

 

The mortgage notes require monthly interest-only payments with the principal        balance due on various dates from November 2009 through September 2017. Each of the        mortgage notes are secured by the respective property. The mortgage notes are generally        non-recourse to the Company and Cole OP I, but both are liable for customary non-recourse        carve-outs.

         

Generally, the mortgage notes may not be prepaid, in whole or in part,        except under the following circumstances: (i) full prepayment may be made on any of        the three monthly payment dates occurring immediately prior to the maturity date, and        (ii) partial prepayments resulting from the application of insurance or condemnation        proceeds to reduce the outstanding principal balance of the mortgage notes. Notwithstanding        the prepayment limitations, the Company may sell the properties to a buyer that assumes the        respective mortgage loan. The transfer would be subject to the conditions set forth in the        individual property’s mortgage note document, including without limitation, the        lender’s approval of the proposed buyer and the payment of the lender’s fees,        costs and expenses associated with the sale of the property and the assumption of the        loan.

         

Generally, in the event that a mortgage note is not paid off on the        respective maturity date, most mortgage notes include hyper-amortization provisions. Under        the hyper-amortization provisions, the individual mortgage note maturity date will be        extended by 20 years. During such period, the lender will apply 100% of the rents collected        to the following items in the order indicated: (i) payment of accrued interest at the        original fixed interest rate, (ii) all payments for escrow or reserve accounts, (iii) any        operating expenses of the property pursuant to an approved annual budget, (iv) any        extraordinary expenses, and (v) the balance of the rents collected will be applied to the        following in such order as the lender may determine: (1) any other amounts due in        accordance with the loan documents, (2) the reduction of the principal balance of the        mortgage note, and (3) capitalized interest at an interest rate equal to the greater        of (A) the initial fixed interest rate as stated on the respective mortgage note agreement        plus 2.0% per annum or (B) the then current Treasury Constant Maturity Yield Index plus        2.0% per annum.

 

The Company’s weighted average interest rate relating to the fixed        rate mortgage notes at December 31, 2007 was approximately 5.76%.

         

         

         

         

         

         

 

F-14

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

         

The following table summarizes the scheduled aggregate principal repayments        for the five years subsequent to December 31, 2007:

 

| **For the Year Ending December 31:** |   | **Principal Repayments** |        |
|--------------------------------------|--------|--------------------------|-------------|
| 2008                                 |   | $                        | —     |   |
| 2009                                 |   |                     | 9,029,500   |   |
| 2010                                 |   |                     | 41,614,000  |   |
| 2011                                 |   |                     | 7,800,000   |   |
| 2012                                 |   |                     | —     |   |
| Thereafter                           |   |                     | 59,533,500  |   |
| Total                                |   | $                        | 117,977,000 |   |

 

The fair        value of our fixed rate mortgage notes payable at December 31, 2007 is approximately        $122.2 million.

         

**NOTE** **6** **—        INTANGIBLE LEASE LIABILITY**

 

Identified        intangible liability consisted of the following:

         

|                                                                                                                                                                                        |   | **December** **31,** |      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|-----------|
|                                                                                                                                                                                        |   | **2007**                  |      |   | **2006** |   |
| Acquired below–market leases, net of accumulated                        amortization of $609,870 and $404,794 at December 31, 2007 and 2006,                        respectively |   |                      |      |   |   |   |   |   |
| (with a weighted average life of 140 and 150 months,                        respectively).                                                                                                  |   | $                         | 1,629,003 |   |   | $ | 1,819,963 |   |

 

Amortization income recorded on the identified intangible liability, for        each of fiscal years ended December 31, 2007 and 2006 was approximately $205,000 and        approximately $202,000 respectively.

         

Estimated amortization income of the respective intangible lease liability        as of December 31, 2007 for each of the five succeeding fiscal years is as        follows:

         

| **Year** |   | **Below Market Leases** |    |   |
|----------|--------|-------------------------|---------|--------|
| 2008     |   | $                       | 203,936 |   |
| 2009     |   |                    | 203,936 |   |
| 2010     |   |                    | 201,713 |   |
| 2011     |   |                    | 200,379 |   |
| 2012     |   |                    | 200,379 |   |
|          |        |                         |         |        |  |

 

 

**NOTE****7 — COMMITMENTS AND        CONTINGENCIES**

 

***Litigation***

 

In the ordinary course of business, the Company may become subject to        litigation or claims. There are no material pending legal proceedings, 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 the consolidated results of        operations.

         

         

F-15

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

         

**NOTE****8 — RELATED PARTY TRANSACTIONS        AND ARRANGEMENTS**

 

Certain affiliates of the Company received fees and compensation in        connection with the Offering, and receive fees and compensation in connection with the        acquisition, management and sale of the assets of the Company.

         

Cole Advisors receives a finance coordination fee of up to 1% of the gross        proceeds of any loan obtained in connection with an investment. The Company paid finance        coordination fees to Cole Advisors of approximately $17,000 and approximately $392,000        during the years ended December 31, 2007 and 2006, respectively.

         

The Company pays Cole Realty, its affiliated property manager, fees for the        management and leasing of the Company’s properties. Such fees are equal to 3% of        gross revenues, plus leasing commissions at prevailing market rates, not to exceed the        greater of $4.50 per square foot or 7.5% of the total lease obligation. Cole Realty or its        affiliates also receive acquisition and advisory fees of up to 3% of the contract purchase        price of each property. The Company paid property management fees to Cole Realty of        approximately $467,000 and approximately $455,000 during the years ended December 31, 2007        and 2006, respectively. The Company paid acquisition fees to Cole Realty of $61,000 during        the year ended December 31, 2007. During the year ended December 31, 2006 the Company paid        no acquisition fees to Cole Realty.

         

The Company pays Cole Advisors a monthly asset management fee of up to 0.75%        of the aggregate asset value of the Company’s assets. The fee is payable monthly.        During the years ended December 31, 2007 and 2006, pursuant to a waiver of part of the fee,        the Company paid Cole Advisors an asset management fee of 0.50% of the aggregate asset        value of the Company’s assets, respectively. The Company is not obligated to pay any        additional amounts for such periods. However, Cole Advisors may elect to increase its asset        management fees in future periods up to the 0.75% fee. The Company paid asset management        fees to Cole Advisors of approximately $493,000 and approximately $490,000 during the years        ended December 31, 2007 and 2006, respectively.

         

If Cole Advisors, or its affiliates, provides substantial assistance 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. During the years ended December 31, 2007 and 2006, the Company        did not pay any fees or amounts to Cole Advisors relating to the sale of        properties.

         

Upon listing of the Company’s common stock on a national securities        exchange, a fee will be paid to Cole Advisors 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 an 7.5% annual cumulative,        non-compounded return to investors.

         

The Company reimburses 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. During the years ended December 31,        2007 and 2006, the Company did not reimburse Cole Advisors for any such costs.

 

**NOTE** **9** **—        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.

 

F-16

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

 

**NOTE** **10** **—        STOCKHOLDERS EQUITY**

 

***Share Redemption Program***

 

The Company’s common stock is currently not listed on a national        securities exchange, and the Company currently does not intend to list its common stock. In        order to provide stockholders with the possibility of liquidity, stockholders who have held        their shares for at least one year may receive the benefit of limited interim liquidity by        presenting for redemption all or a minimum portion of their shares to the Company at any        time in accordance with the procedures outlined below. At that time, the Company may,        subject to the conditions and limitations described below, redeem the shares presented for        redemption for cash to the extent that the Company has sufficient funds available to it to        fund such redemption. The Company will not pay its advisor or its affiliates any fees to        complete any transactions under the share redemption program.

         

The Company determines at the beginning of each fiscal year the maximum        amount of shares that it may redeem during that year. The Company may use up to 0.5% of its        annual cash flow to meet these redemption needs, including cash proceeds generated from new        offerings, operating cash flow not intended for dividends, borrowings, and capital        transactions such as asset sales or refinancings. During the year ended December 31, 2007,        the Company redeemed 1,300 shares at $9.25 per share and 3,500 shares at $10.00 per share        under the share redemption program. During the year ended December 31, 2006, the Company        redeemed 2,500 shares at $8.50 per share under the share redemption program.

         

Except as described below for redemptions upon the death of a stockholder,        the purchase price 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 advisor or another firm it might        choose for that purpose. The Company’s board of directors reserves the right in its        sole discretion at any time and from time to time to (1) waive the one-year holding period        in the event of the death or bankruptcy of a stockholder or other exigent circumstances,        (2) reject any request for redemption, (3) change the purchase price for redemption,        or (4) otherwise amend the terms of the share redemption program.

         

The purchase price for shares redeemed upon the death of a stockholder        generally will be equal to the price the stockholder actually paid for the shares. If, at        the time of redemption, the Company’s advisor or another firm it might choose for        that purpose has made a determination of the net asset value per share, the purchase price        for shares redeemed upon the death of a stockholder will be the net asset value of the        shares as so determined. The Company will redeem shares upon the death of a stockholder        only to the extent that it has sufficient funds available to the Company to fund such        redemption.

         

Redemption of shares, when requested, generally are made quarterly on a        first-come, first-served basis. The Company cannot guarantee that it will have sufficient        available cash flow to accommodate any or all requests made in any quarter. If the Company        does not have such sufficient funds available, at the time when redemption is requested, a        stockholder can (1) withdraw his or her request for redemption or (2) ask that the        Company honor such stockholder request at such time, if any, when sufficient funds become        available. Such pending requests will generally be honored on a first-come, first-served        basis.

         

Stockholders may present to the Company fewer than all of their shares for        redemption, except that (1) any participating stockholder must present for redemption at        least 2,500 shares and (2) if any participating stockholder retains any shares, such        stockholder must retain at least 2,500 shares.

         

The shares the Company redeems under its share redemption program will be        cancelled and return to the status of authorized but unissued shares. The Company does not        intend to resell such shares to the public unless they are first registered with the        Securities and Exchange Commission under the Securities Act and under appropriate state        securities laws or otherwise sold in compliance with such laws.

 

 

 

F-17

**COLE        CREDIT PROPERTY TRUST, INC.**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)**

 

 

**NOTE** **11** **—        INCOME TAXES**

 

For income tax purposes, distributions to common stockholders are        characterized as ordinary income, capital gains, or as a return of a stockholder’s        invested capital. The following table represents the character of distributions to        stockholders for the years ended December 31, 2007 and 2006:

 

| **Character of Distributions:** |   | **2007** |   | **2006** |   |
|---------------------------------|--------|----------|--------|----------|--------|
| Ordinary income                 |   |     | 39     | %        |   | 31 | % |
| Capital gain                    |   |     | 1      | %        |   | — | % |
| Return of capital               |   |     | 60     | %        |   | 69 | % |
|                            |   |     | 100    | %        |   | 100 | % |

 

At December 31, 2007, the tax basis carrying value of the        Company’s total assets was approximately $194.8 million. During the years ended        December 31, 2007 and 2006, the Company incurred state income taxes of approximately        $44,000 and approximately $15,000, respectively, which has been recorded in general and        administrative expenses in the consolidated statements of operations.

 

**NOTE****12 — OPERATING        LEASES**

 

All of the Company’s real estate assets are leased to tenants under        operating leases, for which the terms and expirations vary. The leases frequently have        provisions to extend the lease agreement and other terms and conditions as negotiated. The        Company retains substantially all of the risks and benefits of ownership of the real estate        assets leased to tenants.

         

The future minimum rental income from the Company’s investment in real        estate assets under non-cancelable operating leases, at December 31, 2007 is as        follows:

 

| **Year Ending December 31:** |   | **Amount** |        |
|------------------------------|--------|------------|-------------|
| 2008                         |   | $          | 15,864,367  |   |
| 2009                         |   |       | 15,864,367  |   |
| 2010                         |   |       | 15,864,367  |   |
| 2011                         |   |       | 15,864,367  |   |
| 2012                         |   |       | 15,864,367  |   |
| Thereafter                   |   |       | 123,468,145 |   |
| Total                        |   | $          | 202,789,980 |   |

 

 

F-18