Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies [Abstract]

COMMITMENTS AND CONTINGENCIES

11. COMMITMENTS AND CONTINGENCIES

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

Rent expense under these operating leases was approximately $5.9 million and $5.7 million for the three months ended September 30, 2011 and 2010, respectively, and approximately $17.9 million and $17.3 million for the nine months ended September 30, 2011 and 2010, respectively. Rent expense is included in general and administrative expense in the accompanying consolidated statements of operations.

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

NYSE Listing — On April 7, 2011, we received written notice from NYSE Regulation, Inc. that the 30 trading-day average closing price of its common stock had fallen below $1.00 and as a consequence, we were no longer in compliance with the continued listing criteria of the New York Stock Exchange (the “NYSE”) relating to minimum average trading price. As of April 4, 2011, the Company’s 30 trading-day average closing price was $0.99 per share.

The NYSE’s continued listing standards require that we maintain an average market capitalization and shareowners’ equity of not less than $50.0 million and that our common stock, among other things, not have an average closing price of at least $1.00 over a consecutive thirty trading day period. As of September 30, 2011, we had a market capitalization and shareowner’s deficit of $29.4 million and $101.9 million, respectively, a stock price of $0.42 per share and a thirty day average of $0.53 per share. There can be no assurance that we will be able to maintain the minimum levels of market capitalization and shareowner’s equity and stock price as required by the NYSE. If we are unable to maintain compliance with the NYSE’s continued listing standard, our common stock will be delisted from the NYSE. As a result, we likely would have our common stock listed on another national exchange or quoted on the Over-the-Counter Bulletin Board (“OTC BB”) in order to have our common stock continue to be traded on a public market. In order to have our common stock listed on another national exchange, we will need to effect a reverse stock split. However, there can be no assurance that we will be able to obtain the required shareowner approval for such reverse stock split. Securities that trade on the OTC BB generally have less liquidity and greater volatility than securities that trade on the NYSE. Delisting from the NYSE and failure to register on another national exchange, of which there are no assurances, would trigger a “fundamental change” under the indenture for our Convertible Notes and allow the holders of the Convertible Notes to trigger a repurchase obligation by us of the Convertible Notes. We may not have sufficient funds to repurchase the Convertible Notes should such a fundamental change occur. Delisting from the NYSE may also preclude us from using certain state securities law exemptions, which could make it more difficult and expensive for us to raise capital in the future and more difficult for us to provide compensation packages sufficient to attract and retain top talent. In addition, because issuers whose securities trade on the OTC BB are not subject to the corporate governance and other standards imposed by the NYSE, and such issuers receive less news and analyst coverage, our reputation may suffer, which could result in a decrease in the trading price of our shares. The delisting of our common stock from the NYSE, therefore, could significantly disrupt the ability of investors to trade our common stock and could have a material adverse effect on us and the value and liquidity of our common stock.

As required by the NYSE, in order to maintain our listing, we were required to have our average share price return to at least the $1.00 price level by October 7, 2011. As of October 7, 2011, and through the date of this Quarterly Report, we have not cured this price deficiency. We have been in continuous dialogue with the NYSE regarding our continuing efforts to cure this deficiency, and at the present time the NYSE has agreed to continue to work with us on an interim basis as we take actions to cure this deficiency in connection with our strategic process or otherwise.

Our business operations, SEC reporting requirements and debt agreements are currently unaffected by our current NYSE status.

Claims and Lawsuits — We are involved in lawsuits relating to certain of the investment management offerings of our former affiliate, Grubb & Ellis Realty Investors, LLC (“GERI”), in particular, its TIC programs. These lawsuits allege a variety of claims in connection with these offerings, including mismanagement, breach of contract, negligence, fraud and breach of fiduciary duty, among other claims. Plaintiffs in these suits seek a variety of remedies, including rescission, actual and punitive damages, and attorneys’ fees and costs. The damages being sought are unspecified and to be determined at trial. It is difficult to predict the ultimate disposition of these lawsuits and our ultimate liability with respect to such claims and lawsuits. It is also difficult to predict the cost of defending these matters and to what extent claims will be covered by our existing insurance policies. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our cash flows, financial position and results of operations.

Met Center 10

One such matter relates to a TIC property known as Met Center 10, located in Austin, Texas. The Company and certain of its former and current subsidiaries have been involved in multiple legal proceedings relating to Met Center 10, including three actions pending in state court in Austin, Texas and an arbitration proceeding being conducted in California. The arbitration proceeding involves GERI, a subsidiary of Daymark, and is pending before the American Arbitration Association in Orange County, California captioned NNN Met Center 10 1, LLC, et al. v. Grubb & Ellis Realty Investors, LLC (the “Met 10 Arbitration”). A state court action involving GERI is pending in the District Court of Travis County, Texas captioned NNN Met Center 10, LLC v. Met Center Partners-6, Ltd., et al. (the “Met 10 Main Action”). Two additional state court actions involving the Company, GERI, and Grubb & Ellis Management Services, Inc. (“GEMS”) are pending in the District Court for Travis County, Texas captioned NNN Met Center 10-1, LLC v. Lexington Insurance Company, et al. and NNN Met Center 10, LLC v. Lexington Insurance Company, et al. (together, the “Met 10 Lexington Actions”).

As described above, under the Purchase Agreement, we agreed to indemnify Purchaser and its affiliates (including GERI) against liabilities, expenses, obligations, or claims related to Met Center 10, subject to certain limitations.

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

Before the beginning of the Phase 2 hearing, the TICs, GERI, and Lexington Insurance Company reached a settlement, which has been documented and executed by the parties, and which is awaiting court approval. The settlement is for $0.1 million, net of insurance recoveries. Among other things, under the terms of the settlement, GERI must pay $0.1 million to the TICs shortly after the settlement is approved by the court, and may be obligated to subsequently pay up to approximately $0.6 million in addition to the initial $0.1 million payment, depending upon the resolution of claims relating to Met Center 10 against parties other than GERI. The TICs are releasing all claims relating to Met Center 10 against, among others, us and GERI. The $0.1 million settlement was paid by GERI in the third quarter of 2011.

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

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

TIC Program Exchange Litigation

GERI and Grubb & Ellis Company are defendants in an action filed on or about February 14, 2011 in the Superior Court of Orange County, California captioned S. Sidney Mandel, et al. v. Grubb & Ellis Realty Investors, LLC, et al. The plaintiffs allege that, in order to induce the plaintiffs to purchase $22.3 million in TIC investments that GERI (formerly known as Triple Net Properties, LLC) was syndicating, GERI offered to subsequently “repurchase” those investments and provide certain “put” rights under certain terms and conditions pursuant to a letter agreement executed between GERI and the plaintiffs. The plaintiffs allege that GERI has failed to honor its purported obligations under the letter agreement and have initiated suit for breach of contract, breach of the implied covenant of good faith and fair dealing and declaratory relief as to the rights and obligations of the parties under the letter agreement. By way of a first amended complaint, the plaintiffs are alleging that GERI is merely an inadequately capitalized instrumentality of Grubb & Ellis Company and that Grubb & Ellis Company should be held liable for acts and omissions of GERI. The plaintiffs are seeking damages totaling $26.5 million, attorneys’ fees and costs. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of possible loss for this matter.

Under the Purchase Agreement, IUC-SOV, LLC agreed to indemnify and hold harmless us and our officers, directors, and affiliates against any liabilities of, obligations of or claims against us related to or arising from the businesses or operations of any “Acquired Company” (including GERI). By letter dated September 26, 2011, the Company made a demand, pursuant to the Purchase Agreement, that IUC-SOV, LLC indemnify and hold harmless us against any and all losses that may be incurred or suffered by us in connection with the Mandel action. IUC-SOV, LLC did not make any objection to that claim for indemnification.

We and GERI filed demurrers to the first amended complaint. The court sustained GERI’s demurrer and granted the plaintiffs leave to file an amended pleading. The court denied our demurrer. We intend to vigorously defend the claims asserted by the plaintiffs and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of possible loss for this matter.

Durham Office Park

Grubb & Ellis Company and Grubb & Ellis Securities as well as various Daymark subsidiaries are defendants in an action filed on or about July 21, 2010 in North Carolina Business Court, Durham County Superior Court Division, captioned NNN Durham Office Portfolio I, LLC, et al. v. Grubb & Ellis Company, et al. Plaintiffs invested more than $11 million for TIC interests in a commercial real estate project in Durham, North Carolina. Plaintiffs claim, among other things, that information regarding the intentions of the property’s anchor tenant to remain in occupancy was withheld and misrepresented. Plaintiffs have asserted claims for breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty, fraud, unfair and deceptive trade practices and conspiracy. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome. At this time it is not possible to estimate a range of possible loss for this matter.

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

Guarantees — Historically Daymark provided non-recourse carve-out guarantees or indemnities with respect to loans for properties owned or under the management of Daymark. As of September 30, 2011, subsequent to the sale of Daymark, there were six properties under the management of Daymark for which we continue to have non-recourse carve-out loan guarantees or indemnities of approximately $120.7 million in total principal outstanding (of which $12.2 million are recourse loan guarantees) with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $198.0 million. As of December 31, 2010, there were 133 properties under management with non-recourse carve-out loan guarantees or indemnities of approximately $3.1 billion in total principal outstanding with terms ranging from one to 10 years, secured by properties with a total aggregate purchase price of approximately $4.3 billion. In addition, the consolidated VIEs and unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to the interests in our TIC investments.

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

	September 30,		December 31,
(In thousands)	2011		2010
Daymark non-recourse/carve-out guarantees of debt of properties under Daymark management(1)	$	—	$	2,975,582
Grubb & Ellis Company non-recourse/carve-out guarantees of debt of properties under Daymark management(1)	$	77,394	$	47,092
Daymark and Grubb & Ellis Company non-recourse/carve-out guarantees of debt of properties under Daymark management(2)	$	31,052	$	31,271
Daymark non-recourse/carve-out guarantees of debt of Daymark owned property(1)	$	—	$	60,000
Daymark recourse guarantees of debt of properties under Daymark management	$	—	$	12,900
Grubb & Ellis Company recourse guarantees of debt of properties under Daymark management(3)	$	12,248	$	11,998
Daymark recourse guarantees of debt of Daymark owned property(4)	$	—	$	10,000

(1) A “non-recourse/carve-out” guarantee or indemnity generally imposes liability on the guarantor or indemnitor in the event the borrower engages in certain acts prohibited by the loan documents. Each non-recourse carve-out guarantee or indemnity is an individual document entered into with the mortgage lender in connection with the purchase or refinance of an individual property. While there is not a standard document evidencing these guarantees or indemnities, liability under the non-recourse carve-out guarantees or indemnities generally may be triggered by, among other things, any or all of the following:

• a voluntary bankruptcy or similar insolvency proceeding of any borrower;

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

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

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

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

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

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

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

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

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

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

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

If property values and performance decline, the risk of exposure under these guarantees increases. We initially evaluate these guarantees to determine if the guarantee meets the criteria required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees, (“Guarantees Topic”). Any such liabilities were insignificant upon execution of the guarantees. In addition, on an ongoing basis, we evaluate the need to record an additional liability in accordance with the requirements of ASC Topic 450, Contingencies, (“Contingencies Topic”). As of September 30, 2011 and December 31, 2010, we had recourse guarantees of $12.2 million and $24.9 million, respectively, relating to debt of properties under Daymark management (of which $12.2 million and $12.0 million, respectively, is recourse back to Grubb & Ellis Company, the remainder of which is recourse to Daymark). As of September 30, 2011 and December 31, 2010, approximately $1.3 million and $9.5 million, respectively, of these recourse guarantees relate to debt that has matured, is in default, or is not currently in compliance with certain loan covenants (of which $1.3 million and $2.0 million, respectively, is recourse back to Grubb & Ellis Company, the remainder of which is recourse to Daymark). In addition, as of September 30, 2011, and December 31, 2010, we had $8.0 million of recourse guarantees related to debt that will mature in the next twelve months (of which $8.0 million is recourse back to Grubb & Ellis Company). In connection with the sale of Daymark, the purchaser indemnified us up to $7.5 million for liabilities, obligations and claims related to or arising from the business or operations of Daymark or its subsidiaries. Our evaluation of the potential liability under these guarantees may prove to be inaccurate and liabilities may exceed estimates. In evaluating the potential liability relating to such guarantees, we consider factors such as the value of the properties secured by the debt, the likelihood that the lender will call the guarantee in light of the current debt service and other factors. As of September 30, 2011 and December 31, 2010, we recorded a liability of $0 and $0.8 million which is included in liabilities held for sale, related to our estimate of probable loss related to recourse guarantees of debt of properties under Daymark management and previously under management.

An unaffiliated, individual investor entity (the “TIC debtor”), who was a minority owner in the Met Center 10 TIC program originally sponsored by GERI, filed a chapter 11 bankruptcy petition in January 2011. The principal balance of the mortgage debt for the Met Center 10 property was approximately $29.4 million at the time of the bankruptcy filing. On February 1, 2011, the special servicer for that loan foreclosed on all of the undivided TIC ownership interests in the Met Center 10 property, except the interest owned by the TIC debtor. The automatic stay imposed following the bankruptcy filing prevented the special servicer from foreclosing on 100% of the TIC ownership interests. The special servicer filed a motion for relief from the automatic stay to foreclose upon the remaining TIC ownership interest. By order dated May 2, 2011, the bankruptcy court continued the automatic stay, subject to certain conditions, to November 1, 2011. The May 2, 2011 order also established a procedure by which the special servicer would be required to reconvey the foreclosed upon interests to the Met Center 10 debtor and the other investor entities following payment of an “amount due” as that term is defined in the May 2, 2011 Order. By subsequent order dated October 13, 2011, the bankruptcy court continued the automatic stay, subject to certain conditions, to February 28, 2012.

GERI executed a non-recourse carve-out guarantee in connection with the mortgage loan for the Met 10 property. As discussed in the “Guarantees” disclosure above, such a “non-recourse carve-out” guarantee only imposes liability on GERI if certain acts prohibited by the loan documents take place. Liability under the non- recourse carve-out guarantee may be triggered by the voluntary bankruptcy filing made by the TIC debtor. As a consequence of the bankruptcy filing, the lender may assert that GERI is liable under the guarantee. GERI’s ultimate liability under the guarantee is uncertain as a result of numerous factors, including, without limitation, whether the bankruptcy filing of the TIC debtor triggered GERI’s obligations under the guarantee, the amount of the lender’s credit bid at the time of foreclosure, events in the bankruptcy proceeding and the ultimate disposition of the bankruptcy proceeding, and the defenses GERI may raise under the guarantee. As described above, under the Purchase Agreement, the Company agreed to indemnify Purchaser and its affiliates (including GERI) against liabilities, expenses, obligations, or claims related to Met Center 10, subject to certain limitations. The Company intends to vigorously dispute any imposition of any liability under the Met Center 10 guarantee. As of September 30, 2011, we did not have any liabilities accrued related to that guarantee.

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

Deferred Compensation Plan — During 2008, we implemented a deferred compensation plan that permits employees and independent contractors to defer portions of their compensation, subject to annual deferral limits, and have it credited to one or more investment options in the plan. As of September 30, 2011 and December 31, 2010, $3.0 million and $3.4 million, respectively, reflecting the non-stock liability under this plan were included in accounts payable and accrued expenses. We have purchased whole-life insurance contracts on certain employee participants to recover distributions made or to be made under this plan and as of September 30, 2011 and December 31, 2010 have recorded the cash surrender value of the policies of $0.3 million and $1.1 million, respectively, in prepaid expenses and other assets.

In addition, we award “phantom” shares of our stock to participants under the deferred compensation plan. These awards vest over three to five years. Vested phantom stock awards are also unfunded and paid according to distribution elections made by the participants at the time of vesting and will be settled by issuing shares of our common stock from our treasury share account or issuing unregistered shares of our common stock to the participant. As of September 30, 2011 and December 31, 2010, an aggregate of 3.8 million and 4.1 million phantom share grants were outstanding, respectively. Generally, upon vesting, recipients of the grants are entitled to receive the number of phantom shares granted, regardless of the value of the shares upon the date of vesting; provided, however, as of September 30, 2011 grants with respect to 686,670 phantom shares had a guaranteed minimum share price ($2.4 million in the aggregate) that will result in us paying additional compensation to the participants should the value of the shares upon vesting be less than the grant date value of the shares. We account for additional compensation relating to the “guarantee” portion of the awards by measuring at each reporting date the additional payment that would be due to the participant based on the difference between the then current value of the shares awarded and the guaranteed value. This award is then amortized on a straight-line basis as compensation expense over the requisite service (vesting) period, with an offset to deferred compensation liability.