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SPIRIT REALTY CAPITAL, INC. - Annual Report: 2007 (Form 10-K)

COLE CREDIT PROPERTY TRUST II, INC.
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-K
 
     
(Mark One)    
 
þ
  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 000-51963
 
COLE CREDIT PROPERTY TRUST II, INC.
(Exact name of registrant as specified in its charter)
 
     
Maryland
  20-1676382
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification 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:
None
 
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 þ
 
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 þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ      No o
 
Indicate by check mark 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.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
   
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No þ
 
The aggregate market value of the voting stock held by nonaffiliates as of June 29, 2007: approximately $596.1 million assuming a market value of $10.00 per share.
 
The number of shares of common stock outstanding as of March 31, 2008 was 116,004,302.
 
Documents Incorporated by Reference:
 
The Registrant incorporates by reference portions of the Cole Credit Property Trust II, 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
 
                 
    2  
 
PART I
      BUSINESS     3  
      RISK FACTORS     16  
      UNRESOLVED STAFF COMMENTS     36  
      PROPERTIES     37  
      LEGAL PROCEEDINGS     39  
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     39  
 
PART II
      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     40  
      SELECTED FINANCIAL DATA     44  
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     45  
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS     59  
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     59  
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     59  
      CONTROLS AND PROCEDURES     59  
      OTHER INFORMATION     60  
 
PART III
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     61  
      EXECUTIVE COMPENSATION     61  
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     61  
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE     61  
      PRINCIPAL ACCOUNTING FEES AND SERVICES     61  
 
PART IV
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     61  
    62  
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
    S-1  
    S-2  
    S-20  
    S-21  
 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


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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
Certain statements contained in this Annual Report on Form 10-K of Cole Credit Property Trust II, 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 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 intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. See the section captioned “Item 1A -Risk Factors” beginning on page 16 of this Annual Report on Form 10-K.
 
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.


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PART I
 
ITEM 1.   BUSINESS
 
Formation
 
Cole Credit Property Trust II, Inc. (the “Company,” “we,” “our,” or “us”) is a Maryland corporation formed on September 29, 2004, that has 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 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 333 properties located in 43 states and the U.S. Virgin Islands, comprising approximately 11.3 million rentable square feet. At December 31, 2007, these properties were approximately 99% leased. As of December 31, 2007, we also owned 69 mortgage notes receivable, aggregating approximately $87.1 million, secured by 43 restaurant properties and 26 single-tenant retail properties, each of which is subject to a net lease.
 
Substantially all of our business is conducted through our operating partnership, Cole Operating Partnership II, LP, a Delaware limited partnership organized in 2004 (“Cole OP II”). We own a 99.99% interest in Cole OP II as its general partner. The remaining 0.01% of Cole OP II is held as a limited partner’s interest by Cole REIT Advisors II, LLC (“Cole Advisors II”), which is our affiliated advisor.
 
Cole Advisors II, pursuant to a contractual arrangement, is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf. The agreement with Cole Advisors II is for a one-year term and is reconsidered on an annual basis by our board of directors.
 
On June 27, 2005, we commenced a public offering on a “best efforts” basis of up to 45,000,000 shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a Registration Statement on Form S-11 filed with the SEC under the Securities Act (the “Initial Offering”). The Registration Statement also covered up to 5,000,000 shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of our common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock. On November 13, 2006, we filed a registration statement with the SEC under Rule 462(b) to add securities to the Initial Offering. The registration statement registered an additional 4,390,000 shares of common stock for sale in the primary offering and an additional 952,000 shares of common stock for sale pursuant to our DRIP.
 
We commenced our principal operations on September 23, 2005, when we issued the initial 486,000 shares of our common stock in the Initial Offering. Prior to such date, we were considered a development stage company. We terminated the Initial Offering on May 22, 2007. As of the close of business on May 22, 2007, we had issued a total of 54,838,315 shares in the Initial Offering, including 53,909,877 shares sold in the primary offering and 928,438 shares sold pursuant to the DRIP, resulting in gross offering proceeds of approximately $547.4 million. At the completion of the Initial Offering, a total of 503,685 shares of common stock remained unsold, including 230,123 shares that remained unsold in the primary offering and 273,562 shares of common stock that remained unsold pursuant to the DRIP. All unsold shares in the Initial Offering were deregistered.
 
On May 23, 2007, we commenced our follow-on public offering of up to 150,000,000 shares of common stock (the “Follow-on Offering”). The Follow-on Offering includes up to 125,000,000 shares to be offered for sale at $10.00 per share in the primary offering and up to 25,000,000 shares to be offered for sale pursuant to our DRIP. As of December 31, 2007, we had accepted subscriptions for 38,989,723 shares of our common stock in the Follow-on Offering, resulting in gross proceeds of approximately $389.1 million. Combined with the gross proceeds from the Initial Offering, we raised aggregate gross proceeds from our offerings of approximately $936.5 million as of December 31, 2007, before offering costs, selling commissions, and dealer management fees of approximately $87.3 million. As of December 31, 2007, we were authorized to issue 10,000,000 shares of preferred stock, but had none issued or outstanding.


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As of March 31, 2008, the Company had received approximately $1.2 billion in gross offering proceeds through the issuance of approximately 116.5 million shares of its common stock in its offerings. As of March 31, 2008, approximately $659.3 million in shares (65.9 million shares) remained available for sale to the public, exclusive of shares available under the DRIP.
 
We admit new stockholders pursuant to the Follow-on Offering at least monthly, although we typically do so on a weekly basis. All subscription proceeds are held in a separate account until the subscribing investors are admitted as stockholders. Upon admission of new stockholders, subscription proceeds are released to us and may be utilized as consideration for investments and the payment or reimbursement of dealer manager fees, selling commissions, organization and offering expenses, and operating expenses. We also have used, and may continue to use, a portion of the net proceeds from the Follow-on Offering to fund all or part of our distributions to stockholders. Such distributions may constitute a return of capital and reduce the amount of capital we ultimately invest in properties. Until required for use, net offering proceeds are held in short-term, liquid investments.
 
Our stock is not currently listed on a national securities exchange. We may seek to list our stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares at this time. We do not anticipate that there would be any market for our common stock until our shares are listed for trading. In the event we do not obtain listing prior to May 22, 2017, our charter requires that we 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.
 
Investment Objectives and Policies
 
Our objective is to invest primarily in freestanding, single-tenant, retail properties net leased to investment grade and other creditworthy tenants. We may also invest in mortgage loans or other investments related to real property or entities or joint ventures that make similar investments. Our primary investment objectives are:
 
  •  to provide current income to our stockholders through the payment of cash distributions; and
 
  •  to preserve and return our stockholders’ capital contributions.
 
We also seek capital gains from our investments. We cannot assure investors that we will attain these objectives or that our capital will not decrease.
 
Decisions relating to the purchase or sale of our investments are made by our advisor, Cole Advisors II, subject to approval by our board of directors, including a majority of our independent directors. Our board of directors may revise our investment policies without the concurrence of our stockholders. Our independent directors will review our investment policies at least annually to determine that our policies are in the best interest of our stockholders.
 
Acquisition and Investment Policies
 
Primary Investments
 
We invest primarily in freestanding, single-tenant, retail properties net leased to investment grade and other creditworthy tenants. Our investments may be direct investments in such properties or in other entities that own or invest in, directly or indirectly, interests in such properties. We seek to acquire a portfolio of real estate that is diversified by geographical location and by type and size of property. Currently, our portfolio consists primarily of freestanding, single-tenant properties net leased for use as retail establishments. A portion of our portfolio also includes multi-tenant retail properties and single-tenant properties leased to office and industrial tenants. In addition, we have acquired and may continue to acquire mortgage loans secured by similar types of commercial properties in our portfolio. Although we expect our portfolio will continue to consist primarily of freestanding, single-tenant properties, we expect to continue to invest in other property types, including office and industrial properties, leased to one or more tenants. In addition, we expect to


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further diversify our portfolio by investing in multi-tenant properties that compliment our overall investment objectives and additional mortgage loans.
 
Many of our properties will be leased to single-tenants of large national retail chains or franchises, including “big box” retailers, which operate stores in the home improvement, drug, sporting goods, specialty, convenience, and restaurant industries. Other properties may be so-called “power centers,” which are comprised of big box retailers and smaller retail establishments, and other multi-tenant properties that compliment our overall investment objectives. Our advisor monitors industry trends and invests in properties on our behalf that serve to provide a favorable return balanced with risk. Our management primarily targets retail businesses with established track records. This industry is highly property dependent, therefore our advisor believes it offers highly competitive sale-leaseback investment opportunities.
 
We believe that our general focus on the acquisition of freestanding, single-tenant, retail properties net leased to investment grade and other creditworthy tenants presents lower investment risks and greater stability than other sectors of today’s commercial real estate market. Unlike funds that invest solely in multi-tenant properties, we plan to acquire a diversified portfolio comprised primarily of single-tenant properties and a smaller number of multi-tenant properties that compliment our overall investment objectives. By primarily acquiring single-tenant properties, we believe that lower than expected results of operations from one or a few investments will not necessarily preclude our ability to realize our investment objectives of cash flow and preservation of capital from our overall portfolio. In addition, we believe that freestanding retail properties, as compared to shopping centers, malls and other traditional retail complexes, offer a distinct investment advantage since these properties generally require less management and operating capital, have less recurring tenant turnover and generally offer superior locations that are less dependent on the financial stability of adjoining tenants. In addition, since we intend to acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic downturns in local markets. Our management believes that a portfolio consisting primarily of freestanding, single-tenant, retail properties net leased to creditworthy tenants diversified geographically and by the industry and brand of tenants will enhance our liquidity opportunities for investors by making the sale of individual properties, multiple properties or our investment portfolio as a whole attractive to institutional investors and by making a possible listing of our shares attractive to the public investment community.
 
To the extent feasible, we seek to achieve a well-balanced portfolio diversified by geographic location, age of the property and lease maturity. We pursue properties with tenants that represent a variety of industries so as to avoid concentration in any one industry. We expect these industries to include all types of retail establishments, such as “big box” retailers, convenience stores, drug stores and restaurant properties. We expect that tenants of our properties will also be diversified between national, regional and local brands. We will generally target properties with lease terms in excess of ten years. We may acquire properties with shorter terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable attributes. We expect that these investments will provide long-term value by virtue of their size, location, quality and condition and lease characteristics. We currently expect all of our acquisitions will be in the United States, including United States protectorates.
 
Many retail companies today are entering into sale-leaseback arrangements as a strategy for applying more capital that would otherwise be applied to their real estate holdings to their core operating businesses. We believe that our investment strategy will enable us to take advantage of the increased emphasis on retailers’ core business operations in today’s competitive corporate environment as retailers attempt to divest from real estate assets.
 
There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of the Follow-on Offering that may be invested in a single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition of properties and the amount of proceeds raised in our Follow-on Offering. For a further description, see the section titled “— Other Possible Investments” below.
 
We intend to incur debt to acquire properties where our board determines that incurring such debt is in our best interest. In addition, from time to time, we may acquire some properties without financing and later


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incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We will use the proceeds from such loans to acquire additional properties. See “— Borrowing Policies” under this section for a more detailed explanation of our borrowing intentions and limitations.
 
Investment Grade and Other Creditworthy Tenants
 
In evaluating potential property and mortgage loan acquisitions consistent with our investment objectives, we apply credit underwriting criteria to the tenants of existing properties. Similarly, we will apply credit underwriting criteria to possible new tenants when we are re-leasing properties in our portfolio. Tenants of our properties frequently are national or super-regional retail chains that are investment grade or otherwise creditworthy entities having high net worth and operating income. Generally, these tenants must be experienced multi-unit operators with a proven track record in order to meet the credit tests applied by our advisor.
 
A tenant will be considered “investment grade” when the tenant has a debt rating by Moody’s 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 rating. 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.
 
Moody’s ratings are opinions of future relative creditworthiness based on an evaluation of franchise value, financial statement analysis and management quality. The rating given to a debt obligation describes the level of risk associated with receiving full and timely payment of principal and interest on that specific debt obligation and how that risk compares with that of all other debt obligations. The rating, therefore, measures the ability of a company to generate cash in the future.
 
A Moody’s debt rating of Baa3, which is the lowest investment grade rating given by Moody’s, is assigned to companies with adequate financial security. However, certain protective elements may be lacking or may be unreliable over any given period of time. A Moody’s debt rating of Aaa, which is the highest investment grade rating given by Moody’s, is assigned to companies with exceptional financial security. Thus, investment grade tenants will be judged by Moody’s to have at least adequate financial security, and will in some cases have exceptional financial security.
 
Standard & Poor’s assigns a credit rating to both companies as a whole and to each issuance or class of a company’s debt. A Standard & Poor’s credit rating of BBB-, which is the lowest investment grade rating given by Standard & Poor’s, is assigned to companies that exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial commitments. A Standard & Poor’s credit rating of AAA+, which is the highest investment grade rating given by Standard & Poor’s, is assigned to companies or issuances with extremely strong capacities to meet their financial commitments. Thus, investment grade tenants will be judged by Standard & Poor’s to have at least adequate protection parameters, and will in some cases have extremely strong financial positions.
 
Other creditworthy tenants are tenants with financial profiles that our advisor believes meet our investment objectives. 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 our advisor considers include the financial condition of the tenant and/or guarantor, the operating history of the property with such tenant or tenants, the tenant’s or tenants’ market share and track record within its industry segment, the general health and outlook of the tenant’s or tenants’ industry segment, and the lease length and terms at the time of the acquisition.
 
Description of Leases
 
We typically purchase single-tenant properties with existing “net” leases, and when spaces become vacant or existing leases expire we anticipate entering into “net” leases. “Net” leases means leases that typically require that tenants pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, in addition


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to the lease payments. There are various forms of net leases, typically classified as triple net or double net. Triple net leases typically require the tenant to pay all costs associated with a property in addition to the base rent and percentage rent, if any. Double net leases typically have the landlord responsible for the roof and structure, or other aspects of the property, while the tenant is responsible for all remaining expenses associated with the property. In the event that we acquire multi-tenant properties, we expect to have a variety of lease arrangements with the tenants of such properties. Since each lease is an individually negotiated contract between two or more parties, each contract will have different obligations of both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property, and we will have limited ability to revise the terms of leases to those tenants.
 
We anticipate that a majority of our acquisitions will have lease terms of ten years or more at the time of the acquisition. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases for our properties also will contain provisions that increase the amount of base rent payable at points during the lease term and/or percentage rent that can be calculated by a number of factors. Under triple net and double net leases, the tenants are generally required to pay the real estate taxes, insurance, utilities and common area maintenance charges associated with the properties. Generally, the 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 insurance for both commercial general liability and property damage insurance; however, the premiums are fully reimbursable from the tenant. When 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 carefully tracked and reviewed for compliance by our advisor’s property management department. In general, leases may not be assigned or subleased without our prior written consent. If we do consent to an assignment or sublease, the original tenant generally will remain fully liable under the lease unless we release the tenant from its obligations under the lease.
 
Other Possible Investments
 
Although we expect that most of our additional property acquisitions will be of the type described above, we may make other investments. For example, we are not limited to investments in single-tenant, freestanding retail properties or properties leased to investment grade and other creditworthy tenants and complimentary multi-tenant properties. We may invest in other commercial properties such as business and industrial parks, manufacturing facilities, office buildings and warehouse and distribution facilities, or in other entities that make such investments or own such properties, in order to reduce overall portfolio risks or enhance overall portfolio returns if our advisor and board of directors determine that it would be advantageous to do so. Further, to the extent that our advisor and board of directors determine it is in our best interest, due to the state of the real estate market, in order to diversify our investment portfolio or otherwise, we will make or invest in mortgage loans secured by the same types of commercial properties that we intend to acquire.
 
Our criterion for investing in mortgage loans is substantially the same as those involved in our investment in properties. We do not intend to make loans to other persons (other than mortgage loans), 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.


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Investment Decisions
 
Cole Advisors II 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 II 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 property and location characteristics. Because the factors considered, including the specific weight we place on each factor, will vary for each potential investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
 
In addition to procuring and reviewing an independent valuation estimate and property condition report, our advisor also, to the extent such information is available, considers the following:
 
  •  unit level store performance;
 
  •  property location, visibility and access;
 
  •  age of the property, physical condition and curb appeal;
 
  •  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 whether properties are leased by, or have leases guaranteed by, companies that maintain an investment grade rating by either Standard and Poor’s or Moody’s Investor Services. Our advisor also will consider non-rated and non-investment grade rated tenants that we consider creditworthy, as described in “— Investment Grade and Other Creditworthy Tenants” above.
 
Our advisor reviews the terms of each existing lease by considering various factors, including:
 
  •  rent escalations;
 
  •  remaining lease term;
 
  •  renewal option terms;
 
  •  tenant purchase options;
 
  •  termination options;
 
  •  scope of the landlord’s maintenance, repair and replacement requirements;
 
  •  projected net cash flow yield; and
 
  •  projected internal rates of return.
 
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;


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  •  evidence of marketable title, subject to such liens and encumbrances as are acceptable to Cole Advisors II;
 
  •  financial statements covering recent operations of properties having operating histories;
 
  •  title and liability insurance policies; and
 
  •  tenant estoppel certificates.
 
We generally will not purchase any property unless and until we also 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 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 vicinity 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 a property.
 
We may enter into purchase and sale arrangements with a seller or developer of a suitable property under development or construction. In such cases, we will be obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. In such cases, prior to our acquiring the property, we generally would receive a certificate of an architect, engineer or other appropriate party, stating that the property complies with all plans and specifications. If renovation or remodeling is required prior to the purchase of a property, we expect to pay a negotiated maximum amount to the seller upon completion. We do not currently intend to construct or develop properties or to render any services in connection with such development or construction.
 
In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property. The amount paid for an option, if any, normally is surrendered if the property is not purchased and normally is credited against the purchase price if the property is purchased.
 
In purchasing, leasing and developing properties, we will be subject to risks generally incident to the ownership of real estate. See “Risk Factors — General Risks Related to Investments in Real Estate.”
 
Ownership Structure
 
Our investment in real estate generally takes the form of holding fee title or a long-term leasehold estate. In addition, we invest in mortgages, acquired in the secondary market, secured by commercial properties. We acquire such interests either directly through our operating partnership, or indirectly through limited liability companies, limited partnerships, or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with the developers of the properties, affiliates of Cole Advisors II or other persons. See the “— Joint Venture Investments” section below. In addition, we may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction so that the lease will be characterized as a “true lease” and so that we will be treated as the owner of the property for federal income tax purposes, the Internal Revenue Service could challenge this characterization. In the event that any 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.
 
Joint Venture Investments
 
As of December 31, 2007, we have not entered into any, however we may enter into, joint ventures, partnerships, co-tenancies and other co-ownership arrangements with third parties as well as affiliated entities, including other real estate programs sponsored by affiliates of our advisor for the acquisition, development or improvement of properties with affiliates of our advisor, including other real estate programs sponsored by


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affiliates of our advisor. We may also enter into such arrangements with real estate developers, owners and other unaffiliated third parties for the purpose of developing, owning and operating real properties. In determining whether to invest in a particular joint venture, Cole Advisors II will evaluate the real property that such joint venture owns or is being formed to own under the same criteria described above in “— Investment Decisions” for the selection of our real estate property investments.
 
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. In the event that the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. In the event that any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
 
Cole Advisors II may have conflicts of interest in determining which Cole-sponsored program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, if the joint venture is with an affiliate, Cole Advisors II may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since Cole Advisors II and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may have liabilities that exceed the percentage of our investment in the joint venture.
 
We may enter into joint ventures with other Cole real estate programs only if a majority of our directors not otherwise interested in the transaction and a majority of our independent directors approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by other joint venturers.
 
Borrowing Policies
 
Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. By operating on a leveraged basis, we will have more funds available for investment in properties. This will allow us to make more investments than would otherwise be possible, resulting in a more diversified portfolio. There is no limitation on the amount we may borrow against any single improved property. However, under our charter, we are required to limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. In the event that we issue preferred stock that is entitled to a preference over the common stock in respect of distributions or liquidation or is treated as debt under generally accepted accounting principles in the United States (“GAAP”), we will include it in the leverage restriction calculations, unless the issuance of the preferred stock is approved or ratified by our stockholders. We expect that during the period of our offering of common stock we will request that our independent directors approve borrowings in excess of this limitation since we will then be in the process of raising our equity capital to acquire our portfolio. However, we anticipate that our overall leverage following our offering stage will be within our charter limit.
 
Our advisor will use its best efforts to obtain financing on the most favorable terms available to us. All of our financing arrangements must be approved by a majority of our board members including a majority of our independent directors. Lenders may have recourse to assets not securing the repayment of the indebtedness. Our advisor may refinance properties during the term of a loan only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive investment becomes available and the proceeds from the refinancing can be used to purchase such investment. The benefits of the refinancing may include increased cash flow resulting from reduced debt


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service requirements, an increase in dividend distributions from proceeds of the refinancing, if any, and an increase in property ownership if some refinancing proceeds are reinvested in real estate.
 
Our ability to increase our diversification through borrowing may be adversely impacted if banks and other lending institutions continue to reduce the amount of funds available for loans secured by real estate. When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. To the extent that we do not obtain mortgage loans on our properties, our ability to acquire additional properties will be restricted and we may not be able to adequately diversify our portfolio.
 
We may not borrow money from any of our directors or from our advisor or its affiliates unless such loan is approved by a majority of the directors not otherwise interested in the transaction (including a majority of the independent directors) as fair, competitive and commercially reasonable and no less favorable to us than a comparable loan between unaffiliated parties. During the year ended December 31, 2007, we did not borrow any funds from our advisor’s affiliates. During the year ended December 31, 2006, we borrowed and subsequently repaid an aggregate of approximately $7.0 million from our advisor’s affiliates. Our board of directors, including a majority of our independent directors, not otherwise interested in the transaction approved each of these loans as being fair, competitive, and commercially reasonable to the Company and no less favorable to the Company than between unaffiliated parties under the same circumstances.
 
Acquisition of Properties from Affiliates
 
We may acquire properties or interests in properties from or in co-ownership arrangements with entities affiliated with our advisor, including properties acquired from affiliates of our advisor engaged in construction and development of commercial real properties. We will not acquire any property from an affiliate unless a majority of our directors not otherwise interested in the transaction and a majority of our independent directors determine that the transaction is fair and reasonable to us. The purchase price that we will pay for any property we acquire from affiliates of our advisor, including property developed by an affiliate as well as property held by an affiliate that has already been developed, will not exceed the current appraised value of the property. In addition, the price of the property we acquire from an affiliate may not exceed the cost of the property to the affiliate, unless a majority of our directors and a majority of our independent directors determine that substantial justification for the excess exists and the excess is reasonable. During the year ended December 31, 2007, we did not purchase any properties from our advisor’s affiliates. During the year ended December 31, 2006, we purchased 14 properties for approximately $60.6 million from our advisor’s affiliates. Our board of directors, including a majority of our independent directors, not otherwise interested in the transaction approved each of these purchases as being fair, competitive, and commercially reasonable to the Company and no less favorable to the Company than between unaffiliated parties under the same circumstances.
 
Conflicts of Interest
 
We are subject to various conflicts of interest arising out of our relationship with Cole Advisors II, our advisor, and its affiliates, including conflicts related to the arrangements pursuant to which Cole Advisors II and its affiliates will be compensated by us. 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 affiliates try to balance our interests with their duties to other Cole-sponsored programs. However, to the extent that our advisor or its 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.


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Our independent directors have an obligation to function on our behalf in all situations in which a conflict of interest may arise, and all of our directors have a fiduciary obligation to act on behalf of our stockholders.
 
Interests in Other Real Estate Programs
 
An affiliate of our advisor acts as an advisor to, and our named executive officers and one of our directors act as officers and a director of, Cole Credit Property Trust, Inc., which is a real estate investment trust that has similar investment objectives to us. Affiliates of our 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 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 investment objectives and policies as we do and which may be involved in the same geographic area, and such persons may be engaged in sponsoring one or more of such entities at approximately the same time as our shares of common stock are being offered. Our advisor, its affiliates and affiliates of our 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 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 II and its Affiliates
 
We rely on Cole Advisors II 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 in other Cole-sponsored programs and the fact that they have also engaged and will continue to engage in other business activities, Cole Advisors II and its affiliates 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 II 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.
 
In addition, most of our 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/or other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities which may conflict with the fiduciary duties that they owe to us and our stockholders.
 
We may purchase properties or interests in properties from affiliates of Cole Advisors II. 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. However, our charter provides that the purchase price of any property we acquire from an affiliate may not exceed its fair market value as determined by a competent independent appraiser. In addition, the price must be approved by a majority of our directors who have no financial interest in the transaction, including a majority of our independent directors. If the price to us exceeds the cost paid by our affiliate, our board of directors must determine that there is substantial justification for the excess cost.


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Competition in Acquiring, Leasing and Operating of Properties
 
Conflicts of interest will exist to the extent that we 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 II will seek 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 II will seek 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 resales or leasing of the various properties.
 
Affiliated Dealer Manager
 
Since Cole Capital Corporation (“Cole Capital”), our dealer manager, is an affiliate of Cole Advisors II, 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 Initial Offering or the Follow-on Offering.
 
Affiliated Property Manager
 
Our properties are, and we anticipate that properties we acquire will be, managed and leased by our affiliated property manager, Cole Realty Advisors, Inc. (“Cole Realty Advisors”), pursuant to a property management and leasing agreement. Our agreement with Cole Realty Advisors has a one year term. We expect Cole Realty Advisors to also serve as property manager for properties owned by 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 II, 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 II, 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 II and Its Affiliates
 
A transaction involving the purchase and sale of properties may result in the receipt of commissions, fees and other compensation by Cole Advisors II and its affiliates, including acquisition and advisory fees, the dealer manager fee, property management and leasing fees, asset management fees, real estate brokerage commissions and participation in nonliquidating net sale proceeds. However, the fees and compensation payable to Cole Advisors II 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 II will have considerable discretion with respect to all decisions relating to the terms and timing of all transactions. Therefore, Cole Advisors II 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 II and its affiliates regardless of the quality of the properties acquired or the services provided to us.


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Certain Conflict Resolution Procedures
 
Every transaction that we enter into with Cole Advisors II or its affiliates will be 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 Cole Advisors II or any of its affiliates.
 
In order to reduce or to eliminate certain potential conflicts of interest, our charter contains a number of restrictions relating to (1) transactions we enter into with Cole Advisors II and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities. These restrictions include, among others, the following:
 
  •  We will not purchase or lease properties in which Cole Advisors II, any of our directors or any of their respective affiliates has an interest without a determination by a majority of the directors, including a majority of the independent directors not otherwise interested in such transaction, that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the property to the seller or lessor unless there is substantial justification for any amount that exceeds such cost and such excess amount is determined to be reasonable. In no event will we acquire any such property at an amount in excess of its appraised value. We will not sell or lease properties to Cole Advisors II, any of our directors or any of their respective affiliates unless a majority of the directors, including a majority of the independent directors not otherwise interested in the transaction, determines that the transaction is fair and reasonable to us.
 
  •  We will not make any loans to Cole Advisors II, any of our directors or any of their respective affiliates, except that we may make or invest in mortgage loans involving Cole Advisors II, our directors or their respective affiliates, provided that an appraisal of the underlying property is obtained from an independent appraiser and the transaction is approved as fair and reasonable to us and on terms no less favorable to us than those available from third parties. In addition, Cole Advisors II, any of our directors and any of their respective affiliates will not make loans to us or to joint ventures in which we are a joint venture partner unless approved by a majority of the directors, including a majority of the independent directors not otherwise interested in the transaction, as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties.
 
  •  Cole Advisors II and its affiliates will be entitled to reimbursement, at cost, for actual expenses incurred by them on behalf of us or joint ventures in which we are a joint venture partner; provided, however, Cole Advisors II must reimburse us for the amount, if any, by which our total operating expenses, including the advisor asset management fee, paid during the previous fiscal year exceeded the greater of: (i) 2.0% of our average invested assets for that fiscal year, or (ii) 25.0% of our net income, before any additions to reserves for depreciation, bad debts or other similar non-cash reserves and before any gain from the sale of our assets, for that fiscal year.
 
  •  In the event that an investment opportunity becomes available that is suitable, under all of the factors considered by Cole Advisors II, for both us and one or more other entities affiliated with Cole Advisors II, and for which more than one of such entities has sufficient uninvested funds, then the entity that has had the longest period of time elapse since it was offered an investment opportunity will first be offered such investment opportunity. It will be the duty of our board of directors, including the independent directors, to insure that this method is applied fairly to us. In determining whether or not an investment opportunity is suitable for more than one program, Cole Advisors II, subject to approval by our board of directors, shall examine, among others, the following factors:
 
  •  the anticipated cash flow of the property to be acquired and the cash requirements of each program;
 
  •  the effect of the acquisition on diversification of each program’s investments by type of property, geographic area and tenant concentration;
 
  •  the policy of each program relating to leverage of properties;
 
  •  the income tax effects of the purchase to each program;


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  •  the size of the investment; and
 
  •  the amount of funds available to each program and the length of time such funds have been available for investment.
 
  •  If a subsequent development, such as a delay in the closing of a property or a delay in the construction of a property, causes any such investment, in the opinion of Cole Advisors II, to be more appropriate for a program other than the program that committed to make the investment, Cole Advisors II may determine that another program affiliated with Cole Advisors II or its affiliates will make the investment.
 
  •  We will not accept goods or services from Cole Advisors II or its affiliates or enter into any other transaction with Cole Advisors II or its affiliates unless a majority of our directors, including a majority of the independent directors, not otherwise interested in the transaction approve such transaction as fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
 
Employees
 
We have no direct employees. The employees of Cole Advisors II 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. The employees of Cole Capital, our affiliated dealer manager, provide wholesale brokerage services.
 
We are dependent on our advisor and its affiliates for services that are essential to us, including the sale of shares of our common stock, asset acquisition 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 reimburse Cole Advisors II 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 year ended December 31, 2007, approximately $672,000 was reimbursed to Cole Advisors II or its affiliates for personnel costs and third-party costs allocated in connection with the issuance of shares pursuant to our Initial Offering or the Follow-on Offering. During the year ended December 31, 2006, no amounts were reimbursed to Cole Advisors II or its affiliates for personnel costs and third-party costs allocated in connection with the issuance of shares under the Initial Offering.
 
Insurance
 
See “— Description of Leases” section above.
 
Reportable Segments
 
We operate on a consolidated basis in two operating segments: (i) commercial properties and (ii) mortgage notes receivable. See Note 2 to our consolidated financial statements in this Annual Report on Form 10-K.
 
Competition
 
As we purchase properties to build our portfolio, we are in competition with other potential buyers for the same properties and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although our properties are currently 99% leased and we intend 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.


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Concentration of Credit Risk
 
As of December 31, 2007, we had cash on deposit in three financial institutions, which was approximately $43.3 million, approximately $12.6 million and approximately $33,000, respectively, in excess of federally insured levels; however, we have not experienced any losses in such account. 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.
 
No single tenant accounted for greater than 10% of our gross annualized base rental revenues as of December 31, 2007 and 2006. Tenants in the drugstore, specialty retail, and sporting goods industries comprised approximately 15%, approximately 14%, and approximately 11%, respectively, of our gross annualized base rental revenues as of December 31, 2007. Tenants in the drugstore, specialty retail and automotive supply industries comprised approximately 25%, approximately 12% and approximately 11%, respectively, of our gross annualized base rental revenues as of December 31, 2006. Additionally, we have certain geographic concentrations in our property holdings. In particular, as of December 31, 2007, 37 of our properties were located in Texas and 15 of our properties were located in Illinois, accounting for approximately 16% and approximately 13% of our 2007 gross annualized base rental revenues. As of December 31, 2006, nine of our properties were located in Texas and five of our properties were located in Kansas, accounting for approximately 11% and approximately 9% of our 2006 gross annualized base rental revenues, respectively.
 
Litigation
 
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.
 
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. During the year ended December 31, 2007, we acquired certain properties that are subject to environmental remediation. In each case, the seller, the tenant and/or another third party has been identified as the responsible party for environmental remediation costs related to the property. Additionally, in connection with the purchase of certain of the properties, the respective sellers and/or tenants have indemnified us against future remediation costs. We do not believe that the environmental matters identified at such properties will have a material adverse effect on our consolidated results of operations, nor are we aware of any environmental matters at other properties which we believe will have a material adverse effect on our 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 registration statements, including amendments, and supplements to our prospectus in connection with our Initial Offering, and continue to do so for our Follow-on Offering, with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website, at http://www.sec.gov. Access to these filings is free of charge.
 
ITEM 1A.   RISK FACTORS
 
Set forth below are investment risks that we believe are material to our investors.
 
Risks Related to an Investment in Cole Credit Property Trust II, Inc.
 
You will not have the opportunity to evaluate our future investments before we make them, which makes an investment in us more speculative.
 
We will not provide you with information to evaluate our future investments prior to our acquisition of properties. We will seek to use our net offering proceeds, after the payment of fees and expenses, to continue to acquire a portfolio of commercial real estate comprised primarily of a large number of freestanding, single-


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tenant, retail properties net leased to investment grade or other creditworthy tenants and a smaller number of multi-tenant properties that compliment our overall investment objectives. We may also, in the discretion of our advisor, invest in other types of real estate or in entities that invest in real estate. In addition, our advisor may make or invest in mortgage loans or participations therein on our behalf if our board of directors determines, due to the state of the real estate market or in order to diversify our investment portfolio or otherwise, that such investments are advantageous to us. We established policies relating to the creditworthiness of tenants of our properties, but our board of directors has wide discretion in implementing these policies, and you will not have the opportunity to evaluate potential tenants.
 
There is no public trading market for our shares and there may never be one; therefore, it will be difficult for you to sell your shares.
 
There currently is no public market for our shares and there may never be one. If you are able to find a buyer for your shares, you may not sell your shares unless the buyer meets applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% of our stock by a single investor, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase your shares. Moreover, our share redemption program includes numerous restrictions that would limit your ability to sell your shares to us. Our board of directors may reject any request for redemption of shares, or amend, suspend or terminate our share redemption program upon 30 days’ notice. Therefore, it will be difficult for you to sell your shares promptly or at all. If you are able to sell your shares, you will likely have to sell them at a substantial discount to the price you paid for the shares. It also is likely that your shares would not be accepted as the primary collateral for a loan. You should purchase the shares only as a long-term investment because of the illiquid nature of the shares.
 
We may suffer from delays in locating suitable additional investments, which could adversely affect our ability to make distributions and the value of your investment.
 
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of Cole REIT Advisors II, our advisor, in the acquisition of our investments, the selection of our tenants and the determination of any financing arrangements. You must rely entirely on the management ability of Cole Advisors II and the oversight of our board of directors. We could suffer from delays in locating suitable additional investments, particularly as a result of our reliance on our advisor at times when management of our advisor is simultaneously seeking to locate suitable investments for other affiliated programs. Delays we encounter in the selection, acquisition and, in the event we develop properties, development of income-producing properties, likely would adversely affect our ability to make distributions and the value of your overall returns. In such event, we may pay all or a substantial portion of our distributions from the proceeds of our offering or from borrowings in anticipation of future cash flow, which may constitute a return of your capital. Distributions from the proceeds of our offering or from borrowings also could reduce the amount of capital we ultimately invest in properties. This, in turn, would reduce the value of your investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, you could suffer delays in the receipt of cash distributions attributable to those particular properties. If Cole Advisors II is unable to obtain suitable investments, we will hold our offering proceeds in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. If we cannot invest our offering proceeds within a reasonable amount of time, or if our board of directors determines it is in the best interests of our stockholders, we will return uninvested offering proceeds to investors.
 
If our advisor loses or is unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of your investment.
 
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our advisor, including Christopher H. Cole, Christopher P. Robertson, Daniel E. Weber, John M. Pons, D. Kirk McAllaster, Jr., Mike W. Mathies, and Marc T. Nemer, each of whom would be


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difficult to replace. Our advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or advisor. If any of our key personnel were to cease their affiliation with our advisor, our operating results could suffer. Further, we do not intend to separately maintain key person life insurance on Mr. Cole or any other person. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.
 
Our rights and the rights of our stockholders to recover claims against our officers, directors and our advisor are limited, which could reduce your and our recovery against them if they cause us to incur losses.
 
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter, in the case of our directors, officers, employees and agents, and the advisory agreement, in the case of our advisor, require us to indemnify our directors, officers, employees and agents and our advisor and its affiliates for actions taken by them in good faith and without negligence or misconduct. Additionally, our charter limits the liability of our directors and officers for monetary damages to the fullest extent permitted under Maryland law, subject to the limitations required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Associations, also known as the NASAA REIT Guidelines. Although our charter does not allow us to exonerate and indemnify our directors and officers to a greater extent than permitted under Maryland law and the NASAA REIT Guidelines, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our advisor and its affiliates, than might otherwise exist under common law, which could reduce your and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our advisor in some cases which would decrease the cash otherwise available for distribution to our stockholders.
 
Risks Related to Conflicts of Interest
 
Cole Advisors II will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
 
Affiliates of our advisor may sponsor other real estate investment programs in the future. We may buy properties at the same time as one or more of the other Cole-sponsored programs managed by officers and key personnel of Cole Advisors II. There is a risk that Cole Advisors II will choose a property that provides lower returns to us than a property purchased by another Cole-sponsored program. We cannot be sure that officers and key personnel acting on behalf of Cole Advisors II and on behalf of managers of other Cole-sponsored programs will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other Cole-sponsored programs own properties. Also, we may acquire properties from, or sell properties to, other Cole-sponsored programs. If one of the other Cole-sponsored programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. You will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved as a stockholder. Similar conflicts of interest may apply if our advisor determines to make or purchase mortgage loans or participations in mortgage loans on our behalf, since other Cole-sponsored programs may be competing with us for these investments.
 
Cole Advisors II faces conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense.
 
We may enter into joint ventures with other Cole-sponsored programs for the acquisition, development or improvement of properties. Cole Advisors II may have conflicts of interest in determining which Cole-


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sponsored program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, Cole Advisors II may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since Cole Advisors II and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
 
We may participate in 1031 exchange programs with affiliates of our advisor that will not be the result of arm’s-length negotiations and will result in conflicts of interest.
 
Cole Capital Partners, LLC (“Cole Capital Partners”), an affiliate of our advisor, has developed programs to facilitate the acquisition of real estate properties in co-ownership arrangements with persons who are looking to invest proceeds from a sale of real estate in order to qualify for like-kind exchange treatment under Section 1031 of the Internal Revenue Code (a “Section 1031 Program”). Section 1031 Programs are structured as co-ownership arrangements with other investors in the property (“Section 1031 Participants”) who are seeking to defer taxes under Section 1031 of the Internal Revenue Code. These programs are structured either as a tenant-in-common program or by use of a Delaware Statutory Trust. When Cole Capital Partners develops such a program, it generally organizes a new entity (a “Cole Exchange Entity”) to acquire all or part of a property. We may participate in the program by either co-investing in the property with the Cole Exchange Entity or purchasing a co-ownership interest from the Cole Exchange Entity, generally at the Cole Exchange Entity’s cost. In that event, as a co-owner of properties, we will be subject to the risks inherent in the co-ownership arrangements with unrelated third parties. Our purchase of co-ownership interests will present conflicts of interest between us and affiliates of our advisor. The business interests of Cole Capital Partners and the Cole Exchange Entity may be adverse to, or to the detriment of, our interests. Further, any agreement that we enter into with a Cole Exchange Entity will not be negotiated in an arm’s-length transaction and, as a result of the affiliation between our advisor, Cole Capital Partners and the Cole Exchange Entity, our advisor may be reluctant to enforce the agreements against such entities.
 
Cole Advisors II and its officers and employees and certain of our key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
 
Cole Advisors II and its officers and employees and certain of our key personnel and their respective affiliates are key personnel, general partners and sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.
 
Our officers face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.
 
Each of our executive officers, including Christopher H. Cole, who also serves as the chairman of our board of directors, also are officers of our advisor, our property manager, our dealer manager and other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (i) allocation of new investments and management time and services between us and the other


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entities, (ii) our purchase of properties from, or sale of properties, to affiliated entities, (iii) the timing and terms of the investment in or sale of an asset, (iv) development of our properties by affiliates, (v) investments with affiliates of our advisor, (vi) compensation to our advisor, and (vii) our relationship with our dealer manager and property manager. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.
 
Cole Advisors II faces conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
 
Under our advisory agreement, Cole Advisors II is entitled to fees that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. However, because our advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our advisor’s interests are not wholly aligned with those of our stockholders. In that regard, our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our advisor to fees. In addition, our advisor’s entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle the advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. Our advisory agreement requires us to pay a performance-based termination fee to our advisor in the event that we terminate the advisor prior to the listing of our shares for trading on an exchange or, absent such listing, in respect of its participation in net sales proceeds. To avoid paying this fee, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination fee, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the fee to the advisor at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the fee to the terminated advisor. Moreover, our advisor has the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the performance fee, which could have the effect of delaying, deferring or preventing the change of control.
 
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
 
Morris, Manning & Martin, LLP acts as legal counsel to us and also represents our advisor and some of its affiliates. There is a possibility in the future that 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. If any situation arises in which our interests appear to be in conflict with those of our advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Morris, Manning & Martin, LLP may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
 
Risks Related to Our Offering and Our Corporate Structure
 
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
 
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value of our outstanding stock and more than 9.8% in value or number, whichever is more restrictive, of any class of our outstanding stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger,


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tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
 
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
 
Our charter permits our board of directors to issue up to 250,000,000 shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
 
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit your ability to exit the investment.
 
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
 
  •  any person who beneficially owns 10% or more of the voting power of the corporation’s shares;
 
  •  an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
 
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
 
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
 
  •  80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
 
  •  two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
 
These super-majority vote requirements do not apply if the corporation’s stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving Cole Advisors II or any affiliate of Cole Advisors II. Consequently, the five-year prohibition and the super-majority vote requirements


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will not apply to business combinations between us and Cole Advisors II or any affiliate of Cole Advisors II. As a result, Cole Advisors II and any affiliate of Cole Advisors II may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
 
Maryland law also limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors.
 
Maryland law provides a second anti-takeover statute, its Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the corporation’s disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the acquirer, by officers or by directors who are employees of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock that would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the articles of incorporation or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition act any and all acquisitions of our common stock by Cole Advisors II or any affiliate of Cole Advisors II. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our affiliates or any of their affiliates.
 
If we are required to register as an investment company under the Investment Company Act, we could not continue our business, which may significantly reduce the value of your investment.
 
We are not registered as an investment company under the Investment Company Act of 1940, as amended (Investment Company Act), pursuant to an exemption in Section 3(c)(5)(C) of the Investment Company Act and certain No-Action Letters from the Securities and Exchange Commission. Pursuant to this exemption, (1) at least 55% of our assets must consist of real estate fee interests or loans secured exclusively by real estate or both, (2) at least 25% of our assets must consist of loans secured primarily by real estate (this percentage will be reduced by the amount by which the percentage in (1) above is increased); and (3) up to 20% of our assets may consist of miscellaneous investments. We intend to monitor compliance with these requirements on an ongoing basis. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
 
  •  limitations on capital structure;
 
  •  restrictions on specified investments;
 
  •  prohibitions on transactions with affiliates; and
 
  •  compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
 
In order to maintain our exemption from regulation under the Investment Company Act, we must engage primarily in the business of buying real estate, and these investments must be made within a year after our offering ends. If we are unable to invest a significant portion of our offering proceeds in properties within one year of the termination of our offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns. This would reduce the cash available for distribution to investors and possibly lower your returns.
 
To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition,


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we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court were to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
 
If you do not agree with the decisions of our board of directors, you only have limited control over changes in our policies and operations and may not be able to change such policies and operations.
 
Our board of directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on the following:
 
  •  the election or removal of directors;
 
  •  any amendment of our charter (including a change in our investment objectives), except that our board of directors may amend our charter without stockholder approval, to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, or to classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;
 
  •  our liquidation or dissolution;
 
  •  a reorganization of our company, as provided in our charter; and
 
  •  any merger, consolidation or sale or other disposition of substantially all of our assets.
 
All other matters are subject to the discretion of our board of directors.
 
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investments.
 
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies may also vary, as new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent.
 
You are limited in your ability to sell your shares pursuant to our share redemption program and may have to hold your shares for an indefinite period of time.
 
Our board of directors may amend the terms of our share redemption program without stockholder approval. Our board also is free to suspend or terminate the program upon 30 days notice or to reject any request for redemption. In addition, the share redemption program includes numerous restrictions that would limit your ability to sell your shares. Generally, you must have held your shares for at least one year in order to participate in our share redemption program. Subject to funds being available, we will limit the number of shares redeemed pursuant to our share redemption program as follows: (1) during any calendar year, we will not redeem in excess of 3% of the weighted average number of shares outstanding during the prior calendar year; and (2) funding for the redemption of shares will be limited to the net proceeds we receive from the sale of shares under our distribution reinvestment plan. These limits might prevent us from accommodating all redemption requests made in any year.


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We established the share price in our offering on an arbitrary basis; as a result, the actual value of your investment may be substantially less than what you pay.
 
Our board of directors has arbitrarily determined the selling price of the shares in our offering, and such price bears no relationship to our book or asset values, or to any other established criteria for valuing issued or outstanding shares. Because the offering price is not based upon any independent valuation, the offering price is not indicative of the proceeds that you would receive upon liquidation.
 
Because the dealer manager is one of our affiliates, investors will not have the benefit of an independent review of our prospectus as is customarily performed in underwritten offerings.
 
The dealer manager, Cole Capital, in our offering, is one of our affiliates and will not make an independent review of us or the offering. Accordingly, you will have to rely on your own broker-dealer to make an independent review of the terms of our offering. If your broker-dealer does not conduct such a review, you will not have the benefit of an independent review of the terms of our offering. Further, the due diligence investigation of us by the dealer manager cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker.
 
Your interest in Cole REIT II will be diluted if we issue additional shares.
 
Existing stockholders and potential investors in our offering do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 250,000,000 shares of stock, of which 240,000,000 shares are designated as common stock and 10,000,000 are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may increase the number of authorized shares of stock, increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our board of directors. Existing stockholders and investors purchasing shares in our offering likely will suffer dilution of their equity investment in us, in the event that we (1) sell shares in our offering or sell additional shares in the future, including those issued pursuant to our distribution reinvestment plan, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of our common stock upon the exercise of the options granted to our independent directors, (5) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement, or (6) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of Cole OP II, existing stockholders and investors purchasing shares in our offering will likely experience dilution of their equity investment in us. In addition, the partnership agreement for Cole OP II contains provisions that would allow, under certain circumstances, other entities, including other Cole-sponsored programs, to merge into or cause the exchange or conversion of their interest for interests of Cole OP II. Because the limited partnership interests of Cole OP II may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between Cole OP II and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these and other reasons described in this “Risk Factors” section, you should not expect to be able to own a significant percentage of our shares.
 
Payment of fees to Cole Advisors II and its affiliates reduces cash available for investment and distribution.
 
Cole Advisors II and its affiliates perform services for us in connection with our offer and sale of our shares, the selection and acquisition of our investments, and the management and leasing of our properties, the servicing of our mortgage loans, if any, and the administration of our other investments. They are paid substantial fees for these services, which reduces the amount of cash available for investment in properties or distribution to stockholders.


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We may be unable to pay or maintain cash distributions or increase distributions over time.
 
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions will be based principally on cash available from our operations. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties as offering proceeds become available, rental income from such properties, and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We may not be able to pay or maintain our current level of distributions or increase distributions over time. Rents from the properties may not increase, the securities we buy may not increase in value or provide constant or increased distributions over time, and future acquisitions of real properties, mortgage loans and any investments in securities may not increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. We may not have sufficient cash from operations to make a distribution required to maintain our REIT status. We may increase borrowing or use proceeds from our offering to make distributions, each of which could be deemed to be a return of your capital.
 
General Risks Related to Investments in Real Estate
 
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we may not be profitable and may not realize growth in the value of our real estate properties.
 
Our operating results are subject to risks generally incident to the ownership of real estate, including:
 
  •  changes in general economic or local conditions;
 
  •  changes in supply of or demand for similar or competing properties in an area;
 
  •  changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
 
  •  changes in tax, real estate, environmental and zoning laws; and
 
  •  periods of high interest rates and tight money supply.
 
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
 
Many of our retail properties will depend upon a single tenant for all or a majority of their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of a single tenant.
 
Almost all of our properties are, and we expect that many of our future properties will be, occupied by only one tenant or will derive a majority of their rental income from one tenant and, therefore, the success of those properties will be materially dependent on the financial stability of such tenants. Lease payment defaults by tenants could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions.


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If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.
 
Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.
 
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure you that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.
 
A high concentration of our properties in a particular geographic area, or that have tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
 
We expect that our properties will be diverse according to geographic area and industry of our tenants. However, in the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately effects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio.
 
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
 
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
 
Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return to our stockholders.
 
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce your return.


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We may obtain only limited warranties when we purchase a property and would have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
 
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
 
We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.
 
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. We will use substantially all of our gross proceeds from our offering to buy real estate and pay various fees and expenses. We intend to reserve only 0.1% of the gross proceeds from our offering for future capital needs. Accordingly, if we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
 
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
 
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
 
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
 
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets.
 
Many of our leases do not, and will not, contain rental increases over time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property.
 
Certain of our properties are subject to lock-out provisions, and in the future we may acquire or finance additional properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
 
Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Lock out provisions may prohibit us from reducing the outstanding


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indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
 
Rising expenses could reduce cash flow and funds available for future acquisitions.
 
Our current properties are, and any properties that we buy in the future will be, subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. While we expect that many of our properties will be leased on a triple-net-lease basis or will require the tenants to pay a portion of such expenses, renewals of leases or future leases may not be negotiated on that basis, in which event we may have to pay those costs. If we are unable to lease properties on a triple-net-lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs which could adversely affect funds available for future acquisitions or cash available for distributions.
 
Adverse economic conditions will negatively affect our returns and profitability.
 
Our operating results may be affected by the following market and economic challenges, which may result from a continued or exacerbated general economic slow down experienced by the nation as a whole or by the local economics where our properties may be located:
 
  •  poor economic conditions may result in tenant defaults under leases;
 
  •  re-leasing may require concessions or reduced rental rates under the new leases; and
 
  •  increased insurance premiums may reduce funds available for distribution or, to the extent such increases are passed through to tenants, may lead to tenant defaults. Increased insurance premiums may make it difficult to increase rents to tenants on turnover, which may adversely affect our ability to increase our returns.
 
The length and severity of any economic downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic downturn is prolonged or becomes more severe.
 
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
 
Generally, each of our tenants is responsible for insuring its goods and premises and, in some circumstances, may be required to reimburse us for a share of the cost of acquiring comprehensive insurance for the property, including casualty, liability, fire and extended coverage customarily obtained for similar properties in amounts that our advisor determines are sufficient to cover reasonably foreseeable losses. Tenants of single-user properties leased on a triple-net-lease basis typically are required to pay all insurance costs associated with those properties. Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain


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whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that will have adequate coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
 
Real estate related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.
 
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.
 
Revenue from our properties depends on the amount of our tenants’ retail revenue, making us vulnerable to general economic downturns and other conditions affecting the retail industry.
 
Some of our leases may also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may decrease as the sales of our tenants decrease. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue that we derive from percentage rent leases could decline upon a general economic downturn.
 
CC&Rs may restrict our ability to operate a property.
 
Some of our properties will most likely be contiguous to other parcels of real property, comprising part of the same retail center. In connection with such properties, there will likely exist significant covenants, conditions and restrictions, known as “CC&Rs,” restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.
 
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
 
While we do not currently intend to do so, we may use proceeds to acquire and develop properties upon which we will construct improvements. We will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance may also be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.


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While we do not currently intend to do so, we may invest in unimproved real property. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. Although we intend to limit any investment in unimproved property to property we intend to develop, your investment nevertheless is subject to the risks associated with investments in unimproved real property.
 
If we contract with an affiliated development company for newly developed property, we cannot guarantee that our earnest money deposit made to the development company will be fully refunded.
 
While we currently do not have an affiliated development company, our sponsor and/or its affiliates may form a development company. In such an event, we may enter into one or more contracts, either directly or indirectly through joint ventures with affiliates or others, to acquire real property from an affiliate of Cole Advisors II that is engaged in construction and development of commercial real properties. Properties acquired from an affiliated development company may be either existing income-producing properties, properties to be developed or properties under development. We anticipate that we will be obligated to pay a substantial earnest money deposit at the time of contracting to acquire such properties. In the case of properties to be developed by an affiliated development company, we anticipate that we will be required to close the purchase of the property upon completion of the development of the property by our affiliate. At the time of contracting and the payment of the earnest money deposit by us, our development company affiliate typically will not have acquired title to any real property. Typically, our development company affiliate will only have a contract to acquire land, a development agreement to develop a building on the land and an agreement with one or more tenants to lease all or part of the property upon its completion. We may enter into such a contract with our development company affiliate even if at the time of contracting we have not yet raised sufficient proceeds in our offering to enable us to close the purchase of such property. However, we will not be required to close a purchase from our development company affiliate, and will be entitled to a refund of our earnest money, in the following circumstances:
 
  •  our development company affiliate fails to develop the property;
 
  •  all or a specified portion of the pre-leased tenants fail to take possession under their leases for any reason; or
 
  •  we are unable to raise sufficient proceeds from our offering to pay the purchase price at closing.
 
The obligation of our development company affiliate to refund our earnest money will be unsecured, and no assurance can be made that we would be able to obtain a refund of such earnest money deposit from it under these circumstances since our development company affiliate may be an entity without substantial assets or operations. However, our development company affiliate’s obligation to refund our earnest money deposit may be guaranteed by Cole Realty Advisors, our property manager, which will enter into contracts to provide property management and leasing services to various Cole-sponsored programs, including us, for substantial monthly fees. As of the time Cole Realty Advisors may be required to perform under any guaranty, we cannot assure that Cole Realty Advisors will have sufficient assets to refund all of our earnest money deposit in a lump sum payment. If we were forced to collect our earnest money deposit by enforcing the guaranty of Cole Realty Advisors, we will likely be required to accept installment payments over time payable out of the revenues of Cole Realty Advisors’ operations. We cannot assure you that we would be able to collect the entire amount of our earnest money deposit under such circumstances.
 
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on your investment.
 
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for


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these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and you may experience a lower return on your investment.
 
Our properties face competition that may affect tenants’ ability to pay rent and the amount of rent paid to us may affect the cash available for distributions and the amount of distributions.
 
Our properties typically are, and we expect will be, located in developed areas. Therefore, there are and will be numerous other retail properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. This could result in decreased cash flow from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions, and the amount available for distributions to our stockholders.
 
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for any distributions.
 
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
 
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of your investment.
 
We will not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.
 
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
 
If we decide to sell any of our properties, we intend to use our best efforts to sell them for cash. However, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the


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promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
 
Our recovery of an investment in a mortgage that has defaulted may be limited.
 
There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway relocations and failure by the borrower to maintain the property.
 
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.
 
Our properties will be subject to the Americans with Disabilities Act of 1990 (Disabilities Act). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally requires that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions to our stockholders.
 
Risks Associated with Debt Financing
 
We have incurred, and expect to continue to incur, mortgage indebtedness and other borrowings, which may increase our business risks.
 
We expect to incur additional indebtedness even if we raise significant proceeds in our offering. We expect that in most instances, we will acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.
 
Our advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. There is no limitation on the amount we may borrow against any single improved property. However, under our charter, we are required to limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors. This level of borrowing is less than, and our borrowings will not exceed, 300% of our net assets, as set forth in the NASAA REIT Guidelines. We expect that during the period of our offering we will request that our independent directors approve borrowings in excess of this limitation since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital.
 
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition,


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incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected, which could result in our losing our REIT status and would result in a decrease in the value of our stockholders investment.
 
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
 
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
 
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
 
In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace Cole Advisors II as our advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
 
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
 
We expect that we will incur variable-rate indebtedness in the future. To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
 
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of your investment.
 
Our charter generally limits us to incurring debt no greater than 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of all of our assets, unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such excess borrowing. We expect that during the period of our offering we will request that our independent directors approve borrowings in excess of this limitation since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by


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restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.
 
Risks Associated with Co-Ownership Transactions
 
Our participation in a co-ownership arrangement would subject us to risk that otherwise may not be present in other real estate investments.
 
We may enter in co-ownership arrangements with respect to a portion of the properties we acquire. Co-ownership arrangements involve risks generally not otherwise present with an investment in real estate such as the following:
 
  •  the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
 
  •  the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
 
  •  the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;
 
  •  the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
 
  •  the risk that a co-owner could breach agreements related to the property, which may cause a default, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities law, result in a foreclosure or otherwise adversely affect the property and the co-ownership arrangement;
 
  •  we could have limited control and rights, with management decisions made entirely by a third-party; or
 
  •  the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.
 
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.
 
In the event that our interests become adverse to those of the other co-owners, we will not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
 
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright, we may not be able to sell our interest in a property at the time we would like to sell.
 
Federal Income Tax Risks
 
Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions.
 
We elected to be taxed as a REIT beginning with the tax year ended December 31, 2005. In order for us to continue to qualify as a REIT, we must satisfy certain requirements set forth in the Internal Revenue Code


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and Treasury Regulations and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the Internal Revenue Service, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT. Morris, Manning & Martin, LLP, our legal counsel, rendered its opinion that we will qualify as a REIT, based upon our representations as to the manner in which we are and will be owned, invest in assets and operate, among other things. However, our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific rules, the various tests imposed by the Internal Revenue Code. Morris, Manning & Martin, LLP will not review these operating results or compliance with the qualification standards on an ongoing basis. This means that we may fail to satisfy the REIT requirements at any time after the date of this opinion. Also, this opinion represents Morris, Manning & Martin, LLP’s legal judgment based on the law in effect as of the date of the opinion. Morris, Manning & Martin, LLP’s opinion is not binding on the Internal Revenue Service or the courts and we will not apply for a ruling from the Internal Revenue Service regarding our status as a REIT. Future legislative, judicial or administrative changes to the federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
 
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
 
Re-characterization of the Section 1031 programs may result in a 100% tax on income from a prohibited transaction, which would diminish our cash distributions to our stockholders.
 
The Internal Revenue Service could re-characterize transactions under the Section 1031 program such that Cole OP II, rather than the co-owner in the program (Section 1031 Participant), is treated as the bona fide owner, for tax purposes, of properties acquired and resold by a Section 1031 Participant in connection with the Section 1031 program. Such characterization could result in the fees paid to Cole OP II by a Section 1031 Participant as being deemed income from a prohibited transaction, in which event the fee income paid to us in connection with the Section 1031 programs would be subject to a 100% penalty tax. If this occurs, our ability to pay cash distributions to our stockholders will be adversely affected. We expect to obtain a legal opinion in connection with each co-ownership program to the effect that the program will qualify as a like-kind exchange under Section 1031 of the Internal Revenue Code. However, the Internal Revenue Service may take a position contrary to such an opinion.
 
Re-characterization of sale-leaseback transactions may cause us to lose our REIT status.
 
We may purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction so that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for federal income tax purposes, the IRS could challenge such characterization. In the event that any sale-leaseback transaction is challenged and re-characterized as a financing transaction or loan for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification “asset tests” or the “income tests” and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.


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You may have tax liability on distributions you elect to reinvest in our common stock.
 
If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the common stock received.
 
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
 
Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Internal Revenue Code) will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of Cole OP II or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to stockholders.
 
Legislative or regulatory action could adversely affect investors.
 
Because our operations are governed to a significant extent by the federal tax laws, new legislative or regulatory action could adversely affect investors.
 
You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock. You should also note that our counsel’s tax opinion assumes that no legislation will be enacted after the date of the opinion that will be applicable to an investment in our shares.
 
Foreign holders of our common stock may be subject to FIRPTA tax upon the sale of their shares.
 
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. We cannot assure you that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 5% of the value of our outstanding common stock.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.


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ITEM 2.   PROPERTIES
 
As of December 31, 2007, we owned, through separate wholly-owned limited partnerships or limited liability companies, a portfolio of 333 properties located in 43 states and the U.S. Virgin Islands comprising approximately 11.3 million rentable square feet. As of December 31, 2007, 250 of the properties were freestanding, single-tenant retail properties, 69 of the properties were freestanding, single-tenant commercial properties and 14 of the properties were multi-tenant retail properties. Of the leases related to these properties, 13 were classified as direct financing leases, as discussed in Note 3 to our consolidated financial statements. As of December 31, 2007, 169 of the properties in our portfolio and the related tenant leases were pledged as collateral securing mortgage debt of approximately $984.4 million. As of December 31, 2007, approximately 99% of our properties were leased, with an average remaining lease term of approximately 14.6 years.
 
Property Statistics
 
The following table shows the tenant diversification of our portfolio as of December 31, 2007:
 
                         
                Percentage of 2007
 
    Total Number
    2007 Annualized
    Annualized Gross
 
Tenant
  of Leases     Gross Base Rent     Base Rent  
 
Academy Sports — sporting goods
    8     $ 11,231,925       8 %
Circle K — convenience store
    83       10,819,415       8 %
Walgreens — drug store
    31       10,227,145       8 %
Station Casinos — gaming
    1       5,921,959       4 %
Applebee’s — restaurant
    22       5,323,351       4 %
Rite Aid — drug store
    14       4,291,787       3 %
Home Depot — home improvement
    3       3,615,577       3 %
Circuit City — consumer electronics
    4       3,555,722       3 %
Tractor Supply — specialty retail
    14       3,535,591       3 %
Lowe’s — home improvement
    4       3,418,749       3 %
Other
    254       70,350,070       53 %
                         
        438     $ 132,291,291                 100 %
                         
 
The following table shows the tenant industry diversification of our portfolio as of December 31, 2007:
 
                                 
                      Percentage of 2007
 
    Total Number
    Rentable
    2007 Annualized
    Annualized Gross
 
Industry
  of Leases     Square Feet     Gross Base Rent     Base Rent  
 
Drugstore
    67       879,666     $ 20,129,282       15 %
Specialty retail
    101       1,648,755       18,212,397       14 %
Sporting goods
    14       2,144,776       14,287,476       11 %
Convenience stores
    84       277,478       11,832,533       9 %
Restaurant
    59       313,569       10,215,372       8 %
Home improvement
    7       848,055       7,034,326       5 %
Home furnishings
    10       768,307       6,823,787       5 %
Consumer electronics
    11       1,100,791       6,509,580       5 %
Gaming
    1       138,558       5,921,959       4 %
Office supply
    17       370,380       4,460,518       3 %
Other
    67       2,819,437       26,864,061       21 %
                                 
        438       11,309,772     $ 132,291,291                 100 %
                                 


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The following table shows the geographic diversification of our portfolio as of December 31, 2007:
 
                                 
                      Percentage of 2007
 
    Total Number
    Rentable
    2007 Annualized
    Annualized Gross
 
Location
  of Properties     Square Feet     Gross Base Rents     Base Rent  
 
Texas
    37       2,971,410     $ 21,478,871       16 %
Illinois
    15       1,561,408       17,668,130       13 %
Ohio
    55       485,004       10,343,761       8 %
Georgia
    27       285,079       6,174,133       5 %
Nevada
    1       138,558       5,921,959       5 %
Missouri
    15       300,883       5,707,624       4 %
Michigan
    10       511,438       5,268,930       4 %
Tennessee
    17       361,150       4,740,612       4 %
Kansas
    7       353,690       4,112,318       3 %
South Carolina
    17       256,574       3,959,952       3 %
Other
    132       4,084,578       46,915,001       35 %
                                 
        333       11,309,772     $ 132,291,291                 100 %
                                 
 
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 the properties owned provide for initial terms of 10 to 20 years. As of December 31, 2007, the weighted average remaining lease term was approximately 14.6 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. Certain of the leases require us to maintain the roof and structure. The leases of the properties provide for annual base rental payments (payable in monthly installments) ranging from approximately $6,000 to approximately $8.1 million (average of approximately $303,000). 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.
 
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:
 
                                 
                      Percentage of
 
    Total Number
    Rentable Square
    2007 Annualized
    2007 Annualized
 
Year of Lease Expiration
  of Leases     Feet Expiring     Gross Base Rent     Gross Base Rent  
 
2008
    11       53,937     $ 438,659       0 %
2009
    14       105,760       1,119,203       1 %
2010
    15       128,264       1,460,009       1 %
2011
    14       58,005       979,210       1 %
2012
    16       191,001       2,265,817       2 %
2013
    19       364,674       3,601,909       3 %
2014
    12       194,107       2,823,066       2 %
2015
    16       1,048,672       7,208,667       5 %
2016
    28       1,458,947       11,952,842       9 %
2017
    34       1,307,718       12,711,274       10 %
Thereafter
    259       6,398,687       87,730,635       66 %
                                 
        438       11,309,772     $ 132,291,291                 100 %
                                 


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Mortgage Information
 
As of December 31, 2007, 169 of our properties were encumbered by a mortgage note obligation, with a total of approximately $940.9 million of fixed rate debt outstanding, approximately $71.3 of short-term variable rate debt and approximately $43.5 million outstanding on three revolving lines of credit. The fixed rate mortgage notes mature on various dates from July 2008 through October 2018. The weighted average interest rate relating to the fixed rate mortgage notes at December 31, 2007 and 2006 was approximately 5.85% and approximately 5.72%, respectively. The short-term variable rate debt bears interest at variable rates equal to the one-month LIBOR plus 200 to 275 basis points, matures in March 2008 and have been repaid. The revolving lines of credit bear interest at variable rates equal to the one-month LIBOR plus 150 to 200 basis points and mature on various dates from January 2008 to September 2008. As of December 31, 2007, no amounts were available under the revolving lines of credit. Each of the mortgage notes are secured by the respective property. The mortgage notes are generally non-recourse to the Company and Cole OP II, 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, we 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.
 
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.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our stockholders during the fourth quarter of the year ended December 31, 2007.


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
As of March 31, 2008, we had approximately 116.0 million shares of common stock outstanding, held by a total of 24,175 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 Follow-on Offering, we are selling shares of our common stock to the public at a price of $10.00 per share and at a price of $9.50 per share pursuant to our distribution reinvestment plan. Additionally, we provide discounts in our Follow-on Offering for certain categories of purchasers, including based on volume discounts. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
 
Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop. To assist fiduciaries of tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans and annuities described in Section 403(a) or (b) of the Internal Revenue Code or an individual retirement account or annuity described in Section 408 of the Internal Revenue Code subject to the annual reporting requirements of ERISA and IRA trustees or custodians in preparation of reports relating to an investment in the shares, we intend to provide reports of the quarterly and annual determinations of the current value of the net assets per outstanding share to those fiduciaries who request such reports. In addition, in order for FINRA members and their associated persons to participate in the offering and sale of our shares of common stock, we are required pursuant to FINRA Conduct Rule 2710(f)(2)(m) to disclose in each annual report distributed to investors a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. For these purposes, the deemed value of our common stock is $10.00 per share as of December 31, 2007. However, as set forth above, there is no public trading market for the shares at this time and stockholders may not receive $10.00 per share if a market did exist. Until the later of two full fiscal years after the termination of the Follow-on Offering or the termination of any subsequent offering of our shares, we intend to use the offering price of shares in the most recent offering as the per share net asset value. Beginning two full fiscal years after the completion of the last offering of shares, the value of the properties and other assets will be based on valuations of either our properties or us as a whole, whichever valuation method our board of directors determines to be appropriate, which may include independent valuations of our properties or of our enterprise as a whole.
 
Share Redemption Program
 
Our board of directors has adopted a share redemption program that enables our stockholders to sell their shares to us in limited circumstances. Our share redemption program permits stockholders to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations described below.
 
Our common stock is currently not listed on a national securities exchange, and we will not seek to list our stock until such time as our independent directors believe that the listing of our stock would be in the best interest of our stockholders. In order to provide stockholders with the benefit of interim liquidity, stockholders who have held their shares for at least one year may present all, or a portion consisting of at least 25%, of the holder’s shares to us for redemption 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 will not pay to our board of directors, advisor or its affiliates any fees to complete any transactions under our share redemption program.


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During the term of the Follow-on Offering the redemption price per share will depend on the length of time a redeeming stockholder held such shares as follows: after one year from the purchase date — 92.5% of the amount paid for each share; after two years from the purchase date — 95.0% of the amount paid for each share, after three years from the purchase date — 97.5% of the amount paid for each share; and after four years from the purchase date — 100.0% of the amount paid for each share (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). At any time we are engaged in an offering of shares, the per share price for shares purchased under our redemption plan will always be equal to or lower than the applicable per share offering price. Thereafter the per share redemption price will be based on the then-current net asset value of the shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). Our board of directors will announce any redemption price adjustment and the time period of its effectiveness as a part of its regular communications with our stockholders. At any time the redemption price is determined by any method other than the net asset value of the shares, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share redemption price will be reduced by the net sale proceeds per share distributed to investors prior to the redemption date as a result of the sale of such property in the special distribution. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that a special distribution will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds. Upon receipt of a request for redemption, we will conduct a Uniform Commercial Code search to ensure that no liens are held against the shares. We will charge an administrative fee to the stockholder for the search and other costs, which will be deducted from the proceeds of the redemption or, if a lien exists, will be charged to the stockholder. Subject to our waiver of the one-year holding period requirement, shares required to be redeemed in connection with the death of a stockholder may be repurchased without the one-year holding period requirement, at a purchase price equal to the price actually paid for the shares.
 
During any calendar year, we will not redeem in excess of 3.0% of the weighted average number of shares outstanding during the prior calendar year. The cash available for redemption will be limited to the proceeds from the sale of shares pursuant to our distribution reinvestment plan.
 
We will redeem our shares on the last business day of the month following the end of each quarter. Requests for redemption would have to be received on or prior to the end of the quarter in order for us to repurchase the shares as of the end of the next month. Stockholders may withdraw their request to have their shares redeemed at any time prior to the last day of the applicable quarter.
 
If we could not purchase all shares presented for redemption in any quarter, based upon insufficient cash available and the limit on the number of shares we may redeem during any calendar year, we would attempt to honor redemption requests on a pro rata basis. We would treat the unsatisfied portion of the redemption request as a request for redemption the following quarter. At such time, stockholders may then (1) withdraw their request for redemption at any time prior to the last day of the new quarter or (2) ask that we honor their request at such time, if any, when sufficient funds become available. Such pending requests will generally be honored on a pro rata basis. We will determine whether we have sufficient funds available as soon as practicable after the end of each quarter, but in any event prior to the applicable payment date.
 
Our board of directors may choose to amend, suspend or terminate our share redemption program upon 30 days notice at any time. Additionally, we will be required to discontinue sales of shares under the distribution reinvestment plan on the earlier of May 11, 2009, which is two years from the effective date of the Follow-on Offering, unless the offering is extended, or the date we sell all of the shares registered for sale under the distribution reinvestment plan, unless we file a new registration statement with the SEC and applicable states. Because the redemption of shares will be funded with the net proceeds we receive from the sale of shares under the distribution reinvestment plan, the discontinuance or termination of the distribution reinvestment plan will adversely affect our ability to redeem shares under the share redemption program. We would notify stockholders of such developments (i) in the annual or quarterly reports mentioned above or (ii) by means of a separate mailing to stockholders, accompanied by disclosure in a current or periodic report under the Exchange Act. During the Follow-on Offering, we would also include this information in a


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prospectus supplement or post-effective amendment to the registration statement, as then required under federal securities laws.
 
Our share redemption program is only intended to provide interim liquidity for stockholders until a liquidity event occurs, such as the listing of the shares on a national securities exchange, inclusion of the shares for quotation on a national market system, or our merger with a listed company. The share redemption program will be terminated if the shares become listed on a national securities exchange or included for quotation on a national market system. We cannot guarantee that a liquidity event will occur.
 
The shares we redeem under our share redemption program will be cancelled and return to the status of authorized and unissued shares. We do not intend to resell such shares to the public unless they are first registered with the SEC under the Securities Act and under appropriate state securities laws or otherwise sold in compliance with such laws.
 
During the year ended December 31, 2007, we redeemed approximately 227,000 shares under our share redemption program, at an average price of $9.60. During the year ended December 31, 2006, we did not redeem any shares under our share redemption program. As of December 31, 2007 and 2006, the Company had issued approximately 2.1 million and approximately 371,000 shares of common stock under the DRIP, respectively, for proceeds of approximately $20.3 million and approximately $3.5 million, respectively, which was recorded as redeemable common stock on the consolidated balance sheets, net of redeemed shares.
 
During the three-month period ended December 31, 2007, we redeemed shares as follows:
 
                                 
            Total Number of
  Maximum Number of
            Shares Purchased as
  Shares that May Yet
            Part of Publicly
  Be Purchased Under
    Total Number of
  Average Price Paid
  Announced Plans or
  the Plans or
    Shares Redeemed   per Share   Programs   Programs
 
October 2007
    94,796     $ 9.77       94,796       (1 )
November 2007
                      (1 )
December 2007
                      (1 )
                                 
Total
    94,796     $ 9.77       94,796       (1 )
                                 
 
 
(1) A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.
 
Distributions
 
We qualified as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. 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 dividends, capital gain dividends, or as nontaxable distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a non-taxable return of capital, reducing the tax basis in each U.S. stockholder’s shares, and the amount of each distribution in excess of a U.S. stockholder’s tax basis in its shares will be taxable as gain realized from the sale of its shares.


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The following table shows the distributions we have declared during the years ended December 31, 2007, 2006 and 2005:
 
                                 
    Total
    Distributions
             
    Distributions
    Declared per
    Return of
    Ordinary
 
Year
  Declared     Common Share     Capital     Income  
 
2007
  $ 41,549,545     $ 0.68     $ 0.40     $ 0.28  
2006
  $ 8,492,214     $ 0.64     $ 0.37     $ 0.27  
2005
  $ 195,209     $ 0.47     $     $  
 
Use of Public Offering Proceeds
 
We registered 50,000,000 shares of our common stock in our Initial Offering (SEC File no. 333-121094, effective June 27, 2005), of which we registered 45,000,000 shares at $10.00 per share to be offered to the public and 5,000,000 shares offered to our investors pursuant to our DRIP at $9.50 per share. In November 2006, we filed an additional registration statement to increase the aggregate number of shares available in our primary offering to 49,390,000 and the aggregate number of shares available in our DRIP to 5,952,000. We terminated the Initial Offering on May 22, 2007. We registered 150,000,000 shares of our common stock in our ongoing Follow-on Offering (SEC File no. 333-138444, effective May 11, 2007), of which we registered 125,000,000 shares at $10.00 per share to be offered to the public and 25,000,000 shares offered to our investors pursuant to our DRIP. As of December 31, 2007, we had issued an aggregate of approximately 93,828,038 shares of common stock in our Initial and Follow-on Offerings, raising gross offering proceeds of approximately $936.5 million. From this amount, we paid approximately $34.4 million in acquisition fees to Cole Realty Advisors, approximately $78.9 million in selling commissions and dealer manager fees to Cole Capital (of which approximately $67.4 million was reallowed to third-party broker dealers), approximately $10.1 million in finance coordination fees to Cole Advisors II and approximately $8.4 million in organization and offering costs to Cole Advisors II. With the net offering proceeds and indebtedness, we acquired approximately $1.8 billion in real estate and related assets and made the other payments reflected under “Cash Flows from Financing Activities” in our consolidated statements of cash flows. As of March 31, 2008, we had issued approximately 61.6 million shares in the Follow-on Offering at an aggregate gross offering price of approximately $615.5 million.
 
Unregistered Sale of Securities and Issuance of Stock Options
 
We issued 20,000 shares of our common stock to Cole Holdings Corporation (“Cole Holdings”) in connection with our inception in 2004 at $10.00 per share. On each of May 2, 2005, May 23, 2006 and August 15, 2007, we issued options to purchase 10,000 shares, respectively, of our common stock to our independent directors under our Independent Director Stock Option Plan. These shares and options were not registered under the Securities Act and were issued in reliance on Section 4(2) of the Securities Act.
 
The following table provides information regarding our equity compensation plan as of December 31, 2007:
 
                         
          Weighted-Average
       
    Number of Securities to
    Exercise Price of
    Number of Securities
 
    be Issued Upon Exercise
    Outstanding
    Remaining Available for
 
    of Outstanding Options,
    Options, Warrants
    Future Issuance Under
 
Plan Category
  Warrants and Rights     and Rights     Equity Compensation Plans  
 
Equity compensation plans approved by security holders
    30,000     $ 9.13       970,000  
Equity compensation plans not approved by security holders
          N/A        
                         
Total
    30,000     $ 9.13       970,000  
                         


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ITEM 6.   SELECTED FINANCIAL DATA
 
The following data should be read in conjunction with our consolidated financial statements and the notes thereto and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. The selected financial data presented below has been derived from our audited consolidated financial statements.
 
                                 
                      From Inception
 
                      (September 29,
 
    Year Ended
    Year Ended
    Year Ended
    2004) through
 
    December 31,
    December 31,
    December 31,
    December 31,
 
    2007     2006     2005     2004  
 
Balance Sheet Data:
                               
Total investment in real estate assets, net
  $ 1,794,352,512     $ 446,544,041     $ 91,618,285     $  
Investment in mortgages receivable, net
  $ 87,099,624     $     $     $  
Cash and cash equivalents
  $ 43,517,178     $ 37,566,490     $ 4,575,144     $ 200,000  
Restricted cash
  $ 14,032,616     $ 5,839,733     $ 1,813,804     $    
Total assets
  $ 1,967,697,834     $ 500,420,792     $ 98,809,838     $  
Mortgage notes payable
  $ 1,055,681,538     $ 218,265,916     $ 66,804,041     $  
Notes payable to affiliates
  $     $     $ 4,453,000     $  
Escrowed investor proceeds
  $ 12,737,969     $ 5,710,730     $ 1,813,804     $  
Stockholders’ equity
  $ 781,086,865     $ 266,236,497     $ 25,204,966     $ 200,000  
Operating Data:
                               
Total revenue
  $ 89,842,150     $ 19,519,507     $ 741,669     $  
General and administrative
  $ 2,011,322     $ 952,789     $ 156,252     $  
Property operating expenses
  $ 6,466,677     $ 1,416,745     $     $  
Property and asset management fees
  $ 4,184,271     $ 936,977     $ 38,768     $  
Depreciation and amortization
  $ 30,482,273     $ 6,469,366     $ 221,411     $  
Impairment of real estate assets
  $ 5,400,000     $     $     $  
Operating Income
  $ 41,297,607     $ 9,743,630     $ 325,238     $  
Interest expense
  $ 39,075,748     $ 8,901,113     $ 467,386     $  
Net income (loss)
  $ 4,480,017     $ 1,345,996     $ (114,591 )   $  
Funds from operations(1)
  $ 40,362,290     $ 7,815,362     $ 106,820     $  
Cash Flow Data:
                               
Cash flows provided by operations
  $ 43,366,041     $ 7,861,475     $ 397,741     $  
Cash flows used in investing activities
  $ (1,364,777,444 )   $ (320,176,509 )   $ (93,640,753 )   $  
Cash flows provided by financing activities
  $ 1,327,362,091     $ 345,306,380     $ 97,618,156     $ 200,000  
Per share data:
                               
Net income (loss) — basic and diluted
  $ 0.07     $ 0.10     $ (0.28 )   $  
Weighted average dividends declared
  $ 0.68     $ 0.64     $ 0.47     $  
Weighted average shares outstanding — basic
    60,929,996       13,275,635       411,909        
Weighted average shares outstanding — diluted
    60,931,316       13,275,635       411,909        
 
 
(1) See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds From Operations” for information regarding why we present funds from operations and for a reconciliation of this non-GAAP financial measure to net income (loss).


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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 “Selected Financial Data” and our accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
 
Overview
 
We were formed on September 29, 2004 to acquire and operate commercial real estate primarily consisting of freestanding, single-tenant, retail properties net leased to investment grade and other creditworthy tenants located throughout the United States. We commenced our principal operations on September 23, 2005, when we issued the initial 486,000 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 property on September 26, 2005. We have no paid employees and are externally advised and managed by Cole Advisors II, an affiliate of ours. We intend to qualify, and currently qualify, as a real estate investment trust for federal income tax purposes.
 
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 92% and approximately 94% of total revenue during the years ended December 31, 2007 and 2006, respectively. As approximately 99% of our properties are under lease, with an average remaining lease term of approximately 14.6 years, we believe our exposure to changes in commercial rental rates on our portfolio 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, the debt leverage ratio of our portfolio, which is the ratio of total gross real estate assets to mortgage notes payable, was approximately 52%, with approximately 11% of the debt, or approximately $114.8 million, subject to variable interest rates. As of March 31, 2008, we had repaid approximately $93.5 million of the debt subject to variable interest rates. The repayments of the debt subject to variable interest rates were made with proceeds from our Follow-on Offering. As we continue to raise capital under our Follow-on Offering and invest the proceeds in commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on new indebtedness used to acquire the properties. We may manage our risk of changes in real estate prices on future property acquisitions by entering into purchase agreements and loan commitments simultaneously so that our operating yield is determinable, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions. We expect to manage our interest rate risk by monitoring the interest rate environment in connection with our planned property acquisitions to determine the appropriate acquisition financing, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing for future acquisitions, our results of operations may be adversely affected.
 
As of December 31, 2007, we owned 250 freestanding single-tenant retail properties, 69 freestanding single-tenant commercial properties, and 14 multi-tenant retail properties, which were approximately 99% leased. Of the leases related to these properties, 13 were classified as direct financing leases, as discussed in Note 3 to our consolidated financial statements. During the years ended December 31, 2007 and 2006, we acquired 242 and 77 properties, respectively. During the year ended December 31, 2007, we also purchased two portfolios of mortgage notes receivable for an aggregate price of approximately $87.4 million, consisting of 69 mortgage notes receivable secured by 43 restaurant properties and 26 single-tenant retail properties, each of which is subject to a net lease. See Note 6 to our consolidated financial statements. Our results of operations are not indicative of those expected in future periods as we expect that rental income, operating


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expenses, asset management fees, depreciation expense, interest expense, and net income will each increase in the future as we acquire additional properties and as our current properties are owned for an entire period.
 
The current mortgage lending and interest rate environment for real estate in general is uncertain. We may experience more stringent lending criteria, which may limit our ability to finance certain property acquisitions. Additionally, for properties in which we are able to obtain acquisition financing, the interest rates on such loans may not meet our underwriting criteria. We expect to manage the current mortgage lending environment by utilizing fixed rate loans if the terms are acceptable, utilizing short-term variable rate loans, assuming existing mortgage loans in connection with property acquisitions, entering into interest rate lock agreements, or any combination of those measures. We also may acquire a much larger percentage of our properties for cash without financing. If we are unable to obtain suitable financing for future acquisitions or we acquire a larger percentage of our properties for cash without financing, our results of operations may be adversely affected. Additionally, if we are unable to identify suitable properties at appropriate prices in the current credit environment, we may have a larger amount of uninvested cash, which may adversely affect our results of operations. We will continue to evaluate alternatives in the current market, including purchasing or originating debt backed by real estate, which could produce attractive yields in the current market environment. Our management is not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition and operations of real properties and mortgage loans, other than those discussed above or referred to in this annual report on Form 10-K.
 
With our objectives of providing current income to our stockholders and preserving their capital, we view our most significant challenges as:
 
  •  continuing to raise sufficient amounts of equity capital in order to acquire a large, diversified portfolio while maintaining a moderate leverage ratio; and
 
  •  investing net offering proceeds in properties that are accretive to our stockholders distributions at a time when the demand for high-quality, income-producing properties is high and the market competitive.
 
Application of Critical Accounting Policies
 
Our accounting policies have been established to conform with 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.
 
The critical accounting policies outlined below have been discussed with members of the audit committee of the board of directors.
 
Investment in 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 life of each asset. 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 repairs and maintenance are expensed as incurred.


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All assets are depreciated on a straight line basis. The estimated useful lives of our assets by class generally 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
 
Impairment losses are recorded on long-lived assets used in operations, which includes the operating property, when indicators of impairment are present and the assets’ carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. We have identified one property with impairment indicators for which the undiscounted future cash flows expected from the use of the property and related intangible assets and their eventual disposition was less than the carrying value of the assets. As a result, we reduced the carrying value of the real estate and related intangible assets to their estimated fair value and recorded an impairment loss of $5.4 million during the year ended December 31, 2007. No impairment losses were recorded for the year ended December 31, 2006.
 
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.
 
When a real estate asset is identified by management as held for sale, we cease depreciation of the asset and estimate the sales price, net of selling costs. If, in management’s opinion, the net sales price of the asset is less than the net book value of the asset, an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property.
 
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 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, 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


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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.
 
Investment in Direct Financing Leases
 
We evaluate the leases associated with our real estate properties in accordance with SFAS No. 13, “Accounting for Leases” (“SFAS 13”). For the real estate property leases classified as direct financing leases, we account for the building portion of the property leases as direct financing leases and the land portion of these leases as operating leases. For the direct financing leases, we record an asset (net investment) representing the aggregate future minimum lease payments, estimated residual value of the leased property and deferred incremental direct costs less unearned income. We recognize income over the life of the lease to approximate a level rate of return on the net investment. We value residual values, which are reviewed quarterly, as estimated amounts we expect to receive at lease termination from the disposition of leased property. Actual residual values realized could differ from these estimates. We recognize write-downs of estimated residual value as permanent impairments in the current period.
 
Investment in Mortgage Notes Receivable
 
Mortgage notes receivable consist of loans we acquired, which are secured by real estate properties. Mortgage notes receivable are recorded at stated principal amounts net of any discount or premium or deferred loan origination costs or fees. The related discounts or premiums on mortgage notes receivable purchased are amortized or accreted over the life of the related mortgage receivable. We defer certain loan origination and commitment fees, net of certain origination costs, and amortize them as an adjustment of the mortgage notes receivable’s yield over the term of the related mortgage receivable. We evaluate the collectibility of both interest and principal on each mortgage note receivable to determine whether it is impaired. A mortgage note receivable is considered to be impaired, when based upon current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a mortgage note receivable is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the mortgage note receivable’s effective interest rate or to the value of the underlying collateral if the mortgage note receivable is collateralized. Interest income on performing mortgage note receivable is accrued as earned. Interest income on impaired mortgage notes receivable is recognized on a cash basis. No impairment losses were recorded related to mortgage notes receivable for either of the years ended December 31, 2007 and 2006.
 
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. 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 are taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. We generally will not be subject to federal corporate income tax to the extent we distribute our REIT taxable income to our stockholders, and so long as we distribute at least 90% of our REIT 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.


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Results of Operations
 
We commenced our principal operations on September 23, 2005, when we issued the initial 486,000 shares of our common stock in the Initial Offering. Prior to such date, we were considered a development stage company. We acquired our first real estate property on September 26, 2005.
 
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 
As of December 31, 2007, we owned 333 commercial properties, of which approximately 99% of the rentable space was leased, compared to 91 commercial properties at December 31, 2006. We also owned a portfolio of 69 mortgage notes receivable at December 31, 2007. We had no mortgage notes receivable at December 31, 2006. Accordingly, our results of operations for the year ended December 31, 2007, as compared to the year ended December 31, 2006, reflect significant increases in all categories.
 
Revenue.  Revenue increased approximately $70.3 million, or approximately 360%, to approximately $89.8 million for the year ended December 31, 2007, compared to approximately $19.5 million for the year ended December 31, 2006. Our revenue primarily consists of rental income from net leased commercial properties, which accounted for approximately 92% and 94% of total revenues during the years ended December 31, 2007 and 2006, respectively.
 
Rental income increased approximately $64.1 million, or approximately 349%, to approximately $82.5 million for the year ended December 31, 2007, compared to approximately $18.4 million for the year ended December 31, 2006. The increase was primarily due to the acquisition of 242 new properties during the year ended December 31, 2007 and the ownership of the 77 properties acquired during the year ended December 31, 2006 for the full year in 2007. During the year ended December 31, 2007, we acquired 242 additional properties for which we pay certain operating expenses subject to reimbursement by the tenant, which resulted in approximately $5.2 million of tenant reimbursement income in 2007 compared to approximately $1.2 million in 2006.
 
During the year ended December 31, 2007, we acquired 13 properties that we accounted for as direct financing leases. We had no properties accounted for as direct financing leases at December 31, 2006. Earned income from direct financing leases was approximately $1.1 million for the year ended December 31, 2007, with no earned income from direct financing leases recorded for year ended December 31, 2006. See Note 3 to our consolidated audited financial statements accompanying this Annual Report on Form 10-K.
 
Interest income on mortgages receivable was approximately $1.1 million for the year ended December 31, 2007, with no mortgages receivable interest income recorded for the year ended December 31, 2006. We purchased approximately $87.4 million of mortgage notes receivable during the year ended December 31, 2007. We had no mortgage notes receivable at December 31, 2006. See Note 6 to our consolidated audited financial statements accompanying this Annual Report on Form 10-K.
 
General and Administrative Expenses.  General and administrative expenses increased approximately $1.0 million, or approximately 111%, to approximately $2.0 million for the year ended December 31, 2007, compared to approximately $953,000 for the year ended December 31, 2006. The increase was primarily due to increases in state franchise and income taxes due to the increase in the number of properties owned from 91 properties at December 31, 2006 to 333 properties at December 31, 2007. The primary general and administrative expense items are legal and accounting fees, state franchise and income taxes, organizational costs, and other licenses and fees.
 
Property Operating Expenses.  Property operating expenses increased approximately $5.1 million, or approximately 356%, to approximately $6.5 million for the year ended December 31, 2007, compared to approximately $1.4 million for the year ended December 31, 2006. The increase was primarily due to the ownership of more properties during the year ended December 31, 2007 than in the year ended December 31, 2006, for which we initially pay certain operating expenses and are reimbursed by the tenant in accordance with the respective lease agreements, including 10 additional multi-tenant shopping centers. At December 31, 2007, we owned 14 multi-tenant shopping centers compared to four at December 31, 2006. The primary property operating expense items are repairs and maintenance, property taxes, bad debt expense and insurance.


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Property and Asset Management Fees.  Pursuant to the advisory agreement with our advisor, we are required to pay to our advisor a monthly asset management fee equal to one-twelfth of 0.25% of the aggregate asset value of our properties determined in accordance with the advisory agreement as of the last day of the preceding month. Pursuant to the property management agreement with our affiliated property manager, during the year ended December 31, 2007, we paid to our property manager a property management and leasing fee in an amount equal to 2% of gross revenues. In accordance with the property management agreement, we may pay Cole Realty Advisors (i) up to 2% of gross revenues from our single-tenant properties and (ii) up to 4% of gross revenues from our multi-tenant properties, as determined pursuant to the agreement, less all payments to third-party management subcontractors.
 
Property and asset management fees increased approximately $3.2 million, or approximately 347%, to approximately $4.2 million for the year ended December 31, 2007, compared to approximately $937,000 for the year ended December 31, 2006. Property management fees increased approximately $1.2 million to approximately $1.6 million for the year ended December 31, 2007 from approximately $350,000 for the year ended December 31, 2006. The increase in property management fees was primarily due to an increase in rental income to approximately $82.5 million for the year ended December 31, 2007, from approximately $18.4 million for the year ended December 31, 2006, due to the acquisition of 242 new properties during the year ended December 31, 2007. Asset management fees increased approximately $2.0 million to approximately $2.6 million for the year ended December 31, 2007 from approximately $587,000 for the year ended December 31, 2006. The increase in asset management fees was primarily due to an increase in the average aggregate book value of properties owned to approximately $1.2 billion during the year ended December 31, 2007 from approximately $272.5 million during the year ended December 31, 2006. The increase in aggregate book value is due to the acquisition of 242 new properties during the year ended December 31, 2007.
 
Depreciation and Amortization Expenses.  Depreciation and amortization expenses increased approximately $24.0 million, or approximately 371%, to approximately $30.5 million for the year ended December 31, 2007, compared to approximately $6.5 million for the year ended December 31, 2006. The increase was primarily due to an increase in the average aggregate book value of properties owned to approximately $1.2 billion at December 31, 2007 from approximately $272.5 million at December 31, 2006. The increase in aggregate book value was primarily due to the acquisition of 242 new properties during the year ended December 31, 2007
 
Impairment of Real Estate Assets.  Impairment on real estate assets was approximately $5.4 million for the year ended December 31, 2007, with no impairment loss recorded for the year ended December 31, 2006. The impairment was due to impairment losses recorded on one property during the year ended December 31, 2007, as discussed in Note 2 to our consolidated unaudited financial statements accompanying this Annual Report on Form 10-K.
 
Interest and Other Income.  Interest and other income increased approximately $1.8 million, or approximately 349%, to approximately $2.3 million for the year ended December 31, 2007, compared to approximately $503,000 for the year ended December 31, 2006. Interest income increased approximately $1.3 million, or approximately 253%, to approximately $1.8 million for the year ended December 31, 2007, compared to approximately $503,000 for the year ended December 31, 2006. The increase was primarily due to higher uninvested cash during the year ended December 31, 2007, compared to the year ended December 31, 2006 due to increased proceeds from the Initial Offering and Follow-on Offering. Cash and cash equivalents was approximately $43.5 million at December 31, 2007 compared to approximately $37.6 million at December 31, 2006. Other income consists of the net gain on disposal of rate locks of approximately $478,000 for the year ended December 31, 2007. On August 10, 2007, we elected to terminate our rate lock agreements, as discussed in Note 9 to our consolidated audited financial statements accompanying this Annual Report on Form 10-K. No other income was recorded for the year ended December 31, 2006.
 
Interest Expense.  Interest expense increased approximately $30.2 million, or approximately 339%, to approximately $39.1 million for the year ended December 31, 2007, compared to approximately $8.9 million for the year ended December 31, 2006. The increase was primarily due to an increase in the average mortgage notes payable outstanding during the year ended December 31, 2007 to approximately $637.0 million from


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approximately $142.5 million during the year ended December 31, 2006. The increase in average mortgage notes payable was due to our acquisition of 105 new debt agreements during the year ended December 31, 2007.
 
Our property acquisitions during the year ended December 31, 2007, were financed in part with short-term and long-term notes payable as discussed in Note 6 to our consolidated unaudited financial statements accompanying this Annual Report on Form 10-K. We expect that our interest expense in future periods will vary based on our level of future borrowings, which will depend on the level of proceeds raised in the Follow-on Offering, the cost of our borrowings, and the opportunity to acquire real estate assets that meet our investment objectives.
 
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 
As of December 31, 2006, we owned 91 commercial properties compared to 14 commercial properties at December 31, 2005, all of which were 100% leased. Accordingly, our results of operations for the year ended December 31, 2006 as compared to the year ended December 31, 2005 reflect significant increases in all categories.
 
Revenue.  Rental income increased approximately $17.6 million, or approximately 2,375%, to approximately $18.4 million for the year ended December 31, 2006 compared to approximately $742,000 for the year ended December 31, 2005. The increase was primarily due to our acquisition of 77 new properties during the year ended December 31, 2006 and the recording of rental income for the 14 properties acquired during 2005 for 12 months during the year ended December 31, 2006, compared to three months, or less, during the year ended December 31, 2005. Our revenue primarily consists of rental income from net leased commercial properties, which accounted for approximately 94% and approximately 100% of total revenues during the years ended December 31, 2006 and 2005, respectively. During 2006, we acquired certain properties for which we pay certain operating expenses subject to reimbursement by the tenant, which resulted in approximately $1.2 million of tenant reimbursement income for the year ended December 31, 2006 compared to no amounts for the year ended December 31, 2005.
 
General and Administrative Expenses.  General and administrative expenses increased approximately $797,000, or approximately 510%, to approximately $953,000 for the year ended December 31, 2006, compared to approximately $156,000 for the year ended December 31, 2005. The increase was primarily due to increases in legal and accounting fees, primarily due to our increase in assets and operations and a full year of Securities and Exchange Commission reporting obligations in the year ended December 31, 2006, compared to six months in the year ended December 31, 2005, and increases in state franchise and income taxes due to the increase in the number of properties owned from 14 properties at December 31, 2005 to 91 properties at December 31, 2006. The primary general and administrative expense items are legal and accounting fees, organizational costs, state franchise and income taxes, and other licenses and fees.
 
Property Operating Expenses.  Property operating expenses were approximately $1.4 million for the year ended December 31, 2006, with no property operating expenses recorded for the year ended December 31, 2005. The increase was primarily due to the acquisition of certain properties subsequent to December 31, 2005, for which we initially paid certain operating expenses and are reimbursed by the tenant in accordance with the respective lease agreements. At December 31, 2005, our portfolio consisted solely of properties in which each tenant paid substantially all expenses directly. The primary property operating expense items are repairs and maintenance, property taxes, and insurance.
 
Property and Asset Management Fees.  Pursuant to the advisory agreement with our advisor, we are required to pay to our advisor a monthly asset management fee equal to 1/12 of 0.25% of the aggregate asset value of our properties determined in accordance with the advisory agreement as of the last day of the preceding month. Pursuant to the property management agreement with our advisor, we are required to pay to our advisor a property management and leasing fee in an amount equal to 2.0% of gross revenues for determined pursuant to the agreement, less all payments to third-party management subcontractors.
 
Property and asset management fees increased approximately $898,000, or approximately 2,317% to approximately $937,000 for the year ended December 31, 2006 compared to approximately $39,000 for the


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year ended December 31, 2005. Property management fees increased approximately $336,000 to approximately $350,000 for the year ended December 31, 2006 from approximately $14,000 for the year ended December 31, 2005. The increase in property management fees was primarily due to an increase in rental income to approximately $18.4 million for the year ended December 31, 2006 from approximately $742,000 for the year ended December 31, 2005. Asset management fees increased approximately $562,000 to approximately $587,000 for the year ended December 31, 2006 from approximately $25,000 for the year ended December 31, 2005. The increase in asset management fees was primarily due to an increase in the aggregate book value of properties owned to approximately $272.5 million at December 31, 2006 from approximately $45.8 million at December 31, 2005.
 
Depreciation and Amortization Expenses.  Depreciation and amortization expenses increased approximately $6.3 million, or approximately 2,822%, to approximately $6.5 million for the year ended December 31, 2006 compared to approximately $221,000 for the year ended December 31, 2005. The increase was primarily due to an increase in the average aggregate book value of properties owned to approximately $272.5 million at December 31, 2006 from approximately $45.8 million at December 31, 2005 and the recording of depreciation and amortization for 12 months during the year ended December 31, 2006 compared to three months during the year ended December 31, 2005. The increase in aggregate book value is due to the acquisition of 77 new properties during the year ended December 31, 2006 and the ownership of the 14 properties acquired during the year ended December 31, 2005 for a full year in the year ended December 31, 2006.
 
Interest and Other Income.  Interest income increased approximately $475,000, or approximately 1,727%, to approximately $503,000 for the year ended December 31, 2006 compared to approximately $28,000 for the year ended December 31, 2005. The increase was primarily due to having higher uninvested cash throughout the year due to proceeds from the Initial Offering. Cash and cash equivalents was approximately $37.6 million at December 31, 2006 compared to approximately $4.6 million at December 31, 2005.
 
Interest Expense.  Interest expense increased approximately $8.4 million, or approximately 1,804%, to approximately $8.9 million for the year ended December 31, 2006 compared to approximately $467,000 for the year ended December 31, 2005. The increase was primarily due to an increase in the average mortgage notes payable outstanding during 2006 to approximately $142.5 million from approximately $33.4 million during 2005 and the recording of interest expense for 12 months during the year ended December 31, 2006 compared to four months during the year ended December 31, 2005. The increase in average mortgage notes payable was primarily due to the acquisition of 77 new properties during the year ended December 31, 2006 and the ownership of the 14 properties acquired during the year ended December 31, 2005 for a full year in the year ended December 31, 2006.
 
Portfolio Information
 
Real Estate Portfolio
 
As of December 31, 2007, we owned 333 properties located in 43 states and the U.S. Virgin Islands, the gross rentable space of which was approximately 99% leased with an average lease term remaining of approximately 14.6 years. Of the leases related to these properties, 13 were classified as direct financing leases, as discussed in Note 3 to our consolidated financial statements accompanying this Annual Report on Form 10-K.


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As of December 31, 2007, our five highest geographic concentrations were as follows:
 
                                 
                      Percentage of 2007
 
    Total Number
    Rentable
    2007 Annualized
    Annualized Gross
 
Location
  of Properties     Square Feet     Gross Base Rents     Base Rent  
 
Texas
       37       2,971,410     $ 21,478,871       16 %
Illinois
    15       1,561,408       17,668,130       13 %
Ohio
    55       485,004       10,343,761       8 %
Georgia
    27       285,079       6,174,133       5 %
Nevada
    1       138,558       5,921,959       5 %
                                 
      135       5,441,459     $ 61,586,854                   47 %
                                 
 
As of December 31, 2007, our five highest tenant industry concentrations were as follows:
 
                                 
                      Percentage of 2007
 
    Total Number
    Rentable
    2007 Annualized
    Annualized Gross
 
Industry
  of Leases     Square Feet     Gross Base Rent     Base Rent  
 
Drugstore
       67       879,666     $ 20,129,282       15 %
Specialty retail
    101       1,648,755       18,212,397       14 %
Sporting goods
    14       2,144,776       14,287,476       11 %
Convenience stores
    84       277,478       11,832,533       9 %
Restaurant
    59       313,569       10,215,372       8 %
                                 
      325        5,264,244     $ 74,677,060                      57 %
                                 
 
As of December 31, 2007, our five highest tenant concentrations were as follows:
 
                         
                Percentage of 2007
 
    Total Number
    2007 Annualized
    Annualized Gross
 
Tenant
  of Leases     Gross Base Rent     Base Rent  
 
Academy Sports — sporting goods
        8     $ 11,231,925       8 %
Circle K — convenience store
    83       10,819,415       8 %
Walgreens — drug store
    31       10,227,145       8 %
Station Casinos — gaming
    1       5,921,959       4 %
Applebee’s — restaurant
    22       5,323,351       4 %
                         
      145     $ 43,523,795                   32 %
                         
 
For more information on our portfolio diversification and statistics, see “Item 2 — Properties” above.
 
Mortgage Notes Receivable Portfolio
 
During the year ended December 31, 2007, the Company acquired two portfolios of mortgage notes receivable for an aggregate purchase price of approximately $87.4 million consisting of 69 mortgage notes receivable, secured by 23 restaurant properties leased to Cracker Barrel Old Country Store, 20 restaurant properties leased to KFC, and 26 retail properties leased to O’Reilly Auto Parts.
 
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 or impairment 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


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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 Trusts (“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,
    December 31,
 
    December 31, 2007     2006     2005  
 
Net income (loss)
  $ 4,480,017     $ 1,345,996     $ (114,591 )
Add:
                       
Depreciation of real estate assets
    20,460,219       4,396,460       151,472  
Amortization of lease related costs
    10,022,054       2,072,906       69,939  
Impairment on real estate assets
    5,400,000              
                         
FFO
  $ 40,362,290     $ 7,815,362     $ 106,820  
                         
 
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 $4.4 million, approximately $790,000, and approximately $34,000 during the years ended December 31, 2007, 2006 and 2005, respectively.
 
  •  Net income includes a net gain on disposal of rate lock of approximately $478,000 for the year ended December 31, 2007. No gain on disposal of rate lock was recorded for the years ended December 31, 2006 and 2005. See Note 9 to our consolidated audited financial statements accompanying this Annual Report on Form 10-K.
 
  •  Amortization of deferred financing costs totaled approximately $1.9 million, approximately $548,000 and approximately $18,000 during the years ended December 31, 2007 and 2006, respectively.
 
Liquidity and Capital Resources
 
We expect to continue to raise capital through the sale of our common stock and to utilize the net proceeds from the sale of our common stock and proceeds from secured or unsecured financings to complete future property acquisitions. As of December 31, 2007, we had received and accepted subscriptions for 93,828,038 shares of common stock in our Initial Offering and Follow-on Offering for gross proceeds of approximately $936.5 million.
 
Short-term Liquidity and Capital Resources
 
We expect to meet our short-term liquidity requirements through net cash provided by property operations and proceeds from the Offering, as well as, secured or unsecured borrowings from banks and other lenders to finance our expected future acquisitions. In addition, we may obtain a secured or unsecured revolving line of credit. We expect our operating cash flows to increase as additional properties are added to our portfolio. We expect that approximately 88.6% of the gross proceeds from the sale of our common stock will be invested in


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real estate, approximately 9.2% will be used to pay sales commissions, dealer manager fees and offering and organizational costs, with the remaining 2.2% used to pay acquisition and advisory fees and acquisition expenses. Our advisor pays the offering and organizational costs associated with the sale of our common stock, which we reimburse up to 1.5% of the capital raised by us in connection with our offering of shares of common stock. As of December 31, 2007, Cole Advisors II had paid approximately $8.4 million of offering and organization costs since the inception of the Initial Offering and we had reimbursed our advisor for all such costs, of which approximately $59,000 was expensed as organizational costs.
 
During the period from January 1, 2008 to March 31, 2008, we completed the acquisition of 41 single-tenant properties and two multi-tenant properties in separate transactions for an aggregate purchase price of approximately $261.0 million, exclusive of closing costs. The acquisitions were funded with proceeds from the Initial Offering and Follow-on Offering and approximately $144.9 million in aggregate proceeds from six loans.
 
On January 8, 2008, our board of directors declared a daily distribution of $0.00191781 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2008 and ending on March 31, 2008. The distributions for the period commencing on January 1, 2008 and ending on January 31, 2008 were paid in February 2008 and totaled approximately $5.8 million, of which approximately $3.2 million was reinvested in shares through our distribution reinvestment program. The distributions for the period commencing on February 1, 2008 and ending on February 29, 2008 were paid in March 2008 and totaled approximately $5.8 million, of which approximately $3.2 million was reinvested in shares through our distribution reinvestment program.
 
Long-term Liquidity and Capital Resources
 
We expect to meet our long-term liquidity requirements through proceeds from the sale of our common stock, 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 property acquisitions, for the payment of tenant improvements, for the payment of offering-related costs, for the payment of operating expenses, including interest expense on any outstanding indebtedness, 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 due to fewer properties being acquired or lower returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash resulting from equity or debt financing will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt, or distributions to our stockholders.
 
As of December 31, 2007, we had cash and cash equivalents of approximately $43.5 million, which we expect to be used primarily to invest in additional real estate, pay operating expenses and pay stockholder distributions.
 
As of December 31, 2007, we had approximately $1.1 billion of debt outstanding, consisting of approximately $940.9 million in fixed rate, term mortgage loans, approximately $43.5 million in variable rate term mortgage loans, and approximately $71.3 million in variable rate loans secured by our mortgage notes receivable. The weighted average interest rate at December 31, 2007, under the fixed rate term mortgage loans was approximately 5.85%, the variable rate term mortgage interest rate is stated at LIBOR plus 1.5% to 2.0%, and the variable rate loans secured by mortgage notes receivable interest rate is stated at LIBOR plus 2.0% to 2.75%. Additionally the ratio of debt to total gross assets was approximately 52% and the weighted average years to maturity was approximately 7.34 years.


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Our contractual obligations as of December 31, 2007 were as follows:
 
                                         
          Payments Due by Period(2)  
          Less Than
    1-3
    4-5
    More Than
 
Contractual Obligations
  Total     1 Year     Years     Years     5 Years  
 
Principal payments — fixed rate debt
  $ 940,914,150     $ 10,529,965     $ 59,140,128     $ 47,207,063     $ 824,036,994  
Interest payments — fixed rate debt
    481,745,169       56,353,808       162,688,293       99,649,042       163,054,026  
Principal payments — variable rate debt
    114,767,388       114,767,388                    
Interest payments — variable rate debt(1)
    2,508,224       2,508,224                    
                                         
Total
  $ 1,539,934,931     $ 184,159,385     $ 221,828,421     $ 146,856,105     $ 987,091,020  
                                         
 
 
(1) Rates ranging from 6.84% to 8.09% were used to calculate the variable debt payment obligations in future periods. These were the rates effective as of December 31, 2007.
 
(2) Principal paydown amounts are included in payments due by period amounts.
 
Our charter prohibits us from incurring debt that would cause our borrowings to exceed the greater of 60% of our gross assets, valued at the greater of the aggregate cost (before depreciation and other non-cash reserves) or fair market value of all assets owned by us, unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report. During the quarter ended March 31, 2006, the independent directors approved borrowings that caused our leverage ratio at certain times to exceed the 60% limitation. The independent directors believed such borrowing levels were justified for the following reasons:
 
  •  the borrowings enabled us to purchase the properties and earn rental income more quickly;
 
  •  the property acquisitions were likely to increase the net offering proceeds from our initial public offering by allowing us to show potential investors actual acquisitions, thereby improving our ability to meet our goal of acquiring a diversified portfolio of properties to generate current income for investors and preserve investor capital; and
 
  •  based on expected equity sales at the time and scheduled maturities of our short-term variable rate debt, leverage was likely to exceed the charter’s guidelines only for a limited period of time.
 
Cash Flow Analysis
 
Year ended December 31, 2007 Compared to the Year ended December 31, 2006
 
Operating Activities
 
Net cash provided by operating activities increased approximately $35.5 million, or approximately 452%, to approximately $43.4 million for the year ended December 31, 2007, compared to net cash provided by operating activities of approximately $7.9 million for the year ended December 31, 2006. The increase was primarily due to an increase in net income of approximately $3.1 million, increases in depreciation and amortization expenses totaling approximately $24.5 million, an impairment of real estate assets of approximately $5.4 million and an increase in accounts payable and accrued expenses of approximately $4.0 million, offset by an increase in rents and tenant receivables of approximately $3.3 million for the year ended December 31, 2007. See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.
 
Investing Activities
 
Net cash used in investing activities increased approximately $1.0 billion, or approximately 326%, to approximately $1.4 billion for the year ended December 31, 2007, compared to net cash used in investing


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activities of approximately $320.2 million for the year ended December 31, 2006. The increase was primarily due to the acquisition of 242 real estate properties during the year ended December 31, 2007 compared to the acquisition of 77 properties during the year ended December 31, 2006, and we acquired approximately $87.4 million of mortgage notes receivable using cash of approximately $51.1 million and mortgage notes payable obtained from the seller of approximately $36.3 million.
 
Financing Activities
 
Net cash provided by financing activities increased approximately $982.1 million, or approximately 284%, to approximately $1.3 billion for the year ended December 31, 2007, compared to net cash provided by financing activities of approximately $345.3 million for the year ended December 31, 2006. The increase was primarily due to an increase in aggregate net proceeds from the issuance of common stock in the Initial Offering and the Follow-on Offering of approximately $335.1 million, an increase in proceeds from the issuance of mortgage and affiliate notes of approximately $686.3 million, and a decrease in repayments of mortgage and affiliate notes payable of approximately $10.5 million, offset by an increase in distributions to investors of approximately $13.9 million, an increase in offering costs on issuance of common stock of approximately $31.4 million and an increase in deferred financing costs paid of approximately $15.6 million. The increase in proceeds from issuance of mortgage and affiliate notes payable was due to our issuance of 105 new mortgages during the year ended December 31, 2007, compared to 46 new mortgages during the year ended December 31, 2006. Also, we borrowed approximately $72.2 million from our revolving mortgage notes payable.
 
Year ended December 31, 2006 Compared to the Year ended December 31, 2005
 
Operating Activities
 
Net cash provided by operating activities increased approximately $7.5 million, or approximately 1,877%, to approximately $7.9 million for the year ended December 31, 2006, compared to net cash provided by operating activities of approximately $398,000 for the year ended December 31, 2005. The increase was primarily due to net income for the period of approximately $1.3 million and depreciation and amortization expenses totaling approximately $7.0 million offset by increases in rents and tenant receivables of approximately $2.4 million. See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.
 
Investing Activities
 
Net cash used in investing activities increased approximately $226.6 million, or approximately 242%, to approximately $320.2 million for the year ended December 31, 2006, compared to net cash used in investing activities of approximately $93.6 million for the year ended December 31, 2005. The increase was primarily due to the acquisition of 77 real estate properties during the year ended December 31, 2006 compared to the acquisition of 14 properties during the year ended December 31, 2005, and an approximately $2.2 million increase in restricted cash, due to an increase cash held in escrow pending the issuance of shares to investors.
 
Financing Activities
 
Net cash provided by financing activities increased approximately $247.7 million, or approximately 254%, to approximately $345.3 million for the year ended December 31, 2006, compared to net cash provided by financing activities of approximately $97.6 million for the year ended December 31, 2005. The increase was primarily due to an increase in net proceeds from the issuance of common stock in the Initial Offering of approximately $222.8 million and an increase in proceeds from the issuance of mortgage and affiliate notes of approximately $93.9 million, offset by an increase in repayments of mortgage and affiliate notes payable of approximately $63.5 million. The increase in proceeds from issuance of mortgage and affiliate notes payable was due to the issuance of 59 new mortgages during the year ended December 31, 2006 compared to nine new mortgages during the year ended December 31, 2005. The increase in repayments of mortgage and affiliate notes payable was due to the repayment of short-term variable rate debt at its maturity during the year ended


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December 31, 2006 and the repayment of approximately $4.5 million of affiliate notes payable during the year ended December 31, 2006.
 
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 will 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
 
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, in the event inflation does become a factor, the leases on the real estate we may acquire may not include provisions that would protect us from the impact of inflation.
 
Related-Party Transactions and Agreements
 
We have entered into agreements with Cole Advisors II and its affiliates, whereby we pay certain fees to, or reimburse certain expenses of, Cole Advisors II 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 11 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 II act as sponsor, general partner or advisor to various private real estate limited partnerships and a REIT that offered its shares pursuant to an exemption from registration. As such, there are conflicts of interest where Cole Advisors II 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 II and these other Cole sponsored programs 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 31, 2008, including the sale of shares of common stock, the acquisition of 43 properties and the attainment of additional mortgage financing are discussed in Note 18 to the consolidated financial statements included in this Annual Report on Form 10-K.
 
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.


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Off Balance Sheet Arrangements
 
As of December 31, 2007 and 2006, we had no off balance sheet arrangements.
 
ITEM 7A   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As a result of our use of debt, primarily to acquire properties, we are exposed to interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flow primarily through a moderate level of overall borrowings. We manage our ratio of fixed to floating rate debt with the objective of achieving a mix that we believe is appropriate. Our floating rate debt is based on variable interest rates in order to provide the necessary financing flexibility; however, we are closely monitoring interest rates and will continue to consider the sources and terms of our borrowing facilities to determine whether we have appropriately guarded ourselves against the risk of increasing interest rates in future periods.
 
During the year ended December 31, 2007, we entered into interest rate lock agreements with various lenders to lock interest rates ranging from 5.49% to 6.69% for up to approximately $647.8 million in borrowings. As of December 31, 2007, we had no available borrowings under the interest rate lock agreements and no rate lock deposits outstanding.
 
Our financial instruments consist of both fixed and variable rate debt. As of December 31, 2007, our consolidated debt consisted of the following, with scheduled maturities:
 
                                                 
    2008     2009     2010     2011     2012     Thereafter  
 
Maturing debt
                                               
Variable rate debt
  $ 114,767,388     $     $     $     $     $  
Fixed rate debt
  $ 10,529,965     $ 1,069,917     $ 17,808,720     $ 40,261,492     $ 45,286,607     $ 825,957,449  
Average interest rate on debt
                                               
Variable rate debt
    Libor + 2.32 %                              
Fixed rate debt
    5.15 %           5.59 %     5.77 %     5.51 %     5.88 %
 
Approximately $940.9 million of our total debt outstanding as of December 31, 2007 was subject to fixed rates, with a weighted average interest rate of approximately 5.85% and expiration dates ranging from 2008 to 2018. A change in the market interest rate would impact the net financial instrument position of our fixed rate debt portfolio, but would have no impact on interest incurred or cash flows.
 
As of December 31, 2007, a 1% change in interest rates would result in a change in interest expense of approximately $1.1 million per year.
 
We do not have any foreign operations or assets. As a result, we are not exposed to fluctuations in foreign currency rates.
 
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 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)


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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 Rules 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 II, 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 II, 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 II, Inc.’s internal control over financial reporting was effective as of December 31, 2007.
 
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
 
As of the quarter ended December 31, 2007, all items required to be disclosed under Form 8-K were reported as such.


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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 the SEC 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 the SEC 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 the SEC with respect to our 2008 annual meeting of stockholders.
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS INDEPENDENCE
 
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC 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 the SEC with respect to our 2008 annual meeting of stockholders.
 
PART IV
 
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) List of Documents Filed.
 
1. The list of the financial statements contained herein is set forth on page F-1 hereof.
 
2. Financial Statement Schedules —
 
Schedule II — Valuation and Qualifying Accounts is set forth beginning on page S-1 hereof.
 
Schedule III — Real Estate Assets and Accumulated Depreciation is set forth beginning on page S-2 hereof.
 
Schedule IV — Mortgage Loans on Real Estate Assets is set forth beginning on page S-20 hereof.
 
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
 
3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
 
(b) See (a) 3 above.
 
(c) See (a) 2 above.


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SIGNATURES
 
Pursuant to the requirements of Sections 13 or 15(d) 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 this 31st day of March 2008.
 
Cole Credit Property Trust II, Inc.
 
  By: 
/s/  CHRISTOPHER H. COLE
Christopher H. Cole
Chief Executive Officer and President
 
Date: March 31, 2008
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacity as and on the date indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  CHRISTOPHER H. COLE

Christopher H. Cole
  Chief Executive Officer,
President and Director
(Principal Executive Officer)
  March 31, 2008
         
/s/  D. KIRK MCALLASTER, JR.

D. Kirk McAllaster, Jr.
  Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
  March 31, 2008
         
/s/  MARCUS E. BROMLEY

Marcus E. Bromley
  Director   March 31, 2008
         
/s/  ELIZABETH L. WATSON

Elizabeth L. Watson
  Director   March 31, 2008


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
Financial Statements
  Page
 
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Cole Credit Property Trust II, Inc.
Phoenix, Arizona
 
We have audited the accompanying consolidated balance sheets of Cole Credit Property Trust II, 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 each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 the Company as of December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
/s/  DELOITTE & TOUCHE LLP
 
Phoenix, Arizona
March 31, 2008


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COLE CREDIT PROPERTY TRUST II, INC.
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,
    December 31,
 
    2007     2006  
 
ASSETS:
Investment in real estate assets:
               
Land
  $ 412,947,887     $ 109,506,269  
Buildings and improvements, less accumulated depreciation of $24,075,228 and $4,547,932 at December 31, 2007 and 2006, respectively
    1,090,362,000       282,468,749  
Real estate assets under direct financing leases, less unearned income of $17,297,642 at December 31, 2007
    39,260,183        
Acquired intangible lease assets, less accumulated amortization of $12,925,668 and $2,251,172 at December 31, 2007 and 2006, respectively
    228,790,968       54,569,023  
Real estate assets held for sale, less accumulated depreciation and accumulated amortization of $1,103,519 at December 31, 2007
    22,991,474        
                 
Total investment in real estate assets
    1,794,352,512       446,544,041  
Investment in mortgage notes receivable, less accumulated amortization of $78,916 at December 31, 2007
    87,099,624        
Cash and cash equivalents
    43,517,178       37,566,490  
Restricted cash
    14,032,616       5,839,733  
Rents and tenant receivables, less allowance for doubtful accounts of $521,615 and $75,000 at December 31, 2007 and 2006, respectively
    8,098,152       2,432,536  
Prepaid expenses, mortgage loan deposits and other assets
    1,144,864       4,248,973  
Deferred financing costs, less accumulated amortization of $2,163,027 and $565,946 at December 31, 2007 and 2006, respectively
    19,452,888       3,789,019  
                 
Total assets
  $ 1,967,697,834     $ 500,420,792  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Mortgage notes payable
  $ 1,037,981,538     $ 218,265,916  
Mortgage notes payable associated with assets held for sale
    17,700,000        
Accounts payable and accrued expenses
    7,776,943       2,016,343  
Escrowed investor proceeds
    12,737,969       5,710,730  
Due to affiliates
    1,504,849       67,608  
Acquired below market lease intangibles, less accumulated amortization of $2,083,475 and $96,484 at December 31, 2007 and 2006, respectively
    80,031,916       2,649,374  
Distributions payable
    5,434,275       1,612,094  
Deferred rent and other liabilities
    1,783,620       340,974  
                 
Total liabilities
    1,164,951,110       230,663,039  
                 
Redeemable common stock
    21,659,859       3,521,256  
                 
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, $.01 par value; 240,000,000 shares authorized, 93,621,094 and 30,691,204 shares issued and outstanding at December 31, 2007 and 2006, respectively
    936,211       306,912  
Capital in excess of par value
    824,676,200       273,385,603  
Accumulated distributions in excess of earnings
    (44,525,546 )     (7,456,018 )
                 
Total stockholders’ equity
    781,086,865       266,236,497  
                 
Total liabilities and stockholders’ equity
  $ 1,967,697,834     $ 500,420,792  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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COLE CREDIT PROPERTY TRUST II, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Revenues:
                       
Rental and other income
  $ 82,491,639     $ 18,357,174     $ 741,669  
Tenant reimbursement income
    5,161,162       1,162,333        
Earned income from direct financing leases
    1,075,412              
Interest income on mortgages receivable
    1,113,937              
                         
Total revenue
    89,842,150       19,519,507       741,669  
                         
Expenses:
                       
General and administrative
    2,011,322       952,789       156,252  
Property operating expenses
    6,466,677       1,416,745        
Property and asset management fees
    4,184,271       936,977       38,768  
Depreciation
    20,460,219       4,396,460       151,472  
Amortization
    10,022,054       2,072,906       69,939  
Impairment of real estate assets
    5,400,000              
                         
Total operating expenses
    48,544,543       9,775,877       416,431  
                         
Operating income
    41,297,607       9,743,630       325,238  
                         
Other income (expense):
                       
Interest and other income
    2,258,158       503,479       27,557  
Interest expense
    (39,075,748 )     (8,901,113 )     (467,386 )
                         
Total other expense
    (36,817,590 )     (8,397,634 )     (439,829 )
                         
Net income (loss)
  $ 4,480,017     $ 1,345,996     $ (114,591 )
                         
Net income (loss) per common share:
                       
Basic and diluted
  $ 0.07     $ 0.10     $ (0.28 )
                         
Weighted average number of common shares outstanding:
                       
Basic
    60,929,996       13,275,635       411,909  
                         
Diluted
    60,931,316       13,275,635       411,909  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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COLE CREDIT PROPERTY TRUST II, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
                                         
    Common Stock           Accumulated
    Total
 
    Number of
          Capital in Excess
    Distributions in
    Stockholders’
 
    Shares     Par Value     of Par Value     Excess of Earnings     Equity  
 
Balance, December 31, 2004
    20,000     $ 200     $ 199,800     $     $ 200,000  
Issuance of common stock
    2,812,387       28,124       28,080,997             28,109,121  
Distributions
                      (195,209 )     (195,209 )
Commissions on stock sales and related dealer manager fees
                (2,375,780 )           (2,375,780 )
Other offering costs
                (418,575 )           (418,575 )
Net loss
                      (114,591 )     (114,591 )
                                         
Balance, December 31, 2005
    2,832,387       28,324       25,486,442       (309,800 )     25,204,966  
Issuance of common stock
    27,858,817       278,588       277,953,219             278,231,807  
Distributions
                      (8,492,214 )     (8,492,214 )
Commissions on stock sales and related dealer manager fees
                (23,254,138 )           (23,254,138 )
Other offering costs
                (3,332,577 )           (3,332,577 )
Stock compensation expense
                  53,913               53,913  
Redeemable common stock
                (3,521,256 )           (3,521,256 )
Net income
                      1,345,996       1,345,996  
                                         
Balance, December 31, 2006
    30,691,204       306,912       273,385,603       (7,456,018 )     266,236,497  
Issuance of common stock
    63,156,834       631,568       629,526,228             630,157,796  
Distributions
                      (41,549,545 )     (41,549,545 )
Commissions on stock sales and related dealer manager fees
                (53,346,277 )           (53,346,277 )
Other offering costs
                (4,599,965 )           (4,599,965 )
Redemptions of common stock
    (226,944 )     (2,269 )     (2,176,280 )           (2,178,549 )
Stock compensation expense
                25,494             25,494  
Redeemable common stock
                (18,138,603 )           (18,138,603 )
Net income
                      4,480,017       4,480,017  
                                         
Balance, December 31, 2007
    93,621,094     $ 936,211     $ 824,676,200     $ (44,525,546 )   $ 781,086,865  
                                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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COLE CREDIT PROPERTY TRUST II, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Year Ended December 31,  
    2007     2006     2005  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 4,480,017     $ 1,345,996     $ (114,591 )
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    20,460,219       4,396,460       151,472  
Amortization
    11,000,568       2,630,841       89,793  
Amortization of premiums on mortgage notes receivable
    78,916              
Stock compensation expense
    25,494       53,913        
Impairment of real estate assets
    5,400,000              
Net gain on disposal of rate lock deposits
    (478,397 )            
Changes in assets and liabilities:
                       
Decrease in investment in real estate under direct financing leases
    267,344              
Rents and tenant receivables, net of allowance
    (5,665,616 )     (2,396,534 )     (36,001 )
Prepaid expenses and other assets
    (842,991 )     (269,945 )     (11,928 )
Accounts payable and accrued expenses
    5,760,600       1,733,546       282,797  
Deferred rent and other liabilities
    2,879,887       367,198       36,199  
                         
Net cash provided by operating activities
    43,366,041       7,861,475       397,741  
                         
Cash flows from investing activities:
                       
Investment in real estate and related assets
    (1,155,146,198 )     (278,576,503 )     (81,344,139 )
Investment in real estate under direct financing leases
    (39,527,527 )            
Acquired intangible lease assets
    (190,400,789 )     (40,305,246 )     (10,497,499 )
Acquired below market lease intangibles
    79,378,155       2,731,169       14,689  
Investment in mortgage notes receivable
    (51,120,374 )            
Collection of mortgage loans receivable
    232,172              
Restricted cash
    (8,192,883 )     (4,025,929 )     (1,813,804 )
                         
Net cash used in investing activities
    (1,364,777,444 )     (320,176,509 )     (93,640,753 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of common stock
    609,840,644       274,710,551       28,109,121  
Offering costs on issuance of common stock
    (57,946,242 )     (26,586,715 )     (2,789,170 )
Redemptions of common stock
    (2,178,549 )            
Distributions to investors
    (17,410,212 )     (3,554,073 )      
Proceeds from mortgage and affiliate notes payable
    855,019,450       168,764,469       72,084,404  
Repayment of mortgage and affiliate notes payable
    (53,894,166 )     (64,375,352 )     (827,363 )
Refund of loan deposits
    16,333,592       1,936,000        
Payment of loan deposits
    (12,386,492 )     (5,903,100 )      
Proceeds from rate lock termination
    2,162,197              
Escrowed investor proceeds liability
    7,027,239       3,896,925       1,813,804  
Deferred financing costs paid
    (19,205,370 )     (3,582,325 )     (772,640 )
                         
Net cash provided by financing activities
    1,327,362,091       345,306,380       97,618,156  
                         
Net increase in cash and cash equivalents
    5,950,688       32,991,346       4,375,144  
Cash and cash equivalents, beginning of year
    37,566,490       4,575,144       200,000  
                         
Cash and cash equivalents, end of year
  $ 43,517,178     $ 37,566,490     $ 4,575,144  
                         
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
                       
Dividends declared and unpaid
  $ 5,434,275     $ 1,612,094     $ 195,209  
                         
Mortgage notes assumed in real estate acquisitions
  $     $ 42,619,758     $  
                         
Mortgage notes payable from seller of mortgages receivable
  $ 36,290,338     $     $  
                         
Common stock issued through distribution reinvestment plan
  $ 20,317,152     $ 3,521,256     $  
                         
Commissions and dealer manager fees due to affiliate
  $     $     $ 5,185  
                         
Supplemental Cash Flow Disclosures:
                       
Interest paid
  $ 34,319,865     $ 7,981,952     $ 223,183  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 — ORGANIZATION AND BUSINESS
 
Cole Credit Property Trust II, Inc. (the “Company”) is a Maryland corporation that was formed on September 29, 2004 to operate as a real estate investment trust (“REIT”) for federal income tax purposes. Substantially all of the Company’s business is conducted through Cole Operating Partnership II, LP (“Cole OP II”), a Delaware limited partnership. The Company is the sole general partner of and owns an approximately 99.99% partnership interest in Cole OP II. Cole REIT Advisors II, LLC (“Cole Advisors II”), the affiliate advisor to the Company, is the sole limited partner and owner of an approximately 0.01% (minority interest) of the partnership interests of Cole OP II.
 
At December 31, 2007, the Company owned 333 properties comprising approximately 11.3 million square feet of single and multi-tenant commercial space located in 43 states and the U.S. Virgin Islands. At December 31, 2007, the rentable space at these properties was approximately 99% leased. As of December 31, 2007, the Company also owned 69 mortgage notes receivable, aggregating approximately $87.1 million, secured by 43 restaurant properties and 26 single-tenant retail properties, each of which is subject to a net lease.
 
On June 27, 2005, the Company commenced an initial public offering on a “best efforts” basis of up to 45,000,000 shares of common stock offered at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a Registration Statement on Form S-11 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Initial Offering”). The Registration Statement also covered up to 5,000,000 shares available pursuant to a distribution reinvestment plan (the “DRIP”) under which our stockholders may elect to have their distributions reinvested in additional shares of the Company’s common stock at the greater of $9.50 per share or 95% of the estimated value of a share of common stock. On November 13, 2006, the Company increased the aggregate amount of the public offering to 49,390,000 shares for the primary offering and 5,952,000 shares pursuant to the DRIP in a related Registration Statement on Form S-11. Subsequently, the Company reallocated the shares of common stock available such that a maximum of 54,140,000 shares of common stock was available under the primary offering for an aggregate offering price of approximately $541.4 million and a maximum of 1,202,000 shares was available under the DRIP for an aggregate offering price of approximately $11.4 million.
 
The Company commenced its principal operations on September 23, 2005, when it issued the initial 486,000 shares of its common stock in the Initial Offering. Prior to such date, the Company was considered a development stage company. The Company terminated the Initial Offering on May 22, 2007. As of the close of business on May 22, 2007, the Company had issued a total of 54,838,315 shares in the Initial Offering, including 53,909,877 shares sold in the primary offering and 928,438 shares sold pursuant to the DRIP, resulting in gross offering proceeds to the Company of approximately $547.4 million. At the completion of the Initial Offering, a total of 503,685 shares of common stock remained unsold, including 230,123 shares that remained unsold in the primary offering and 273,562 shares of common stock that remained unsold pursuant to the DRIP. All unsold shares in Initial Offering have been deregistered.
 
On May 23, 2007, the Company commenced its follow-on public offering of up to 150,000,000 shares of common stock (the “Follow-on Offering”) (collectively with the Initial Offering, the “Offerings”). The Follow-on Offering includes up to 125,000,000 shares to be offered for sale at $10.00 per share in the primary offering and up to 25,000,000 shares to be offered for sale pursuant to the Company’s DRIP. As of December 31, 2007, the Company had accepted subscriptions for 38,989,723 shares of its common stock in the Follow-on Offering, resulting in gross proceeds to the Company of approximately $389.1 million. Combined with the gross proceeds from the Initial Offering, the Company had aggregate gross proceeds from its offerings of approximately $936.5 million as of December 31, 2007, before offering costs, selling commissions, and dealer management fees of approximately $87.3 million. As of December 31, 2007, the Company was authorized to issue 10,000,000 shares of preferred stock, but had none issued or outstanding.


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
As of March 31, 2008, the Company had received approximately $1.2 billion in gross offering proceeds through the issuance of 116,473,675 shares of its common stock in its offerings. As of March 31, 2008, approximately $659.3 million in shares (65.9 million shares) remained available for sale to the public, exclusive of shares available under the DRIP.
 
The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe 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 for trading. In the event it does not obtain listing prior to May 22, 2017, 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. 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 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 repairs and maintenance are expensed as incurred.
 
All assets are depreciated on a straight line basis. The estimate 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
 
Impairment losses are recorded on long-lived assets used in operations, which includes the operating property, when indicators of impairment are present and the assets’ carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. The Company has identified one property with impairment indicators for which the undiscounted future cash flows expected from the use of the property and related intangible assets and their eventual disposition was less than the carrying value of the assets. As a result, the Company reduced the carrying value of the real estate and related


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
intangible assets to their estimated fair value and recorded an impairment loss of $5.4 million during the year ended December 31, 2007. No impairment losses were recorded for the year ended December 31, 2006.
 
When a real estate asset is identified by management as held for sale, the Company ceases depreciation of the asset and estimates the sales price, net of selling costs. If, in management’s opinion, the net sales price of the asset is less than the net book value of the asset, an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property.
 
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 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.
 
Real Estate Assets Held for Sale
 
As of December 31, 2007, the Company had one single-tenant commercial property classified as held for sale. The Company continually monitors the performance of its properties, including their demographics, potential current capital appreciation, and tenants and may identify properties to dispose based on such performance characteristics. During the quarter ended September 30, 2007, the Company identified one property based on such performance characteristics that it elected to market for sale. Therefore, as of September 30, 2007, the Company reclassified its consolidated statements of operations to reflect income and expenses for the property held for sale as discontinued operations and reclassified its consolidated balance sheets to reflect assets related to such property as held for sale.


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
On February 1, 2008, the property’s tenant filed for Chapter 11 bankruptcy protection and, as a result, the Company elected to no longer market the property for sale. Accordingly, the Company no longer classified the property as a discontinued operation within its consolidated statements of operations or its consolidated balance sheets at December 31, 2007. At December 31, 2007, no adjustment of the property’s carrying value has been recorded as the book value of the property held for sale did not exceed its estimated fair value. The Company continues to evaluate the potential impact of the tenant’s bankruptcy on the property’s future operating results and its carrying value.
 
Investment in Direct Financing Leases
 
The Company evaluates the leases associated with its real estate properties in accordance with SFAS No. 13, “Accounting for Leases” (“SFAS 13”). For the real estate property leases classified as direct financing leases, the building portion of the property leases are accounted for as direct financing leases while the land portion of these leases are accounted for as operating leases. For the direct financing leases, we record an asset (net investment) representing the aggregate future minimum lease payments, estimated residual value of the leased property and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are reviewed quarterly, represent the estimated amount we expect to receive at lease termination from the disposition of leased property. Actual residual values realized could differ from these estimates. Write-downs of estimated residual value are recognized as permanent impairments in the current period.
 
Investment in Mortgage Notes Receivable
 
Mortgage notes receivable consist of loans acquired by the Company, which are secured by real estate properties. Mortgage notes receivable are recorded at stated principal amounts net of any discount or premium or deferred loan origination costs or fees. The related discounts or premiums on mortgage notes receivable purchased are amortized or accreted over the life of the related mortgage receivable. The Company defers certain loan origination and commitment fees, net of certain origination costs, and amortizes them as an adjustment of the mortgage notes receivable’s yield over the term of the related mortgage receivable. The Company evaluates the collectibility of both interest and principal on each mortgage note receivable to determine whether it is collectible. A mortgage note receivable is considered to be impaired, when based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a mortgage note receivable is considered to be impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the mortgage note receivable’s effective interest rate or to the value of the underlying collateral if the mortgage note receivable is collateralized. Interest income on performing mortgage note receivable is accrued as earned. Interest income on impaired mortgage notes receivable is recognized on a cash basis. No impairment losses were recorded related to mortgage notes receivable for either of the years ended December 31, 2007 and 2006.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid instruments with maturities when purchased of three months or less to be cash equivalents.
 
Restricted Cash and Escrowed Investor Proceeds
 
The Company is currently engaged in a public offering of its common stock. Included in restricted cash is escrowed investor proceeds of approximately $12.7 million and approximately $5.7 million of offering proceeds for which shares of common stock had not been issued as of December 31, 2007 and 2006,


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
respectively. Restricted cash also includes approximately $728,000 and $0 as of December 31, 2007 and 2006, which is restricted to fund capital expenditures for the Company’s real estate investment properties.
 
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.
 
Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets includes expenses incurred 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. Amortization of deferred financing costs for the years ended December 31, 2007, 2006 and 2005, was approximately $1.9 million, approximately $548,000 and approximately $18,000, 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 is taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. 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 three financial institutions, which was approximately $43.3 million, approximately $12.6 million and approximately $33,000, respectively, in excess


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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, no single tenant accounted for more than 10% of the Company’s gross annualized base rental revenues. Tenants in the drugstore, specialty retail, and sporting goods industries comprise approximately 15%, approximately 14%, and approximately 11%, respectively, of the Company’s gross annualized base rental revenues for the year ended December 31, 2007. As of December 31, 2006, no single tenant accounted for more than 10% of the Company’s gross annualized base rental revenues. Tenants in the drugstore, specialty retail and automotive supply industries comprise approximately 25%, approximately 12% and approximately 11%, respectively, of the Company’s gross annualized base rental revenues for the year ended December 31, 2006. Additionally, the Company has certain geographic concentration in our property holdings. In particular, as of December 31, 2007, 37 of the Company’s properties were located in Texas and 15 of the Company’s properties were located in Illinois, accounting for approximately 16% and approximately 13% of Company’s 2007 gross annualized base rental revenues, respectively. As of December 31, 2006, nine of the Company’s properties were located in Texas and five of the Company’s properties were located in Kansas, accounting for approximately 11% and approximately 9% of the Company’s 2006 gross annualized base rental revenues, respectively.
 
Offering and Related Costs
 
Cole Advisors II funds all of the organization and offering costs on the Company’s behalf and is reimbursed for such costs up to 1.5% of gross proceeds from the Offerings, excluding selling commissions and the dealer-manager fee. As of December 31, 2007 and 2006, Cole Advisors II had incurred organization and offering costs of approximately $4.6 million and approximately $3.8 million, respectively, on behalf of the Company, of which, all were reimbursable by the Company. The offering costs, which include items such as legal and accounting fees, marketing, and promotional printing costs, are recorded as a reduction of capital in excess of par value along with sales commissions and dealer manager fees of 7% and 2%, respectively. Organization costs are expensed as incurred. No organization costs were expensed during the year ended December 31, 2007 and approximately $57,000 of organization costs was expensed during the year ended December 31, 2006.
 
Due to Affiliates
 
As of December 31, 2007, the amount due to affiliates primarily consisted of approximately $743,000 due to Cole Realty Advisors for acquisition fees incurred, approximately $350,000 due to Cole Advisors II for finance coordination fees incurred, and approximately $383,000 due to Cole Advisors II for offering costs incurred. As of December 31, 2006, due to affiliates consisted of approximately $47,000 due to Cole Advisors II for reimbursement of organization and offering costs and approximately $20,000 due to an affiliate of Cole Advisors II for reimbursement of certain loan costs.
 
Stockholders’ Equity
 
As of each of December 31, 2007 and 2006 the Company was authorized to issue 240,000,000 shares of common stock and 10,000,000 shares of preferred stock. All shares of such stock have a par value of $.01 per share. The Company’s board of directors may authorize additional shares of capital stock and amend its terms without obtaining stockholder approval.
 
The par value of investor proceeds raised from the Offerings is classified as common stock, with the remainder allocated to capital in excess of par value. The Company’s share redemption program provides that all redemptions during any calendar year, including those upon death or qualifying disability, are limited to those that can be funded with proceeds raised from the DRIP. In accordance with Accounting Series Release


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
No. 268, “Presentation in Financial Statements of Redeemable Preferred Stock,” the Company accounts for the proceeds received from its DRIP outside of permanent equity for future redemption of shares. During the years ended December 31, 2007 and 2006, proceeds of approximately $20.3 million and approximately $3.5 million were received from the DRIP, respectively, were recorded as redeemable common stock in the respective consolidated balance sheets. As of December 31, 2007, the Company had redeemed 226,944 shares under its share redemption program. As of December 31, 2006, the Company had redeemed no shares under its share redemption program.
 
Earnings Per Share
 
Earnings per share are calculated based on the weighted average number of common shares outstanding during each period. Diluted income per share considers the effect of all potentially dilutive share equivalents, including outstanding employee stock options. See Note 13.
 
Stock Options
 
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options related to the 2004 Independent Directors Stock Option Plan (“IDSOP”) (see Note 13), based on estimated fair values. The Company adopted SFAS 123R using the modified prospective application. Accordingly, prior period amounts were not restated. As of December 31, 2007, there were 30,000 stock options outstanding under the IDSOP at a weighted average exercise price of $9.13 per share. As of December 31, 2006, there were 20,000 stock options outstanding under the IDSOP at a weighted average exercise price of $9.15 per share
 
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 it has two operating segments, (i) commercial properties and (ii) mortgage notes receivable. Commercial properties consist of activities related to investing in real estate including retail, office, and distribution properties. The Company’s commercial properties generate rental revenue and other income through the leasing of the properties, which comprised 98.7%, 100% and 100% of the Company’s total consolidated revenues the years ended December 31, 2007, 2006 and 2005, respectively. Although the Company’s commercial properties are geographically diversified throughout the United States, management evaluates operating performance on an individual property level, therefore the Company’s properties have been aggregated into one reportable segment. In addition, the Company has not presented separate financial information for the investment in mortgages receivable because its results of operations are not material to the Company’s consolidated financial statements as a whole. For the year ended December 31, 2007, the interest income from investment in mortgage notes receivable accounted for 1.2% of the consolidated revenue. For the year ended December 31, 2007, net income from investment in mortgage notes receivable accounted for 3.8% of consolidated net income. Mortgage notes receivable, net of related notes payable accounted for less than 1% of consolidated assets as of December 31, 2007. There were no mortgages receivable, or related interest income, recorded during the year ended December 31, 2006.
 
Interest
 
Interest is charged to interest expense as it accrues. No interest costs were capitalized during the years ended December 31, 2007 and 2006.


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 quarterly distributions to stockholders. Distributions are paid to those stockholders who are stockholders of record as of applicable record dates.
 
During January 2008, our board of directors declared a daily distribution of $0.00191781 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2008 and ending on March 31, 2008. The monthly distributions were calculated to be equivalent to an annualized distribution of seven percent (7.0%) per share, assuming a purchase price of $10.00 per share. As of December 31, 2007, the Company had distributions payable of approximately $5.4 million. The distributions were paid in January 2007, of which approximately $3.0 million was reinvested in shares through our distribution reinvestment program.
 
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 generally accepted accounting principles 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. During February 2008, the FASB issued a Staff Position that will (i) partially defer the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities and (ii) remove certain leasing transactions from the scope of SFAS No. 157. 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.
 
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.


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COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 December 15, 2008. 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 — INVESTMENT IN DIRECT FINANCING LEASES
 
The Company evaluates the leases associated with its real estate properties in accordance with SFAS 13. For the real estate property leases classified as direct financing leases, the building portion of the property leases are accounted for as direct financing leases while the land portion of these leases are accounted for as operating leases. For the direct financing leases, we record an asset (net investment) representing the aggregate future minimum lease payments, estimated residual value of the leased property and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment. Residual values, which are reviewed quarterly, represent the estimated amount we expect to receive at lease termination from the disposition of leased property. Actual residual values realized could differ from these estimates. Write-downs of estimated residual value are recognized as permanent impairments in the current period. There were no write-downs recognized during the years ended December 31, 2007 and 2006.
 
The components of investment in direct financing leases as of December 31, 2007 and 2006 were as follows:
 
                 
    December 31,  
    2007     2006  
 
Minimum lease payments receivable
  $ 26,862,088     $          —  
Estimated residual value of leased assets
    29,695,737        
Deferred incremental direct costs
           
Unearned income
    (17,297,642 )      
                 
Total
  $ 39,260,183     $  
                 


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of minimum lease future rentals, exclusive of any renewals, under the non-cancelable direct financing leases in existence at December 31, 2007 is as follows:
 
         
    Amount  
 
Year ending December 31:
       
2008
  $ 2,814,172  
2009
    2,821,326  
2010
    2,847,953  
2011
    2,885,052  
2012
    2,936,275  
Thereafter
    12,557,310  
         
Total
  $ 26,862,088  
         
 
NOTE 4 — REAL ESTATE ACQUISITIONS
 
During the year ended December 31, 2007, the Company acquired a 100% interest in 242 commercial properties for an aggregate purchase price of approximately $1.3 billion, including acquisition costs of approximately $32.5 million. The Company financed the acquisitions through the issuance and assumption of approximately $820.0 million of mortgage loans generally secured by the individual properties. The Company allocated the purchase price of these properties, including aggregate acquisition costs, to the fair value of the assets acquired and liabilities assumed. The Company allocated approximately $306.7 million to land, approximately $848.2 million to building and improvements, approximately $158.6 million to acquired in-place leases, approximately $39.5 million to investment in direct financing leases, approximately $79.4 million to acquired below-market leases and approximately $31.8 million to acquired above-market leases during the year ended December 31, 2007. Additionally, during the year ended December 31, 2007 the Company capitalized approximately $232,000 of expenditures relating to building and improvements, which will be depreciated over the estimated useful life of each asset.
 
During the year ended December 31, 2006, the Company acquired a 100% interest in 77 commercial properties for an aggregate purchase price of approximately $358.8 million, including acquisition costs of approximately $7.9 million. The Company financed the acquisitions through the issuance and assumption of approximately $213.2 million of mortgage loans generally secured by the individual properties. The Company allocated the purchase price of these properties, including aggregate acquisition costs, to the fair value of the assets acquired and liabilities assumed. The Company allocated approximately $85.7 million to land, approximately $229.5 million to building and improvements, approximately $46.3 million to acquired in-place leases, approximately $2.7 million to acquired below-market leases and approximately $42.6 million related to debt assumed on properties acquired during the year ended December 31, 2006.


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 5 — INTANGIBLE LEASE ASSETS
 
Identified intangible lease assets consisted of the following:
 
                 
    December 31,  
    2007     2006  
 
Acquired in place leases, net of accumulated amortization of $11,737,401 and $2,142,845 at December 31, 2007 and 2006, respectively (with a weighted average life of 185 and 159 months for in-place leases, respectively)
  $ 196,320,176     $ 51,939,520  
Acquired above market leases, net of accumulated amortization of $1,188,267 and $108,327 at December 31, 2007 and 2006, respectively (with a weighted average life of 183 and 162 months for acquired above market leases, respectively)
    32,470,792       2,629,503  
                 
    $ 228,790,968     $ 54,569,023  
                 
 
Amortization expense recorded on the identified intangible assets, for each of fiscal years ended December 31, 2007, 2006 and 2005, was approximately $11.0 million, approximately $2.2 million, and approximately $72,000, respectively.
 
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
  $ 16,624,480     $ 2,589,037
2009
  $ 16,139,689     $ 2,544,663
2010
  $ 15,573,587     $ 2,464,677
2011
  $ 15,325,819     $ 2,427,407
2012
  $ 15,087,176     $ 2,404,833
 
NOTE 6 — MORTGAGE NOTES RECEIVABLE ACQUISITIONS
 
During the year ended December 31, 2007, the Company acquired a portfolio of 23 mortgage notes receivable with an aggregate face value of approximately $45.0 million, which are secured by 23 restaurant properties, and a portfolio of 46 mortgage notes receivable with an aggregate face amount of approximately $33.3 million secured by 20 restaurant properties and 26 retail properties (collectively, the “Mortgage Notes”). The receivable balance of approximately $87.1 million as of December 31, 2007 consists of the face value of the notes of approximately $78.3 million, an approximately $6.9 million premium, and approximately $1.9 million of acquisition costs, net of accumulated amortization of approximately $79,000. The premium and acquisition costs will be amortized over the terms of the respective mortgage notes using the effective interest rate method. The Mortgage Notes mature on various dates from August 1, 2020 to January 1, 2021. Interest and principal is due each month at interest rates ranging from 8.60% to 10.47% per annum.
 
NOTE 7 — MORTGAGE NOTES PAYABLE
 
As of December 31, 2007, the Company had 171 mortgage notes payable totaling approximately $1.1 billion. As of December 31, 2007, the Company had 166 mortgage notes payable totaling approximately $940.9 million, in connection with real estate assets, with interest rates ranging from 5.15% to 6.88% with a weighted average interest rate of approximately 5.85% (the “Fixed Rate Debt”). The Fixed Rate Debt matures on various dates from July 2008 through October 2018. Each of the mortgage notes are secured by the


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
respective property. The mortgage notes are generally non-recourse to the Company and Cole Op II, but both are liable for customary non-recourse carveouts.
 
As of December 31, 2007, the Company had approximately $43.5 million outstanding under three revolving lines of credit. During the year ended December 31, 2007, the Company borrowed an aggregate of approximately $72.2 million and subsequently repaid approximately $28.7 million on the revolving lines of credit to partially fund certain of the real estate acquisitions described in Note 4. The revolving lines of credit bear interest at variable rates equal to the one-month LIBOR plus 150 to 200 basis points and mature on various dates from January 2008 to September 2008. As of December 31, 2007, no amounts were available under the three revolving lines of credit. The Company repaid approximately $22.2 million on two revolving lines of credit in January 2008.
 
As of December 31, 2007, the Company had approximately $71.3 million of short-term variable rate debt, which bears interest at variable rates equal to the one-month LIBOR rate plus 200 to 275 basis points. Approximately $36.3 million was secured by certain real estate properties and approximately $35.0 million was secured by certain mortgage notes receivable. Both notes matured and were repaid in March 2008.
 
On March 2, 2007, the Company repaid a fixed rate mortgage note of approximately $5.2 million that was due on October 1, 2016. As a result, approximately $113,000 of unamortized deferred financing costs was expensed and included in interest expense in the consolidated financial statements for year ended December 31, 2007.
 
As of December 31, 2006, the Company had 71 mortgage notes payable totaling approximately $218.3 million, of which approximately $215.6 million was fixed rate debt with interest rates ranging from 5.15% to 6.31% with a weighted average interest rate of approximately 5.72%. The Company also had approximately $2.7 million of short-term variable rate debt outstanding at December 31, 2006.
 
Generally, the Fixed Rate Debt 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 (3) 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 mortgage note includes hyperamortization provisions. The interest rate during the hyperamortization period shall be the fixed interest rate as stated on the respective mortgage note agreement plus two percent (2.0%). The individual mortgage note maturity date, under the hyperamortization provisions, will be extended by twenty (20) years. During such period, the lender will apply 100% of the rents collected to (i) all payments for escrow or reserve accounts, (ii) payment of interest at the original fixed interest rate, (iii) payments for the replacement reserve account, (iv) any other amounts due in accordance with the mortgage note agreement other than any additional interest expense, (v) any operating expenses of the property pursuant to an approved annual budget, (vi) any extraordinary expenses, (vii) payments to be applied to the reduction of the principal balance of the mortgage note, and (viii) any additional interest expense, which is not paid will be added to the principal balance of the mortgage note.


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, 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:
 
         
    Principal
 
    Repayments  
 
For the year ending December 31:
       
2008
  $ 125,297,353  
2009
    1,069,917  
2010
    17,808,720  
2011
    40,261,492  
2012
    45,286,607  
Thereafter
    825,957,449  
         
Total
  $ 1,055,681,538  
         
 
The variable rate mortgages approximate fair market value. The fair value of our fixed rate mortgage notes payable at December 31, 2007 approximates $1.0 billion.
 
Related party notes
 
On February 10, 2006, Cole OP II borrowed approximately $4.7 million from Series B, LLC (“Series B”), an affiliate of the Company and the Company’s advisor, by executing a promissory note which was secured by membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $5.9 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non-recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in May 2006.
 
On February 6, 2006, Cole OP II borrowed approximately $2.3 million from Series C by executing a promissory note which was secured by membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $18.5 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in April 2006.
 
On December 15, 2005, Cole OP II borrowed approximately $2.5 million and approximately $2.0 million from Series C, LLC (“Series C”), which is an affiliate of the Company and the Company’s advisor, by executing two promissory notes which were secured by membership interests held by Cole OP II in two wholly-owned subsidiaries. Each of the loans had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest payable in full on June 30, 2006. Each of the loans was generally non recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including a majority of its independent directors, approved the loans and determined that the terms of the loans were no


F-19


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the notes in full in April 2006.
 
During the year ended December 31, 2007, no interest expense was incurred for related party transactions. During the years ended December 31, 2006 and 2005 Cole OP II incurred approximately $210,000 and approximately $13,000, respectively, in interest expense to affiliates under the aforementioned loans.
 
NOTE 8 — INTANGIBLE LEASE LIABILITY
 
Identified intangible liability relating to the real estate acquisitions discussed in Note 4 consisted of the following:
 
                 
    December 31,  
    2007     2006  
 
Acquired below — market leases, net of accumulated amortization of $2,083,475 and $96,484 at December 31, 2007 and 2006, respectively (with a weighted average life of 199 and 144 months, respectively)
  $ 80,031,916     $ 2,649,374  
                 
 
Amortization income recorded on the identified intangible liability, for each of fiscal years ended December 31, 2007, 2006 and 2005 was $2.0 million, $96,000 and $52, 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:
 
         
    Amount
 
    Below
 
Year
  Market Lease  
 
2008
  $ 5,897,599  
2009
  $ 5,835,949  
2010
  $ 5,681,524  
2011
  $ 5,584,089  
2012
  $ 5,499,927  
 
NOTE 9 — EXTENDED RATE LOCK AGREEMENTS
 
The Company entered into Extended Rate Lock Agreements with Bear Stearns Commercial Mortgage, Inc. (“Bear Stearns”), JP Morgan Chase Bank, N.A. (“JP Morgan”), Wachovia Bank, and Wells Fargo Bank, N.A. (“Wells Fargo”) (the “Rate Locks”) to lock interest rates ranging from 5.49% to 6.69% for up to approximately $647.8 million in borrowings. Under the terms of Rate Locks, the Company made rate lock deposits totaling approximately $12.4 million to Bear Stearns, JP Morgan, Wachovia and Wells Fargo. As of December 31, 2007, the Company had no available borrowings under the Rate Locks and no rate lock deposits outstanding.
 
The Company had approximately $3.9 million in rate lock deposits outstanding at December 31, 2006, which are reflected as Mortgage Loan Deposits and recorded in “Prepaid Expenses, Mortgage Loan Deposits, and Other Assets” on the Company’s consolidated balance sheet and statement of cash flows.
 
The rate lock deposits are refundable to the Company on an allocable basis with respect to any loans funded under the agreements. The Rate Locks expire 60 days from execution. The agreements may be extended by intervals of 30 days, up to 180 days, for a rate lock fee of 0.25% of the loan amount or, at the Company’s election, by converting the fee into interest rate spread. Either party may terminate the agreement upon notice to the other party at any time prior to the determination of the rate and the rate locked amount in accordance with the terms of the agreement. In the event the Company wishes to terminate and cancel a Rate


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Locks agreement, subsequent to the determination of the rate and the rate locked amount, and the Company has satisfied all of the obligations set forth in the agreement, including the payment of any and all hedge breakage costs, and Bear Stearns, JP Morgan, or Wachovia (the “Lenders”) has realized a net gain on any hedges entered into by the Lenders relating to the Rate Lock, then Lenders will remit one-half of such net gain to the Company. The Company will be liable to the Lenders for 100% of any net hedge break loss incurred by the Lenders on terminated rate locks. Wells Fargo will retain the rate lock deposit as consideration for locking the rate on terminated rate locks.
 
On August 10, 2007, the Company terminated its rate lock agreement with Bear Stearns, which fixed interest rates for the remaining unallocated borrowings of up to approximately $275.8 million. As a result, approximately $5.7 million in rate lock deposits was refunded to the Company. In accordance with the terms of the rate lock agreements, the Company earned a rate lock breakage gain of approximately $2.2 million. In addition, the Company expensed previously deferred financing costs of approximately $1.7 million relating to the remaining unallocated borrowings. The net gain of approximately $478,000 is included in interest and other income on the condensed consolidated statements of operations.
 
NOTE 10 — 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 known to be contemplated against us.
 
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. During the year ended December 31, 2007, the Company acquired certain properties which are subject to environmental remediation. In each case, the seller, the tenant and/or another third party has been identified as the responsible party for environmental remediation costs related to the property. Additionally, in connection with the purchase of certain of the properties, the respective sellers and/or tenants have indemnified the Company against future remediation costs. The Company does not believe that the environmental matters identified at such properties will have a material adverse effect on its consolidated results of operations, nor is it aware of any environmental matters at other properties which it believes will have a material adverse effect on its consolidated results of operations.
 
NOTE 11 —  RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
Certain affiliates of the Company receive, and will continue to receive fees and compensation in connection with the Offerings, and the acquisition, management and sale of the assets of the Company. Cole Capital receives, and will continue to receive, a selling commission of up to 7% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. Cole Capital reallows, and intends to continue to reallow 100% of commissions earned to participating broker-dealers. In addition, Cole Capital will receive up to 1.5% of gross proceeds from the Offerings, excluding selling commissions and the dealer manager fee. Cole Capital, in its sole discretion, may reallow all or a portion of its dealer-manager fee to such participating broker-dealers as a marketing and due diligence expense reimbursement, based on such factors as the volume of shares sold by such participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. No selling commissions or dealer-manager fees are paid to Cole Capital in respect to shares sold under the DRIP. During the years ended December 31, 2007, 2006 and 2005, the Company paid approximately $53.3 million, approximately $23.3 million and approximately $2.4 million to Cole Capital for commissions and dealer manager fees, of which approximately $45.4 million, approximately $20.0 million and approximately $2.0 million was reallowed to participating broker-dealers.


F-21


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
All organization and offering expenses associated with the sale of the Company’s common stock (excluding selling commissions and the dealer-manager fee) are paid for by Cole Advisors II or its affiliates and are reimbursed by the Company up to 1.5% of gross offering proceeds. Cole Advisors II or its affiliates also receive acquisition and advisory fees of up to 2% of the contract purchase price of each asset for the acquisition, development or construction of real property and will be reimbursed for acquisition costs incurred in the process of acquiring properties, but not to exceed 4.0% of the contract purchase price. The Company expects the acquisition expenses to be approximately 0.5% of the purchase price of each property. During the years ended December 31, 2007, 2006 and 2005, the Company reimbursed the Advisor approximately $4.6 million, approximately $3.4 million and approximately $421,000, respectively, for organizational and offering expenses in the Offerings, of which $0, approximately $57,000 and approximately $2,000, respectively, was expensed as organization costs. During the years ended December 31, 2007, 2006 and 2005, the Company paid Cole Realty Advisors approximately $26.9 million, approximately $5.8 million and approximately $1.7 million, respectively, for acquisition fees.
 
If Cole Advisors II provides services, as determined by the independent directors, in connection with the origination or refinancing of any debt financing obtained by the Company that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors II or its affiliates a financing coordination fee equal to 1% of the amount available under such financing; provided however, that Cole Advisors II or its affiliates shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which Cole Advisors II or its affiliates received such a fee. Financing coordination fees payable from loan proceeds from permanent financing will be paid to Cole Advisors II or its affiliates as the Company acquires such permanent financing. However, no acquisition fees will be paid on loan proceeds from any line of credit until such time as all net offering proceeds have been invested by the Company. During the years ended December 31, 2007, 2006 and 2005, the Company paid Cole Advisors II or its affiliates approximately $8.0 million, approximately $1.8 million and approximately $320,000, respectively, for finance coordination fees.
 
The Company pays, and expects to continue to pay, Cole Realty Advisors, its affiliated property manager, fees for the management and leasing of the Company’s properties. Such fees currently equal, and are expected to continue to equal (i) 2.0% of gross revenues from its single tenant properties and (ii) 4.0% of gross revenues from its multi-tenant properties, plus leasing commissions at prevailing market rates; provided however, that the aggregate of all property management and leasing fees paid to affiliates plus all payments to third parties will not exceed the amount that other nonaffiliated management and leasing companies generally charge for similar services in the same geographic location. Cole Realty Advisors may subcontract its duties for a fee that may be less than the fee provided for in the property management agreement. During the years ended December 31, 2007, 2006 and 2005, the Company paid Cole Realty Advisors approximately $1.6 million, approximately $350,000 and approximately $14,000, respectively, for property management fees.
 
The Company pays Cole Advisors II an annualized asset management fee of 0.25% of the aggregate asset value of the Company’s assets (the “Asset Management Fee”). The fee is payable monthly in an amount equal to 0.02083% of aggregate asset value as of the last day of the immediately preceding month. During the years ended December 31, 2007, 2006 and 2005, the Company paid asset management fees to Cole Advisors II of approximately $2.6 million, approximately $587,000 and approximately $25,000, respectively.
 
If Cole Advisors II or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more properties, the Company will pay Cole Advisors II up to one-half of the brokerage commission paid, but in no event to exceed an amount equal to 2% of the sales price of each property sold. In no event will the combined real estate commission paid to Cole Advisors II, its affiliates and unaffiliated third parties exceed 6% of the contract sales price. In addition, after investors have received a return of their net capital contributions and an 8% annual cumulative,


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
non-compounded return, then Cole Advisors II is entitled to receive 10% of the remaining net sale proceeds. During the years ended December 31, 2007, 2006 and 2005, the Company did not pay any fees or amounts to Cole Advisors II relating to the sale of properties.
 
Upon listing of the Company’s common stock on a national securities exchange, a fee equal to 10% 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 8% annual cumulative, non-compounded return to investors will be paid to Cole Advisors II (the “Subordinated Incentive Listing Fee”).
 
Upon termination of the advisory agreement with Cole Advisors II, other than termination by the Company because of a material breach of the advisory agreement by Cole Advisors II, a performance fee of 10% of the amount, if any, by which (i) the appraised asset value at the time of such termination plus total distributions paid to stockholders through the termination date exceeds (ii) the aggregate capital contribution contributed by investors less distributions from sale proceeds plus payment to investors of an 8% annual, cumulative, non-compounded return on capital. No subordinated performance fee will be paid if the Company has already paid or become obligated to pay Cole Advisors II a Subordinated Incentive Listing Fee.
 
The Company will reimburse Cole Advisors II for all expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse for any amount by which it’s operating expenses (including the Asset Management Fee) at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested assets, or (ii) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period. The Company will not reimburse for personnel costs in connection with services for which Cole Advisors II receives acquisition fees or real estate commissions. During the year ended December 31, 2007, the Company reimbursed approximately $672,000 to Cole Advisors II. During the years ended December 31, 2006, and 2005, the Company did not reimburse Cole Advisors II for any such costs.
 
On February 10, 2006, Cole OP II borrowed approximately $4.7 million from Series B, an affiliate of the Company and the Company’s advisor, by executing a promissory note which was secured by the membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $5.9 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non-recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in May 2006.
 
On February 6, 2006, Cole OP II borrowed approximately $2.3 million from Series C, an affiliate of the Company and the Company’s advisor, by executing a promissory note which was secured by the membership interest held by Cole OP II in a wholly-owned subsidiary. The loan proceeds were used to acquire a property with a purchase price of approximately $18.5 million, exclusive of closing costs. The loan had a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest was payable in full on December 31, 2006. The loan was generally non recourse to Cole OP II and could be prepaid at any time without penalty or premium. The Company’s board of directors, including all of the independent directors, approved the loan and determined that its terms were no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the note in full in April 2006.


F-23


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
On December 15, 2005, Cole OP II borrowed approximately $2.5 million and approximately $2.0 million from Series C by executing two promissory notes which are secured by the membership interests held by Cole OP II in two wholly-owned subsidiaries, respectively. Each of the loans has a variable interest rate based on the one-month LIBOR rate plus 200 basis points with monthly interest-only payments, and the outstanding principal and accrued and unpaid interest payable in full on June 30, 2006. Each of the loans is generally non recourse to Cole OP II and may be prepaid at any time without penalty or premium. The Company’s board of directors, including a majority of its independent directors, approved the loans and determined that the terms of the loans are no less favorable to the Company than loans between unaffiliated third parties under the same circumstances. Cole OP II repaid the notes in full in April 2006.
 
Cole OP II incurred no interest expense to affiliates during the year ended December 31, 2007. During the years ended December 31, 2006 and 2005 Cole OP II incurred approximately $210,000 and approximately $13,000, respectively, in interest expense to affiliates under the aforementioned loans.
 
During the year ended December 31, 2007, Cole OP II acquired no properties from affiliates of the Company or the Company’s advisor. During the year ended December 31, 2006, Cole OP II acquired the following properties from various affiliates of the Company and the Company’s advisor. The acquisitions were funded by net proceeds from the Company’s Offering and the assumption of loans secured by the respective properties.
 
                             
    Acquisition
          Purchase
    Loan
 
Property Description
 
Date
 
Location
 
Seller
 
Price
   
Assumed
 
 
Wawa — convenience store
  March 29, 2006   Hockessin, DE   Series A, LLC   $ 4,830,000 (1)   $ 2,598,068  
Wawa — convenience store
  March 29, 2006   Manahawkin, NJ   Series A, LLC     4,414,000 (1)     2,374,301  
Wawa — convenience store
  March 29, 2006   Narberth, PA   Series A, LLC     4,206,000 (1)     2,262,417  
Conns — appliance retailer
  May 26, 2006   San Antonio, TX   Series D, LLC     4,624,619 (2)     3,580,000  
Rite Aid — drugstore
  May 26, 2006   Defiance, OH   Cole Acquisitions I, LLC     4,326,165 (2)     2,321,000  
CVS — drugstore
  May 26, 2006   Madison, MS   Cole Acquisitions I, LLC     4,463,088 (2)     2,809,000  
CVS — drugstore
  June 28, 2006   Portsmouth, OH   Cole Acquisitions I, LLC     2,101,708 (2)     1,753,000  
CVS — drugstore
  July 7, 2006   Okeechobee, FL   Cole Acquisitions I, LLC     6,459,262 (2)     4,076,000  
Office Depot — office supply
  July 7, 2006   Dayton, OH   Cole Acquisitions I, LLC     3,416,526 (2)     2,130,000  
Advance Auto — specialty retailer
  July 12, 2006   Holland, MI   Cole Acquisitions I, LLC     2,071,843 (2)     1,193,000  
Advance Auto — specialty retailer
  July 12, 2006   Holland Township, MI   Cole Acquisitions I, LLC     2,137,244 (2)     1,231,000  
Advance Auto — specialty retailer
  July 12, 2006   Zeeland, MI   Cole Acquisitions I, LLC     1,840,715 (2)     1,057,000  
CVS — drugstore
  July 12, 2006   Orlando, FL   Series D, LLC     4,956,763 (2)     3,016,000  
Office Depot — office supply
  July 12, 2006   Greenville, MS   Cole Acquisitions I, LLC     3,491,470 (2)     2,192,000  
Office Depot — office supply
  July 19, 2006   Warrensburg, MO   Series D, LLC     2,880,552 (2)     1,810,000  
CVS — drugstore
  August 10, 2006   Gulfport, MS   Cole Acquisitions I, LLC     4,414,117 (2)     2,611,000  
                             
                $ 60,634,072     $ 37,013,786  
                             
 
 
(1) The Company’s board of directors, including all of the independent directors, approved the transaction as being fair and reasonable to the Company, at a price in excess of the cost to Series A, LLC, but substantial justification exists for such excess, such excess is reasonable and the costs of the interest did exceed its current fair market value as determined by an independent expert selected by the Company’s independent directors.
 
(2) The Company’s board of directors, including all of the independent directors, approved the transactions above as being fair and reasonable to the Company, at a price no greater than the cost to the affiliated


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
entity, and at a cost that did not exceed its current fair market value as determined by an independent expert.
 
NOTE 12 — ECONOMIC DEPENDENCY
 
Under various agreements, the Company has engaged or will engage Cole Advisors II 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 II 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.
 
NOTE 13 — INDEPENDENT DIRECTOR’S STOCK OPTION PLAN
 
The Company has a stock option plan, the IDSOP, which authorizes the grant of non-qualified stock options to the Company’s independent directors, subject to the absolute discretion of the board of directors and the applicable limitations of the plan. The Company intends to grant options under the IDSOP to each qualifying director annually. The exercise price for the options granted under the IDSOP initially will be $9.15 per share. The options contractual life will be ten years from date of grant. It is intended that the exercise price for future options granted under the IDSOP will be at least 100% of the fair market value of the Company’s common stock as of the date the option is granted. The exercise price for the options granted under the IDSOP was $9.15 per share for 2005 and 2006 and $9.10 per share for 2007. As of December 31, 2007 and 2006, the Company had granted options to purchase 30,000, and 20,000 shares, respectively. The 10,000 options granted during the year ended December 31, 2007 have a vesting period of approximately nine months. The remaining 20,000 options have a one year vesting period. A total of 1,000,000 shares have been authorized and reserved for issuance under the IDSOP. On January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options related to the IDSOP, based on estimated fair values. The Company adopted SFAS 123R using the modified prospective application. Accordingly, prior period amounts were not restated.
 
During the year ended December 31, 2007, the Company recorded stock-based compensation charges of approximately $25,000. During the year ended December 31, 2006, the adoption of SFAS 123R resulted in stock-based compensation charges of approximately $54,000. Stock-based compensation expense recognized in the years ended December 31, 2007 and 2006 was based on awards ultimately expected to vest, and has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s calculations do not assume any forfeitures.


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of the Company’s stock option activity under its Independent Director Plan during the years ended December 31, 2007 and 2006 is as follows:
 
                         
          Weighted
       
          Average
       
          Exercise
       
    Number     Price     Exercisable  
 
Outstanding at December 31, 2005
    10,000     $ 9.15        
Granted in 2006
    10,000     $ 9.15          
                         
Outstanding at December 31, 2006
    20,000     $ 9.15       10,000  
Granted in 2007
    10,000     $ 9.10          
                         
Outstanding at December 31, 2007
    30,000     $ 9.13       20,000  
                         
 
As of December 31, 2007 and 2006, options to purchase 10,000 shares were unvested with a weighted average contractual remaining life of approximately 8.4 and approximately 9.3 years, respectively.
 
The weighted average fair value of options granted were $0.70 in 2007 and $5.55 in 2006. As of December 31, 2007 the number of options that were currently vested and expected to become vested was 30,000 shares which had an intrinsic value of $26,000.
 
In accordance with SFAS 123R, the fair value of each stock option granted was estimated as of the date of the grant using the Black-Scholes method based on the following assumptions: a weighted average risk-free interest rate from 4.69% to 5.07%, a projected future dividend yield from 6.25% to 7.00%, expected volatility from 0% to 15.35%, and an expected life of an option of 10 years. Based on these assumptions, the fair value of the options granted during the years ended December 31, 2007 and 2006 were approximately $7,000 and $55,000, respectively. As of December 31, 2007, there was approximately $4,000 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the IDSOP. That cost is expected to be recognized during 2008.
 
NOTE 14 — STOCKHOLDERS EQUITY
 
Distribution Reinvestment Plan
 
The Company maintains a distribution reinvestment plan that allows common stockholders (the “Stockholders”) to elect to have the distributions the Stockholders receive reinvested in additional shares of the Company’s common stock. The purchase price per share under the distribution reinvestment plan will be the higher of 95% of the fair market value per share as determined by the Company’s board of directors and $9.50 per share. No sales commissions or dealer manager fees will be paid on shares sold under the distribution reinvestment plan. The Company may terminate or amend the distribution reinvestment plan at the Company’s discretion at any time upon ten days prior written notice to the Stockholders. Additionally, the Company will be required to discontinue sales of shares under the distribution reinvestment plan on the earlier of May 11, 2009, which is two years from the effective date of the Follow-on Offering, unless the Follow-on Offering is extended, or the date the Company sells 25,000,000 shares under the Follow-on Offering, unless the Company files a new registration statement with the Securities and Exchange Commission and applicable states. During the years ended December 31, 2007 and 2006, approximately 2.1 million and approximately 371,000 shares were purchased under the distribution reinvestment plan, for approximately $20.3 million and approximately $3.5 million, respectively, which were recorded as redeemable common stock on the consolidated balance sheets.


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Share Redemption Program
 
The Company’s share redemption program permits its stockholders to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below.
 
There are several restrictions on the stockholder’s ability to sell their shares to the Company under the program. The stockholders generally have to hold their shares for one year before selling the shares to the Company under the plan; however, the Company may waive the one-year holding period in the event of the death or bankruptcy of a Stockholder. In addition, the Company will limit the number of shares redeemed pursuant to the Company’s share redemption program as follows: (1) during any calendar year, the Company will not redeem in excess of 3.0% of the weighted average number of shares outstanding during the prior calendar year; and (2) funding for the redemption of shares will be limited to the amount of net proceeds the Company receives from the sale of shares under the Company’s distribution reinvestment plan. These limits may prevent the Company from accommodating all requests made in any year. During the term of the Offering, and subject to certain provisions the redemption price per share will depend on the length of time the stockholder has held such shares as follows: after one year from the purchase date — 92.5% of the amount the stockholder paid for each share; after two years from the purchase date — 95.0% of the amount the stockholder paid for each share; after three years from the purchase date — 97.5% of the amount the stockholder paid for each share; and after four years from the purchase date — 100.0% of the amount the stockholder paid for each share.
 
Upon receipt of a request for redemption, the Company will conduct a Uniform Commercial Code search to ensure that no liens are held against the shares. Repurchases will be made quarterly. If funds are not available to redeem all requested redemptions at the end of each quarter, the shares will be purchased on a pro rata basis and the unfulfilled requests will be held until the next quarter, unless withdrawn. The Company’s board of directors may amend, suspend or terminate the share redemption program at any time upon 30 days prior written notice to the stockholders. The Company redeemed approximately 227,000 shares under the share redemption program during the year ended December 31, 2007 for approximately $2.2 million. No shares were redeemed under the share redemption program during the year ended December 31, 2006.
 
NOTE 15 — INCOME TAXES
 
For income tax purposes, dividends 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 stockholder for the years ended December 31, 2007, 2006 and 2005.
 
                         
Character of Distributions:
  2007     2006     2005  
 
Ordinary income
    41 %     42 %     0 %
Return of capital
    59 %     58 %     0 %
                         
Total
    100 %     100 %     0 %
                         
 
At December 31, 2007, 2006 and 2005, the tax basis carrying value of the Company’s total assets was approximately $1.7 billion, approximately $500.5 million and approximately $98.8 million, respectively. During the years ended December 31, 2007, 2006 and 2005, the Company had state income taxes of approximately $158,000, approximately $24,000 and approximately $3,000, respectively, which were recorded in general and administrative expenses in the consolidated statements of operations.


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
NOTE 16 — OPERATING LEASES
 
The Company’s operating leases’ 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:
 
         
    Amount  
 
Year ending December 31:
       
2008
  $ 113,711,614  
2009
    113,905,344  
2010
    112,407,413  
2011
    111,406,202  
2012
    110,264,602  
Thereafter
    962,046,560  
         
Total
  $ 1,523,741,735  
         
 
NOTE 17 — QUARTERLY RESULTS (Unaudited)
 
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2007, 2006 and 2005. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with GAAP, the selected quarterly information.
 
                                 
    2007  
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter  
 
Revenues
  $ 12,597,351     $ 18,821,384     $ 26,538,544     $ 31,884,871  
Operating income
    6,442,770       4,068,448       13,512,244       17,274,145  
Net income (loss)
    1,684,727       (3,366,779 )     2,997,849       3,164,220  
Basic and diluted net income (loss) per share
    0.05       (0.06 )     0.04       0.04  
Dividends per share
  $ 0.16     $ 0.16     $ 0.18     $ 0.18  
                                 
                                 
    2006  
    First
    Second
    Third
    Fourth
 
    Quarter     Quarter     Quarter     Quarter  
 
Revenues
  $ 2,571,786     $ 3,715,493     $ 5,392,741     $ 7,839,487  
Operating income
    1,262,699       1,779,812       2,748,315       3,952,804  
Net income (loss)
    (182,588 )     (181,847 )     548,942       1,161,489  
Basic and diluted net income (loss) per share
    (0.04 )     (0.02 )     0.04       0.12  
Dividends per share
  $ 0.15     $ 0.15     $ 0.16     $ 0.16  
 


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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
    2005(1)  
    Third
    Fourth
 
    Quarter     Quarter  
 
Revenues
  $ 2,761     $ 738,908  
Operating income (loss)
    (27,679 )     352,917  
Net loss
    (29,543 )     (85,048 )
Basic and diluted net loss per share(2)
    (0.46 )     (0.05 )
Dividends per share
  $     $ 0.15  
 
 
(1) No quarterly financial information is presented for the first two quarters of 2005 as the Company was a development stage company during those quarters and had no operations.
 
(2) The total of the two quarterly amounts for the year ended December 31, 2005, does not equal the total for the year then ended. This difference results from the increase in shares outstanding over the year.
 
NOTE 18 — SUBSEQUENT EVENTS
 
Sale of Shares of Common Stock
 
As of March 24, 2008, the Company had raised approximately $1.1 billion of gross proceeds through the issuance of approximately 114.4 million shares of its common stock in its offerings (including shares sold under the DRIP). As of March 24, 2008, approximately $679.8 million (68.0 million shares) remained available for sale to the public in the Follow-on Offering, exclusive of shares available under the DRIP. As of March 24, 2008, 59.6 million shares had been sold in the Follow-on Offering (including shares sold under the DRIP).
 
Property Acquisitions
 
Subsequent to December 31, 2007, the Company acquired a 100% interest in 44 commercial properties for an aggregate purchase price of approximately $266.3 million, excluding closing costs. The Company financed the acquisitions through the issuance and assumption of approximately $144.9 million of mortgage loans generally secured by the individual property on which each loan was made. The Company allocated the purchase price of these properties, including aggregate acquisitions costs, to the fair market value of the assets acquired and liabilities assumed.
 
Mortgage Notes Payable
 
Subsequent to December 31, 2007, the Company obtained six mortgage notes payable in connection with the real estate acquisitions described above, totaling approximately $144.9 million. The Company obtained $20.9 million of fixed rate debt which bears interest at rates ranging from 5.593% to 5.900% and a weighted average interest rate of 5.815% (the “Fixed Rate Debt”). The Fixed Rate Debt matures on various dates during 2016. The Company obtained $124.0 million of variable rate debt which bears interest at rates ranging from one-month LIBOR plus 1.5% to 2.0% (the “Variable Rate Debt”). The Variable Rate Debt matures on various dates during 2009. Of the Variable Rate Debt, $16.0 million was borrowed from Series B and $16.0 million was borrowed from Series C, each of which are affiliates of the Company and the Company’s advisor, by executing two promissory notes that were secured by the membership interest held by Cole OP II in certain wholly-owned subsidiaries of Cole OP II.
 
In addition, subsequent to December 31, 2007, the Company repaid an aggregate of approximately $71.3 million of variable rate debt related to two mortgage notes payable and repaid approximately $22.2 million on two of its revolving lines of credit.

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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
December 31, 2007
 
                                         
                Adjustments
             
    Balance at
    Charged
    to
          Balance at
 
    beginning
    to
    valuation
          end of
 
    of period     expenses     accounts     Deductions     period  
 
Year Ended December 31, 2005
Allowance for doubtful accounts
  $     $     $     $     $  
Year Ended December 31, 2006
Allowance for doubtful accounts
  $     $ 75,000     $     $     $ 75,000  
Year Ended December 31, 2007
Allowance for doubtful accounts
  $ 75,000     $ 446,615     $     $     $ 521,615  


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Table of Contents

COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
December 31, 2007
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Tractor Supply — Parkersburg, WV
  $ 2,607,000     $ 934,094     $ 2,049,813     $     $ 934,094     $ 2,049,813     $     $ 2,983,907     $ 135,996  
Walgreens — Brainerd, MN
    3,463,000       981,431       2,881,615             981,431       2,881,615             3,863,046       181,990  
Rite Aid — Alliance, OH
          431,879       1,445,749             431,879       1,445,749             1,877,628       95,279  
La-Z-Boy — Glendale, AZ
    4,553,000       2,515,230       2,968,168             2,515,230       2,968,168             5,483,398       183,829  
Walgreens — Florissant, MO
    4,150,000       1,481,823       3,204,729             1,481,823       3,204,729             4,686,552       175,993  
Walgreens (Gravois Rd) — St. Louis, MO
    4,922,000       2,220,036       3,304,989             2,220,036       3,304,989             5,525,025       181,710  
Walgreens (Telegraph Rd) — St. Louis, MO
    4,048,000       1,744,792       2,874,581             1,744,792       2,874,581             4,619,373       158,121  
Walgreens — Olivette, MO
    5,379,146       3,076,687       3,797,714             3,076,687       3,797,714             6,874,401       216,190  
Walgreens — Columbia, MO
    4,487,895       2,352,646       3,350,669             2,352,646       3,350,669             5,703,315       196,164  
CVS — Alpharetta, GA
    2,480,000       1,214,170       1,692,629             1,214,170       1,692,629             2,906,799       98,932  
Lowe’s — Enterprise, AL
    5,980,000       1,011,873       5,803,040             1,011,873       5,803,040             6,814,913       337,484  
CVS — Richland Hills, TX
    2,928,000       1,141,450       2,302,484             1,141,450       2,302,484             3,443,934       125,178  
FedEx Package Distribution Center — Rockford, IL
    4,920,000       1,468,781       3,668,567             1,468,781       3,668,567             5,137,348       216,241  
Plastech — Auburn Hills, MI
    17,700,000       3,282,853       18,153,264             3,282,853       18,153,264             21,436,117       808,088  
Academy Sports — Macon, GA
    4,280,000       1,232,263       3,900,882             1,232,263       3,900,882             5,133,145       218,872  
David’s Bridal — Lenexa, KS
    2,616,000       765,520       2,197,084             765,520       2,197,084             2,962,604       146,113  
Staples — Crossville, TN
    2,320,000       549,410       2,134,375             549,410       2,134,375             2,683,785       146,762  
Rite Aid — Enterprise, AL
    2,971,000       919,527       2,390,771             919,527       2,390,771             3,310,298       130,351  
Rite Aid — Wauseon, OH
    3,115,000       1,046,758       2,332,783             1,046,758       2,332,783             3,379,541       128,614  
Rite Aid — Saco, ME
    2,000,000       391,401       1,989,472             391,401       1,989,472             2,380,873       109,433  
Wadsworth Boulevard — Denver, CO
    12,025,000       4,722,891       12,727,784             4,722,891       12,796,724             17,519,615       622,403  
Mountainside Fitness — Chandler, AZ
          1,176,983       4,479,662             1,176,983       4,479,662             5,656,645       277,400  
Drexel Heritage — Hickory, NC
    3,400,000       393,637       3,621,909             393,637       3,621,909             4,015,546       370,898  
Rayford Square — Spring, TX
    5,940,000       2,338,988       6,695,818             2,338,988       6,873,513             9,212,501       310,680  
CVS — Portsmouth (Scioto Trail), OH
    1,753,000       560,614       1,639,355             560,614       1,639,355             2,199,969       86,454  
Wawa — Hockessin, DE
    2,604,523       1,849,527       1,999,555               1,849,527       1,999,555               3,849,082       106,625  
Wawa — Manahawkin, NJ
    2,604,523       1,359,042       2,360,169               1,359,042       2,360,169               3,719,211       97,741  
Wawa — Narberth, PA
    2,242,784       1,659,442       1,781,616               1,659,442       1,781,616               3,441,058       91,817  
CVS — Lakewood, OH
    1,960,000       552,398       1,225,358             552,398       1,305,558             1,857,956       72,035  
Rite Aid — Fremont, OH
    2,020,000       862,601       1,434,798             862,601       1,434,798             2,297,399       72,437  
Rite Aid — Cleveland, OH
    2,055,000       565,621       1,752,831             565,621       1,752,831             2,318,452       90,857  
Walgreens — Knoxville, TN
    3,800,000       1,825,563       2,465,399             1,825,563       2,465,399             4,290,962       116,332  
Conns — San Antonio, TX
    3,580,000       1,025,607       3,054,708             1,025,607       3,054,708             4,080,315       132,220  
Rite Aid — Defiance, OH
    2,321,000       1,174,368       2,372,766             1,174,368       2,372,766             3,547,134       108,156  
CVS — Madison, MS
    2,809,000       1,067,833       2,834,999             1,067,833       2,834,999             3,902,832       128,397  
Dollar General — Crossville, TN
    2,400,000       646,516       2,087,900             646,516       2,087,900             2,734,416       94,700  
Dollar General — Ardmore, TN
    2,220,000       735,251       1,839,020             735,251       1,839,020             2,574,271       82,588  
Dollar General — Livingston, TN
    2,285,000       899,366       1,686,871             899,366       1,686,871             2,586,237       77,257  


S-2


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Wehrenberg Theatre — Arnold, MO
          2,798,101       4,604,122             2,798,101       4,604,122             7,402,223       189,319  
Sportsmans Warehouse — Wichita, KS
    6,173,250       1,585,901       5,953,572             1,585,901       5,953,572             7,539,473       235,493  
CVS — Portsmouth, OH
          327,922       1,862,155             327,922       1,862,155             2,190,077       85,035  
Advance Auto — Greenfield, IN
          670,376       608,925             670,376       608,925             1,279,301       31,690  
Advance Auto — Trenton, OH
          333,410       650,514             333,410       650,514             983,924       33,823  
Rite Aid — Lansing, MI
    1,041,000       253,728       1,276,423             253,728       1,276,423             1,530,151       62,648  
Advance Auto — Columbia Heights, MN
    1,384,000       548,504       1,071,332             548,504       1,071,332             1,619,836       46,943  
Advance Auto — Fergus Falls, MN
    963,000       186,571       911,215             186,571       911,215             1,097,786       41,294  
CVS — Okeechobee, FL
    4,076,000       1,622,567       3,563,282             1,622,567       3,563,282             5,185,849       140,841  
Office Depot — Dayton, OH
    2,130,000       806,590       2,182,866             806,590       2,182,866             2,989,456       82,788  
CVS — Orlando, FL
    3,016,000       2,125,478       2,213,491             2,125,478       2,213,491             4,338,969       90,369  
Office Depot — Greenville, MS
    2,192,000       665,789       2,469,061             665,789       2,469,061             3,134,850       95,345  
Advance Auto — Holland Township, MI
    1,231,000       647,207       1,134,493             647,207       1,134,493             1,781,700       51,896  
Advance Auto — Holland, MI
    1,193,000       613,597       1,117,758             613,597       1,117,758             1,731,355       51,130  
Advance Auto — Zeeland, MI
    1,057,000       429,608       1,108,675             429,608       1,108,675             1,538,283       50,715  
Office Depot — Warrensburg, MO
    1,810,000       1,024,240       1,539,821             1,024,240       1,539,821             2,564,061       82,798  
CVS — Gulfport, MS
    2,611,000       1,230,582       2,482,860             1,230,582       2,482,860             3,713,442       92,627  
Advance Auto — Grand Forks, ND
    1,120,000       345,742       889,051             345,742       889,051             1,234,793       38,627  
CVS — Clinton, NY
    2,440,000       683,648       2,013,683             683,648       2,013,683             2,697,331       72,690  
Oxford Theater Co. — Oxford, MS
    5,175,000       281,345       4,051,021             281,345       4,051,021             4,332,366       142,401  
Advance Auto — Duluth, MN
    1,146,000       283,999       1,049,951             283,999       1,049,951             1,333,950       41,137  
Walgreens — Picayune, MS
    3,404,000       1,212,126       2,548,056             1,212,126       2,548,056             3,760,182       87,817  
Kohl’s — Wichita, KS
    5,200,000       1,798,355       6,200,416             1,798,355       6,200,416             7,998,771       221,218  
Lowe’s — Midland, TX
    7,150,000       3,524,571       7,331,521             3,524,571       7,331,521             10,856,092       268,147  
Lowe’s — Lubbock, TX
    7,475,000       4,580,832       6,562,902             4,580,832       6,562,902             11,143,734       242,857  
Advance Auto — Rainsville, AL
          383,035       823,287             383,035       823,287             1,206,322       34,002  
Advance Auto — Grand Bay, AL
          255,650       769,738             255,650       769,738             1,025,388       32,159  
Advance Auto — Hurley, MS
          171,442       811,166             171,442       811,166             982,608       33,694  
Gold’s Gym — O’Fallon, IL
    5,840,000       1,406,558       5,253,248             1,406,558       5,253,248             6,659,806       203,681  
Rite Aid — Glassport, PA
    2,325,000       673,691       3,111,915             673,691       3,111,915             3,785,606       95,996  
David’s Bridal — Topeka, KS
    2,000,000       568,818       2,193,130             568,818       2,193,130             2,761,948       90,374  
Rite Aid — Hanover, PA
    4,115,000       1,924,176       3,804,197             1,924,176       3,804,197             5,728,373       116,256  
American TV & Appliance — Peoria, IL
    7,307,543       2,028,344       8,171,777             2,028,344       8,171,777             10,200,121       273,491  
Tractor Supply — La Grange, TX
    1,405,000       255,831       2,090,959             255,831       2,090,959             2,346,790       69,629  
Staples — Peru, IL
    1,930,000       1,284,858       1,958,593             1,284,858       1,958,593             3,243,451       70,560  
FedEx — Council Bluffs, IA
    2,185,000       529,813       1,845,363             529,813       1,845,363             2,375,176       56,610  
FedEx — Edwardsville, KS
    12,880,000       1,692,923       15,438,730             1,692,923       15,438,730             17,131,653       466,617  


S-3


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
CVS — Glenville Scotia, NY
    4,200,000       1,600,660       2,927,958             1,600,660       2,927,958             4,528,618       86,705  
Advance Auto — Ashland, KY
          640,697       826,862             640,697       826,862             1,467,559       31,327  
Advance Auto — Jackson, OH
          449,448       755,073             449,448       755,073             1,204,521       28,973  
Advance Auto — New Boston, OH
          477,296       846,287             477,296       846,287             1,323,583       32,533  
Advance Auto — Scottsburg, IN
          263,641       843,653             263,641       843,653             1,107,294       32,071  
Tractor Supply — Livingston, TN
    1,725,000       429,905       2,359,595             429,905       2,359,595             2,789,500       77,672  
Office Depot — Benton, AR
    2,130,000       559,519       2,506,456             559,519       2,506,456             3,065,975       73,722  
Old Time Pottery — Fairview Heights, IL
    3,424,000       1,043,902       2,943,316             1,043,902       2,943,316             3,987,218       159,509  
Tractor Supply — New Braunfels, TX
    1,750,000       510,964       2,350,433             510,964       2,350,433             2,861,397       77,949  
Infiniti — Davie, FL
          3,075,608       5,409,573             3,075,608       5,409,573             8,485,181       171,937  
Tractor Supply — Crockett, TX
    1,325,000       290,764       1,957,094             290,764       1,957,094             2,247,858       60,162  
Office Depot — Oxford, MS
    2,295,000       916,139       2,140,799             916,139       2,140,799             3,056,938       58,205  
Mercedes Benz — Atlanta, GA
          2,623,201       7,207,824             2,623,201       7,207,824             9,831,025       191,453  
Dick’s Sporting Goods — Amherst, NY
    6,321,000       3,146,987       6,083,597             3,146,987       6,083,597             9,230,584       222,980  
Chili’s — Paris, TX
    1,790,000       600,098       1,851,435             600,098       1,851,435             2,451,533       52,485  
Staples — Clarksville, IN
    2,900,000       938,994       3,080,184             938,994       3,080,184             4,019,178       96,919  
HOM Furniture — Fargo, ND
    4,800,000       1,154,977       9,778,611             1,154,977       9,778,611             10,933,588       256,083  
La-Z-Boy — Newington, CT
    4,140,000       1,465,969       4,979,097             1,465,969       4,979,097             6,445,066       121,603  
Advance Auto — Maryland Heights, MO
          735,759       895,626             735,759       895,626             1,631,385       29,020  
Victoria Crossing — Victoria, TX
    10,200,000       2,206,872       9,531,253             2,206,872       9,531,253             11,738,125       238,684  
Gordmans — Peoria, IL
    4,950,000       1,557,575       6,673,689             1,557,575       6,673,689             8,231,264       168,391  
Academy Sports — Katy, TX
    68,250,000       8,853,084       88,007,832             8,853,084       88,007,832             96,860,916       2,360,231  
One Pacific Place — Omaha, NE
    23,400,000       6,253,640       27,876,843             6,253,640       27,876,843             34,130,483       976,581  
O’Reilly Auto — Dallas, TX
    3,290,000       1,896,053       2,904,272             1,896,053       2,904,272             4,800,325       65,611  
Tractor Supply — Ankeny, IA
    1,950,000       717,410       1,983,550             717,410       1,983,550             2,700,960       52,050  
ABX Air — Coventry, RI
    2,454,000       547,887       3,292,975             547,887       3,292,975             3,840,862       81,043  
Office Depot — Enterprise, AL
    1,850,000       770,703       1,634,991             770,703       1,634,991             2,405,694       37,666  
Office Max — Orangeburg, SC
    1,875,000       590,247       2,362,890             590,247       2,362,890             2,953,137       63,427  
Northern Tool and Equipment — Blaine, MN
    3,185,000       2,233,139       2,431,878             2,233,139       2,431,878             4,665,017       62,052  
Walgreens — Cincinnati, OH
    3,341,000       1,335,254       3,272,174             1,335,254       3,272,174             4,607,428       67,201  
Walgreen — Madeira, OH
    2,876,000       1,059,625       2,910,762             1,059,625       2,910,762             3,970,387       60,047  
Walgreen — Sharonville, OH
    2,655,000       1,202,537       2,836,460             1,202,537       2,836,460             4,038,997       58,473  
AT&T — Beaumont, TX
    8,592,000       611,182       10,716,773             611,182       10,716,773             11,327,955       288,836  
Walgreens — Shreveport, LA
    3,312,000       476,744       2,647,660             476,744       2,647,660             3,124,404       54,182  


S-4


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Cost-U-Less — St. Croix, USVI
    4,035,000       705,672       4,472,360             705,672       4,472,360             5,178,032       93,708  
Gallina Centro — Collierville, TN
    14,200,000       5,669,304       10,347,244             5,669,304       10,347,244             16,016,548       230,747  
Apria Healthcare — St. John, MO
          1,669,047       4,389,931             1,669,047       4,389,931             6,058,978       135,834  
Logan’s Roadhouse — Johnson City, TN
    3,093,000       1,280,324       1,793,661             1,280,324       1,793,661             3,073,985       37,256  
Logan’s Roadhouse — Fairfax, VA
    2,567,000       1,526,553       1,414,085             1,526,553       1,414,085             2,940,638       29,456  
7500 Cottonwood Center — Jenison, MI
          1,078,759       4,022,597             1,078,759       4,022,597             5,101,356       94,594  
Tractor Supply — Greenfield, MN
    2,227,500       1,310,633       2,366,941             1,310,633       2,366,941             3,677,574       43,426  
Rite Aid — Lincolnton, NC
    1,809,000       556,957       2,131,414             556,957       2,131,414             2,688,371       39,315  
Lincoln Place — Fairview Heights, IL
    35,432,000       6,009,749       36,737,636             6,009,749       36,737,636             42,747,385       691,644  
Ashley Furniture — Amarillo, TX
    4,736,000       1,366,633       4,746,855             1,366,633       4,746,855             6,113,488       92,767  
Pocatello Square — Pocatello, ID
    18,400,000       3,262,208       18,417,906             3,262,208       18,417,906             21,680,114       343,346  
Tractor Supply — Marinette, WI
    1,918,000       448,352       2,123,445             448,352       2,123,445             2,571,797       44,725  
Tractor Supply — Paw Paw, MI
    2,048,000       536,707       2,348,703             536,707       2,348,703             2,885,410       43,124  
Staples — Greenville, SC
    2,955,000       1,717,615       2,495,594             1,717,615       2,495,594             4,213,209       46,367  
Big 5 — Aurora, CO
    2,804,000       1,264,734       2,827,242             1,264,734       2,827,242             4,091,976       54,263  
Rite Aid — Plains, PA
    3,380,000       1,147,397       3,780,072             1,147,397       3,780,072             4,927,469       69,752  
Tractor Supply — Navasota, TX
    2,412,000       348,201       2,368,266             348,201       2,368,266             2,716,467       48,762  
Sportsman’s Warehouse — DePere, WI
    3,906,500       1,131,335       4,295,487             1,131,335       4,295,487             5,426,822       83,032  
Thrift Drug — Easton, PA
    4,776,000       2,307,740       3,410,891             2,307,740       3,410,891             5,718,631       61,402  
Applebee’s — Santa Fe, NM
    2,805,977       1,636,993       2,183,567             1,636,993       2,183,567             3,820,560       39,320  
Applebee’s — Augusta, GA
    2,342,769       621,082       2,474,391             621,082       2,474,391             3,095,473       45,098  
Applebee’s — Columbus (Airport), GA
    2,155,703       725,707       2,265,436             725,707       2,265,436             2,991,143       41,440  
Applebee’s — Albany, OR
    1,781,573       807,841       1,835,669             807,841       1,835,669             2,643,510       34,900  
Applebee’s — Macon (Eisenhower), GA
    1,692,494       784,916       1,561,001             784,916       1,561,001             2,345,917       28,539  
Applebee’s — Walla Walla, WA
    1,496,520       770,061       1,486,858             770,061       1,486,858             2,256,919       28,726  
Applebee’s — Aurora, CO
    1,665,771       1,001,171       1,373,236             1,001,171       1,373,236             2,374,407       24,731  
Applebee’s — Colorado Springs, CO
    1,220,378       781,046       984,888             781,046       984,888             1,765,934       17,831  
Applebee’s — Columbus (Genetian), OH
    2,556,557       1,098,426       2,263,214             1,098,426       2,263,214             3,361,640       41,387  
Applebee’s — Gallup, NM
    2,137,888       499,198       2,477,442             499,198       2,477,442             2,976,640       44,539  
Applebee’s — Warner Robins, GA
    1,826,112       677,488       1,696,184             677,488       1,696,184             2,373,672       31,125  
Applebee’s — Savannah, GA
    1,915,191       1,079,168       1,453,659             1,079,168       1,453,659             2,532,827       26,788  
Applebee’s — Union Gap, WA
    1,692,494       196,092       2,217,916             196,092       2,217,916             2,414,008       41,237  
Applebee’s — Loveland, CO
    1,621,231       437,031       1,543,495             437,031       1,543,495             1,980,526       27,815  
Applebee’s — Littleton, CO
    1,487,613       1,490,997       655,524             1,490,997       655,524             2,146,521       12,054  
Applebee’s — Longview, WA
    2,378,400       968,843       2,429,384             968,843       2,429,384             3,398,227       45,275  


S-5


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Applebee’s — Grand Junction, CO
    2,289,321       915,368       2,020,966             915,368       2,020,966             2,936,334       36,497  
Applebee’s — Garden City, CA
    1,933,006       802,750       1,688,073             802,750       1,688,073             2,490,823       30,833  
Applebee’s — Fountain, CO
    1,906,283       747,039       1,824,731             747,039       1,824,731             2,571,770       33,072  
Applebee’s — Aurora (Lliff Ave.), CO
    1,808,297       1,324,162       1,257,712             1,324,162       1,257,712             2,581,874       22,700  
Applebee’s — Macon (Riverside), GA
    1,754,849       793,958       1,578,983             793,958       1,578,983             2,372,941       28,868  
Applebee’s — Clovis, NM
    1,781,573       511,646       2,125,111             511,646       2,125,111             2,636,757       38,250  
Walgreens — Bridgetown, OH
    3,580,000       1,536,845       2,355,524             1,536,845       2,355,524             3,892,369       44,119  
Rite Aid — Fredericksburg, VA
    4,332,000       1,522,157       3,377,637             1,522,157       3,377,637             4,899,794       53,802  
Tractor Supply — Fredericksburg, TX
    2,031,250       592,635       2,234,524             592,635       2,234,524             2,827,159       36,069  
Sam’s Club — Anderson, SC
    9,600,000       3,264,909       8,442,014             3,264,909       8,442,014             11,706,923       149,393  
Wal-Mart — New London, WI
    2,091,000       657,728       1,937,596             657,728       1,937,596             2,595,324       33,877  
Walgreens — Dallas, TX
    2,175,000       991,874       2,748,999             991,874       2,748,999             3,740,873       45,229  
Rite Aid — Lima, OH
    3,103,000       1,813,544       2,402,143             1,813,544       2,402,143             4,215,687       39,837  
Rite Aid — Allentown, PA
    3,615,000       1,635,024       3,653,818             1,635,024       3,653,818             5,288,842       59,226  
Staples — Warsaw, IN
    1,850,000       1,083,720       1,983,966             1,083,720       1,983,966             3,067,686       34,161  
Rite Aid — Spartanburg, SC
    2,258,750       1,368,325       1,791,000             1,368,325       1,791,000             3,159,325       30,563  
CVS — Florence, SC
    1,706,250       771,001       1,802,539             771,001       1,802,539             2,573,540       30,722  
Walgreens — Harris County, TX
    4,521,000       1,651,280       3,006,575             1,651,280       3,006,575             4,657,855       49,807  
Walgreens — Bryan, TX
    5,060,000       782,690       4,792,411             782,690       4,792,411             5,575,101       76,082  
Wal-Mart — Spencer, IN
    1,620,000       611,536       1,427,475             611,536       1,427,475             2,039,011       26,177  
Tractor Supply — Fairview, TN
    1,930,500       448,817       2,233,612             448,817       2,233,612             2,682,429       35,911  
Walgreens — Gainesville, FL
    2,900,000       1,079,232       2,398,294             1,079,232       2,398,294             3,477,526       33,533  
Borders — Rapid City, SD
    5,169,000       1,588,878       1,951,194             1,588,878       1,951,194             3,540,072       29,204  
Borders — Reading, PA
    5,009,000       2,128,289       3,185,592             2,128,289       3,185,592             5,313,881       45,456  
Chili’s — Fredericksburg, TX
    1,851,000       820,342       1,290,142             820,342       1,290,142             2,110,484       20,274  
Tractor Supply — Baytown, TX
    2,648,000       807,568       2,211,612             807,568       2,211,612             3,019,180       30,980  
Starbucks — Sedalia, MO
          249,357       836,776             249,357       836,776             1,086,133       12,055  
Starbucks — Covington, TN
          563,270       856,427             563,270       856,427             1,419,697       13,460  
Best Buy/Supervalue — Warwick, RI
    5,350,000       3,948,287             9,543,555       3,948,287             9,543,555       13,491,842        
Rite Aid — Vineland, NJ
    3,500,000       2,353,036             4,742,940       2,353,036             4,742,940       7,095,976        
Rite Aid — Mantua, NJ
    1,470,000       943,010             1,495,276       943,010             1,495,276       2,438,286        
Academy Sports — Houston, TX
    3,825,000       3,952,799             1,952,357       3,952,799             1,952,357       5,905,156        
Best Buy — Evanston, IL
    5,900,000       3,661,250             6,984,225       3,661,250             6,984,225       10,645,475        
WinCo Foods — Eureka, CA
    11,247,000       4,276,706       10,919,021             4,276,706       10,919,021             15,195,727       154,665  
Kroger — LaGrange, GA
    4,750,000       1,100,877       6,031,517             1,100,877       6,031,517             7,132,394       84,234  
La-A-Boy — Kentwood, MI
    3,602,000       1,441,948       3,702,213             1,441,948       3,702,213             5,144,161       57,686  
Tractor Supply — Prior Lake, MN
    3,283,250       1,756,245       2,947,737             1,756,245       2,947,737             4,703,982       41,458  
Circuit City — Mesquite, TX
    4,305,000       1,093,557       6,687,259             1,093,557       6,687,259             7,780,816       92,468  


S-6


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Staples — Guntersville, AL
    2,161,250       969,485       2,329,996             969,485       2,329,996             3,299,481       28,400  
Walgreens — Kansas City (63rd St.), MO
    3,034,500       1,254,698       2,944,357             1,254,698       2,944,357             4,199,055       34,558  
Walgreens — Topeka, KS
    1,870,000       860,441       2,141,543             860,441       2,141,543             3,001,984       25,170  
Walgreens — Kansas City (Independence), KS
    2,990,000       1,232,940       3,066,269             1,232,940       3,066,269             4,299,209       36,074  
Walgreens — Kansas City (Linwood), MO
    2,437,500       1,066,415       2,634,233             1,066,415       2,634,233             3,700,648       30,969  
Walgreens — Kansas City (Troost), MO
    2,464,000       1,149,031       3,288,283             1,149,031       3,288,283             4,437,314       38,589  
Circuit City — Taunton, MA
    4,323,000       2,219,273       6,313,971             2,219,273       6,313,971             8,533,244       79,219  
Circuit City — Groveland, FL
    20,250,000       4,990,360       24,739,631             4,990,360       24,739,631             29,729,991       288,887  
Walgreens — Fort Worth, TX
    3,675,000       275,936       2,981,965             275,936       2,981,965             3,257,901       34,471  
Kohl’s — Lake Zurich, IL
    9,075,000       1,853,934       10,086,334             1,853,934       10,086,334             11,940,268       121,987  
EDS Information Systems — Salt Lake City, UT
    18,000,000       2,282,637       19,795,939             2,282,637       19,795,939             22,078,576       231,390  
Lowe’s — Cincinnati, OH
    13,800,000       5,591,535       11,319,066             5,591,535       11,319,066             16,910,601       141,938  
TelerX Marketing — Kings Mountain, NC
    6,083,000       367,053       7,795,098             367,053       7,795,098             8,162,151       99,329  
Dickinson Theatres, Inc - Yukon, OK
          979,861       3,403,202             979,861       3,403,202             4,383,063       39,847  
Academy Sports — Houston (Southwest), TX
    4,625,000       3,376,576             5,066,069       3,376,576             5,066,069       8,442,645        
Academy Sports — North Richland Hills, TX
    4,217,000       2,096,731             5,692,842       2,096,731             5,692,842       7,789,573        
Academy Sports — Houston (Breton), TX
    3,045,000       1,194,116             4,675,227       1,194,116             4,675,227       5,869,343        
Academy Sports — Baton Rouge, LA
    4,687,000       2,718,701             6,014,191       2,718,701             6,014,191       8,732,892        
Rite Aid — Del City, OK
    2,631,000       1,084,538             4,496,033       1,084,538             4,496,033       5,580,571        
Rite Aid- Amarillo, TX
    1,741,000       832,260             2,562,589       832,260             2,562,589       3,394,849        
Rite Aid- Mableton, GA
    1,197,000       715,669             1,699,339       715,669             1,699,339       2,415,008        
Rite Aid- Chattanooga, TN
    1,920,000       1,022,575             2,976,478       1,022,575             2,976,478       3,999,053        
Dave and Buster’s — Addison, IL
    5,600,000       5,836,990       6,809,821             5,836,990       6,809,821             12,646,811       85,403  
Long John Silvers — Houston, TX
          964,820                   964,820                   964,820        
Taco Bell — Princeton, IN
          287,028       628,285             287,028       628,285             915,313       11,401  
Taco Bell — Robinson, IN
          299,648       527,124             299,648       527,124             826,772       9,235  
Taco Bell — Brazil, IN
          539,113       569,006             539,113       569,006             1,108,119       9,453  
Taco Bell — Washington, IN
          333,959       583,211             333,959       583,211             917,170       10,033  
Taco Bell — Vincennes, IN
          622,968       648,003             622,968       648,003             1,270,971       10,966  
Taco Bell — Henderson, KY
          380,438       946,044             380,438       946,044             1,326,482       14,075  
Taco Bell — Martinsville, IN
          420,969       633,255             420,969       633,255             1,054,224       10,578  
Taco Bell — Anderson, IN
          344,421       639,915             344,421       639,915             984,336       10,913  
Taco Bell — Spencer, IN
          216,067       582,547             216,067       582,547             798,614       9,825  
FedEx — Peoria, IL
    2,080,000       336,918       2,629,087             336,918       2,629,087             2,966,005       30,748  
Gold’s Gym — St. Peters, MO
    5,250,000       2,337,523       4,428,212             2,337,523       4,428,212             6,765,735       54,163  
FedEx — Walker, MI
    4,669,000       1,386,589       4,423,921             1,386,589       4,423,921             5,810,510       42,675  
Wal-Mart — Bay City, TX
          636,831       2,557,919             636,831       2,557,919             3,194,750       25,534  
Walgreens — Richmond, VA
          744,796       2,901,801             744,796       2,901,801             3,646,597       29,101  


S-7


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Home Depot — Bedford Park, IL
          9,023,680       20,876,643             9,023,680       20,876,643             29,900,323       203,020  
Circuit City — Aurora, CO
    4,777,000       1,763,273       4,295,473             1,763,273       4,295,473             6,058,746       42,347  
24 Hour Fitness — Olathe, KS
    4,816,500       1,089,906       5,353,029             1,089,906       5,353,029             6,442,935       51,468  
Walgreens — Dallas, TX
          366,755       2,214,161             366,755       2,214,161             2,580,916       20,950  
Gold’s Gym — O’Fallon, MS
    5,425,000       3,119,692       3,992,461             3,119,692       3,992,461             7,112,153       42,599  
Wal-Mart — Washington, IL
          1,043,493       2,385,744             1,043,493       2,385,744             3,429,237       20,265  
Wal-Mart — Borger, TX
          932,368       1,827,747             932,368       1,827,747             2,760,115       14,258  
Broadview Village Square - Broadview , IL
    31,500,000       8,488,537       46,932,606             8,488,537       46,932,606             55,421,143       391,859  
Chambers Corners — Wayland, MI
          1,608,013       7,277,092             1,608,013       7,277,092             8,885,105       64,211  
Ashley Furniture — Anderson, SC
          677,465       3,239,855             677,465       3,239,855             3,917,320       23,886  
Best Buy — Fayetteville, NC
          2,019,707       4,284,705             2,019,707       4,284,705             6,304,412       23,018  
Massard Farms — Fort Smith, AR
    10,237,000       4,295,435       10,754,676             4,295,435       10,754,676             15,050,111       61,617  
Wal-Mart — Whiteville, NC
          854,207       1,357,059             854,207       1,357,059             2,211,266       9,024  
Staples — Moraine, OH
          1,167,988       2,181,610             1,167,988       2,181,610             3,349,598       12,424  
Wickes Furniture — Chicago, IL
    15,925,000       9,895,944       11,281,990             9,895,944       11,281,990             21,177,934       66,677  
Walgreens — Brentwood, TN
          2,904,357       2,179,090             2,904,357       2,179,090             5,083,447       11,766  
Starbucks — Bowling Green, KY
          557,424       1,005,439             557,424       1,005,439             1,562,863       5,884  
Walgreens — Harriman, TN
          1,133,363       3,526,019             1,133,363       3,526,019             4,659,382       18,785  
Starbucks — Shawnee, OK
          361,515       644,286             361,515       644,286             1,005,801       3,945  
Station Casinos — Las Vegas, NV
    42,250,000       4,976,412       50,023,626             4,976,412       50,023,626             55,000,038       160,346  
Starbucks — Oklahoma City, OK
          385,773       724,786             385,773       724,786             1,110,559       2,716  
Starbucks — Powell, TN
          516,719       727,916             516,719       727,916             1,244,635       2,687  
Starbucks — Seymour, TN
          509,421       751,808             509,421       751,808             1,261,229       2,751  
Starbucks — Chattanooga, TN
          532,677       788,230             532,677       788,230             1,320,907       2,883  
Starbucks — Maryville, TN
          662,538       733,335             662,538       733,335             1,395,873       2,706  
Walgreens — Beverly Hills, TX
          1,286,171       2,561,566             1,286,171       2,561,566             3,847,737       2,703  
Walgreens — Waco, TX
          1,138,023       2,682,968             1,138,023       2,682,968             3,820,991       2,839  
Mealey’s Furniture — Maple Shade, NJ
          1,716,286       3,906,569             1,716,286       3,906,569             5,622,855       4,589  
Allstate Insurance Company —
Cross Plains, WI
          864,118       4,487,563             864,118       4,487,563             5,351,681       5,456  
Circle K — Akron (Brittain), OH
    640,000       344,987       1,004,943             344,987       1,004,943             1,349,930       1,146  
Circle K — Cuyahoga Falls (Port), OH
    710,000       412,800       988,074             412,800       988,074             1,400,874       1,111  
Circle K — Cleveland , OH
    810,000       572,669       1,352,051             572,669       1,352,051             1,924,720       1,500  
Circle K — Akron (Cuyahoga), OH
    860,000       517,689       794,256             517,689       794,256             1,311,945       915  
Circle K — Augusta, GA
    530,000       782,814       953,287             782,814       953,287             1,736,101       1,070  
Circle K — Auburn, AL
    820,000       692,680       1,045,035             692,680       1,045,035             1,737,715       1,168  
Circle K — El Paso (Americas), TX
    1,170,000       695,938       1,272,090             695,938       1,272,090             1,968,028       1,423  


S-8


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Circle K — Fort Mill, SC
    1,240,000       1,206,663       2,007,175             1,206,663       2,007,175             3,213,838       2,160  
Circle K — Mount Pleasant, SC
    750,000       615,894       631,244             615,894       631,244             1,247,138       714  
Circle K — Goose Creek, SC
    670,000       670,960       577,891             670,960       577,891             1,248,851       645  
Circle K — Akron (West Market), OH
    850,000       663,557       2,064,384             663,557       2,064,384             2,727,941       2,224  
Circle K — Akron (Waterloo), OH
    630,000       385,484       1,019,384             385,484       1,019,384             1,404,868       1,135  
Circle K — Parma, OH
    670,000       450,537       1,051,805             450,537       1,051,805             1,502,342       1,164  
Circle K — Twinsburg, OH
    690,000       409,268       1,146,055             409,268       1,146,055             1,555,323       1,304  
Circle K — Cuyahoga Falls (Bath), OH
    1,040,000       471,636       1,287,164             471,636       1,287,164             1,758,800       1,411  
Circle K — Charlotte (Independence), NC
    965,000       589,016       580,743             589,016       580,743             1,169,759       656  
Circle K — Savannah (King George), GA
    800,000       815,873       711,814             815,873       711,814             1,527,687       781  
Circle K — Phoenix City, AL
    820,000       673,832       1,147,507             673,832       1,147,507             1,821,339       1,263  
Circle K — Macon (Riverside), GA
    600,000       587,551       624,508             587,551       624,508             1,212,059       734  
Circle K — Lanett, AL
    455,000       1,645,155       4,693,079             1,645,155       4,693,079             6,338,234       5,405  
Circle K — North Monroe, LA
    780,000       816,271       1,375,497             816,271       1,375,497             2,191,768       1,486  
Circle K — Akron (Market), OH
    720,000       538,889       832,441             538,889       832,441             1,371,330       931  
Circle K — Akron (Ridgewood), OH
    640,000       434,723       385,679             434,723       385,679             820,402       461  
Circle K — Akron (Manchester), OH
    840,000       304,195       944,821             304,195       944,821             1,249,016       1,075  
Circle K — Barberton (31st), OH
    480,000       388,644       1,518,890             388,644       1,518,890             1,907,534       1,693  
Circle K — Charlotte (Sharon), NC
    1,000,000       662,880       733,756             662,880       733,756             1,396,636       805  
Circle K — Savannah (Johnny Mercer), GA
    740,000       550,737       480,323             550,737       480,323             1,031,060       551  
Circle K — Columbus (Buena Vista), GA
    770,000       575,722       622,956             575,722       622,956             1,198,678       720  
Circle K — Columbus (Airport), GA
    730,000       569,126       455,487             569,126       455,487             1,024,613       526  
Circle K — Opelika (Columbus), AL
    1,160,000       828,976       967,667             828,976       967,667             1,796,643       1,168  
Circle K — Baton Rouge (Burbank), LA
    470,000       538,452       707,803             538,452       707,803             1,246,255       797  
Circle K — West Monroe (503), LA
    750,000       918,039       660,056             918,039       660,056             1,578,095       739  
Circle K — Copley, OH
    590,000       336,475       691,504             336,475       691,504             1,027,979       816  
Circle K — Akron (Albrecht), OH
    570,000       400,498       907,791             400,498       907,791             1,308,289       994  
Circle K — Akron (Arlington), OH
    720,000       434,330       834,092             434,330       834,092             1,268,422       944  
Circle K — Kent, OH
    500,000       223,280       677,908             223,280       677,908             901,188       756  
Circle K — Huntersville, NC
    1,030,000       680,452       715,938             680,452       715,938             1,396,390       787  
Circle K — Springdale, SC
    860,000       368,030       609,057             368,030       609,057             977,087       667  
Circle K — Charleston, SC
    1,330,000       1,182,471       757,823             1,182,471       757,823             1,940,294       818  
Circle K — Port Wentworth, GA
    1,150,000       945,020       861,381             945,020       861,381             1,806,401       1,038  


S-9


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Circle K — Columbus (Warm Springs), GA
    940,000       2,084,773       2,949,242             2,084,773       2,949,242             5,034,015       3,184  
Circle K — Baton Rouge (Jefferson), LA
    510,000       770,306       599,689             770,306       599,689             1,369,995       673  
Circle K — Cuyahoga Falls (State), OH
    490,000       327,186       612,654             327,186       612,654             939,840       692  
Circle K — Akron (940 Arlington), OH
    580,000       362,304       1,062,076             362,304       1,062,076             1,424,380       1,192  
Circle K — Akron (Exchange), OH
    750,000       558,587       899,886             558,587       899,886             1,458,473       996  
Circle K — Bedford, OH
    660,000       415,723       707,962             415,723       707,962             1,123,685       785  
Circle K — Columbia (Hardscrabble), SC
    900,000       586,826       776,884             586,826       776,884             1,363,710       841  
Circle K — El Paso (Mesa), TX
    610,000       684,282       821,064             684,282       821,064             1,505,346       915  
Circle K — Valley, AL
    800,000       512,489       732,695             512,489       732,695             1,245,184       819  
Circle K — Midland (Beaver Run), GA
    1,240,000       1,066,023       1,099,119             1,066,023       1,099,119             2,165,142       1,242  
Circle K — Columbus (Whiteville), GA
    1,600,000       1,394,497       1,038,581             1,394,497       1,038,581             2,433,078       1,128  
Circle K — Baton Rouge (Floynell), LA
    670,000       551,145       686,306             551,145       686,306             1,237,451       758  
Circle K — Akron (Darrow), OH
    640,000       544,121       849,155             544,121       849,155             1,393,276       949  
Circle K — Barberton (Wooster), OH
    1,140,000       519,746       1,167,757             519,746       1,167,757             1,687,503       1,296  
Circle K — Norton, OH
    730,000       374,116       1,429,650             374,116       1,429,650             1,803,766       1,587  
Circle K — Willoughby, OH
    610,000       390,046       1,000,615             390,046       1,000,615             1,390,661       1,098  
Circle K — Columbia (Garners), SC
    1,080,000       645,130       738,558             645,130       738,558             1,383,688       806  
Circle K — El Paso (Zaragosa), TX
    1,090,000       967,015       764,167             967,015       764,167             1,731,182       840  
Circle K — Martinez, GA
    630,000       506,294       701,738             506,294       701,738             1,208,032       789  
Circle K — Pine Mountain, GA
    600,000       743,979       3,016,456             743,979       3,016,456             3,760,435       3,293  
Circle K — Beaufort, SC
    830,000       745,425       662,600             745,425       662,600             1,408,025       725  
Circle K — West Monroe (1602), LA
    850,000       538,234       1,126,689             538,234       1,126,689             1,664,923       1,223  
Circle K — Akron (Main), OH
    600,000       329,927       1,288,445             329,927       1,288,445             1,618,372       1,454  
Circle K — Akron (Brown), OH
    640,000       328,579       706,648             328,579       706,648             1,035,227       854  
Circle K — Canton (12th St.) , OH
    555,000       458,570       878,332             458,570       878,332             1,336,902       1,021  
Circle K — Maple Heights, OH
    760,000       524,311       1,051,968             524,311       1,051,968             1,576,279       1,194  
Circle K — Brookpark, OH
    690,000       471,579       818,676             471,579       818,676             1,290,255       893  
Circle K — Charlotte (Sugar Creek), SC
    1,030,000       622,719       603,360             622,719       603,360             1,226,079       664  
Circle K — Mobile (Airport) , AL
    860,000       516,231       651,095             516,231       651,095             1,167,326       768  
Circle K — Bluffton , SC
    1,230,000       1,075,131       777,276             1,075,131       777,276             1,852,407       874  
Circle K — Macon (Arkwright), GA
    560,000       421,989       675,391             421,989       675,391             1,097,380       752  
Circle K — Mobile (Moffett) , AL
    655,000       475,095       374,168             475,095       374,168             849,263       447  
Circle K — Shreveport, LA
    620,000       516,741       1,074,317             516,741       1,074,317             1,591,058       1,179  
Circle K — Seville, OH
    1,300,000       642,351       1,988,521             642,351       1,988,521             2,630,872       2,163  


S-10


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                                                                         
    Initial Costs to Company     Gross Amount at Which Carried at December 31, 2007 (2)(3)(5)  
                      Real
                Real
             
                      Estate
                Estate
             
                      Assets
                Assets
             
                      Under
                Under
             
                Buildings
    Direct
          Buildings
    Direct
             
                and
    Financing
          and
    Financing
          Accumulated
 
Description(1)
  Encumbrances     Land     Improvements     Lease     Land     Improvements     Lease     Total     Depreciation(4)(6)  
 
Circle K — Barberton (5th St.), OH
    630,000       283,147       1,067,007             283,147       1,067,007             1,350,154       1,165  
Circle K — Fairlawn, OH
    800,000       480,209       818,471             480,209       818,471             1,298,680       924  
Circle K — Canton (Tuscarwas), OH
    1,130,000       730,449       1,338,809             730,449       1,338,809             2,069,258       1,487  
Circle K — Northfield , OH
    990,000       828,606       1,564,058             828,606       1,564,058             2,392,664       1,694  
Circle K — Columbia (Lumpkin), GA
    800,000       526,133       755,965             526,133       755,965             1,282,098       866  
Circle K — Opelika (2nd
                                                                       
Avenue), AL
    630,000       777,682       1,590,353             777,682       1,590,353             2,368,035       1,779  
Circle K — Albuquerque, NM
    650,000       748,155       625,571             748,156       625,571             1,373,727       683  
Circle K — North Augusta, SC
    590,000       379,748       678,356             379,749       678,356             1,058,105       744  
Circle K — Bossier City, LA
    780,000       754,834       771,156             754,835       771,156             1,525,991       838  
Walgreens — Cincinnati (Seymour), OH
          756,068       2,586,696             756,069       2,586,695             3,342,764       2,901  
                                                                         
TOTAL
                                  $ 416,230,740     $ 1,132,590,492     $ 57,901,121     $ 1,606,722,353     $ 24,883,316  
                                                                         
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Tractor Supply — Parkersburg, WV
  September 26, 2005     2005       0 to 40 years  
Walgreens — Brainerd, MN
  October 5, 2005     2000       0 to 40 years  
Rite Aid — Alliance, OH
  October 20, 2005     1996       0 to 40 years  
La-Z-Boy — Glendale, AZ
  October 25, 2005     2001       0 to 40 years  
Walgreens — Florissant, MO
  November 2, 2005     2001       0 to 40 years  
Walgreens (Gravois Rd) — St. Louis, MO
  November 2, 2005     2001       0 to 40 years  
Walgreens (Telegraph Rd) — St. Louis, MO
  November 2, 2005     2001       0 to 40 years  
Walgreens — Olivette, MO
  November 22, 2005     2001       0 to 40 years  
Walgreens — Columbia, MO
  November 22, 2005     2002       0 to 40 years  
CVS — Alpharetta, GA
  December 1, 2005     1998       0 to 40 years  
Lowe’s — Enterprise, AL
  December 1, 2005     1995       0 to 40 years  
CVS — Richland Hills, TX
  December 8, 2005     1997       0 to 40 years  
FedEx Package Distribution Center — Rockford, IL
  December 9, 2005     1994       0 to 40 years  
Plastech — Auburn Hills, MI
  December 15, 2005     1995       0 to 40 years  
Academy Sports — Macon, GA
  January 6, 2006     2005       0 to 40 years  
David’s Bridal — Lenexa, KS
  January 11, 2006     2005       0 to 40 years  
Staples — Crossville, TN
  January 26, 2006     2001       0 to 40 years  
Rite Aid — Enterprise, AL
  January 26, 2006     2005       0 to 40 years  
Rite Aid — Wauseon, OH
  January 26, 2006     2005       0 to 40 years  
Rite Aid — Saco, ME
  January 27, 2006     1997       0 to 40 years  
Wadsworth Boulevard — Denver, CO
  February 6, 2006     1991       0 to 40 years  
Mountainside Fitness — Chandler, AZ
  February 9, 2006     2001       0 to 40 years  
Drexel Heritage — Hickory, NC
  February 24, 2006     1963       0 to 40 years  
Rayford Square — Spring, TX
  March 2, 2006     1973       0 to 40 years  


S-11


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
CVS — Portsmouth (Scioto Trail), OH
  March 8, 2006     1997       0 to 40 years  
Wawa — Hockessin, DE
  March 29, 2006     2000       0 to 40 years  
Wawa — Manahawkin, NJ
  March 29, 2006     2000       0 to 40 years  
Wawa — Narberth, PA
  March 29, 2006     2000       0 to 40 years  
CVS — Lakewood, OH
  April 20, 2006     1996       0 to 40 years  
Rite Aid — Fremont, OH
  April 27, 2006     1997       0 to 40 years  
Rite Aid — Cleveland, OH
  April 27, 2006     1997       0 to 40 years  
Walgreens — Knoxville, TN
  May 8, 2006     2000       0 to 40 years  
Conns — San Antonio, TX
  May 26, 2006     2002       0 to 40 years  
Rite Aid — Defiance, OH
  May 26, 2006     2005       0 to 40 years  
CVS — Madison, MS
  May 26, 2006     2004       0 to 40 years  
Dollar General — Crossville, TN
  June 2, 2006     2006       0 to 40 years  
Dollar General — Ardmore, TN
  June 9, 2006     2005       0 to 40 years  
Dollar General — Livingston, TN
  June 12, 2006     2006       0 to 40 years  
Wehrenberg Theatre — Arnold, MO
  June 14, 2006     1998       0 to 40 years  
Sportsmans Warehouse — Wichita, KS
  June 27, 2006     2006       0 to 40 years  
CVS — Portsmouth, OH
  June 28, 2006     1997       0 to 40 years  
Advance Auto — Greenfield, IN
  June 29, 2006     2003       0 to 40 years  
Advance Auto — Trenton, OH
  June 29, 2006     2003       0 to 40 years  
Rite Aid — Lansing, MI
  June 29, 2006     1950       0 to 40 years  
Advance Auto — Columbia Heights, MN
  July 6, 2006     2005       0 to 40 years  
Advance Auto — Fergus Falls, MN
  July 6, 2006     2005       0 to 40 years  
CVS — Okeechobee, FL
  July 7, 2006     2001       0 to 40 years  
Office Depot — Dayton, OH
  July 7, 2006     2005       0 to 40 years  
CVS — Orlando, FL
  July 12, 2006     2005       0 to 40 years  
Office Depot — Greenville, MS
  July 12, 2006     2000       0 to 40 years  
Advance Auto — Holland Township, MI
  July 12, 2006     2006       0 to 40 years  
Advance Auto — Holland, MI
  July 12, 2006     2006       0 to 40 years  
Advance Auto — Zeeland, MI
  July 12, 2006     2006       0 to 40 years  
Office Depot — Warrensburg, MO
  July 19, 2006     2001       0 to 40 years  
CVS — Gulfport, MS
  August 10, 2006     2000       0 to 40 years  
Advance Auto — Grand Forks, ND
  August 15, 2006     2005       0 to 40 years  
CVS — Clinton, NY
  August 24, 2006     2006       0 to 40 years  
Oxford Theater Co. — Oxford, MS
  August 31, 2006     2006       0 to 40 years  
Advance Auto — Duluth, MN
  September 8, 2006     2006       0 to 40 years  
Walgreens — Picayune, MS
  September 15, 2006     2006       0 to 40 years  
Kohl’s — Wichita, KS
  September 27, 2006     1996       0 to 40 years  
Lowe’s — Midland, TX
  September 27, 2006     1996       0 to 40 years  
Lowe’s — Lubbock, TX
  September 27, 2006     1996       0 to 40 years  
Advance Auto — Rainsville, AL
  September 29, 2006     2005       0 to 40 years  
Advance Auto — Grand Bay, AL
  September 29, 2006     2005       0 to 40 years  
Advance Auto — Hurley, MS
  September 29, 2006     2005       0 to 40 years  
Gold’s Gym — O’Fallon, IL
  September 29, 2006     2005       0 to 40 years  
Rite Aid — Glassport, PA
  October 4, 2006     2006       0 to 40 years  

S-12


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
David’s Bridal — Topeka, KS
  October 13, 2006     2006       0 to 40 years  
Rite Aid — Hanover, PA
  October 17, 2006     2006       0 to 40 years  
American TV & Appliance — Peoria, IL
  October 23, 2006     2003       0 to 40 years  
Tractor Supply — La Grange, TX
  November 6, 2006     2006       0 to 40 years  
Staples — Peru, IL
  November 10, 2006     1998       0 to 40 years  
FedEx — Council Bluffs, IA
  November 15, 2006     1999       0 to 40 years  
FedEx — Edwardsville, KS
  November 15, 2006     1999       0 to 40 years  
CVS — Glenville Scotia, NY
  November 16, 2006     2006       0 to 40 years  
Advance Auto — Ashland, KY
  November 17, 2006     2006       0 to 40 years  
Advance Auto — Jackson, OH
  November 17, 2006     2005       0 to 40 years  
Advance Auto — New Boston, OH
  November 17, 2006     2005       0 to 40 years  
Advance Auto — Scottsburg, IN
  November 17, 2006     2006       0 to 40 years  
Tractor Supply — Livingston, TN
  November 20, 2006     2006       0 to 40 years  
Office Depot — Benton, AR
  November 21, 2006     2001       0 to 40 years  
Old Time Pottery — Fairview Heights, IL
  November 21, 2006     1979       0 to 40 years  
Tractor Supply — New Braunfels, TX
  November 22, 2006     2006       0 to 40 years  
Infiniti — Davie, FL
  November 30, 2006     2006       0 to 40 years  
Tractor Supply — Crockett, TX
  December 1, 2006     2006       0 to 40 years  
Office Depot — Oxford, MS
  December 1, 2006     2006       0 to 40 years  
Mercedes Benz — Atlanta, GA
  December 15, 2006     2000       0 to 40 years  
Dick’s Sporting Goods — Amherst, NY
  December 20, 2006     1986       0 to 40 years  
Chili’s — Paris, TX
  December 28, 2006     1999       0 to 40 years  
Staples — Clarksville, IN
  December 29, 2006     2006       0 to 40 years  
HOM Furniture — Fargo, ND
  January 4, 2007     2004       0 to 40 years  
La-Z-Boy — Newington, CT
  January 5, 2007     2006       0 to 40 years  
Advance Auto — Maryland Heights, MO
  January 12, 2007     2005       0 to 40 years  
Victoria Crossing — Victoria, TX
  January 12, 2007     2006       0 to 40 years  
Gordmans — Peoria, IL
  January 18, 2007     2006       0 to 40 years  
Academy Sports — Katy, TX
  January 18, 2007     1976       0 to 40 years  
One Pacific Place — Omaha, NE
  February 6, 2007     1988       0 to 40 years  
O’Reilly Auto — Dallas, TX
  February 6, 2007     1970       0 to 40 years  
Tractor Supply — Ankeny, IA
  February 9, 2007     2006       0 to 40 years  
ABX Air — Coventry, RI
  February 14, 2007     1998       0 to 40 years  
Office Depot — Enterprise, AL
  February 27, 2007     2006       0 to 40 years  
Office Max — Orangeburg, SC
  February 28, 2007     1999       0 to 40 years  
Northern Tool and Equipment — Blaine, MN
  February 28, 2007     2006       0 to 40 years  
Walgreens — Cincinnati, OH
  March 6, 2007     2000       0 to 40 years  
Walgreens — Madeira, OH
  March 6, 2007     1998       0 to 40 years  
Walgreens — Sharonville, OH
  March 6, 2007     1998       0 to 40 years  
AT&T — Beaumont, TX
  March 19, 2007     1971       0 to 40 years  
Walgreens — Shreveport, LA
  March 23, 2007     1998       0 to 40 years  
Cost-U-Less — St. Croix, USVI
  March 26, 2007     2005       0 to 40 years  
Gallina Centro — Collierville, TN
  March 26, 2007     2000       0 to 40 years  
Apria Healthcare — St. John, MO
  March 28, 2007     1996       0 to 40 years  

S-13


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Logan’s Roadhouse — Johnson City, TN
  March 28, 2007     1996       0 to 40 years  
Logan’s Roadhouse — Fairfax, VA
  March 28, 2007     1998       0 to 40 years  
7500 Cottonwood Center — Jenison, MI
  March 30, 2007     1993       0 to 40 years  
Tractor Supply — Greenfield, MN
  April 2, 2007     2006       0 to 40 years  
Rite Aid — Lincolnton, NC
  April 3, 2007     1998       0 to 40 years  
Lincoln Place — Fairview Heights, IL
  April 5, 2007     1998       0 to 40 years  
Ashley Furniture — Amarillo, TX
  April 6, 2007     1980       0 to 40 years  
Pocatello Square — Pocatello, ID
  April 6, 2007     2006       0 to 40 years  
Tractor Supply — Marinette, WI
  April 9, 2007     2006       0 to 40 years  
Tractor Supply — Paw Paw, MI
  April 9, 2007     2006       0 to 40 years  
Staples — Greenville, SC
  April 11, 2007     2007       0 to 40 years  
Big 5 — Aurora, CO
  April 11, 2007     2006       0 to 40 years  
Rite Aid — Plains, PA
  April 16, 2007     2006       0 to 40 years  
Tractor Supply — Navasota, TX
  April 18, 2007     2006       0 to 40 years  
Sportsman’s Warehouse — DePere, WI
  April 20, 2007     2004       0 to 40 years  
Thrift Drug — Easton, PA
  April 25, 2007     2005       0 to 40 years  
Applebee’s — Santa Fe, NM
  April 26, 2007     1997       0 to 40 years  
Applebee’s — Augusta, GA
  April 26, 2007     2005       0 to 40 years  
Applebee’s — Columbus (Airport), GA
  April 26, 2007     2006       0 to 40 years  
Applebee’s — Albany, OR
  April 26, 2007     2005       0 to 40 years  
Applebee’s — Macon (Eisenhower), GA
  April 26, 2007     1998       0 to 40 years  
Applebee’s — Walla Walla, WA
  April 26, 2007     2005       0 to 40 years  
Applebee’s — Aurora, CO
  April 26, 2007     1998       0 to 40 years  
Applebee’s — Colorado Springs, CO
  April 26, 2007     1998       0 to 40 years  
Applebee’s — Columbus (Genetian), OH
  April 26, 2007     2005       0 to 40 years  
Applebee’s — Gallup, NM
  April 26, 2007     2004       0 to 40 years  
Applebee’s — Warner Robins, GA
  April 26, 2007     1994       0 to 40 years  
Applebee’s — Savannah, GA
  April 26, 2007     1993       0 to 40 years  
Applebee’s — Union Gap, WA
  April 26, 2007     2004       0 to 40 years  
Applebee’s — Loveland, CO
  April 26, 2007     1997       0 to 40 years  
Applebee’s — Littleton, CO
  April 26, 2007     1990       0 to 40 years  
Applebee’s — Longview, WA
  April 26, 2007     2004       0 to 40 years  
Applebee’s — Grand Junction, CO
  April 26, 2007     1995       0 to 40 years  
Applebee’s — Garden City, CA
  April 26, 2007     1998       0 to 40 years  
Applebee’s — Fountain, CO
  April 26, 2007     2005       0 to 40 years  
Applebee’s — Aurora (Lliff Ave.), CO
  April 26, 2007     1992       0 to 40 years  
Applebee’s — Macon (Riverside), GA
  April 26, 2007     1998       0 to 40 years  
Applebee’s — Clovis, NM
  April 26, 2007     2005       0 to 40 years  
Walgreens — Bridgetown, OH
  April 30, 2007     1998       0 to 40 years  
Rite Aid — Fredericksburg, VA
  May 2, 2007     2007       0 to 40 years  
Tractor Supply — Fredericksburg, TX
  May 7, 2007     2007       0 to 40 years  
Sam’s Club — Anderson, SC
  May 8, 2007     1993       0 to 40 years  
Wal-Mart — New London, WI
  May 9, 2007     1991       0 to 40 years  
Walgreens — Dallas, TX
  May 9, 2007     1996       0 to 40 years  

S-14


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Rite Aid — Lima, OH
  May 14, 2007     2005       0 to 40 years  
Rite Aid — Allentown, PA
  May 15, 2007     2006       0 to 40 years  
Staples — Warsaw, IN
  May 17, 2007     1998       0 to 40 years  
Rite Aid — Spartanburg, SC
  May 17, 2007     1998       0 to 40 years  
CVS — Florence, SC
  May 17, 2007     1998       0 to 40 years  
Walgreens — Harris County, TX
  May 18, 2007     2000       0 to 40 years  
Walgreens — Bryan, TX
  May 18, 2007     2001       0 to 40 years  
Wal-Mart — Spencer, IN
  May 23, 2007     1987       0 to 40 years  
Tractor Supply — Fairview, TN
  May 25, 2007     2007       0 to 40 years  
Walgreens — Gainesville, FL
  June 1, 2007     1997       0 to 40 years  
Borders — Rapid City, SD
  June 1, 2007     1999       0 to 40 years  
Borders — Reading, PA
  June 1, 2007     1997       0 to 40 years  
Chili’s — Fredericksburg, TX
  June 5, 2007     1985       0 to 40 years  
Tractor Supply — Baytown, TX
  June 11, 2007     2007       0 to 40 years  
Starbucks — Sedalia, MO
  June 22, 2007     2006       0 to 40 years  
Starbucks — Covington, TN
  June 22, 2007     2007       0 to 40 years  
Best Buy/Supervalue — Warwick, RI
  June 27, 2007     1992       0 to 40 years  
Rite Aid — Vineland, NJ
  June 27, 2007     1997       0 to 40 years  
Rite Aid — Mantua, NJ
  June 27, 2007     1993       0 to 40 years  
Academy Sports — Houston, TX
  June 27, 2007     1995       0 to 40 years  
Best Buy — Evanston, IL
  June 27, 2007     1996       0 to 40 years  
WinCo Foods — Eureka, CA
  June 27, 2007     1960’s       0 to 40 years  
Kroger — LaGrange, GA
  June 28, 2007     1998       0 to 40 years  
La-A-Boy — Kentwood, MI
  June 28, 2007     1986       0 to 40 years  
Tractor Supply — Prior Lake, MN
  June 29, 2007     1991       0 to 40 years  
Circuit City — Mesquite, TX
  June 29, 2007     1996       0 to 40 years  
Staples — Guntersville, AL
  July 6, 2007     2001       0 to 40 years  
Walgreens — Kansas City (63rd St.), MO
  July 10, 2007     2000       0 to 40 years  
Walgreens — Topeka, KS
  July 10, 2007     1999       0 to 40 years  
Walgreens — Kansas City (Independence), KS
  July 11, 2007     1997       0 to 40 years  
Walgreens — Kansas City (Linwood), MO
  July 11, 2007     2000       0 to 40 years  
Walgreens — Kansas City (Troost), MO
  July 11, 2007     2000       0 to 40 years  
Circuit City — Taunton, MA
  July 13, 2007     2001       0 to 40 years  
Circuit City — Groveland, FL
  July 17, 2007     1999       0 to 40 years  
Walgreens — Fort Worth, TX
  July 17, 2007     1999       0 to 40 years  
Kohl’s — Lake Zurich, IL
  July 17, 2007     2000       0 to 40 years  
EDS Information Systems — Salt Lake City, UT
  July 17, 2007     1999       0 to 40 years  
Lowe’s — Cincinnati, OH
  July 17, 2007     1998       0 to 40 years  
TelerX Marketing — Kings Mountain, NC
  July 17, 2007     2007       0 to 40 years  
Dickinson Theatres, Inc — Yukon, OK
  July 17, 2007     2007       0 to 40 years  
Academy Sports — Houston (Southwest), TX
  July 19, 2007     1996       0 to 40 years  
Academy Sports — North Richland Hills, TX
  July 19, 2007     1996       0 to 40 years  
Academy Sports — Houston (Breton), TX
  July 19, 2007     1995       0 to 40 years  
Academy Sports — Baton Rouge, LA
  July 19, 2007     1996       0 to 40 years  

S-15


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Rite Aid — Del City, OK
  July 19, 2007     1998       0 to 40 years  
Rite Aid — Amarillo, TX
  July 19, 2007     1994       0 to 40 years  
Rite Aid — Mableton, GA
  July 19, 2007     1994       0 to 40 years  
Rite Aid — Chattanooga, TN
  July 19, 2007     1997       0 to 40 years  
Dave and Buster’s — Addison, IL
  July 19, 2007     2006       0 to 40 years  
Long John Silvers — Houston, TX
  July 19, 2007     2004       0 to 40 years  
Taco Bell — Princeton, IN
  July 19, 2007     1992       0 to 40 years  
Taco Bell — Robinson, IN
  July 19, 2007     1994       0 to 40 years  
Taco Bell — Brazil, IN
  July 19, 2007     1996       0 to 40 years  
Taco Bell — Washington, IN
  July 19, 2007     1995       0 to 40 years  
Taco Bell — Vincennes, IN
  July 19, 2007     2000       0 to 40 years  
Taco Bell — Henderson, KY
  July 19, 2007     1992       0 to 40 years  
Taco Bell — Martinsville, IN
  July 19, 2007     1986       0 to 40 years  
Taco Bell — Anderson, IN
  July 19, 2007     1995       0 to 40 years  
Taco Bell — Spencer, IN
  July 19, 2007     1999       0 to 40 years  
FedEx — Peoria, IL
  July 20, 2007     1997       0 to 40 years  
Gold’s Gym — St. Peters, MO
  July 31, 2007     2007       0 to 40 years  
FedEx — Walker, MI
  August 8, 2007     2001       0 to 40 years  
Wal-Mart — Bay City, TX
  August 14, 2007     1990       0 to 40 years  
Walgreens — Richmond, VA
  August 17, 2007     1997       0 to 40 years  
Home Depot — Bedford Park, IL
  August 21, 2007     1992       0 to 40 years  
Circuit City — Aurora, CO
  August 22, 2007     1995       0 to 40 years  
24 Hour Fitness — Olathe, KS
  August 24, 2007     2007       0 to 40 years  
Walgreens — Dallas, TX
  August 27, 2007     1997       0 to 40 years  
Gold’s Gym — O’Fallon, MS
  August 29, 2007     2007       0 to 40 years  
Wal-Mart — Washington, IL
  September 10, 2007     1989       0 to 40 years  
Wal-Mart — Borger, TX
  September 12, 2007     1991       0 to 40 years  
Broadview Village Square — Broadview , IL
  September 14, 2007     1994       0 to 40 years  
Chambers Corners — Wayland, MI
  September 19, 2007     2000       0 to 40 years  
Ashley Furniture — Anderson, SC
  September 28, 2007     2006       0 to 40 years  
Best Buy — Fayetteville, NC
  October 4, 2007     1999       0 to 40 years  
Massard Farms — Fort Smith, AR
  October 11, 2007     2001       0 to 40 years  
Wal-Mart — Whiteville, NC
  October 11, 2007     1988       0 to 40 years  
Staples — Moraine, OH
  October 12, 2007     2006       0 to 40 years  
Wickes Furniture — Chicago, IL
  October 17, 2007     2007       0 to 40 years  
Walgreens — Brentwood, TN
  October 17, 2007     2006       0 to 40 years  
Starbucks — Bowling Green, KY
  October 23, 2007     2007       0 to 40 years  
Walgreens — Harriman, TN
  October 24, 2007     2007       0 to 40 years  
Starbucks — Shawnee, OK
  October 31, 2007     2006       0 to 40 years  
Station Casinos — Las Vegas, NV
  November 1, 2007     2007       0 to 40 years  
Starbucks — Oklahoma City, OK
  November 20, 2007     2007       0 to 40 years  
Starbucks — Powell, TN
  November 26, 2007     2007       0 to 40 years  
Starbucks — Seymour, TN
  November 26, 2007     2007       0 to 40 years  
Starbucks — Chattanooga, TN
  November 26, 2007     2007       0 to 40 years  

S-16


Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Starbucks — Maryville, TN
  November 26, 2007     2007       0 to 40 years  
Walgreens — Beverly Hills, TX
  December 5, 2007     1998       0 to 40 years  
Walgreens — Waco, TX
  December 5, 2007     1998       0 to 40 years  
Mealey’s Furniture — Maple Shade, NJ
  December 12, 2007     1978       0 to 40 years  
Allstate Insurance Company — Cross Plains, WI
  December 7, 2007     1988       0 to 40 years  
Circle K — Akron (Brittain), OH
  December 20, 2007     1995       0 to 40 years  
Circle K — Cuyahoga Falls (Port), OH
  December 20, 2007     1995       0 to 40 years  
Circle K — Cleveland , OH
  December 20, 2007     2002       0 to 40 years  
Circle K — Akron (Cuyahoga), OH
  December 20, 2007     1998       0 to 40 years  
Circle K — Augusta, GA
  December 20, 2007     1985       0 to 40 years  
Circle K — Auburn, AL
  December 20, 2007     1990       0 to 40 years  
Circle K — El Paso (Americas), TX
  December 20, 2007     1999       0 to 40 years  
Circle K — Fort Mill, SC
  December 20, 2007     1999       0 to 40 years  
Circle K — Mount Pleasant, SC
  December 20, 2007     1978       0 to 40 years  
Circle K — Goose Creek, SC
  December 20, 2007     1983       0 to 40 years  
Circle K — Akron (West Market), OH
  December 20, 2007     2000       0 to 40 years  
Circle K — Akron (Waterloo), OH
  December 20, 2007     2001       0 to 40 years  
Circle K — Parma, OH
  December 20, 2007     2002       0 to 40 years  
Circle K — Twinsburg, OH
  December 20, 2007     1983       0 to 40 years  
Circle K — Cuyahoga Falls (Bath), OH
  December 20, 2007     2002       0 to 40 years  
Circle K — Charlotte (Independence), NC
  December 20, 2007     1996       0 to 40 years  
Circle K — Savannah (King George), GA
  December 20, 2007     1997       0 to 40 years  
Circle K — Phenix City, AL
  December 20, 2007     1999       0 to 40 years  
Circle K — Macon (Riverside), GA
  December 20, 2007     1974       0 to 40 years  
Circle K — Lanett, AL
  December 20, 2007     1974       0 to 40 years  
Circle K — North Monroe, LA
  December 20, 2007     1986       0 to 40 years  
Circle K — Akron (Market), OH
  December 20, 2007     1995       0 to 40 years  
Circle K — Akron (Ridgewood), OH
  December 20, 2007     1969       0 to 40 years  
Circle K — Akron (Manchester), OH
  December 20, 2007     1994       0 to 40 years  
Circle K — Barberton (31st), OH
  December 20, 2007     1991       0 to 40 years  
Circle K — Charlotte (Sharon), NC
  December 20, 2007     1997       0 to 40 years  
Circle K — Savannah (Johnny Mercer), GA
  December 20, 2007     1990       0 to 40 years  
Circle K — Columbus (Buena Vista), GA
  December 20, 2007     1990       0 to 40 years  
Circle K — Columbus (Airport), GA
  December 20, 2007     1984       0 to 40 years  
Circle K — Opelika (Columbus), AL
  December 20, 2007     1988       0 to 40 years  
Circle K — Baton Rouge (Burbank), LA
  December 20, 2007     1976       0 to 40 years  
Circle K — West Monroe (503), LA
  December 20, 2007     1983       0 to 40 years  
Circle K — Copley, OH
  December 20, 2007     1993       0 to 40 years  
Circle K — Akron (Albrecht), OH
  December 20, 2007     1997       0 to 40 years  
Circle K — Akron (Arlington), OH
  December 20, 2007     1994       0 to 40 years  
Circle K — Kent, OH
  December 20, 2007     1994       0 to 40 years  
Circle K — Huntersville, NC
  December 20, 2007     1996       0 to 40 years  
Circle K — Springdale, SC
  December 20, 2007     1999       0 to 40 years  
Circle K — Charleston, SC
  December 20, 2007     1987       0 to 40 years  

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COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Circle K — Port Wentworth, GA
  December 20, 2007     1991       0 to 40 years  
Circle K — Columbus (Warm Springs), GA
  December 20, 2007     1978       0 to 40 years  
Circle K — Baton Rouge (Jefferson), LA
  December 20, 2007     1970       0 to 40 years  
Circle K — Cuyahoga Falls (State), OH
  December 20, 2007     1972       0 to 40 years  
Circle K — Akron (940 Arlington), OH
  December 20, 2007     1991       0 to 40 years  
Circle K — Akron (Exchange), OH
  December 20, 2007     1996       0 to 40 years  
Circle K — Bedford, OH
  December 20, 2007     2000       0 to 40 years  
Circle K — Columbia (Hardscrabble), SC
  December 20, 2007     1997       0 to 40 years  
Circle K — El Paso (Mesa), TX
  December 20, 2007     1999       0 to 40 years  
Circle K — Valley, AL
  December 20, 2007     1974       0 to 40 years  
Circle K — Midland (Beaver Run), GA
  December 20, 2007     1995       0 to 40 years  
Circle K — Columbus (Whiteville), GA
  December 20, 2007     1995       0 to 40 years  
Circle K — Baton Rouge (Floynell), LA
  December 20, 2007     1977       0 to 40 years  
Circle K — Akron (Darrow), OH
  December 20, 2007     1994       0 to 40 years  
Circle K — Barberton (Wooster), OH
  December 20, 2007     2000       0 to 40 years  
Circle K — Norton, OH
  December 20, 2007     2001       0 to 40 years  
Circle K — Willoughby, OH
  December 20, 2007     1986       0 to 40 years  
Circle K — Columbia (Garners), SC
  December 20, 2007     1993       0 to 40 years  
Circle K — El Paso (Zaragosa), TX
  December 20, 2007     1998       0 to 40 years  
Circle K — Martinez, GA
  December 20, 2007     1986       0 to 40 years  
Circle K — Pine Mountain, GA
  December 20, 2007     1999       0 to 40 years  
Circle K — Beaufort, SC
  December 20, 2007     1997       0 to 40 years  
Circle K — West Monroe (1602), LA
  December 20, 2007     1999       0 to 40 years  
Circle K — Akron (Main), OH
  December 20, 2007     2000       0 to 40 years  
Circle K — Akron (Brown), OH
  December 20, 2007     1950       0 to 40 years  
Circle K — Canton (12th St.) , OH
  December 20, 2007     1992       0 to 40 years  
Circle K — Maple Heights, OH
  December 20, 2007     1998       0 to 40 years  
Circle K — Brookpark, OH
  December 20, 2007     1998       0 to 40 years  
Circle K — Charlotte (Sugar Creek), SC
  December 20, 2007     1991       0 to 40 years  
Circle K — Mobile (Airport) , AL
  December 20, 2007     1987       0 to 40 years  
Circle K — Bluffton , SC
  December 20, 2007     1997       0 to 40 years  
Circle K — Macon (Arkwright), GA
  December 20, 2007     1993       0 to 40 years  
Circle K — Mobile (Moffett) , AL
  December 20, 2007     1988       0 to 40 years  
Circle K — Shreveport , LA
  December 20, 2007     1988       0 to 40 years  
Circle K — Seville, OH
  December 20, 2007     2003       0 to 40 years  
Circle K — Barberton (5th St.), OH
  December 20, 2007     1996       0 to 40 years  
Circle K — Fairlawn, OH
  December 20, 2007     1993       0 to 40 years  
Circle K — Canton (Tuscarwas), OH
  December 20, 2007     2000       0 to 40 years  
Circle K — Northfield , OH
  December 20, 2007     1983       0 to 40 years  
Circle K — Columbia (Lumpkin), GA
  December 20, 2007     1978       0 to 40 years  
Circle K — Opelika (2nd Avenue), AL
  December 20, 2007     1989       0 to 40 years  
Circle K — Albuquerque, NM
  December 20, 2007     1994       0 to 40 years  
Circle K — North Augusta, SC
  December 20, 2007     1999       0 to 40 years  

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Table of Contents

 
COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE III — REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION — (Continued)
 
                     
    Date
  Date
    Depreciation
 
Description
 
Acquired
  Constructed     is Computed(6)  
 
Circle K — Bossier City, LA
  December 20, 2007     1987       0 to 40 years  
Walgreens — Cincinnati (Seymour), OH
  December 21, 2007     2000       0 to 40 years  
 
 
(1) At December 31, 2007, the Company owned 250 single tenant retail properties, 69 single tenant commercial properties, and 14 multi-tenant retail properties.
 
(2) The aggregate cost for federal income tax purposes is $1,729,928,176
 
(3) The following is a reconciliation of total real estate carrying value for the years ended December 31:
 
                         
    2007     2006     2005  
 
Balance at beginning of period
  $ 396,522,950     $ 81,344,139     $  
Additions
                       
Acquisitions
    1,213,047,319       315,178,811       81,344,139  
                         
Total additions
    1,213,047,319       315,178,811       81,344,139  
                         
Deductions
                       
Cost of real estate sold
                 
Other (including provisions for impairment of real estate assets)
    2,847,916              
                         
Total Deductions
    2,847,916              
                         
Balance at close of period
  $ 1,606,722,353     $ 396,522,950     $ 81,344,139  
                         
 
(4) The following is a reconciliation of accumulated depreciation for the years ended December 31:
 
                         
    2007     2006     2005  
 
                                                        
Balance at beginning of period
  $ 4,547,932     $ 151,472     $  
Additions
                       
Acquisitions
    20,460,219       4,396,460       151,472  
                         
Total additions
    20,460,219       4,396,460       151,472  
                         
Deductions
                       
Cost of real estate sold
                 
Impairment of real estate assets
    124,835              
                         
Total Deductions
    124,835              
                         
Balance at close of period
  $ 24,883,316     $ 4,547,932     $ 151,472  
                         
 
(5) In 2007, provisions for impairment were recorded on one property.
 
(6) The Company’s assets are depreciated or amortized using the straight-lined method over the useful lives of the assets by class. Generally, tenant improvements and lease intangibles are amortized over the respective lease term and buildings are depreciated over 40 years.

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Table of Contents

COLE CREDIT PROPERTY TRUST II, INC.
 
SCHEDULE IV — MORTGAGE LOANS ON REAL ESTATE ASSETS
December 31, 2007
 
                                                                 
                      Final
    Periodic
                Carrying
 
                Interest
    Maturity
    Payment
    Prior
    Face Amount
    Amount of
 
Mortgage Loans *
  Description     Location     Rate     Date     Terms(1)     Liens     of Mortgages     Mortgages(2)  
 
Cracker Barrel Notes
    Retail       (3 )     9.84 %     8/1/2020       P & I       None     $ 45,033,676     $ 49,161,063  
KFC Notes
    Retail       (4 )     10.47 %     10/1/2020       P & I       None       20,463,822       23,272,133  
O’Reilly Notes
    Retail       (5 )     8.60-9.35 %     1/1/2021       P & I       None       12,882,493       14,666,428  
                                                                 
                                                    $ 78,379,991     $ 87,099,624  
                                                                 
 
 
No individual mortgage loan exceeds 3 percent of the total of the carrying amount for all mortgage loans.
 
(1) P & I = Principal and interest payments.
 
(2) The aggregate cost for Federal income tax purposes is approximately $87.1 million.
 
(3) The Cracker Barrel Notes are secured by 23 restaurant properties located in 16 states.
 
(4) The KFC Notes are secured by 20 restaurant properties located in nine states.
 
(5) The O’Reilly Notes are secured by 26 commercial retail properties located in two states.
 
The following shows changes in the carrying amounts of mortgage loans receivable during the period:
 
         
Balance at December 31, 2006
  $  
Additions:
       
New mortgage loans
    78,612,164  
Premium on new mortgage loans and capitalized loan costs
    8,798,550  
Deductions:
       
Collections of principal
    (232,173 )
Amortization of premium and capitalized loan costs
    (78,917 )
         
Balance at December 31, 2007
  $ 87,099,624  
         


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Table of Contents

 
EXHIBIT INDEX
 
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2007 (and are numbered in accordance with Item 601 of Regulation S-K).
 
         
Exhibit
   
No.
 
Description
 
  3 .1   Fifth Articles of Amendment and Restatement, as corrected. (Incorporated by reference to Exhibit 3.1 of the Company’s Form 10-K (File No. 333-121094), filed on March 23, 2006).
  3 .2   Amended and Restated Bylaws. (Incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K (File No. 333-121094), filed on September 6, 2005).
  3 .3   Articles of Amendment to Fifth Articles of Amendment and Restatement. (Incorporated by reference to Exhibit 3.3 of the Company’s Form S-11 (File No. 333-138444), filed on November 3, 2006).
  4 .1   Form of Subscription Agreement and Subscription Agreement Signature Page. (Incorporated by reference to Exhibit 4.1 to the Company’s post-effective amendment to Form S-11 (File No. 333-138444), filed on February 1, 2008).
  4 .2   Form of Additional Investment Subscription Agreement. (Incorporated by reference to Exhibit 4.2 to the Company’s post-effective amendment to Form S-11 (File No. 333-138444), filed on February 1, 2008).
  10 .1   2004 Independent Directors’ Stock Option Plan. (Incorporated by reference to Exhibit 10.5 to the Company’s Form S-11 (File No. 333-121094), filed on December 9, 2004).
  10 .2   Form of Stock Option Agreement under 2004 Independent Directors’ Stock Option Plan. (Incorporated by reference to Exhibit 10.6 to the Company’s pre-effective amendment to Form S-11 (File No. 333-121094), filed on April 11, 2005).
  10 .3   Amended and Restated Property Management and Leasing Agreement, dated September 16, 2005, by and among Cole Credit Property Trust II, Inc., Cole Operating Partnership II, LP and Fund Realty Advisors, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K (File No. 333-121094), filed on September 23, 2005).
  10 .4   Amended and Restated Advisory Agreement, dated September 16, 2005, by and between Cole Credit Property Trust II, Inc. and Cole REIT Advisors II, LLC. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K (File No. 333-121094), filed on September 23, 2005).
  10 .5   Amended and Restated Agreement of Limited Partnership of Cole Operating Partnership II, LP, dated September 16, 2005, by and between Cole Credit Property Trust II, Inc. and the limited partners thereto. (Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K (File No. 333-121094), filed on September 23, 2005).
  10 .6   Amended and Restated Distribution Reinvestment Plan. (Incorporated by reference to Exhibit 10.6 to the Company’s pre-effective amendment to Form S-11 (File No. 333-138444), filed on May 10, 2007).
  10 .7   First Amendment to Amended and Restated Advisory Agreement, dated April 17, 2006, between Cole Credit Property Trust II, Inc. and Cole REIT Advisors II, LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q (File No. 000-51963), filed on May 12, 2006).
  10 .8   Form of Dealer Manager Agreement. (Incorporated by reference to Exhibit 1.1 to the Company’s pre-effective amendment to Form S-11 (File No. 333-138444), filed on April 12, 2007).
  10 .9   Purchase Agreement between Cole AS Katy TX, LP and 44.385 Acres, Ltd. and Mason MSG, Ltd. pursuant to an Assignment of Agreement of Purchase and Sale Agreement dated January 17, 2007. (Incorporated by reference to Exhibit 10.10 to the Company’s Form 10-K (File No. 000-51963), filed on March 20, 2007).
  10 .10   Promissory Note between Cole AS Katy TX, LP and Bear Stearns Commercial Mortgage, Inc. dated January 18, 2007. (Incorporated by reference to Exhibit 10.10 to the Company’s Form 10-K (File No. 000-51963), filed on March 20, 2007).
  10 .11   First Amendment to Amended and Restated Property Management and Leasing Agreement, dated May 9, 2007, by and among Cole Credit Property Trust II, Inc., Cole Operating Partnership II, LP and Cole Realty Advisors, Inc. (Incorporated by reference to Exhibit 10.10 to the Company’s pre-effective amendment to Form S-11 (File No. 333-138444), filed on May 10, 2007).
  10 .12   First Amendment to Amended and Restated Agreement of Limited Partnership of Cole Operating Partnership II, LP, dated May 9, 2007, by and between Cole Credit Property Trust II, Inc. and the limited partners thereto. (Incorporated by reference to Exhibit 10.11 to the Company’s pre-effective amendment to Form S-11 (File No. 333-138444), filed on May 10, 2007).


Table of Contents

         
Exhibit
   
No.
 
Description
 
  14 .1   Cole Credit Property Trust II, Inc. Code of Business Conduct and Ethics. (Incorporated by reference to Exhibit 14.1 to the Company’s Form 10-K (file No. 000-51963), filed on March 23, 2006).
  21 .1   List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 to the Company’s POS AM (File No. 333-121094), filed on December 20, 2006).
  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.