UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[X] Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2011

or

[  ] Transition Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Transition Period from ------------to------------

 

Commission File Number: 000-54295

INREIT Real Estate Investment Trust

(Exact name of registrant as specified in its charter)

North Dakota		90-0115411
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
216 South Broadway, Suite 202, Minot, North Dakota		58701
(Address of principal executive offices)		(Zip Code)

(701) 837-1031
(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o		Smaller reporting company	x
(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 x

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at August 12, 2011
Common Stock, $0.01 par value per share		3,793,102.828

 

 

INREIT REAL ESTATE INVESTMENT TRUST

INDEX

		Page
		No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets – as of June 30, 2011 and December 31, 2010			3
Consolidated Statements of Operations – Three and six-months ended June 30, 2011 and 2010			5
Consolidated Statements of Shareholders’ Equity – Six-months ended June 30, 2011 and 2010			6
Consolidated Statements of Cash Flows – Six-months ended June 30, 2011 and 2010			8
Notes to Condensed Financial Statements			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			36
Item 4. Controls and Procedures			48
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 6. Exhibits			50
Signatures			51
EX-31.1
EX-31.2
EX-32.1
EX-99.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements.

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010

 

		(unaudited)
		June 30,				December 31,
		2011				2010
ASSETS
PROPERTY AND EQUIPMENT, less accumulated depreciation		$	325,151,480			$	312,567,343
CASH AND CASH EQUIVALENTS			11,071,971				10,010,564
RESTRICTED DEPOSITS AND FUNDED RESERVES			5,735,692				5,814,623
DUE FROM RELATED PARTY			204,462				306,951
RECEIVABLES			2,206,662				2,241,896
PREPAID EXPENSES			258,774				474,602
NOTES RECEIVABLE			1,802,101				1,917,573
FINANCING COSTS, less accumulated amortizatian of $720,322 in 2011 and $559,017 in 2010			2,088,448				1,713,903
ASSETS HELD FOR SALE			1,896,431				1,115,618
RENT INCENTIVE, less accumulated amortization of $166,667 in 2011 and $116,667 in 2010			1,333,333				1,383,333
INTANGIBLE ASSETS, less accumulated amortization of $1,293,453 in 2011 and $953,481 in 2010			7,434,038				6,290,576
OTHER ASSETS			61,701				145,201
		$	359,245,093			$	343,982,183

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010

 

		(unaudited)
		June 30,				December 31,
		2011				2010
LIABILITIES
MORTGAGE NOTES PAYABLE		$	200,863,885			$	192,171,523
SPECIAL ASSESSMENTS PAYABLE			1,651,389				1,582,610
DIVIDENDS PAYABLE			2,896,226				2,606,033
DUE TO RELATED PARTY			62,226				544,988
TENANT SECURITY DEPOSITS PAYABLE			1,343,514				1,213,102
INVESTMENT CERTIFICATES			2,261,427				2,455,534
UNFAVORABLE LEASES, net			548,369				583,350
ACCOUNTS PAYABLE - TRADE			271,361				152,833
LIABILITIES RELATED TO ASSETS HELD FOR SALE			1,750,169				48,062
FAIR VALUE OF INTEREST RATE SWAP			225,873				194,499
DEFERRED INSURANCE PROCEEDS			5,456				6,816
ACCRUED EXPENSES			3,633,943				2,759,658
Total liabilities			215,513,838				204,319,008
COMMITMENTS - Note 14
SHAREHOLDERS’ EQUITY
NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP			107,779,734				105,012,439
BENEFICIAL INTEREST			36,177,394				34,845,235
ACCUMULATED COMPREHENSIVE LOSS			(225,873	)			(194,499	)
			143,731,255				139,663,175
		$	359,245,093			$	343,982,183

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
INCOME FROM RENTAL OPERATIONS		$	12,020,717			$	11,022,987			$	23,954,079			$	21,708,422
EXPENSES
Expenses from rental operations
Interest			2,967,797				2,936,306				5,896,335				5,864,105
Depreciation and amortization			2,418,729				2,234,705				4,836,139				4,447,683
Real estate taxes			1,445,109				1,277,419				2,834,183				2,497,584
Property management fees			960,480				821,359				1,879,907				1,622,621
Utilities			815,299				666,569				1,794,029				1,561,646
Repairs and maintenance			1,085,789				837,718				2,358,113				1,920,199
Insurance			175,177				164,094				345,066				320,623
Salary and wages			-				10,122				-				19,244
Food costs for residents			-				5,184				-				10,097
Administrative			13,959				32,494				18,327				39,925
			9,882,339				8,985,970				19,962,099				18,303,727
Administration of REIT
Administrative expenses			7,967				11,150				31,751				31,039
Advisory fees			184,709				169,586				373,279				338,412
Acquisition and disposition expenses			318,076				-				455,258				117,567
Director fees			12,100				9,600				22,000				18,100
Rent							1,200								1,200
Legal and accounting			166,197				14,299				385,462				113,569
			689,049				205,835				1,267,750				619,887
Total expenses			10,571,388				9,191,805				21,229,849				18,923,614
INCOME FROM OPERATIONS			1,449,329				1,831,182				2,724,230				2,784,808
OTHER INCOME
Interest income			66,035				65,759				130,581				121,668
Insurance proceeds			-				-				-				38,900
			66,035				65,759				130,581				160,568
INCOME FROM CONTINUING OPERATIONS			1,515,364				1,896,941				2,854,811				2,945,376
DISCONTINUED OPERATIONS - NOTE 15			276,486				-				258,553				189,842
NET INCOME			1,791,850				1,896,941				3,113,364				3,135,218
NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST			1,319,020				1,449,869				2,291,131				2,402,831
NET INCOME ATTRIBUTABLE TO INREIT REAL ESTATE INVESTMENT TRUST		$	472,830			$	447,072			$	822,233			$	732,387
NET INCOME PER COMMON SHARE
Basic and diluted		$	0.13			$	0.14			$	0.22			$	0.24

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

						Common				Accumulated				Total								Accumulated
		Common				Shares				Earnings				Beneficial				Noncontrolling				Comprehensive
		Shares				Amount				(Deficit)				Interest				Interest				Loss				Total
BALANCE, DECEMBER 31, 2009			2,859,039			$	32,038,916			$	(6,067,369	)		$	25,971,547			$	100,046,173			$	(168,332	)		$	125,849,388
Issuance of common shares			265,108				3,673,821								3,673,821												3,673,821
Contribution of assets in exchange for the issuance of noncontrolling interest shares																			946,336								946,336
Repurchase of shares			(58,418	)			(752,396	)							(752,396	)											(752,396	)
Dividends											(573,340	)			(573,340	)			(1,940,425	)							(2,513,765	)
Dividends declared											(610,096	)			(610,096	)			(1,905,471	)							(2,515,566	)
Dividends reinvested/stock dividend			52,961				704,385								704,385												704,385
UPREIT units converted to REIT common shares			52,341				700,694								700,694				(700,694	)
Syndication costs											(263,787	)			(263,787	)			(39,975	)							(303,762	)
Decrease in fair value of interest rate swap																							(61,024	)			(61,024	)
Net income											732,387				732,387				2,402,831								3,135,218
BALANCE, June 30, 2010			3,171,031			$	36,365,420			$	(6,782,205	)		$	29,583,215			$	98,808,776			$	(229,356	)		$	128,162,635

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY – page 2

						Common				Accumulated				Total								Accumulated
		Common				Shares				Earnings				Beneficial				Noncontrolling				Comprehensive
		Shares				Amount				(Deficit)				Interest				Interest				Loss				Total
BALANCE, DECEMBER 31, 2010			3,602,853			$	42,284,483			$	(7,439,249	)		$	34,845,235			$	105,012,439			$	(194,499	)		$	139,663,175
Issuance of common shares			150,824				2,075,445								2,075,445												2,075,445
Contribution of assets in exchange for the issuance of noncontrolling interest shares																			5,037,405								5,037,405
Repurchase of shares			(84,257	)			(1,061,630	)							(1,061,630	)											(1,061,630	)
Dividends											(750,775	)			(750,775	)			(2,106,867	)							(2,857,642	)
Dividends declared											(755,830	)			(755,830	)			(2,140,397	)							(2,896,227	)
Dividends reinvested/stock dividend			66,729				887,480								887,480												887,480
UPREIT units converted to REIT common shares			19,526				246,035								246,035				(246,035	)							-
Syndication costs											(130,799	)			(130,799	)			(67,942	)							(198,741	)
Decrease in fair value of interest rate swap																							(31,374	)			(31,374	)
Net income											822,233				822,233				2,291,131								3,113,364
BALANCE, June 30, 2011			3,755,675			$	44,431,813			$	(8,254,420	)		$	36,177,394			$	107,779,734			$	(225,873	)		$	143,731,255

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

		Six Months Ended
		June 30,
		2011				2010
OPERATING ACTIVITIES
Net income		$	3,113,364			$	3,135,218
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of property and equipment			(366,990	)			(189,374	)
Gain due to insurance proceeds			-				(38,900	)
Loss on impairment of property			-				-
Depreciation			4,362,908				4,044,230
Amortization			516,296				403,453
Effects on operating cash flows due to changes in
Tenant security deposits			(100,654	)			(30,695	)
Due from related party			102,489				859,127
Receivables			35,234				(270,653	)
Prepaid expenses			215,828				286,995
Other assets			83,500				(74,225	)
Due to related party			(170,869	)			71,472
Tenant security deposits payable			130,412				63,859
Accounts payable			118,528				(10,586	)
Accrued expenses			874,285				420,234
NET CASH FROM OPERATING ACTIVITIES			8,914,331				8,670,155
INVESTING ACTIVITIES
Purchase of property and equipment			(3,440,606	)			(5,900,889	)
Purchase of intangible assets			(1,483,434	)			(1,935,564	)
Proceeds from sale of property and equipment			1,444,355				693,217
Insurance proceeds received			-				414,463
Real estate tax and insurance escrows			(2,054,454	)			(1,324,962	)
Notes receivable payments received			26,123				22,171
Deferred insurance proceeds			(1,360	)			(102,741	)
Net payments from (deposits to) replacement reserve			(78,889	)			(71,619	)
Net payments from exchange escrow			2,312,927				653,043
NET CASH USED FOR INVESTING ACTIVITIES			(3,275,338	)			(7,552,881	)

CONSOLIDATED STATEMENTS OF CASH FLOWS – page 2

		2011				2010
FINANCING ACTIVITIES
Payments for financing costs			(535,853	)			(173,870	)
Proceeds from investment certificates issued			-				464,762
Payments on investment certificates			(194,107	)			(10,000	)
Proceeds from issuance of mortgage notes payable			6,512,000				3,472,000
Principal payments on mortgage notes payable			(6,286,612	)			(9,258,056	)
Net change in short-term notes payable			-				7,442,771
Payments on construction payable			-				(125,528	)
Proceeds from issuance of shares			2,075,445				3,673,821
Repurchase of shares			(1,061,630	)			(752,396	)
Distributions paid			(4,576,195	)			(4,182,587	)
Payment of syndication costs			(510,634	)			(367,837	)
NET CASH FLOWS FROM FINANCING ACTIVITIES			(4,577,586	)			183,080
NET CHANGE IN CASH AND CASH EQUIVALENTS			1,061,407				1,300,354
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			10,010,564				8,702,274
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	11,071,971			$	10,002,628
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest		$	5,922,653			$	5,882,843
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Distributions reinvested		$	887,480			$	704,385
Distributions declared and not paid		$	755,830			$	610,096
UPREIT distributions declared and not paid		$	2,140,397			$	1,905,471
UPREIT units converted to REIT common shares		$	246,035			$	700,694
Acquisition of assets in exchange for the issuance of noncontrolling interest shares in UPREIT		$	5,037,405			$	946,336
Acquisition of assets through assumption of debt and property purchased with financing		$	10,192,329			$	407,637
Increase in land improvements due to increase in special assessments payable		$	69,361			$	27,287
Unrealized (gain) loss on interest rate swap		$	31,374			$	61,024
Acquisition of assets with reduction of notes receivable		$	89,349			$	-

Notes to Consolidated Financial Statements

NOTE 1 - ORGANIZATION

The INREIT Real Estate Investment Trust (“INREIT”) is a registered, but unincorporated business trust organized in North Dakota in November 2002. INREIT has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75 percent of the assets of a REIT must consist of real estate assets and that 75 percent of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.

INREIT previously established an operating partnership (INREIT Properties, LLLP) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. The general partner has management responsibility for all activities of the operating partnership. As of June 30, 2011 and December 31, 2010, INREIT had an ownership percentage of approximately 25.9 and 25.7 percent respectively. INREIT Properties, LLLP is the 100% owner of Grand Forks INREIT, LLC, Minot Vista Properties, LLC, Autumn Ridge INREIT, LLC, Bismarck Interstate INREIT, LLC, 32nd Avenue INREIT, LLC, INREIT BL Mankato, LLC, INREIT BL Janesville, LLC, INREIT BL Eau Claire, LLC, INREIT BL Stevens Point, LLC, INREIT BL Sheboygan, LLC, INREIT BL Oshkosh, LLC, INREIT BL Onalaska, LLC, INREIT BL Grand Forks, LLC, INREIT BL Marquette, LLC, INREIT BL Bismarck, LLC, INREIT Stonybrook, LLC, INREIT Alexandria, LLC, INREIT Batesville, LLC, INREIT Fayetteville, LLC, INREIT Laurel, LLC, Sierra Ridge, LLC, INREIT Maple Ridge, LLC, INREIT Fed-3 LLC, and a 50% owner of Marketplace Investors, LLC.

NOTE 2 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2010, which have previously been filed with the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of June 30, 2011 and consolidated statements of operations, consolidated statements of shareholders’ equity, and consolidated statements of cash flows for the three and six month periods ended June 30, 2011 and 2010, as applicable, have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of June 30, 2011 and our consolidated statements of operations and our consolidated cash flows for the three and six month periods ended June 30, 2011 and 2010, as applicable. These adjustments are of a normal recurring nature.

Principles of Consolidation

The consolidated financial statements include the accounts of INREIT; INREIT Properties, LLLP; Grand Forks INREIT, LLC; Minot Vista Properties, LLC; Autumn Ridge INREIT, LLC; Bismarck Interstate INREIT, LLC; 32nd Avenue INREIT, LLC; INREIT BL Mankato, LLC; INREIT BL Janesville, LLC; INREIT BL Eau Claire, LLC; INREIT BL Stevens Point, LLC; INREIT BL Sheboygan, LLC; INREIT BL Oshkosh, LLC; INREIT BL Onalaska, LLC; INREIT BL Grand Forks, LLC; INREIT BL Marquette, LLC; INREIT BL Bismarck, LLC; INREIT Stonybrook, LLC; INREIT Alexandria, LLC; INREIT Batesville, LLC; INREIT Fayetteville, LLC; INREIT Laurel, LLC; Sierra Ridge, LLC; INREIT Maple Ridge, LLC; INREIT FED-3, LLC; and Marketplace Investors, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

Notes to Consolidated Financial Statements

Principal Business Activity

INREIT has a sole general partner interest in INREIT Properties, LLLP, which owns and operates the following property:

Residential Property

	-		2,283 and 204 units respectively in Fargo and West Fargo, North Dakota.
	-		533 units in Grand Forks, North Dakota.
	-		470 units in Bismarck, North Dakota.
	-		316 units in Omaha, Nebraska.
	-		14 units in Hawley, Minnesota.
	-		193 unit assisted living facility in Bismarck, North Dakota.

Commercial Property

	-		15,010 square foot office building in Minot, North Dakota.
	-		38,300 square foot retail complex in Norfolk, Nebraska.
	-		15,000 square foot office and retail complex in Fargo, North Dakota.
	-		28,500 square foot office and retail complex in Fargo, North Dakota.
	-		30,200 square foot retail facility in Waite Park, Minnesota.
	-		17,000 square foot office building in Fargo, North Dakota.
	-		124,306 square foot office complex in Fargo, North Dakota.
	-		10,810 square foot office building in St. Cloud, Minnesota.
	-		95,961 square foot office building in Duluth, MN.
	-		11,973 square foot office building in Fargo, North Dakota.
	-		21,492 square foot office building and 1,625 square foot storage area in Grand Forks, North Dakota.
	-		102,448 square foot office building in Edina, Minnesota.
	-		5,043 square foot restaurant in Bloomington, Minnesota.
	-		5,576 square foot restaurant in Coon Rapids, Minnesota.
	-		4,936 square foot restaurant in Savage, Minnesota.
	-		7,296 square foot restaurant in Austin, Texas.
	-		15,400 square foot commercial building in Mandan, North Dakota.
	-		4,997 square foot restaurant in Apple Valley, Minnesota.
	-		2,712 square foot restaurant in Moorhead, Minnesota.
	-		3,510 square foot office building in Moorhead, Minnesota.

INREIT Properties, LLLP is the 100% owner of Grand Forks INREIT, LLC, which owns a 1/3 interest as a tenant in common of Grand Forks Marketplace Retail Center. INREIT Properties, LLLP is also the 50% owner of Marketplace Investors, LLC, which owns a 1/3 interest as a tenant in common of Grand Forks Marketplace Retail Center. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota.

INREIT Properties, LLLP is the owner of INREIT 32^nd, LLC, which owns and leases a commercial building with approximately 31,000 square feet of rental space in Fargo, North Dakota.

INREIT Properties, LLLP is the owner of Autumn Ridge INREIT, LLC which owns and leases two 36 unit residential apartment buildings in Grand Forks, North Dakota.

INREIT Properties, LLLP is the owner of Sierra Ridge, LLC which owns and leases a 136 unit residential apartment complex in Bismarck, North Dakota.

Notes to Consolidated Financial Statements

INREIT Properties, LLLP owns a 2/3 interest as a tenant in common of a commercial building with approximately 75,000 square feet of rental space in Fargo, North Dakota.

INREIT Properties, LLLP is the owner of Bismarck Interstate INREIT, LLC, which owns and leases two commercial buildings with approximately 75,000 square feet of rental space in Bismarck, North Dakota.

INREIT Properties, LLLP is the owner of INREIT Maple Ridge, LLC which owns and leases a 168 unit residential apartment complex in Omaha, Nebraska.

INREIT Properties, LLLP is the owner of INREIT Somerset, LLC, which owns and leases a 75 unit residential apartment complex in Fargo, North Dakota.

INREIT Properties, LLLP is the owner of INREIT Stonybrook, LLC, which owns and leases a 148 unit residential apartment complex in Omaha, Nebraska.

INREIT Properties, LLLP is the owner of INREIT Alexandria, LLC, INREIT Batesville, LLC, INREIT Fayetteville, LLC, INREIT Laurel, LLC, and INREIT FED-3, LLC which own a total of five separate commercial properties totaling 72,140 square feet. These properties are located in Alexandria, Louisiana, Batesville, Arkansas, Fayetteville, Arkansas, Laurel, Mississippi, and Denver, Colorado.

INREIT Properties, LLLP is the owner of INREIT BL Mankato, LLC, INREIT BL Janesville, LLC, INREIT BL Eau Claire, LLC, INREIT BL Stevens Point, LLC, INREIT BL Sheboygan, LLC, INREIT BL Oshkosh, LLC, INREIT BL Onalaska, LLC, INREIT BL Grand Forks, LLC, INREIT BL Marquette, LLC, and INREIT BL Bismarck, LLC, which own a total of ten separate commercial properties totaling 124,686 square feet. These properties are located in Mankato, Minnesota; Janesville, Wisconsin; Eau Claire, Wisconsin; Stevens Point, Wisconsin; Sheboygan, Wisconsin; Oshkosh, Wisconsin; Onalaska, Wisconsin; Grand Forks, North Dakota; Marquette, Michigan; and Bismarck, North Dakota.

INREIT Properties, LLLP is the 81.25% owner of Eagle Run Partnership, which owns and leases a 144 unit residential apartment complex in West Fargo, North Dakota.

Tenant in Common Interest

We own two properties through a tenant in common interest with unaffiliated third parties. For such properties, the approval of the other party is not required to finance, develop, sell, or operate the property. We proportionally consolidate our ownership interest in the property, which reflects our proportional share of assets, liabilities, revenue, and expenses of those properties in our consolidated financial statements.

Concentration of Credit Risk

INREIT’s cash balances are maintained in various bank deposit accounts. The bank deposit accounts may exceed federally insured limits at various times throughout the year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Notes to Consolidated Financial Statements

Property and Equipment

INREIT accounts for its property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of their fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition.

Equipment, furniture and fixtures purchased by INREIT are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:

Buildings and improvements		40 years
Furniture and fixtures		9 years

Depreciation expense for the six months ended June 30, 2011 and 2010 totaled $4,362,908 and $4,044,230 respectively.

Annually, INREIT evaluates its real estate investments for significant changes in the operations to assess whether any impairment indications are present, including recurring operating losses and significant adverse changes in legal factors or business climate that affect the recovery of the recorded value. If any real estate investment is considered impaired, a loss is provided to reduce the carrying value of the property to its estimated fair value.

Cash and Cash Equivalents

Highly liquid investments with a maturity of three months or less when purchased are classified as cash equivalents.

Receivables

Receivables consist primarily of amounts due for rent and real estate taxes. The receivables are non-interest bearing. The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected. As of June 30, 2011 and December 31, 2010, management determined that no allowance was necessary for uncollectible receivables.

Other assets

Lease intangibles represent a proportional purchase price allocation of a property acquisition. The lease intangibles represent the estimated value of in-place leases and above-market lease terms. Intangible assets are comprised of finite-lived and indefinite-lived assets. Indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives.

Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. The carrying amount of intangible assets that are not deemed to have an indefinite useful life is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, no impairment was deemed necessary at June 30, 2011 or June 30, 2010.

Notes to Consolidated Financial Statements

Rental Incentives

Rental incentives consist of up-front cash payments to lessees to sign the lease. Rental incentives are amortized against rental income over the term of the lease.

Noncontrolling Interest

Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnerships’ income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.

Financing Costs

Financing costs incurred in connection with financing have been capitalized and are being amortized over the life of the financing using the straight-line method, which approximates the effective interest method.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. These fees are paid based on management’s discretion. Syndication costs are recorded as a reduction to equity and noncontrolling interest.

Federal Income Taxes

INREIT has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code. A REIT calculates taxable income similar to other domestic corporations, with the major difference being that a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90 percent of its taxable income. If it chooses to retain the remaining 10 percent of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.

INREIT intends to continue to qualify as a real estate investment trust as defined by the Internal Revenue Code and, as such, will not be taxed on the portion of the income that is distributed to the shareholders. In addition, INREIT intends to distribute all of its taxable income, therefore, no provision or liability for income taxes have been recorded in the financial statements.

INREIT Properties, LLLP is organized as a limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for partnership interest. The conversion of partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

INREIT has adopted the provisions of FASB Accounting Standards Codification Topic ASC 740-10, on January 1, 2009. The implementation of this standard had no impact on the financial statements. As of both the date of adoption, and as of June 30, 2011, the unrecognized tax benefit accrual was zero. The Company is no longer subject to Federal tax examinations by tax authorities for years before 2008 and state examinations for years before 2008.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Effective for periods beginning

Notes to Consolidated Financial Statements

after December 15, 2011, ASU No. 2011-04 clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risks and the concept of valuation premise and highest and best use, extends the prohibition on blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures. ASU No. 2011-04 will only apply to our disclosures in Note 8 related to fair value assets and liabilities and is not expected to have a significant impact on our footnote disclosures.

Revenue Recognition

Generally, housing units are rented under short-term lease agreements. Generally, commercial space is rented under long-term lease agreements.

INREIT derives over 95% of its revenues from tenant rents and other tenant-related activities. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and straight-line rents. INREIT records base rents on a straight-line basis, which means that the monthly base rent income according to the terms of INREIT’s leases with its tenants is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $124,704 and $250,723 in 2011 and 2010. The straight-line receivable balance included in receivables on the consolidated balance sheet as of June 30, 2011 and December 31, 2010 was $1,534,768 and $1,410,063 respectively. INREIT receives payments for these reimbursements from substantially all its multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which are immaterial, are recognized in the subsequent year.

Segment Information

The Company assesses and measures operating results on an individual property basis for each of its investment properties based on property net operating income. However, management internally evaluates the operating performance of the properties as a whole and does not differentiate properties by geography, size or type. In accordance with existing guidance, under the aggregation criteria of this guidance, the Company’s properties are considered one reportable segment.

Earnings per Common Share

Basic earnings per common share (“Basic EPS”) is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. The Company had no dilutive potential common shares as of June 30, 2011 or 2010, and therefore, basic earnings per common share were equal to diluted earnings per common share for both periods.

For the six months ended June 30, 2011 and 2010, the Company’s the denominator of the basic and diluted earnings per common share were approximately 3,750,574 and 3,003,416 shares respectively.

Notes to Consolidated Financial Statements

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment as of June 30, 2011 and December 31, 2010:

		2011				2010
Land and land improvements		$	46,819,403			$	42,021,838
Building and improvements			293,781,523				281,669,671
Furniture and fixtures			13,518,289				12,989,679
			354,119,215				336,681,188
Less accumulated depreciation			(27,071,304	)			(23,021,736	)
		$	327,047,911			$	313,659,452
Less: property and equipment included in assests held for sale			(1,896,431	)			(1,092,109	)
		$	325,151,480			$	312,567,343

There were no insurance proceeds received during the first six months of 2011. During the first six months of 2010, INREIT received insurance proceeds in the amount of $414,463 for damages caused by a storm on twenty properties. INREIT reduced the book value of the property and equipment by $375,563 and recorded income in the amount of $38,900.

NOTE 4 - HEDGING ACTIVITIES

As part of INREIT’s interest rate risk management strategy, INREIT uses a derivative instrument to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings. To meet these objectives, the Company has entered into interest rate swaps in the amount of $1,293,900 and $2,429,044 to provide a fixed rate of 7.25% and 2.57% respectively. The swaps mature on April 15, 2020 and December 2017. The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception. The carrying amount of the swaps have been adjusted to their fair values at the end of the quarter, which because of changes in forecasted levels of LIBOR resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps. The interest rate swaps are accounted for as effective hedges in accordance with ASC 815-20 whereby they are recorded at fair value and changes in fair value are recorded to comprehensive income. As of June 30, 2011 and December 31, 2010, INREIT has recorded a liability and other comprehensive loss of $225,873 and $194,499 respectively.

Notes to Consolidated Financial Statements

NOTE 5 - LEASE INTANGIBLES

The following table summarizes the net value of other intangible assets and the accumulated amortization for each class of intangible asset:

		June 30, 2011
		Lease				Accumulated				Lease
		Intangibles				Amortization				Intangibles, net
In-place leases		$	7,139,210			$	(1,200,288	)		$	5,938,922
Above-market leases			1,588,281				(93,165	)			1,495,116
Below-market leases			(682,497	)			134,128				(548,369	)
		$	8,044,994			$	(1,159,325	)		$	6,885,669

		December 31, 2010
		Lease				Accumulated				Lease
		Intangibles				Amortization				Intangibles, net
In-place leases		$	6,116,650			$	(902,685	)		$	5,213,965
Above-market leases			1,127,407				(50,796	)			1,076,611
Below-market leases			(682,497	)			99,147				(583,350	)
		$	6,561,560			$	(854,334	)		$	5,707,226

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

Years ending December 31,		Amount
2012		$	655,647
2013			655,647
2014			655,647
2015			655,647
2016			655,647
Thereafter			3,607,434
		$	6,885,669

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of June 30, 2011 was 12.0 years.

NOTE 6 - SHORT TERM NOTES PAYABLE

The Company has a $5,000,000 variable rate (1-month LIBOR plus 3.25%) line of credit agreement with Wells Fargo Bank, which expires in March 2012 and a $2,000,000 variable rate (prime rate or floor of 4.25%) line of credit agreement with State Bank and Trust of Fargo, which expires in June 2012. At June 30, 2011 and December 31, 2010, there was no outstanding balance on the lines of credit. The notes are each secured by a property.

Notes to Consolidated Financial Statements

NOTE 7 - MORTGAGE NOTES PAYABLE

Mortgage notes payable consist of:

		2011				2010
5.26% mortgage note payable, due in monthly installments of $38,283, including interest until July 2013, secured by a mortgage on property, security agreement, and an assignment of rents (Note 14)		$	6,043,520			$	6,111,450
7.15% mortgage note payable, due in monthly installments of $5,439, including interest, unpaid principal and interest due March 2011, secured by a mortgage on property and a security interest in cash or investment accounts with the lender			-				722,603
7.25% mortgage note payable, due in varying monthly installments of approximately $9,500, including interest, unpaid principal and interest due April 2020, secured by a mortgage on property and a security interest in cash or investment accounts held with the lender			1,151,062				1,165,072
Variable rate mortgage note payable, interest fixed at 6.25% through June 2010, thereafter adjusted every 5 years, due in monthly installments of $15,356 until July 2025, secured by a mortgage on property and an assignment of rents			1,725,335				1,763,803
5.74% mortgage note payable, due in monthly installments of $18,945, including interest, until January 2016, secured by a mortgage on property, security agreement, and an assignment of rents			3,007,314				3,033,277
5.92% mortgage note payable, due in monthly installments of $22,291, including interest, until November 2019, secured by a mortgage on property and guaranty of owners			3,521,026				1,183,348
5.46% mortgage note payable, due in monthly installments of $17,524, including interest, until August 2019, secured by a mortgage on property			2,818,934				948,892

Notes to Consolidated Financial Statements

		2011				2010
7.00% mortgage note payable, due in monthly installments of $35,628, including interest, until May 2022, secured by a mortgage on property (Note 14).			5,087,936				5,121,897
5.93% mortgage note payable, due in monthly installments of $45,224, including interest, until August 2017, secured by a mortgage on property and assignment of rents and leases			7,232,715				7,286,288
4.25% mortgage note payable, due in monthly installments of $7,967, including interest, until March 2015, remainder due at that time, secured by a mortgage on property			1,315,979				1,330,240
5.33% mortgage note payable, due in monthly installments of $68,688, including interest, until September 2020, secured by a mortgage on property			6,008,796				6,256,916
5.96% mortgage note payable, due in monthly installments of $20,297, including interest, until July 2021, secured by a mortgage on property, security agreement, and an assignment of rents			3,166,849				3,193,791
6.67% mortgage note payable, due in monthly installments of $21,872, including interest, until December 2013, secured by a mortgage on property, security agreement, and an assignment of rents			2,706,352				2,746,540
7.18% mortgage note payable, due in monthly installments of $16,258, including interest, until January 2013, secured by a mortgage on property, security agreement, and an assignment of rents			1,888,258				1,917,407
6.30% mortgage note payable, due in monthly installments of $4,224, including interest, until October 2017, remainder due at that time, secured by a mortgage on property and business assets			650,847				655,605
6.30% mortgage note payable, due in monthly installments of $2,032, including interest, until October 2017, remainder due at that time, secured by a mortgage on property and business assets			313,027				315,315
6.10% mortgage note payable, due in monthly installments of $13,862, including interest, until December 2017, remainder due at that time, secured by a mortgage on property and business assets			2,183,197				2,199,492

Notes to Consolidated Financial Statements

		2011				2010
6.10% mortgage note payable, due in monthly installments of $12,680, including interest, until December 2017, remainder due at that time, secured by a mortgage on property and business assets			1,997,089				2,011,994
6.59% mortgage note payable, due in monthly installments of $6,700, including interest, until December 2012, remainder due at that time, secured by a mortgage on property			-				924,753
6.23% mortgage note payable, due in monthly installments of $13,642, including interest, until January 2013, remainder due at that time, secured by mortgage on property			1,921,995				1,942,926
6.73% mortgage note payable, due in monthly installments of $17,314, including interest, until December 2013, remainder due at that time, secured by mortgage on property, security agreement, and an assignment of rents			2,133,349				2,164,828
5.03% mortgage note payable, due in monthly installments of $19,122, including interest, until September 2019, remainder due at that time, secured by mortgage on property, security agreement, and an assignment of rents			3,217,043				3,250,378
7.06% - 7.65% mortgage notes payable, due in various monthly installments of principal and interest, until March 2016, remainder due at that time, secured by mortgage on property and assignment of rents			13,028,230				13,519,564
5.72% mortgage note payable, due in monthly installments of $17,683, including interest, until January 2013, remainder due at that time, secured by mortgage on property, deed to secure debt or deed of trust			2,627,125				2,657,576
5.50% mortgage note payable, due in monthly installments of $3,735, including interest, until June 2013, remainder due at that time, secured by mortgage on property			570,993				577,634
5.98% mortgage note payable, due in monthly installments of $11,965, including interest, until September 2017, remainder due at that time, secured by mortgage on property, deed to secure debt or deed of trust			1,933,109				1,946,227
5.93% mortgage note payable, due in monthly installments of $15,174, including interest, until September 2017, remainder due at that time, secured by mortgage on property, deed to secure debt or deed of trust			2,463,848				2,480,731

Notes to Consolidated Financial Statements

		2011				2010
6.15% mortgage note payable, due in monthly installments of $6,862, including interest, until July 2016, remainder due at that time, secured by mortgage on property			948,307				960.104
4.75% mortgage note payable, due in monthly installments of $35,057, including interest, until June 2016, remainder due at that time, secured by mortgage on property and an assignment of rents			5,486,704				5,526,684
6.00% mortgage note payable, due in monthly installments of $13,084, including interest, until May 2015, remainder due at that time, secured by mortgage on property and an assignment of rents			–				2,092,259
6.83% mortgage note payable, due in monthly installments of $2,800, including interest, until June 2018, remainder due at that time, secured by mortgage on property and an assignment of rents			389,195				392,490
6.83% mortgage note payable, due in monthly installments of $12,500, including interest, until June 2018, remainder due at that time, secured by mortgage on property and an assignment of rents			1,691,532				1,707,794
Variable rate mortgage note payable (5.95% at June 30, 2011 and December 31, 2010), adjusted every three years, due in monthly installments of $7,700, including interest, until April 2018, remainder due at that time, secured by mortgage on property and an assignment of rents			1,127,052				1,139,135
6.83% mortgage note payable, due in monthly installments of $5,100, including interest, until June 2018, remainder due at that time, secured by mortgage on property and an assignment of rents			699,952				706,255
6.83% mortgage note payable, due in monthly installments of $2,500, including interest, until June 2018, remainder due at that time, secured by mortgage on property and an assignment of rents			342,235				345,354
5.60% mortgage note payable, due in monthly installments of $12,658, including interest, until December 2012, remainder due at that time, secured by mortgage on property and an assignment of rents			1,910,953				1,932,446
6.25% mortgage note payable, due in monthly installments of $25,200, including interest, until August 2015, remainder due at that time, secured by mortgage on property and an assignment of rents			3,601,450				3,638,170

Notes to Consolidated Financial Statements

		2011				2010
5.96% mortgage note payable, due in monthly installments of $6,727, including interest, until October 2015, remainder due at that time, secured by mortgage on property			988,507				998,908
5.96% mortgage note payable, due in monthly installments of $11,488, including interest, until October 2015, remainder due at that time, secured by mortgage on property			1,688,054				1,705,818
6.96% mortgage note payable, due in monthly installments of $16,897, including interest, until June 2013, remainder due at that time, secured by mortgage on property, deed to secure debt or deed of trust			2,017,864				2,048,400
7.80% mortgage note payable, due in monthly installments of $12,914, including interest, until September 2014, remainder due at that time, secured by mortgage on property, deed to secure debt or deed of trust			1,506,063				1,524,394
Variable rate mortgage note payable (4.00% at June 30, 2011 and December 31, 2010), adjusted every three years, due in monthly installments of $31,300, including interest, until December 2013, remainder due at that time, secured by mortgage on property and assignment of rents			5,535,142				5,610,116
5.50% mortgage note payable, due in monthly installments of $16,024, including interest, until December 2013, remainder due at that time, secured by mortgage on property and an assignment of rents			2,460,827				2,488,100
5.60% mortgage note payable, due in monthly installments of $14,905, including interest, until December 2013, remainder due at that time, secured by mortgage on property and an assignment of rents			2,267,105				2,291,940
6.96% mortgage note payable, due in monthly installments of $24,848, including interest, until June 2013, remainder due at that time, secured by mortgage on property and an assignment of rents			2,967,450				3,012,356
6.96% mortgage note payable, due in monthly installments of $22,198, including interest, until July 2013, remainder due at that time, secured by mortgage on property and an assignment of rents			2,657,704				2,697,589
5.64% construction note payable, due in monthly installments of $116,225, including interest, until June 2015, remainder due at that time, secured by mortgage on property and an assignment of the executed lease			15,497,797				15,670,622

Notes to Consolidated Financial Statements

		2011				2010
5.96% mortgage note payable, due in monthly installments of $5,955, including interest, until January 2016, remainder due at that time, secured by mortgage on property and an assignment of rents			878,314				887,416
5.50% mortgage note payable, due in monthly installments of $7,492, including interest, until July 2014, remainder due at that time, secured by mortgage on property and an assignment of rents			1,174,120				1,186,677
5.40% mortgage note payable, due in monthly installments of $34,815, including interest, until April 2015, remainder due at that time, secured by mortgage on property and an assignment of rents			5,835,703				5,884,498
5.75% mortgage note payable, due in monthly installments of $8,551, including interest, until May 2019, remainder due at that time, secured by mortgage on property and an assignment of rents			1,303,637				1,317,330
5.75% mortgage note payable, due in monthly installments of $12,742, including interest, until March 2014, remainder due at that time, secured by mortgage on property and corporate guaranty			1,687,874				1,714,798
5.75% mortgage note payable, due in monthly installments of $7,545, including interest, until May 2019, remainder due at that time, secured by mortgage on property and an assignment of rents			1,150,237				1,162,319
5.68% mortgage note payable, due in monthly installments of $63,989, including interest, until October 2015, remainder due at that time, secured by mortgage on property, security agreement, and assignment of rents and leases			10,034,240				10,128,451
5.69% mortgage note payable, due in monthly installments of $20,960, including interest, until April 2025 remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			2,404,664				2,461,070
6.85% mortgage note payable, due in monthly installments of $49,216, including interest, until March 2034 remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			6,799,053				6,860,254
6.85% mortgage note payable, due in monthly installments of $38,325, including interest, until August 2033, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			5,236,786				5,286,382

Notes to Consolidated Financial Statements

		2011				2010
5.400% mortgage note payable, due in monthly installments of $19,682, including interest, until March 2015, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			3,411,322				3,435,885
6.07% mortgage note payable, due in monthly installments of $21,542, including interest, until October 2024, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			2,378,338				2,433,614
4.25% mortgage note payable, due in monthly installments of $38,325, including interest, until August 2011, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			6,549,223				6,549,223
4.95% mortgage note payable, due in monthly installments of $5,989, including interest, until August 2015, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			1,004,692				1,015,327
5.55% mortgage note payable, due in monthly installments of $4,159, including interest, until December 2017, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			667,643				675,340
4.00% mortgage note payable, due in monthly installments of $12,932, including interest, until December 2013, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			2,429,044				2,450,000
5.25% mortgage note payable, due in monthly installments of $7,569, including interest, until January 2016, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			1,102,894				1,114,500
4.25% mortgage note payable, due in monthly installments of $20,900 including interest, until December 2013, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			3,635,150				3,690,961
5.00% mortgage note payable, due in monthly installments of $7,580 including interest, until March 2016, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			1,279,780				-
5.39% mortgage note payable, due in monthly installments of $5,881 including interest, until April 2016, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			719,747				-

Notes to Consolidated Financial Statements

		2011				2010
5.69% mortgage note payable, due in monthly installments of $26,090 including interest, until May 2021, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			4,495,959				-
4.37% mortgage note payable, due in monthly installments of $10,170 including interest, until July 2018, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			737,979				-
3.00% mortgage note payable, due in monthly installments of $4,387 including interest, until December 2012, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			575,000				-
4.50% mortgage note payable, due in monthly installments of $25,742 including interest, until June 2021, remainder due at that time, secured by mortgage on property, security agreement and assignment of rents and leases			4,600,000				-
		$	202,589,220			$	192,171,523
Less: Liabilities related to assets held for sale			(1,725,335	)			-
		$	200,863,885			$	192,171,523

The mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of June 30, 2011 and December 31, 2010, the Company was in compliance with all covenants with exception of one loan on a retail property in Fargo, North Dakota for which it has received a one year waiver on January 1, 2011 from the lender.

NOTE 8 - FAIR VALUE MEASUREMENT

FASB issued ASC 820-10 in September 2006 and ASC 825-10 in February 2007. Both standards address the aspects of the expanding application of fair value accounting. Effective January 1, 2008, INREIT adopted ASC 820-10 and ASC 825-10. There were no adjustments to accumulated deficit as a result of the adoption of ASC 820-10. ASC 825-10 permits a company to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. INREIT has elected not to measure any financial assets or financial liabilities at fair value which were not previously required to be measured at fair value.

ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions. These two types of inputs create the following fair value hierarchy:

•

Level 1 – Quoted prices for identical instruments in active markets;

	•		Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable;
	•		Level 3 – Instruments whose significant inputs are unobservable.

Assets measured at fair value on a recurring basis in accordance with ASC 820-10:

Quoted

Significant

Significant

Total

Prices:

Other Inputs:

Nonobservable

Liabilities

06/30/11

Level 1

Level 2

Inputs: Level 3

Fair value of interest rate swap

$

225,873

$

-

$

225,873

$

-

Quoted

Significant

Significant

Total

Prices:

Other Inputs:

Nonobservable

Liabilities

12/31/10

Level 1

Level 2

Inputs: Level 3

Fair value of interest rate swap

$

194,499

$

-

$

194,499

$

-

Notes to Consolidated Financial Statements

NOTE 9 - NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIPS

As of June 30, 2011 and December 31, 2010, noncontrolling shareholders partnership units totaled 10,729,466 and 10,389,178, respectively. As of June 30, 2011 and, 2010, INREIT had declared distributions of $2,140,397 and $1,905,471 respectively, to noncontrolling interest shareholders to be paid in July 2011 and 2010. Distributions per unit were $.4025 and $.3850 during the first six months of 2011 and 2010 respectively.

During the first six months of 2011 and 2010, noncontrolling shareholders converted 19,526 and 52,341 partnership units to INREIT shares, totaling $246,035 and $700,694, respectively.

Limited partners in the operating partnership have the right to require the operating partnership to redeem their limited partnership units for cash after a minimum three-year holding period. Upon a redemption request, INREIT has the right to purchase the partnership units either with cash or INREIT shares, in its discretion, on the basis of one partnership unit for one INREIT share. However, payment will be in cash if the issuance of INREIT shares will cause the shareholder to exceed the ownership limitations, among other reasons. No limited partner will be permitted more than two redemptions during any calendar year, and no redemptions may be made for less than 1,000 limited partnership units or, if such limited partner owns less than 1,000 limited partnership units, all of the limited partnership units held by such limited partner.

NOTE 10 - BENEFICIAL INTEREST

The Company is authorized to issue 100,000,000 common shares of beneficial interest with $.01 par value and 50,000,000 preferred shares with $.01 par value, which collectively represent the beneficial interest of the Company. As of June 30, 2011 and December 31, 2010, there were 3,755,675 and 3,602,853, respectively, common shares outstanding.

Distributions paid to holders of common shares were $0.4025 and $0.3850 for the six months ending June 30, 2011 and 2010, respectively.

Notes to Consolidated Financial Statements

NOTE 11 - RELATED PARTY TRANSACTIONS

Property Management Fee

During 2011 and 2010, INREIT paid property management fees of 5% of rents to INREIT Management, LLC. The management team of INREIT Management, LLC consists of Board of Trustee members Kenneth Regan and James Wieland. For the six month periods ended June 30, 2011 and June 30, 2010, INREIT paid management fees of $3,175 and $7,011, respectively, to INREIT Management, LLC.

During 2011 and 2010, INREIT paid property management fees of 5% of rents to Goldmark Property Management. The management team of Goldmark Property Management consists of Board of Trustee members Kenneth Regan and James Wieland. For the six month period ended June 30, 2011 and 2010, INREIT incurred management fees of $1,820,644 and $1,552,600, respectively, to Goldmark Property Management.

Director Fees

INREIT paid director fees of $22,000 and $18,100 during the six months ended June 30, 2011 and 2010, respectively.

Advisory Management Fees

For the six months ended June 30, 2011 and 2010, INREIT incurred $373,279 and $338,412 to INREIT Management, LLC for advisory management fees. As of June 30, 2011 and December 31, 2010, the Company owed INREIT Management, LLC $62,226 and $60,558, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage the day-to-day operations of INREIT, and is paid based on the approved Advisory Agreement rate of 0.50% of net invested assets during 2011 and 2010.

Acquisition and Disposition Fees

Our agreement with our advisor requires that we pay 3% of the acquisition and disposition costs or construction value to our advisor upon successful completion of an acquisition, disposition or construction of real estate projects and the related services to arrange mortgages to finance the acquisition, disposition or construction. With the adoption of ASC 805 Business Combinations, we were required to expense a certain amount of the fees related to acquisition costs. Accordingly, we were required to determine what portion of the 3% fee related to acquisition, disposition or construction and to the arranging of financing. We have evaluated the services provided and determined that it is appropriate to attribute 50% of the 3% fee to financing costs for the administration of arranging a loan to fund the acquisition, disposition or construction of a property. We believe this is an appropriate allocation of the total fee as our advisor has informed us that approximately equal time is spent on discovering the potential property or construction project as is spent on the successful coordination of financing.

During the six months ended June 30, 2011 and 2010, INREIT incurred $585,797 and $197,100 respectively, to INREIT Management, LLC for acquisition and financing fees. These fees are for performing due diligence on properties acquired in an I.R.C Section 721 exchange, and are paid on 3% of the purchase price up to a maximum of $300,000 per individual property in 2011 and 2010. One half of the acquisition fee is allocated to the cost of ongoing financing activities required during the life of the acquisition. There was no acquisition fees owed to INREIT Management, LLC as of June 30, 2011. As of December 31, 2010, INREIT owed $172,537 to INREIT Management, LLC for acquisition fees.

In April 2011, INREIT paid $43,500 disposition fee to INREIT Management, LLC for coordinating the sale of a senior living facility in Williston, North Dakota.

Notes to Consolidated Financial Statements

In May 2011, INREIT purchased a 40 unit apartment complex and a 24 unit apartment complex in Fargo, North Dakota for approximately $2,400,000. The properties were purchased from entities affiliated with Kenneth Regan and James Wieland, related parties. Mr. Regan and Mr. Wieland each received partnership units valued at approximately $419,232 in the purchase transaction.

Commissions

During the six month period ended June 30, 2011 and 2010, INREIT incurred brokerage fees of $82,833 and $4,285, respectively, to Roger Domres, or entities owned by Roger Domres, shareholder of INREIT and a former Governor and member of INREIT Management, LLC. Brokerage fees are paid based on 4% of UPREIT partnership units and 8% of INREIT shares sold. During the six month period ended June 30, 2011 and 2010, INREIT incurred marketing fees of $19,063 and $51,462 respectively, to HSC Partner, LLC, an entity owned by Roger Domres. Marketing fees are paid based on 2% of INREIT shares sold. As of December 31, 2010, INREIT owed $111,058, to HSC Partners, LLC for brokerage and marketing fees. As of June 30, 2011 there were no outstanding brokerages or marketing fees owed to HSC Partners, LLC or entities owned by Roger Domres.

During the six month period ended June 30, 2011 and 2010, INREIT incurred brokerage fees of $54,701 and $174,707 to Dale Lian, or entities owned by Dale Lian, a shareholder of INREIT and a member of INREIT Management, LLC. Brokerage fees are paid based on 4% of UPREIT partnership units and 8% of INREIT shares sold. As of December 31, 2010, INREIT owed $200,835 to Dale Lian, or entities owned by Dale Lian. As of June 30, 2011, there were no outstanding brokerage fees owed to Dale Lian, or entities owned by Dale Lian.

During the six month period ended June 30, 2011 and 2010, INREIT incurred brokerage commissions of $15,968 and $23,984 to Larry O’Callaghan, a member of the Board of Trustees.

During the six month period ended June 30, 2011, INREIT incurred real estate commissions of $133,499 to an entity affiliated with Kenneth Regan and James Wieland, related parties.

Rental Income

During the six month period ended June 30, 2011 and 2010, INREIT received rental income of $1,080,035 and $1,432,406, respectively, under various lease agreements with Edgewood Vista Senior Living, Inc., an entity affiliated with Philip Gisi, a former member of the Board of Trustees. As of June 30, 2011 and December 31, 2010, INREIT was owed $137,734, and $262,350, respectively, from Edgewood Vista Senior Living, Inc. for real estate taxes related to the properties.

During the six month period ended June 30, 2011 and 2010, INREIT received rental income of $50,125 under a lease agreement for an office building with EMG Investment Group, an entity affiliated with Philip Gisi, a former member of the Board of Trustees. As of June 30, 2011 and December 31, 2010, INREIT was owed $66,728 and $43,756, respectively, from EMG Investment Group.

During the six month period ended June 30, 2011 and 2010, INREIT received rental income of $89,525 under an operating lease agreement with Goldmark Property Management.

During the six month period ended June 30, 2011 and 2010, INREIT received rental income of $25,854 and $21,000, respectively, under operating lease agreements with INREIT Management, LLC.

Notes to Consolidated Financial Statements

NOTE 12 - RENTALS UNDER OPERATING LEASES / RENTAL INCOME

Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $15,730,950 and $13,947,317 for the six months ended June 30, 2011 and 2010, respectively.

For the six months ended June, 2011 and 2010, gross revenues from commercial property rentals, including CAM (common area maintenance) income of $1,981,600 and $1,834,372, respectively, totaled $8,317,951 and $7,769,289. Commercial properties are leased to tenants under terms expiring at various dates through 2034. Lease terms often include renewal options.

NOTE 13 - PROPERTY MANAGEMENT FEES

INREIT has entered into various management agreements with unrelated management companies. The agreements provide for INREIT to pay management fees based on a percentage of rental income (3 to 5%). During the six month period ended 2011 and 2010, INREIT incurred property management fees of $61,663 and $63,440, respectively, to unrelated management companies.

During the six month period ended 2011 and 2010, INREIT incurred management fees of 5% of rents to INREIT Management, LLC and Goldmark Property Management, both related parties (Note 11).

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which INREIT may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by INREIT, INREIT could incur liability for the removal of the substances and the cleanup of the property. There can be no assurance that INREIT would have effective remedies against prior owners of the property. In addition, INREIT may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.

Risk of Uninsured Property Losses

INREIT maintains property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) INREIT might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) INREIT Real Estate Development Trust may suffer a loss of profits which might be anticipated from one or more properties.

Tenant in Common Ownership

As a tenant in common, INREIT owns its respective share of the assets of tenant in common properties as well as being liable for its respective share of the debts. INREIT owned the following properties as a tenant in common.

INREIT Properties, LLLP is the 100% owner of Grand Forks INREIT, LLC, which owns a 1/3 interest as a tenant in common of Grand Forks Marketplace Retail Center. INREIT Properties, LLLP is also the 50% owner of Marketplace Investors, LLC, which owns a 1/3 interest as a tenant in common of Grand Forks Marketplace Retail Center. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in

Notes to Consolidated Financial Statements

Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with Key Bank Real Estate Capital with a balance at June 30, 2011 of $12,087,040. INREIT owed $6,043,520 and $6,111,450 for their respective share of the balance as of June 30, 2011 and December 31, 2010, respectively.

INREIT Properties, LLLP owns a 2/3 interest as a tenant in common of a commercial building with approximately 75,000 square feet of rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with GE Commercial Finance Business Property Corporation with a balance at June 30, 2011 in the amount of $7,631,904. INREIT owed $5,087,936 and $5,121,897 for its respective share of the balance on June 30, 2011 and December 31, 2010, respectively.

NOTE 15 - DISCONTINUED OPERATIONS

The Company reports in discontinued operations the results of operations for properties that have either been sold or are classified as held for sale. The Company also reports any gains or losses from the sale of properties in discontinued operations.

During the second quarter of 2011, the Company sold a small assisted living facility in Williston, North Dakota for $1.45 million and recognized a gain of approximately $366,990. The Company also entered into an agreement to sell a retail property in Norfolk, Nebraska. The transaction is expected to be completed in August 2011 pending due diligence or other normal contingencies. There were no dispositions or properties held for sale during the second quarter of 2010.

During the first quarter of 2011, there were no dispositions. During the first quarter of 2010, the Company sold a small apartment complex in Carrington, North Dakota for $710,000 and recognized a gain of approximately $189,374.

The following table shows the effect on net income and the gains or losses from the sale of properties classified as discontinued operations for the three months and six months ended June 30, 2011 and 2010:

Notes to Consolidated Financial Statements

		Discontinued								Discontinued
		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
INCOME FROM RENTAL OPERATIONS		$	12,300			$	-			$	97,458			$	8,184
EXPENSES
Expenses from rental operations
Interest			25,938				-				51,910				1,266
Depreciation and amortization			14,544				-				37,186				1,342
Real estate taxes			9,580				-				25,463				827
Property management fees			1,200				-				5,575				430
Utilities			2,193				-				9,618				833
Repairs and maintenance			3,003				-				9,380				1,215
Insurance			2,502				-				6,812				382
Salary and wages			-								10,416				-
Food costs for residents			-								4,604				-
Administrative			-				-				239				1,421
			58,961				-				161,203				7,716
Administration of REIT
Administrative expenses			-				-				-				-
Advisory fees			-				-				-				-
Acquisition and disposition expenses			43,500				-				43,500				-
Director fees			-				-				-				-
Rent			-				-				-				-
Legal and accounting			343				-				1,193				-
			43,843				-				44,693				-
Total expenses			102,804				-				205,896				7,716
INCOME FROM DISCONTINUED OPERATIONS BEFORE GAIN ON SALE			(90,504	)			-				(108,437	)			468
GAIN ON SALE OF DISCONTINUED OPERATIONS			366,990				-				366,990				189,374
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		$	276,486			$	-			$	258,553			$	189,842

NOTE 16 - BUSINESS COMBINATIONS

The Company continued to implement its strategy of acquiring properties in desired markets. It is impractical for the Company to obtain historical financial information on acquired properties and accordingly, proforma statements have not been presented.

The Company accounts for its property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of their fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition. Significant factors included in the independent appraisal include items such as current rent schedules, occupancy levels, and discount factors. Property valuations are completed primarily using the income capitalization approach, which anticipated benefits are converted to an indication of current value.

Notes to Consolidated Financial Statements

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

The Company estimates the in-place lease value for each lease acquired. This fair value estimate is calculated using factors available in third party appraisals or cash flow estimates of the property prepared by the Company’s internal analysts. These estimates are based upon cash flow projections for the property, existing leases, and the current economic climate.

The Company’s analysis results in three discrete financial items: assets for above market leases, liabilities for below market leases, and assets for the in-place lease value. The calculation of each of these components is performed in tandem to provide a complete intangible asset value.

Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, dark periods, direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

2011 Purchases

In January 2011, INREIT purchased a 4,997 square foot restaurant in Apple Valley, Minnesota for approximately $2.5 million. The purchase was financed through the issuance of operating partnership units valued at approximately $1,698,549 and cash. The Company also purchased the remaining 65.44% interest in Sierra Ridge, a 136 unit apartment complex in Bismarck, North Dakota for approximately $6.5 million. The purchase was financed with approximately $2.2 million in cash and the assumption of $4.3 in debt. The debt assumption was finalized on April 1, 2011.

In May 2011, INREIT purchased a 40 unit apartment complex and a 24 unit apartment complex in Fargo, North Dakota for approximately $2.5 million. The purchase was financed through the assumption of approximately $0.8 in debt and the issuance of operating partnership units valued at approximately $1.7 million. The properties were purchased from entities affiliated with Kenneth Regan and James Wieland, related parties who each received partnership units valued at approximately $419,232.

In May 2011, INREIT purchased a 2,712 square foot restaurant and a 3,510 square foot office building in Moorhead, Minnesota for approximately $2,181,000. The purchase was financed with a combination of a new $575,000 loan and the issuance of operating partnership units valued at approximately $1,627,705.

Notes to Consolidated Financial Statements

In June 2011, INREIT purchased a 13,390 square foot retail store and 36,432 square feet of adjacent land in Denver, Colorado for approximately $5,900,000. The purchase was financed with a combination of a $4,600,000 loan and approximately $1,300,000 in cash.

The following table summarizes the fair value of the assets acquired and liabilities assumed during the six months ended June 30, 2011:

		Property and				In Place				Favorable				Unfavorable				Mortgages				Consideration
		Equipment				Leases				Lease Terms				Lease Terms				Assumed				Given
Applebee’s, Apple Valley, MN		$	1,795,299			$	322,866			$	404,635			$	-			$	-			$	2,522,800
Sierra Ridge Apartments, Bismarck, ND			6,458,761				-				-				-				(4,264,480	)			2,194,281
Country Side Apartments, Fargo, ND			936,320				-				-				-				(286,083	)			650,237
Country Club Apartments, Fargo, ND			1,527,680				-				-				-				(466,766	)			1,060,914
Bank of the West, Moorhead, MN			922,187				77,813				-				-				(263,925	)			736,075
Dairy Queen, Moorhead, MN			1,027,324				151,810				1,866				-				(311,075	)			869,925
Walgreen’s, Denver, CO			4,706,332				449,949				53,719				-				(4,062,030	)			1,147,970
Taco Bell Land, Denver, CO			669,224				20,122				654				-				(537,970	)			152,030
		$	18,043,127			$	1,022,560			$	460,874			$	-			$	(10,192,329	)		$	9,334,232