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EXCEL - IDEA: XBRL DOCUMENT - Bluerock Residential Growth REIT, Inc.Financial_Report.xls
EX-10.1 - EXHIBIT 10.1 - Bluerock Residential Growth REIT, Inc.v239335_ex10-1.htm
EX-32.1 - EXHIBIT 32.1 - Bluerock Residential Growth REIT, Inc.v239335_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Bluerock Residential Growth REIT, Inc.v239335_ex31-2.htm
EX-10.3 - EXHIBIT 10.3 - Bluerock Residential Growth REIT, Inc.v239335_ex10-3.htm
EX-31.1 - EXHIBIT 31.1 - Bluerock Residential Growth REIT, Inc.v239335_ex31-1.htm
EX-10.2 - EXHIBIT 10.2 - Bluerock Residential Growth REIT, Inc.v239335_ex10-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 

FORM 10-Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
OR
 
¨
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 333-153135
 
BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)

Maryland
26-3136483
(State or other Jurisdiction of Incorporation or Organization
(I.R.S. Employer Identification No.)
   
Heron Tower, 70 East 55th St., New York, NY
10022
(Address or Principal Executive Offices)
(Zip Code)

(212) 843-1601
(Registrant’s Telephone Number, Including Area Code)

None
(Former name, former address or former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by 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 ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ¨

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.
 
Large Accelerated Filer
¨
Accelerated Filer
¨
Non-Accelerated Filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
As of October 31, 2011 the Registrant had 947,288 shares of Common Stock outstanding.

 
 

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
FORM 10-Q
September 30, 2011
 
PART I  – FINANCIAL INFORMATION
 
   
 
Item 1.
Financial Statements
 
       
   
Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
2
       
   
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
3
       
   
Consolidated Statement of Stockholders’ (Deficit) Equity for the Nine Months Ended September 30, 2011 and the Year Ended December 31, 2010
4
       
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010
5
       
   
Notes to Consolidated Financial Statements
6
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
28
       
 
Item 4.
Controls and Procedures
28
       
PART II – OTHER INFORMATION
 
   
 
Item 1.
Legal Proceedings
29
       
 
Item 1A.
Risk Factors
29
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
29
       
 
Item 3.
Defaults Upon Senior Securities
30
       
 
Item 4.
[Removed and Reserved]
30
       
 
Item 5.
Other Information
30
       
 
Item 6.
Exhibits
30
       
SIGNATURES
32

 
 

 

PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
CONSOLIDATED BALANCE SHEETS

   
September 30,
2011
   
December 31,
2010
 
   
(Unaudited)
       
ASSETS
           
Investments in unconsolidated real estate joint ventures
  $ 5,565,306     $ 6,301,860  
Cash and cash equivalents
    201,703       125,237  
Due from affiliates
    39,325       524,248  
Other assets
    98,112       82,679  
Total Assets
  $ 5,904,446     $ 7,034,024  
                 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
               
Notes payable to affiliates
  $ 4,984,578     $ 4,834,578  
Accounts payable
    228,839       219,686  
Other accrued liabilities
    430,732       261,495  
Due to affiliates
    1,543,574       -  
Distributions payable
    50,329       40,286  
Total Liabilities
    7,238,052       5,356,045  
                 
Commitments and contingencies (Note 9)
               
Redeemable common stock
    91,344       63,334  
                 
Stockholders’ Equity
               
Preferred stock, $0.01 par value, 250,000,000 shares authorized; none issued and outstanding
    -       -  
                 
Common stock, $0.01 par value, 749,999,000 shares authorized; 898,631 and 677,618 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
    8,986       6,776  
Nonvoting convertible stock, $0.01 par value per share; 1,000 shares authorized, issued and outstanding
    10       10  
Additional paid-in-capital, net of costs
    5,723,070       4,586,644  
Cumulative distributions and net losses
    (7,157,016 )     (2,978,785 )
Total Stockholders’ (Deficit) Equity
    (1,424,950 )     1,614,645  
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
  $ 5,904,446     $ 7,034,024  

See Notes to Consolidated Financial Statements

 
2

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Expenses
                       
Asset Management and oversight fees to affiliates
  $ 82,574     $ 55,726     $ 247,305     $ 133,676  
Acquisition costs to affiliates
    -       188,371       -       350,115  
General and administrative
    502,016       73,561       3,180,883       259,485  
Total Expenses
    584,590       317,658       3,428,188       743,276  
Other operating activities
                               
Equity income (loss) of unconsolidated joint ventures
    10,162       (325,227 )     (89,258 )     (941,579 )
Operating Loss
    (574,428 )     (642,885 )     (3,517,446 )     (1,684,855 )
Interest expense, net
    (87,926 )     (53,363 )     (260,319 )     (178,321 )
Net Loss
  $ (662,354 )   $ (696,248 )   $ (3,777,765 )   $ (1,863,176 )
                                 
Basic and Diluted Loss Per Common Share
  $ (0.80 )   $ (1.43 )   $ (5.01 )   $ (8.14 )
                                 
Weighted Average Common Shares Outstanding
    828,387       489,423       754,151       229,340  

See Notes to Consolidated Financial Statements

 
3

 

 
BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
 
    
Convertible Stock
   
Common Stock
   
Additional
               
Total
 
   
Number
   
Par
   
Number
   
Par
   
Paid-in
   
Cumulative
         
Stockholders’
 
   
of Shares
   
Value
   
of Shares
   
Value
   
Capital
   
Distributions
   
Net Loss
   
(Deficit) Equity
 
                                                 
Balance, January 1, 2010
    1,000     $ 10       37,200     $ 372     $ 222,731     $ -     $ (438,921 )   $ (215,808 )
Issuance of restricted stock, net
    -       -       7,500       75       56,800       -       -       56,875  
Issuance of common stock, net
    -       -       632,918       6,329       4,370,447       -       -       4,376,776  
Transfers to redeemable common stock
    -       -       -       -       (63,334 )     -       -       (63,334 )
Distributions declared
    -       -       -       -       -       (232,994 )     -       (232,994 )
Net loss
    -       -       -       -       -       -       (2,306,870 )     (2,306,870 )
Balance at December 31, 2010
    1,000       10       677,618       6,776       4,586,644       (232,994 )     (2,745,791 )     1,614,645  
Issuance of restricted stock, net
    -       -       7,500       75       53,050       -       -       53,125  
Issuance of common stock, net
    -       -       215,013       2,150       1,209,621       -       -       1,211,771  
Redemptions of common stock
    -       -       (1,500 )     (15 )     15       -       -       -  
Transfers to redeemable common stock
    -       -       -       -       (126,260 )     -       -       (126,260 )
Distributions declared
    -       -       -       -       -       (400,466 )     -       (400,466 )
Net loss
    -       -       -       -       -       -       (3,777,765 )     (3,777,765 )
Balance at September 30, 2011 (Unaudited)
    1,000     $ 10       898,631     $ 8,986     $ 5,723,070     $ (633,460 )   $ (6,523,556 )   $ (1,424,950 )

See Notes to Consolidated Financial Statements

 
4

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

   
Nine Months Ended
 
   
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (3,777,765 )   $ (1,863,176 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Equity loss of unconsolidated joint ventures
    89,258       941,579  
Distributions from unconsolidated real estate joint ventures
    702,726       291,959  
Share-based compensation attributable to director’s stock compensation plan
    53,125       45,625  
Amortization of deferred financing costs
    -       4,962  
Increase (decrease) in due to affiliates
    2,028,497       (63,417 )
Increase in other assets
    (15,433 )     (13,197 )
Increase in accounts payable and other accrued liabilities
    95,140       163,618  
Net cash used in operating activities
    (824,452 )     (492,047 )
                 
Cash flows from investing activities:
               
Investment in unconsolidated real estate joint ventures
    (55,430 )     (5,437,157 )
Net cash used in investing activities
    (55,430 )     (5,437,157 )
                 
Cash flows from financing activities:
               
Distributions on common stock
    (264,163 )     (50,032 )
Proceeds from notes payable
    150,000       5,086,777  
Repayment on notes payable
    -       (3,006,655 )
Issuance of common stock, net
    1,085,511       3,910,193  
Payments to redeem common stock
    (15,000 )     -  
Net cash provided by financing activities
    956,348       5,940,283  
                 
Net increase in cash and cash equivalents
    76,466       11,079  
Cash and cash equivalents at beginning of period
    125,237       186,863  
Cash and cash equivalents at end of period
  $ 201,703     $ 197,942  
                 
Supplemental Disclosure of Cash Flow Information – Interest Paid
  $ 257,752     $ 177,422  
                 
Supplemental Disclosure of Noncash Transactions:
               
Distributions payable
  $ 50,329     $ 33,161  
Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan
  $ 126,260     $ 33,895  

See Notes to Consolidated Financial Statements
 
 
5

 
 
BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 – Organization and Nature of Business
 
Bluerock Enhanced Multifamily Trust, Inc. (the “Company”) was incorporated on July 25, 2008 under the laws of the state of Maryland. If we meet the qualification requirements, we intend to elect to be treated as a real estate investment trust or REIT for Federal income tax purposes. The Company was incorporated to raise capital and acquire a diverse portfolio of residential real estate assets.  Our day-to-day operations are managed by Bluerock Enhanced Multifamily Advisor, LLC, or our advisor, under an advisory agreement.  The advisory agreement has a one-year term expiring October 14, 2012, and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and us. The use of the words “we,” “us” or “our” refers to Bluerock Enhanced Multifamily Trust, Inc. and its subsidiary Bluerock Enhanced Multifamily Holdings, L.P., or our operating partnership, except where the context otherwise requires.

On August 22, 2008, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of $1,000,000,000 in shares of its common stock in a primary offering, at an offering price of $10.00 per share, with discounts available for certain categories of purchasers and up to $285,000,000 in shares pursuant to its distribution reinvestment plan at $9.50 per share (the “Initial Public Offering”).  The Securities and Exchange Commission (“SEC”) declared the Company’s registration statement effective on October 15, 2009.  As of May 20, 2010, the Company had received gross offering proceeds sufficient to satisfy the minimum offering amount for the Initial Public Offering.  Accordingly, the Company broke escrow with respect to subscriptions received from all states in which the shares are currently being offered.  As of September 30, 2011, the Company had accepted aggregate gross offering proceeds of $8,221,110.  Also as of September 30, 2011, the Company had redeemed 1,500 shares sold in the Initial Public Offering for $15,000.

On July 5, 2011, the Company provided its former dealer manager, Select Capital Corporation (“Select Capital”), with notice that it considers the Dealer Manager Agreement with Select Capital entered into on October 15, 2009 to have been terminated, effective immediately.  In addition, on July 5, 2011, the Company entered into a dealer manager agreement with Bluerock Capital Markets, LLC (“Bluerock Capital Markets”), the Company’s affiliate, pursuant to which it assumed dealer manager responsibilities for the remainder of the Initial Public Offering.  The dealer manager is responsible for marketing the Company’s shares in the Initial Public Offering.

The Initial Public Offering was suspended from November 17, 2010 until March 2, 2011 in connection with the Company’s determination to restate certain of its financial statements.  These restatements, which were filed on January 19, 2011, resulted in unanticipated costs in the form of accounting, legal fees, and similar professional fees, in addition to the time and attention of the Company’s Chief Financial Officer and members of its accounting team in preparing the restatements. The Company’s current corporate operating expenses exceed the cash flow received from its investments in real estate joint ventures.  If the rate at which the Company raises offering proceeds does not improve significantly, its general and administrative costs will remain higher relative to the size of the Company’s portfolio, its portfolio may not be as diversified as it would be otherwise and the Company may need to seek additional sources of funding to address short and long term liquidity requirements. To the extent cash on hand is not sufficient to meet the Company’s short-term liquidity requirements it expects to utilize credit facilities obtained from affiliates or unaffiliated third parties.  The Company’s Sponsor has also agreed to defer payment of asset management fees, acquisition fees and operating and offering costs advanced on its behalf and current year reimbursable operating expenses through 2011 as well as to fund any remaining cash shortfall, as necessary.  In addition, as the Company’s sponsor has management control of the affiliates that are lenders to us and thus have the authority to extend the notes that have maturities in 2011; it has committed to extend such notes based on the Company’s ability to repay those obligations.  The notes obtained from the Company’s affiliates, Augusta, Hillsboro and Meadowmont have all been extended.

The Company intends to use substantially all of the net proceeds from the Initial Public Offering to invest in a diverse portfolio of real estate and real estate-related assets.  As of September 30, 2011, the Company owned, through joint venture partnerships, five multifamily real estate properties discussed in detail in Note 3 – Investments in Real Estate.

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The Company operates as an umbrella partnership REIT in which our wholly owned subsidiary, Bluerock Enhanced Multifamily Holdings, L.P., a Delaware limited partnership, or wholly owned subsidiaries of its operating partnership, owns substantially all of the property interests acquired on its behalf.

 
6

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Because the Company is the sole general partner of its operating partnership and has unilateral control over its management and major operating decisions (even if additional limited partners are admitted to the operating partnership), the accounts of its operating partnership are consolidated in its consolidated financial statements. All significant intercompany accounts and transactions are eliminated in consolidation.  The Company will consider future majority owned and controlled joint ventures for consolidation in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) FASB Accounting Standards Codification (“ASC”).

Interim Financial Information

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and the instructions to Form 10-Q and Article 10-01 of Regulation S-X.  Accordingly, the financial statements for interim reporting do not include all of the information and notes or disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included.  Operating results for interim periods should not be considered indicative of the operating results for a full year.

The balance sheet at December 31, 2010, has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements.  For further information refer to the financial statements and notes thereto included in our audited consolidated financial statements for the year ended December 31, 2010 contained in the Annual Report on Form 10-K as filed with the SEC.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of the financial statements in conformity with GAAP 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.  At the property level these estimates include such items as purchase price allocation of real estate acquisitions, impairment of long-lived assets, depreciation and amortization and allowance for doubtful accounts.  Actual results could differ from those estimates.

Selling Commissions and Dealer Manager Fees

The Company pays the dealer manager up to 7% and 2.6% of the gross offering proceeds from the primary offering as selling commissions and dealer manager fees, respectively. A reduced sales commission and dealer manager fee is paid with respect to certain volume discount sales. No sales commission or dealer manager fee is paid with respect to shares issued through the distribution reinvestment plan. The dealer manager may re-allow all or a portion of sales commissions earned to participating broker-dealers. The dealer manager may re-allow, in its sole discretion, to any participating broker-dealer a portion of its dealer manager fee as a marketing fee.  As of September 30, 2011 and December 31, 2010, the Company has incurred $766,907 and $565,629, respectively, of selling commissions and dealer manager fees.

Recently Adopted Accounting Pronouncements

In November 2010, the FASB issued an update to its existing guidance on business combinations. This guidance requires a public entity that presents comparative financial statements to present in its pro forma disclosure the revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the prior annual reporting period. In addition, this guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2010, which is calendar year 2011 for the Company. The guidance did not have an impact on our disclosures for the quarter ended September 30, 2011 as the Company has not acquired properties in the reporting period.

 
7

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements Not Yet Adopted

There has been no issued accounting guidance not yet adopted by the Company that it believes is material or potentially material to the Company’s Consolidated Financial Statements.

Note 3 – Investments in Real Estate

As of September 30, 2011, the Company’s portfolio consists of five properties acquired through unconsolidated joint ventures.  The following table provides summary information regarding the Company’s investments ($ in thousands).
 
                            
Joint Venture Equity
                   
                           
Investment Information
                   
Multifamily
Community
Name/Location
 
Approx.
Rentable
Square
Footage
   
Number of
Units
   
Date
Acquired
   
Property
Acquisition
Cost(1)
   
Amount of
Our
Investment
   
Our
Ownership
Interest in
Property
Owner
   
Approx.
Annualized
Base Rent
(2)
   
Average
Annual
Effective
Rent Per
Unit(3)
   
Approx.
% Leased
 
Springhouse at Newport News/Newport News, Virginia
    310,826       432    
12/03/2009
    $ 29,250     $ 1,622       37.50 %   $ 4,219     $ 9       94 %
                                                                       
The Reserve at Creekside Village/Chattanooga, Tennessee
    211,632       192    
03/31/2010
    $ 14,250     $ 257       23.31 %   $ 2,129     $ 11       97 %
                                                                       
The Apartments at Meadowmont/Chapel Hill, North Carolina
    296,240       258    
04/09/2010
    $ 36,960     $ 1,173       16.25 %   $ 4,055     $ 16       98 %
                                                                       
The Estates at Perimeter/ Augusta, Georgia
    266,148       240    
09/01/2010
    $ 24,950     $ 1,569       25.00 %   $ 2,915     $ 12       95 %
                                                                       
Gardens at Hillsboro Village/  Nashville, Tennessee
    187,430       201    
09/30/2010
    $ 32,394     $ 1,099       12.50 %   $ 3,334     $ 17       98 %
                                                                       
Total
                        $ 137,804     $ 5,720             $ 16,652                  
 
 
(1)
Property Acquisition Cost excludes acquisition fees and closing costs.
 
(2)
Annualized base rent is calculated by annualizing the current, in-place monthly base rent for leases as of September 30, 2011 and does not take into account any rent concessions or prospective rent increases.
 
(3)
Annual effective rent per unit includes the effect of tenant concessions over the term of the lease.

Note 4 – Equity Method Investments

The Company accounted for the acquisitions of our interests in properties through managing member LLCs in accordance with the provisions of the Consolidation Topic 810 of the FASB ASC.  Following is a summary of the Company’s ownership interest by property as of September 30, 2011.

Property 
 
Joint Venture
Interest
   
Managing Member
LLC Interest
   
Indirect Equity
Interest in Property
 
Springhouse
    75.00 %     50.00 %     37.50 %
Creekside
    69.93 %     33.33 %     23.31 %
Meadowmont
    50.00 %     32.50 %     16.25 %
Augusta
    50.00 %     50.00 %     25.00 %
Hillsboro
    37.57 %     33.27 %     12.50 %
 
8

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A variable interest entity (“VIE”) is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest.  VIE’s are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that potentially could be significant to the entity.  Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE’s net assets.  The Company continuously re-assesses whether its interest in the managing member LLC is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE.

For Springhouse, Augusta and Hillsboro, the Company’s contribution into the managing member LLC was funded through a loan from an affiliate who is another investor in the managing member LLC; thus its equity investment is not at risk. Since unanimous approval is required by all members to direct the activities that most significantly impact the managing member LLC’s economic performance, the holder of the equity investment at risk lacks that power and thus the Company concluded that the managing member LLC entities are VIE’s.  The Company is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the economic performance of the managing member LLC and would not be considered to be the investor that is most closely associated with the entity among the related party investors.  As a result, the Company’s investments are reflected as investments in unconsolidated joint ventures under the equity method of accounting.

For Creekside, the Company’s initial contribution into the managing member LLC was funded through a loan from an affiliate and accounted for as discussed above; however, on September 28, 2010  the loan was repaid and the managing member LLC was no longer considered a VIE.  The Company then analyzed the managing member LLC under a voting interest model and determined that the investment in the unconsolidated joint venture should be accounted for under the equity method as each member had an equal voting interest.

For Meadowmont, the Company’s initial contribution into the managing member LLC on April 9, 2010 was funded through a loan from an affiliate who is another investor in the managing member LLC, but this was subsequently repaid on June 8, 2010. However, the voting rights of the investors are not proportional to their obligations to absorb the expected losses or their rights to receive the expected residual returns of the managing member and substantially all of the activities are done on behalf of the single related party group (all of the investors are part of a single related party group); thus this would cause the managing member LLC to be a VIE.  The Company is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the economic performance of the managing member LLC and would not be considered to be the investor that is most closely associated with the entity among the related party investors.  As a result the Company’s investment is reflected as an investment in unconsolidated joint ventures under the equity method of accounting.

The carrying amount of the Company’s investments in unconsolidated joint ventures was $5,565,306 and $6,301,860 as of September 30, 2011 and December 31, 2010, respectively.  Summary unaudited financial information for the operating properties, Balance Sheets as of September 30, 2011 and December 31, 2010 and Operating Statements for the three and nine months ended September 30, 2011 and 2010 is as follows:

   
September 30,
2011
   
December 31,
2010
 
Balance Sheet:
           
Real estate, net of depreciation
  $ 130,108,893     $ 133,126,052  
Other assets
    4,397,370       4,622,311  
Total assets
  $ 134,506,263     $ 137,748,363  
                 
Mortgage payable
  $ 105,930,278     $ 106,016,772  
Other current liabilities
    1,943,157       1,789,209  
Total liabilities
  $ 107,873,435     $ 107,805,981  
Stockholders’ equity
    26,632,828       29,942,382  
Total liabilities and stockholders’ equity
  $ 134,506,263     $ 137,748,363  

 
9

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Operating Statements:
                       
Rental revenues
  $ 4,104,597     $ 2,752,057     $ 11,936,545     $ 6,023,657  
Operating expenses
    (1,613,253 )     (1,165,603 )     (4,597,545 )     (2,625,603 )
Income before debt service, acquisition costs, and depreciation and amortization
    2,491,344       1,586,454       7,339,000       3,398,054  
Mortgage interest
    (1,321,040 )     (998,027 )     (3,925,875 )     (2,216,527 )
Acquisition costs
    -       (823,204 )     -       (1,514,904 )
Depreciation and amortization
    (1,063,996 )     (1,380,399 )     (3,669,256 )     (3,503,099 )
Net income (loss)
    106,308       (1,615,176 )     (256,131 )     (3,836,476 )
Net (income) loss attributable to JV partners
    (93,632 )     1,291,935       174,416       2,899,859  
      12,676       (323,241 )     (81,715 )     (936,617 )
Amortization of deferred financing costs paid on behalf of joint ventures
    (2,514 )     (1,986 )     (7,543 )     (4,962 )
Equity income (loss) of unconsolidated joint ventures
  $ 10,162     $ (325,227 )   $ (89,258 )   $ (941,579 )

As discussed above, the investments in Springhouse, Meadowmont, Augusta and Hillsboro are considered VIEs and the Company is not the primary beneficiary.  The risks and rewards associated with the Company’s interest in these entities are based primarily on its ownership percentage.  The Company’s maximum exposure to loss is equal to its investment balance which is $5,332,623 as of September 30, 2011.

These investments, along with our investment in Creekside, are accounted for as equity method investments and are included in “Investments in unconsolidated real estate joint ventures” in the Company’s Consolidated Balance Sheets.

Note 5 – Notes Payable

The carrying amounts of the notes payable as of September 30, 2011 and December 31, 2010 are as follows:

                 
Principal Outstanding
 
Note Payable
   
Maturity
   
Interest Rate as of 
September 30, 2011
   
September 30,
2011
   
December 31,
2010
 
Augusta
   
February 28, 2012
      7.0%     $ 1,931,484     $ 1,931,484  
Springhouse
   
December 3, 2011
      7.0%       1,646,067       1,646,067  
Hillsboro
   
March 31, 2012
      7.0%       1,257,027       1,257,027  
Meadowmont
   
January 20, 2012
      7.0%       150,000       -  

On January 20, 2011, BEMT Meadowmont, LLC, a wholly owned subsidiary of our operating partnership (“BEMT Meadowmont”) entered into an agreement with Bluerock Special Opportunity + Income Fund II, an affiliate of the Company’s sponsor (“SOIF II”) for a line of credit represented by a promissory note (the “Note”).  Under the terms of the Note, BEMT Meadowmont may borrow, from time to time, up to $500,000, for general working capital.  The Note has a six-month term from the date of the first advance which matured on July 20, 2011, and was subsequently extended to January 20, 2012.  It bears interest compounding monthly at a rate of 30-day LIBOR + 5.00%, subject to a minimum rate of 7.00%, annualized.  Interest on the loan will be paid on a current basis from cash flow distributed to the Company from BR Meadowmont JV Member, LLC (the “Meadowmont JV Member”).  The Note is secured by a pledge of the Company’s indirect membership interest in the Meadowmont Property and a pledge of the Company’s direct membership interest in the Meadowmont JV Member.

The Company expects to repay the notes with the proceeds to be raised from the Initial Public Offering.  If the Company is unable to repay the principal amounts upon maturity, its sponsor, who has management control of the affiliates that are lenders to the Company and thus has the authority to extend the notes that have maturities in 2011, has committed to extend such notes based on the Company’s ability to repay those obligations.  The notes obtained from the Company’s affiliates, Augusta, Hillsboro and Meadowmont have all been extended.

 
10

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Fair Value Disclosure

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The GAAP fair value framework uses a three-tiered approach.  Fair value measurements are classified and disclosed in one of the following three categories:

 
·
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
 
·
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 in which significant inputs and significant value drivers are observable in active markets; and
 
·
Level 3 – Prices or valuation techniques where little or no market data is available that requires inputs that are significant to the fair value measurement and unobservable.

 If the inputs used to measure the fair value of a financial instrument fall within different levels of the hierarchy, the financial instrument is categorized based upon the lowest level input that is significant to the fair value measurement.  Whenever possible, the Company uses quoted market prices to determine fair value. In the absence of quoted market prices, the Company uses independent sources and data to determine fair value.

As of September 30, 2011, the Company believes the carrying values of cash and cash equivalents and receivables and payables from affiliates, accounts payable, accrued liabilities, distribution payable and notes payable approximate their fair values based on their highly-liquid nature and/or short-term maturities, including prepayment options.  As of September 30, 2011 and December 31, 2010, the Company had no significant assets or liabilities measured at fair value on a recurring or nonrecurring basis.  The Company estimates fair values for financial instruments based on interest rates with similar terms and remaining maturities that management believes it could obtain.

Note 7 – Related Party Transactions

In connection with the Company’s investments it entered into loan agreements with Bluerock Special Opportunity + Income Fund, LLC and Bluerock Special Opportunity + Income Fund II, LLC, the terms of which are described above in Note 5 - Notes Payable (Springhouse, Augusta, Hillsboro and Meadowmont).

As of September 30, 2011, $2,844,061 of organizational and offering costs have been incurred on the Company’s behalf. The Company is liable to reimburse these costs only to the extent selling commissions, the dealer manager fee and other organization and offering costs do not exceed 15% of the gross proceeds of the Initial Public Offering.  When recorded by the Company, organizational costs are expensed and third-party offering costs are charged to stockholders’ equity.  Organizational and offering costs will be reimbursed from the gross proceeds of the Initial Public Offering.  As of September 30, 2011, $49,931 of organizational costs were expensed in 2010 and $2,069,388 million of offering costs have been charged to stockholders’ equity.  As of December 31, 2010, the Company had recognized offering costs, other than selling commissions and dealer manager fees, of $1,339,397 of which $831,741 was paid directly by the Company and $507,656 was reimbursed to the advisor, and $49,931 of organizational costs.

The advisor performs its duties and responsibilities as the Company’s fiduciary under an advisory agreement. The advisory agreement has a one-year term expiring October 14, 2012, and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the Company and its advisor. The advisor conducts the Company’s operations and manages its portfolio of real estate and real estate-related investments under the terms of the advisory agreement.  Certain of the Company’s affiliates will receive fees and compensation in connection with the Initial Public Offering, and the acquisition, management and sale of its real estate investments.

The Company pays its advisor a monthly asset management fee for the services it provides pursuant to the advisory agreement. The asset management fee equals one-twelfth of 1.0% of the higher of the cost or the value of each asset, where (A) cost equals the amount actually paid, excluding acquisition fees and expenses, to purchase each asset it acquires, including any debt attributable to the asset (including any debt encumbering the asset after acquisition), provided that, with respect to any properties the Company develops, constructs or improves, cost will include the amount expended by the Company for the development, construction or improvement, and (B) the value of an asset is the value established by the most recent independent valuation report, if available, without reduction for depreciation, bad debts or other non-cash reserves.  The asset management fee will be based only on the portion of the cost or value attributable to our investment in an asset if the Company does not own all of an asset.

 
11

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The advisor receives 1.75% of the purchase price of a property or investment for its services in connection with the investigation, selection, sourcing, due diligence and acquisition of that property or investment. The purchase price of a property or investment will equal the amount paid or allocated to the purchase, development, construction or improvement of a property, inclusive of expenses related thereto, and the amount of debt associated with such real property or investment. The purchase price allocable for joint venture investments will equal the product of (1) the purchase price of the underlying property and (2) the Company’s ownership percentage in the joint venture. The Company will pay the advisor an origination fee in lieu of an acquisition fee for services in connection with the investigation, selection, sourcing, due diligence, and acquisition of mortgage, subordinated, bridge or other loans of 1.75% of the principal amount of the borrower’s loan obligation or of the purchase price of any loan the Company purchases including third- party expenses.  For the three months ended September 30, 2011 and September 30, 2010, the Company has incurred zero and $188,371, respectively, of acquisition fees.  For the nine months ended September 30, 2011 and September 30, 2010, the Company has incurred zero and $350,115, respectively, of acquisition fees.

The advisor also receives a financing fee equal to 1% of the amount, under any loan or line of credit, made available to the Company. The advisor may re-allow some or all of this fee to reimburse third parties with whom it may subcontract to procure such financing for the Company. In addition, to the extent the advisor provides a substantial amount of services in connection with the disposition of one or more of our properties or investments (except for securities that are traded on a national securities exchange), the advisor will receive fees equal to the lesser of (A) 1.5% of the sales price of each property or other investment sold or (B) 50% of the selling commission that would have been paid to a third-party broker in connection with such a disposition. In no event may disposition fees paid to the advisor or its affiliates and unaffiliated third parties exceed in the aggregate 6% of the contract sales price. In addition to the fees payable to the advisor, the Company reimburses the advisor for all reasonable expenses incurred in connection with services provided to the Company, subject to the limitation that it will not reimburse any amount that would cause the Company’s total operating expenses at the end of the four preceding fiscal quarters to exceed the greater of 2% of our average invested assets or 25% of its net income determined (1) without reductions for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and (2) excluding any gain from the sale of our assets for the period.  Notwithstanding the above, the Company may reimburse amounts in excess of the limitation if a majority of its independent directors determines such excess amount was justified based on unusual and non-recurring factors. If such excess expenses are not approved by a majority of the Company’s independent directors, its advisor must reimburse us at the end of the four fiscal quarters the amount by which the aggregate expenses during the period paid or incurred by us exceeded the limitations provided above.  The Company will not reimburse the advisor for personnel costs in connection with services for which the advisor receives acquisition, origination or disposition fees.  From January 1, 2009 through March 31, 2011, the Company’s advisor and its affiliates incurred $677,415 of operating expenses on our behalf.  Due to the limitation discussed above and because operating expenses incurred directly by the Company exceeded the 2% threshold, the amount due to the advisor had not been recorded on its income statement as of December 31, 2010.  Further, $973,607 had been recorded as a receivable from the advisor as of December 31, 2010 for the excess operating expenses incurred directly by the Company over the 2% threshold.  The Company’s Board of Directors, including all of its independent directors, reviewed the total operating expenses for the four fiscal quarters ended December 31, 2009 (and the four fiscal quarters ended each quarter after) and an estimate of the Company’s total operating expenses for the four fiscal quarters to end March 31, 2011 and unanimously determined the excess amount to be justified because of the costs of operating a public company in its early stage of operation.  Upon approval of these costs on March 22, 2011, $1,646,818 of these costs were expensed and $677,415 became a liability to the Company, payable to its advisor and its affiliates.  As the Board of Directors has previously approved such expenses, all 2011 operating expenses have been and will be expensed as incurred.  As of September 30, 2011, $4,204 has been reimbursed to the Company’s advisor and the advisor has agreed to defer further repayment of these costs until a later date.
 
We have issued 1,000 shares of convertible stock, par value $0.01 per share to the Company’s advisor. The convertible stock will convert to shares of common stock if and when: (A) the Company has made total distributions on the then outstanding shares of its common stock equal to the original issue price of those shares plus an 8% cumulative, non-compounded, annual return on the original issue price of those shares or (B) subject to specified conditions, the Company lists its common stock for trading on a national securities exchange. A “listing” will be deemed to have occurred on the effective date of any merger of the Company in which the consideration received by the holders of its common stock is the securities of another issuer that are listed on a national securities exchange. Upon conversion, each share of convertible stock will convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 15% of the excess of (1) the Company’s “enterprise value” (as defined in the Company’s charter) plus the aggregate value of distributions paid to date on the outstanding shares of its common stock over the (2) aggregate purchase price paid by the stockholders for those shares plus an 8% cumulative, non-compounded, annual return on the original issue price of those shares, divided by (B) the Company’s enterprise value divided by the number of outstanding shares of common stock, in each case calculated as of the date of the conversion. In the event an event triggering the conversion occurs after the advisory agreement with the advisor is not renewed or terminates (other than because of a material breach by the advisor), the number of shares of common stock the advisor will receive upon conversion will be prorated to account for the period of time the advisory agreement was in force.

 
12

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company may pay Bluerock REIT Property Management, LLC, a wholly owned subsidiary of the advisor, a property management fee equal to 4% of the monthly gross income from any properties it manages. In general, the Company contracts property management services for certain properties directly to non-affiliated third parties, in which event it will pay the advisor an oversight fee equal to 1% of monthly gross revenues of such properties.

All of the Company’s executive officers and some of its directors are also executive officers, managers and/or holders of a direct or indirect controlling interest in the advisor and other Bluerock-affiliated entities.  As a result, they owe fiduciary duties to each of these entities, their members and limited partners and investors, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to the Company and its stockholders.

Some of the material conflicts that the advisor or its affiliates face are: 1) the determination of whether an investment opportunity should be recommended to us or another Bluerock-sponsored program or Bluerock-advised investor; 2) the allocation of the time of key executive officers, directors, and other real estate professionals among the Company, other Bluerock-sponsored programs and Bluerock-advised investors, and the activities in which they are involved; 3) the fees received by the advisor and its affiliates in connection with transactions involving the purchase, origination, management and sale of investments regardless of the quality of the asset acquired or the service provided us; and 4) the fees received by the advisor and its affiliates in connection with the Initial Public Offering.

Pursuant to the terms of the advisory agreement, summarized below are the related-party amounts payable and receivable as of September 30, 2011 and December 31, 2010:

   
Payable
   
Receivable
   
Payable
   
Receivable
 
   
September 30, 2011
   
December 31, 2010
 
Asset Management and Oversight Fees
  $ 479,881     $ -     $ 232,576     $ -  
Acquisitions Fees
    81,776       -       81,776       -  
Financing Fees
    14,491       -       14,491       -  
Reimbursable Operating Expenses
    847,897       -       -       973,607  
Reimbursable Organizational Costs
    49,931       -       49,931       -  
Other
    69,598       39,325       70,585       -  
Total
  $ 1,543,574     $ 39,325     $ 449,359     $ 973,607  

In addition to the amounts shown above, the Company’s advisor has incurred on the Company’s behalf $2,286,474 of offering costs which will become payable as additional offering proceeds are raised to the extent that selling commissions, dealer manager fees and other organization and offering costs do not exceed 15% of gross offering proceeds

Note 8 – Stockholders’ Equity

Net Loss Per Common Share

Basic net loss per common share is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted net loss per common share is computed by dividing net loss attributable to common shareholders by the sum of the weighted average number of common shares outstanding and any potential dilutive shares for the period.  Under the two-class method of computing earnings per share, net loss attributable to common shareholders is computed by adjusting net loss for the non-forfeitable dividends paid on non-vested restricted stock.

 
13

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables reconcile the components of basic and diluted net loss per common share:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net Loss
  $ (662,354 )   $ (696,248 )   $ (3,777,765 )   $ (1,863,176 )
Dividends on restricted stock expected to vest
    (3,003 )     (3,176 )     (7,899 )     (4,591 )
Gain on redemption of common stock
    6,750       -       6,750       -  
Basic net loss attributable to common shareholders
  $ (658,607 )   $ (699,424 )   $ (3,778,914 )   $ (1,867,767 )
Weighted average common shares outstanding
    828,387       489,423       754,151       229,340  
                                 
Potential dilutive shares (1)
    -       -       -       -  
Weighted average common shares outstanding and potential dilutive shares
    828,387       489,423       754,151       229,340  
                                 
Basic and diluted loss per share
  $ (0.80 )   $ (1.43 )   $ (5.01 )   $ (8.14 )

 
(1) Excludes 17,022 and 18,000 shares related to non-vested restricted stock for the three months ended September 30, 2011 and 2010, respectively and 15,088 and 16,389 for the nine months ended September 30, 2011 and 2010, respectively as the effect would be anti-dilutive.  Also excludes any dilution related to the 1,000 shares of convertible stock as the conversion would be anti-dilutive and currently there would be no conversion into common shares.

Share Repurchase Plan and Redeemable Common Stock
 
The Company has adopted a share repurchase plan that may enable stockholders to sell their shares to the Company in limited circumstances.

There are several limitations on the Company’s ability to repurchase shares under the share repurchase plan:

 
·
The Company may not repurchase shares until the stockholder has held the shares for one year.
 
·
During any calendar year, the share repurchase plan limits the number of shares the Company may repurchase to those that the Company could purchase with the net proceeds from the sale of shares under the distribution reinvestment plan during the previous fiscal year.
 
·
During any calendar year, the Company may not repurchase in excess of 5% of the number of shares of common stock outstanding as of the same date in the prior calendar year.

Pursuant to the plan, the Company will initially repurchase shares at prices determined as follows:

 
·
The lower of $9.25 or the price paid to acquire the shares from the Company for stockholders who have held their shares for at least one year;
 
·
The lower of $9.50 or the price paid to acquire the shares from the Company for stockholders who have held their shares for at least two years;
 
·
The lower of $9.75 or the price paid to acquire the shares from the Company for stockholders who have held their shares for at least three years; and
 
·
The lower of $10.00 or the price paid to acquire the shares from the Company for stockholders who have held their shares for at least four years

The Company’s Board of Directors may amend or modify any provision of the plan at any time in its discretion without prior notice to participants. In the event that the Company’s Board of Directors amends, suspends or terminates the share repurchase plan, however, the Company will send stockholders notice of the change(s) following the date of such amendment, suspension or modification, and will disclose the change(s) in a report filed with the SEC on either Form 8-K, Form 10-Q or Form 10-K, as appropriate. 

 
14

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company records amounts that are redeemable under the share repurchase plan as redeemable common stock in the accompanying consolidated balance sheets because the shares are redeemable at the option of the holder and therefore their redemption is outside the Company’s control. The maximum amount redeemable under the Company’s share repurchase plan is limited to the number of shares the Company could repurchase with the amount of the net proceeds from the sale of shares under the distribution reinvestment plan during the prior fiscal year. However, because the amounts that can be repurchased in future periods are determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company presents the net proceeds from the current dividend reinvestment plan, net of current year redemptions, as redeemable common stock in the accompanying consolidated balance sheets.

The Company classifies financial instruments that represent a mandatory obligation to the Company to repurchase shares as liabilities. When the Company determines it has a mandatory obligation to repurchase shares under the share repurchase plan the Company will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.

The Company limits the dollar value of shares that may be repurchased under the program as described above.  During the three months ended September 30, 2011, the Company redeemed $15,000 of common stock.  Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2010 totaling $63,334 and during 2011 totaling $126,260, the Company may redeem up to $48,334 of shares for the remainder of 2011 and $126,260 in 2012. As the Company has received additional redemption requests that they are able to fill from the remaining net proceeds from the sale of shares under the dividend reinvestment plan for 2010 and through September 30, 2011 totaling $83,250 it has reclassified this amount from redeemable common stock to other accrued liabilities as of September 30, 2011.  Subsequent to September 30, 2011, the Company redeemed shares up to the limit of $48,334 for 2010.

Stock-based Compensation for Independent Directors

The Company’s independent directors received an automatic grant of 5,000 shares of restricted stock on the effective date of the Initial Public Offering and will receive an automatic grant of 2,500 shares of restricted stock when such directors are reelected at each annual meeting of the Company’s stockholders thereafter. Each person who thereafter is elected or appointed as an independent director will receive an automatic grant of 5,000 shares of restricted stock on the date such person is first elected as an independent director and an automatic grant of 2,500 shares of restricted stock when such director is reelected at each annual meeting of our stockholders thereafter. To the extent allowed by applicable law, the independent directors will not be required to pay any purchase price for these grants of restricted stock. The restricted stock will vest 20% at the time of the grant and 20% on each anniversary thereafter over four years from the date of the grant. All restricted stock may receive distributions, whether vested or unvested. The value of the restricted stock to be granted is not determinable until the date of grant. During the three months ended September 30, 2011, no shares of restricted stock have been granted to the three independent directors.

On August 8, 2011, the Company’s three independent directors received an automatic grant of 2,500 shares each of restricted stock after their re-election to the board of directors at the Company’s annual meeting.

A summary of the status of the Company’s non-vested shares as of September 30, 2011, and changes during the nine months ended September 30, 2011, is as follows:

Non Vested shares
 
Shares
   
Weighted average grant-date
fair value
 
Balance at January 1, 2011
    15,000     $ 150,000  
Granted
    7,500       75,000  
Vested
    (3,000 )     (30,000 )
Forfeited
    -       -  
Balance at September 30, 2011
    19,500     $ 195,000  

At September 30, 2011, there was $153,750 of total unrecognized compensation cost related to unvested stock options granted under the Plan. That cost is expected to be recognized over a period of four years. The total fair value of shares vested during the nine months ended September 30, 2011 was $30,000.

The Company currently uses authorized and unissued shares to satisfy share award grants.

 
15

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Distributions

Distributions, including distributions paid by issuing shares under the distribution reinvestment plan, for the nine months ended September 30, 2011 were as follows:

   
Distributions
 
2011
 
Declared
   
Paid
 
First Quarter
  $ 117,538     $ 117,040  
Second Quarter
    134,526       129,314  
Third Quarter
    148,402       144,069  
    $ 400,466     $ 390,423  

Distributions are calculated based on stockholders of record each day during the period at a rate of $0.00191781 per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a purchase price of $10.00 per share.

Note 9 – Commitments and Contingencies

The Company is subject to various legal actions and claims arising in the ordinary course of business. Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position or results of operations or liquidity of the Company.

Note 10 – Economic Dependency
 
The Company is dependent on the advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments; management of the daily operations of its real estate portfolio; and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other sources.

Note 11 – Subsequent Events

The Company has performed an evaluation of subsequent events through the date the Company’s consolidated financial statements were issued.  No material subsequent events, other than the items disclosed below, have occurred that required recognition or disclosure in these financial statements.

Status of the Offering
 
For the period October 1, 2011 through October 31, 2011, the Company sold approximately 53,882 shares of common stock for gross proceeds of $519,348 including issuances through its distribution reinvestment plan

Distributions Paid

Distributions
Declared Daily
For Each Day in
Month Listed
   
Date Paid
   
Total Distribution
   
Cash Distribution
   
Dollar amount of
Shares Issued
pursuant to the
distribution
reinvestment plan
 
September 2011
   
October 1, 2011
    $ 50,329     $ 31,923     $ 18,406  
October 2011
   
November 1, 2011
    $ 54,567     $ 34,171     $ 20,396  

 
16

 

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Bluerock Enhanced Multifamily Trust, Inc., and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Bluerock Enhanced Multifamily Trust, Inc., a Maryland corporation, and, as required by context, Bluerock Enhanced Multifamily Holdings, L.P., a Delaware limited partnership, which we refer to as our “operating partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this quarterly report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Bluerock Enhanced Multifamily Trust, Inc., and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

 
·
We are a newly-formed entity and our limited operating history makes our future performance difficult to predict.

 
·
Our officers and non-independent directors have substantial conflicts of interest because they also are officers and owners of our advisor and its affiliates, including our sponsors.

 
·
During the early stages of our operations, we expect to fund distributions from the un-invested proceeds of our public offering and borrowings. Thereafter, we may pay distributions from un-invested proceeds of our Initial Public Offering, borrowings and the sale of assets to the extent distributions exceed our earnings or cash flows from operations.

 
·
We will rely on our advisor, an affiliate of our officers and non-independent directors, to manage our business and select and manage investments. Our advisor is a newly-formed entity. The success of our business will depend on the success of our advisor in performing these duties.

 
·
To the extent we sell substantially less than the maximum number of shares in our public offering, we may not have sufficient funds, after the payment of offering and related expenses, to acquire a diverse portfolio of properties.

 
·
We may fail to qualify as a REIT for federal income tax purposes. We would then be subject to corporate level taxation and we would not be required to pay any distributions to our stockholders.

 
·
The Initial Public Offering was suspended from November 17, 2010 until March 2, 2011 in connection with our determination to restate certain of our financial statements. These restatements, which were filed on January 19, 2011, resulted in substantial unanticipated costs in the form of accounting, legal fees, and similar professional fees, in addition to the substantial diversion of time and attention of our Chief Financial Officer and members of our accounting team in preparing the restatements. Our current corporate operating expenses exceed the cash flow received from our investments in real estate joint ventures. If the rate at which we raise offering proceeds does not improve significantly our general and administrative costs will remain higher relative to the size of our portfolio, our portfolio may not be as diversified as it would be otherwise and we may need to seek additional sources of funding to address short and long term liquidity requirements. To the extent cash on hand is not sufficient to meet our short-term liquidity requirements we expect to utilize credit facilities obtained from affiliates or unaffiliated third parties.

 
17

 

All forward-looking statements should be read in light of the factors identified in the “Risk Factors” section of our Registration Statement on Form S-11 (File No. 333-153135) filed with the SEC, as the same may be amended and supplemented from time to time.

Overview

We are a Maryland corporation incorporate on July 25, 2008 that elected to qualify as a REIT beginning with the taxable year ended December 31, 2010.

As of May 20, 2010 we had received gross offering proceeds sufficient to satisfy the minimum offering amount. Accordingly we broke escrow with respect to subscriptions received from all states in which our shares are currently being offered.  As of October 31, 2011 we had accepted aggregate gross offering proceeds of $8,740,458.  We will experience a relative increase in liquidity as we accept additional subscriptions for shares and a relative decrease in liquidity as we spend net offering proceeds in connection with the acquisition, development and operation of our assets.

We intend to make reserve allocations as necessary to aid our objective of preserving capital for our investors by supporting the maintenance and viability of properties we acquire. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties. There is no assurance that such funds will be available or, if available, that the terms will be acceptable to us.

We intend to make an election to be taxed as a REIT under Section 856(c) of the Internal Revenue Code. In order to qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our taxable income (excluding net capital gains). If we qualify as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify as a REIT for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and results of operations.

Results of Operations

The SEC declared the registration statement for our best efforts Initial Public Offering effective on October 15, 2009.  On July 5, 2011, we provided our former dealer manager, Select Capital Corporation (“Select Capital”), with notice that we consider the Dealer Manager Agreement with Select Capital entered into on October 15, 2009 to have been terminated, effective immediately.  In addition, on July 5, 2011, we entered into a dealer manager agreement with Bluerock Capital Markets, LLC (“Bluerock Capital Markets”), our affiliate, pursuant to which it assumed dealer manager responsibilities for the remainder of the Initial Public Offering.  The dealer manager is responsible for marketing our shares in the Initial Public Offering.  Our results of operations for the three and nine months ended September 30, 2011 are not indicative of those expected in future periods as we are still in our organizational and development stage.
  
Our management is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting our targeted portfolio, the apartment housing industry and real estate generally, which may be reasonably anticipated to have a material impact on the revenues or incomes to be derived from the operation of our assets.

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

As of September 30, 2011, we have ownership interests in five joint ventures. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments.

 
18

 

The following table highlights some of our operating results and should be read along with the consolidated financial statements and the accompanying notes included in this report.

   
Three Months Ended
       
   
September 30,
       
   
2011
   
2010
   
$ Change
 
Expenses
                 
Asset Management and oversight fees to affiliates
  $ 82,574     $ 55,726     $ 26,848  
Acquisition costs to affiliates
    -       188,371       (188,371 )
General and administrative
    502,016       73,561       428,455  
Total expenses
    584,590       317,658       266,932  
Other operating activities
                       
Equity income (loss) of unconsolidated joint ventures
    10,162       (325,227 )     (335,389 )
Operating Loss
    (574,428 )     (642,885 )     (68,457 )
Interest expense, net
    (87,926 )     (53,363 )     34,563  
Net Loss
  $ (662,354 )   $ (696,248 )     (33,894 )

Asset management and oversight fees to affiliates increased $26,848 from $55,726 for the three months ended September 30, 2010 period to $82,574 for the three months ended September 30, 2011.  The increase is due to the acquisitions made during 2010 and represents the asset management fee due, but unpaid, to the advisor.  We expect asset management fees to increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments.

Acquisition costs to affiliates was zero for the three months ended September 30, 2011 as there were no acquisitions.

General and administrative expenses increased $428,455 from $73,561 for the three months ended September 30, 2010 to $502,016 for the three months ended September 30, 2011. In 2010, we expensed allowable expenses up to the 2% limitation of our average invested assets in our income statement and the remainder was recorded as a receivable for the expenses exceeding the 2% threshold until approved by the board during the first quarter of 2011.  For the three months ended September 30, 2011, the amounts represent all expenses incurred during the period.

Equity income (loss) of unconsolidated joint venture decreased by $335,389 from a loss of $325,227 in the 2010 period to income of $10,162 for the three months ended September 30, 2011.  This represents our ownership share of net income (loss) from our real estate investments as detailed in Note 4 (Equity Method Investments). The lower overall loss is due to acquisitions fees that were incurred during the three months ended September 30, 2010 and three months of operating activity during the third quarter 2011 for the properties acquired throughout 2010.  While revenue variations may occur at any of our properties, the Augusta and Springhouse properties’ revenues are specifically subject to unplanned troop deployment.  The property management team is working to fully diversify the tenant mix to lessen a potential impact from unplanned deployments.

 
19

 

The table below reflects the components of equity income of unconsolidated joint ventures of $10,162:

   
Springhouse
   
Creekside
   
Meadowmont
   
Augusta
   
Hillsboro
   
Total
 
Property Operating Results:
                                   
Rental revenue
  $ 1,010,074     $ 530,091     $ 1,029,891     $ 683,111     $ 851,430     $ 4,104,597  
Operating expenses
    (357,053 )     (217,606 )     (322,828 )     (224,620 )     (269,376 )     (1,391,483 )
Net Operating Income (NOI)(1)
    653,021       312,485       707,063       458,491       582,054       2,713,114  
Major renovation and other expenses
    (68,013 )     (27,706 )     (57,532 )     (3,584 )     (64,935 )     (221,770 )
Income Before Debt Service and Depreciation and Amortization
    585,008       284,779       649,531       454,907       517,119       2,491,344  
Interest Expense (2)
    (338,468 )     (148,189 )     (404,225 )     (194,933 )     (235,225 )     (1,321,040 )
Depreciation and amortization
    (262,547 )     (128,598 )     (278,307 )     (193,156 )     (201,388 )     (1,063,996 )
Net (loss) income
    (16,007 )     7,992       (33,001 )     66,818       80,506       106,308  
Net income (loss) attributable to JV partners
    (9,550 )     8,788       (27,251 )     50,949       70,696       93,632  
Net income (loss) attributable to the Company
    (6,457 )     (796 )     (5,750 )     15,869       9,810       12,676  
Amortization of deferred financing costs paid on behalf of joint ventures
    (1,097 )     -       (579 )     (321 )     (517 )     (2,514 )
Equity income (loss) of unconsolidated joint ventures
  $ (7,554 )   $ (796 )   $ (6,329 )   $ 15,548     $ 9,293     $ 10,162  
\
 
(1)
We evaluate the performance of our properties based upon NOI, which is a non-Generally Accepted Accounting Principle (“GAAP”) supplemental financial measure.  We use NOI to evaluate the operating performance of our real estate and to make decisions concerning the operation of the property.  We believe that NOI is essential to the investor in understanding the value of income-producing real estate.  Net income is the GAAP measure that is most directly comparable to NOI; however, NOI should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, interest expense and corporate general and administrative expenses.  Additionally, NOI as defined by us may not be comparable to other REITs or companies as their definitions of NOI may differ from our definition.

 
(2)
Aggregate debt service ratio of 1.89.

The following is a summary of our investments as of September 30, 2011.

Multifamily
Community
   
Date 
Acquired
   
Number of
Units
   
Our
Ownership
Interest in
Property
Owner
   
Occupancy %
   
NOI (1)
(in thousands)
   
Debt
Service
Coverage
Ratio
 
Springhouse at Newport News
   
12/03/2009
    432     37.50%     94%     $ 653     1.73  
The Reserve at Creekside Village
   
03/31/2010
    192     23.31%     97%     $ 312     1.72  
The Apartments at Meadowmont
   
04/09/2010
    258     16.25%     98%     $ 707     1.63  
The Estates at Perimeter
   
09/01/2010
    240     25.00%     95%     $ 458     2.27  
Gardens at Hillsboro Village
   
09/30/2010
    201     12.50%     98%     $ 582     2.25  

 
(1)
Please see table above for a reconciliation of our equity in net income (loss) of unconsolidated joint ventures to the NOI of our properties.

 
20

 
 
Interest expense, net increased $34,563 from $53,363 for the three months ended September 30, 2010 to $87,926 for the three months ended September 30, 2011 and relates to the affiliate loans for the joint venture investments acquired during 2010 and the borrowing on the Meadowmont line of credit in 2011.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

   
Nine Months Ended
September 30,
       
   
2011
   
2010
   
$ Change
 
Expenses
                 
Asset Management and oversight fees to affiliates
  $ 247,305     $ 133,676     $ 113,629  
Acquisition costs to affiliates
    -       350,115       (350,115 )
General and administrative
    3,180,883       259,485       2,921,398  
Total expenses
    3,428,188       743,276       2,684,912  
Other operating activities
                       
Equity loss of unconsolidated joint ventures
    (89,258 )     (941,579 )     (852,321 )
Operating Loss
    (3,517,446 )     (1,684,855 )     (1,832,591 )
Interest expense, net
    (260,319 )     (178,321 )     (81,998 )
Net Loss
  $ (3,777,765 )   $ (1,863,176 )   $  (1,914,589 )

Asset management and oversight fees to affiliates increased $113,629 from $133,676 for the nine months ended September 30, 2010 period to $247,305 for the nine months ended September 30, 2011.  The increase is due to the acquisitions made during 2010 and represents the asset management fee due, but unpaid, to the advisor.  We expect asset management fees to increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments.

Acquisition costs to affiliates was zero for the nine months ended September 30, 2011 as no acquisitions have occurred during the nine months ended September 30, 2011.

General and administrative expenses increased $2,921,398 from $259,485 for the nine months ended September 30, 2010 to $3,180,883 for the nine months ended September 30, 2011. From January 1, 2009 through March 31, 2011, our advisor and its affiliates incurred $677,415 of operating expenses on our behalf.  We reimburse the advisor for all reasonable expenses incurred in connection with services provided to us, subject to the limitation that we will not reimburse any amount that would cause our total operating expenses at the end of the four preceding fiscal quarters to exceed the greater of 2% of our average invested assets or 25% of our net income.  Because operating expenses incurred directly by us exceeded the 2% threshold, the amount due to the advisor had not been recorded on our income statement as of December 31, 2010.  Further, $973,607 had been recorded as a receivable from the advisor for the excess operating expenses over the 2% threshold incurred directly by us as of December 31, 2010.  Our Board of Directors, including all of our independent directors, reviewed our total operating expenses for the four fiscal quarters ended December 31, 2009 (and the four fiscal quarters ended each quarter after) and an estimate of our total operating expenses for the four fiscal quarters to end March 31, 2011 and unanimously determined the excess amount to be justified because of the costs of operating a public company in our early stages of operation.   Upon approval of these costs on March 22, 2011, $1,646,818 of total costs were expensed.  As the Board of Directors has previously approved these expenses, all 2011 operating expenses have been and will be expensed as incurred.  This accounts for the largest component of the year over year increase.

Equity in loss of unconsolidated joint venture decreased by $852,321 from $941,579 in the 2010 period to $89,258 for the nine months ended September 30, 2011.  This represents our ownership share of net income (loss) from our real estate investments as detailed in Note 4 (Equity Method Investments). The lower overall loss is primarily due to acquisitions fees that were incurred during the nine months ended September 30, 2010 and nine months of operating activity during 2011 for the properties acquired throughout 2010.  While revenue variations may occur at any of our properties, the Augusta and Springhouse properties’ revenues are specifically subject to unplanned troop deployment.  The property management team is working to fully diversify the tenant mix to lessen a potential impact from unplanned deployments.

 
21

 

The table below reflects the components of the $89,258 equity loss of unconsolidated joint ventures:

   
Springhouse
   
Creekside
   
Meadowmont
   
Augusta
   
Hillsboro
   
Total
 
Property Operating Results:
                                   
Rental revenue
  $ 2,943,519     $ 1,546,740     $ 2,988,861     $ 1,985,785     $ 2,471,640     $ 11,936,545  
Operating expenses
    (1,070,359 )     (654,352 )     (913,981 )     (638,946 )     (772,448 )     (4,050,086 )
Net Operating Income (NOI)(1)
    1,873,160       892,388       2,074,880       1,346,839       1,699,192       7,886,459  
Major renovation and other expenses
    (138,683 )     (124,585 )     (125,332 )     (31,505 )     (127,354 )     (547,459 )
Income Before Debt Service and Depreciation and Amortization
    1,734,477       767,803       1,949,548       1,315,334       1,571,838       7,339,000  
Interest Expense (2)
    (1,004,367 )     (445,566 )     (1,199,494 )     (578,444 )     (698,004 )     (3,925,875 )
Depreciation and amortization
    (784,018 )     (384,234 )     (832,427 )     (756,058 )     (912,519 )     (3,669,256 )
Net loss
    (53,908 )     (61,997 )     (82,373 )     (19,168 )     (38,685 )     (256,131 )
Net loss attributable to JV partners
    (28,631 )     (39,644 )     (67,197 )     (10,100 )     (28,844 )     (174,416 )
Net loss attributable to the Company
    (25,277 )     (22,353 )     (15,176 )     (9,068 )     (9,841 )     (81,715 )
Amortization of deferred financing costs paid on behalf of joint ventures
    (3,291 )     -       (1,737 )     (963 )     (1,552 )     (7,543 )
Equity loss of unconsolidated joint ventures
  $ (28,568 )   $ (22,353 )   $ (16,913 )   $ (10,031 )   $ (11,393 )   $ (89,258 )
 
 
(1)
We evaluate the performance of our properties based upon NOI, which is a non-Generally Accepted Accounting Principle (“GAAP”) supplemental financial measure.  We use NOI to evaluate the operating performance of our real estate and to make decisions concerning the operation of the property.  We believe that NOI is essential to the investor in understanding the value of income-producing real estate.  Net income is the GAAP measure that is most directly comparable to NOI; however, NOI should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes certain items such as depreciation and amortization, interest expense and corporate general and administrative expenses.  Additionally, NOI as defined by us may not be comparable to other REITs or companies as their definitions of NOI may differ from our definition.
 
 
(2)
Aggregate debt service ratio of 1.87.

Interest expense, net increased $81,998 from $178,321 for the nine months ended September 30, 2010 to $260,319 for the nine months ended September 30, 2011 and relates to the affiliate loans for the joint venture investments acquired during 2010 and the borrowing on the Meadowmont line of credit in 2011.

Organization and Offering Costs

Our organization and offering costs (other than selling commissions and dealer manager fees) may be paid by our advisor, the dealer manager or their affiliates on our behalf. Other offering costs include all expenses to be incurred by us in connection with our Initial Public Offering. Organization costs include all expenses incurred by us in connection with our formation, including but not limited to legal fees and other costs to incorporate. Organization costs are expensed as incurred and offering costs, which include selling commissions and dealer manager fees, are charged as incurred as a reduction to stockholders’ equity.

Pursuant to the advisory agreement and the dealer manager agreement, we are obligated to reimburse our advisor, the dealer manager or their affiliates, as applicable, for organization and other offering costs paid by them on our behalf; however, our advisor is obligated to reimburse us to the extent selling commissions, dealer manager fees and organization and other offering costs incurred by us exceed 15% of gross proceeds from our Initial Public Offering.  Through September 30, 2011, including shares issued through our distribution reinvestment plan, we had sold 892,631 shares in the offering for gross offering proceeds of $8,221,110 and recorded organization costs of $49,931, other offering costs of $2,069,388 and selling commissions and dealer manager fees of $766,907. In addition our advisor has incurred on our behalf $2,286,474 of offering costs which will become payable as additional offering proceeds are raised to the extent that selling commissions, dealer manager fees and other organization and offering costs do not exceed 15% of gross offering proceeds.
 
 
22

 

 
Operating Expenses

Under our advisory agreement our advisor and its affiliates have the right to seek reimbursement from us for all costs and expenses they incur in connection with their provision of services to us, including our allocable share of our advisor’s overhead, such as rent, employee costs, utilities and information technology costs.  We do not, however, reimburse our advisor for personnel costs in connection with services for which our advisor receives acquisition, origination or disposition fees or for personnel costs related to the salaries of our executive officers.  From January 1, 2009 through March 31, 2011, our advisor and its affiliates incurred $677,415 of operating expenses on our behalf, which amount has not yet been reimbursed as of October 31, 2011.  Our charter limits our total operating expenses at the end of the four preceding fiscal quarters to the greater of (A) 2% of our average invested assets, or (B) 25% of our net income determined (1) without reductions for any additions to reserves for depreciations, bad debts or other similar non-cash reserves and (2) excluding any gain from the sale of our assets for the period, notwithstanding the above limitation, we may reimburse amounts in excess of the limitation if  a majority or our independent directors determines that such excess amounts were justified based on unusual and non-recurring factors.  Due to the limitations discussed above and because operating expenses incurred directly by us have exceeded the 2% threshold, the amount due to the advisor had not been recorded on our income statement as of December 31, 2010.  Further, $973,607 had been recorded as a receivable from the advisor as of December 31, 2010 for the excess operating expenses incurred directly by us over the 2% threshold.  Our Board of Directors, including all of our independent directors, reviewed our total operating expenses for the four fiscal quarters ended December 31, 2009 (and the four fiscal quarters ended each quarter after) and an estimate of our total operating expenses for the four fiscal quarters to end March 31, 2011 and unanimously determined the excess amounts to be justified because of the costs of operating a public company in our early stages of operating.  Upon approval of these costs on March 22, 2011, $1,646,818 of total costs, were expensed and $677,415 became a liability to us, payable to our advisor and its affiliates.  As of the Board of Directors has approved such expenses, all 2011 operating expenses have been and will be expensed as incurred.

Liquidity and Capital Resources

We are offering a maximum of $1,000,000,000 in shares of our common stock in our primary offering, at an offering price of $10.00 per share, with discounts available for certain categories of purchasers.  We also are offering up to $285,000,000 in shares pursuant to our distribution reinvestment plan at $9.50 per share.  

Our principal demands for cash will be for acquisition costs, including the purchase price of any properties, loans or securities we acquire, and construction, renovation and development costs and the payment of our operating and administrative expenses, continuing debt service obligations and distributions to our stockholders. Generally, we will fund our acquisitions from the net proceeds of our public offering. We intend to acquire our assets with cash and mortgage or other debt, but we may acquire assets free and clear of permanent mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in units of limited partnership interest in our operating partnership. Due to the delay between the sale of our shares and our acquisitions, there may be a delay in the benefits to our stockholders, if any, of returns generated from our investments.

We generally expect to meet our short-term liquidity requirements, such as our operating and administrative expenses, continuing debt service obligations and the payment of distributions, through net cash provided by operations and net proceeds raised in our public offering.  Operating cash flow is expected to increase as additional investments are added to our portfolio.  We are continuing to raise proceeds in our ongoing public offering; however, we suspended our offering on November 17, 2010 in order to restate certain of our financial statements and selling efforts did not recommence until March 2, 2011.  In order to fund general working capital while our offering was suspended, on January 20, 2011 we entered a loan agreement for a line of credit with an affiliate of our sponsor that permits us to borrow up to $500,000 and we have borrowed $150,000 as of September 30, 2011.  Our current corporate operating expenses exceed the cash flow received from our investments in real estate joint ventures.  If the rate at which we raise offering proceeds does not improve significantly, our general and administrative costs will remain higher relative to the size of our portfolio and we may be required to incur additional debt to fund our operations.  To the extent cash on hand is not sufficient to meet our short-term liquidity requirements, we expect to utilize credit facilities obtained from affiliates or unaffiliated third parties. Our sponsor has also agreed to defer payment of asset management fees, acquisition fees and operating and offering costs advanced on our behalf and current year reimbursable operating expenses through 2011 as well as to fund any remaining cash shortfall, as necessary. In addition as our sponsor has management control of the affiliates that are lenders to us and thus has the authority to extend the notes that have maturities in 2011, it has committed to extend such notes based on our ability to repay those obligations.  The notes obtained from our affiliates, Augusta, Hillsboro and Meadowmont have all been extended.

As of July 5, 2011, Bluerock Capital Markets, an affiliate of us and our advisor, assumed the role of dealer manager for the remainder of the Initial Public Offering.  Prior to July 5, 2011, Select Capital Corporation, a third party, served as dealer manager for the Initial Public Offering. We expect that this transition to an affiliated dealer manager will lead to greater sales of shares in the Initial Public Offering; however, we can provide no assurances that this will be the case.  If Bluerock Capital Markets is unsuccessful in its efforts to market the Initial Public Offering, our liquidity will be adversely affected which would adversely affect our ability to fund our ongoing operations.

 
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In addition, our policy is generally to pay distributions from cash flow from operations. However, all of our distributions to date have been paid from proceeds from our public offering and may in the future be paid from additional sources, such as from borrowings, advances from our advisor, and our advisor’s deferral of its fees and expense reimbursements.  We expect to meet our long-term liquidity requirements, such as scheduled debt maturities and repayment of short-term financing of future property acquisitions, through long-term secured and unsecured borrowings.

Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit, proceeds from the sale of properties and undistributed cash flow.

Cash Flows from Operating Activities

As of September 30, 2011, we owned indirect equity interests in five real estate properties.  During the nine months ended September 30, 2011, net cash used in operating activities was $824,452 and primarily consisted of our net loss of $3,777,765, which was offset by the following increases in our cash from operations; cash distributions received for our unconsolidated joint ventures of $702,726; increase in due to affiliates of $2,028,497; a non-cash adjustment for director’s stock compensation of $53,125, and non-cash adjustments that increase our cash flow from operations of $89,258 for the loss in unconsolidated joint ventures which includes our pro-rata share of (1) non-cash adjustment for the depreciation and amortization at the property level, (2) any non-recurring acquisition costs incurred in the year we acquired our indirect equity interest in the property.

Cash Flows from Investing Activities

Our cash used in investing for the nine months ended September 30, 2011 was $55,430 for the additional capital needs related to our indirect equity interests in the real estate properties indicated above.

Cash Flows from Financing Activities

Our cash flows from financing consist primarily of proceeds from the Initial Public Offering (which offering we temporarily suspended from November 17, 2010 until March 2, 2011 in connection with our determination to restate certain of our financial statements) and proceeds from affiliate loans less distributions paid to our stockholders.  

For the nine months ended September 30, 2011, net cash provided by financing activities was $956,348, which consisted of $2,017,080 of gross offering proceeds related to our Initial Public Offering, net of (1) payments of commissions on sales of common stock and related dealer manager fees in the amount of $201,579, (2) and offering costs paid by us directly in the amount of $729,990; as well as $150,000 of proceeds from affiliate loans.  This was offset by $264,163 of net cash distributions, after giving effect to distributions reinvested by stockholders of $126,260.

Funds from Operations and Modified Funds from Operations
 
Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance.  We consider FFO to be an appropriate supplemental measure of our operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. We define FFO, consistent with the National Association of Real Estate Investment Trusts (“NAREITs”) definition, as net income, computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
 
In addition to FFO, we use modified funds from operations ("Modified Funds from Operations" or "MFFO"), as defined by the Investment Program Association (“IPA”).  MFFO excludes from FFO the following items:

 
(1)
acquisition fees and expenses;
 
(2)
straight line rent amounts, both income and expense;
 
(3)
amortization of above or below market intangible lease assets and liabilities;
 
(4)
amortization of discounts and premiums on debt investments;
 
(5)
impairment charges;
 
(6)
gains or losses from the early extinguishment of debt;

 
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(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our operations;
 
(8)
gains or losses related to fair value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
 
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
 
(10)
gains or losses related to contingent purchase price adjustments; and
 
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We believe that MFFO is helpful in assisting management, investors and analysts assess the sustainability of our operating performance, and in particular, after our offering and acquisition stages are complete primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired.  Because we are currently in our offering and acquisition stage, we expect that the exclusion of acquisition expense will be our most significant adjustment for the near future, although no acquisition expenses have been incurred in the nine months ended September 30, 2011.  Thus, MFFO provides helpful information relevant to evaluating the Company’s operating performance in periods in which there is no acquisition activity.
  
In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management's investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Acquisition costs related to business combinations are to be expensed.  We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of our real estate investments and is consistent with management's analysis of the investing and operating performance of our properties.  In addition, it provides investors with information about our operating performance so they can better assess the sustainability of our operating performance after our offering and acquisition stages are completed.  Acquisition expenses include those incurred with our advisor or third parties. Table 1 presents our calculation of FFO and MFFO for the three and nine months ended September 30, 2011 and 2010.

Because we have been raising capital in our public offering since our inception, did not commence real estate operations until the end of 2009, and made several additional equity investments in 2010, the results presented in Table 1 below are not directly comparable and should not be considered an indication of our historical operating performance.  Table 2 presents additional information about our MFFO on a property-level basis and presents our calculation of our pro-rata share of MFFO generated by our indirect equity interest in the properties for the three and nine months ended September 30, 2011 and 2010.

TABLE 1
 
Three Months Ended
September 30,
   
Nine Month Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net Loss(1)
  $ (662,354 )   $ (696,248 )   $ (3,777,765 )   $ (1,863,176 )
Add:
                               
Pro-rata share of unconsolidated JV depreciation and amortization(2)
    243,094       309,443       805,798       912,788  
FFO
    (419,260 )     (386,805 )     (2,971,967 )     (950,388 )
Add:
                               
Pro-rata share of unconsolidated JV acquisition costs(2)
    -       154,807       -       331,837  
Acquisition costs per statement of operations
    -       188,371       -       350,115  
MFFO
  $ (419,260 )   $ (43,627 )   $ (2,971,967 )   $ (268,436 )

(1)
The net loss for the nine months ended September 30, 2011 includes $1,646,818 of excess operating expenses approved by our Board of Directors on March 22, 2011 relating to our total operating expenses for the four fiscal quarters ended December 31, 2009 and the four fiscal quarters ended each quarter after through March 31, 2011.
(2)
This represents our share of depreciation and amortization expense and acquisition costs at the properties that we account for under the equity method of accounting. 

 
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TABLE 2
 
Three Months Ended September 30, 2011
 
   
Springhouse
   
Creekside
   
Meadowmont
   
Augusta
   
Hillsboro
   
Total
 
Equity (loss) income of unconsolidated JV
  $ (7,554 )   $ (796 )   $ (6,329 )   $ 15,548     $ 9,293     $ 10,162  
Pro-rata share of unconsolidated JV depreciation and amortization
    96,235       29,588       44,260       46,488       26,523       243,094  
      88,681       28,792       37,931       62,036       35,816       253,256  
Affiliate loan interest, net(1)
    (29,022 )     -       (2,646 )     (34,079 )     (22,179 )     (87,926 )
Asset management and oversight fees
    (27,423 )     (8,303 )     (18,516 )     (17,385 )     (10,947 )     (82,574 )
Corporate operating expenses(2)
    (140,010 )     (12,799 )     (94,906 )     (146,069 )     (108,232 )     (502,016 )
                                                 
Consolidated MFFO
  $ (107,774 )   $ 7,690     $ (78,137 )   $ (135,497 )   $ (105,542 )   $ (419,260 )
 
TABLE 2
 
Nine Months Ended September 30, 2011
 
   
Springhouse
   
Creekside
   
Meadowmont
   
Augusta
   
Hillsboro
   
Total
 
Equity loss of unconsolidated JV
  $ (28,568 )   $ (22,353 )   $ (16,913 )   $ (10,031 )   $ (11,393 )   $ (89,258 )
Pro-rata share of unconsolidated JV depreciation and amortization
    287,348       88,400       132,372       183,613       114,065       805,798  
      258,780       66,047       115,459       173,582       102,672       716,540  
Affiliate loan interest, net(1)
    (86,103 )     -       (7,278 )     (101,125 )     (65,813 )     (260,319 )
Asset management and oversight fees
    (82,266 )     (24,910 )     (55,405 )     (51,914 )     (32,810 )     (247,305 )
Corporate operating expenses(2)(3)
    (898,785 )     (133,913 )