Pacific Oak Strategic Opportunity REIT, Inc. - FORM 10-Q - November 13, 2014

Attached files

file filename
EX-10.1 - ADVISORY AGREEMENT - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq32014exhibit101.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq32014exhibit322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq32014exhibit311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq32014exhibit312.htm
EXCEL - IDEA: XBRL DOCUMENT - Pacific Oak Strategic Opportunity REIT, Inc.Financial_Report.xls
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq32014exhibit321.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, 2014
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 000-54382
______________________________________________________
 
KBS STRATEGIC OPPORTUNITY REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
______________________________________________________
Maryland
 
26-3842535
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
620 Newport Center Drive, Suite 1300
Newport Beach, California
 
92660
(Address of Principal Executive Offices)
 
(Zip Code)
(949) 417-6500
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  x 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. (Check one):
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 November 7, 2014, there were 59,884,462 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.


KBS STRATEGIC OPPORTUNITY REIT, INC.
FORM 10-Q
September 30, 2014
INDEX 
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.

1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
September 30,
2014
 
December 31, 2013
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate held for investment, net
 
$
852,466

 
$
636,885

Real estate held for sale, net
 
—

 
1,274

Real estate loan receivable, net
 
27,216

 
21,893

Real estate securities
 
—

 
333

Total real estate and real estate-related investments, net
 
879,682

 
660,385

Cash and cash equivalents
 
19,171

 
57,996

Investments in unconsolidated joint ventures
 
73,968

 
16,338

Rents and other receivables, net
 
16,900

 
8,540

Above-market leases, net
 
2,288

 
2,935

Assets related to real estate held for sale
 
—

 
126

Prepaid expenses and other assets
 
28,261

 
29,818

Total assets
 
$
1,020,270

 
$
776,138

Liabilities and equity
 
 
 
 
Notes and bond payable, net
 
$
520,801

 
$
257,420

Accounts payable and accrued liabilities
 
17,176

 
15,558

Below-market leases, net
 
4,956

 
4,420

Other liabilities
 
8,873

 
6,481

Total liabilities
 
551,806

 
283,879

Commitments and contingencies (Note 13)
 


 


Redeemable common stock
 
19,775

 
17,573

Equity
 
 
 
 
KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding
 
—

 
—

Common stock, $.01 par value; 1,000,000,000 shares authorized, 59,903,681 and 59,619,000 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
 
599

 
596

Additional paid-in capital
 
512,966

 
512,036

Cumulative distributions and net losses
 
(81,533
)
 
(52,801
)
Accumulated other comprehensive loss
 
—

 
(9
)
Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
432,032

 
459,822

Noncontrolling interests
 
16,657

 
14,864

Total equity
 
448,689

 
474,686

Total liabilities and equity
 
$
1,020,270

 
$
776,138

See accompanying condensed notes to consolidated financial statements.
 

2
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
21,505

 
$
13,828

 
$
61,932

 
$
31,107

Tenant reimbursements
 
4,404

 
3,341

 
12,029

 
6,508

Interest income from real estate loans receivable
 
948

 
5,826

 
2,377

 
9,552

Interest income from real estate securities
 
—

 
30

 
—

 
86

Other operating income
 
741

 
256

 
2,131

 
853

Total revenues
 
27,598

 
23,281

 
78,469

 
48,106

Expenses:
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
8,992

 
6,700

 
26,285

 
14,942

Real estate taxes and insurance
 
3,409

 
2,762

 
10,329

 
6,355

Asset management fees to affiliate
 
2,049

 
1,203

 
5,567

 
2,868

Real estate acquisition fees to affiliate
 
—

 
857

 
2,274

 
2,469

Real estate acquisition fees and expenses
 
—

 
348

 
2,178

 
834

General and administrative expenses
 
726

 
649

 
2,618

 
2,326

Depreciation and amortization
 
11,895

 
9,066

 
35,509

 
18,933

Interest expense
 
3,777

 
1,742

 
11,805

 
3,435

Total expenses
 
30,848

 
23,327

 
96,565

 
52,162

Other income (loss):
 
 
 
 
 
 
 
 
Other interest income
 
10

 
5

 
15

 
49

Equity in loss of unconsolidated joint venture
 
(256
)
 
—

 
(757
)
 
—

Gain on sale of real estate, net
 
55

 
—

 
55

 
—

Gain on foreclosure of real estate loan receivable, net
 
—

 
7,543

 
—

 
7,543

Total other (loss) income
 
(191
)
 
7,548

 
(687
)
 
7,592

(Loss) income from continuing operations
 
(3,441
)
 
7,502

 
(18,783
)
 
3,536

Discontinued operations:
 
 
 
 
 
 
 
 
Gain on sale of real estate, net
 
—

 
—

 
—

 
4,225

Income (loss) from discontinued operations
 
15

 
(242
)
 
(18
)
 
(1,187
)
Total income (loss) from discontinued operations
 
15

 
(242
)
 
(18
)
 
3,038

Net (loss) income
 
(3,426
)
 
7,260

 
(18,801
)
 
6,574

Net loss (income) attributable to noncontrolling interests
 
59

 
84

 
486

 
(160
)
Net (loss) income attributable to common stockholders
 
$
(3,367
)
 
$
7,344

 
$
(18,315
)
 
$
6,414

Basic and diluted (loss) income per common share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.06
)
 
$
0.13

 
$
(0.31
)
 
$
0.06

Discontinued operations
 
—

 
—

 
—

 
0.05

Net (loss) income per common share
 
$
(0.06
)
 
$
0.13

 
$
(0.31
)
 
$
0.11

Weighted-average number of common shares outstanding, basic and diluted
 
59,735,474

 
58,330,896

 
59,658,088

 
58,265,522

See accompanying condensed notes to consolidated financial statements.

3
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net (loss) income
 
$
(3,426
)
 
$
7,260

 
$
(18,801
)
 
$
6,574

Other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized gain on real estate securities
 
—

 
4

 
9

 
8

Total other comprehensive income
 
—

 
4

 
9

 
8

Total comprehensive (loss) income
 
(3,426
)
 
7,264

 
(18,792
)
 
6,582

Total comprehensive loss (income) attributable to noncontrolling interests
 
59

 
84

 
486

 
(160
)
Total comprehensive (loss) income attributable to common stockholders
 
$
(3,367
)
 
$
7,348

 
$
(18,306
)
 
$
6,422

See accompanying condensed notes to consolidated financial statements.



4
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2013 and the Nine Months Ended September 30, 2014 (unaudited)
(dollars in thousands)
 
 
 
 
 
Additional Paid-in Capital
 
Cumulative Distributions and
Net Losses
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Common Stock
 
 
 
 
Shares
 
Amounts
 
 
 
Balance, December 31, 2012
58,127,627

 
$
581

 
$
505,907

 
$
(38,615
)
 
$
(13
)
 
$
467,860

 
$
15,792

 
$
483,652

Net income
—

 
—

 
—

 
11,493

 
—

 
11,493

 
96

 
11,589

Other comprehensive income
—

 
—

 
—

 
—

 
4

 
4

 
—

 
4

Issuance of common stock
1,751,478

 
18

 
16,623

 
—

 
—

 
16,641

 
—

 
16,641

Transfers to redeemable common stock
—

 
—

 
(7,922
)
 
—

 
—

 
(7,922
)
 
—

 
(7,922
)
Redemptions of common stock
(260,105
)
 
(3
)
 
(2,447
)
 
—

 
—

 
(2,450
)
 
—

 
(2,450
)
Distributions declared
—

 
—

 
—

 
(25,679
)
 
—

 
(25,679
)
 
—

 
(25,679
)
Other offering costs
—

 
—

 
(125
)
 
—

 
—

 
(125
)
 
—

 
(125
)
Noncontrolling interests contributions
—

 
—

 
—

 
—

 
—

 
—

 
1,213

 
1,213

Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(2,237
)
 
(2,237
)
Balance, December 31, 2013
59,619,000

 
$
596

 
$
512,036

 
$
(52,801
)
 
$
(9
)
 
$
459,822

 
$
14,864

 
$
474,686

Net loss
—

 
—

 
—

 
(18,315
)
 
—

 
(18,315
)
 
(486
)
 
(18,801
)
Other comprehensive income
—

 
—

 
—

 
—

 
9

 
9

 
—

 
9

Issuance of common stock
618,483

 
6

 
6,618

 
—

 
—

 
6,624

 
—

 
6,624

Transfers from redeemable common stock
—

 
—

 
(2,202
)
 
—

 
—

 
(2,202
)
 
—

 
(2,202
)
Redemptions of common stock
(333,802
)
 
(3
)
 
(3,484
)
 
—

 
—

 
(3,487
)
 
—

 
(3,487
)
Distributions declared
—

 
—

 
—

 
(10,417
)
 
—

 
(10,417
)
 
—

 
(10,417
)
Other offering costs
—

 
—

 
(2
)
 
—

 
—

 
(2
)
 
—

 
(2
)
Noncontrolling interests contributions
—

 
—

 
—

 
—

 
—

 
—

 
2,436

 
2,436

Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(157
)
 
(157
)
Balance, September 30, 2014
59,903,681

 
$
599

 
$
512,966

 
$
(81,533
)
 
$
—

 
$
432,032

 
$
16,657

 
$
448,689

See accompanying condensed notes to consolidated financial statements.


5
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
Cash Flows from Operating Activities:
 
 
 
 
Net (loss) income
 
$
(18,801
)
 
$
6,574

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Loss due to property damages
 
730

 
—

Equity in loss of unconsolidated joint venture
 
757

 
—

Depreciation and amortization:
 
 
 
 
Continuing operations
 
35,509

 
18,933

Discontinued operations
 
—

 
997

Non-cash interest income on real estate-related investments
 
(399
)
 
(705
)
Gain on sale of real estate, net
 
(55
)
 
(4,225
)
Gain on foreclosure of real estate loan receivable, net
 
—

 
(7,543
)
Deferred rent
 
(6,884
)
 
(3,355
)
Bad debt expense
 
136

 
139

Amortization of above- and below-market leases, net
 
(1,013
)
 
214

Amortization of deferred financing costs
 
2,166

 
565

Amortization of net premium/discount on bond and notes payable
 
(6
)
 
(40
)
Changes in assets and liabilities:
 
 
 
 
Rents and other receivables
 
(1,587
)
 
(1,461
)
Deferred interest receivable
 
—

 
1,001

Prepaid expenses and other assets
 
(6,170
)
 
(2,642
)
Accounts payable and accrued liabilities
 
536

 
6,179

Due to affiliates
 
—

 
(21
)
Other liabilities
 
2,392

 
2,616

Net cash provided by operating activities
 
7,311

 
17,226

Cash Flows from Investing Activities:
 
 
 
 
Acquisitions of real estate
 
(191,701
)
 
(243,988
)
Improvements to real estate
 
(22,829
)
 
(11,440
)
Proceeds from sales of real estate, net
 
1,393

 
7,545

Investments in real estate loans receivable
 
(5,850
)
 
(21,568
)
Proceeds from early payoff of real estate loan receivable
 
—

 
35,750

Principal repayments on real estate securities
 
333

 
3,263

Investment in unconsolidated joint venture
 
(58,387
)
 
—

Extension fee received on real estate loan receivable
 
935

 
—

Net cash used in investing activities
 
(276,106
)
 
(230,438
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes payable
 
272,637

 
194,416

Principal payments on notes payable
 
(34,043
)
 
(33,227
)
Payments of deferred financing costs
 
(3,621
)
 
(3,499
)
Payments to redeem common stock
 
(3,487
)
 
(753
)
Payments of other offering costs
 
(2
)
 
(195
)
Distributions paid
 
(3,793
)
 
(1,236
)
Noncontrolling interests contributions
 
2,436

 
644

Distributions to noncontrolling interest
 
(157
)
 
(2,211
)
Net cash provided by financing activities
 
229,970

 
153,939

Net decrease in cash and cash equivalents
 
(38,825
)
 
(59,273
)
Cash and cash equivalents, beginning of period
 
57,996

 
125,960

Cash and cash equivalents, end of period
 
$
19,171

 
$
66,687

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Interest paid, net of capitalized interest of $1,467 and $0 for the nine months ended September 30, 2014 and 2013, respectively
 
$
9,158

 
$
2,709

Supplemental Disclosure of Noncash Transactions:
 
 
 
 
Mortgage debt assumed in connection with real estate acquisition (at fair value)
 
$
24,793

 
$
—

Application of escrow deposits to acquisition of real estate
 
$
13,000

 
$
—

Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan
 
$
6,624

 
$
2,340

Liabilities assumed in connection with real estate acquisition
 
$
207

 
$
—

Increase in capital expenses payable
 
$
47

 
$
1,645

Investment in real estate acquired through foreclosure
 
$
—

 
$
45,943

Assets assumed in connection with foreclosure of real estate
 
$
—

 
$
7,156

Liabilities assumed in connection with foreclosure of real estate
 
$
—

 
$
9,671

See accompanying condensed notes to consolidated financial statements.

6
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited)



1.
ORGANIZATION
KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in, the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.
Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2014 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments. The Advisor owns 20,000 shares of the Company’s common stock.
On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.
The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of September 30, 2014, the Company had sold 3,699,313 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $35.9 million. Also, as of September 30, 2014, the Company had redeemed 676,851 shares sold in the Offering for $6.7 million. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.
As of September 30, 2014, the Company owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes, except for the addition of an accounting policy with respect to insurance proceeds for property damages, to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2013. During the nine months ended September 30, 2014, the Company adopted ASU No. 2014-08 (defined below), which impacts the Company’s reporting of discontinued operations. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC.

7
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Insurance Proceeds for Property Damages
The Company maintains an insurance policy that provides coverage for property damages and business interruption.  Losses due to physical damages are recognized during the accounting period in which they occur, while the amount of monetary assets to be received from the insurance policy is recognized when receipt of insurance recoveries is probable.  Losses, which are reduced by the related insurance recoveries, are recorded as operating, maintenance and management expenses on the accompanying consolidated statements of operations.  Anticipated proceeds in excess of recognized losses would be considered a gain contingency and recognized when the contingency related to the insurance claim has been resolved.  Anticipated recoveries for lost rental revenue due to property damages are also considered to be a gain contingency and recognized when the contingency related to the insurance claim has been resolved.
Reclassifications
Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period.
Segments
The Company has invested in non-performing loans, opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in non-performing loans, opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of non-performing loans, opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views non-performing loans, opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from non-performing loans, opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.

8
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

Per Share Data
Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three and nine months ended September 30, 2014 and 2013.
Distributions declared per share were $0.069 and $0.174 during the three and nine months ended September 30, 2014, respectively, and $0.062 during the nine months ended September 30, 2013. No distributions were declared during the three months ended September 30, 2013.
Recently Issued Accounting Standards Updates
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”).  ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification.  ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted.  The Company does not expect the adoption of ASU No. 2014-09 to have a material impact on its financial statements. 
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”).  ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: a) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; b) the component of an entity or group of components of an entity is disposed of by sale; and c) the component of an entity or group of components of an entity is disposed of other than by sale.  ASU No. 2014-08 also requires additional disclosures about discontinued operations.  ASU No. 2014-08 is effective for reporting periods beginning after December 15, 2014.  Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted ASU No. 2014-08 for the reporting period beginning January 1, 2014.  As a result of the adoption of ASU No. 2014-08, results of operations for properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation. Additionally, any gain or loss on sale of real estate that does not meet the criteria for classification as a discontinued operation would be included in income from continuing operations on the consolidated statements of operations.

9
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

In January 2014, the FASB issued ASU No. 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (“ASU No. 2014-04”). ASU No. 2014-04 clarifies when the Company is considered to have obtained physical possession, from an in-substance possession or foreclosure, of a residential real estate property collateralizing a mortgage loan. Current guidance indicates that the Company should reclassify a collateralized mortgage loan such that the loan should be derecognized and the collateral asset recognized when it determines that there has been an in-substance repossession or foreclosure by the Company. This update defines the term “in-substance repossession or foreclosure” to reduce diversity in interpretation of when such an event occurs. The amendments in this update are effective for the first interim or annual period beginning after December 15, 2014. The Company does not expect that the adoption of ASU No. 2014-04 will have a material impact on its consolidated financial statements.
3.
RECENT ACQUISITIONS OF REAL ESTATE
During the nine months ended September 30, 2014, the Company acquired the following properties (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Intangibles
 
 
Property Name
 
City
 
State
 
Acquisition Date
 
Land
 
Building and Improvements
 
Tenant Origination 
and Absorption 
Costs
 
Above-Market Lease Assets
 
Below-
Market
Lease 
Liabilities
 
Other Intangible Assets
 
Total 
Purchase
Price
Plaza Buildings
 
Bellevue
 
WA
 
01/14/2014
 
$
53,040

 
$
124,212

 
$
8,945

 
$
196

 
$
(2,392
)
 
$
—

 
$
184,001

424 Bedford (1)
 
Brooklyn
 
NY
 
01/31/2014
 
8,860

 
24,266

 
554

 
—

 
—

 
4,547

(2) 
38,227

 
 
 
 
 
 
 
 
$
61,900

 
$
148,478

 
$
9,499

 
$
196

 
$
(2,392
)
 
$
4,547

 
$
222,228

_____________________
(1) In connection with the acquisition of 424 Bedford, the Company assumed the 424 Bedford Mortgage Loan from the seller. The Company recorded the mortgage debt with a principal balance of $26.3 million assumed at an estimated fair value of $24.8 million, net of a discount on note payable of $1.5 million due to a below-market interest rate. The discount on note payable is amortized over the remaining life of the loan of 8.7 years. See Note 8, “Notes and Bond Payable” for more information.
(2) The property is subject to a property tax abatement from the city’s department of housing preservation and development. The estimated fair value of the property tax abatement of $4.5 million was recorded as prepaid expenses and other assets on the Company’s consolidated balance sheet as of the acquisition date and amortized on a straight-line basis over the projected property tax abatement period of approximately 12.4 years. Amortization of the property tax abatement asset is included in depreciation and amortization expense on the accompanying consolidated statements of operations.
The intangible assets and liabilities acquired in connection with these acquisitions have weighted-average amortization periods as of the dates of each acquisition as follows (in years):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
Plaza Buildings
 
5.8
 
5.2
 
4.3
424 Bedford
 
0.5
 
—
 
—

10
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

During the nine months ended September 30, 2014, the Company recorded each real estate acquisition as a business combination and expensed $4.4 million of total acquisition costs. For the nine months ended September 30, 2014, the Company recognized $12.8 million of total revenues and $8.9 million of operating expenses from these properties.
Investment in Undeveloped Land
On September 4, 2014, the Company, through an indirect wholly owned subsidiary, and JP-Richardson, LLC, an affiliate of JP Realty Partners, LTD., entered into a joint venture agreement (the “Richardson Land II Joint Venture”) and on September 4, 2014, the Richardson Land II Joint Venture acquired 20 acres of undeveloped land in Richardson, Texas (the “Richardson Land II”). JP Realty Partners is a joint venture partner in the Richardson Portfolio Joint Venture (see Note 4). The seller was not affiliated with the Company or the Advisor.
The Company owns a 90% controlling membership interest in the Richardson Land II Joint Venture and exercises significant control and therefore consolidates the Richardson Land II Joint Venture in its financial statements. Income and losses are generally allocated among the members such that each member’s capital account is proportionately equal to the distributions that would be made to each member if the Richardson Land II Joint Venture were dissolved pursuant to the provisions of the joint venture agreement. The Company records the portion of the Richardson Land II Joint Venture not owned by the Company as noncontrolling interest. The purchase price, including acquisition fees and expenses, for the Richardson Land II was $7.5 million, all of which was recorded as land.
4.
REAL ESTATE HELD FOR INVESTMENT
As of September 30, 2014, the Company owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties and one retail property encompassing, in the aggregate, approximately 4.6 million rentable square feet. As of September 30, 2014, these properties were 79% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 83% occupied. The Company also owned two investments in undeveloped land encompassing an aggregate of 1,670 acres. The following table summarizes the Company’s real estate investments as of September 30, 2014 and December 31, 2013, respectively (in thousands):
 
 
September 30, 2014
 
December 31, 2013
Land
 
$
231,742

 
$
159,596

Buildings and improvements
 
624,035

 
459,136

Tenant origination and absorption costs
 
51,914

 
48,012

Total real estate, cost
 
907,691

 
666,744

Accumulated depreciation and amortization
 
(55,225
)
 
(29,859
)
Total real estate, net
 
$
852,466

 
$
636,885


11
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

The following table provides summary information regarding the properties owned by the Company as of September 30, 2014 (in thousands):
Property
 
Date
Acquired or Foreclosed on
 
City
 
State
 
Property Type
 
Land
 
Building
and Improvements
 
Tenant Origination and Absorption
 
Total
Real Estate at Cost (1)
 
Accumulated Depreciation and Amortization
 
Total
Real Estate,
Net
 
Ownership %
Academy Point Atrium I
 
11/03/2010
 
Colorado Springs
 
CO
 
Office
 
$
1,291

 
$
2,007

 
$
—

 
$
3,298

 
$
(89
)
 
$
3,209

 
100.0
%
Northridge Center I & II
 
03/25/2011
 
Atlanta
 
GA
 
Office
 
2,234

 
6,513

 
—

 
8,747

 
(1,065
)
 
7,682

 
100.0
%
Iron Point Business Park
 
06/21/2011
 
Folsom
 
CA
 
Office
 
2,670

 
18,920

 
150

 
21,740

 
(2,634
)
 
19,106

 
100.0
%
1635 N. Cahuenga Building
 
08/03/2011
 
Los Angeles
 
CA
 
Office
 
3,112

 
4,653

 
149

 
7,914

 
(725
)
 
7,189

 
70.0
%
Richardson Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Palisades Central I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
1,037

 
8,802

 
847

 
10,686

 
(1,397
)
 
9,289

 
90.0
%
Palisades Central II
 
11/23/2011
 
Richardson
 
TX
 
Office
 
810

 
16,790

 
1,554

 
19,154

 
(3,316
)
 
15,838

 
90.0
%
Greenway I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
561

 
2,180

 
—

 
2,741

 
(359
)
 
2,382

 
90.0
%
Greenway III
 
11/23/2011
 
Richardson
 
TX
 
Office
 
702

 
3,867

 
895

 
5,464

 
(1,218
)
 
4,246

 
90.0
%
Undeveloped Land
 
11/23/2011
 
Richardson
 
TX
 
Undeveloped Land
 
7,208

 
—

 
—

 
7,208

 
—

 
7,208

 
90.0
%
Total Richardson Portfolio
 
 
 
 
 
 
 
 
 
10,318

 
31,639

 
3,296

 
45,253

 
(6,290
)
 
38,963

 
 
Park Highlands
 
12/30/2011
 
North Las Vegas
 
NV
 
Undeveloped Land
 
27,664

 
—

 
—

 
27,664

 
—

 
27,664

 
50.1
%
Bellevue Technology Center
 
07/31/2012
 
Bellevue
 
WA
 
Office
 
25,506

 
51,201

 
3,813

 
80,520

 
(4,716
)
 
75,804

 
100.0
%
Powers Ferry Landing East
 
09/24/2012
 
Atlanta
 
GA
 
Office
 
1,642

 
7,556

 
204

 
9,402

 
(789
)
 
8,613

 
100.0
%
1800 West Loop
 
12/04/2012
 
Houston
 
TX
 
Office
 
8,360

 
58,549

 
5,557

 
72,466

 
(6,051
)
 
66,415

 
100.0
%
West Loop I & II
 
12/07/2012
 
Houston
 
TX
 
Office
 
7,300

 
28,903

 
3,051

 
39,254

 
(3,558
)
 
35,696

 
100.0
%
Burbank Collection
 
12/12/2012
 
Burbank
 
CA
 
Retail
 
4,175

 
8,220

 
993

 
13,388

 
(791
)
 
12,597

 
90.0
%
Austin Suburban Portfolio
 
03/28/2013
 
Austin
 
TX
 
Office
 
8,288

 
65,548

 
4,830

 
78,666

 
(6,700
)
 
71,966

 
100.0
%
Westmoor Center
 
06/12/2013
 
Westminster
 
CO
 
Office
 
10,058

 
64,363

 
10,094

 
84,515

 
(8,047
)
 
76,468

 
100.0
%
Central Building
 
07/10/2013
 
Seattle
 
WA
 
Office
 
7,015

 
24,783

 
2,301

 
34,099

 
(1,746
)
 
32,353

 
100.0
%
50 Congress Street
 
07/11/2013
 
Boston
 
MA
 
Office
 
9,876

 
40,246

 
3,598

 
53,720

 
(3,382
)
 
50,338

 
100.0
%
1180 Raymond
 
08/20/2013
 
Newark
 
NJ
 
Apartment
 
8,292

 
36,166

 
136

 
44,594

 
(1,288
)
 
43,306

 
100.0
%
Park Highlands II
 
12/10/2013
 
North Las Vegas
 
NV
 
Undeveloped Land
 
20,976

 
—

 
—

 
20,976

 
—

 
20,976

 
99.5
%
Maitland Promenade II
 
12/18/2013
 
Orlando
 
FL
 
Office
 
3,434

 
23,613

 
4,812

 
31,859

 
(1,623
)
 
30,236

 
100.0
%
Plaza Buildings
 
01/14/2014
 
Bellevue
 
WA
 
Office
 
53,040

 
126,464

 
8,930

 
188,434

 
(5,285
)
 
183,149

 
100.0
%
424 Bedford
 
01/31/2014
 
Brooklyn
 
NY
 
Apartment
 
8,860

 
24,691

 
—

 
33,551

 
(446
)
 
33,105

 
90.0
%
Richardson Land II
 
09/04/2014
 
Richardson
 
TX
 
Undeveloped Land
 
7,631

 
—

 
—

 
7,631

 
—

 
7,631

 
90.0
%
 
 
 
 
 
 
 
 
 
 
$
231,742

 
$
624,035

 
$
51,914

 
$
907,691

 
$
(55,225
)
 
$
852,466

 
 
_____________________
(1) Amounts are net of impairment charges.

12
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

Operating Leases
Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2014, the leases, excluding options to extend and apartment leases, which have terms that are generally one year or less, had remaining terms of up to 13.5 years with a weighted-average remaining term of 3.8 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions or foreclosures related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $4.6 million and $3.5 million as of September 30, 2014 and December 31, 2013, respectively.
During the nine months ended September 30, 2014 and 2013, the Company recognized deferred rent from tenants of $6.9 million and $3.3 million, respectively, net of lease incentive amortization. As of September 30, 2014 and December 31, 2013, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $15.2 million and $7.8 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $1.6 million and $1.2 million of unamortized lease incentives as of September 30, 2014 and December 31, 2013, respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.
As of September 30, 2014, the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):
October 1, 2014 through December 31, 2014
$
17,234

2015
68,565

2016
62,647

2017
52,762

2018
42,495

Thereafter
95,116

 
$
338,819

As of September 30, 2014, the Company’s commercial real estate properties were leased to approximately 450 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:
Industry
 
Number of
Tenants
 
Annualized
Base Rent (1) 
(in thousands)
 
Percentage of
Annualized
Base Rent
Finance
 
47
 
$
11,450

 
15.4
%
Computer System Design & Programming
 
36
 
9,125

 
12.3
%
Insurance Carriers & Related Activities
 
25
 
7,598

 
10.2
%
 
 
 
 
$
28,173

 
37.9
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of September 30, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

13
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.
Geographic Concentration Risk
As of September 30, 2014, the Company’s real estate investments in Texas and Washington represented 21.6% and 28.6% of the Company’s total assets, respectively.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Washington and Texas real estate markets.  Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.
Property Damage
During the nine months ended September 30, 2014, two of the Company’s apartment properties suffered physical damages due to broken pipes. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to $25,000 per incident. Based on management’s estimates, the Company recognized an estimated aggregate loss due to damages of $0.8 million during the nine months ended September 30, 2014, which was reduced by $0.7 million of estimated insurance recoveries related to such damages, which the Company determined were probable of collection. The aggregate net loss due to damages of $50,000 during the nine months ended September 30, 2014 was classified as operating, maintenance and management expenses on the accompanying consolidated statements of operations and relates to the Company’s insurance deductible. Through September 30, 2014, the Company received insurance proceeds of $0.4 million related to these two incidents. As of September 30, 2014, the total estimated insurance proceeds to be collected of $0.3 million were classified as deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets.
5.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW‑MARKET LEASE LIABILITIES
As of September 30, 2014 and December 31, 2013, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Cost
 
$
51,914

 
$
48,012

 
$
3,873

 
$
4,394

 
$
(7,694
)
 
$
(5,955
)
Accumulated Amortization
 
(16,947
)
 
(10,751
)
 
(1,585
)
 
(1,459
)
 
2,738

 
1,535

Net Amount
 
$
34,967

 
$
37,261

 
$
2,288

 
$
2,935

 
$
(4,956
)
 
$
(4,420
)
Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2014 and 2013 were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Three Months Ended
September 30,
 
For the Three Months Ended
September 30,
 
For the Three Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Amortization
 
$
(3,397
)
 
$
(3,573
)
 
$
(235
)
 
$
(359
)
 
$
575

 
$
523


14
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Nine Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Amortization
 
$
(11,793
)
 
$
(7,092
)
 
$
(843
)
 
$
(1,025
)
 
$
1,856

 
$
1,055

Additionally, as of September 30, 2014 and December 31, 2013, the Company had recorded unamortized tax abatement intangible assets, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $8.5 million and $4.6 million, respectively.  During the three and nine months ended September 30, 2014, the Company recorded amortization expense of $0.2 million and $0.7 million related to tax abatement intangible assets, respectively.  During the three and nine months ended September 30, 2013, the Company recorded amortization expense of $0.1 million related to tax abatement intangible assets.
6.
REAL ESTATE LOAN RECEIVABLE
As of September 30, 2014, the Company owned one real estate loan receivable that it had originated. The information for that real estate loan receivable as of September 30, 2014 and December 31, 2013 is set forth below (in thousands):
Loan Name
Location of Related Property or 
Collateral
 
Date Acquired/ Originated
 
Property Type
 
Loan Type
 
Outstanding Principal Balance as of September 30, 2014 (1)
 
Book Value
as of September 30, 2014 (2)
 
Book Value as of December 31, 2013 (2)
 
Contractual Interest Rate (3)
 
Annualized Effective Interest Rate (3)
 
Maturity Date
University House First Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New York, New York (4)
 
3/20/2013
 
Student Housing
 
Mortgage
 
$
27,850

 
$
27,216

 
$
21,893

 
11.0%
 
14.2%
 
06/30/2015
_____________________
(1) Outstanding principal balance as of September 30, 2014 represents original principal balance outstanding under the loan, increased for any subsequent fundings, including interest income deferred until maturity.
(2) Book value of the real estate loan receivable represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.
(3) Contractual interest rates are the stated interest rates on the face of the loans. Annualized effective interest rates are calculated as the actual interest income recognized in 2014, using the interest method annualized (if applicable) and divided by the average amortized cost basis of the investment. The annualized effective interest rates and contractual interest rates presented are as of September 30, 2014.
(4) During the nine months ended September 30, 2014, the Company and the borrower under the University House First Mortgage entered into a loan modification under which the maturity date was extended to June 30, 2015 and the Company advanced an additional $5.9 million to the borrower.
The following summarizes the activity related to the real estate loan receivable for the nine months ended September 30, 2014 (in thousands):
Real estate loan receivable - December 31, 2013
$
21,893

Advance on real estate loan receivable
5,850

Extension fee on real estate loan receivable
(935
)
Accretion of closing costs and origination fees on real estate loan receivable, net
408

Real estate loan receivable - September 30, 2014
$
27,216


15
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

For the three and nine months ended September 30, 2014 and 2013, interest income from real estate loans receivable consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Contractual interest income (including deferred interest)
$
752

 
$
4,960

 
$
1,969

 
$
7,630

Accretion of closing costs, origination fees and extension fees, net
196

 
538

 
408

 
736

Interest accretion
—

 
328

 
—

 
1,186

Interest income from real estate loans receivable
$
948

 
$
5,826

 
$
2,377

 
$
9,552

7.
REAL ESTATE HELD FOR SALE AND DISCONTINUED OPERATIONS
The Company early adopted ASU 2014-08 for the reporting period beginning January 1, 2014. As a result of the adoption of ASU 2014-08, properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. Properties that were classified as held for sale in financial statements previously issued will remain in discontinued operations on the Company’s consolidated statements of operations. Prior to the adoption of ASU 2014-08, the operations of properties held for sale or to be disposed of and the aggregate net gains recognized upon their disposition were presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the year ended December 31, 2013, the Company disposed of three office buildings and one industrial/flex property, all of which are included in discontinued operations on the Company’s consolidated statements of operations. During the nine months ended September 30, 2014, the Company disposed of one office property and no properties were classified as held for sale as of September 30, 2014.
During the nine months ended September 30, 2014, the Company sold one office property, which was not classified as held for sale in financial statements issued for the reporting period prior to January 1, 2014. In accordance with the Company’s early adoption of ASU No. 2014-08, the operations of this property and gain on sale are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to this property for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenues
$
58

 
$
69

 
$
239

 
$
200

 
 
 
 
 
 
 
 
Total expenses
63

 
116

 
260

 
296

Discontinued Operations
The following table summarizes operating income from discontinued operations for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenues and other income
$
—

 
$
315

 
$
—

 
$
1,286

Total expenses
(15
)
 
557

 
18

 
2,473

Income (loss) from discontinued operations before gain on sales of real estate
15

 
(242
)
 
(18
)
 
(1,187
)
Gain on sales of real estate, net
—

 
—

 
—

 
4,225

Total income (loss) from discontinued operations
$
15

 
$
(242
)
 
$
(18
)
 
$
3,038


16
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

8.
NOTES AND BOND PAYABLE
As of September 30, 2014 and December 31, 2013, the Company’s notes and bond payable consisted of the following (dollars in thousands):
 
 
Book Value as
of September 30, 2014
 
Book Value as of December 31, 2013
 
Contractual Interest Rate as of September 30, 2014 (1)
 
Effective Interest Rate at September 30, 2014 (1)
 
Payment Type
 
Maturity
Date (2)
Richardson Portfolio Mortgage Loan (3)
 
$
38,000

 
$
31,566

 
One-Month LIBOR + 2.10%
 
2.26%
 
Interest Only
 
05/01/2017
Bellevue Technology Center Mortgage Loan (4)
 
49,287

 
47,408

 
One-Month LIBOR + 2.25%
 
2.41%
 
Interest Only
 
03/01/2017
Portfolio Revolving Loan Facility (5)
 
36,938

 
3,379

 
One-Month LIBOR + 2.25%
 
2.41%
 
Interest Only
 
05/01/2017
Portfolio Mortgage Loan (6)
 
91,271

 
82,766

 
One-Month LIBOR + 2.50%
 
2.66%
 
Interest Only
 
07/01/2017
1635 N. Cahuenga Mortgage Loan (7)
 
4,650

 
4,650

 
One-Month LIBOR + 2.35%
 
2.51%
 
Interest Only
 
08/01/2016
Burbank Collection Mortgage Loan (8)
 
8,200

 
8,200

 
One-Month LIBOR + 2.35%
 
2.54%
 
Interest Only
 
09/30/2016
50 Congress Mortgage Loan (9)
 
26,935

 
26,535

 
One-Month LIBOR + 1.90%
 
2.06%
 
Interest Only
 
10/01/2017
1180 Raymond Bond Payable
 
6,980

 
7,085

 
6.50%
 
6.50%
 
Principal
& Interest
 
09/01/2036
Central Building Mortgage Loan (10)
 
24,100

 
24,100

 
One-Month LIBOR + 1.75%
 
1.91%
 
Interest Only
 
11/13/2018
Maitland Promenade II Mortgage Loan (11)
 
20,182

 
20,182

 
One-Month LIBOR + 2.90%
 
3.25%
 
Interest Only
 
01/01/2017
Westmoor Center Mortgage Loan (12)
 
54,880

 
—

 
One-Month LIBOR + 2.25%
 
2.41%
 
Interest Only
 
02/01/2018
Plaza Buildings Senior Loan (13)
 
108,367

 
—

 
One-Month LIBOR + 1.90%
 
2.05%
 
Interest Only
 
01/14/2017
Plaza Buildings Mezzanine Loan (14)
 
25,000

 
—

 
(14) 
 
8.10%
 
Interest Only
 
01/14/2017
424 Bedford Mortgage Loan (15)
 
25,991

 
—

 
3.91%
 
3.91%
 
Principal
& Interest
 
10/01/2022
Total Notes and Bond Payable principal outstanding
 
520,781

 
255,871

 
 
 
 
 
 
 
 
Net Premium/Discount on Notes and Bond Payable (16)
 
20

 
1,549

 
 
 
 
 
 
 
 
Total Notes and Bond Payable, net
 
$
520,801

 
$
257,420

 
 
 
 
 
 
 
 
_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2014. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2014 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at September 30, 2014, where applicable.
(2) Represents the initial maturity date or the maturity date as extended as of September 30, 2014; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.
(3) The Company owns a 90% equity interest in the joint venture that owns the Richardson Portfolio. As of September 30, 2014, $38.0 million had been disbursed to the Company and the remaining $3.5 million is available for future disbursements, subject to certain conditions contained in the loan documents. Monthly payments are initially interest only. Beginning June 2015, monthly payments include principal and interest with principal payments of up to approximately $64,000 per month.
(4) As of September 30, 2014, $49.3 million had been disbursed to the Company and the remaining $3.7 million is available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain conditions contained in the loan documents. Monthly payments are initially interest only. Beginning March 1, 2016, monthly payments also include principal amortization payments of up to $60,000 per month.
(5) The Portfolio Revolving Loan Facility is secured by the 1800 West Loop Building and the Iron Point Business Park. The Portfolio Revolving Loan Facility is comprised of $59.5 million of revolving debt and $13.0 million of non-revolving debt available to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. As of September 30, 2014, $30.5 million of revolving debt and $6.4 million of non-revolving debt had been disbursed to the Company and the remaining $29.0 million of revolving debt and $6.6 million of non-revolving debt is available for future disbursements, subject to certain conditions contained in the loan documents. Monthly payments are initially interest only. Beginning June 1, 2016, and to the extent that there are amounts outstanding under the non-revolving portion of the loan, monthly payments will include interest and principal amortization payments of up to $80,000 per month.
(6) As of September 30, 2014, $91.3 million had been disbursed to the Company with $16.3 million of debt available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. Monthly payments are initially interest only. Beginning July 1, 2016, monthly payments will include principal and interest with principal payments calculated using an amortization schedule of 30 years and an assumed annual interest rate of 6.0%.
(7) The Company owns a 70% equity interest in the joint venture that owns the 1635 N. Cahuenga Building. As of September 30, 2014, $4.7 million had been disbursed and $2.0 million remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. Monthly payments are initially interest only. Beginning August 1, 2015, monthly payments will also include principal amortization payments of $7,000 per month.

17
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

(8) The Company owns a 90% equity interest in the joint venture that owns the Burbank Collection. As of September 30, 2014, $8.2 million had been disbursed and $3.0 million remains available for future disbursements, subject to certain terms and conditions contained in the loan documents.
(9) As of September 30, 2014, $26.9 million of the 50 Congress Mortgage Loan was funded and $5.9 million remains available, $2.9 million of which is available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements at 50 Congress and $3.0 million of which is available through October 1, 2016, subject to certain terms and conditions contained in the loan documents. Monthly payments are initially interest only. Beginning November 1, 2016, monthly payments will also include principal amortization payments of $32,000 per month.
(10) As of September 30, 2014, $24.1 million of the Central Building Mortgage Loan was funded, and $3.5 million remains available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents.
(11) As of September 30, 2014, $20.2 million of the Maitland Promenade II Mortgage Loan was funded and $2.8 million remains available for future disbursements to be used for tenant improvements, leasing commissions, capital improvements and interest shortfalls, subject to certain terms and conditions contained in the loan documents. Interest on the loan is calculated at a variable annual rate of 290 basis points over one-month LIBOR, but at no point shall the interest rate be less than 3.25%. Beginning February 1, 2016, monthly payments will include principal and interest with principal payments calculated using an amortization schedule of 30 years. Monthly payments are initially interest only.
(12) As of September 30, 2014, $54.9 million had been disbursed and $7.1 million remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. Monthly payments are initially interest only. Beginning March 1, 2017, monthly payments include principal and interest with principal payments calculated using an amortization schedule of 30 years and an annual interest rate of 6.5%.
(13) As of September 30, 2014, $108.4 million had been disbursed and $2.6 million remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. Monthly payments are initially interest only. Beginning with the February 2016 payment, monthly payments may include principal and interest, with principal payments calculated using an amortization schedule of 30 years and an annual interest rate of 6.5%.
(14) Interest on this loan is calculated as a floating rate of 785 basis points over one-month LIBOR, but at no point shall interest rate be less than 8.10%. As of September 30, 2014, $25.0 million had been disbursed and $5.0 million remains available for future disbursements, subject to certain terms and conditions contained in the loan documents.
(15) The Company owns a 90% equity interest in the joint venture that owns 424 Bedford. Monthly payments include principal and interest, with principal payments calculated using an amortization schedule of 30 years.
(16) Represents the unamortized premium/discount on notes and bond payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bond payable.
During the three and nine months ended September 30, 2014, the Company incurred $3.8 million and $11.8 million of interest expense, respectively. Included in interest expense for the three and nine months ended September 30, 2014 was $0.6 million and $2.2 million of amortization of deferred financing costs, respectively. Additionally, during the three and nine months ended September 30, 2014, the Company capitalized $0.5 million and $1.5 million of interest to its investments in undeveloped land, respectively. During the three and nine months ended September 30, 2013, the Company incurred $1.7 million and $3.4 million of interest expense, respectively. Included in interest expense for the three and nine months ended September 30, 2013 was $0.2 million and $0.4 million of amortization of deferred financing costs, respectively. As of September 30, 2014 and December 31, 2013, the Company’s deferred financing costs were $6.3 million and $5.0 million, respectively, net of amortization, and are included in prepaid expenses and other assets on the accompanying consolidated balance sheets. As of September 30, 2014 and December 31, 2013, the Company’s interest payable was $1.1 million and $0.5 million, respectively.
The following is a schedule of maturities, including principal amortization payments, for all notes and bond payable outstanding as of September 30, 2014 (in thousands):
October 1, 2014 through December 31, 2014
 
$
416

2015
 
2,006

2016
 
18,208

2017
 
394,183

2018
 
80,176

Thereafter
 
25,792

 
 
$
520,781

The Company’s notes payable contain financial debt covenants. As of September 30, 2014, the Company was in compliance with all of these debt covenants.

18
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

9.
FAIR VALUE DISCLOSURES
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). 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 both significant to the fair value measurement and unobservable.
The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Cash and cash equivalents, rent and other receivables, and accounts payable and accrued liabilities: These balances     approximate their fair values due to the short maturities of these items.
Real estate loan receivable: The Company’s real estate loan receivable is presented in the accompanying consolidated balance sheets at its amortized cost net of recorded loan loss reserves and not at fair value. The fair values of real estate loans receivable are estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.
Notes and bond payable: The fair values of the Company’s notes and bond payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.

19
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013, which carrying amounts do not approximate the fair values (in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
 
Face Value        
 
Carrying Amount    
 
Fair Value        
 
Face Value        
 
Carrying Amount    
 
Fair Value        
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans receivable
 
$
27,850

 
$
27,216

 
$
27,850

 
$
22,000

 
$
21,893

 
$
22,000

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Notes and bond payable
 
$
520,781

 
$
520,801

 
$
524,085

 
$
255,871

 
$
257,420

 
$
258,876

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.
Assets and Liabilities Recorded at Fair Value
During the nine months ended September 30, 2014, the Company measured the following liability at fair value (in thousands):
 
 
 
Fair Value Measurements Using
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Nonrecurring Basis (1):
 
 
 
 
 
 
 
424 Bedford Mortgage Loan
$
(24,793
)
 
$
—

 
$
—

 
$
(24,793
)
_____________________
(1) Amounts reflect the fair values of the assets and liabilities at the time each event occurred.
The Company estimated the fair value of the 424 Bedford Mortgage Loan by performing a discounted cash flow analysis and the discount rate applied to future estimated debt payments was 4.80%.
10.
RELATED PARTY TRANSACTIONS
The Advisory Agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments and the disposition of real estate and real estate-related investments (including the discounted payoff of non-performing loans) among other services, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. The Advisory Agreement may also entitle the Advisor to certain back-end cash flow participation fees. The Company also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with KBS Capital Markets Group LLC, the dealer manager for the Company’s initial public offering (the “Dealer Manager”), pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”) and KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”).

20
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance.
During the three and nine months ended September 30, 2014 and 2013, no other transactions occurred between the Company and these other KBS-sponsored programs.
Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 2014 and 2013, respectively, and any related amounts payable as of September 30, 2014 and December 31, 2013 (in thousands):
 
 
Incurred
 
 
 
 
 
 
 
Payable as of
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
September 30,
 
December 31,
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Expensed
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees (1)
 
$
2,049

 
$
1,235

 
$
5,567

 
$
2,965

 
$
—

 
$
—

Real estate acquisition fees
 
—

 
857

 
2,274

 
2,469

 
—

 
—

Reimbursable operating expenses (2)
 
37

 
44

 
110

 
102

 
—

 
—

Disposition fees (3)
 
—

 
—

 
—

 
77

 
—

 
—

Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition and origination fees on real estate loans receivable
 
—

 
—

 
—

 
220

 
—

 
—

Acquisition fee on investment in unconsolidated joint venture
 
—

 
—

 
1,573

 
—

 
—

 
—

Acquisition fee on undeveloped land
 
67

 
—

 
67

 
—

 
—

 
—

 
 
$
2,153

 
$
2,136

 
$
9,591

 
$
5,833

 
$
—

 
$
—

_____________________
(1) Amounts include asset management fees from discontinued operations.
(2) The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $37,000 and $44,000 for the three months ended September 30, 2014 and 2013, respectively, and $110,000 and $102,000 for the nine months ended September 30, 2014 and 2013, respectively, and were the only employee costs reimbursed under the Advisory Agreement during these periods. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers.
(3) Disposition fees with respect to real estate sold are included in the gain on sales of real estate in the accompanying consolidated statements of operations.

21
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

11.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of September 30, 2014 and December 31, 2013, the Company’s investments in unconsolidated joint ventures were composed of the following (dollars in thousands):
 
 
 
 
 
 
 
 
Investment Balance at
Joint Venture
 
Number of Properties
 
Location
 
Ownership %
 
September 30,
2014
 
December 31, 2013
NIP Joint Venture
 
23
 
Various
 
Less than 5.0%
 
$
7,484

 
$
7,484

110 William Joint Venture
 
1
 
New York, New York
 
60.0%
 
66,484

 
8,854

 
 
 
 
 
 
 
 
$
73,968

 
$
16,338

Investment in National Industrial Portfolio Joint Venture
On May 18, 2012, the Company, through an indirect wholly owned subsidiary, entered into a joint venture (the “NIP Joint Venture”) with OCM NIP JV Holdings, L.P. and HC KBS NIP JV, LLC (“HC-KBS”). The NIP Joint Venture owns 23 industrial properties and a master lease with respect to another industrial property encompassing 11.4 million square feet. The Company made an initial capital contribution of $8.0 million which represents less than a 5.0% ownership interest in the NIP Joint Venture as of September 30, 2014. The Company has virtually no influence over the NIP Joint Venture’s operations, financial policies or decision making. Accordingly, the Company has accounted for its investment in the NIP Joint Venture under the cost method of accounting. Income, losses and distributions from the NIP Joint Venture are generally allocated among the members based on their respective equity interests.
KBS REIT I, an affiliate of the Advisor, is a member of HC-KBS and has a participation interest in certain future potential profits generated by the NIP Joint Venture.  However, KBS REIT I does not have any equity interest in the NIP Joint Venture. None of the other joint venture partners are affiliated with the Company or the Advisor.
As of September 30, 2014 and December 31, 2013, the book value of the Company’s investment in the NIP Joint Venture was $7.5 million. During the nine months ended September 30, 2014 and 2013, the Company did not receive any distributions related to its investment in the NIP Joint Venture.
Investment in 110 William Joint Venture
On December 23, 2013, the Company, through an indirect wholly owned subsidiary, entered into an agreement with SREF III 110 William JV, LLC (the “110 William JV Partner”) to form a joint venture (the “110 William Joint Venture”). On May 2, 2014, the 110 William Joint Venture acquired an office property containing 928,157 rentable square feet located on approximately 0.8 acres of land in New York, New York (“110 William Street”). At acquisition, 110 William Street was 97% leased to 33 tenants. Each of the Company and the 110 William JV Partner hold a 60% and 40% ownership interest in the 110 William Joint Venture, respectively. The Company exercises significant influence over the operations, financial policies and decision making with respect to the 110 William Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 110 William Joint Venture under the equity method of accounting. Income, losses and distributions are generally allocated based on the members’ respective equity interests.
The contractual purchase price of 110 William Street was $261.1 million plus closing costs. The 110 William Joint Venture funded the purchase of 110 William Street through (i) the assumption of an existing first mortgage loan from an unaffiliated lender with a face amount of $141.5 million bearing interest at a fixed rate of 4.8% per annum and maturing on July 6, 2017, (ii) the assumption of an existing mezzanine loan from an unaffiliated lender with a face amount of $20.0 million bearing interest at a fixed rate of 9.5% per annum and maturing on July 6, 2017 and (iii) contributions from the Company and the 110 William JV Partner to the 110 William Joint Venture.

22
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

As of September 30, 2014 and December 31, 2013, the book value of the Company’s investment in the 110 William Joint Venture was $66.5 million and $8.9 million, respectively. During the three and nine months ended September 30, 2014, the Company recognized an equity in loss of unconsolidated joint venture of $0.3 million and $0.8 million, respectively, related to the Company’s share of income and expenses incurred by the 110 William Joint Venture.
Summarized financial information for the 110 William Joint Venture follows (in thousands):
 
 
September 30, 2014
 
December 31, 2013
Assets:
 
 
 
 
       Real estate assets, net of accumulated depreciation and amortization
 
$
277,619

 
$
—

       Other assets
 
14,837

 
15,000

       Total assets
 
$
292,456

 
$
15,000

Liabilities and Equity:
 
 
 
 
       Notes payable, net
 
169,440

 
—

       Other liabilities
 
14,893

 
243

       Partners’ capital
 
108,123

 
14,757

Total Liabilities and Equity
 
$
292,456

 
$
15,000

 
 
Three Months ended
September 30, 2014
 
Nine Months ended
September 30, 2014
Revenues
 
$
8,428

 
$
13,876

Expenses:
 
 
 
 
       Operating, maintenance, and management
 
2,463

 
3,852

       Real estate taxes and insurance
 
1,313

 
2,162

       Real estate acquisition fees and expenses
 
24

 
1,016

       Depreciation and amortization
 
3,441

 
5,497

       Interest expense
 
1,585

 
2,616

Total expenses
 
8,826

 
15,143

Total other income
 
1

 
34

Net loss
 
(397
)
 
(1,233
)
Equity in loss of unconsolidated joint venture
 
$
(256
)
 
$
(757
)

23
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

12.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information for the three and nine months ended September 30, 2014 and 2013 has been prepared to give effect to the acquisition of the Plaza Buildings as if the acquisition had occurred on January 1, 2013. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the acquisition occurred on this date, nor does it purport to predict the results of operations for future periods (in thousands, except share and per share amounts).
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
$
27,598

 
$
27,588

 
$
79,008

 
$
58,360

Depreciation and amortization
 
$
11,895

 
$
10,427

 
$
35,763

 
$
23,015

Net (loss) income attributable to common stockholders
 
$
(3,367
)
 
$
6,774

 
$
(16,258
)
 
$
4,703

Net (loss) income per common share, basic and diluted
 
$
(0.06
)
 
$
0.12

 
$
(0.27
)
 
$
0.08

Weighted-average number of common shares outstanding, basic and diluted
 
59,735,474

 
58,330,896

 
59,658,088

 
58,265,522

The unaudited pro forma information for the three and nine months ended September 30, 2014 was adjusted to exclude $2.1 million of acquisition costs incurred in 2014 in connection with the acquisition of the above property.
13.
COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide these services, the Company will be required to obtain such services from other sources.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations as of September 30, 2014. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
Legal Matters
From time to time, the Company is a party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and the possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

24
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2014
(unaudited)

14.
EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per share (in thousands, except share and per share amounts):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(3,441
)
 
$
7,502

 
$
(18,783
)
 
$
3,536

Loss from continuing operations attributable to noncontrolling interests
 
59

 
84

 
486

 
238

(Loss) income from continuing operations attributable to common stockholders
 
(3,382
)
 
7,586

 
(18,297
)
 
3,774

Total income (loss) from discontinued operations
 
15

 
(242
)
 
(18
)
 
3,038

Total income from discontinued operations attributable to noncontrolling interests
 
—

 
—

 
—

 
(398
)
Total income (loss) from discontinued operations attributable to common stockholders
 
15

 
(242
)
 
(18
)
 
2,640

Net (loss) income loss attributable to common stockholders
 
$
(3,367
)
 
$
7,344

 
$
(18,315
)
 
$
6,414

 
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding, basic and diluted
 
59,735,474

 
58,330,896

 
59,658,088

 
58,265,522

 
 
 
 
 
 
 
 
 
Basic and diluted (loss) income per common share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.06
)
 
$
0.13

 
$
(0.31
)
 
$
0.06

Discontinued operations
 
—

 
—

 
—

 
0.05

Net (loss) income per common share
 
$
(0.06
)
 
$
0.13

 
$
(0.31
)
 
$
0.11

15.
SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the consolidated financial statements are issued.
Distribution Declared
On November 12, 2014, the Company’s board of directors authorized a distribution in the amount of $0.088219 per share of common stock to stockholders of record as of the close of business on December 15, 2014. The Company expects to pay this distribution on December 29, 2014. The board of directors will declare distributions from time to time based on the Company’s income, cash flow and investing and financing activities. As such, the Company can give no assurances as to the timing, amount or notice with respect to any future distribution declarations.


25
PART I. FINANCIAL INFORMATION (CONTINUED)
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 financial statements of KBS Strategic Opportunity REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Strategic Opportunity REIT, Inc., a Maryland corporation, and, as required by context, KBS Strategic Opportunity Limited Partnership, a Delaware limited partnership, which we refer to as the “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 KBS Strategic Opportunity REIT, 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 of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
We have a limited operating history. This inexperience makes our future performance difficult to predict.
•
All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and other KBS‑affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS‑advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. Fees paid to our advisor in connection with transactions involving the origination, acquisition and management of our investments are based on the cost of the investment, not on the quality of the investment or services rendered to us. This arrangement could influence our advisor to recommend riskier transactions to us.
•
We pay substantial fees to and expenses of our advisor and its affiliates and, in connection with our initial public offering, we paid substantial fees to our dealer manager and participating broker-dealers. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase our stockholders’ risk of loss.
•
We have paid distributions from financings and expect that in the future we may not pay distributions solely from our cash flow from operations or gains from asset sales. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have less funds available for investment in loans, properties and other assets, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.
•
Continued disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to stockholders.
•
We have focused, and expect to continue to focus, our investments in non-performing real estate and real estate‑related loans, real estate-related loans secured by non-stabilized assets and real estate-related debt securities in distressed debt, which involve more risk than investments in performing real estate and debt.

26
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•
Our opportunistic investment strategy involves a higher risk of loss than would a strategy of investing in some other types of real estate and real estate-related investments.
•
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our property investments could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, limiting our ability to pay distributions to our stockholders.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”).
Overview
We were formed on October 8, 2008 as a Maryland corporation, elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010 and intend to operate in such manner. KBS Capital Advisors LLC (“KBS Capital Advisors”) is our advisor. As our advisor, KBS Capital Advisors manages our day-to-day operations and our portfolio of investments. KBS Capital Advisors also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors. KBS Capital Advisors will also provide asset-management, marketing, investor-relations and other administrative services on our behalf.
On January 8, 2009, we filed a registration statement on Form S‑11 with the SEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public, of which 100,000,000 shares were registered in our primary offering and 40,000,000 shares were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on November 14, 2012. We sold 56,584,976 shares of common stock in the primary offering for gross offering proceeds of $561.7 million. We continue to offer shares of common stock under the dividend reinvestment plan. As of September 30, 2014, we had sold 3,699,313 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $35.9 million. Also as of September 30, 2014, we had redeemed 676,851 of the shares sold in our offering for $6.7 million. Additionally, on December 29, 2011 and October 23, 2012, we issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.
As of September 30, 2014, we owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures.
Market Outlook – Real Estate and Real Estate Finance Markets
The following discussion is based on management’s beliefs, observations and expectations with respect to the real estate and real estate finance markets.
As a direct result of the recent recession, the Federal Reserve has maintained an accommodative monetary policy since the introduction of quantitative easing (“QE”) in October of 2008. Through this program, the Federal Reserve injected trillions of U.S. dollars into the global financial markets through the purchases of U.S. treasury bonds and mortgage backed securities. At present, it is unclear what the final cost or impact of this program will be. In July 2014, the Federal Reserve announced plans to end the purchase of securities by October 2014. The imminent end of this program has shifted investor focus from QE to the timing of an eventual interest rate increase by the Federal Reserve.
In the United States, recent economic data has been improving. Slow and steady growth in the labor markets has driven unemployment below 6%. The U.S. labor participation rate continues to be less than optimal at 62.7% as of September 2014 and personal income growth remained muted at 0.3% as of August 2014. Consumer spending in the United States has increased, and is being driven by lower debt service burdens, record level stock market valuations and rebounding home prices. U.S. gross domestic product (“U.S. GDP”) has continued to grow at a moderate level. In the fourth quarter of 2013, U.S. GDP increased at an annual rate of 3.5%, which was followed by a decrease in U.S. GDP of 2.1% in the first quarter of 2014. In the second quarter of 2014, U.S. GDP grew at an annual rate of 4.6% and the current consensus expectation for overall U.S. GDP growth in 2014 is a modest 2.2%.

27
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

The U.S. dollar has remained a safe haven currency and the U.S. commercial real estate market has benefited from an inflow of foreign capital. Initially, gateway markets such as New York City and San Francisco benefited from a high demand for commercial properties. By 2014, the commercial real estate market recovery had spread to secondary and tertiary markets and to most asset classes. The U.S. commercial real estate market has continued to gain favor as an alternative investment class and capital flows continue to improve. Looking forward, however, the recovery in commercial real estate is expected to remain uneven across geographies and among property types.
After several years of improving market conditions, the recovery in the U.S. residential real estate market has recently begun to slow. The initial recovery was driven by low interest rates, pent-up demand from the consumer sector and institutional investors in the form of buy-to-rent portfolios. In 2014, investor demand for homes has slowed and stringent mortgage lending standards have reduced demand in the residential markets. In addition, as referenced above, the Federal Reserve’s QE program, which peaked at $85 billion a month in purchases of long-term treasury bonds and mortgage backed securities terminated on October 31, 2014. This reduction in market support could cause the demand for residential real estate to decrease further.
From a global standpoint, the U.S. economy is considered to be a bright spot. Recently the International Monetary Fund (“IMF”) lowered its global growth forecast from 3.7% to 3.3%. Lower than expected growth in the European Union (“EU”) and Chinese economies are the primary factors in the forecast change. Geopolitical events in the Ukraine and Middle East and the recent outbreak of the Ebola virus in Africa, and its possible spread to the rest of the world, have all been impediments to global economic growth.
Overall, despite indications of recovery in the United States and the U.K., uncertainties abound. China’s export-based economy has slowed, the EU is wrestling with the specter of deflation and another recession, and in Japan the government continues to experiment with a large-scale QE program of its own. In the United States, the Federal Reserve has stuck to its schedule for ending the QE program and we are monitoring the markets for their reaction to global economic slowing and related uncertainty. In the short-term, we anticipate that market conditions will continue to change and, combined with a challenging global macro-economic environment, may interfere with the implementation of our business strategy and/or force us to modify it.
Liquidity and Capital Resources
Our principal demand for funds during the short and long-term is and will be for the acquisition of properties, loans and other real estate-related investments; the payment of operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; and payments of distributions to stockholders. To date, we have had five primary sources of capital for meeting our cash requirements:
•
Proceeds from the primary portion of our initial public offering; 
•
Proceeds from our dividend reinvestment plan;
•
Debt financing;
•
Proceeds from the sale of real estate and the repayment of real estate-related investments; and
•
Cash flow generated by our real estate and real estate-related investments. 
We sold 56,584,976 shares of common stock in the primary portion of our initial public offering for gross offering proceeds of $561.7 million. We ceased offering shares in the primary portion of our initial public offering on November 14, 2012. We continue to offer shares of common stock under the dividend reinvestment plan. As of September 30, 2014, we had sold 3,699,313 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $35.9 million. To date, we have invested substantially all of the net proceeds from our initial public offering in real estate and real estate-related investments and we may make a limited number of investments in the future to the extent we have sufficient cash on hand for any such investments. We intend to use our cash on hand, proceeds from debt financing, cash flow generated by our real estate operations and real estate-related investments, proceeds from our dividend reinvestment plan and principal repayments on our real estate loans receivable as our primary sources of immediate and long-term liquidity.
Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures and corporate general and administrative expenses.  Cash flow from operations from our real estate investments is primarily dependent upon the occupancy levels of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures.  As of September 30, 2014, our office and retail properties were collectively 79% occupied and our apartment properties were collectively 83% occupied. 

28
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Investments in real estate-related loans generate cash flow in the form of interest income, which are reduced by loan service fees, asset management fees and corporate general and administrative expenses. As of September 30, 2014, we had one real estate loan receivable outstanding with a total book value of $27.2 million. The borrower under our real estate loan receivable was current on all contractual debt service payments.
As of September 30, 2014, we had outstanding debt obligations in the aggregate principal amount of $520.8 million, all of which mature between 2016 and 2036. As of September 30, 2014, we had $29.0 million of unrestricted secured revolving debt available for future disbursements under a portfolio loan facility, subject to certain conditions set forth in the loan agreement.
Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the Conflicts Committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended September 30, 2014 did not exceed the charter imposed limitation.
For the nine months ended September 30, 2014, our cash needs for acquisitions, capital expenditures and debt servicing were met with proceeds from debt financing and proceeds from our dividend reinvestment plan. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments and cash on hand.
Cash Flows from Operating Activities
As of September 30, 2014, we owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures. During the nine months ended September 30, 2014, net cash provided by operating activities was $7.3 million. We expect that our cash flows from operating activities will increase in future years as a result of owning the assets acquired during 2014 for an entire period and leasing additional space that is currently unoccupied.
Cash Flows from Investing Activities
Net cash used in investing activities was $276.1 million for the nine months ended September 30, 2014 and primarily consisted of the following:
•
Acquisitions of one office property, one apartment property and undeveloped land for an aggregate purchase price of $191.7 million, after giving effect for escrow deposits and liabilities assumed;
•
Investment in an unconsolidated joint venture of $58.4 million;
•
Improvements to real estate of $22.8 million;
•
Advance on real estate loan receivable of $5.0 million, net of a $0.9 million extension fee;
•
Proceeds from the sale of real estate of $1.4 million; and
•
Principal repayments on real estate securities of $0.3 million.
Cash Flows from Financing Activities
Net cash provided by financing activities was $230.0 million for the nine months ended September 30, 2014 and consisted primarily of the following:
•
$235.0 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $272.6 million, partially offset by principal payments on notes payable of $34.0 million and payments of deferred financing costs of $3.6 million;
•
$3.8 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $6.6 million;
•
$3.5 million of cash used for redemptions of common stock; and
•
$2.4 million of contributions from noncontrolling interests.

29
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets; however, we may exceed that limit if a majority of the Conflicts Committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of September 30, 2014, our borrowings and other liabilities were approximately 52% of the cost (before depreciation or other noncash reserves) and book value (before depreciation) of our tangible assets.
In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our advisor and our dealer manager. During our offering stage, these payments included payments to our dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to our dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. During our acquisition and development stage, we expect to continue to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us as well as for any dispositions of assets (including the discounted payoff of non-performing loans).
The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee.
Among the fees payable to our advisor is an asset management fee. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment, inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan or other investment, plus the fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the sum of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property, and inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment, inclusive of our proportionate share of any fees and expenses related thereto.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of September 30, 2014 (in thousands):
 
 
 
 
Payments Due During the Years Ending December 31,
Contractual Obligations
 
Total
 
Remainder of 2014
 
2015-2016
 
2017-2018
 
Thereafter
Outstanding debt obligations (1)
 
$
520,781

 
$
416

 
$
20,214

 
$
474,359

 
$
25,792

Interest payments on outstanding debt obligations (2)
 
48,167

 
3,600

 
28,678

 
7,741

 
8,148

_____________________
(1) Amounts include principal payments only.
(2) Projected interest payments are based on the outstanding principal amounts and interest rates in effect at September 30, 2014. We incurred interest expense of $11.1 million, excluding amortization of deferred financing costs of $2.2 million and interest capitalized of $1.5 million, for the nine months ended September 30, 2014.

30
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations
Overview
As September 30, 2013, we owned 11 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 43 acres of undeveloped land, one office portfolio consisting of three office properties, one industrial/flex property, one retail property, one apartment property, 1,375 acres of undeveloped land, one investment in commercial mortgage-backed securities, one first mortgage loan and one investment in an unconsolidated joint venture. As of September 30, 2014, we owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures. Our results of operations for the three and nine months ended September 30, 2014 may not be indicative of those in future periods as the occupancy in our properties has not been stabilized. As of September 30, 2014, our office and retail properties were collectively 79% occupied and our apartment properties were collectively 83% occupied.  However, due to the short outstanding weighted-average lease term in the portfolio of less than four years, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our assets will increase, or that we will recognize a gain on the sale of our assets. We funded the acquisitions of these investments with proceeds from our initial public offering and debt financing. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of owning the assets acquired in 2014 for an entire period.
Comparison of the three months ended September 30, 2014 versus the three months ended September 30, 2013
The following table provides summary information about our results of operations for the three months ended September 30, 2014 and 2013 (dollar amounts in thousands):
 
 
Three Months Ended September 30,
 
Increase (Decrease)
 
Percentage Change
 
$ Change Due to Acquisitions/ Originations/Dispositions (1)
 
$ Change Due to 
Investments Held Throughout
Both Periods (2)
 
 
2014
 
2013
 
 
 
 
Rental income
 
$
21,505

 
$
13,828

 
$
7,677

 
56
 %
 
$
6,414

 
$
1,263

Tenant reimbursements
 
4,404

 
3,341

 
1,063

 
32
 %
 
411

 
652

Interest income from real estate loans receivable
 
948

 
5,826

 
(4,878
)
 
(84
)%
 
(5,105
)
 
227

Other operating income
 
741

 
256

 
485

 
189
 %
 
465

 
20

Operating, maintenance, and management costs
 
8,992

 
6,700

 
2,292

 
34
 %
 
1,887

 
405

Real estate taxes, property-related taxes, and insurance
 
3,409

 
2,762

 
647

 
23
 %
 
466

 
181

Asset management fees to affiliate
 
2,049

 
1,203

 
846

 
70
 %
 
766

 
80

Real estate acquisition fees to affiliate
 
—

 
857

 
(857
)
 
n/a

 
(857
)
 
n/a

Real estate acquisition fees and expenses
 
—

 
348

 
(348
)
 
n/a

 
(348
)
 
n/a

General and administrative expenses
 
726

 
649

 
77

 
12
 %
 
n/a

 
n/a

Depreciation and amortization
 
11,895

 
9,066

 
2,829

 
31
 %
 
2,621

 
208

Interest expense
 
3,777

 
1,742

 
2,035

 
117
 %
 
2,138

 
(103
)
_____________________
(1) Represents the dollar amount increase (decrease) for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 related to real estate and real estate-related investments acquired, originated, repaid or disposed on or after July 1, 2013.
(2) Represents the dollar amount increase (decrease) for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 with respect to real estate and real estate-related investments owned by us during the entire periods presented.
Rental income and tenant reimbursements increased from $13.8 million and $3.3 million, respectively, for the three months ended September 30, 2013 to $21.5 million and $4.4 million, respectively, for the three months ended September 30, 2014, primarily as a result of the growth in our real estate portfolio. Additionally, rental income and tenant reimbursements related to properties held throughout both periods increased by $1.9 million as a result of a slight increase in occupancy. We expect rental income and tenant reimbursements to increase in future periods as a result of owning the assets acquired during 2014 for an entire period and leasing additional space.

31
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Interest income from our real estate loans receivable decreased from $5.8 million for the three months ended September 30, 2013 to $0.9 million for the three months ended September 30, 2014 primarily due to the early payoff of the Ponte Palmero First Mortgage in August 2013. Our interest income in future periods will decrease upon any principal repayment on our real estate loan receivable or increase as a result of any additional fundings.
Property operating costs and real estate taxes and insurance increased from $6.7 million and $2.8 million, respectively, for the three months ended September 30, 2013 to $9.0 million and $3.4 million, respectively, for the three months ended September 30, 2014, primarily as a result of the growth in our real estate portfolio. We expect property operating costs and real estate taxes and insurance to increase in future periods as a result of owning the assets acquired during 2014 for an entire period and increasing occupancy of our real estate assets.
Asset management fees increased from $1.2 million for the three months ended September 30, 2013 to $2.0 million for the three months ended September 30, 2014, as a result of the growth in our investment portfolio. We expect asset management fees to increase in future periods as a result of owning the assets acquired in 2014 for an entire period. All asset management fees incurred as of September 30, 2014 have been paid.
Real estate acquisition fees and expenses to affiliates and non-affiliates was $1.2 million for the three months ended September 30, 2013. We did not expense any real estate acquisition fees and expenses during the three months ended September 30, 2014. During the three months ended September 30, 2014, we capitalized $0.2 million in acquisition fees and expenses related to our investment in undeveloped land. We do not expect to incur significant real estate acquisition fees and expenses in future periods as we do not expect to make significant acquisitions, if any acquisitions at all.
Depreciation and amortization increased from $9.1 million for the three months ended September 30, 2013 to $11.9 million for the three months ended September 30, 2014, due to the growth of our real estate portfolio. We expect depreciation and amortization to increase in future periods as a result of owning the assets acquired during 2014 for an entire period.
Interest expense increased from $1.7 million for the three months ended September 30, 2013 to $3.8 million for the three months ended September 30, 2014. Excluded from interest expense was $0.5 million of interest capitalized to our investments in undeveloped land during the three months ended September 30, 2014. The increase in interest expense is primarily a result of our use of debt in connection with the acquisitions of real estate assets. Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

32
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the nine months ended September 30, 2014 versus the nine months ended September 30, 2013
The following table provides summary information about our results of operations for the nine months ended September 30, 2014 and 2013 (dollar amounts in thousands):
 
 
Nine Months Ended
September 30,
 
Increase (Decrease)
 
Percentage Change
 
$ Change Due to Acquisitions/ Originations/ Dispositions (1)
 
$ Change Due to 
Investments Held Throughout
Both Periods (2)
 
 
2014
 
2013
 
 
 
 
Rental income
 
$
61,932

 
$
31,107

 
$
30,825

 
99
 %
 
$
27,517

 
$
3,308

Tenant reimbursements
 
12,029

 
6,508

 
5,521

 
85
 %
 
4,752

 
769

Interest income from real estate loans receivable
 
2,377

 
9,552

 
(7,175
)
 
(75
)%
 
(7,175
)
 
—

Other operating income
 
2,131

 
853

 
1,278

 
150
 %
 
1,287

 
(9
)
Operating, maintenance, and management costs
 
26,285

 
14,942

 
11,343

 
76
 %
 
10,259

 
1,084

Real estate taxes, property-related taxes, and insurance
 
10,329

 
6,355

 
3,974

 
63
 %
 
3,882

 
92

Asset management fees to affiliate
 
5,567

 
2,868

 
2,699

 
94
 %
 
2,608

 
91

Real estate acquisition fees to affiliate
 
2,274

 
2,469

 
(195
)
 
(8
)%
 
(195
)
 
n/a

Real estate acquisition fees and expenses
 
2,178

 
834

 
1,344

 
161
 %
 
1,344

 
n/a

General and administrative expenses
 
2,618

 
2,326

 
292

 
13
 %
 
n/a

 
n/a

Depreciation and amortization
 
35,509

 
18,933

 
16,576

 
88
 %
 
16,323

 
253

Interest expense
 
11,805

 
3,435

 
8,370

 
244
 %
 
8,074

 
296

Total (loss) income from discontinued operations
 
(18
)
 
3,038

 
(3,056
)
 
(101
)%
 
n/a

 
n/a

_____________________
(1) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 related to real estate and real estate-related investments acquired, originated, repaid or disposed on or after January 1, 2013.
(2) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 with respect to real estate and real estate-related investments owned by us during the entire periods presented.
Rental income and tenant reimbursements increased from $31.1 million and $6.5 million, respectively, for the nine months ended September 30, 2013 to $61.9 million and $12.0 million, respectively, for the nine months ended September 30, 2014, primarily as a result of the growth in our real estate portfolio. Additionally, rental income and tenant reimbursements related to properties held throughout both periods increased by $4.1 million as a result of a slight increase in occupancy. We expect rental income and tenant reimbursements to increase in future periods as a result of owning the assets acquired during 2014 for an entire period and leasing additional space.
Interest income from our real estate loans receivable decreased from $9.6 million for the nine months ended September 30, 2013 to $2.4 million for the nine months ended September 30, 2014 primarily due to the early payoff of the Ponte Palmero First Mortgage in August 2013, which was partially offset by the increase in interest income from the University House First Mortgage originated on March 20, 2013. Our interest income in future periods will decrease upon any principal repayment on our real estate loan receivable or increase as a result of any additional fundings.
Property operating costs and real estate taxes and insurance increased from $14.9 million and $6.4 million, respectively, for the nine months ended September 30, 2013 to $26.3 million and $10.3 million, respectively, for the nine months ended September 30, 2014, primarily as a result of the growth in our real estate portfolio. We expect property operating costs and real estate taxes and insurance to increase in future periods as a result of owning the assets acquired during 2014 for an entire period and increasing occupancy of our real estate assets.
Asset management fees increased from $2.9 million for the nine months ended September 30, 2013 to $5.6 million for the nine months ended September 30, 2014, as a result of the growth in our investment portfolio. We expect asset management fees to increase in future periods as a result of owning the assets acquired in 2014 for an entire period. All asset management fees incurred as of September 30, 2014 have been paid.
Real estate acquisition fees and expenses to affiliates and non-affiliates increased from $3.3 million for the nine months ended September 30, 2013 to $4.5 million for the nine months ended September 30, 2014. The increase is due to higher diligence costs related to properties acquired during the nine months ended September 30, 2014. Additionally, during the nine months ended September 30, 2014, we capitalized $1.8 million in acquisition fees and expenses related to our investment in an unconsolidated joint venture and our investment in undeveloped land. We expect real estate acquisition fees and expenses to decrease in future periods as we do not expect to make significant acquisitions, if any acquisitions at all.

33
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Depreciation and amortization increased from $18.9 million for the nine months ended September 30, 2013 to $35.5 million for the nine months ended September 30, 2014, due to the growth of our real estate portfolio. We expect depreciation and amortization to increase in future periods as a result of owning the assets acquired during 2014 for an entire period.
Interest expense increased from $3.4 million for the nine months ended September 30, 2013 to $11.8 million for the nine months ended September 30, 2014. Excluded from interest expense was $1.5 million of interest capitalized to our investments in undeveloped land during the nine months ended September 30, 2014. The increase in interest expense is primarily a result of our use of debt in connection with the acquisitions of real estate assets. Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
Income from discontinued operations was $3.0 million for the nine months ended September 30, 2013 and loss from discontinued operations was $18,000 for the nine months ended September 30, 2014. During the nine months ended September 30, 2013, we sold an office building that resulted in a gain on sale of $4.2 million. As of September 30, 2014, we did not own any real estate held for sale.
Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations
We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.
Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. Items such as acquisition fees and expenses, which had previously been capitalized prior to 2009, are currently expensed and accounted for as operating expenses. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses; adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.
In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land. 

34
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO.  Management believes that excluding acquisition costs from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage.  MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue.  Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance.  MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies.  MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.
FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.
Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, the amortization of discounts and closing costs and acquisition fees and expenses are the most significant adjustments for the periods presented.  We have excluded these items based on the following economic considerations:
•
Adjustments for straight-line rent.  These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease.  We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;
•
Amortization of above- and below-market leases.  Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue.  Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate; and
•
Amortization of discounts and closing costs.  Discounts and closing costs related to debt investments are amortized over the term of the loan as an adjustment to interest income.  This application results in income recognition that is different than the underlying contractual terms of the debt investments.  We have excluded the amortization of discounts and closing costs related to our debt investments in our calculation of MFFO to more appropriately reflect the economic impact of our debt investments, as discounts will not be economically recognized until the loan is repaid and closing costs are essentially the same as acquisition fees and expenses on real estate (discussed below).  We believe excluding these items provides investors with a useful supplemental metric that directly addresses core operating performance;
•
Acquisition fees and expenses.  Acquisition fees and expenses related to the acquisition of real estate are expensed.  Although these amounts reduce net income, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis.  Additionally, acquisition costs have been funded from the proceeds from our now terminated initial public offering and debt financings and not from our operations.  We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance.
Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain of our investments in undeveloped land.  We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net income (loss), FFO and MFFO.   

35
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the three and nine months ended September 30, 2014 and 2013 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.
 
For the Three Months Ended September 30,
 
For the Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Net (loss) income attributable to common stockholders
$
(3,367
)
 
$
7,344

 
$
(18,315
)
 
$
6,414

Depreciation of real estate assets
5,255

 
3,019

 
14,806

 
6,514

Depreciation of real estate assets - discontinued operations
—

 
91

 
—

 
233

Amortization of lease-related costs
6,640

 
6,047

 
20,703

 
12,419

Amortization of lease-related costs - discontinued operations
—

 
176

 
—

 
764

Gain on sale of real estate, net
(55
)
 
—

 
(55
)
 
(4,225
)
Gain on foreclosure of real estate loan receivable, net
—

 
(7,543
)
 
—

 
(7,543
)
Adjustments for noncontrolling interests - consolidated entity (1)
(169
)
 
(128
)
 
(506
)
 
52

Adjustments for investment in unconsolidated entity (2)
2,082

 
—

 
3,315

 
—

FFO
10,386

 
9,006

 
19,948

 
14,628

Straight-line rent and amortization of above- and below-market leases
(2,425
)
 
(1,458
)
 
(7,897
)
 
(3,141
)
Amortization of discounts and closing costs
(196
)
 
(531
)
 
(399
)
 
(705
)
Real estate acquisition fees to affiliate
—

 
857

 
2,274

 
2,469

Real estate acquisition fees and expenses
—

 
348

 
2,178

 
834

Amortization of net premium/discount on bond and notes payable
3

 
(40
)
 
(6
)
 
(40
)
Prepayment fees related to the extinguishment of debt
—

 
—

 
332

 
119

Adjustments for noncontrolling interests - consolidated entity (1)
25

 
4

 
(154
)
 
16

Adjustments for investment in unconsolidated entity (2)
(1,594
)
 
—

 
(1,857
)
 
—

MFFO
6,199

 
8,186

 
14,419

 
14,180

Other capitalized operating expenses (3)
(692
)
 
(115
)
 
(2,053
)
 
(346
)
Adjustments for noncontrolling interests - consolidated entity (1)
74

 
58

 
220

 
173

Adjusted MFFO
$
5,581

 
$
8,129

 
$
12,586

 
$
14,007

_____________________
(1) Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO.
(2) Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO for our equity investment in unconsolidated joint venture.
(3) Reflects real estate taxes, property insurance and financing costs that are capitalized with respect to certain of our investments in undeveloped land.  During the time in which we are incurring costs necessary to bring these investments to their intended use, certain normal recurring operating costs are capitalized in accordance with GAAP and not reflected in our net loss, FFO and MFFO.   
FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve as a result of owning the assets acquired during 2014 for an entire period and leasing additional space in our real estate assets.

36
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Distributions
Distributions declared, distributions paid and cash flows from operations were as follows for the first, second and third quarters of 2014 (in thousands, except per share amounts):
 
 
Distribution Declared
 
Distributions Declared Per Share
 
Distributions Paid
 
Cash  Flows (Used in) Provided by Operations
Period
 
 
 
Cash
 
Reinvested
 
Total
 
First Quarter 2014
 
$
2,937

 
$
0.049

 
$
—

 
$
—

 
$
—

 
$
(2,931
)
Second Quarter 2014
 
3,343

 
0.056

 
2,260

 
4,020

 
6,280

 
1,441

Third Quarter 2014
 
4,137

 
0.069

 
1,533

 
2,604

 
4,137

 
8,801

 
 
$
10,417

 
$
0.174

 
$
3,793

 
$
6,624

 
$
10,417

 
$
7,311

On March 6, 2014, our board of directors authorized a distribution in the amount of $0.04931507 per share of common stock to stockholders of record as of the close of business on March 31, 2014. We paid this distribution on April 15, 2014 and this was the only distribution declared during the first quarter of 2014.
On May 8, 2014, our board of directors authorized a distribution in the amount of $0.056096 per share of common stock to stockholders of record as of the close of business on June 16, 2014. We paid this distribution on June 23, 2014 and this was the only distribution declared during the second quarter of 2014.
On August 4, 2014, our board of directors authorized a distribution in the amount of $0.069315 per share of common stock to stockholders of record as of the close of business on September 15, 2014. We paid this distribution on September 24, 2014 and this was the only distribution declared during the third quarter of 2014.  
Our board of directors will declare distributions from time to time based on income and cash flow from our investments, gains on sales of assets and financing activities. As such, we can also give no assurances as to the timing, amount or notice with respect to any other future distribution declarations.
Our net loss attributable to common stockholders for the nine months ended September 30, 2014 was $18.3 million and our cash flows provided by operations were $7.3 million. Our cumulative distributions paid and net loss attributable to common stockholders from inception through September 30, 2014 were $55.4 million and $26.1 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and dividends reinvested by stockholders, with proceeds from debt financing of $18.7 million, proceeds from the dispositions of property of $13.7 million and cash provided by operations of $23.0 million. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have fewer funds available for investment in real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.
Critical Accounting Policies
Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC. There have been no significant changes, except for the addition of an accounting policy with respect to insurance proceeds for property damages, to our policies during 2014.

37
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Insurance Proceeds for Property Damages
We maintain an insurance policy that provides coverage for property damages and business interruption. Losses due to physical damages are recognized during the accounting period in which they occur, while the amount of monetary assets to be received from the insurance policy is recognized when receipt of insurance recoveries is probable. Losses, which are reduced by the related insurance recoveries, are recorded as operating, maintenance and management expenses on the accompanying consolidated statements of operations. Anticipated proceeds in excess of recognized losses would be considered a gain contingency and recognized when the contingency related to the insurance claim has been resolved. Anticipated recoveries for lost rental revenue due to property damages are also considered to be a gain contingency and recognized when the contingency related to the insurance claim has been resolved.
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial statements are issued.
Distribution Declared
On November 12, 2014, our board of directors authorized a distribution in the amount of $0.088219 per share of common stock to stockholders of record as of the close of business on December 15, 2014. We expect to pay this distribution on December 29, 2014. The board of directors will declare distributions from time to time based on our income, cash flow and investing and financing activities. As such, we can give no assurances as to the timing, amount or notice with respect to any future distribution declarations.




38
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity, fund distributions and to fund the refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans and the acquisition of real estate securities. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest‑earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.
We borrow funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of September 30, 2014, the fair value of our fixed rate real estate loan receivable was $27.9 million and the carrying value of our fixed rate real estate loan receivable was $27.2 million. The fair value estimate of our fixed rate real estate loan receivable was estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral-dependent loans) and the estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. As of September 30, 2014, the fair value of our fixed rate debt was $34.5 million and the carrying value of our fixed rate debt was $33.0 million. The fair value estimate of our fixed rate debt was calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated as of September 30, 2014. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting changes in fair value of our fixed rate instruments, would have a significant impact on our operations.
Conversely, movements in interest rates on variable rate debt and loans receivable would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of September 30, 2014, we were exposed to market risks related to fluctuations in interest rates on $487.8 million of variable rate debt outstanding. Based on interest rates as of September 30, 2014, if interest rates were 100 basis points higher during the 12 months ending September 30, 2015, interest expense on our variable rate debt would increase by $4.8 million. As of September 30, 2014, one-month LIBOR was 0.1525% and if the LIBOR index was reduced to 0% during the 12 months ending September 30, 2015, interest expense on our variable rate debt would decrease by $0.7 million.
The weighted-average interest rates of our fixed rate debt and variable rate debt as of September 30, 2014 were 4.5% and 2.7%, respectively.  The annual effective interest rate of our fixed rate real estate loan receivable as of September 30, 2014 was 14.2%. The annual effective interest rate represents the effective interest rate as of September 30, 2014, using the interest method that we use to recognize interest income on our real estate loans receivable. 

39
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 4. Controls and Procedures

Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

40
PART II. OTHER INFORMATION


Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the three months ended March 31, 2014, both filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a)
During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.
b)
Not applicable.
c)
We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.
Pursuant to the share redemption program there are several limitations on our ability to redeem shares:
•
Unless the shares are being redeemed in connection with a stockholder's death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.
•
During each calendar year, redemptions are limited to the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year and the last $1.0 million of such net proceeds shall be reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” (except that we may increase or decrease this funding limit by providing ten business days’ notice to our stockholders)
•
During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
•
We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
We may amend, suspend or terminate the program upon 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.


41
PART II. OTHER INFORMATION (CONTINUED)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During the nine months ended September 30, 2014, we fulfilled redemption requests and redeemed shares pursuant to the share redemption program as follows:
Month
 
Total Number
of Shares
Redeemed 
 
Average
Price Paid
Per Share (1)
 
Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2014
 
13,154

 
$
9.29

 
(2) 
February 2014
 
52,330

 
$
9.00

 
(2) 
March 2014
 
—

 
$
—

 
(2) 
April 2014
 
73,339

 
$
10.88

 
(2) 
May 2014
 
61,507

 
$
10.78

 
(2) 
June 2014
 
42,712

 
$
10.67

 
(2) 
July 2014
 
35,650

 
$
10.72

 
(2) 
August 2014
 
25,634

 
$
10.75

 
(2) 
September 2014
 
29,476

 
$
10.79

 
(2) 
Total
 
333,802

 
 
 
 
_____________________
(1) Pursuant to the program, as amended, we will initially redeem shares as follows:
•
92.5% of our most recent estimated value per share as of the applicable redemption date for those shares held for at least one year;
•
95.0% of our most recent estimated value per share as of the applicable redemption date for those shares held for at least two years;
•
97.5% of our most recent estimated value per share as of the applicable redemption date for those shares held for at least three years; and
•
100.0% of our most recent estimated value per share as of the applicable redemption date for those shares held for at least four years.
Until we announced in a public filing with the SEC the establishment of our estimated value per share on March 27, 2014, the estimated value per share was $10.00 for purposes of the foregoing prices. Notwithstanding the above, upon the death, “qualifying disability” or “determination of incompetence” of a stockholder, the redemption price was the amount paid to acquire the shares from us until we announced in a public filing with the SEC the establishment of our estimated value per share on March 27, 2014, at which time the redemption price was such estimated value per share. On March 25, 2014, our board of directors approved an estimated value per share of our common stock of $11.27, based on the estimated value of the Company’s assets less the estimated value of the Company’s liabilities, or net asset value, divided by the number of shares outstanding as of December 31, 2013, with the exception of certain adjustments for actual and expected acquisition-related costs subsequent to December 31, 2013. The change in the redemption price was effective for the April 2014 redemption date, which was April 30, 2014. We currently expect to engage our advisor and/or an independent valuation firm to update our estimated value per share in December 2014, but we are not required to update our estimated value per share more frequently than every 18 months.
(2) We limit the dollar value of shares that may be redeemed under the program as described above. During the nine months ended September 30, 2014, we redeemed $3.5 million of shares of common stock, which represented all redemption requests received in good order and eligible for redemption through the September 2014 redemption date. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2013 and redemptions made through September 30, 2014, we have $13.2 million available for redemptions during the remainder of 2014, subject to the limitations described above.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.

42
PART II. OTHER INFORMATION (CONTINUED)
Item 6. Exhibits

Ex.
 
Description
 
 
 
3.1
 
Second Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed February 4, 2010
 
 
 
3.2
 
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11, Commission File No. 333-156633
 
 
 
4.1
 
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Company's Registration Statement on Form S-11, Commission File No. 333-156633
 
 
 
4.2
 
Fourth Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2014
 
 
 
10.1
 
Advisory Agreement by and between the Company and KBS Capital Advisors LLC, dated October 8, 2014
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
99.1
 
Fourth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed February 18, 2014
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase

43

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
KBS STRATEGIC OPPORTUNITY REIT, INC.
 
 
 
 
Date:
November 13, 2014
By:
/S/ KEITH D. HALL        
 
 
 
Keith D. Hall
 
 
 
Chief Executive Officer and Director
 
 
 
(principal executive officer)
 
 
 
 
Date:
November 13, 2014
By:
/S/ DAVID E. SNYDER        
 
 
 
David E. Snyder
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)

44

Pacific Oak Strategic Opportunity REIT, Inc. Reports

Also read