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EXCEL - IDEA: XBRL DOCUMENT - BERKSHIRE INCOME REALTY, INC.Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - BERKSHIRE INCOME REALTY, INC.ex321-20140930x10q.htm
EX-31.2 - EXHIBIT 31.2 - BERKSHIRE INCOME REALTY, INC.ex312-20140930x10q.htm
EX-31.1 - EXHIBIT 31.1 - BERKSHIRE INCOME REALTY, INC.ex311-20140930x10q.htm
EX-32.2 - EXHIBIT 32.2 - BERKSHIRE INCOME REALTY, INC.ex322-20140930x10q.htm

United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

ý 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
o TRANSITION REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
_____________________

Commission File Number 001-31659
BERKSHIRE INCOME REALTY, INC.


Maryland
 
32-0024337
(State or other jurisdiction of incorporation or organization)
 
(I. R. S. Employer Identification No.)
 
 
 
One Beacon Street, Boston, Massachusetts
 
02108
(Address of principal executive offices)
 
(Zip Code)

 
(617) 523-7722
 
 
(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 ý     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o
Accelerated Filer o
Non-accelerated Filer ý
(Do not check if a smaller reporting company)
Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes o    No ý

There were 1,406,196 shares of Class B common stock outstanding as of November 13, 2014.

1


 
BERKSHIRE INCOME REALTY, INC.
 
 
 
 
 
 
 
 
TABLE OF CONTENTS
 
ITEM NO.
 
PAGE NO.
 
 
 
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.

2


Part I    FINANCIAL INFORMATION

Item 1.    CONSOLIDATED FINANCIAL STATEMENTS

BERKSHIRE INCOME REALTY, INC.
CONSOLIDATED BALANCE SHEETS
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Multifamily apartment communities, net of accumulated depreciation of $200,046,571 and $242,291,624, respectively
$
429,463,144

 
$
381,663,433

Cash and cash equivalents
12,624,959

 
15,254,613

Cash restricted for tenant security deposits
1,291,663

 
1,321,895

Replacement reserve escrow
1,348,646

 
1,121,258

Prepaid expenses and other assets
9,152,113

 
10,675,302

Investments in unconsolidated multifamily entities
9,887,214

 
14,294,474

Acquired in-place leases and tenant relationships, net of accumulated amortization of $1,152,000 and $0, respectively
490,098

 

Deferred expenses, net of accumulated amortization of $2,220,236 and $2,953,066, respectively
5,881,557

 
2,977,939

Total assets
$
470,139,394

 
$
427,308,914

 
 
 
 
LIABILITIES AND DEFICIT
 

 
 

 
 
 
 
Liabilities:
 

 
 

Mortgage notes payable
$
451,660,736

 
$
475,525,480

Credit Facility (Note 6)
5,000,000

 

Note payable - other
1,250,000

 
1,250,000

Due to affiliates, net
2,678,796

 
2,454,167

Due to affiliate, incentive advisory fees
12,759,433

 
8,289,617

Dividend and distributions payable
837,607

 
837,607

Accrued expenses and other liabilities
14,107,312

 
10,968,053

Tenant security deposits
1,515,873

 
1,531,472

Total liabilities
489,809,757

 
500,856,396

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
Deficit:
 

 
 

Noncontrolling interest in properties (Note 12)
136,530

 
879,785

Noncontrolling interest in Operating Partnership (Note 13)
(48,993,123
)
 
(102,297,937
)
Series A 9% Cumulative Redeemable Preferred Stock, no par value, $25 stated value, 5,000,000 shares authorized, 2,978,110 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
70,210,830

 
70,210,830

Class A common stock, $.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

Class B common stock, $.01 par value, 5,000,000 shares authorized, 1,406,196 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
14,062

 
14,062

Excess stock, $.01 par value, 15,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

Accumulated deficit
(41,038,662
)
 
(42,354,222
)
Total deficit
(19,670,363
)
 
(73,547,482
)
 
 
 
 
Total liabilities and deficit
$
470,139,394

 
$
427,308,914


The accompanying notes are an integral part of these financial statements.

3


BERKSHIRE INCOME REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Rental
$
17,847,848

 
$
18,468,549

 
$
58,305,011

 
$
54,397,584

Utility reimbursement
893,495

 
866,346

 
2,920,743

 
2,556,845

Other
1,020,923

 
867,340

 
3,119,315

 
2,518,973

Total revenue
19,762,266

 
20,202,235

 
64,345,069

 
59,473,402

Expenses:
 

 
 

 
 
 
 
Operating
4,162,979

 
4,587,613

 
15,479,524

 
13,662,836

Maintenance
1,178,896

 
1,384,633

 
3,752,651

 
3,497,705

Real estate taxes
1,864,041

 
1,770,935

 
6,597,822

 
5,606,147

General and administrative
554,511

 
505,702

 
1,897,296

 
1,743,601

Management fees
1,177,690

 
1,208,938

 
3,742,979

 
3,605,724

Incentive advisory fees
2,367,299

 
423,153

 
5,040,718

 
1,796,933

Depreciation
6,310,170

 
6,397,609

 
19,839,493

 
19,157,233

Interest, inclusive of amortization of deferred financing fees
6,896,115

 
6,784,545

 
21,957,455

 
19,841,847

Loss on extinguishment of debt
336,749

 

 
2,080,401

 

Amortization of acquired in-place leases and tenant relationships
406,797

 

 
1,152,000

 
5,377

Total expenses
25,255,247

 
23,063,128

 
81,540,339

 
68,917,403

Loss before equity in income (loss) of unconsolidated multifamily entities
(5,492,981
)
 
(2,860,893
)
 
(17,195,270
)
 
(9,444,001
)
Equity in income (loss) of unconsolidated multifamily entities
495,664

 
(24,499
)
 
13,471,100

 
(1,655,602
)
Gain on disposition of real estate assets
34,593,815

 

 
84,113,807

 

Income (loss) from continuing operations
29,596,498

 
(2,885,392
)
 
80,389,637

 
(11,099,603
)
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations

 
(12,444
)
 
(114,216
)
 
47,336

Gain on disposition of real estate assets

 

 

 
18,689,058

Net income (loss) from discontinued operations

 
(12,444
)
 
(114,216
)
 
18,736,394

Net income (loss)
29,596,498

 
(2,897,836
)
 
80,275,421

 
7,636,791

Net income attributable to noncontrolling interest in properties
(14,734
)
 
(25,553
)
 
(205,457
)
 
(40,361
)
Net (income) loss attributable to noncontrolling interest in Operating Partnership (Note 13)
(27,239,605
)
 
4,488,677

 
(73,250,824
)
 
(2,509,405
)
Net income attributable to the Company
2,342,159

 
1,565,288

 
6,819,140

 
5,087,025

Preferred dividend
(1,675,193
)
 
(1,675,194
)
 
(5,025,580
)
 
(5,025,582
)
Net income (loss) available to common shareholders
$
666,966

 
$
(109,906
)
 
$
1,793,560

 
$
61,443

Net income (loss) from continuing operations attributable to the Company per common share, basic and diluted
$
0.47

 
$
(0.07
)
 
$
1.36

 
$
(13.28
)
Net income (loss) from discontinued operations attributable to the Company per common share, basic and diluted
$

 
$
(0.01
)
 
$
(0.08
)
 
$
13.32

Net income (loss) available to common shareholders per common share, basic and diluted
$
0.47

 
$
(0.08
)
 
$
1.28

 
$
0.04

Weighted average number of common shares outstanding, basic and diluted
1,406,196

 
1,406,196

 
1,406,196

 
1,406,196


The accompanying notes are an integral part of these financial statements.

4


BERKSHIRE INCOME REALTY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013
(unaudited)
 
Company Shareholders
 
 
 
 
 
 
 
Series A Preferred Stock
 
Class B Common Stock
 
Accumulated
Deficit
 
Noncontrolling Interests –Properties
 
Noncontrolling Interests – Operating Partnership
 
Total
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance at
January 1, 2013
2,978,110

 
$
70,210,830

 
1,406,196

 
$
14,062

 
$
(42,077,020
)
 
$
1,527,431

 
$
(89,708,267
)
 
$
(60,032,964
)
Net income

 

 

 

 
5,087,025

 
40,361

 
2,509,405

 
7,636,791

Contributions

 

 

 

 

 
399,718

 

 
399,718

Distributions

 

 

 

 
(286,800
)
 
(921,443
)
 
(12,897,338
)
 
(14,105,581
)
Distributions to preferred shareholders

 

 

 

 
(5,025,582
)
 

 

 
(5,025,582
)
Balance at
September 30, 2013
2,978,110

 
$
70,210,830

 
1,406,196

 
$
14,062

 
$
(42,302,377
)
 
$
1,046,067

 
$
(100,096,200
)
 
$
(71,127,618
)

 
Company Shareholders
 
 
 
 
 
 
 
Series A Preferred Stock
 
Class B Common Stock
 
Accumulated
Deficit
 
Noncontrolling Interests –Properties
 
Noncontrolling Interests – Operating Partnership
 
Total
Deficit
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
Balance at
January 1, 2014
2,978,110

 
$
70,210,830

 
1,406,196

 
$
14,062

 
$
(42,354,222
)
 
$
879,785

 
$
(102,297,937
)
 
$
(73,547,482
)
Net income

 

 

 

 
6,819,140

 
205,457

 
73,250,824

 
80,275,421

Contributions

 

 

 

 

 
665,447

 

 
665,447

Distributions

 

 

 

 
(478,000
)
 
(1,943,985
)
 
(19,946,010
)
 
(22,367,995
)
Change in noncontrolling interest due to deconsolidation of real estate

 

 

 

 

 
329,826

 

 
329,826

Distributions to preferred shareholders

 

 

 

 
(5,025,580
)
 

 

 
(5,025,580
)
Balance at
September 30, 2014
2,978,110

 
$
70,210,830

 
1,406,196

 
$
14,062

 
$
(41,038,662
)
 
$
136,530

 
$
(48,993,123
)
 
$
(19,670,363
)
The accompanying notes are an integral part of these financial statements.

5


BERKSHIRE INCOME REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the nine months ended
 
September 30,
 
2014
 
2013
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
80,275,421

 
$
7,636,791

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Amortization of deferred costs
802,655

 
433,159

Amortization of acquired in-place leases and tenant relationships
1,152,000

 
5,377

Amortization of fair value premium on mortgage debt
(221,260
)
 

Loss on extinguishment of debt
91,654

 
3,807

Depreciation
19,839,493

 
19,762,355

Deferred costs
(51,102
)
 

Equity in (income) loss of unconsolidated multifamily entities
(13,471,100
)
 
1,655,602

Gain on disposition of real estate assets
(84,113,807
)
 
(18,689,058
)
Increase (decrease) in cash attributable to changes in assets and liabilities:
 

 
 

Tenant security deposits, net
(223,446
)
 
138,882

Prepaid expenses and other assets
(319,652
)
 
1,270,118

Due to/from affiliates
191,252

 
(1,394,562
)
Due to affiliate - incentive advisory fees
4,469,816

 
958,275

Accrued expenses and other liabilities
238,476

 
(1,053,427
)
Distributions of return on investments in unconsolidated multifamily entities
466,667

 

Net cash provided by operating activities
9,127,067

 
10,727,319

 
 
 
 
Cash flows from investing activities:
 

 
 

Capital improvements
(25,732,038
)
 
(12,308,567
)
Acquisition of multifamily apartment communities
(60,611,119
)
 

Return of earnest money deposits on acquisition
2,000,000

 

Proceeds from sale of multifamily apartment communities
158,854,249

 
30,958,927

Investments in unconsolidated multifamily entities

 
(305,175
)
Distributions from investment in unconsolidated multifamily entities
12,580,344

 
868,093

Interest earned on replacement reserve deposits
(669
)
 
(446
)
Deposits to replacement reserve escrow
(226,719
)
 
(140,785
)
Withdrawal from replacement reserve escrow

 
41,481

Deconsolidation of real estate
(1,279,500
)
 

Net cash provided by investing activities
85,584,548

 
19,113,528

 
 
 
 
Cash flows from financing activities:
 

 
 

Borrowings from mortgage notes payable
51,063,010

 
2,770,663

Principal payments on mortgage notes payable
(4,257,811
)
 
(4,396,752
)
Repayments of mortgage notes payable
(118,642,979
)
 
(14,833,286
)
Borrowings from Credit Facility - Affiliate

 
1,627,000

Principal payments on Credit Facility - Affiliate

 
(1,627,000
)
Borrowings from Credit Facility
80,000,000

 

Principal payments on Credit Facility
(75,000,000
)
 

Deferred financing costs
(3,775,361
)
 
(61,974
)
Contributions from noncontrolling interest holders in properties
665,447

 
399,718

Distributions to noncontrolling interest holders in properties
(1,943,985
)
 
(1,221,443
)
Distributions to noncontrolling interest partners in Operating Partnership
(19,946,010
)
 
(10,164,258
)
Distributions to common shareholders
(478,000
)
 
(219,880
)
Distributions to preferred shareholders
(5,025,580
)
 
(5,025,582
)
Net cash used in financing activities
(97,341,269
)
 
(32,752,794
)
 
 
 
 
Net decrease in cash and cash equivalents
(2,629,654
)
 
(2,911,947
)
Cash and cash equivalents at beginning of period
15,254,613

 
12,224,361

Cash and cash equivalents at end of period
$
12,624,959

 
$
9,312,414



6


The accompanying notes are an integral part of these financial statements.
BERKSHIRE INCOME REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
For the nine months ended
 
September 30,
 
2014
 
2013
 
 
 
 
Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest
$
21,932,595

 
$
20,622,669

Capitalization of interest
841,851

 
425,271

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Capital improvements included in accrued expenses and other liabilities
2,924,972

 
120,308

Dividends declared and payable to preferred shareholders
837,607

 
837,607

Dividends declared and payable to common stockholders

 
66,920

Distributions payable

 
2,733,080

Mortgage debt assumed
70,472,066

 

Write-off of fully amortized acquired in-place leases and tenant relationships

 
605,079

 
 
 
 
Acquisition of multifamily apartment communities:
 
 
 
Assets acquired:
 
 
 
Multifamily apartment communities
$
(129,560,979
)
 
$

Acquired in-place leases
(1,642,098
)
 

Prepaid expenses and other assets
(632,521
)
 

Liabilities assumed:
 
 
 
Accrued expenses
511,151

 

Tenant security deposit liability
241,262

 

Mortgage notes payable
70,472,066

 

Net cash used for acquisition of multifamily apartment communities
$
(60,611,119
)
 
$

 
 
 
 
Sale of real estate:
 
 
 
Gross selling price
$
161,200,000

 
$
31,500,000

Cost of sale
(2,345,751
)
 
(541,073
)
Cash flows from sale of multifamily apartment communities
$
158,854,249

 
$
30,958,927

 
 
 
 
Deconsolidation of real estate due to ownership structure:
 
 
 
Change in multifamily apartment communities, net of accumulative depreciation
$
15,667,726

 
$

Change in prepaid expenses and other assets
475,362

 

Change in investments in unconsolidated multifamily entities
4,831,349

 

Change in deferred expenses, net of accumulative amortization
15,557

 

Change in mortgage notes payable
(22,277,770
)
 

Change in due to affiliates, net
33,377

 

Change in accrued expenses and other liabilities
(351,744
)
 

Change in tenant security deposits, net
(3,183
)
 

Change in noncontrolling interest in properties
329,826

 

Decrease in cash due to deconsolidation of real estate
$
(1,279,500
)
 
$


The accompanying notes are an integral part of these financial statements.


7


BERKSHIRE INCOME REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
ORGANIZATION AND BASIS OF PRESENTATION

Berkshire Income Realty, Inc. (the “Company”), a Maryland corporation, was incorporated on July 19, 2002 and 100 Class B common shares were issued upon organization.  The Company is in the business of acquiring, owning, operating, developing and rehabilitating multifamily apartment communities.  As of September 30, 2014, the Company owned, or had an interest in, 13 multifamily apartment communities consisting of 4,328 total apartment units, two multifamily development projects and three unconsolidated multifamily entities. The Company conducts its business through Berkshire Income Realty-OP, L.P. (the "Operating Partnership").

The Company elected to be treated as a real estate investment trust ("REIT") under Section 856 of the Tax Code (the "Code"), with the filing of its first tax return. As a result, the Company generally is not subject to federal corporate income tax on its taxable income that is distributed to its shareholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income. The Company's policy is to make sufficient distributions of its taxable income to meet the REIT distribution requirements. The Company must also meet other operational requirements with respect to its investments, assets and income. The Company monitors these various requirements on a quarterly basis and believes that as of and for the nine-month periods ended September 30, 2014 and 2013, it was in compliance on all such requirements. Accordingly, the Company has made no provision for federal income taxes in the accompanying consolidated financial statements. The Company is subject to certain state level taxes based on the location of its properties.

Discussion of acquisitions for the nine-month period ended September 30, 2014

On January 22, 2014, the Company executed a joint venture limited liability company agreement with an unrelated entity for the development of Aura Prestonwood, a 322-unit multifamily apartment project located in Dallas, Texas (the "Prestonwood Project"). The Company has a 95% interest in the joint venture and has made a commitment to invest $12,643,500 in the project, which has been fully funded. Simultaneously with the execution of the limited liability company agreement, the joint venture acquired the land where the multifamily apartment project is being built. The cost of the land was $7,302,960 and consideration of $1,000,000 was paid at closing for the option to acquire the abutting land parcel at a future time.

On March 20, 2014, the Company, through its subsidiaries, BIR Pavilion, L.L.C. and BIR Eon, L.L.C., completed the acquisitions of Pavilion Townplace, a 236-unit multifamily apartment community located in Dallas, Texas, and EON at Lindbergh, a 352-unit multifamily apartment community located in Atlanta, Georgia, respectively. The seller was an unaffiliated third party. The purchase prices for Pavilion Townplace and EON at Lindbergh were $56,000,000 and $64,000,000, respectively, and were subject to loan assumptions, normal operating prorations and adjustments as provided for in the purchase and sale agreements. The Company has acquired these assets as replacement properties in a reverse exchange transaction, under Section 1031 of the Internal Revenue Code, for Chisholm Place, Berkshires on Brompton, Bridgewater and Lakeridge, which were sold in 2014.

Accounting Standards Codification ("ASC") 805-10 requires that identifiable assets acquired and liabilities assumed be recorded at fair value as of the acquisition date. As of the acquisition date, the amounts recognized for each major class of assets acquired and liabilities assumed is as follows:
 
Aura Prestonwood
 
Pavilion Townplace
 
EON at
Lindbergh
 
Total
Asset acquired:
 
 
 
 
 
 
 
Multifamily apartment communities
$
8,302,960

 
$
57,201,053

 
$
64,056,966

 
$
129,560,979

Acquired in-place leases and tenant relationships

 
769,534

 
872,564

 
1,642,098

Prepaid and other assets
100,000

 
296,013

 
236,508

 
632,521

Total assets acquired
$
8,402,960

 
$
58,266,600

 
$
65,166,038

 
$
131,835,598

 
 
 
 
 
 
 
 
Liabilities assumed:
 
 
 
 
 
 
 
Accrued expenses
$

 
$
309,154

 
$
201,997

 
$
511,151

Tenant security deposit liability

 
119,808

 
121,454

 
241,262

Mortgage notes payable

 
27,542,536

 
42,929,530

 
70,472,066

Total liabilities assumed
$

 
$
27,971,498

 
$
43,252,981

 
$
71,224,479


8


Discussion of dispositions for the nine-month period ended September 30, 2014

On May 5, 2014, the Company completed the sale of Chisholm Place, located in Dallas, Texas, to an unaffiliated buyer. The sale price of $15,000,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $7,556,301 of gain from the sale.

On May 12, 2014, the Company completed the sale of Laurel Woods, located in Austin, Texas, to an unaffiliated buyer. The sale price of $13,200,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $9,211,973 of gain from the sale.

On June 4, 2014, the Company completed the sale of Bear Creek, located in Dallas, Texas, to an unaffiliated buyer. The sale price of $9,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $5,988,770 of gain from the sale.

On June 25, 2014, the Company completed the sale of Berkshires on Brompton, located in Houston, Texas, to an unaffiliated buyer. The sale price of $38,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $26,762,948 of gain from the sale.

On August 18, 2014, the Company completed the sales of Bridgewater and Lakeridge, both located in Hampton, Virginia, to an unaffiliated buyer. The sale prices of $23,500,000 and $40,000,000 for Bridgewater and Lakeridge, respectively, were subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $11,235,832 and $16,754,795 of gain from the sales of Bridgewater and Lakeridge, respectively.

On August 19, 2014, the Company completed the sale of Reserves at Arboretum, located in Newport News, Virginia, to an unaffiliated buyer. The sale price of $21,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $6,603,188 of gain from the sale.

The Company has used Chisholm Place, Berkshires on Brompton, Bridgewater and Lakeridge as the relinquished properties in the reverse exchange transaction for Pavilion Townplace and EON at Lindbergh, under Section 1031 of the Internal Revenue Code.

Recent Accounting Pronouncements

On April 10, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which raises the threshold for determining which disposals are required to be presented as discontinued operations and modifies related disclosure requirements. The standard is applied prospectively and is effective in 2015 with early adoption permitted. The Company has elected to early adopt this standard effective with the interim period beginning April 1, 2014. Prior to April 1, 2014, disposed properties are presented in discontinued operations.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additional, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company is currently assessing the potential impact that the adoption of this guidance will have on its financial position and results of operations.

Unaudited interim consolidated financial statements

The accompanying interim consolidated financial statements of the Company are unaudited; however, the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted.  In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair statement for the interim periods have been included.  The results of operations for the interim periods are not necessarily indicative of the results to be obtained for other interim periods or for the full fiscal year. The interim financial statements and

9


notes thereto should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Consolidated Statements of Comprehensive Income (Loss)

For the nine-month periods ended September 30, 2014 and 2013, comprehensive income (loss) equaled net income (loss).  Therefore, the Consolidated Statements of Comprehensive Income and Loss required to be presented have been omitted from the consolidated financial statements.

2.    MULTIFAMILY APARTMENT COMMUNITIES

The following summarizes the carrying value of the Company’s multifamily apartment communities:
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
(audited)
Land
$
75,834,596

 
$
66,318,761

Buildings, improvement and personal property
553,675,119

 
557,636,296

Multifamily apartment communities
629,509,715

 
623,955,057

Accumulated depreciation
(200,046,571
)
 
(242,291,624
)
Multifamily apartment communities, net
$
429,463,144

 
$
381,663,433


The Company accounts for its acquisitions of investments in real estate in accordance with ASC 805-10, which requires the fair value of the real estate acquired be allocated to the acquired tangible assets, consisting of land, building, furniture, fixtures and equipment and identified intangible assets and liabilities, consisting of the value of the above-market and below-market leases, the value of in-place leases and the value of other tenant relationships, based in each case on their fair values. The value of in-place leases and tenant relationships is determined based on the specific expiration dates of the in-place leases and amortized over a period of 12 months and the tenant relationships are based on the straight-line method of amortization over a 24-month period.

The Company evaluated the carrying value of its multifamily apartment communities for impairment pursuant to ASC 360-10. The Company did not record an impairment adjustment during the nine-month period ended September 30, 2014 or twelve-month period ended December 31, 2013.

Discontinued Operations

On June 25, 2013, the Company completed the sale of Walden Pond and Gables of Texas, both located in Houston, Texas, to an unaffiliated buyer. The combined sale price of $31,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement.

The results of operations for Walden Pond and Gables of Texas have been restated and are presented as results from discontinued operations in the Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2014 and 2013, respectively, pursuant to ASC 205-20.*

10


The operating results of properties sold in 2013* and their discontinued operations for the three- and nine-month periods ended September 30, 2014 and 2013 are presented in the following table.
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Rental
$

 
$
5,203

 
$

 
$
2,020,361

Utility reimbursement

 

 

 
230,542

Other

 
52,604

 
210

 
297,838

Total revenue

 
57,807

 
210

 
2,548,741

Expenses:
 
 
 
 
 
 
 
Operating

 
37,440

 
112,954

 
810,822

Maintenance

 
7,697

 

 
136,819

Real estate taxes

 
23,097

 

 
288,619

General and administrative

 

 
1,472

 
31,663

Management fees

 
2,017

 

 
96,567

Depreciation

 

 

 
605,122

Interest, inclusive of amortization of deferred financing fees

 

 

 
527,986

Loss on extinguishment of debt

 

 

 
3,807

Total expenses

 
70,251

 
114,426

 
2,501,405

Income (loss) from discontinued operations
$

 
$
(12,444
)
 
$
(114,216
)
 
$
47,336


*
On April 1, 2014, the Company early adopted ASU 2014-08 and as such, the dispositions of Chisholm Place, Laurel Woods, Bear Creek, Berkshires on Brompton, Bridgewater, Lakeridge and Reserves at Arboretum are not presented as part of discontinued operations. Discussion of property sales is included in Note 1 - Organization and Basis of Presentation.

3.     INVESTMENTS IN UNCONSOLIDATED MULTIFAMILY ENTITIES

INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP

On August 12, 2005, the Company, together with affiliates and other unaffiliated parties, entered into a subscription agreement to invest in the Berkshire Multifamily Value Fund, L.P. (“BVF”), an affiliate of Berkshire Property Advisors, L.L.C. (“Berkshire Advisor” or the “Advisor”).  Under the terms of the agreement and the related limited partnership agreement, the Company and its affiliates agreed to invest up to $25,000,000, or approximately 7%, of the total capital of the partnership.  The Company’s final commitment under the subscription agreement with BVF totaled $23,400,000, which represented an ownership interest of 7% in BVF.  BVF’s investment strategy was to acquire middle-market properties where there is an opportunity to add value through repositioning or rehabilitation.

In accordance with ASC 810-10 issued by FASB, as amended by ASU 2009-17, related to the consolidation of variable interest entities, the Company has performed an analysis of its investment in BVF to determine whether it would qualify as a variable interest entity (“VIE”) and whether it should be consolidated or accounted for as an equity investment in an unconsolidated joint venture.  As a result of the Company’s qualitative assessment to determine whether its investment in BVF is a VIE, the Company determined that the investment is a VIE based upon the fact that the holders of the equity investment at risk lack the power, through voting or similar rights, to direct the activities of BVF that most significantly impact BVF’s economic performance.  Under the terms of the limited partnership agreement of BVF, the general partner of BVF has the full, exclusive and complete right, power, authority, discretion, obligation and responsibility to make all decisions affecting the business of BVF.

After making the determination that its investment in BVF was a VIE, the Company performed an assessment of which partner would be considered the primary beneficiary of BVF and therefore would be required to consolidate BVF’s balance sheets and result of operations.  This assessment was based upon which entity (1) had the power to direct matters that most significantly impact the activities of BVF, and (2) had the obligation to absorb losses or the right to receive benefits of BVF that could potentially be significant to the entity based upon the terms of the partnership and management agreements of BVF.  As a result of fees paid to an affiliate of the general partner of BVF for asset management and other services, the Company has determined that the general partner of BVF has the obligation to absorb the losses or the right to receive benefits of BVF while retaining the power to make significant decisions for BVF.  Based upon this understanding, the Company concluded that the general partner of BVF should

11


consolidate BVF and as such, the Company accounts for its investment in BVF as an equity investment in an unconsolidated joint venture.

As of September 30, 2014, the Company had invested 100% of its total committed capital amount of $23,400,000 in BVF and had received distributions from BVF of $17,753,897, or approximately 75.9%, of its invested capital. The general partner of BVF is proceeding with BVF's plan to sell the remaining 18 assets in the portfolio. Subsequent to the quarter ended September 30, 2014, BVF sold 17 of the remaining 18 assets.

The summarized statement of assets, liabilities and partners’ equity (deficit) of BVF is as follows:
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Multifamily apartment communities, net
$
282,954,958

 
$
664,692,480

Cash and cash equivalents
29,301,208

 
21,227,583

Other assets
7,353,430

 
11,565,547

Total assets
$
319,609,596

 
$
697,485,610

 
 
 
 
LIABILITIES AND PARTNERS’ EQUITY (DEFICIT)
 

 
 

Mortgage notes payable
$
311,808,441

 
$
686,193,544

Credit facility

 
16,200,000

Other liabilities
16,526,249

 
15,049,296

Noncontrolling interest
(9,806,491
)
 
(6,961,558
)
Partners’ equity (deficit)
1,081,397

 
(12,995,672
)
Total liabilities and partners’ equity (deficit)
$
319,609,596

 
$
697,485,610

 
 
 
 
Company’s share of partners’ equity (deficit)
$
75,701

 
$
(604,395
)
Basis differential (1)
604,395

 
604,395

Carrying value of the Company’s investment in unconsolidated limited partnership (2)
$
680,096

 
$


(1)
This amount represents the difference between the Company’s investment in BVF and its share of the underlying equity in the net assets of BVF (adjusted to conform with GAAP).  At September 30, 2014 and December 31, 2013, the differential was comprised mainly of $583,240, which represents the Company’s share of syndication costs incurred by BVF that the Company was not required to fund via a separate capital call.

(2)
Per the partnership agreement of BVF, the Company’s liability is limited to its investment in BVF.  The Company does not guarantee any third-party debt held by BVF.  The Company has fully funded its obligations under the partnership agreement as of September 30, 2014 and has no commitment to make additional contributions to BVF. The carrying value of the investment was $0 at December 31, 2013, as distributions from the investment have exceeded the Company's invested equity as adjusted for the Company's share of gains and losses over the holding period of the investment. The Company resumed equity method earnings in BVF during the nine-month period ended September 30, 2014, as its share of BVF's earnings during the period exceeded the excess distributions and net losses not recognized during the period the equity method was suspended.

The Company evaluates the carrying value of its investment in BVF for impairment periodically and records impairment charges when events or circumstances change indicating that a decline in the fair values below the carrying values has occurred and such decline is other-than-temporary.  No such other-than-temporary impairment charges have been recognized during the nine-month period ended September 30, 2014 or twelve-month period ended December 31, 2013.

12


The summarized statements of operations of BVF for the three- and nine-month periods ended September 30, 2014 and 2013 are as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenue
$
13,473,383

 
$
34,116,230

 
$
67,486,238

 
$
101,002,262

Expenses
(15,608,589
)
 
(42,051,265
)
 
(101,489,789
)
 
(125,568,161
)
Gain (loss) on property sales and extinguishment of debt (2)
(397,093
)
 
14,339,915

 
224,943,500

 
14,261,091

Noncontrolling interest
936,401

 
1,196,501

 
2,837,120

 
3,799,608

Net income (loss) attributable to investment
$
(1,595,898
)
 
$
7,601,381

 
$
193,777,069

 
$
(6,505,200
)
 
 
 
 
 
 
 
 
Equity in income (loss) of unconsolidated limited partnership (1)(2)
$
(111,725
)
 
$
532,154

 
$
13,260,440

 
$
(455,413
)

(1)
There were no impairment indicators or impairment writeoffs in the nine-month periods ended September 30, 2014 or 2013.

The Company has determined that its valuation of the real estate was categorized within Level 3 of the fair value hierarchy in accordance with ASC 820-10, as it utilized significant unobservable inputs in its assessment.

(2)
During the nine-month period ended September 30, 2013, BVF recorded a net gain on the disposition of one property. The gain on the sale was $14,261,091, of which the Company's share was approximately $998,000 and is reflected in the "Equity in income (loss) of unconsolidated multifamily entities" for the nine-month period ended September 30, 2013.

During the nine-month period ended September 30, 2014, BVF recorded a net gain on the disposition of fifteen properties. The gain on the sale was $224,943,500, of which the Company's share was approximately $15,746,000 and is reflected in the "Equity in income (loss) of unconsolidated multifamily entities" for the nine-month period ended September 30, 2014.

INVESTMENT IN UNCONSOLIDATED LIMITED LIABILITY COMPANIES

On March 2, 2011, the Operating Partnership executed an agreement with Berkshire Multifamily Value Fund II ("BVF II"), an affiliated entity, to create a joint venture, BIR/BVF-II NoMa JV, L.L.C. ("NoMa JV"), to participate in and take an ownership position in a real estate development project. BVF II is the managing member of NoMa JV and has a percentage ownership interest of approximately 67% while the Operating Partnership has a percentage ownership interest of approximately 33%.

Also on March 2, 2011, NoMa JV acquired a 90% interest in NOMA Residential West I, LLC. (“NOMA Residential”).  NOMA Residential has developed and is operating a 603-unit multifamily apartment community in Washington, D.C. (the "NoMa Project"). The remaining 10% interest in NOMA Residential is owned by the developer, an unrelated third party (the “NoMa Developer”).  The governing agreements for NOMA Residential give the NoMa Developer the authority to manage the construction and development of, and subsequent to completion, the day-to-day operations of NOMA Residential.  The agreement also provides for fees to the NoMa Developer, limits the authority of the NoMa Developer and provides for distributions based on percentage interest and thereafter in accordance with achievement of economic hurdles.

In accordance with ASC 810-10, as amended by ASU 2009-17, related to the consolidation of variable interest entities, the Company has performed an analysis of its investment in NoMa JV to determine whether it would qualify as a VIE and whether it should be consolidated or accounted for as an equity investment in an unconsolidated joint venture. As a result of the Company's qualitative assessment to determine whether its investment is a VIE, the Company determined that the investment is a VIE based upon the holders of the equity investment at risk lacking the power, through voting rights or similar rights, to direct the activities of the entity that most significantly impact the entity's economic performance.  Under the terms of the limited liability company agreement of NoMa JV, the managing member has the full, exclusive and complete right, power, authority, discretion, obligation and responsibility to make all decisions affecting the business of NoMa JV.

After making the determination that its investment in NoMa JV was a VIE, the Company performed an assessment of which partner would be considered the primary beneficiary of NoMa JV and would be required to consolidate the VIE's balance sheet and results of operations. This assessment was based upon which entity (1) had the power to direct matters that most significantly impact the activities of NoMa JV, and (2) had the obligation to absorb losses or the right to receive benefits of NoMa JV that could potentially be significant to the VIE based upon the terms of the partnership and management agreements of NoMa JV.  Because

13


the managing member owns two-thirds of the entity and all profits and losses are split pro-rata in accordance with capital accounts, the Company has determined that the managing member has the obligation to absorb the losses or the right to receive benefits of the VIE while retaining the power to make significant decisions for NoMa JV.  Based upon this understanding, the Company concluded that the managing member should consolidate NoMa JV and as such, the Company accounts for its investment in NoMa JV as an equity investment in an unconsolidated joint venture.

As of September 30, 2014, the Company had invested 100% of its total committed capital amount of $14,520,000 in NoMa JV for an ownership interest of approximately 33% and had recorded $1,710,327 of capitalized interest on the investment. The Company has no obligation to fund capital to NoMa JV in excess of its original commitment of capital of $14,520,000. The NoMa Project was completed during the quarter ended June 30, 2013.

As of September 30, 2014, the Company had received distributions from NoMa JV of $466,667, or approximately 3.2%, of its invested capital.

On July 16, 2014, the Company converted its ownership in Country Place I and Country Place II from a joint venture limited liability company, of which it held a 58% controlling interest, into a tenancy-in-common ("TIC") undivided ownership interest of 58% in each property. Prior to July 16, 2014, the Company consolidated its investment in Country Place I and Country Place II and reported the remaining 42% ownership through "Noncontrolling interest in properties". The Company evaluated the ownership and control rights under the TIC structure and has determined that it would require deconsolidation and the adoption of the equity method of accounting for its interest in the TIC at carrying value. Accordingly, effective July 16, 2014, the Company recorded its investment in the properties under the equity method of accounting and deconsolidated Country Place I and Country Place II. As of September 30, 2014, its interest in the properties is reflected on the Consolidated Balance Sheets in "Investments in unconsolidated multifamily entities" and the Company's share of net income is reflected in Consolidated Statements of Operations in "Equity in income (loss) of unconsolidated multifamily entities".

The summarized statement of assets, liabilities and members’ capital of NoMa JV, Country Place I and Country Place II is as follows:
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Multifamily apartment communities, net
$
137,563,537

 
$
126,139,123

Cash and cash equivalents
5,009,328

 
1,629,885

Other assets
2,197,000

 
546,996

Total assets
$
144,769,865

 
$
128,316,004

 
 
 
 
LIABILITIES AND MEMBERS’ CAPITAL
 

 
 

Mortgage note payable
$
107,646,455

 
$
85,466,258

Other liabilities
1,103,429

 
756,990

Noncontrolling interest
4,098,975

 
4,209,276

Members’ capital
31,921,006

 
37,883,480

Total liabilities and members’ capital
$
144,769,865

 
$
128,316,004

 
 
 
 
Company’s share of members’ capital 
$
7,591,459

 
$
12,627,826

Basis differential (1)
$
1,615,659

 
$
1,666,648

Carrying value of the Company’s investment in unconsolidated limited liability companies (2)
$
9,207,118

 
$
14,294,474


(1)
This amount represents capitalized interest, net of amortization, pursuant to ASC 835-20, related to the Company's equity investment in NoMa JV. The capitalized interest was computed on the amounts borrowed by the Company to finance its investment in NoMa JV and was not an item required to be funded via a capital call.

(2)
Per the limited liability company agreement of NoMa JV, the Company's liability is limited to its investment in NoMa JV. The Company has fully funded its maximum obligation under the limited liability company agreement as of September 30, 2014 and has no commitment to make additional contributions to NoMa JV.

Per the tenancy in common agreement of BIR Country Place II, L.L.C., the Company assumes its proportionate share of

14


any damages associated with the mortgages on Country Place I and Country Place II, which are guaranteed by the Operating Partnership.

The Company evaluates the carrying value of its investments in unconsolidated limited liability companies for impairment periodically and records impairment charges when events or circumstances change indicating that a decline in the fair values below the carrying values has occurred and such decline is other-than-temporary.  No such other-than-temporary impairment charges have been recognized during the nine-month period ended September 30, 2014 or twelve-month period ended December 31, 2013.

The summarized statements of operations of NoMa JV, Country Place I and Country Place II for the three- and nine-month periods ended September 30, 2014 and 2013 are as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenue
$
4,596,853

 
$
1,522,546

 
$
9,857,261

 
$
2,804,862

Expenses
(2,717,670
)
 
(3,290,569
)
 
(9,152,862
)
 
(6,718,005
)
Noncontrolling interest
(166,274
)
 
176,802

 
(48,814
)
 
391,314

Net income (loss) attributable to investment
$
1,712,909

 
$
(1,591,221
)
 
$
655,585

 
$
(3,521,829
)
 
 
 
 
 
 
 
 
Equity in income (loss) of unconsolidated limited liability companies
$
624,385

 
$
(530,407
)
 
$
261,649

 
$
(1,173,943
)
Amortization of basis
(16,996
)
 
(26,246
)
 
(50,989
)
 
(26,246
)
Adjusted equity in income (loss) of unconsolidated limited liability companies
$
607,389

 
$
(556,653
)
 
$
210,660

 
$
(1,200,189
)

4.    MORTGAGE NOTES PAYABLE

On November 1, 2013, the Company, through its joint venture partnership for the development of the 141-unit apartment building in Walnut Creek, California (the "Walnut Creek Project"), acquired the land associated with the development project. The Company assumed the seller's outstanding land loan in the amount of $4,828,495. The assumed land loan had a fixed interest rate of 6.00% and matured on March 31, 2014, at which point it was paid off in the amount of $4,828,495.

On January 16, 2014, the Company closed on a $44,000,000 mortgage loan refinancing for Berkshires of Columbia and paid off the three existing mortgages totaling $32,254,894. The refinanced mortgage bears interest at a variable rate of 2.43% above the 1-month London Inter-Bank Offered Rate ("LIBOR") and matures on February 1, 2024.

On January 22, 2014, the Company, through the joint venture formed with its subsidiary, BRD Arapaho, L.L.C. and TRG Prestonwood, L.P., entered into a loan agreement totaling up to $31,054,212 for the development of the Prestonwood Project, a 322-unit multifamily apartment project in Dallas, Texas. The loan has a variable interest rate of 2.50% above the 1-month LIBOR and matures on January 22, 2017. As of September 30, 2014, the outstanding balance on the loan was $7,063,010.

On March 20, 2014, the Company, through its subsidiaries, BIR Pavilion, L.L.C. and BIR Eon, L.L.C., assumed mortgage notes payable with outstanding balances of $25,571,949 and $42,000,000, respectively, in connection with acquisitions of Pavilion Townplace and EON at Lindbergh. Both mortgage notes are collateralized by the related properties. The mortgage on Pavilion Townplace has a fixed interest rate of 5.27% and matures on January 1, 2021. The mortgage on EON at Lindbergh has a fixed interest rate of 4.25% and matures on May 1, 2022. In accordance with ASC 805-10, which requires identifiable assets acquired and liabilities assumed be recorded at fair value as of the acquisition date, the Company determined the fair values of both mortgage notes by calculating the present value of future payments at current interest rates. The fair values at the acquisition date for the mortgages assumed were $27,542,536 for Pavilion Townplace and $42,929,530 for EON at Lindbergh, respectively.

On July 23, 2014, the Company through the joint venture formed with its subsidiary, BRD Walnut Creek, L.L.C., and Laconia Residential One LLC, entered into a construction loan agreement totaling up to $44,500,000 for the Walnut Creek Project. The loan has a fixed interest rate of 5.309% and matures on August 1, 2024. As of September 30, 2014, the outstanding balance on the loan was $0.

The Company determines the fair value of the mortgage notes payable in accordance with authoritative guidance related to fair value measurement based on the discounted future cash flows at a discount rate that approximates the Company’s current effective borrowing rate for comparable loans (other observable inputs or Level 3 inputs, as defined by the authoritative guidance). For

15


purposes of determining fair value, the Company groups its debt by similar maturity date for purposes of obtaining comparable loan information.  In addition, the Company also considers the loan-to-value percentage of individual loans to determine if further stratification of the loans is appropriate in the valuation model.  Under this approach, debt in excess of 80% loan-to-value is considered similar to mezzanine debt and is valued using a greater interest spread than the average debt pool.  Based on this analysis, the Company has determined that the fair value of the mortgage notes payable approximated $492,589,000 and $505,385,000 at September 30, 2014 and December 31, 2013, respectively.

5.    REVOLVING CREDIT FACILITY - AFFILIATE

On June 30, 2005, the Company obtained financing in the form of a revolving credit facility. The revolving credit facility in the amount of $20,000,000 was provided by an affiliate of the Company (the "Credit Facility - Affiliate"). The Credit Facility - Affiliate was amended on May 31, 2007 to add additional terms to the Credit Facility - Affiliate ("Amendment No. 1"), on February 17, 2011 to add an amendment period with a temporary increase in the commitment amount to $40,000,000 ("Amendment No. 2"), and on May 24, 2011 to increase the commitment fee ("Amendment No. 3"). The Credit Facility - Affiliate provides for interest on borrowings at a rate of 5% above the 30-day LIBOR rate, as announced by Reuter's, and fees based on borrowings under the Credit Facility - Affiliate and various operational and financial covenants, including a maximum leverage ratio and a maximum debt service ratio. The agreement had a maturity date of December 31, 2006, with a one-time six-month extension available at the option of the Company. The terms of the Credit Facility - Affiliate were agreed upon through negotiations and were approved by the Audit Committee (which committee is comprised of our three directors who are independent under applicable rules and regulations of the SEC and the NYSE MKT LLC) ("Audit Committee"). Subsequent to its exercise of extension rights, the Company on May 31, 2007 executed Amendment No.1 that provides for an extension of the maturity date by replacing the then current maturity date of June 30, 2007 with a 60-day notice of termination provision by which the lender can affect a termination of the commitment under the agreement and render all outstanding amounts due and payable. Amendment No. 1 also added a clean-up requirement to the agreement, which requires the borrower to repay in full all outstanding loans and have no outstanding obligations under the agreement for a 14 consecutive day period during each 365-day period. The last 365-day clean-up period requirement was satisfied on July 9, 2013 and the Company has not borrowed from the Credit Facility - Affiliate subsequent to that date.

On February 17, 2011, the Company executed Amendment No. 2 which provides for a temporary modification of certain provisions of the Credit Facility - Affiliate during a period commencing with the date of execution and ending on July 31, 2012 (the "Amendment Period"), subject to extension. During the Amendment Period, certain provisions of the Credit Facility - Affiliate were modified and included: an increase in the amount of the commitment from $20,000,000 to $40,000,000; elimination of the leverage ratio covenant and clean-up requirement (each as defined in the Credit Facility - Affiliate agreement); and computation and payment of interest on a quarterly basis. At the conclusion of the Amendment Period, including extensions, the provisions modified pursuant to Amendment No. 2 reverted back to the provisions of the Credit Facility - Affiliate agreement prior to the Amendment Period.

On May 24, 2011, the Company executed Amendment No. 3 which limits the total commitment fee provided for in the agreement to be no greater than $400,000 in the aggregate.

On July 31, 2012, the provisions of the Amendment Period, as described above, expired as the Company did not exercise the extension provision to the Amendment Period of the Credit Facility - Affiliate, as provided for in Amendment No. 2. As a result, the specific provisions, which had been modified pursuant to Amendment No. 2, reverted back to the original provisions of the Credit Facility - Affiliate agreement prior to the Amendment Period.

During the nine-month periods ended September 30, 2014 and 2013, the Company borrowed $0 and $1,627,000, respectively, under the Credit Facility - Affiliate and repaid $0 and $1,627,000 of advances, respectively, during the same periods.  The Company incurred interest charges of $0 and $32,981 related to the Credit Facility - Affiliate during the nine-month periods ended September 30, 2014 and 2013, respectively. The Company did not pay any commitment fees during the nine-month periods ended September 30, 2014 or 2013. There was no outstanding balance under the Credit Facility - Affiliate as of September 30, 2014 and December 31, 2013

6.    CREDIT FACILITY

On January 21, 2014, the Company, through the Operating Partnership, closed on a $90,000,000 line of credit (the "Credit Facility") with an unaffiliated lender. The Credit Facility provides for interest on borrowings at a rate of 3.75% above the 30-day LIBOR rate, as announced by Reuter's, and includes various operational and financial covenants, including a leverage ratio and a debt service ratio. The Credit Facility has a maturity date of January 21, 2017 and provides for a maximum commitment to the Company of $90,000,000 commencing with the date of execution through June 29, 2014; $75,000,000 from June 30, 2014 to September 29, 2014; $60,000,000 from September 30, 2014 to December 30, 2014; and $45,000,000 from December 31, 2014 to January 21,

16


2017. The Credit Facility provides for unused commitment fees of 0.50% per annum if the unused amount is equal to or greater than 50% of the applicable maximum commitment and 0.35% per annum if such unused amount is less than 50%.

On June 16, 2014, the Company amended the Credit Facility to extend the date on which the maximum commitment reduces to $75,000,000 from June 30, 2014 to August 30, 2014.

During the nine-month period ended September 30, 2014, the Company borrowed $80,000,000 under the Credit Facility and repaid $75,000,000 of advances during the same period.  The Company incurred $1,781,471 of interest expense and $76,354 of unused commitment fee during the nine-month period ended September 30, 2014. There was $5,000,000 and $0 outstanding on the Credit Facility as of September 30, 2014 and December 31, 2013, respectively.

The Company determines the fair value of the Credit Facility in accordance with authoritative guidance related to fair value measurement. The Company has determined the fair value of the Credit Facility approximated the outstanding principal balance of the Credit Facility at September 30, 2014.

7.    NOTE PAYABLE - OTHER

On June 12, 2012, Zocalo Community Development, Inc. ("Zocalo"), the managing member of the joint venture ("JV 2020 Lawrence") that the Operating Partnership formed with its subsidiary, BIR 2020 Lawrence, L.L.C. ("BIR 2020"), Zocalo and JB 2020, LLC, entered into a financing agreement with the State of Colorado, through the Colorado Energy Office, for $1,250,000 (the "Colorado Energy Loan") to be used for inclusion of energy efficient components in the construction of a mid-rise multifamily apartment building in Denver, Colorado (the "2020 Lawrence Project"). The Colorado Energy Loan has a term of 10 years and an interest rate of 5% per annum. The Colorado Energy Loan will mature on June 11, 2022. Zocalo has pledged all of its membership interests, both currently owned and subsequently acquired, in JV 2020 Lawrence as collateral for the Colorado Energy Loan. Pursuant to an authorizing resolution adopted by the members of JV 2020 Lawrence, Zocalo advanced the proceeds of the Colorado Energy Loan, as received from time to time, to JV 2020 Lawrence for application to the 2020 Lawrence Project. Such advances to JV 2020 Lawrence will not be considered contributions of capital to JV 2020 Lawrence. Also, Zocalo is authorized and directed to cause JV 2020 Lawrence to repay such advances, including principal and interest, made by Zocalo at such times as required by the Colorado Energy Loan. Any payments pursuant to the authorizing resolution shall be payable only from surplus cash of the 2020 Lawrence Project as defined by the U.S. Department of Housing and Urban Development ("HUD") in the governing regulatory agreement of the primary financing on the project as described above. If surplus cash is not available to satisfy Zocalo's payment obligations under the Colorado Energy Loan, then either Zocalo or BIR 2020 may issue a funding notice, pursuant to the JV 2020 Lawrence limited liability company agreement, for payment obligation amounts due and payable. As of September 30, 2014 and December 31, 2013, the outstanding balance on the Colorado Energy Loan was $1,250,000.

The Company determines the fair value of the "Note payable - other" in accordance with authoritative guidance related to fair value measurement. Based on the fair value analysis using the same method as described in Note 4 - Mortgage Notes Payable, the Company has determined that the fair value of the "Note payable - other" approximated $1,340,000 and $1,287,000 at September 30, 2014 and December 31, 2013, respectively.

8.    EQUITY / DEFICIT

On March 25, 2003, the Board of Directors (“Board”) declared a dividend at an annual rate of 9%, on the stated liquidation preference of $25 per share of the outstanding 9% Series A Cumulative Redeemable Preferred Stock ("Preferred Shares") which is payable quarterly in arrears, on February 15, May 15, August 15, and November 15 of each year to shareholders of record in the amount of $0.5625 per share per quarter.  For the nine-month periods ended September 30, 2014 and 2013, the Company’s aggregate dividends on the Preferred Shares totaled $5,025,580 and $5,025,582, respectively, of which $837,607 was payable and included on the Consolidated Balance Sheets in "Dividends and distributions payable" as of September 30, 2014 and December 31, 2013.

On August 6, 2013, the Board authorized the general partner of the Operating Partnership to make a special distribution of $12,000,000 from the proceeds of the sale of Walden Pond and Gables of Texas to the common general and noncontrolling interest partners in Operating Partnership. Also on August 6, 2013, the Board declared a common dividend of $0.203954 per share on the Company's Class B common stock in respect to the special distribution to the common general partner. On August 28, 2013 and December 12, 2013, the Operating Partnership made a special distribution of $9,200,000 and $2,800,000, respectively, to the common general partner and noncontrolling interest partners in Operating Partnership.

Concurrently with the Operating Partnership distributions on August 28, 2013 and December 12, 2013, the Company paid common dividends of $219,880 and $66,920, respectively, from the special distribution proceeds of the common general partner.

17


On January 16, 2014, the Board authorized the general partner of the Operating Partnership to make a special distribution of $20,000,000 from proceeds of the supplemental loan on Seasons of Laurel, which closed in December 2013, and the refinancing of Berkshires of Columbia, which closed in January 2014, to the common general and noncontrolling interest partners in Operating Partnership, which was paid on January 17, 2014. Also on January 16, 2014, the Board declared a common dividend of $0.339924 per share on the Company's Class B common stock in respect to the special distribution to the common general partner. Concurrently with the Operating Partnership distributions, the common dividend was paid from the special distribution proceeds of the common general partner on January 17, 2014.

For the nine-month periods ended September 30, 2014 and 2013, the Company's aggregate dividends on the Class B common stock totaled $478,000 and $286,800, respectively, of which $478,000 and $219,880 were paid during the same periods, respectively. There were no dividends payable to the Class B common stockholders as of September 30, 2014 and December 31, 2013.

During the nine-month periods ended September 30, 2014 and 2013, the Company made tax payments of $424,010 and $1,184,138, respectively, on behalf of the noncontrolling interest partners in Operating Partnership as required by the taxing authorities of the jurisdictions in which the Company owns and operates properties. The payments were treated as distributions attributable to the noncontrolling interest in Operating Partnership and are reflected in the Consolidated Statements of Changes in Deficit.

For the nine-month periods ended September 30, 2014 and 2013, the Company's aggregate distribution to noncontrolling interest partners in Operating Partnership totaled $19,946,010 and $12,897,338, respectively, of which $19,946,010 and $10,164,258 was paid during the same periods, respectively. There were no distributions payable to the noncontrolling interest partners in Operating Partnership as of September 30, 2014 and December 31, 2013.

The Company’s policy to provide for common distributions is based on available cash and Board approval.

9.    EARNINGS PER SHARE

Net income (loss) available to common shareholders per common share, basic and diluted, is computed as net income (loss) available to common shareholders divided by the weighted average number of common shares outstanding during the applicable period, basic and diluted.

The reconciliation of the basic and diluted earnings per common share for the three- and nine-month periods ended September 30, 2014 and 2013 follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Income (loss) from continuing operations prior to adjustments
$
29,596,498

 
$
(2,885,392
)
 
$
80,389,637

 
$
(11,099,603
)
Add:
Net loss attributable to noncontrolling interest in Operating Partnership
$

 
$
4,488,677

 

 

Less:
Preferred dividends
$
(1,675,193
)
 
$
(1,675,194
)
 
(5,025,580
)
 
(5,025,582
)
 
Net income attributable to noncontrolling interest in properties
$
(14,734
)
 
$
(25,553
)
 
(205,457
)
 
(40,361
)
 
Net income attributable to noncontrolling interest in Operating Partnership
$
(27,239,605
)
 
$

 
(73,250,824
)
 
(2,509,405
)
Income (loss) from continuing operations
$
666,966

 
$
(97,462
)
 
$
1,907,776

 
$
(18,674,951
)
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations
$

 
$
(12,444
)
 
$
(114,216
)
 
$
18,736,394

 
 
 
 
 
 
 
 
Net income (loss) available to common shareholders
$
666,966

 
$
(109,906
)
 
$
1,793,560

 
$
61,443

 
 
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to the Company per common share, basic and diluted
$
0.47

 
$
(0.07
)
 
$
1.36

 
$
(13.28
)
Net income (loss) from discontinued operations attributable to the Company per common share, basic and diluted
$

 
$
(0.01
)
 
$
(0.08
)
 
$
13.32

Net income (loss) available to common shareholders per common share, basic and diluted
$
0.47

 
$
(0.08
)
 
$
1.28

 
$
0.04

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic and diluted
1,406,196

 
1,406,196

 
1,406,196

 
1,406,196

 
 
 
 
 
 
 
 
 
Dividend declared per common share
$

 
$
0.203954

 
$
0.339924

 
$
0.203954


18


For the three- and nine-month periods ended September 30, 2014 and 2013, the Company did not have any common stock equivalents; therefore basic and dilutive earnings per share were the same.

10.     COMMITMENTS AND CONTINGENCIES

The Company is party to certain legal actions arising in the ordinary course of its business, such as those relating to tenant issues.  All such proceedings taken together are not expected to have a material adverse effect on the Company.  While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

The Company has commitments to two joint venture multifamily development projects as of September 30, 2014. The Walnut Creek Project is a 141-unit multifamily apartment development project located in Walnut Creek, California. The Company will own a 98% interest in the project once fully invested and its current commitment in the joint venture is approximately $26.8 million. As of September 30, 2014, the Company has made capital contributions totaling approximately $13.7 million. The Company consolidates its investment in the Walnut Creek Project.

The Prestonwood Project is a 322-unit multifamily apartment development project located in Dallas, Texas. The Company has a 95% interest in the joint venture and has made a commitment to invest $12.6 million in the project. The Company has no obligation to fund capital to the Prestonwood Project in excess of its commitment of capital of $12.6 million. As of September 30, 2014, the Company has invested 100% of its total committed capital amount. The Company consolidates its investment in the Prestonwood Project.

In connection with mortgage financings collateralized by the Standard at Lenox Park, Berkshires at Town Center and Sunfield Lake properties, the Operating Partnership agreed to guarantee approximately $11.7 million of mortgage debt, at origination, related to its obligation to achieve certain revenue targets at the properties. In connection with the construction loan financing collateralized by the Walnut Creek Project, the Operating Partnership agreed to guarantee approximately $44.5 million, at origination, of construction loan debt. Additionally, the Company has guaranteed payment of the obligation under the Credit Facility, in full, when due at maturity or otherwise.

11.    DERIVATIVE FINANCIAL INSTRUMENTS

The Company utilizes interest rate caps to add stability to interest expense, to manage our exposure to interest rate movements and as required by our lenders when entering into variable interest mortgage debt. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above a certain level in exchange for an upfront premium.

During the nine-month period ended September 30, 2014, the Company acquired an interest rate cap related to its investment in Berkshires of Columbia. The derivative instrument was obtained as a requirement by the lender under the terms of the financing and limits increases in interest costs of the variable rate debt. The interest rate cap limits that interest exposure on the variable rate mortgage to 4.25% of the total mortgage amount of $44,000,000. The instrument matures on February 1, 2018. As of September 30, 2014, the value of the interest rate cap is $86,775 and is included in "Prepaid expenses and other assets".

The Company did not own any derivative instruments as of December 31, 2013.

12.    NONCONTROLLING INTEREST IN PROPERTIES

Four of the Company's properties, Berkshires of Columbia, 2020 Lawrence, Walnut Creek and Aura Prestonwood, are owned in joint ventures with third parties as of September 30, 2014. The Company owns interests of 91.38% in Berkshires of Columbia, 91.08% in 2020 Lawrence, 95.00% in Aura Prestonwood and will own a 98.00% interest in Walnut Creek once fully invested.

On July 16, 2014, the Company converted its ownership in Country Place I and Country Place II from a joint venture limited liability company, of which it held a 58% controlling interest, into a TIC undivided ownership interest of 58% in each property. As a result, the Company discontinued the use of the consolidation method of accounting for its investment in the joint venture and adopted the equity method of accounting for its ownership interest in the properties prospectively. Such deconsolidation resulted in the removal of the 42% noncontrolling interest in properties for Country Place I and Country Place II. Please refer to Note 3 - Investments in Unconsolidated Multifamily Entities for additional information on the transaction.

19


During the nine-month periods ended September 30, 2014 and 2013, the Company received $665,447 and $399,718, respectively, of contributions from noncontrolling interest holders in properties.

During the nine-month periods ended September 30, 2014 and 2013, the Company made tax payments of $76,000 and $300,000, respectively, on behalf of the noncontrolling interest holders in properties as required by the taxing authorities of the jurisdictions in which the Company owns and operates properties.

During the nine-month periods ended September 30, 2014 and 2013, the Company's aggregate distributions to the noncontrolling interest holders in properties totaled $1,943,985 and $1,221,443, respectively, which included $0 and $300,000 of tax payments accrued and included on the balance sheets in "Dividends and distributions payable" as of December 31, 2013 and 2012, respectively.

13.    NONCONTROLLING INTEREST IN OPERATING PARTNERSHIP

The following table sets forth the calculation of net income (loss) attributable to noncontrolling interest in the Operating Partnership for the three- and nine-month periods ended September 30, 2014 and 2013:
 
 
Three months ended
 
Nine months ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
29,596,498

 
$
(2,897,836
)
 
$
80,275,421

 
$
7,636,791

Adjust:
Net income attributable to noncontrolling interest in properties
(14,734
)
 
(25,553
)
 
(205,457
)
 
(40,361
)
Income (loss) before noncontrolling interest in Operating Partnership
29,581,764

 
(2,923,389
)
 
80,069,964

 
7,596,430

Preferred dividend
(1,675,193
)
 
(1,675,194
)
 
(5,025,580
)
 
(5,025,582
)
Income (loss) available to common equity
27,906,571

 
(4,598,583
)
 
75,044,384

 
2,570,848

Noncontrolling interest in Operating Partnership
97.61
%
 
97.61
%
 
97.61
%
 
97.61
%
Net income (loss) attributable to noncontrolling interest in Operating Partnership
$
27,239,605

 
$
(4,488,677
)
 
$
73,250,824

 
$
2,509,405


The following table sets forth a summary of the items affecting the noncontrolling interest in the Operating Partnership:
 
For the nine months ended
 
September 30,
 
2014
 
2013
Balance at beginning of period
$
(102,297,937
)
 
$
(89,708,267
)
Net income attributable to noncontrolling interest in Operating Partnership
73,250,824

 
2,509,405

Distributions to noncontrolling interest partners in Operating Partnership
(19,946,010
)
 
(12,897,338
)
Balance at end of period
$
(48,993,123
)
 
$
(100,096,200
)

As of September 30, 2014 and December 31, 2013, the noncontrolling interest in the Operating Partnership consisted of 5,242,223 Operating Partnership units held by parties other than the Company.


20


14.    RELATED PARTY TRANSACTIONS

Amounts accrued or paid to the Company’s affiliates are as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Property management fees
$
746,158

 
$
781,559

 
$
2,430,511

 
$
2,418,068

Expense reimbursements
60,135

 
60,228

 
192,442

 
159,035

Salary reimbursements
1,930,810

 
2,083,615

 
6,394,087

 
6,633,072

Asset management fees
397,739

 
407,913

 
1,213,565

 
1,223,740

Incentive advisory fee
2,367,299

 
423,153

 
5,040,718

 
1,796,933

Acquisition fees

 

 
1,200,000

 

Construction management fees
206,004

 
87,925

 
315,548

 
207,043

Development fees
69,663

 

 
193,634

 
69,715

Interest on Credit Facility - Affiliate

 

 

 
32,981

Total
$
5,777,808

 
$
3,844,393

 
$
16,980,505

 
$
12,540,587


Amounts due to affiliates of $2,678,796 and $2,454,167 are included in “Due to affiliates, net” at September 30, 2014 and December 31, 2013, respectively, and represent intercompany development fees, expense reimbursements, asset management fees and shared services, which consist of amounts due to affiliates of $4,873,292 and $5,070,512 at September 30, 2014 and December 31, 2013, respectively, and amounts due from affiliates of $2,194,496 and $2,616,345 at September 30, 2014 and December 31, 2013, respectively.

The Company pays property management fees to an affiliate, Berkshire Advisor, for property management services.  The fees are payable at a rate of 4% of gross income. The Company incurred $2,430,511 and $2,418,068 of property management fees in the nine-month periods ended September 30, 2014 and 2013, respectively.

The Company also reimburses Berkshire Advisor for administrative services for our operation, including property management, legal, accounting, data processing, transfer agent and other necessary services. Under the terms of the Advisory Services Agreement, the Company reimburses Berkshire Advisor for actual property employee salary and benefit expenses incurred in the operation of the properties under management. Additionally, Berkshire Advisor allocates a portion of its corporate level personnel and overhead expense to the Company on the basis of an employee's time spent on duties and activities performed on behalf of the Company. Expense reimbursements paid were $192,442 and $159,035 for the nine-month periods ended September 30, 2014 and 2013, respectively. Salary reimbursements paid were $6,394,087 and $6,633,072 for the nine-month periods ended September 30, 2014 and 2013, respectively.

The Company pays Berkshire Advisor a fixed annual asset management fee equal to 0.40%, up to a maximum of $1,600,000 in any calendar year, of the purchase price of real estate properties owned by the Company, as adjusted from time to time to reflect the then current fair value of the properties.  Annual asset management fees earned by the affiliate in excess of the $1,600,000 maximum payable by the Company represent fees attributable to and paid by the noncontrolling partners in the properties.  As discussed below, in addition to the fixed fee, effective January 1, 2010, the Company may also pay Berkshire Advisor an incentive advisory fee based on increases in value of the Company that would not be subject to the $1,600,000 maximum.  

On November 12, 2009, the Audit Committee of the Company approved an amendment to the advisory services agreement with Berkshire Advisor which included an incentive advisory fee component to the existing asset management fees payable to Berkshire Advisor (the "Advisory Services Amendment") pursuant to Berkshire Advisor's Supplemental Long Term Incentive Plan (the "Supplemental Plan"). The Advisory Services Amendment became effective January 1, 2010 and provides for an incentive advisory fee based on the increase in fair value of the Company, as calculated and approved by management, over the base value ("Base Value").  The Company accrues incentive advisory fees payable to Berkshire Advisor at 10%, which can be increased to 12% from time to time, based on the increase in fair value of the Company above the Base Value established by the Advisor.  On May 12, 2014, the Audit Committee of the Company approved an amendment to the Supplemental Plan which allows reissuance of previously forfeited or settled carried interests. The Company has recorded $5,040,718 and $1,796,933 of incentive advisory fees during the nine-month periods ended September 30, 2014 and 2013, respectively. As of September 30, 2014 and December 31, 2013, the accrued liability of $12,759,433 and $8,289,617, respectively, was included in "Due to affiliate, incentive advisory fees" on the Consolidated Balance Sheets.  Payments from the Company to Berkshire Advisor approximate the amounts Berkshire Advisor pays to its employees. Payments to employees by Berkshire Advisor pursuant to the Supplemental Plan are generally

21


paid over a four-year period in quarterly installments. Additional limits have been placed on the total amount of payments that can be made by the Company in any given year, with interest accruing at the rate of 7% on any payments due but not yet paid.  The Company made $570,902 and $838,657 of incentive advisory fee payments during the nine-month periods ended September 30, 2014 and 2013, respectively.

The Company pays acquisition fees to an affiliate, Berkshire Advisor, for acquisition services.  These fees are payable upon the closing of an acquisition of real property.  The fee is equal to 1% of the purchase price of any new property acquired directly or indirectly by the Company.  The purchase price is defined as the capitalized basis of an asset under GAAP, including renovations or new construction costs, or other items paid or received that would be considered an adjustment to basis.  The purchase price does not include acquisition fees and capital costs of a recurring nature.  During the nine-month period ended September 30, 2014, the Company paid acquisition fees of $560,000 and $640,000 on the acquisitions of Pavilion Townplace and EON at Lindbergh, respectively. The Company did not acquire any properties in the nine-month period ended September 30, 2013.

The Company pays a construction management fee to an affiliate, Berkshire Advisor, for services related to the management and oversight of renovation and rehabilitation projects at its properties.  The Company paid or accrued $315,548 and $207,043 in construction management fees for the nine-month periods ended September 30, 2014 and 2013, respectively.  The fees are capitalized as part of the project cost in the year they are incurred.

The Company pays development fees to an affiliate, Berkshire Residential Development, L.L.C. ("BRD"), for property development services.  The fees were based on the project’s development and construction costs. During the nine-month periods ended September 30, 2014 and 2013, the Company incurred $193,634 and $69,715, respectively, on the 2020 Lawrence Project, the Walnut Creek Project and the Prestonwood Project. The Company did not incur any development fees on the NoMa Project to BRD for the nine-month periods ended September 30, 2014 and 2013.

During the nine-month periods ended September 30, 2014 and 2013, the Company borrowed $0 and $1,627,000, respectively, under the Credit Facility - Affiliate and repaid $0 and $1,627,000 of advances, respectively, during the same periods.  The Company incurred interest of $0 and $32,981 related to the Credit Facility - Affiliate during the nine-month periods ended September 30, 2014 and 2013, respectively. The Company did not pay any commitment fees during the nine-month periods ended September 30, 2014 or 2013. There was no outstanding balance under the Credit Facility - Affiliate as of September 30, 2014 and December 31, 2013.  

Related party arrangements are approved by the independent directors of the Company and are evidenced by a written agreement between the Company and the affiliated entity providing the services.

15.    LEGAL PROCEEDINGS
 
The Company is party to certain legal actions arising in the ordinary course of its business, such as those relating to tenant issues.  All such proceedings taken together are not expected to have a material adverse effect on the Company.  While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations. The Company is not aware of any proceedings contemplated by governmental authorities.


22


16.    PROFORMA CONDENSED FINANCIAL INFORMATION

As discussed in Note 1 - Organization and Basis of Presentation, during the nine-month periods ended September 30, 2014, the Company acquired Pavilion Townplace and EON at Lindbergh, which were deemed to be individually significant in accordance with Regulation S-X, Rule 3-14 “Special Instructions for Real Estate Operations to be Acquired”.

The proforma financial information set forth below is based upon the Company's historical Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2014 and 2013, adjusted to give effect to the transaction at the beginning of each of the periods presented.

The proforma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transaction occurred at the beginning of each year, nor does it attempt to represent the results of operations for future periods.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenue from rental property
$
19,762,266

 
$
22,967,342

 
$
66,663,562

 
$
67,543,461

Net income (loss)
$
29,656,043

 
$
(3,102,840
)
 
$
81,194,157

 
$
6,719,024

Net income (loss) attributable to common shareholders
$
726,511

 
$
(314,910
)
 
$
2,712,296

 
$
(856,324
)
Net income (loss) attributable to common shareholders, per common share, basic and diluted
$
0.52

 
$
(0.22
)
 
$
1.93

 
$
(0.61
)

17.    SUBSEQUENT EVENTS

On October 30, 2014, the Company completed the sale of Yorktowne, located in Millersville, Maryland, to an unaffiliated buyer. The sale price of $33,000,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company has designated Yorktowne as the relinquished property in the exchange transaction for a replacement property, under Section 1031 of the Internal Revenue Code. The proceeds from the sale of Yorktowne were deposited with a qualified intermediary and will be used to close the 1031 exchange transaction for the replacement property.

On November 4, 2014, the Board authorized the general partner of the Operating Partnership to make a special distribution of $11,000,000 from the net proceeds of the sales of Bear Creek, Laurel Woods and Reserves at Arboretum to the common general and noncontrolling interest partners in Operating Partnership, payable on November 17, 2014. Also on November 4, 2014, the Board declared a common dividend of $0.186958 per share on the Company's Class B common stock in respect to the special distribution to the common general partner. Concurrently with the Operating Partnership distributions, the common dividend will be paid from the special distribution proceeds of the common general partner on November 17, 2014.

On November 7, 2014, the Company rate locked a loan modification to the 2020 Lawrence mortgage. The revised rate on the mortgage will be reduced to 4.45% from the current rate of 5.00%. The maturity date of the mortgage remains the same at February 1, 2053. The closing date for the loan modification is November 28, 2014.

On November 14, 2014, the Company completed the sale of its interest in Country Place I and Country Place II, both located in Burtonsville, Maryland, to an unaffiliated buyer. The combined sale price of $57,300,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company has designated its Country Place I and Country Place II interests as relinquished properties in an exchange transaction for a replacement property, under Section 1031 of the Internal Revenue Code. The proceeds from the sale of Country Place I and Country Place II were deposited with a qualified intermediary and will be used to close the 1031 exchange transaction for the replacement property.




23


Item 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BERKSHIRE INCOME REALTY, INC.

You should read the following discussion in conjunction with the consolidated financial statements of Berkshire Income Realty, Inc. (the “Company”) and the related notes and other financial information included in this report. For further information please refer to the Company’s consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Forward Looking Statements

The statements contained in this report, including information with respect to our future business plans, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements, subject to a number of risks and uncertainties that could cause actual results to differ significantly from those described in this report.  These forward-looking statements include statements regarding, among other things, our business strategy and operations, future expansion plans, future prospects, financial position, anticipated revenues or losses and projected costs, and objectives of management.  Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms and other comparable terminology are intended to identify forward-looking statements.  There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements.  These factors include, but are not limited to, changes in economic conditions generally and the real estate and bond markets specifically, legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts (“REITs”)), possible sales or acquisitions of assets, the acquisition restrictions placed on the Company by an affiliated entity Berkshire Multifamily Value Plus Fund III, LP (“BVF III”), availability of capital, interest rates and interest rate spreads, changes in accounting principles generally accepted in the United States of America ("GAAP") and policies and guidelines applicable to REITs, those factors set forth in Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (the “SEC”) and other risks and uncertainties as may be detailed from time to time in our public announcements and our reports filed with the SEC.

The foregoing risks are not exhaustive.  Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risks factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, undue reliance should not be placed on forward-looking statements as a prediction of actual results.

As used herein, the terms “we”, “us” or the “Company” refer to Berkshire Income Realty, Inc., a Maryland corporation, incorporated on July 19, 2002.  The Company is in the business of acquiring, owning, operating, developing and renovating multifamily apartment communities.  Berkshire Property Advisors, L.L.C. (“Berkshire Advisor” or “Advisor”) is an affiliated entity we have contracted with to make decisions relating to the day-to-day management and operation of our business, subject to the oversight of the Company’s Board of Directors ("Board").  Refer to Part III, Item 13 - Certain Relationships and Related Transactions and Director Independence and Part IV, Item 15 - Notes to the Consolidated Financial Statements, Note 14 - Related Party Transactions of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC, for additional information about the Advisor.

Overview

The Company is engaged primarily in the acquisition, ownership, operation, development and rehabilitation of multifamily apartment communities in the Baltimore/Washington D.C., Southeast, Southwest, Northwest and Western areas of the United States. We conduct substantially all of our business and own, either directly or through subsidiaries, substantially all of our assets through Berkshire Income Realty-OP, L.P., a Delaware limited partnership (the "Operating Partnership").  The Company’s wholly owned subsidiary, BIR GP, L.L.C., a Delaware limited liability company, is the sole general partner of the Operating Partnership.

As of November 13, 2014, the Company owns 100% of the preferred limited partner units of the Operating Partnership, whose terms mirror the terms of the Company’s Series A 9% Cumulative Redeemable Preferred Stock and, through BIR GP, L.L.C., owns 100% of the general partner interest of the Operating Partnership, which represents approximately 2.39% of the common economic interest of the Operating Partnership.


24


Our general and limited partner interests in the Operating Partnership entitle us to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to our percentage interest therein. The other partners of the Operating Partnership are affiliates who contributed their direct or indirect interests in certain properties to the Operating Partnership in exchange for common units of limited partnership interest in the Operating Partnership.

Our highlights of the nine-month period ended September 30, 2014 included the following:

During 2014, the Company executed strategies to upgrade the quality of the portfolio. Numerous properties were identified for sale of which seven have been sold as of September 30, 2014. A portion of the proceeds of the sales were used to acquire two properties in a reverse exchange transaction, under Section 1031 of the Internal Revenue Code, and to fund equity commitments of ongoing development projects.

On January 16, 2014, the Company closed on a $44,000,000 mortgage loan refinancing for Berkshires of Columbia. The mortgage has a variable interest rate of 2.43% above the 1-month London Inter-Bank Offered Rate ("LIBOR") and will mature on February 1, 2024. As part of the refinancing, proceeds from the new mortgage were used to pay off three existing loans on the Berkshire of Columbia property totaling $32,254,893.

On January 16, 2014, the Board authorized the general partner of the Operating Partnership to make a special distribution of $20,000,000 from proceeds of the supplemental loan on Seasons of Laurel and the refinancing of Berkshires of Columbia to the common general and noncontrolling interest partners in Operating Partnership, which was paid on January 17, 2014. Also on January 16, 2014, the Board declared a common dividend of $0.339924 per share on the Company's Class B common stock in respect to the special distribution to the common general partner. Concurrently with the Operating Partnership distributions, the common dividend was paid from the special distribution proceeds of the common general partner on January 17, 2014.

On January 21, 2014, the Company closed on a $90,000,000 line of credit (the "Credit Facility") with an unaffiliated lender. The Credit Facility will be used to facilitate property acquisitions and to fund the development activities of the Company. As of September 30, 2014, the Credit Facility provides for a maximum commitment of $60,000,000 to the Company.
 
During the nine-month period ended September 30, 2014, the Company borrowed $80,000,000 from and repaid $75,000,000 to the Credit Facility.
 
On January 22, 2014, the Company executed a joint venture limited liability company agreement with an unrelated entity for the development of Aura Prestonwood, a 322-unit multifamily apartment project in Dallas, Texas (the "Prestonwood Project"). The Company's ownership percentage in the project is 95%. Total capital committed to the venture is $12,643,500 and is fully funded as of September 30, 2014. Simultaneously with the execution of the limited liability company agreement, the joint venture acquired the land where the multifamily apartment project is being built. The cost of the land was $7,302,960 and consideration of $1,000,000 was paid at closing for the option to acquire the abutting land parcel at a future time.

On March 20, 2014, the Company, through its subsidiaries, BIR Pavilion, L.L.C. and BIR Eon, L.L.C., completed the acquisitions of Pavilion Townplace, a 236-unit multifamily apartment community located in Dallas, Texas and EON at Lindbergh, a 352-unit multifamily apartment community located in Atlanta, Georgia, respectively. The seller was an unaffiliated third party. The purchase prices for Pavilion Townplace and EON at Lindbergh were $56,000,000 and $64,000,000, respectively, and were subject to loan assumptions, normal operating prorations and adjustments as provided for in the purchase and sale agreements.

On March 31, 2014, the Company through its joint venture partnership in the development of the 141-unit apartment project in Walnut Creek, California (the "Walnut Creek Project"), paid off the outstanding land loan balance of $4,828,495. The land loan was assumed on November 1, 2013 as part of the acquisition of the land for the Walnut Creek Project.

On May 5, 2014, the Company completed the sale of Chisholm Place, located in Dallas, Texas, to an unaffiliated buyer. The sale price of $15,000,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $7,556,301 of gain from the sale and paid off the outstanding mortgage balance of $6,734,476 from sale proceeds.

On May 12, 2014, the Company completed the sale of Laurel Woods, located in Austin, Texas, to an unaffiliated buyer. The sale price of $13,200,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $9,211,973 of gain from the sale and paid off the outstanding mortgages balance of $5,473,785 from sale proceeds.


25


On June 4, 2014, the Company completed the sale of Bear Creek, located in Dallas, Texas, to an unaffiliated buyer. The sale price of $9,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $5,988,770 of gain from the sale and paid off the outstanding mortgage balance of $3,676,750 from sale proceeds.

On June 25, 2014, the Company completed the sale of Berkshires on Brompton, located in Houston, Texas, to an unaffiliated buyer. The sale price of $38,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $26,762,948 of gain from the sale and paid off the outstanding mortgage balance of $18,214,961 from sale proceeds.

On July 16, 2014, the Company converted its ownership in Country Place I and Country Place II from a joint venture limited liability company, of which it had a 58% controlling interest, into a tenancy-in-common ("TIC") undivided ownership interest of 58% in each property. The Company discontinued the use of the consolidation method of accounting for its investment in the joint venture and adopted the equity method of accounting for its ownership interest in the properties prospectively. (Refer to Note 3 - Investments in Unconsolidated Multifamily Entities of Notes to Consolidated Financial Statements for additional information on the transaction.)

On July 23, 2014, the Company through the joint venture formed with its subsidiary, BRD Walnut Creek, L.L.C., and Laconia Residential One LLC, entered into a construction loan agreement totaling up to $44,500,000 for the Walnut Creek Project. The loan has a fixed interest rate of 5.309% and matures on August 1, 2024. As of September 30, 2014, the outstanding balance on the loan was $0.

On August 18, 2014, the Company completed the sales of Bridgewater and Lakeridge, both located in Hampton, Virginia, to an unaffiliated buyer. The sale prices of $23,500,000 and $40,000,000 for Bridgewater and Lakeridge, respectively, were subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $11,235,832 and $16,754,795 of gain from the sales of Bridgewater and Lakeridge, respectively, and paid off the outstanding mortgage balances of $12,344,619 and $22,745,260 from sales proceeds, respectively.

On August 19, 2014, the Company completed the sale of Reserves at Arboretum, located in Newport News, Virginia, to an unaffiliated buyer. The sale price of $21,500,000 was subject to normal operating prorations and adjustments as provided for in the purchase and sale agreement. The Company recognized $6,603,188 of gain from the sale and paid off the outstanding mortgage balance of $12,369,740 from sale proceeds.

General

The Company detailed a number of significant trends and specific factors affecting the real estate industry in general and the Company’s business in particular in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2013.  The Company believes those trends and factors continue to be relevant to the Company’s performance and financial condition.

Liquidity and Capital Resources

Cash and Cash Flows

As of September 30, 2014 and December 31, 2013, the Company had approximately $12,625,000 and $15,255,000 of cash and cash equivalents, respectively.  Cash provided and used by the Company for the three- and nine-month periods ended September 30, 2014 and 2013 are as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Cash provided by operating activities
$
5,981,432

 
$
2,747,200

 
$
9,127,067

 
$
10,727,319

Cash provided by (used in) investing activities
109,968,035

 
(2,079,416
)
 
85,584,548

 
19,113,528

Cash used in financing activities
(120,916,120
)
 
(12,137,453
)
 
(97,341,269
)
 
(32,752,794
)

During the nine-month period ended September 30, 2014, cash decreased by approximately $2,630,000.  


26


The Company's net cash flow from operating activities for the nine-month period ended September 30, 2014 decreased by $1,600,000 from the same period in 2013 primarily due to $2,116,000 of higher interest expense, $2,080,000 of loss on extinguishment of debt and $1,726,000 lower Net Operating Income ("NOI") (see page 38 for more detail), partially offset by $4,437,000 increase in cash attributable to changes in assets and liabilities.

The Company's net cash from investing activities for the nine-month period ended September 30, 2014 increased by $66,471,000 from the comparable period in 2013 primarily due to $158,854,000 of sale proceeds from property dispositions received for the nine-month period ended September 30, 2014 as compared to $30,959,000 received during the same period in 2013. The Company also received $12,580,000 of distributions from its investment in unconsolidated multifamily entities during the nine-month period ended September 30, 2014 as compared to $868,000 during the comparable period in 2013. The increase was partially offset by $60,611,000 used for acquisitions of Pavilion Townplace, EON at Lindbergh and Aura Prestonwood.

Cash used in financing activities for the nine-month period ended September 30, 2014 increased by $64,588,000 from the same period in 2013, primarily due to net cash outflow for mortgage notes of $71,838,000 in the nine-month period ended September 30, 2014 compared to $16,459,000 in the comparable period of 2013 and aggregate distributions of $22,368,000 made during the nine-month period ended September 30, 2014 compared to $11,606,000 made during the nine-month period ended September 30, 2013. The increase in cash outflow was offset by net borrowing from the credit facilities of