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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 000-54686

 

 

CNL Growth Properties, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-3859644

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

CNL Center at City Commons

450 South Orange Avenue

Orlando, Florida

  32801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (407) 650-1000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of exchange on which registered

None   Not applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

There is currently no established public market for the registrant’s shares of common stock. Based on the Company’s $9.90 estimated net asset value per share as of June 30, 2014, the aggregate market value of the stock held by non-affiliates of the registrant on such date was approximately $219 million.

The number of shares of common stock outstanding as of March 18, 2015 was 22,526,171.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant incorporates by reference portions of the CNL Growth Properties, Inc. Definitive Proxy Statement for the 2015 Annual Meeting of Stockholders (Items 10, 11, 12, 13 and 14 of Part III) to be filed no later than April 30, 2015.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

Part I.

  

Statement Regarding Forward Looking Information

     1   

Item 1.

 

Business

     1   

Item 1A.

 

Risk Factors

     6   

Item 1B.

 

Unresolved Staff Comments

     22   

Item 2.

 

Properties

     23   

Item 3.

 

Legal Proceedings

     25   

Item 4.

 

Mine Safety Disclosure

     25   

Part II.

  

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26   

Item 6.

 

Selected Financial Data

     30   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     51   

Item 8.

 

Financial Statements and Supplementary Data

     52   

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     81   

Item 9A.

 

Controls and Procedures

     81   

Item 9B.

 

Other Information

     81   

Part III.

  

Item 10.

 

Directors, Executive Officers and Corporate Governance

     82   

Item 11.

 

Executive Compensation

     82   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     82   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     82   

Item 14.

 

Principal Accountant Fees and Services

     82   

Part IV.

  

Item 15.

 

Exhibits and Financial Statement Schedules

     82   

Signatures

     83   

Exhibit Index

     84   


Table of Contents

PART I

Statement Regarding Forward Looking Information

Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (this “Annual Report”) that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should,” “could” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimates of per share net asset value of the Company’s common stock, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.

For further information regarding risks and uncertainties associated with the Company’s business, and important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the Company’s documents filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, this Annual Report and the Company’s quarterly reports on Form 10-Q, copies of which may be obtained from the Company’s website at http://www.cnlgrowthproperties.com.

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

 

Item 1. BUSINESS

General

CNL Growth Properties, Inc. was organized as a Maryland corporation on December 12, 2008 and has elected to be taxed, and currently qualifies as a real estate investment trust (“REIT”) for federal income tax purposes. The terms “us,” “we,” “our,” “our Company” and “CNL Growth Properties, Inc.” include CNL Growth Properties, Inc. and each of its subsidiaries.

We are externally advised by CNL Global Growth Advisors, LLC (the “Advisor”) and our property manager is CNL Global Growth Managers, LLC (the “Property Manager”), each of which is a Delaware limited liability company and a wholly owned affiliate of CNL Financial Group, LLC, our sponsor (the “Sponsor”). CNL Financial Group, LLC is an affiliate of CNL Financial Group, Inc. (“CNL”). The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, recommending and executing acquisitions and dispositions on our behalf pursuant to an advisory agreement.

Substantially all of our acquisition, operating, administrative and property management services are provided by sub-advisors to the Advisor and by sub-property managers to the Property Manager. In addition, certain unrelated sub-property managers have been engaged to provide certain property management services.

 

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Our Investment Objectives

Our primary investment objectives are to:

 

    realize growth in the value of our assets;

 

    preserve, protect and return our stockholders’ invested capital;

 

    invest in a diversified portfolio of assets; and

 

    explore liquidity options in the future, including the sale of either us or our assets, potential merger opportunities or the listing of our common stock on a national securities exchange (“Listing”).

There is no assurance that we will be able to achieve our investment objectives.

Our Investment Strategy

Our investment strategy allows us to acquire a range of growth-oriented real estate and real estate-related assets. Our Advisor used CNL’s and the sub-advisors’ network of relationships to locate, conduct due diligence, and assist in the acquisition, operation and management of our real estate investments, and we used these relationships to enter into joint ventures, partnerships or other co-ownership arrangements for the acquisition, development or improvement of real estate properties.

Since our inception, our Advisor and its sub-advisors have evaluated various investment opportunities on our behalf. To date, the investments we have made, as well as the remaining property we have identified as a possible investment opportunity, focused on multifamily development projects in the southeastern and sunbelt regions of the United States due to favorable and compelling market and industry data, as well as, unique opportunities to co-invest with experienced development operators.

We believe that multifamily development in the United States represents a unique near-term opportunity due to significant consumer demand for newly-constructed multifamily units. In addition, investor demand for stabilized multifamily operations drives prices up particularly in major markets and a compelling opportunity exists for those with capital, relationships, and expertise to develop and operate new units. We build on the success of our initial multifamily projects by continuing to capitalize on this supply/demand imbalance while monitoring for any shift in fundamental return metrics.

Our Real Estate Portfolio

As of December 31, 2014, we owned interests in sixteen Class A multifamily properties in the southeastern and sunbelt regions of the United States, seven of which had substantially completed development and were operational. The remaining nine properties were under development, including three of which were partially operational, with completion expected in phases by the third quarter of 2016. Generally, the development period for our properties is up to 24 months with the properties becoming partially operational as buildings within the project are completed and certificates of occupancy obtained. We generally expect our multifamily properties to reach stabilization within 24 months after completion.

We had a total of 2,323 completed apartment units as of December 31, 2014 (excluding 258 units relating to the Long Point Property classified as real estate held for sale), and expect to have more than 4,400 units once construction is completed on our remaining properties under development. We expect to add additional units once we acquire our last property during 2015.

In March 2014, we sold our three-building office complex located in Duluth, Georgia (“Gwinnett Center”) to an unrelated third party and received net sales proceeds of approximately $15.0 million, resulting in a gain of approximately $1.2 million for financial reporting purposes. During the year ended December 31, 2014, due to continuing trends and favorable market conditions in multifamily properties, we entered into an agreement to sell our interest in our 258-unit Class A garden-style multifamily community located in Mount Pleasant, Charleston County, South Carolina (the “Long Point Property”), one of our seven operational properties, to an unrelated third party. As a result, the operating results of these properties and the gain on the sale of the Gwinnett Center were treated as discontinued operations in accordance with generally accepted accounting principles (“GAAP”) in our accompanying financial statements. In January 2015, the Long Point Joint Venture sold the Long Point Property and received net sales proceeds of approximately $54.5 million, resulting in a gain of approximately $27.4 million for financial reporting purposes.

Our Advisor will continue to evaluate opportunities that arise from favorable market conditions in multifamily development until it begins to evaluate potential exit strategies for our stockholders. These opportunities may include evaluating provisions within the individual joint venture agreements to consider specific asset sales, as was the case of the opportunity to sell the properties described above.

 

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Our multifamily properties are typically owned through a joint venture in which we have co-invested with an affiliate of a national or regional multifamily developer. As of December 31, 2014, excluding the Whitehall Property that we wholly owned, we had co-invested with eight separate developers in 15 properties or affiliates thereof. Our joint ventures are structured such that we serve as the managing member and own a majority interest. Under the terms of the limited liability company agreements of each joint venture, operating cash flow is generally distributed to the members of the joint venture on a pro rata basis. Generally, in a capital event, such as a sale or refinancing of the joint venture’s property, net proceeds will be distributed pro rata to each member until each member’s invested capital is returned and a minimum return on capital is achieved, and thereafter our joint venture partner will receive a disproportionately higher share of any proceeds at varying levels based on our having received certain minimum threshold returns. We have determined that all of the joint ventures in which we have invested as of December 31, 2014 are variable interest entities in which we are the primary beneficiary. As such, the transactions and accounts of the joint ventures are consolidated in our accompanying financial statements.

For additional information regarding our real estate properties, see Item 2. “Properties.”

Our Common Stock Offerings

On October 20, 2009, we commenced our initial public offering (the “Initial Offering”) which closed on April 7, 2013. On August 19, 2013, we commenced a follow-on offering (the “Follow-On Offering”) which terminated on April 11, 2014. Through the close of the Follow-On Offering, we received aggregate offering proceeds of approximately $208.3 million from our Initial and Follow-On Offerings.

Our Borrowing Policies

Under our articles of incorporation, the maximum amount of our indebtedness cannot exceed 300% of our “net assets,” as defined by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007 (the “NASAA REIT Guidelines”) as of the date of any borrowing unless any excess borrowing is approved by a majority of our independent directors and is disclosed to stockholders in our next quarterly report, together with a justification for the excess. In addition to the limitations contained in our articles of incorporation, our board of directors has adopted a policy to limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets and only will apply once we have invested substantially all of our capital. As a result, we may borrow more than 75% of the initial acquisition and development budget of each asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent. Although we had an aggregate debt leverage ratio of approximately 53% of the aggregate carrying value of our consolidated assets as of December 31, 2014, due to the fact that we generally have obtained construction financing to fund up to approximately 75% of the development budget of our development properties, we expect this ratio to increase as we incur additional development costs as our properties under development are completed and we use construction financing to fund such development.

We may seek to refinance our indebtedness under such terms and at such times as we deem appropriate, and use any net proceeds received to invest in additional properties, acquire some or all of the equity interests of our partners, make cash distributions to our stockholders, establish reserves or for any other corporate purpose deemed appropriate.

Our Distribution Policy

In order to qualify as a REIT, we are required to distribute 90% of our annual REIT taxable income to our stockholders. Through December 31, 2014, we have not generated REIT taxable income and therefore have not been required to make cash distributions to our stockholders for purposes of complying with REIT qualifications.

Due to our investment strategy of seeking growth-oriented assets and our current investment focus of investing in multifamily development properties, the board initially determined to issue stock distributions in order to preserve cash as we developed properties and achieved stabilization of those properties upon completion of construction. On June 24, 2010, our board of directors authorized a daily stock distribution equal to 0.000219178 of a share of common stock on each outstanding share of common stock (which was equal to an annualized distribution rate of 0.08 of a share based on a 365-day calendar year), payable to all common stockholders of record as of the close of business on each day. Distributions pursuant to this policy began on July 1, 2010. Effective October 1, 2012, our board of directors authorized the declaration of a monthly stock distribution of 0.006666667 of a share of common stock on each outstanding share of common stock (which represented an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month and distributed quarterly until the policy was terminated by our board.

 

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On September 15, 2014, our board approved the termination of our distribution policy effective as of October 1, 2014. The board believed that additional stock distributions no longer provided an economic benefit, and believed that stock distributions were not in the best interests of our existing stockholders. As a result, we did not declare any further stock distributions effective October 1, 2014.

For the years ended December 31, 2014, 2013 and 2012, we declared 1,187,388 shares, 816,952 shares and 472,462 shares of common stock, respectively, as stock distributions. When issued, the stock distributions were non-taxable distributions.

On February 9, 2015, the board declared a special cash distribution in the amount of $1.30 per share payable to the holders of record of our common stock as of the close of business on February 9, 2015 (the “Special Distribution”). The Special Distribution was paid in cash and was funded from the proceeds of refinancings and asset sales, including the January 2015 sale of the Long Point Property. We paid the Special Distribution on February 24, 2015.

Our Valuation Policy

The valuation process used to determine an estimated NAV was designed to follow recommendations of the Investment Program Association (“IPA”), a trade association for non-listed direct investment vehicles, in the IPA Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, which was issued by the IPA in April 2013. The purpose of our valuation policy is to establish guidelines to be followed in determining the net asset value per share of our common stock for regulatory and investor reporting and on-going evaluation of investment performance. “Net asset value” means the fair value of real estate, real estate-related investments and all other assets less the fair value of total liabilities. Our net asset value will be determined based on the fair value of our assets less liabilities under market conditions existing as of the time of valuation and assuming the allocation of the resulting net value among our stockholders after any adjustments for incentive, preferred or special interests, if applicable.

In accordance with our policy, the valuation committee of our board of directors, comprised of our independent directors, oversees our valuation process and engages one or more third-party valuation advisors to assist in the process of determining the net asset value per share of our common stock.

To assist our board of directors in its determination of our net asset value, our board of directors engaged an independent valuation firm, CBRE Capital Advisors, Inc. (“CBRE Cap”), to provide property level and aggregate valuation analyses of the Company and a range for the net asset value per share of our common stock. For a discussion of the determination of our net asset value per share of our common stock, including our valuation process and methodology, see Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.”

In accordance with our valuation policy and as recommended by the IPA Valuation Guidelines, we will produce an estimated net asset value per share at least annually as of December 31 and disclose such amount as soon as possible after year end.

Our Disposition Policies

As each of our investments reach what we believe to be its optimum value during the expected holding periods of our assets, we will consider disposing of the investment and may do so for the purpose of either distributing the net sales proceeds after repayment of mortgage debt associated with the investment to our stockholders or investing the proceeds in other assets. The determination of when a particular investment should be sold or otherwise disposed of will be made after considering all of the relevant factors, including prevailing and projected economic and market conditions, whether the value of the property or other investment is anticipated to decline substantially, and whether we could apply the proceeds from the sale of the asset to make other investments consistent with our investment objectives.

Our ability to dispose of properties is restricted as a result of the rules applicable to REITs. Under applicable provisions of the Internal Revenue Code (“Code”) regarding prohibited transactions by REITs, a REIT that sells property, other than foreclosure property, that is deemed to be property held primarily for sale in the ordinary course of business is subject to a 100% penalty tax on the net gain from any such transaction. We focus on properties which meet our investment objectives, and we generally expect to continue holding properties beyond the point of stabilization. Once stabilized, we will consider a number of relevant factors in analyzing any potential disposition of a property, including any potential for the penalty tax.

Our Exit Strategy

In accordance with our investment objectives, our board of directors will consider strategic alternatives for future stockholder liquidity, including opportunities to merge with another company, the listing of our common stock on a national securities exchange,

 

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our sale or the sale of all of our assets. Although our board of directors is not required to recommend any such exit event by any certain date, due to our Follow-On Offering having closed in April 2014 and the estimated time needed to complete our acquisition phase and have our assets substantially stabilize, our Advisor has begun to explore strategic alternatives for providing liquidity to investors. A liquidation of our Company, or all of our assets, would generally require the approval of our stockholders in accordance with our governing documents.

Financial Information about Industry Segments

We have determined that we operate in one business segment, real estate ownership, which consists of owning, managing, leasing, acquiring, developing, investing in, and as conditions warrant, disposing of real estate assets. We internally evaluate all of our real estate assets as one industry segment and, accordingly, we do not report segment information.

Competition

We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, REITs, real estate limited partnerships and other entities engaged in real estate investment activities, many of which will have greater resources than we do.

Our fully-operational properties are located in the metropolitan areas of Charlotte and Raleigh, North Carolina, Tampa, Florida, Houston and Dallas, Texas and Nashville, Tennessee. Each location is in a highly competitive, large metropolitan area with multiple competing projects under construction.

We also have properties under development with partial operations and preleasing activities occurring in Charlotte and Houston (Cypress, Spring). Each of these markets has an active development pipeline which will compete with our development properties during the lease-up phase.

Employees

We are externally managed and as such we do not have any employees.

Our Advisor

Substantially all of our acquisition, operating, administrative and property management services are provided by sub-advisors to our Advisor and sub-property managers to the Property Manager. Under the terms of the advisory agreement, our Advisor has responsibility for our day-to-day operations, including serving as our consultant in connection with policy decisions to be made by our board of directors, identifying and making acquisitions and investments on our behalf and providing asset management and administrative services. In exchange for these services, our Advisor is entitled to receive certain fees and reimbursements from us.

The current advisory agreement may be extended annually upon mutual consent of the parties. Our independent directors are required to review and approve the terms of our advisory agreement at least annually.

For additional information on our Advisor and the fees and reimbursements we pay, see Item 8. “Financial Statements and Supplementary Data.”

Our Tax Status

We elected to be taxed as a REIT under Sections 856(c) of the Code commencing with our taxable year ended December 31, 2010. In order to be taxed as a REIT, we are subject to a number of organizational and operational requirements, including the requirement to make distributions to our stockholders each year of at least 90 percent of our REIT taxable income (excluding any net capital gain). As a REIT, we generally will not be subject to U.S. federal corporate income tax on income distributed to our stockholders. As a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income. We may also be subject to foreign taxes on investments outside of the U.S. based on the jurisdictions in which we conduct business.

Since electing to be taxed as a REIT, we have had tax losses for federal income tax purposes and therefore have not been required to make cash distributions to our stockholders. In February 2015, we paid a special distribution, as described above under “Our Distribution Policy.”

 

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Available Information

Our sponsor maintains a website at www.CNLGrowthProperties.com containing additional information about our business, and a link to the Securities and Exchange Commission (the “SEC” or “Commission”) website (www.sec.gov), but the contents of the website are not incorporated by reference in, or otherwise a part of, this report.

We make information available free of charge through our website, as soon as practicable after we file it with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, definitive proxy statements on Form 14A and, if applicable, amendments to these reports.

 

Item 1A. RISK FACTORS

The risks and uncertainties described below represent those risks and uncertainties that we believe are material to investors. Our stockholders or potential investors may be referred to as “you” or “your” in this Item 1A. “Risk Factors” section.

Company Related Risks

There is no public market for our shares and it is not likely that one will develop.

Our shares are not listed, there is no current public market for shares of our common stock and one is not likely to develop. We have no obligation to list our shares on any public securities market or provide any other type of liquidity to our stockholders. Additionally, our board of directors suspended our stock redemption plan. Therefore, it may be difficult for you to sell your shares promptly or at all, including in the event of an emergency; and if you are able to sell your shares, you may have to sell them at a substantial discount from your purchase price of such shares or less than your proportionate value of the net assets we own. Our board of directors began to explore strategic alternatives in 2014, however, our articles of incorporation do not require that we consummate a transaction to provide liquidity to stockholders on any certain date or at all.

Our board of directors estimated our net asset value per share as of December 31, 2014 and in doing so, we primarily relied upon a valuation of our portfolio of properties as of December 31, 2014. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties; therefore, our estimated net asset value per share may not reflect the amount that would be realized upon a sale of each of our properties.

For the purposes of determining the estimated net asset value per share of our common stock as of December 31, 2014, we retained an independent investment banking firm to value of our properties as of December 31, 2014, which properties consist principally of illiquid commercial real estate. The methodologies used to value of our properties involved certain subjective judgments, including but not limited to, estimated future cash flows for properties recently developed or currently under development for which we have limited or no operating history, respectively. Due to the short-term nature of multifamily leases, the value of our properties and the estimated net asset value of our shares may be more susceptible to fluctuation than REITs with longer term leases where cash flows are not subject to as much potential volatility. In addition, the ultimate realization of the value of our assets depend to a great extent on economic and other conditions beyond our control and the control of our Advisor and the independent investment banking firm. Moreover, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. Further, in accordance with the recommendations in the IPA Valuation Guidelines, the valuation of our properties used in the determination of our estimated net asset value per share did not include deductions for estimated disposition costs and fees or other selling expenses of our assets. As a result of the foregoing, as well as other factors, and despite that we used the guidelines recommended by the IPA for determining the net asset value for shares of non-traded real estate investment trusts such as us, the valuations of our properties may not correspond to the realizable value upon a sale of those assets; and our estimated net asset value per share may not be indicative of the proceeds a stockholder would receive upon the sale of his or her shares in a market transaction or if we were liquidated or dissolved and the proceeds were distributed to the stockholders.

We and our Advisor have limited operating histories and the prior performance of real estate investment programs sponsored by our sponsor or CNL may not be indicative of our future results.

We and our Advisor have limited operating histories. Prior to April 26, 2010, the date our operations commenced, we had no previous performance history. You should not rely upon the past performance of other real estate investment programs sponsored by our sponsor or CNL to predict our future results. You should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that, like us, have a limited operating history. To be successful, our Advisor must, among other things:

 

    identify and acquire investments that meet our investment objectives;

 

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    attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;

 

    respond to competition for our targeted real estate properties and other investments; and

 

    continue to build and expand its operational structure to support our business.

There can be no assurance that our Advisor will succeed in achieving these goals.

Because we rely on affiliates of CNL for advisory and property management services, if these affiliates or their executive officers and other key personnel are unable to meet their obligations to us, we may be required to find alternative providers of these services, which could disrupt our business.

CNL, through one or more of its affiliates or subsidiaries, owns and controls our Advisor and our Property Manager, as well as, one of our sub-advisors and sub-property managers. In the event that any of these affiliates or related parties are unable to meet their obligations to us, we might be required to find alternative service providers, which could disrupt our business by causing delays and/or increasing our costs.

Further, our success depends to a significant degree upon the continued contributions of certain executive officers and other key personnel of our Advisor, its affiliates and related parties, each of whom would be difficult to replace. We do not have employment agreements with our executive officers, and we cannot guarantee that they will remain affiliated with us or our Advisor. Although several of our executive officers have entered into employment agreements with affiliates of our Advisor, these agreements are terminable at will, and we cannot guarantee that such persons will remain employed by our Advisor or its affiliates. We do not maintain key person life insurance on any of our executive officers.

We may suffer from delays in selecting, acquiring and/or developing suitable properties.

We may experience delays in deploying our capital into assets or in realizing a return on the capital we invest. Although we have identified properties in which we expect to invest the majority of our offering proceeds, we may determine to not pursue any or all such acquisitions for any reason or we may experience delays in completing such acquisitions. To the extent we have available proceeds to invest in properties, we could suffer from delays in locating suitable investments as a result of competition in the relevant market, regulatory requirements and our reliance on our Advisor, at times when management of our Advisor is simultaneously seeking to locate suitable investments for other real estate investment programs sponsored by CNL or our sponsor, some of which may have investment objectives and employ investment strategies that are similar to ours. Furthermore, with our focus of investing in multifamily development properties, our investments are not expected to yield immediate returns.

If we are unable to invest the balance of our offering proceeds and/or the proceeds from asset refinancings or sales in real estate assets in a timely manner, we may invest such proceeds in short-term, investment-grade securities pending the acquisition of properties or other uses. These securities typically yield less than investments in commercial real estate.

Stockholders have limited control over changes in our policies and operations.

Our board of directors determines our investment policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of our stockholders. Under our articles of incorporation and Maryland general corporation law, our stockholders currently have a right to vote only on the following matters:

 

    the election or removal of directors;

 

    any amendment of our articles of incorporation, except that our board of directors may amend our articles of incorporation without stockholder approval to change our name, increase or decrease the aggregate number of our shares and of any class or series that we have the authority to issue, or classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares;

 

    effect stock splits and reverse stock splits;

 

    our termination, liquidation and dissolution;

 

    our reorganization;

 

    modification or elimination of our investment limitations as set forth in our articles of incorporation; provided, however, for so long as we are subject to the NASAA REIT Guidelines, the investment limitations imposed by the NASAA REIT Guidelines that are set forth in our articles of incorporation may not be modified or amended in any manner that would be inconsistent with the NASAA REIT Guidelines; and

 

    our being a party to any merger, consolidation, sale or other disposition of substantially all of our assets (notwithstanding that Maryland law may not require stockholder approval).

 

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All other matters are subject to the discretion of our board of directors. Although stockholders have the right to vote on amendments to our articles of incorporation in the manner described above, under Maryland general corporation law, an amendment to our articles of incorporation must be found to be advisable by our board of directors. That requirement has the effect of limiting stockholders’ control over our articles of incorporation. In addition, our board of directors has the authority to amend, without stockholder approval, the terms of both our advisory agreement and our property management agreement, which, in either case, could result in less favorable terms to our investors.

We may be restricted in our ability to replace our Property Manager under certain circumstances.

Our ability to replace our Property Manager is limited. Under the terms of our property management agreement, we may terminate the agreement (i) in the event of our Property Manager’s voluntary or involuntary bankruptcy or a similar insolvency event or (ii) for “cause.” In this case, “cause” means a material breach of the property management agreement of any nature by the Property Manager relating to all or substantially all of the properties being managed under the agreement that is not cured within 30 days after notice to the Property Manager. We may amend the property management agreement from time to time to remove a particular property from the pool of properties managed by our Property Manager (i) if the property is sold to a bona fide unaffiliated purchaser, or (ii) for “cause.” In this case, “cause” means a material breach of the property management agreement of any nature by the Property Manager relating to that particular property that is not cured within 30 days after notice to the Property Manager. Our board of directors may find the performance of our Property Manager to be unsatisfactory. However, unsatisfactory performance by the Property Manager may not constitute “cause.” As a result, we may be unable to terminate the property management agreement even if our board concludes that doing so is in our best interest.

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.

We are not registered as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) based on exclusions that we believe are available to us. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:

 

    limitations on capital structure;

 

    restrictions on specified investments;

 

    prohibitions on transactions with affiliates; and

 

    compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

In order to be excluded from regulation under the Investment Company Act, we have and intend to continue to engage primarily in the business of acquiring real property, making mortgage loans and other loans collateralized by interests in real estate and making other real estate-related investments. We intend to rely on exemptions or exclusions provided by the Investment Company Act for the direct ownership, or the functional equivalent thereof, of certain qualifying real estate assets or by engaging in business through one or more majority-owned subsidiaries. We may rely on any other exemption or exclusion under the Investment Company Act.

To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forego opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.

If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

There can be no assurance that we will be able to achieve expected results or cash flows necessary to initiate or maintain cash distributions at any particular level.

There are many factors that can affect the type, availability and timing of cash distributions to stockholders. Cash distributions generally will be based upon such factors as the amount of cash available or anticipated to be available from real estate investments and other assets, current and projected cash requirements, expected and actual cash flow from operations, the estimated

 

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total return on our assets, our overall financial condition, our objective of qualifying as a REIT for tax purposes, the determination of reinvestment versus distribution following the sale or refinancing of an asset, as well as other factors. Cash distributions declared may not reflect our income earned in that particular distribution period. The amount of cash available for distributions is affected by many factors, such as our ability to make acquisitions in a timely manner as funds become available, the income from those investments, as well as, our operating expenses and many other variables. Actual amounts available for cash distribution may vary substantially from estimates. We cannot assure you that:

 

    properties currently in development will be completed and stabilized as planned;

 

    rents from our properties will stabilize, or once stabilized, will remain stable or increase; or

 

    our real estate portfolio will increase in value or generate or increase our cash available for distributions to stockholders.

Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to make distributions. For instance:

 

    Amounts available for distributions may be reduced if we are required to spend more than expected to correct defects or to make improvements to properties.

 

    Amounts available to pay distributions may decrease if the assets we acquire have lower yields than expected.

 

    Federal income tax laws require REITs to distribute at least 90% of their REIT taxable income to stockholders each year, limiting the earnings that we may retain for corporate growth, such as asset acquisition, development or expansion, and making us more dependent upon additional debt or equity financing than corporations that are not REITs. If we borrow more funds in the future, more of our operating cash will be needed to make debt payments and amounts available for distributions may decrease.

 

    The payment of principal and interest required to service the debt may leave us with insufficient cash to pay distributions.

 

    We may pay distributions to our stockholders to comply with the distribution requirements of the Code and to eliminate, or at least minimize, exposure to federal income taxes and the nondeductible REIT excise tax. Differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, could require us to borrow funds on a short term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.

In addition, subject to the applicable REIT rules, our board of directors, in its discretion, may retain any portion of our cash on hand or use debt and/or equity proceeds for capital needs and other corporate purposes. We cannot assure you that we will generate or have sufficient amounts available to make cash distributions to you at any specified level, or that the cash distributions we make may not be decreased or be eliminated in the future.

We have experienced losses in the past and may experience losses in the future.

We incurred net losses for the three years ended December 31, 2014. Our losses can be attributed, in part, to our operating expenses which include pre-leasing costs for our development properties and various general and administrative expenses related to being a public reporting company, as well as, the fact that a significant number of our properties are under development, or construction was completed recently and have not yet stabilized. In addition, depreciation and amortization expense substantially reduced our income. Our operating costs to date have been primarily funded with offering proceeds. We cannot assure you that we will be profitable in the future, that our properties will stabilize and produce sufficient income to fund our operating expenses, or that we will realize growth in the value of our assets.

We may pay distributions from sources other than our cash flow from operations or funds from operations.

Due to the nature of our investment strategy and our investment focus in multifamily development properties, we expect to generate little, if any, cash flow from operations or funds from operations to pay distributions in cash; and our ability to make cash distributions may be negatively affected. Therefore, we do not anticipate generating distributable earnings in the near term. However, we have and we may in the future elect to pay special cash distributions and pay all or a portion of any such distributions from sources other than net operating cash flows, such as cash flows generated from refinancing activities and proceeds from asset sales. A component of any cash distribution may include the proceeds of our offerings and/or borrowings, whether secured by our assets or unsecured. We have not established any limit on the extent to which we may use borrowings or proceeds of our offerings to pay distributions. To the extent we use sources of cash other than cash flow from operations or funds from operations to pay distributions, we will have less capital available to invest in properties and other real estate-related assets and the net asset value per share of our common stock may decline.

 

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We disclose funds from operations, or FFO, and modified funds from operations, or MFFO, non-GAAP financial measures; however, FFO and MFFO are not equivalent to our net income or loss as determined under GAAP, and you should consider GAAP measures to be more relevant to our operating performance.

We use and disclose to investors FFO and MFFO, which are non-GAAP financial measures. See “Selected Financial Data — Funds from Operations and Modified Funds from Operations.” FFO and MFFO are not equivalent to our net income or loss as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant to evaluating our operating performance. FFO and GAAP net income differ because FFO excludes gains or losses from sales of property and asset impairment write-downs, depreciation and amortization, and is after adjustments for such items related to non-controlling interests. MFFO and GAAP net income differ because MFFO represents FFO with further adjustments to exclude acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, realized gains and losses from early extinguishment of debt, straight-line rent adjustments and the adjustments of these further items related to non-controlling interests.

Because of the differences with GAAP net income or loss, neither FFO nor MFFO may be an accurate indicator of our operating performance, especially during periods in which we are acquiring properties. In addition, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and investors should not consider FFO or MFFO as an alternative to cash flows from operations, as an indication of our liquidity, or as indicative of funds available to fund our cash needs, including our ability to make cash distributions to our stockholders.

Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate MFFO. Also, because not all companies calculate MFFO the same way, comparisons with other companies may not be meaningful.

We are uncertain of our sources for funding of future capital needs.

Other than our mortgage loans associated with property acquisitions and development projects, neither we nor our Advisor has any established financing sources. If our capital resources, or those of our Advisor (to the extent it advances amounts to us or on our behalf), are insufficient to support our operations, we may not achieve our investment objectives.

For our operating properties, we will consider capital reserves on a property-by-property basis, as we deem appropriate, to pay operating expenses to the extent that the property does not generate operating cash flow to fund anticipated capital improvements. If we do not have enough capital reserves to supply needed funds for capital improvements throughout the life of our investment in a property and there is insufficient cash available from our operations or from other sources, we may be required to defer necessary improvements to a property. This may result in decreased cash flow and reductions in property values. If our reserves are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. Additionally, due to the volatility and uncertainty experienced in recent years by financial markets, liquidity has tightened in financial markets, including the investment grade debt and equity capital markets. Consequently, there is greater uncertainty regarding our ability to access credit markets in order to obtain financing on reasonable terms or at all. Accordingly, in the event that we develop a need for additional capital in the future for the maintenance or improvement of our properties or for any other reason, we have not identified any established sources for such funding other than our existing mortgage loans. Although our Advisor has relationships with various lenders, we cannot assure you that sources of funding will be available to us for capital needs in the future.

Although our Advisor began exploring possible strategic alternatives in 2014, there is no assurance we will have a liquidity event in the near term or that, in the event of a transaction, that we will be able to meet our investment objectives.

With the completion of our Follow-On Offering in April 2014, our Advisor began exploring possible strategic alternatives in connection with providing liquidity to stockholders. We are not obligated to enter into any particular transaction and there is no specific date by which we must have a liquidity event. There is no assurance we will have a liquidity event in the near term or that, in the event of a transaction, we will be able to meet our investment objectives or provide a return to stockholders that equals or exceeds the price per share paid for shares of our common stock.

Changes in accounting pronouncements could materially impact our reported financial performance.

Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC, entities that create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements.

 

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Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.

Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence.

Risks Related to Conflicts of Interest and Our Relationships with Our Advisor, Its Affiliates and Related Parties

We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates and related parties, including the material conflicts discussed below.

Individuals associated with our Advisor, Property Manager and other entities affiliated with CNL that conduct our day-to-day operations will face competing demands on their time.

We rely upon our Advisor, including its investment committee, our Property Manager and the executive officers and employees of entities affiliated with CNL, to conduct our day-to-day operations. Certain of these persons also conduct the day-to-day operations of other real estate investment programs sponsored by CNL or our sponsor, and they may have other business interests as well. One of our directors, James M. Seneff, Jr., is also a director of other real estate investment programs sponsored by CNL or our sponsor. We have the same executive officers in common with Global Income Trust, Inc., a non-listed REIT sponsored by our Sponsor, which has invested in income-producing office and industrial commercial properties. Additionally, our Advisor and the advisor to Global Income Trust, Inc. have the same managers, executive officers and investment committee members in common. We currently anticipate that our executive officers and the executive officers of our Advisor, as well as, the managers of our Advisor and the Advisor’s representatives on its investment committee, will devote the time necessary to fulfill their respective duties to us and our Advisor. However, because these persons have competing interests on their time and resources, they may find it difficult to allocate their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and resources to our business than is necessary or appropriate.

Our Advisor and its affiliates, including all of our executive officers and our affiliated director, will face conflicts of interest as a result of their compensation arrangements with us, which could result in actions that are not in the best interest of our stockholders.

We pay substantial fees to our Advisor and our Property Manager (including their sub-advisors and sub-property managers, respectively) and their affiliates. These fees could influence their advice to us, as well as the judgment of our Advisor and its affiliates performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:

 

    the continuation, renewal or enforcement of our agreements with our Advisor, its affiliates and related parties;

 

    property sales, which may entitle our Advisor to real estate commissions;

 

    property acquisitions, which entitle our Advisor to investment services fees and asset management fees payable to our Advisor;

 

    borrowings to acquire assets, which increase the investment services fees and asset management fees payable to our Advisor;

 

    refinancing debt, which may entitle our Advisor or its affiliates to receive a financing coordination fee in connection with assisting in obtaining such financing;

 

    whether we seek to internalize our management functions, which could result in our retaining some of our Advisor’s and its affiliates’ key officers and employees for compensation that is greater than that which they currently earn or which could require additional payments to our Advisor or its affiliates to purchase the assets and operations of our Advisor, its affiliates and related parties performing services for us;

 

    a liquidity event with respect to our shares of common stock, which may entitle our Advisor to a subordinated incentive fee;

 

    a sale of assets, which may entitle our Advisor to a subordinated share of net sales proceeds; and

 

    whether and when we seek to sell our operating partnership or its assets, which sale could entitle our Advisor to additional fees.

 

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The fees our Advisor receives in connection with transactions involving the purchase and management of our assets are not necessarily based on the quality of the investment or the quality of the services rendered to us. The basis upon which fees are calculated may influence our Advisor to recommend riskier transactions to us.

None of the agreements with our Advisor, Property Manager or any other affiliates and related parties were negotiated at arm’s length.

Agreements with our Advisor, Property Manager or any other affiliates and related parties may contain terms that are not in our best interest and would not otherwise apply if we entered into agreements negotiated at arm’s length with third parties.

Risks Related to Our Business

Our property acquisition strategy involves a high risk of loss.

Our strategy for acquiring properties focuses on multifamily development properties, which may be located in markets undergoing positive changes or facing time-sensitive deadlines. These investments are typically riskier than stabilized properties or properties located in stable markets or markets that have validated their growth opportunities. There is no assurance that we have selected, or that we will be able to select in the future, appropriate markets to affect our strategy; and there is a risk that our properties will experience declines in value.

We may suffer losses in developing properties, including losses due to environmental and other liabilities, labor disputes, occupational health and safety, cost overruns and other factors. Additionally, properties that we acquire for development may decline in value after our acquisition for reasons specific to the property or the real estate market generally.

The returns we earn on our real estate assets will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.

The returns we earn on our real estate assets will be impacted by risks generally incident to the ownership of real estate, including:

 

    changes in local conditions, including oversupply of space or reduced demand for real estate assets of the type we own;

 

    inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;

 

    changes in supply of, or demand for, similar or competing properties in a geographic area;

 

    an inability to acquire and finance, or refinance, if applicable, properties on favorable terms;

 

    changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;

 

    the illiquidity of real estate investments generally;

 

    changes in tax, real estate, environmental, land use and zoning laws;

 

    vacancies or inability to rent space on favorable terms;

 

    acts of God, such as earthquakes, floods and hurricanes;

 

    inability to collect rents from tenants;

 

    discretionary consumer spending and changing consumer tastes; and

 

    periods of high interest rates and negative capital market conditions.

We may be limited in our ability to vary our portfolio in response to changes in economic, market or other conditions, including by restrictions on transfer imposed by our joint venture partners, if any, or by our lenders. Additionally, the return on our real estate assets also may be affected by a continued or exacerbated general economic slowdown, as a whole, or by the local economies where our properties and the properties underlying our other real estate-related investments are located, including:

 

    poor economic conditions may result in defaults by tenants of our properties;

 

    job transfers and layoffs may cause tenant vacancies to increase; and

 

    increasing concessions, reduced rental rates or capital improvements may be required to maintain occupancy levels.

 

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Potential development and construction delays and resultant increased costs and risks may hinder our operating results and decrease our net income.

Generally, we acquire unimproved real property or properties that are under development or construction. Although we have and expect to continue to invest in these types of properties after initial pre-development activities have been completed, investments in such properties are subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for development, environmental concerns of governmental entities and/or community groups and our developers’ ability to build in conformity with plans, specifications, budgeted costs and timetables. A developer’s performance may be affected or delayed by conditions beyond the developer’s control. We may incur additional risks when we make periodic progress payments or other advances to developers before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We generally have and expect to continue to seek performance and cost overrun guarantees from the developer and/or affiliates of our joint venture partners for development projects to mitigate the risk of increases associated with delays. However, if such parties are unable to meet their obligations under any such agreements, it could have an adverse effect on our investment.

In addition, we are and will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.

Should capitalization rates increase, the value of our existing multifamily portfolio could decline, or if costs of developing a multifamily asset increase, we may not achieve as high of a return on our multifamily development properties as anticipated.

To date, we have invested and expect to continue to invest, substantially all of the available proceeds from our equity offerings in multifamily development properties. If capitalization rates increase, we would expect declines in the pricing of assets upon sale or at the time of a valuation. If we are required to sell investments into such a market, we could experience a decrease in the value of our investments. In most domestic markets, there is a spread between capitalization rates on stabilized multifamily assets and the return on cost at which new multifamily projects can be developed. The opportunity to develop at higher returns on cost and finance at today’s interest rates enables us to potentially produce higher levered returns than had we bought a stabilized multifamily property. However, if capitalization rates increase, we would expect the value of our current investments to decline. In addition, if costs of developing a multifamily asset increase, the difference between the costs to develop and the price to purchase stabilized multifamily properties will shrink and make the risk adjusted return for development less attractive.

Increases in unemployment could adversely affect multifamily property occupancy and rental rates.

Increases in unemployment in the markets in which we have acquired or intend on acquiring multifamily properties could significantly decrease occupancy and rental rates. In times of increasing unemployment, multifamily occupancy and rental rates have historically been adversely affected by:

 

    A decline in household formation;

 

    Rental of fewer units as a result of renters’ decision to share rental units;

 

    A reduced demand for higher-rent units, such as those of high quality multifamily communities;

 

    The inability or unwillingness of residents to pay rent increases; and

 

    Increased rent collection losses.

If employment levels remain flat or increase, our properties may not perform as anticipated and we may not realize growth in the value of our multifamily properties.

As a result of limited geographic diversification of our properties, our operating results and the value of our real estate assets may be affected by economic changes that have an adverse impact on the real estate market in those areas.

All of our properties purchased to date are located in the southeastern and sunbelt regions of the United States and we foresee additional opportunities in these regions. As a result of this limited geographic diversification, our operating results, amounts available for cash distributions to stockholders and the value of our real estate assets are likely to be impacted by economic changes affecting the real estate markets in that area. We are subject to greater risk to the extent that we lack a geographically diversified portfolio.

 

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Concentration of our portfolio in the multifamily sector may leave our profitability vulnerable to a downturn or slowdown in such sector.

Our portfolio is invested in multifamily properties. As a result, we are subject to risks inherent to investments in a single real estate sector. With the concentration of our investments in multifamily, the potential effects on our revenues resulting from a downturn or slowdown in the multifamily sector will be more significant than if we had a diversified portfolio.

Increased development of similar multifamily properties that compete with our properties in any particular location could adversely affect the operating results of our properties.

We may acquire properties in locations that experience demographic or other shifts that cause increases in the development of multifamily properties that compete with our properties. This increased competition and construction could:

 

    Make it more difficult to find tenants to lease units in our multifamily communities; and

 

    Drive lower rental prices in order to lease units in our multifamily communities.

As a result, our operating results, as well as the value of our multifamily properties, could be adversely affected by increased competition.

Continued market disruptions may adversely affect our operating results.

In recent years, the global financial markets have experienced pervasive and fundamental disruptions. A disruption in the financial markets often results in a significant negative impact on the financial markets. Such disruptions have had and may continue to have an adverse impact on the availability of credit to businesses, generally, and have resulted in and could lead to further weakening of the U.S. economy and the economies of other countries. Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry generally or by the local economic conditions where our properties are located, including the current dislocations in the credit markets and general global economic recession. Availability of debt financing secured by commercial real estate has been significantly restricted as a result of tightened underwriting standards. Continued declines in the financial markets may materially affect the value of our investment properties, and may affect our ability to pay cash distributions, if any, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due. Such challenging economic conditions may also negatively impact the ability of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases.

Our operating results could be negatively impacted during periods of rising inflation or during periods of deflation.

Inflationary expectations or periods of rising inflation could also be accompanied by rising prices of commodities that are critical to the development or maintenance of real estate assets or to the return expected with respect to such assets. During periods of high inflation, capital tends to move to other assets, such as (historically) gold, which may adversely affect the prices at which we are able to sell our investments. There may be limited cash available for distribution from real estate assets with fixed income streams. The market value of such investments may decline in value in times of higher inflation rates. Although multifamily leases are generally short term and we would expect increases in rent during periods of inflation, as inflation may affect both income and expenses, any increase in income may not be sufficient to cover increases in expenses.

During periods of deflation, the demand for assets in which we have invested could fall, reducing the revenues generated by, and therefore the value of, such investments, resulting in reduced returns to us and our stockholders. Where the operating costs and expenses associated with any such investments do not fall by a corresponding amount, the rate of return to us and our stockholders could be further reduced. As a result, it may be more difficult for leveraged assets to meet or service their debt obligations. Periods of deflation are often characterized by a tightening of money supply and credit, which could limit the amounts available to us with which to acquire or refinance our investments, which would limit the number and size of investments that we may make and affect the rate of return to us and our stockholders. Such economic constraints could also make the real estate assets in which we may invest more illiquid, preventing us from divesting such assets efficiently and so reducing the return to us and our stockholders from such investments.

 

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Our co-venture partners or other partners in co-ownership arrangements could take actions that decrease the value of an investment to us and lower our overall return on our investments.

Generally, we enter into co-venture arrangements with third parties in connection with our investments in multifamily development projects. We may also purchase and develop properties in joint ventures or in partnerships or other co-ownership arrangements with the sellers of the properties, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other forms of real estate investment, including, for example:

 

    the possibility that our co-venturer or partner might become bankrupt;

 

    the possibility that a co-venturer or partner might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us or the investment;

 

    the possibility that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;

 

    the possibility that because a co-venturer or partner will have competing interests for their time and resources, they may find it difficult to allocate their time between our business and their other activities. During times of intense activity in other programs and ventures, they may devote less time and resources to our business than is necessary or appropriate;

 

    the possibility that we may incur liabilities as the result of an action taken by our co-venturer or partner;

 

    the possibility that a co-venturer or partner may exercise buy/sell rights that force us to either acquire the entire investment, or dispose of our share, at a time and price that may not be consistent with our investment objectives; or

 

    the possibility that we may not be able to control the management of such assets and such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT.

Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.

The nature of the activities at certain properties we own or may acquire will expose us and our tenants or operators to potential liability for personal injuries and, in certain instances, property damage claims. In addition, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that may be uninsurable or not economical to insure, or may be insured subject to limitations such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally require property owners to purchase specific coverage insuring against terrorism as a condition for providing mortgage, bridge or mezzanine loans. These policies may or may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for such losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of the particular asset will likely be reduced by the uninsured loss. In addition, we cannot assure you that we will be able to fund any uninsured losses.

We compete to acquire properties with third parties that may be better capitalized than we are.

We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships and other entities engaged in real estate investment activities, many of which have greater resources than we do. Larger real estate programs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. We may not be able to purchase properties at prices that allow us to earn returns consistent with our investment objectives, if at all.

The development of new multifamily properties could outpace demand. Increased competition for tenants could require a property to undertake unbudgeted capital improvements or to lower its rental rates in order to obtain or retain tenants.

We may fail to integrate acquired properties and related personnel.

To grow successfully, our Advisor and Property Manager must apply their experience to a larger number of properties. In addition, our Advisor’s sub-advisors and our Property Manager’s sub-property managers must be able to integrate new management and qualified operations personnel as our investments grow in size and complexity. These entities may not be successful in doing so.

 

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If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.

In some instances we may sell a property by providing financing to the purchaser. In so doing, however, we will bear the risk that the purchaser defaults on its obligation. There are no limits or restrictions on our ability to accept purchase money obligations. If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our stockholders, or our reinvestment in other assets, will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.

The costs of compliance with environmental laws and regulations may adversely affect our income and the amounts available for distributions.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. These laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of removing or remediating could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.

Environmental laws and regulations also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability on us or that the environmental condition of our properties will not be affected by the manner in which tenants operate their businesses, the existing condition of the land, operations in the vicinity of the properties such as the presence of underground storage tanks, or the activities of unrelated third parties.

We may incur significant costs to comply with the Americans with Disabilities Act or similar laws.

Our properties will generally be subject to the Americans with Disabilities Act of 1990, as amended (or “Disabilities Act”), or similar laws of foreign jurisdictions. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. In addition, with respect to any apartment properties located in the United States, we also must comply with the Fair Housing Amendment Act of 1988, or FHAA, which requires that apartment communities first occupied after March 13, 1991 be accessible to disabled residents and visitors.

The requirements of the Disabilities Act or the FHAA could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act, the FHAA or similar laws of foreign jurisdictions or place the burden on the seller or other third party, such as a tenant, to ensure compliance with these laws. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. We may incur significant costs to comply with these laws.

Property tax increases may reduce the income from our properties.

The amount we pay in property taxes may increase from time to time due to rising real estate values and adjustments in assessments. Increases in real estate values or assessment rate adjustments will result in higher taxes. We may not be able to increase rental revenues sufficiently to cover any such increases in real estate taxes.

Short-term leases may expose us to the effects of declining market rent.

Multifamily properties typically have short-term leases for a term of one year or less. There is no assurance that we will be able to renew these leases as they expire or attract replacement tenants on comparable terms, if at all.

 

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Governmental regulation may increase the costs of acquiring and operating properties.

There are various local, state and federal fire, health, life-safety and similar regulations that we are required to comply with, and that may subject us to liability in the form of fines or damages for noncompliance. Complying, or failure to comply, with these laws or regulations could increase the cost of acquiring or operating properties. Further, there can be no assurance that new applications of laws, regulations and policies, or changes in such laws, regulations and policies, will not occur in a manner that could have a detrimental effect on the properties we owned prior to the change, which could result in us incurring added costs to comply or maintain licenses and permits.

Financing Related Risks

Mortgage indebtedness and other borrowings will increase our business risks.

We have obtained, and expect to continue to obtain, mortgage financing in connection with the acquisition and development of our properties. We may incur or increase our mortgage debt by obtaining loans secured by some or all of our assets to obtain funds to acquire additional investments or to pay distributions to our stockholders. If necessary, we also may borrow funds to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income,” or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

Although our articles of incorporation impose limits on our total indebtedness, there is no limit on the amount we may invest in any single property or other asset or on the amount we can borrow to purchase any individual property or other investment. Further, we may exceed the limits set forth in our articles if approved by a majority of our independent directors.

In addition to the limitations in our articles of incorporation, our board of directors has adopted a policy to generally limit our aggregate borrowings to not exceed approximately 75% of the aggregate value of our assets, unless substantial justification exists that borrowing a greater amount is in our best interest. Our policy limitation, however, will not apply to individual real estate assets and will only apply once we have invested substantially all of our capital. As a result, we may borrow more than 75% of the initial acquisition and development budget of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is reasonable. Principal and interest payments reduce cash that would otherwise be available for other purposes. Further, incurring mortgage debt increases the risk of loss because defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For tax purposes, a foreclosure of non-recourse debt is generally treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We also may provide full or partial guarantees to lenders of mortgage debt to the entities that own our properties. In this case, we will be responsible to the lender for satisfaction of the debt if it is not paid by the entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default.

Instability in the credit markets and real estate markets could have a material adverse effect on our results of operations, financial condition and ability to pay cash distributions.

We may not be able to continue to obtain financing for investments on terms and conditions acceptable to us, if at all. Domestic and international financial markets have experienced unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be significantly impacted, and the return on the properties we purchase likely will be lower. In addition, if we pay fees to lock-in a favorable interest rate, falling interest rates or other factors could require us to forfeit these fees. Additionally, the reduction in equity and debt capital resulting from turmoil in the capital markets may result in fewer buyers seeking to acquire commercial properties leading to lower property values and the continuation of these conditions could adversely impact our timing and ability to sell our properties.

In addition to volatility in the credit markets, the real estate market is subject to fluctuation and can be impacted by factors such as general economic conditions, supply and demand, availability of financing and interest rates. To the extent we purchase real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracted at the time of our purchases, or the number of parties seeking to acquire properties decreases, the value of our investments may not appreciate or may decrease significantly below the amount we paid for our investments.

Disruptions in the financial markets could adversely affect the multifamily sector’s ability to obtain financing and credit enhancements from Fannie Mae and Freddie Mac, which could adversely affect us.

The Federal National Mortgage Association (or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (or “Freddie Mac”) are government sponsored enterprises that have historically been major sources of financing for the multifamily sector. Should Fannie Mae and/or Freddie Mac have their precepts changed or reduced, be disbanded or reorganized by the

 

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government or otherwise discontinue providing liquidity to the multifamily sector, it would significantly reduce our access to debt capital and/or increase borrowing costs. If new federal regulations heighten Fannie Mae’s and Freddie Mac’s underwriting standards, adversely affect interest rates and reduce the amount of capital they can make available to the multifamily sector, it could have a material adverse effect on both the multifamily sector and us if private alternative sources of funding are reduced or unavailable. Any potential reduction in loans, guarantees and credit enhancement arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s derivative securities market, potentially causing breaches in loan covenants, and through reduced loan availability, impact the value of multifamily assets, which could impair the value of a significant portion of multifamily communities. Specifically, the potential for a decrease in liquidity made available to the multifamily sector by Fannie Mae and Freddie Mac could (i) make it more difficult for us to secure new takeout financing for current multifamily development projects; (ii) hinder our ability to refinance completed multifamily assets; (iii) decrease the amount of available liquidity and credit that could be used to further diversify our portfolio of multifamily assets; and (iv) require us to obtain other sources of debt capital with potentially different terms.

Rising interest rates negatively affect our ability to acquire properties, pay existing debt obligations and refinance our properties.

We may be unable to refinance or sell properties collateralized by debt that is maturing on acceptable terms and conditions, if at all. This risk may be greater in the case of interest-only loans or balloon payment loans where no or little payments on the principal amount of the loan have been made. If interest rates are higher at the time we intend to refinance, we may not be able to refinance the properties at reasonable rates and our net income could be reduced. In addition, we have incurred and may continue to incur indebtedness that bears interest at a variable rate. Increases in interest rates on variable rate loans would increase our interest costs, which could have an adverse effect on our operating cash flow. An increase in interest rates, either on refinancing of properties or on variable rate loans, could increase the amount of our debt payments and reduce cash flow. In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may need to borrow more money or to liquidate one or more of our investments at inopportune times that may not permit realization of the maximum return on such investments.

Lenders may require us to comply with restrictive covenants.

In connection with obtaining financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. In general, we expect our loan agreements to restrict our ability to encumber or otherwise transfer our interest in the applicable property without the prior consent of the lender. Loan documents we enter into may contain other customary negative covenants that may limit our ability to further mortgage the property, discontinue insurance coverage, replace our Advisor or impose other limitations.

To hedge against interest rate fluctuations, we may use derivative financial instruments. Using derivative financial instruments may be costly and ineffective.

We have and may continue to engage in hedging transactions to manage the risk of changes in interest rates with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by us. We may use derivative financial instruments for this purpose, collateralized by our assets and investments. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time.

To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we have additional REIT tax compliance requirements and we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. We may be unable to manage these risks effectively.

Federal Income Tax Risks

Failure to qualify as a REIT would adversely affect our operations and our ability to pay distributions to you.

We elected to be treated as a REIT in connection with the filing of our federal tax return for the taxable year ended December 31, 2010. We believe that, commencing with such year, we have been organized, have operated, and are continuing to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. However, our qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, and through actual operating results, requirements regarding the type of assets we own, and other tests imposed by the Code. Qualification as a REIT is governed by highly technical and complex provisions for which there are only limited judicial or administrative interpretations. Accordingly, there is no assurance we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT.

 

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If we fail to qualify as a REIT for any taxable year, (i) we will be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income for that year at regular corporate rates, (ii) unless entitled to relief under relevant statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status, and (iii) we will not be allowed a deduction for distributions made to stockholders in computing our taxable income. Losing our REIT status would reduce our net earnings available for distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.

Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell properties through TRSs, each of which would diminish the return to our stockholders.

The sale of one or more of our properties may be considered prohibited transactions under the Code. Any “inventory-like” sales would almost certainly be considered such a prohibited transaction. If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all taxable gain we derive from such sale would be subject to a 100% penalty federal tax. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. The principal requirements of the safe harbor are that: (i) the REIT must hold the applicable property for not less than two years for the production of rental income prior to its sale; (ii) the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of sale which are includible in the basis of the property do not exceed 30% of the net selling price of the property; and (iii) the REIT does not make more than seven sales of property during the taxable year, the aggregate adjusted bases of property sold during the taxable year does not exceed 10% of the aggregate bases of all of the REIT’s assets as of the beginning of the taxable year or the fair market value of property sold during the taxable year does not exceed 10% of the fair market value of all of the REIT’s assets as of the beginning of the taxable year. Given our investment strategy, the sale of one or more of our properties may not fall within the prohibited transaction safe harbor.

If we desire to sell a property pursuant to a transaction that does not fall within the safe harbor, we may be able to mitigate the 100% penalty tax if we acquired the property through a taxable REIT subsidiary (“TRS”) or acquired the property and transferred it to a TRS for a non-tax business purpose prior to the sale (i.e., for a reason other than the avoidance of taxes). However, there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor. Additionally, even if it is possible to effect a property disposition through a TRS, we may decide to forego the use of a TRS in a transaction that does not meet the safe harbor based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors. In cases where a property disposition does not satisfy the safe harbor rules, the Internal Revenue Service could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net taxable gain from the sale of such property will be payable as a tax, thereby reducing the amount of cash available for investment by us or distribution to stockholders. If a property is acquired or subsequently transferred to a TRS, the taxable income, including gain, will be subject to federal corporate tax and potentially state and local income taxes. This tax obligation would diminish the amount of the proceeds from the sale of such property that would be distributable to our stockholders. As a result, the amount available for distribution to our stockholders would be substantially less than if the REIT had not operated and sold such property through the TRS and such transaction was not successfully characterized as a prohibited transaction.

As a REIT, the value of our investment in all of our TRSs may not exceed 25% of the value of all of our assets at the end of any calendar quarter. If the Internal Revenue Service were to determine the value of our interests in all of our TRSs exceeded 25% of the value of our total assets at the end of any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interest to own a substantial number of our properties through one or more TRSs, then it is possible that the Internal Revenue Service may conclude that the value of our interests in our TRSs exceeds 25% of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income with respect to any year may be from sources other than investments relating to real property or mortgages on real property and from certain other specified sources. Distributions paid to us from a TRS are considered to be non-qualifying income for purposes of satisfying the 75% gross income test required for REIT qualification. Therefore, we may fail to qualify as a REIT if distributions from all of our TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year.

Certain fees paid to us may affect our REIT status.

Income received in the nature of rental subsidies or rent guarantees, in some cases, may not qualify as rental income from real estate and could be characterized by the Internal Revenue Service as non-qualifying income for purposes of satisfying the 75% and 95% gross income tests required for REIT qualification. If the aggregate of non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year, we could lose our REIT status for that taxable year and the four taxable years following the year of losing our REIT status.

 

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If our operating partnership fails to maintain its status as a partnership or disregarded entity, its income may be subject to taxation, which would reduce the cash available to us for distribution to our stockholders.

We intend to maintain the status of our operating partnership as either a disregarded entity or an entity taxable as a partnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the operating partnership as a disregarded entity or an entity taxable as a partnership, our operating partnership would be taxable as a corporation. In such event, this would reduce the amount of distributions the operating partnership could make to us. This could also result in our losing REIT status, and becoming subject to a corporate level tax on our income. This would substantially reduce the cash available to us to pay distributions and the return on your investment. In addition, if any of the partnerships or limited liability companies through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership or disregarded entity for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.

In certain circumstances, we may be subject to federal and state taxes on income as a REIT, which would reduce our cash available for distribution to our stockholders.

As a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have gain from a “prohibited transaction,” such gain will be subject to the 100% penalty tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our assets and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. We may also be subject to state and local taxes on our income or property, either directly or at the level of our operating partnership or at the level of the other entities through which we indirectly own our assets.

Complying with REIT requirements may limit our ability to hedge risk effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Except to the extent permitted by the Code and Treasury Regulations, any income we derive from a hedging transaction which is clearly identified as such as specified in the Code, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 75% and 95% gross income tests, and therefore will be exempt from these tests, but only to the extent that the transaction hedges (i) indebtedness incurred or to be incurred by us to acquire or carry real estate assets or (ii) currency fluctuations with respect to any item of income that would qualify under the 75% or 95% gross income tests. To the extent that we do not properly identify such transactions as hedges, hedge with other types of financial instruments, or hedge other types of indebtedness, the income from those transactions is not likely to be treated as qualifying income for purposes of the gross income tests. As a result of these rules, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

Legislative or regulatory action could adversely affect us or your investment in us.

In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel’s tax opinion is based upon our representations and existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.

Although REITs continue to receive more favorable tax treatment than entities taxed as corporations (i.e. a deduction for dividends paid is afforded REITs), it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for U.S. federal income tax purposes as a corporation. As a result, our articles of incorporation provide our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders in accordance with the Maryland General Corporation Law and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.

 

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Excessive non-real estate asset values may jeopardize our REIT status.

In order to qualify as a REIT, among other requirements, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents and government securities. Accordingly, the value of any other property that is not considered a real estate asset for federal income tax purposes must represent in the aggregate not more than 25% of our total assets. In addition, under federal income tax law, we may not own securities in, or make loans to, any one company (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the voting securities or 10% of the value of all securities of that company (other than certain specified securities), or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a value in excess of 25% of our total assets.

The 75%, 25%, 10% and 5% REIT qualification tests are determined at the end of each calendar quarter. If we fail to meet any such test at the end of any calendar quarter, and such failure is not remedied within 30 days after the close of such quarter, we will cease to qualify as a REIT, unless certain requirements are satisfied.

We may have to borrow funds or sell assets to meet our distribution requirements.

Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable income to its stockholders. For the purpose of determining taxable income, we may be required to accrue interest, rent and other items treated as earned for tax purposes, but that we have not yet received. In addition, we may be required not to accrue as expenses for tax purposes some items which actually have been paid, or some of our deductions might be subject to certain disallowance rules under the Code. As a result, we could have taxable income in excess of cash available for distribution. If this occurs, we may have to borrow funds or liquidate some of our assets in order to meet the distribution requirements applicable to a REIT.

Despite our REIT status, we remain subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred.

Even if we remain qualified as a REIT, we may be subject to certain applicable federal, foreign and state and local taxes on our income and property that could reduce operating cash flow, including but not limited to: (i) tax on any undistributed real estate investment trust taxable income; (ii) “alternative minimum tax” on our items of tax preference; (iii) certain state income and franchise taxes (because not all states treat REITs the same as they are treated for federal income tax purposes); (iv) a tax equal to 100% of net gain from “prohibited transactions;” (v) tax on gains from the sale of certain “foreclosure property;” (vi) tax on gains of sale of certain “built-in gain” properties; (vii) tax on capital gains retained; and (viii) certain taxes and penalties if we fail to comply with one or more REIT qualification requirements, but nevertheless qualify to maintain our status as a REIT.

Foreclosure property includes property with respect to which we acquire ownership by reason of a borrower’s default on a loan or possession by reason of a tenant’s default on a lease. We may elect to treat certain qualifying property as “foreclosure property,” in which case, the income from such property will be treated as qualifying income under the 75% and 95% gross income tests for three years following such acquisition. To qualify for such treatment, we must satisfy additional requirements, including that we operate the property through an independent contractor after a short grace period. We will be subject to tax on our net income from foreclosure property. Such net income generally means the excess of any gain from the sale or other disposition of foreclosure property and income derived from foreclosure property that otherwise does not qualify for the 75% gross income test, over the allowable deductions that relate to the production of such income.

We may also decide to retain income we earn from the sale or other disposition of our assets and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. Any such taxes incurred will reduce the amount of cash available for distribution.

Risks Related to Our Organizational Structure

You will be limited in your right to bring claims against our officers and directors.

Our articles of incorporation provide that a director will not have any liability as a director so long as he or she performs his or her duties in accordance with the applicable standard of conduct and without negligence or misconduct on the part of our officers and non-independent directors, our Advisor or affiliates and without gross negligence or willful misconduct by our independent directors. In addition, our articles of incorporation provide that, subject to the applicable limitations set forth therein or under Maryland law, no director or officer will be liable to us or our stockholders for monetary or other damages. Our articles of incorporation also provide that, with the approval of our board of directors, we may indemnify our employees and agents for losses they may incur by reason of their service in such capacities so long as they satisfy these requirements. We have entered into separate indemnification agreements with each of our directors and executive officers. As a result, we and our stockholders may have more limited rights against these persons than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by these persons in some cases.

 

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The limit on the percentage of shares of our stock that any person may own may discourage a takeover or business combination that may benefit our stockholders.

Our articles of incorporation restrict the direct or indirect ownership by one person or entity to no more than 9.8%, by number or value, of any class or series of our equity stock (which includes common stock and any preferred stock we may issue), and this restriction may be waived only by our board of directors, in its sole discretion, under certain conditions. This restriction may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to stockholders or which may cause a change in our management. This ownership restriction may also prohibit business combinations that would have otherwise been approved by our board of directors and stockholders and may also decrease your ability to sell your shares of our common stock.

Our ability to issue preferred stock may include a preference in distributions superior to our common stock and to issue preferred stock or additional common stock also may deter or prevent a sale of shares of our common stock in which you could profit.

Stockholders do not have preemptive rights to any shares we may issue in the future. Our articles of incorporation authorize our board of directors to issue up to 200,000,000 shares of preferred stock. Our board of directors has the discretion to establish the preferences and rights, including a preference in distributions superior to our common stockholders, of any issued preferred stock. If we authorize and issue preferred stock with a distribution preference over our common stock, payment of any distribution preferences of outstanding preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of preferred stock are normally entitled to receive payment in the event we liquidate, dissolve or wind up before any payment is made to our common stockholders which may reduce the amount available to common stockholders.

Our board of directors also may increase the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. In addition, under certain circumstances, the issuance of preferred stock or additional shares of common stock may render more difficult or tend to discourage:

 

    a merger, offer or proxy contest;

 

    the assumption of control by a holder of a large block of our securities; or

 

    the removal of incumbent management, including our advisor and property manager.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

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Item 2. PROPERTIES

As of December 31, 2014, we owned interests in sixteen Class A multifamily properties, seven (including the Long Point Property classified as held for sale) of which were operational and nine of which were under development, including three of which were partially operational. Our properties are subject to encumbrances, as described in “Schedule III – Real Estate and Accumulated Depreciation” of Item 15. “Exhibits and Financial Statement Schedules” and Note 7, “Indebtedness” of Item 8. “Financial Statements and Supplementary Data” of this Annual Report. The following table presents information on our properties owned as of December 31, 2014:

 

Property Name and Location

  Date
Acquired
 

Operator/Developer

  Ownership
Interest
    Number of
Units Upon
Completion
or Square
Footage
    Number of Units
or Square
Footage
Completed as of
December 31,
2014
    Capitalized
Cost or
Development
Budget (in
millions) (1)
   

Estimated
Completion
Date (2)

  Percent
Leased
December 31,
2014 (2)
 

Class A Multifamily:

               

Operating:

               

Whitehall Charlotte, NC

  02/24/12   Woodfield Investments, LLC     100 % (3)      298 units        298 units      $ 29.6      Completed Q2/2013     95

Crescent Crosstown Tampa, FL

  03/27/12   Crescent Communities, LLC (4)     60     344 units        344 units      $ 36.3      Completed Q3/2013     96

Aura Castle Hills Lewisville, TX

  11/30/12   Hunt Realty Investments and Trinsic Residential Group, L.P. (4)     54     316 units        316 units      $ 34.2      Completed Q2/2014     95

Aura Grand Katy, TX

  12/20/12   Trinsic Residential Group, L.P. (4)     90     291 units        291 units      $ 31.5      Completed Q2/2014     88

REALM Patterson Place Durham, NC

  06/27/13   The Bainbridge Companies, LLC (4)     90     322 units        322 units      $ 38.5      Completed Q4/2014     38

Crescent Cool Springs Nashville, TN

  06/28/13   Crescent Communities, LLC (4)     60     252 units        252 units      $ 40.9      Completed Q4/2014     31

Under Development:

               

Crescent Alexander Village Charlotte, NC

  11/27/12   Crescent Communities, LLC (4)     60     320 units        212 units      $ 34.8      1st quarter 2015     39

Fairfield Ranch Cypress, TX

  09/24/13   Allen Harrison Development, LLC (4)     80     294 units        234 units      $ 32.8      1st quarter 2015     37

City Walk Roswell, GA

  11/15/13   LMI City Walk Investor, LLC (4)     75     320 units        —        $ 46.4      2nd quarter 2015     N/A   

Premier at Spring Town Center Spring, TX

  12/20/13   MCRT Spring Town LLC (4)     95     396 units        54 units      $ 45.8      4st quarter 2015     9

Crescent Gateway Altamonte Springs, FL

  01/31/14   Crescent Communities, LLC (4)     60     249 units        —        $ 38.2      4st quarter 2015     N/A   

Aura at The Rim San Antonio, TX

  02/18/14   Trinsic Residential Group LP (4)     54     308 units        —        $ 39.5      4st quarter 2015     N/A   

Oxford Square Hanover, MD

  03/07/14   Woodfield Investments, LLC (4)     95     248 units        —        $ 51.3      4st quarter 2015     N/A   

 

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Table of Contents

Property Name and Location

  Date
Acquired
 

Operator/Developer

  Ownership
Interest
    Number of
Units Upon
Completion
or Square
Footage
    Number of Units
or Square
Footage
Completed as of
December 31,
2014
    Capitalized
Cost or
Development
Budget (in
millions) (1)
   

Estimated
Completion
Date (2)

  Percent
Leased
December 31,
2014 (2)
 

Haywood Place Greenville, SC

  10/15/14   Daniel Haywood, LLC (4)     90     292 units        —        $ 35.7      2nd quarter 2016     N/A   

Aura on Broadway Tempe, AZ

  12/12/14   Trinsic Residential Group, LP (4)     90     194 units        —        $ 29.5      3rd quarter 2016     N/A   

Real Estate Held for Sale

               

Long Point Mount Pleasant Charleston, SC

  05/20/11   Woodfield Investments, LLC (4)     95     258 units        258 units      $ 29.5      Completed Q4/2012     97

FOOTNOTES:

 

(1)  For the multifamily properties that are operating, the amount presented in the table represents total capitalized costs for GAAP purposes, before depreciation and amortization, for the acquisition, development and construction of the property as of December 31, 2014. Amounts include investment services fees, asset management fees, interest expense and other costs capitalized during the development period. For multifamily properties that are under development, the amount presented in the table represents the total development budget, including the cost of the land, construction costs, development fees, financing costs, start-up costs and initial operating deficits of the respective property and excluding investment services fees payable to our Advisor in connection with the acquisition of the property.
(2)  For each property under development, certificates of occupancy will be obtained in phases which will allow us to begin leasing activities and commence operations for completed units prior to the estimated completion date of the entire project.
(3)  In April 2014, our consolidated subsidiary that owns the Whitehall Property in Charlotte, North Carolina (the “Whitehall Joint Venture”) refinanced its original construction loan. In connection therewith, we received a return of a portion of our equity investment in the Whitehall Joint Venture, of which we used approximately $5.5 million to purchase our joint venture partner’s 5% interest in the Whitehall Joint Venture.
(4)  This property is owned through a joint venture in which this entity or one of its affiliates (i) is our joint venture partner, (ii) serves, or in the case of the completed development properties, served, as developer of the project and (iii) provides any lender required guarantees on the loan. Generally, we fund development and the applicable joint venture makes distributions of operating cash flow on a pro rata basis using each member’s ownership interest. In addition, generally, proceeds from a capital event, such as a sale of the property or refinancing of the debt, will be distributed pro rata until the members of the joint venture receive the return of their invested capital and a specified minimum return thereon, and thereafter, the respective co-venture partner will receive a disproportionally higher share of any remaining proceeds at varying levels based on our having received certain minimum threshold returns.

We had a total of 2,323 completed apartment units as of December 31, 2014 (excluding 258 units relating to the Long Point Property classified as real estate held for sale), and expect to have more than 4,400 units once construction is completed on our remaining properties under development. We expect to add additional units once we acquire our last property during 2015. Our multifamily properties that are operational are all new, and feature the latest trends in design, construction and amenities. They are typically three and four story buildings in a landscaped setting. Our multifamily properties are typically appointed with swimming pools, a clubhouse, fitness facilities and other amenities reflective of the trend toward upscale multifamily living. The seven operating properties in which we owned interests and operated at December 31, 2014 averaged 976 square feet of living area per apartment unit and averaged monthly rental revenue per apartment unit of $1,278 as of December 31, 2014. Resident lease terms generally range from 6 to 18 months.

Geographic Concentration of Our Real Estate Portfolio

As of December 31, 2014, all our properties were located in the southeastern and sunbelt regions of the U.S., including five properties in Texas, three in North Carolina, two in South Carolina and two in Florida.

 

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Item 3. LEGAL PROCEEDINGS

In the ordinary course of business, we may become subject to litigation or other claims. There are no material legal proceedings pending or known to be contemplated against us.

 

Item 4. MINE SAFETY DISCLOSURE

None.

 

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Table of Contents

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.

In July 2013, we adopted a valuation policy (the “Valuation Policy”) consistent with IPA Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, which was issued by the IPA April 2013 (the “IPA Guidelines”).

The valuation process used by the valuation committee and the board to determine the 2014 estimated net asset value per share was designed to follow recommendations in the IPA Guidelines and our Valuation Policy. In accordance with our Valuation Policy and in order to assist brokers in providing information on customer account statements consistent with the requirements of NASD Notice 01-08 and Financial Industry Regulatory Authority (“FINRA”) Rule 2340, the valuation committee engaged CBRE Cap to assist it and the board in determining the estimated net asset value per share of our common stock as of December 31, 2014. The valuation committee and the board deemed it to be in our best interest and the best interests of our stockholders to engage CBRE Cap to provide the valuation analysis, based upon CBRE Cap’s familiarity with our business model and portfolio of assets.

On January 14, 2014, our board of directors unanimously approved $9.90 as our estimated net asset value (“2013 NAV”) per share of our common stock as of December 31, 2013, and increased the price for the purchase of shares of our common stock in our Follow-On Offering from $10.84 per share to $11.00 per share effective January 16, 2014. On January 13, 2015, our board of directors unanimously approved $10.63 as our estimated net asset value per share (“2014 Estimated NAV”) of our common stock as of December 31, 2014. Subsequently, on February 9, 2015, our board of directors revised our 2014 Estimated NAV to take into account our actual balance sheet as of December 31, 2014, and to give effect to the Special Distribution. Our board concluded the Special Distribution, together with various reconciliations relating to our actual balance sheet at December 31, 2014, had the effect of reducing the 2014 Estimated NAV to $9.40 per share as of the date of the payment of the Special Distribution (the “Revised 2014 NAV”).

Valuation Methodologies

In preparation of the 2014 valuation report, CBRE Cap conducted property level and aggregate valuation analyses as of December 31, 2014 and provided a range for our 2014 Estimated NAV per share. In preparation of the 2014 valuation report, CBRE Cap considered the IPA Guidelines and utilized operating information and financial materials and projections prepared by our senior management, our Advisor, and/or our joint venture partners.

CBRE Cap relied on the following sources in determining the major assumptions in the 2014 valuation report:

 

    Restricted-use appraisals;

 

    Proprietary research of affiliates of CBRE Cap, including market and sector capitalization rate surveys;

 

    Third-party research, including Wall Street equity reports and online data providers;

 

    The Purchase and Sale Agreement for the Long Point Property;

 

    Our public reports filed with the Commission; and

 

    Guidance from our senior management and the Advisor.

The actual value of our common stock may vary significantly depending on numerous factors that generally impact the price of securities, our financial condition and the state of the real estate industry more generally. Accordingly, with respect to the estimated net asset value per share of our common stock, neither us nor CBRE Cap can give any assurance that:

 

    a stockholder would be able to resell his or her shares at this estimated value;

 

    a stockholder would ultimately realize distributions per share equal to our estimated net asset value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;

 

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    our shares would trade at a price equal to or greater than the estimated net asset value per share if we listed them on a national securities exchange; or

 

    the methodology used to estimate our net asset value per share would be acceptable to FINRA or under ERISA for compliance with its reporting requirements.

Refer to our Form 8-K filed on January 15, 2015 for additional details on the 2014 Estimated NAV valuation, valuation methodologies, material assumptions, limitations and engagement of CBRE Cap. Please also refer to our Form 8-K filed on February 9, 2015 for additional details on the Special Distribution and the Revised 2014 NAV.

As of December 31, 2014, we had raised a total of approximately $208 million (22.7 million shares) from our Initial Offering and our Follow-On Offering.

As of March 12, 2015, we had 6,699 common stockholders of record.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities in the past three years.

Secondary Sales of Registered Shares between Investors

For the years ended December 31, 2014 and 2013, we are aware of transfers of 1,447 and 1,266 shares, respectively, by investors. The shares were transferred at a sales price of $6.67 and $7.20 per share during 2014 and 2013, respectively. We are not aware of any transfers of shares by investors for the year ended December 31, 2012 and we are not aware of any other trades of our shares, other than purchases made in our public offerings and redemptions of shares by us.

Distributions

Distributions to our stockholders are governed by the provisions of our articles of incorporation. On June 24, 2010, our board of directors authorized a distribution policy providing for a daily stock distribution equal to 0.000219178 of a share of common stock on each outstanding share of common stock (which was equal to an annualized distribution rate of 0.08 of a share based on a 365-day calendar year). Distributions pursuant to this policy began on July 1, 2010. Effective October 1, 2012, our board of directors authorized the declaration of a monthly stock distribution of 0.006666667 of a share of common stock on each outstanding share of common stock (which represented an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month and distributed quarterly. Effective October 1, 2012, the shares pursuant to this policy were issued on or before the last business day of the applicable quarter. On September 15, 2014, our board approved the termination of the stock distributions and distribution reinvestment plan, as described above in Item 1. “Business - Our Distribution Policy” section and below in the “Redemption Plan” section.

 

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Table of Contents

The following table presents total stock distributions declared and issued and FFO for each quarter in the years ended December 31, 2014, 2013 and 2012:

 

Periods

   Share Distribution
Declared
per Share Held
    Stock
Distributions
Declared
(Shares) (1) (2)
     Stock
Distributions
Declared (3)
     FFO Attributable
to Common
Stockholders (4)
 

2014 Quarter

          

First

     0.006666667 per month        325,315       $ 3,220,619       $ (97,142

Second

     0.006666667 per month        420,384         4,161,802         500,648   

Third

     0.006666667 per month        441,689         4,372,721         906,566   

Fourth

          (5)      —           —           620,916   
    

 

 

    

 

 

    

 

 

 

Total

  1,187,388    $ 11,755,142    $ 1,930,988   
    

 

 

    

 

 

    

 

 

 

2013 Quarter

First

  0.006666667 per month      157,859    $ 1,578,590    $ 48,528   

Second

  0.006666667 per month      200,810      2,008,100      (90,408

Third

  0.006666667 per month      209,716      2,046,828      (23,812

Fourth

  0.006666667 per month      248,567      2,426,014      (133,165
    

 

 

    

 

 

    

 

 

 

Total

  816,952    $ 8,059,532    $ (198,857
    

 

 

    

 

 

    

 

 

 

2012 Quarter

First

  0.000219178 per day      93,403    $ 934,030    $ (405,626

Second

  0.000219178 per day      112,444      1,124,440      (610,871

Third

  0.000219178 per day      128,554      1,285,540      (240,462

Fourth

  0.006666667 per month      138,061      1,380,610      128,598   
    

 

 

    

 

 

    

 

 

 

Total

  472,462    $ 4,724,620    $ (1,128,361
    

 

 

    

 

 

    

 

 

 

FOOTNOTES:

 

(1)  Represents amount of shares declared and distributed, including shares issued subsequent to the applicable quarter end.
(2)  The distribution of new common shares is non-taxable to the recipients when issued. The stock distributions may cause the interest of later investors in our common stock to be diluted as a result of the stock distributions issued to earlier investors.
(3)  The amount of stock distributions declared presented in the table above includes periods prior to our determination of an estimated net asset value per share. Therefore, for purposes of this table, we have calculated the dollar amount of stock distributions declared using (i) our Initial Offering price of $10 per share for shares issued during periods prior to July 1, 2013 since we did not determine an estimated net asset value during such time and (ii) our December 2013 NAV of $9.90 per share for shares issued after December 31, 2013.
(4)  See reconciliation of funds from operations in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Funds from Operations.”
(5)  Our board approved the termination of our distribution policy effective as of October 1, 2014. As a result, we did not declare any further stock distributions effective October 1, 2014.

On February 9, 2015, the board declared a Special Distribution in the amount of $1.30 per share payable to the holders of record of our common stock as of the close of business on February 9, 2015. The Special Distribution was paid in cash and was funded from the proceeds of refinancings and asset sales, including the January 2015 sale of our interest in the Long Point Property. We paid the Special Distribution on February 24, 2015. This Special Distribution will be included in each stockholder’s Form 1099 for the year ending December 31, 2015. We anticipate the Special Distribution will constitute a return of capital. However, the tax determination of the Special Distribution will be based on the taxable results for the year-ending December 31, 2015.

Securities Authorized for Issuance under Equity Compensation Plans

None.

 

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Table of Contents

Redemption Plan

We had adopted a share redemption plan that allowed a stockholder who held shares for at least one year to request that we redeem between 25% and 100% of its shares. If we had sufficient funds available to do so and if we chose, in our sole discretion, to redeem shares, the aggregate number of shares we redeemed in any calendar year and the price at which they were redeemed were subject to conditions and limitations, including:

 

    if we elected to redeem shares, some or all of the proceeds from the sale of shares, if any, under our distribution reinvestment plan attributable to any quarter were used to redeem shares presented for redemption during such quarter. In addition, we used up to $100,000 per quarter of the proceeds from any public offering for redemptions (with the unused amount of any offering proceeds available for use in future quarters to the extent not used to invest in assets or for other purposes); and

 

    no more than 5% of the weighted average number of shares of our common stock outstanding during a 12-month period may be redeemed during such 12-month period.

On September 15, 2014, our board approved the suspension of our amended and restated redemption plan (the “Redemption Plan”), and terminated the distribution reinvestment plan effective as of October 1, 2014.

During the year ended December 31, 2014, prior to the utilizing of funds available for redemption requests, we received and accepted redemption requests for 40,447 shares of common stock at an average redemption price of $9.90 per share for approximately $0.4 million. During the year ended December 31, 2013, we received and accepted redemption requests for 70,699 shares of common stock at an average redemption price of $9.73 per share for approximately $0.7 million. During the year ended December 31, 2012, we received and accepted redemption requests for 65,046 shares of common stock at an average redemption price of $9.41 per share for approximately $0.6 million. Redemptions were funded with offering proceeds. Shares redeemed were retired and not available for reissue.

Issuer Purchases of Equity Securities

Through June 30, 2014, we had fully utilized all funds available for redemption requests under the Redemption Plan so there were no funds available to redeem any additional requests subsequent to June 30, 2014. On September 15, 2014, our board approved the suspension of our Redemption Plan and terminated the distribution reinvestment plan. Outstanding redemption requests of approximately 51,000 shares received in good order prior to September 10, 2014, were placed in the redemption queue. However, we will not accept or otherwise process any additional redemption requests after September 10, 2014 unless the Redemption Plan is reinstated by the board. There is no guarantee that the Redemption Plan will be reinstated by the board.

 

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Item 6. SELECTED FINANCIAL DATA

The following selected financial data for CNL Growth Properties, Inc. should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data.”

 

     Year Ended December 31,  
     2014     2013     2012     2011     2010(¹)  

Operating Data:

          

Revenues

   $ 15,309,618      $ 3,542,226      $ 5,460      $ —       $ —    

Operating loss

     (3,929,588     (3,890,425     (1,964,648     (1,363,876     (1,402,979

Loss from continuing operations attributable to common stockholders(2)

     (5,419,908     (4,484,616     (1,963,719     (1,363,561     (1,402,979

Income (loss) from discontinued operations(2)

     2,378,499        586,384        (1,172,768     (645,690     —    

Loss from continuing operations attributable to noncontrolling interests(2)

     897,670        645,371        9,498        —         —    

(Income) loss from discontinued operations attributable to non-controlling interests(2)

     (45,265     (29,358     3,037        —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders(2)

$ (2,189,004 $ (3,282,219 $ (3,123,952 $ (2,009,251 $ (1,402,979
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations per share(2)

$ (0.21 $ (0.32 $ (0.24 $ (0.25 $ (0.41

Income (loss) from discontinued operations per share(2)

  0.11      0.05      (0.14   (0.12   —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share (basic and diluted)

$ (0.10 $ (0.27 $ (0.38 $ (0.37 $ (0.41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)(3)

  21,361,725      12,249,900      8,262,638      5,439,693      3,443,422   

Net cash provided by (used in) operating activities

  4,281,141      672,083      (869,890   (1,267,166   (836,067

Net cash used in investing activities

  (187,920,865   (128,018,204   (70,705,796   (21,432,479   —    

Net cash provided by financing activities

  195,503,567      148,177,428      68,539,209      30,562,967      10,805,908   

Other Data:

Funds from operations (“FFO”) attributable to common stockholders (4)

$ 1,930,988    $ (198,857 $ (1,128,361 $ (1,716,703 $ (1,402,979

FFO per share

  0.09      (0.02   (0.14   (0.32   (0.41

Modified funds from operations (“MFFO”) attributable to common stockholders (4)

  2,062,396      (153,051   (1,227,866   (1,249,750   (1,394,462

MFFO per share

  0.10      (0.01   (0.15   (0.23   (0.40

Properties owned at the end of period(5)

  16      12      7      2      —    
     As of December 31,  
     2014     2013     2012     2011     2010  

Balance Sheet Data:

          

Real estate assets, net

   $ 396,515,403      $ 188,391,571      $ 55,921,124      $ 5,326,673      $ —    

Real estate held for sale

     27,020,559        41,488,051        42,168,327        17,443,948        —    

Cash and cash equivalents

     47,691,457        35,827,614        14,996,307        18,032,784        10,169,462   

Total assets

     478,276,500        272,492,393        114,890,689        41,325,304        10,192,459   

Long-term debt obligations

     254,561,600        117,360,210        44,479,650        7,178,984        —    

Total liabilities

     284,365,567        138,114,282        54,444,049        9,879,443        640,464   

Noncontrolling interests

     34,900,995        23,415,094        9,849,660        357,300        —    

Total equity

     193,910,933        134,378,111        60,446,640        31,445,861        9,551,995   

 

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FOOTNOTES:

 

(1)  Significant operations commenced on April 26, 2010 when we received the minimum offering proceeds and funds were released from escrow. The results of operations for the year ended December 31, 2010 include only organizational costs incurred on our behalf by our Advisor, and general and administrative expenses. Weighted average number of shares outstanding is presented for the period we were operational.
(2)  The results of operations relating to the Long Point Property and the Gwinnett Center that were classified as held for sale are reported as discontinued operations for all applicable periods presented.
(3)  For purposes of determining the weighted average number of shares of common stock outstanding, stock distributions issued from inception through September 15, 2014 are treated as if they were outstanding as of the beginning of the periods presented. On September 15, 2014, the Company’s board approved the termination of our stock distribution policy. As a result, we did not declare any further monthly stock distributions, effective October 1, 2014.
(4)  FFO is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property, asset impairment write-downs, depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures, as one measure to evaluate our operating performance. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in order to recognize that income-producing real estate has historically not depreciated on the basis determined under GAAP.

We define MFFO, a non-GAAP measure, consistent with the IPA Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, and the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for various items, as applicable, included in the determination of GAAP net income or loss including: acquisition fees and expenses; amounts relating to straight-line rent adjustments, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, and realized gains and losses from early extinguishment of debt.

 

(5)  As of December 31, 2014, 2013 and 2012, nine, eight and five, respectively, of the properties owned at the end of the year were under development and two properties were reported as discontinued operations for all periods presented.

FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered (i) as an alternative to net income or loss, or net income or loss from continuing operations, as an indication of our performance, (ii) as an alternative to cash flows from operations as an indication of our liquidity, or (iii) as indicative of funds available to fund our cash needs or our ability to make cash distributions to our stockholders. FFO and MFFO should not be construed as more relevant or accurate than the current GAAP methodology in calculating net income or loss and its applicability in evaluating our operating performance. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional disclosures relating to FFO and MFFO, including a reconciliation of net loss to FFO and MFFO for the years ended December 31, 2014, 2013 and 2012.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

CNL Growth Properties, Inc. was organized as a Maryland corporation on December 12, 2008 and has elected to be taxed, and currently qualifies as a real estate investment trust (“REIT”) for federal income tax purposes. The terms “us,” “we,” “our,” “our Company” and “CNL Growth Properties, Inc.” include CNL Growth Properties, Inc. and each of its subsidiaries.

Our Advisor and Property Manager

Our Advisor and Property Manager are each wholly owned affiliates of our Sponsor, which is an affiliate of CNL, a leading private investment management firm providing global real estate and alternative investments. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, recommending and executing acquisitions and dispositions on our behalf pursuant to an advisory agreement.

Substantially all of our acquisition, operating, administrative and property management services are provided by sub-advisors to the Advisor and by sub-property managers to the Property Manager. In addition, certain unrelated sub-property managers have been engaged to provide certain property management services.

Our Common Stock Offerings

On October 20, 2009, we commenced our initial public offering (the “Initial Offering”) which closed on April 7, 2013. On August 19, 2013, we commenced a follow-on offering (the “Follow-On Offering”) which terminated on April 11, 2014. Through the close of the Follow-On Offering, we received aggregate offering proceeds of approximately $208.3 million from our Initial and Follow-On Offerings.

 

We expect to complete our acquisition phase and invest part of our uninvested available cash as of December 31, 2014 in one additional multifamily development property during the first half of 2015. We will continue to focus on completing the development of our properties, operations, and evaluating potential exit strategies for our stockholders.

Our Real Estate Portfolio

As of December 31, 2014, we owned interests in sixteen Class A multifamily properties in the southeastern and sunbelt regions of the United States, seven of which had substantially completed development and were operational. The remaining nine properties were under development, including three of which were partially operational with completion expected in phases by the third quarter of 2016. Generally, the development period for our properties is up to 24 months with the properties becoming partially operational as buildings within the project are completed and certificates of occupancy obtained. We generally expect our multifamily properties to reach stabilization within 24 months after completion.

We had a total of 2,323 completed apartment units as of December 31, 2014 (excluding 258 units relating to the Long Point Property classified as real estate held for sale), and expect to have more than 4,400 units once construction is completed on our remaining properties under development. We expect to add additional units once we acquire our last property during 2015.

In March 2014, we sold our three-building office complex located in Duluth, Georgia (“Gwinnett Center”) to an unrelated third party and received net sales proceeds of approximately $15.0 million, resulting in a gain of approximately $1.2 million for financial reporting purposes. During the year ended December 31, 2014, due to continuing trends and favorable market conditions in multifamily properties, we entered into an agreement to sell our interest in our Long Point Property, one of our seven operational properties, to an unrelated third party for $55.5 million. As a result, the operating results of these properties and the gain on the sale of the Gwinnett Center were treated as discontinued operations in accordance with generally accepted accounting principles (“GAAP”) in our accompanying financial statements. In January 2015, the Long Point Joint Venture sold the Long Point Property and received net sales proceeds of approximately $54.5 million, resulting in a gain of approximately $27.4 million for financial reporting purposes.

We used approximately $8.0 million of the net proceeds from the sale of Gwinnett Center to repay the outstanding balance of mortgage loan on the property. We used net sales proceeds from the Long Point Property to pay down the related debt of $28.6 million and to pay distributions to its joint venture partner in accordance with the provisions of the Joint Venture’s governing documents. The remaining net sales proceeds from the sale of these properties were used to make a Special Distribution to our investors as described below under “Uses of Liquidity and Capital Resources-Special Distribution.”

 

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Our multifamily properties are typically owned through a joint venture in which we have co-invested with an affiliate of a national or regional multifamily developer. As of December 31, 2014, excluding the Whitehall Property that we wholly own, we had co-invested with 15 separate joint ventures with eight separate developers or affiliates thereof. Our joint ventures are structured such that we serve as the managing member and own a majority interest. Under the terms of the limited liability company agreements of each joint venture, operating cash flow is generally distributed to the members of the joint venture on a pro rata basis. Generally, in a capital event, such as a sale or refinancing of the joint venture’s property, net proceeds will be distributed pro rata to each member until each member’s invested capital is returned and a minimum return on capital is achieved, and thereafter our joint venture partner will receive a disproportionately higher share of any proceeds at varying levels based on our having received certain minimum threshold returns. We have determined that all of the joint ventures in which we have invested as of December 31, 2014 are variable interest entities in which we are the primary beneficiary. As such, the transactions and accounts of the joint ventures are consolidated in our accompanying financial statements.

For a description of the individual properties included in our real estate portfolio, including the location, date acquired, operator/developer, completion date or estimated completion date of development, percentage leased and capitalized costs or development budget for each property, as of December 31, 2014, see Item 2. “Properties.”

Exit Strategy

In accordance with our investment objectives, our board of directors will consider strategic alternatives, including opportunities to merge with another company, the listing of our common stock on a national securities exchange, our sale or the sale of all of our assets. Although our board of directors is not required to recommend any such exit event by any certain date, due to our Follow-On Offering having closed in April 2014 and the estimated time needed to complete our acquisition phase and have our assets substantially stabilize, our Advisor has begun to explore strategic alternatives for providing liquidity to investors. We do not know at this time what circumstances will exist in the future and therefore we do not know what factors our board of directors will consider in determining whether to pursue an exit event in the future and the board of directors has not established any pre-determined criteria. A liquidation of our Company, or all of our assets, would generally require the approval of our stockholders in accordance with our governing documents.

Liquidity and Capital Resources

General

As a REIT, we are required to distribute at least 90% of our taxable income without regard to net capital gain. Therefore, as with other REITs, we must obtain debt and/or equity capital in order to fund our growth. Our primary sources of capital have been proceeds from our Initial Offering and our Follow-On Offering (which closed in April 2014), debt financings and refinancing, and to some extent, net sales proceeds from sales of properties. To the extent we decide to sell select assets due to favorable market conditions, the related net sales proceeds will serve as another source of capital.

We expect to invest a portion of our uninvested net proceeds from our Follow-On Offering in one additional multifamily development property and to fund development costs on current properties. Thereafter, our ongoing principal demands for funds are expected to be for funding development costs, operating fees and expenses and the payment of debt service.

To date, we have met and expect to continue to meet cash needs for acquisitions and acquisition-related expenses from net proceeds from our equity offerings and financings. Generally, we expect to meet cash needs for our operating expenses and debt service from our cash flow from operations once our properties are operating and stabilized. Since inception and through December 31, 2013, we used a portion of our remaining uninvested offering proceeds to pay a substantial portion of our operating expenses and debt service. As some of our properties have become operational in phases and occupancy levels have stabilized, we expect to generate positive cash flows from operations. During the year ended December 31, 2014, four properties had become fully operational and three properties had become partially operational and we generated sufficient cash flows from operations to cover our operating expenses and debt service. In addition, due to our investment focus of investing in multifamily development properties, we expected to have little, if any, cash flow from operations available to pay distributions in cash until construction of our development properties was completed and the operations of such properties stabilized. Any cash generated from operations would be used to repay debt and fund capital items. As such, our board of directors determined to issue stock distributions, which allowed us to preserve cash during the time that our properties achieved stabilization. Our board of directors authorized a monthly stock distribution equal to 0.006666667 of a share of common stock on each outstanding share of common stock (which was equal to an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month and continuing until terminated or amended by our board of directors. The shares issued pursuant to this policy were issued on or before the last business day of the applicable calendar quarter. On September 15, 2014, our board approved the termination of our stock distribution policy, and as a result, no stock distributions were declared after September 1, 2014. In addition, on September 15, 2014, our board also approved the termination of the distribution reinvestment plan and the suspension of our

 

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amended Redemption Plan. For the years ended December 31, 2014, 2013 and 2012, we declared distributions of 1,187,388 shares, 816,952 shares and 472,462 shares of common stock, respectively. Stock distributions are non-taxable to stockholders at the time of distribution.

In February 2015, our board authorized a special cash distribution of $1.30 per share of common stock and we funded this Special Distribution from the proceeds of refinancings and asset sales, including the January 2015 sale of the Long Point Property, as described below in “Sources of Liquidity and Capital Resources – Special Distribution.” The distributions may constitute ordinary income or a return of capital for federal tax purposes.

We have borrowed and expect to continue to borrow in connection with the acquisition and development of our properties. Although, in general, our articles of incorporation allow us to borrow up to 300% of our net assets and our board of directors has adopted a policy to permit our aggregate borrowings to approximately 75% of the aggregate value of our assets. However, if needed, our articles of incorporation and the borrowing policy limitation adopted by our board of directors permit borrowings in certain circumstances, in excess of such levels if approved by a majority of our independent directors. As of December 31, 2014, we had an aggregate debt leverage ratio of approximately 53% of the aggregate book value of our consolidated assets; however, due to the fact that we generally have obtained construction financing to fund up to approximately 65% to 75% of the development budget of our development properties, we expect this ratio to increase as we incur additional development costs as our properties under development are completed and we use construction financing to fund such development.

We have and expect to continue to seek to refinance the construction loans on our development properties with longer term debt as our properties’ operations stabilize. However, our ability to continue to obtain indebtedness could be adversely affected by credit market conditions, which result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate.

Potential future sources of cash to meet our capital needs include proceeds from collateralized or uncollateralized financings, including refinancings of existing debt, from banks or other lenders and proceeds from the sale of properties or other assets. If necessary, we may use financings or offering proceeds in the event of unforeseen significant capital expenditures or other corporate purposes.

Sources of Liquidity and Capital Resources

Common Stock Offering

Since inception and through the close of our Follow-On Offering on April 11, 2014, our main sources of capital were from proceeds of our public offerings. For the twelve months ended December 31, 2014, 2013 and 2012, we received aggregate offering proceeds of approximately $65.4 million, $75.4 million and $27.3 million, respectively. Our Follow-On Offering terminated on April 11, 2014, and we currently have no plans for an additional equity offering at this time.

As of December 31, 2014, our cash totaled $47.6 million and consisted primarily of unused offering proceeds from our Follow-On Offering. We expect to use a portion of this to fund our remaining capital commitments to our joint ventures, which will be used to pay certain development costs of our joint ventures. In addition, we expect to use available uncommitted cash on hand as of December 31, 2014, from our Follow-On Offering, our debt financings and refinancing and net sales proceeds from asset sales, to invest in one additional multifamily development property through a joint venture arrangement, pay down some of our indebtedness, make the Special Distribution or for other corporate purposes.

Borrowings

As described above, we have and expect to continue to obtain construction financing on our multifamily development projects equal to approximately 65% to 75% of the development budgets. During the years ended December 31, 2014, 2013 and 2012, our consolidated joint ventures entered into construction loans to fund development costs and we borrowed approximately $140.8 million, $142.6 million and $119.9 million, respectively under all of our loans. Generally, our construction financing provides for a term of three years, extendable for up to an additional two years, and requires monthly interest only payments during the initial term at variable rates generally equal to 2% to 2.9% above LIBOR rates. If extended, the loans typically require monthly principal and interest payments thereafter based on a 30-year amortization, with the unpaid principal balance due at maturity; however, we expect to consider refinancing our construction debt prior to the initial maturity date as each development property stabilizes. An affiliate of each applicable co-venture partner has provided the lenders with any required completion and repayment guarantees. Although we typically have not entered into interest rate caps or other types of hedging instruments on all of our debt to hedge interest rate risk, we have entered into interest rate caps for four of our loans, as described in the notes to our consolidated financial statements, and may determine to enter into additional hedging transactions in the future.

 

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In March 2014, as part of acquiring the Oxford Square Property, we obtained $4.9 million in temporary financing through our Oxford Square Joint Venture in the form of a temporary loan and our joint venture partner advanced approximately $1.2 million for the development costs. In June 2014, we used unused proceeds from our offering to repay the $4.9 million and entered into a new construction loan that matures in June 2018 as described in Note 7, “Indebtedness.”

In April 2014, Whitehall Joint Venture, our consolidated joint venture which developed the Whitehall Property completed in April 2013, refinanced its original development and construction loan which had an outstanding principal balance of $22.3 million and entered into a new $28.2 million variable rate, seven-year loan. The Whitehall Venture also entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $28.2 million mortgage note secured by the Whitehall Property in connection with the refinancing described in Note 7, “Indebtedness.” The Whitehall Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 3.94% by obtaining a maximum interest rate cap through April 2017. We were able to increase the level of indebtedness on the Whitehall Property based on an appraised value that exceeded our original cost. The refinancing resulted in us receiving net proceeds of over $5.5 million, which were used to acquire our joint venture partner’s 5% interest in the Whitehall Joint Venture as described below in “Uses of Liquidity and Capital Resource-Purchase of Noncontrolling Interests and Distributions to Noncontrolling Interests.”

In September 2014, the Spring Town Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $18.5 million mortgage note secured by the Spring Town Property. The Spring Town Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 1% by obtaining a maximum interest rate cap through December 2015.

In May 2013, Long Point Joint Venture, our consolidated joint venture which developed the Long Point Property completed in November 2012, refinanced its original development and construction loan, which had an outstanding amount of $21.2 million, and entered into a new mortgage loan and security agreement for $28.5 million. Terms of the refinancing are described further in Note 7, “Indebtedness.” Long Point Joint Venture also entered into an interest rate cap with a $28.5 million notional principal amount and a LIBOR rate cap of 5.18%, as part of entering into the refinancing. We were able to increase the level of debt on the Long Point Property based on an appraised value that was above our original cost. The refinancing resulted in us receiving net proceeds of over $6.4 million, representing the return of the majority of our original capital contributions to the Long Point Joint Venture, which was used to invest in additional properties and other corporate purposes.

In June 2013, as part of acquiring the Patterson Place Property, we obtained a development and construction loan of $28.1 million, through our consolidated Patterson Place Joint Venture, as described further in Note 7 “Indebtedness”. The Patterson Place Joint Venture also obtained a 1.25% LIBOR rate cap, secured from a counterparty designed to ensure that the interest expense will not exceed 3.25% during the term of the rate cap, which expires on July 1, 2015.

During the years ended December 31, 2014, 2013 and 2012, we borrowed approximately $145.4 million, $65.4 million and $36.6 million, respectively, in connection with construction draws relating to our development properties. In addition, we borrowed approximately $0.2 million and $0.7 million during the years ended December 31, 2013 and 2012, respectively, for tenant improvements and leasing costs related to our Gwinnett Center, which was sold in March 2014. As of December 31, 2014 and 2013, we had an aggregate debt leverage ratio of approximately 53% and 43.1%, respectively. During the years ended December 31, 2014, 2013 and 2012, we paid loan costs totaling approximately $2.5 million, $2.0 million and $1.2 million, respectively, in connection with our indebtedness.

In February 2015, the Crosstown Joint Venture, our consolidated joint venture which developed the Crosstown Property, modified its original development and construction loan which had an outstanding principal balance of $26.5 million which matured in March 2015. We modified the original loan with the existing lender into a new $30 million variable rate loan with an interest rate of LIBOR plus 1.95% and extended the maturity by one year to March 27, 2016. We were able to increase the level of indebtedness on the Crosstown Property based on an appraised value that exceeded our original cost. We intend to use the excess proceeds for funding development costs, operating fees and expenses and the payment of debt service.

We, through joint ventures formed to make investments, generally have borrowed and expect to continue to borrow on a non-recourse basis. The use of non-recourse financing allows us to limit our exposure on any investment to the amount invested. Non-recourse indebtedness means the indebtedness of the borrower or its subsidiaries is collateralized only by the assets to which such indebtedness relates, without recourse to the Company or any of its subsidiaries.

Certain of our loan documents contain customary affirmative, negative and financial covenants, agreements, representations, warranties and borrowing conditions, as well as customary events of default and cure provisions, and escrows, all as set forth in the loan documents. As of December 31, 2014, we were in compliance with all applicable debt covenants.

 

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For additional information on our borrowings, see Note 7, “Indebtedness” in our consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” of this Annual Report.

Capital Contributions from Noncontrolling Interests

During the years ended December 31, 2014, 2013 and 2012, our co-venture partners made capital contributions aggregating to approximately $14.2 million, $12.9 million and $9.3 million, respectively. In addition, in accordance with the terms of the Oxford Square Property joint venture agreement, once the Oxford Square Joint Venture obtained a construction loan in June 2014, our ownership interest in the joint venture increased to 95% with an additional capital contribution by us and a $1.5 million return of capital to our joint venture partner.

In accordance with the terms of our joint venture agreements relating to the multifamily development properties, our co-venture partners have commitments to fund additional capital contributions aggregating approximately $0.9 million as of December 31, 2014. These amounts, as well as amounts previously funded, will be or have been used to fund part of the land acquisition and initial development costs of the development projects. In connection with the expected acquisition of one additional multifamily development property, we expect to enter into a joint venture arrangement with terms similar to the ones in place as of December 31, 2014, whereby our co-venture partner is responsible for their pro rata share of the equity investment in the property.

Real Estate Held for Sale

In 2011, we developed the Long Point Property, a Class A multifamily property that completed construction in the fourth quarter of 2012. In 2014, due to continuing trends and favorable market conditions in multifamily development, we entered into an agreement to sell the Long Point Property for approximately $55.5 million, for which net sales proceeds would exceed the net carrying value of the property. As a result, the financial statements reflect the reclassifications of rental income, interest expense and other categories relating to the Long Point Property from income (loss) from continuing operations to income (loss) from discontinued operations for all periods presented. In January 2015, we sold our Long Point Property as described above in the “Our Real Estate Portfolio” section. We used the net sales proceeds to pay a special distribution as described below in the “Uses of Liquidity and Capital Resources-Special Distribution” section.

In 2011, we acquired the Gwinnett Center, a three building office complex that was a lender owned, or “REO,” property with the investment objective of increasing net operating income through the lease-up of existing vacancies and repositioning of the property. During the year ended December 31, 2013, due to continuing trends and favorable market conditions in multifamily development and our increased focus on multifamily development, we decided to pursue a potential sale of the Gwinnett Center. As a result, the financial statements reflect the reclassifications of rental income, interest expense and other categories relating to Gwinnett Center from income (loss) from continuing operations to income (loss) from discontinued operations for all periods presented. In March 2014, we sold the Gwinnett Center and received net sales proceeds of approximately $15.0 million, resulting in a gain of approximately $1.2 million for financial reporting purposes, which was included in income (loss) from discontinued operations for the year ended December 31, 2014 in the accompanying condensed consolidated statements of operations.

If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all taxable gain we derive from such sale would be subject to a 100% federal tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. The principal requirements of the safe harbor are that: (i) the REIT must hold the applicable real estate asset for not less than two years for the production of rental income prior to its sale; (ii) the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of sale which are includible in the basis of the property do not exceed 30% of the net selling price of the property; and (iii) the REIT does not make more than seven sales of property during the taxable year or the aggregate adjusted bases of property sold during the taxable year does not exceed 10% of the aggregate bases of all of the REIT’s assets as of the beginning of the taxable year or the fair market value of property sold during the taxable year does not exceed 10% of the fair market value of all of the REIT’s assets as of the beginning of the taxable year. Given our investment strategy, the sale of one or more of our properties may not fall within the prohibited transaction safe harbor.

Uses of Liquidity and Capital Resources

Acquisition and Development of Properties

We acquired our first multifamily development property in 2011 and five additional properties in each of 2012, 2013 and 2014. In connection with our sixteen development projects, we funded approximately $204 million, $123.9 million and $69.8 million in acquisition and development costs during 2014, 2013 and 2012, respectively. Pursuant to the development agreements for the nine properties under development as of December 31, 2014, we had commitments to fund approximately $163.6 million in additional development and other costs. We expect to fund the remaining development costs primarily from the construction loans on each property, and to a lesser extent, from additional equity contributions from noncontrolling interests of $0.9 million and cash on hand.

 

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Debt Service

During the year ended December 31, 2014, we repaid approximately $36.7 million of outstanding loans, which included approximately $22.3 million related to refinancing Whitehall Joint Venture’s original construction loan, approximately $4.9 million related to Oxford Square Joint Venture’s temporary loan, and approximately $8.0 million related to Gwinnett Center as the result of the sale of the property.

In March 2014, as part of acquiring the Oxford Square Property, we obtained $4.9 million in temporary financing through our Oxford Square Joint Venture in the form of a temporary loan and our joint venture partner advanced approximately $1.2 million for development costs. In June 2014, we used unused proceeds from our offering to repay the $4.9 million and entered into a new construction loan that matures in June 2018 as described in Note 7, “Indebtedness.”

In addition, in accordance with the terms of the Oxford Square Property joint venture agreement, once the Oxford Square Joint Venture obtained a construction loan in June 2014, our ownership interest in the joint venture increased to 95% with an additional capital contribution by us and a $1.5 million return of capital to our joint venture partner.

During the year ended December 31, 2013, we used approximately $21.0 million in refinancing proceeds from a new $28.5 million loan to repay the outstanding balance of the original development and construction loan related to our Long Point Property.

Scheduled maturities for 2015 include the refinancing of three construction and development loans, as described further in Note 7. “Indebtedness” in the accompanying condensed consolidated financial statements. We modified the construction and development loan related to the Crosstown Property in February 2015, as described above in “Sources of Liquidity and Capital Resources-Borrowings”. We believe that we will be able to refinance our two remaining construction and development loans that mature in 2015 and other debt as it comes due in the ordinary course of business. As a result of the sale of the Long Point Property in January 2015, we repaid the corresponding mortgage loan balance of approximately $28.6 million.

Special Distribution

On September 15, 2014, our board approved the termination of the stock distributions and distribution reinvestment plan, as described above in Item 1, in the “Our Distribution Policy” section.

On February 9, 2015, the board declared a Special Distribution in the amount of $1.30 per share payable to the holders of record of our common stock as of the close of business on February 9, 2015. The Special Distribution was paid in cash and was funded from the proceeds of refinancings and asset sales, including the January 2015 sale of the Long Point Property. We paid the Special Distribution on February 24, 2015. This Special Distribution will be included in stockholders’ Form 1099 for the year ending December 31, 2015. We anticipate the Special Distribution will constitute a return of capital, however, the tax determination of the Special Distribution will be based on the taxable results for the year-ending December 31, 2015.

Stock Issuance and Offering Costs

Under the terms of our offerings, certain affiliates were entitled to receive selling commissions and a marketing support fee of up to 7% and 3%, respectively, of gross offering proceeds on shares sold through the close of our Follow-On Offering on April 11, 2014. In addition, affiliates were entitled to reimbursement of actual expenses incurred in connection with our offerings, such as filing fees, legal, accounting, printing, and due diligence expense reimbursements, which were recorded as stock issuance and offering costs and deducted from stockholders’ equity. In accordance with our articles of incorporation, the total amount of selling commissions, marketing support fees, and other organizational and offering costs paid by us did not exceed 15% of the aggregate gross offering proceeds. Offering costs were generally funded by our Advisor and subsequently reimbursed by us subject to this limitation. During the years ended December 31, 2014, 2013 and 2012, we paid approximately $9.6 million, $11.1 million and $4.1 million, respectively, in stock issuance and offering costs.

Purchase of Noncontrolling Interests and Distributions to Noncontrolling Interests

During the year ended December 31, 2014, 2013 and 2012, our consolidated joint ventures paid distributions of approximately $0.7 million, $0.5 million and $0.02 million, respectively, to our co-venture partners representing their pro rata share of positive operating cash flows and proceeds received in connection with debt refinancings in accordance with the terms of our joint venture agreements. During the year ended December 31, 2014, we used $5.5 million of the excess proceeds received from the refinancing of the construction loan by the Whitehall Joint Venture to acquire our joint venture partner’s 5% interest in the Whitehall Joint Venture. Effective April 2014, we owned 100% of the interests in the Whitehall Joint Venture.

 

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In accordance with the terms of the Oxford Square Property joint venture agreement, once the Oxford Square Joint Venture obtained a construction loan in June 2014, our ownership interest in the joint venture increased to 95% with an additional capital contribution by us and a $1.5 million return of capital to our joint venture partner.

Net Cash Provided by (Used in) Operating Activities

Our net cash flows provided by operating activities was approximately $4.3 million and $0.7 million for the years ended December 31, 2014 and 2013, respectively. Cash flows from operating activities improved during the years ended December 31, 2014 and 2013, primarily as a result of more properties and units being operational during 2014 than 2013 and an increase in occupancy as the units become operational and leased. During the year ended December 31, 2012, we used approximately $0.9 million of net cash in operating activities. Since inception and through December 31, 2013, we used a portion of our remaining uninvested offering proceeds to pay a substantial portion of our operating expenses and debt service. During the year ended December 31, 2014, we generated sufficient cash flows from operations to cover our operating expenses and debt service.

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

 

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Results of Operations

As of December 31, 2014, we owned interests in sixteen Class A multifamily properties (including our Long Point Property which was held for sale), seven of which were operational and as to which development was substantially complete and nine of which were under development, including three which were partially operational. As described earlier, during 2014, we determined to seek the sale of our Long Point Property and, as such, the results of operations of this property are included in the income from discontinued operations in the accompanying statements of operations for all periods presented. The following table presents the number of completed apartment units, percent leased, as well as, revenues and property operating expenses for each of our properties with operations during the years ended December 31, 2014, 2013 and 2012 (excluding the Long Point Property which was held for sale):

 

    Start Date
of Operations
  Completion
Date
  Units
Expected
Upon
Completion
    Completed Apartment
Units as of December 31,
    % Leased(1)
as of December 31,
    Year Ended
December 31,
 
                  2014     2013     2012     2014     2013     2012     2014     2013     2012  

Revenues:

                   

Whitehall Property

  Q4 2012   Q2 2013     298        298        298        75        95     97     20   $ 3,947,015      $ 2,365,094      $ 5,460   

Crescent Crosstown Property

  Q2 2013   Q3 2013     344        344        344        —          96     56     —          4,188,292        1,042,813        —     

Aura Castle Hills Property

  Q3 2013   Q2 2014     316        316        127        —          95     27     —          2,922,756        88,997        —     

Aura Grand Property

  Q4 2013   Q2 2014     291        291        102        —          88     23     —          2,721,458        45,322        —     

REALM Patterson Place Property

  Q2 2014   Q4 2014     322        322        —          —          38     —          —          477,259        —          —     

Crescent Cool Springs Property

  Q3 2014   Q4 2014     252        252        —          —          31     —          —          175,863        —          —     

Crescent Alexander Village Property

  Q2 2014   Est. Q1

2015

    320        212        —          —          39     —          —          410,025        —          —     

Fairfield Ranch Property

  Q3 2014   Est. Q1

2015

    294        234        —          —          37     —          —          447,965        —          —     

Premier at Spring Town Center

  Q4 2014   Est. Q4

2015

    396        54        —          —          9     —          —          17,600        —          —     

Other

                      1,385        —          —     
       

 

 

   

 

 

   

 

 

         

 

 

   

 

 

   

 

 

 

Total

  2,323      871      75    $ 15,309,618    $ 3,542,226    $ 5,460   
       

 

 

   

 

 

   

 

 

         

 

 

   

 

 

   

 

 

 

Property operating expenses:

Whitehall Property

$ 1,359,675    $ 1,200,567    $ 121,229   

Crescent Crosstown Property

  1,662,323      792,313      3,535   

Aura Castle Hills Property

  1,626,932      218,168      —     

Aura Grand Property

  1,463,982      224,852      —     

REALM Patterson Place Property

  558,787      —        —     

Crescent Cool Springs Property

  530,751      108,369      —     

Crescent Alexander Village Property

  540,321      104,135      —     

Fairfield Ranch Property

  360,393      —        —     

Premier at Spring Town Center

  167,219      —        —     

Crescent Gateway Property(2)

  135,400      —        —     

Other

  83,088      10,370      —     
                   

 

 

   

 

 

   

 

 

 

Total

$ 8,488,871    $ 2,658,774    $ 124,764   
                   

 

 

   

 

 

   

 

 

 

 

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FOOTNOTES:

 

(1)  The percentage leased presented in the table above represents the number of units leased as of the end of the applicable period as a percentage of the total number of expected units of the property, whether or not currently available for lease.
(2)  Expenses incurred for this property for the year ended December 31, 2014 primarily relate to pre-leasing and marketing activities.

We had a total of 2,323 and 871 completed apartment units as of December 31, 2014 and 2013, respectively, and expect to have more than 4,400 units once construction is completed on our remaining properties under development. We expect to add additional units with once we acquire our last property during 2015.

Our results of operations for the respective periods presented reflect increases in most categories due to the growth of our multifamily portfolio. Management expects increases in revenues and operating expenses as our existing multifamily development properties become operational. Four properties became fully operational and three properties became partially operational during 2014. We have reclassified the Long Point property and the Gwinnett Center revenues and expenses as discontinued operations for all periods, as described below.

Comparison of the fiscal year ended December 31, 2014 to the fiscal year ended December 31, 2013

Analysis of Revenues and Expenses from Continuing Operations:

Revenues. Rental income from operating leases from continuing operations was approximately $15.3 million and $3.5 million for the years ended December 31, 2014 and 2013, respectively. Rental income from continuing operations increased approximately $11.8 million over 2013 primarily due to the increased stabilization of several properties (either fully operational or partially operational, as described above). We expect additional increases in revenue as additional units are completed, leased and our properties become more fully operational and as additional portions of our properties under development become operational.

Property Operating Expenses. Property operating expenses from continuing operations for the years ended December 31, 2014 and 2013 were $8.5 million and $2.7 million, respectively. Property operating expenses increased approximately $5.8 million due to additional properties becoming either fully operational or partially operational, as described above. Property operating expenses also increased in 2014 due to pre-leasing and marketing activities at our properties under development with partial operations. Property operating expenses are expected to increase as additional units are completed and our properties become fully operational, and as portions of our other properties under development become operational.

General and Administrative Expenses. General and administrative expenses from continuing operations for the years ended December 31, 2014 and 2013 were approximately $2.9 million and $2.1 million, respectively. General and administrative expenses were comprised primarily of reimbursable personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, accounting and legal fees, NAV fees and board of directors’ fees. For the year ended December 31, 2014 as compared to 2013, general and administrative expenses increased 38% primarily as a result of the additional legal, accounting and other professional services necessary to account and report on our growing portfolio of assets. Although we anticipate general and administrative expenses will increase as we acquire additional properties and more properties become operational, due to the relatively fixed nature of the majority of these expenses we believe the increase will be relatively small in relation to the growth in our revenues and the ratio of general and administrative expenses to revenues will continue to decrease.

Asset Management Fees. We incurred approximately $2.1 million and $0.7 million in asset management fees from continuing operations payable to our Advisor during the year ended December 31, 2014 and 2013, respectively, (of which approximately $1.0 million and $0.4 million, respectively, were capitalized as part of the cost of our properties that were under development). We incur asset management fees at an annual rate of 1% of our “real estate asset value” as defined in the advisory agreement (which generally equals our acquisition and development capitalized costs and excludes pro rata portions attributable to our joint venture partners); therefore, asset management fees increased over 2013 as a result of the increase in our real estate assets under management subsequent to December 31, 2013 and as a result of several multifamily projects becoming operational. Asset management fees relating to development are capitalized as part of the cost of development. Accordingly, we expect increases in asset management fees in the future as our multifamily projects become fully developed and we invest in additional properties. However, we expect certain asset management fees incurred on properties under development to continue to be capitalized as part of the cost of the development until such time as the applicable property becomes operational.

Property Management Fees. We incurred approximately $0.8 million and $0.3 million in property management fees from continuing operations during the years ended December 31, 2014 and 2013, respectively. Property management fees generally range from 2.25% to 4% of property revenues, subject to minimum monthly fees from third party property managers during initial lease-up periods. Property management fees increased during 2014 primarily as a result of increased property revenues. We expect additional increases in these fees as property revenues increase as more of our development properties become operational.

 

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Acquisition Fees and Expenses. We incurred approximately $3.5 million and $3.9 million in acquisition fees and expenses, including closing costs, during the years ended December 31, 2014 and 2013, respectively, of which approximately $3.4 million and $3.9 million, respectively, were capitalized as part of the costs of our properties under development. The decrease in acquisition fees and expenses in 2014, as compared to 2013, was primarily the result of a decrease in investment services fee paid to our Advisor. The decrease was a result of a decrease in the basis on which these fees are paid which is based on our pro rata ownership interest in the properties. We expect to continue to incur acquisition fees and expenses, consisting primarily of investment services fees and other acquisition expenses, in the future as we purchase one additional property. However, we expect acquisition fees and expenses incurred on properties under development to continue to be capitalized as part of the cost of the development.

Depreciation. Depreciation from continuing operations for the years ended December 31, 2014 and 2013 was approximately $5.9 million and $2.0 million, respectively. Depreciation expense increased primarily due to several properties being fully operational in 2014, as compared to only partially operational for the same period in 2013, and other properties being partially operationally in 2014, as described above. We expect increases in depreciation in the future as additional phases of other properties become fully operational and other development properties become operational.

Fair Value Adjustments and Other Income (Expense). During the year ended December 31, 2014 and 2013, we recognized income (expense) of approximately $0.06 million and $(0.04) million, respectively. The increase is due to interest income on cash deposits as a result of higher cash balances offset by a decrease in fair value adjustments in interest rate caps due to changes in interest rates.

Interest Expense and Loan Cost Amortization, Net of Amounts Capitalized. During the year ended December 31, 2014 and 2013, we incurred approximately $5.5 million and $1.7 million, respectively, of interest expense and loan cost amortization from continuing operations relating to debt outstanding on our properties, $4.0 million and $1.1 million, respectively, of which was capitalized as development costs relating to our properties under development.

Interest costs incurred during the year ended December 31, 2014, increased as a result of an increase in our average debt outstanding during the year ended December 31, 2014 to $186 million from $80.9 million during 2013, resulting in an approximately $3.8 million increase in interest cost and loan cost amortization. Interest expense also increased as a result of less interest expense being eligible for capitalization due to the completion of construction activity on several properties that became operational during the year, resulting in an approximately $0.9 million increase.

We expect interest cost to continue to increase over the next 24 to 30 months as we continue to borrow under our construction loans to fund construction costs, as we acquire our last property and as we complete construction on buildings that become operational. We expect to continue to capitalize interest expense and loan cost amortization incurred as costs relating to our development properties. As our development properties become operational, we expect that these expenses will be recognized in our consolidated statement of operations, as opposed to capitalized.

As of December 31, 2014, even though all of our loans were variable rate, we had purchased interest rate caps relating to four of our loans to reduce our exposure to future increases in LIBOR rate. Any increases to LIBOR rates will result in increased interest expense, but the interest rate caps will partially offset the full impact of an increase in the LIBOR rate. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for an estimate of how a 1% change in LIBOR would impact our annual interest expense incurred.

Analysis of Discontinued Operations

During the year ended December 31, 2014, we established our intent to sell Long Point Property, as described in Management’s Discussion and Analysis – Real Estate Held for Sale. In addition, during 2013, we established our intent to sell Gwinnett Center and, in March 2014 we sold the property to an unrelated party and received net sales proceeds of approximately $15.0 million, resulting in a gain on sale of approximately $1.2 million for financial reporting purposes. As a result, we accounted for the revenues and expenses associated with the Long Point Property and Gwinnett Center as discontinued operations for all periods presented in accordance with GAAP. We had income from discontinued operations of approximately $2.4 million for the year ended December 31, 2014, as compared to $0.6 million for the year ended December 31, 2013. The improvement in the results from discontinued operations was primarily the result of (i) amounts for 2014 including a gain on sale of approximately $1.2 million relating to the Gwinnett Center and (ii) our discontinuing the recognition of depreciation and amortization expense relating to the Gwinnett Center and the Long Point Property upon the determination of recording these properties as real estate held for sale.

See Item 8, Note 6. “Real Estate Held for Sale” in the accompanying consolidated financial statements for additional information on the income (loss) from discontinued operations for Long Point property and Gwinnett Center, including the revenues and expenses related to these properties.

 

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2%/25% Limitation

We incur operating expenses which, in general, are expenses relating to our administration on an ongoing basis. Pursuant to the advisory agreement, the Advisor will reimburse us the amount by which the total operating expenses paid or incurred by us exceed, in any four consecutive fiscal quarters (the “Expense Year”) commencing with the Expense Year ended December 31, 2012, the greater of 2% of average invested assets or 25% of net income (as defined in the advisory agreement) (the “Limitation”), unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors.

During 2014, total operating expenses did not exceed the Limitation.

Comparison of the fiscal year ended December 31, 2013 to the fiscal year ended December 31, 2012

Analysis of Revenues and Expenses from Continuing Operations:

Revenues. Rental income from operating leases from continuing operations (excluding the Long Point Property and Gwinnett Center which were held for sale) was approximately $3.5 million and $0.01 million for the years ended December 31, 2013 and 2012, respectively. Rental income from continuing operations increased approximately $3.5 million over 2012 primarily due to (i) the Whitehall Property commencing operations and reaching stabilization, (ii) the Crosstown Property becoming operational beginning in the second quarter of 2013, and (iii) the Aura Castle Hills Property and Aura Grand Property becoming partially operational late in 2013.

Property Operating Expenses. Property operating expenses from continuing operations for the years ended December 31, 2013 and 2012 were $2.7 million and $0.1 million, respectively. Property operating expenses increased approximately $2.6 million as a result of the Whitehall Property and Crosstown Property becoming fully operational during 2013, and portions of the Aura Castle Hills Property and Aura Grand Property being operational during 2013. Property operating expenses also increased in 2013 because of pre-leasing activities associated with our Crescent Alexander Village and Crescent Cool Springs properties.

General and Administrative Expenses. General and administrative expenses from continuing operations for the years ended December 31, 2013 and 2012 were approximately $2.1 million and $1.7 million, respectively. General and administrative expenses were comprised primarily of reimbursable personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, accounting and legal fees, and board of directors’ fees. For the year ended December 31, 2013, as compared to 2012, general and administrative expenses increased 24% primarily as a result of the additional legal, accounting and other professional services necessary to account and report on our growing portfolio of assets.

Asset Management Fees. We incurred approximately $0.7 million and $0.1 million in asset management fees from continuing operations payable to our Advisor during the years ended December 31, 2013 and 2012, respectively, of which approximately $0.4 million and $0.1 million, respectively, were capitalized as part of the cost of our properties that were under development. We incur asset management fees at an annual rate of 1% of our “real estate asset values,” as defined in the advisory agreement (which generally equals our acquisition and development capitalized costs and excludes pro rata portions attributable to our joint venture partners); therefore, asset management fees increased over 2012 as a result of the increase in our real estate assets during 2013. Asset management fees incurred that relate to development are capitalized as part of the cost of development.

Property Management Fees. We incurred approximately $0.3 million and $0.03 million in property management fees from continuing operations during the years ended December 31, 2013 and 2012, respectively. Property management fees are generally range from 2.5% to 2.75% of property revenues and increased during 2013 as a result of increased property revenues.

Acquisition Fees and Expenses. We incurred approximately $3.9 million and $3.3 million in acquisition fees and expenses, including closing costs, during the years ended December 31, 2013 and 2012, respectively, of which approximately $3.9 million and $3.2 million, respectively, were capitalized as part of the costs of our properties under development. The increase in acquisition fees and expenses in 2013, as compared to 2012, was primarily the result of an increase in investment services fees paid to our Advisor, which are initially determined based on our pro rata share of budgeted development costs and adjusted to our pro rata share of actual development costs upon completion of the project, all of which were capitalized.

Depreciation. Depreciation from continuing operations for the years ended December 31, 2013 and 2012 was approximately $2.0 million and $0, respectively. Depreciation expense increased year over year primarily due to the Whitehall Property being completed in the second quarter of 2013, the Crosstown Property becoming operational in phases throughout 2013, and the Aura Castle Hills Property and Aura Grand Property becoming partially operationally in late 2013.

Interest Expense and Loan Cost Amortization. During the years ended December 31, 2013 and 2012, we incurred approximately $1.7 million and $0.2 million, respectively, of interest expense and loan cost amortization from continuing operations

 

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relating to debt outstanding on our properties, $1.1 million and $0.2 million, respectively, of which was capitalized as development costs relating to our properties under development. Our average debt outstanding during the year ended December 31, 2013 increased to $80.9 million from $25.8 million during 2012, resulting in an approximately $0.6 million increase in interest expense and loan cost amortization.

2%/25% Limitation

We incur operating expenses which, in general, are expenses relating to our administration on an ongoing basis. Pursuant to the advisory agreement, the Advisor will reimburse us the amount by which the total operating expenses paid or incurred by us exceed, in any four consecutive fiscal quarters (the “Expense Year”) commencing with the Expense Year ended December 31, 2012, the greater of 2% of average invested assets or 25% of net income (as defined in the advisory agreement) (the “Limitation”), unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors.

During 2013 and 2012, total operating expenses in excess of the Limitation were $0.29 million and $0.8 million, respectively. Our independent directors determined that such amounts were justified based on a number of factors including:

 

    The time necessary to educate financial advisors and investors about our growth-orientation, and our stock distribution,

 

    Our strategy of investing in assets that require repositioning or development and the timing and amount of its initial investments, and

 

    The operating expenses necessary as a public company.

Analysis of Discontinued Operations:

Income (loss) from discontinued operations was $0.6 million and $(1.2) million for the years ended December 31, 2013 and 2012, respectively, relating to our Long Point Property and Gwinnett Center.

The decline in losses was the result of discontinuing depreciation and amortization expense beginning in the second quarter of 2013 upon the determination of recording the Gwinnett Center as real estate held for sale, and improved revenues as a result of stabilization the Long Point Property which was placed in service during 2012.

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts (“NAREIT”) promulgated a measure known as funds from operations, which we believe to be an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT. The use of funds from operations (“FFO”) is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (“White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property, real estate asset impairment write-downs, depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Our FFO calculation complies with NAREIT’s policy described above.

We may, in the future, make other adjustments to net loss in arriving at FFO as identified above at the time that any such other adjustments become applicable to our results of operations. FFO, for example, may exclude impairment charges of real estate-related investments. Because GAAP impairments represent non-cash charges that are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe FFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rates, occupancy and other core operating fundamentals. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance. While impairment charges may be excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are recorded based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. In addition, FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO.

Notwithstanding the widespread reporting of FFO, changes in accounting and reporting rules under GAAP that were adopted after NAREIT’s definition of FFO have prompted a significant increase in the magnitude of non-operating items included in FFO. For example, acquisition fees and expenses, which we intend to fund from the proceeds of our offerings and which we do not view as an

 

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operating expense of a property, are now deducted as expenses in the determination of GAAP net income for non-development projects. As a result, the Investment Program Association (“IPA”), an industry trade group, has standardized a measure known as modified FFO (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-traded REITs and which we believe to be another additional supplemental measure to reflect the operating performance of a non-traded REIT. Under the IPA Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITS: MFFO, issued in November 2010 (the “IPA Guideline”), MFFO excludes from FFO additional non-cash or non-recurring items, including the following:

 

    acquisition fees and expenses from business combinations that are not capitalized as part of the cost of the development property, which have been deducted as expenses in the determination of GAAP net income;

 

    non-cash amounts related to straight-line rent;

 

    amortization of above or below market intangible lease assets and liabilities;

 

    accretion of discounts and amortization of premiums on debt investments;

 

    impairments of loans receivable, and equity and debt investments;

 

    realized gains or losses from the early extinguishment of debt;

 

    realized gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;

 

    unrealized gains or losses related to fair value adjustments for derivatives for which we did not elect or qualify for hedge accounting, including interest rate and foreign exchange derivatives;

 

    unrealized gains or losses related to consolidation from, or deconsolidation to, equity accounting;

 

    adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income; and

 

    adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We consider MFFO as a supplemental measure when assessing our operating performance. We have calculated MFFO in accordance with the IPA Guideline. For the years ended December 31, 2014, 2013 and 2012, our MFFO represents FFO, excluding acquisition fees and expenses, the amortization of above- and below-market leases, straight-line rent adjustments, loss on write-off of lease related costs, loss on early extinguishment of debt and unrealized gains or losses related to fair value adjustments for derivatives, which we believe is helpful in evaluating our results of operations for the reasons discussed below.

 

    Acquisition fees and expenses. In evaluating investments in real estate, management’s investment models and analyses differentiate between costs to acquire the investment and the operating results derived from the investment. Acquisition fees and expenses have been and are expected to continue to be funded from the proceeds of our offerings and other financing sources and not from operations. We believe by excluding acquisition fees and expenses from business combinations that are not capitalized as part of the cost of the development properties and have been expensed for GAAP purposes, MFFO provides useful supplemental information that is comparable between differing reporting periods for our real estate investments and is more indicative of future operating results from our investments as consistent with management’s analysis of the investing and operating performance of our properties. If earnings from the operations of our properties or net sales proceeds from the future disposition of our properties are not sufficient enough to overcome the acquisition costs and fees incurred, then such fees and expenses will have a dilutive impact on our returns.

 

    Amortization of above- and below-market leases. Under GAAP, certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, we believe that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

 

    Straight-line rent adjustments. Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to restate such payments from a GAAP accrual basis to a cash basis), MFFO provides useful supplemental information on the realized economic impact of lease terms, providing insight on the contractual cash flows of such lease terms, and aligns results with management’s analysis of operating performance.

 

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    Loss on early extinguishment of debt. These losses are non-cash adjustments related primarily to the accelerated write off of unamortized loan costs in conjunction with early repayment on a loan or related to a refinancing. We believe adding back non-cash losses from the acceleration of amortization of loan costs should resemble the add-back for normal amortization during the period.

 

    Unrealized gains or losses related to fair value adjustments for derivatives. These unrealized gains or losses relate to fair value adjustments for derivatives for which we did not elect or qualify for hedge accounting, including interest rate caps. We believe excluding non-cash unrealized gains or losses related to changes in fair values of our interest rate caps, for which we did not elect hedge accounting, should be excluded.

We may, in the future, make other adjustments to FFO as identified above at the time that any such other adjustments become applicable to our results of operations. MFFO, for example would exclude adjustments related to contingent purchase price obligations. We believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rates, occupancy and other core operating fundamentals.

We believe that MFFO is helpful in assisting management to assess the sustainability of our distribution and operating performance in future periods, particularly after our offering and acquisition stages are complete, because MFFO excludes acquisition fees and expenses that have been expensed for GAAP purposes that affect property operations only in the period in which a property is acquired; however, MFFO should only be used by investors to assess the sustainability of our operating performance after our offering stage has been completed and properties have been acquired. Acquisition fees and expenses that have been expensed for GAAP purposes have a negative effect on our cash flows from operating activities during the periods in which properties are acquired.

Presentation of MFFO also is intended to provide useful information to investors as they compare the operating performance of different non-traded REITs, although it should be noted that not all REITs calculate MFFO the same way, so comparisons with other REITs may not be meaningful. Neither the U.S. Securities and Exchange Commission (the “Commission”), NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate MFFO. Furthermore, FFO and MFFO are not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make cash distributions, if any, to our stockholders. FFO and MFFO should not be construed as historic performance measures or as more relevant or accurate than the current GAAP methodology in calculating net income (loss) and its applicability in evaluating our operating performance.

 

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The following table presents a reconciliation of net income (loss) attributable to common stockholders to FFO and MFFO for the quarters ended:

 

                                                                          
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
    Total  

Net income (loss) attributable to common stockholders

  $ 96,731      $ (655,509   $ (639,756   $ (990,470   $ (2,189,004

Adjustments:

         

Gain on sale of property:

         

Discontinued operations

    (1,219,693     —          —          —          (1,219,693

Depreciation and amortization:

         

Continuing operations

    754,025        879,472        1,272,310        1,611,386        4,517,193   

Discontinued operations

    271,795        276,685        274,012        —          822,492   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO attributable to common stockholders

  (97,142   500,648      906,566      620,916      1,930,988   

Acquisition fees and expenses(1):

Continuing operations

  45,069      (16,177   15,984      31,134      76,010   

Amortization of above- and below-market lease intangible assets(2):

Discontinued operations

  —        —        —        —        —     

Straight-line rent adjustments(3):

Continuing operations

  18,837      (90,430   (143,048   (69,650   (284,291

Discontinued operations

  18,296      (3,448   2,194      —        17,042   

Loss on extinguishment of debt(4):

Continuing operations

  —        56,739      —        —        56,739   

Discontinued operations

  32,787      —        —        —        32,787   

Unrealized loss related to changes in fair value of derivatives(5):

Continuing operations

  24,131      40,787      18,665      19,166      102,749   

Discontinued operations

  30,635      76,271      8,586      14,880      130,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MFFO attributable to common stockholders

$ 72,613    $ 564,390    $ 808,947    $ 616,446    $ 2,062,396   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

  18,040,112      22,292,778      22,526,171      22,526,171      21,361,725   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share (basic and diluted)

$ 0.01    $ (0.03 $ (0.03 $ (0.05 $ (0.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO per share (basic and diluted)

$ (0.01 $ 0.03    $ 0.04    $ 0.03    $ 0.09   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MFFO per share (basic and diluted)

$ —      $ 0.03    $ 0.04    $ 0.03    $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    Total  

Net loss attributable to common stockholders

  $ (655,794   $ (757,662   $ (825,954   $ (1,042,809   $ (3,282,219

Adjustments:

         

Depreciation and amortization:

         

Continuing operations

    161,141        301,345        539,702        647,651        1,649,839   

Discontinued operations

    543,181        365,909        262,440        261,993        1,433,523   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO attributable to common stockholders

  48,528      (90,408   (23,812   (133,165   (198,857

Acquisition fees and expenses(1):

Continuing operations

  14,596      4,492      14,355      13,648      47,091   

Amortization of above- and below-market lease intangible assets(2):

Discontinued operations

  13,487      4,496      —        —        17,983   

Straight-line rent adjustments(3):

Continuing operations

  (48,905   (25,003   26,608      23,047      (24,253

Discontinued operations

  (59,794   (15,018   21,560      13,545      (39,707

Loss on extinguishment of debt(4):

Continuing operations

  —        65,812      —        —        65,812   

Unrealized (gain) loss related to changes in fair value of derivatives(5):

Continuing operations

  —        25,319      8,470      7,334      41,123   

Discontinued operations

  —        (72,477   16,899      (6,665   (62,243
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MFFO attributable to common stockholders

$ (32,088 $ (102,787 $ 64,080    $ (82,256 $ (153,051
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

  10,172,805      12,114,212      12,168,513      14,496,871      12,249,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share (basic and diluted)

$ (0.06 $ (0.07 $ (0.07 $ (0.07 $ (0.27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO per share (basic and diluted)

$ —      $ (0.01 $ —      $ (0.01 $ (0.02
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MFFO per share (basic and diluted)

$ —      $ (0.01 $ 0.01    $ (0.01 $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
                                                                          
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    Total  

Net loss attributable to common stockholders

  $ (830,971   $ (1,038,792   $ (781,364   $ (472,825   $ (3,123,952

Adjustments:

         

Depreciation and amortization:

         

Discontinued operations

    425,345        427,921        540,902        601,423        1,995,591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO attributable to common stockholders

  (405,626   (610,871   (240,462   128,598      (1,128,361

Acquisition fees and expenses(1):

Continuing operations

  2,466      54,821      30,916      (5,628   82,575   

Amortization of above- and below-market lease intangible assets(2):

Discontinued operations

  41,187      38,132      35,016      20,862      135,197   

Straight-line rent adjustments(3):

Discontinued operations

  (36,225   (43,860   (127,274   (109,918   (317,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MFFO attributable to common stockholders

$ (398,198 $ (561,778 $ (301,804 $ 33,914    $ (1,227,866
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

  7,170,339      8,033,413      8,660,890      9,175,788      8,262,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share (basic and diluted)

$ (0.12 $ (0.12 $ (0.09 $ (0.05 $ (0.38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO per share (basic and diluted)

$ (0.05 $ (0.07 $ (0.03 $ 0.01    $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MFFO per share (basic and diluted)

$ (0.06 $ (0.06 $ (0.03 $ —      $ (0.15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FOOTNOTES:

 

(1)  In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-traded REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs from business combinations that are not capitalized as part of the cost of the development properties and are expensed for GAAP purposes, management believes MFFO provides useful supplemental information that is comparable for real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties. These acquisition fees and expenses include payments to our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Acquisition fees and expenses will have negative effects on returns to investors, the potential for future cash distributions, if any, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.
(2)  Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of other real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)  Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to restate such payments from a GAAP accrual basis to a cash basis), MFFO provides useful supplemental information on the realized economic impact of lease terms, providing insight on the contractual cash flows of such lease terms, and aligns results with management’s analysis of operating performance.
(4)  Management believes that adjusting for the realized loss on the early extinguishment of debt is appropriate because the write-off of unamortized loan costs are non-cash adjustments that are not reflective of our ongoing operating performance and aligns results with management’s analysis of operating performance.
(5)  These items relate to fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, because these items may not be directly attributable to our current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, where we are not speculating or trading assets, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses.

Off Balance Sheet Arrangements

As of December 31, 2014, we had no off balance sheet arrangements.

 

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Table of Contents

Contractual Obligations

As of December 31, 2014, we were subject to contractual payment obligations as described in the table below.

 

     Payments Due by Period  
     Less than
1 year
     Years
1 - 3
     Years
3 - 5
     More than
5 years
     Total  

Development contracts on development properties (1)

   $ 172,007,883       $ 15,382,633       $ —         $ —         $ 187,390,516   

Mortgage note payable (principal and interest) (2)

     1,877,161         4,726,402         4,943,742         54,829,123         66,376,428   

Construction notes payable (principal and interest)

     97,099,102         106,642,343         1,858,201         —           205,599,646   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 270,984,146    $ 126,751,378    $ 6,801,943    $ 54,829,123    $ 459,366,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

FOOTNOTE:

 

(1)  The amounts presented above represent accrued development costs as of December 31, 2014 and development costs, including start-up costs, not yet incurred of the aggregate budgeted development costs in accordance with the development agreements, and the expected timing of such costs.
(2)  For purposes of this table, management has assumed the mortgage and construction notes payable are repaid as of the initial maturity dates and are not extended beyond such dates as allowed pursuant to the loan agreements. Additionally, management has calculated estimated interest payments based on interest rates of our mortgage note payables as of December 31, 2014.

Related Party Arrangements

We have entered into agreements with our Advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition and advisory services, organization and offering costs, selling commissions, marketing support fees, asset and property management fees and reimbursement of operating costs. In addition, our chief executive officer, who is also chief executive officer and president of our Advisor, serves on the board of directors of Crescent Communities, LLC, an affiliate of our joint venture partner for four of our multifamily development projects. In connection with the development of such projects, each consolidated joint venture has agreed to pay Crescent or its affiliates development fees based on a percent of the development costs of the applicable projects. In January 2014, the Crescent Gateway Joint Venture purchased the land located in Altamonte Springs, Florida for approximately $4.5 million from Crescent. See Item 8, “Financial Statements and Supplementary Data”, Item 13, “Certain Relationships and Related Transactions, and Director Independence”, Note 9, “Related Party Arrangements” for a discussion of the various related party transactions, agreements and fees, and Note 14, “Subsequent Events”.

Critical Accounting Policies and Estimates

Below is a discussion of the accounting policies that management believes are critical to our operations. We consider these policies critical because they involve difficult management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Our most sensitive estimates involve the determination of whether an entity should be consolidated, and the capitalization of costs associated with our development properties.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts, the accounts of our wholly owned subsidiaries or subsidiaries for which we have a controlling interest, the accounts of variable interest entities in which we are the primary beneficiary, and the accounts of other subsidiaries over which we have control. All intercompany accounts and transactions have been eliminated in consolidation. The determination of whether we are the primary beneficiary is based on a combination of qualitative and quantitative factors which require management in some cases to estimate future cash flows or likely courses of action.

 

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Table of Contents

Real Estate

Buildings and improvements are depreciated on the straight-line method over their estimated useful lives, which generally are 39 and 15 years, respectively. Tenant improvements were depreciated on the straight-line method over the shorter of the useful life of the assets or the term of the lease.

Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve or extend the life of the asset, are capitalized.

Real Estate Under Development

We record acquisition and development costs of properties under development at cost, including acquisition fees and expenses incurred. The cost of real estate under development includes direct and indirect costs of development, including interest and miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. In addition, during active development, all operating expenses related to the project, including property expenses such as real estate taxes, are capitalized rather than expensed and incidental revenue is recorded as a reduction of capitalized project (i.e., construction) costs. Preleasing costs are expensed as incurred. Assets are placed into service once certificates of occupancy are issued.

Capitalized Interest

We capitalize interest and the amortization of loan costs as a cost of development using the weighted average interest rate of our total outstanding indebtedness and based on our weighted average expenditures for its development properties for the period. Capitalization of interest for a particular development project begins when expenses related to the project have been made, activities necessary to get the project ready for its intended use are in progress and when interest costs have been incurred. Capitalization of interest ceases when the project is substantially complete and ready for occupancy.

Impairment of Real Estate Assets and Real Estate Held for Sale

Real estate assets are reviewed on an ongoing basis to determine whether there are any indicators, including property operating performance and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired. To assess if a property value is potentially impaired, management compares the estimated current and projected undiscounted cash flows, including estimated net sales proceeds, of the property over its remaining useful life to the net carrying value of the property. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition, and other factors. In the event that the carrying value exceeds the undiscounted operating cash flows, we would recognize an impairment provision to adjust the carrying value of the asset to the estimated fair value of the property.

Income Taxes

We have elected and qualified as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations beginning with the year ended December 31, 2010. As a REIT, we are generally subject to federal corporate income taxes on undistributed taxable income.

As a REIT, we may be subject to certain state and local taxes on our income and property, and U.S. federal income and excise taxes on its undistributed income.

If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, then we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. It is not possible to state whether we would be entitled to this statutory relief.

Recent Accounting Pronouncements

See Item 8. “Financial Statements and Supplementary Data” for information about the impact of recent accounting pronouncements.

 

50


Table of Contents
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire and develop properties and to make loans and other permitted investments, if any. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The following is a schedule of our variable rate debt maturities for each of the next five years, and thereafter, assuming the terms of the loans are not extended (principal maturities only):

 

    2015     2016     2017     2018     2019     Thereafter     Total     Approximate
Fair Value
 

Variable rate debt

  $ 92,579,191      $ 79,703,647      $ 26,416,112      $ 2,976,880      $ 1,160,075      $ 51,725,695      $ 254,561,600      $ 256,144,316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average interest rate(1)

  2.75   2.84   2.47   2.6   2.49   2.49   2.69
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

In January 2015, the Long Point Joint Venture sold the Long Point Property and repaid $28.6 million in debt which was scheduled to mature in 2023. In addition, in February 2015, the Crosstown Joint Venture extended the maturity date of its debt from March 2015 to March 2016.

FOOTNOTE:

 

(1)  As of December 31, 2014, we were paying the interest rate floor on certain of our variable rate debts.

Management estimates that a hypothetical one-percentage point increase in LIBOR compared to the LIBOR rate as of December 31, 2014, would increase annual interest expense by approximately $2.3 million on our variable rate debt. This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and our actual results will likely vary.

 

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Table of Contents
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Certified Public Accounting Firm

     53   

Financial Statements

  

Consolidated Balance Sheets

     54   

Consolidated Statements of Operations

     55   

Consolidated Statements of Equity

     56   

Consolidated Statements of Cash Flows

     57   

Notes to Consolidated Financial Statements

     59   

 

52


Table of Contents

Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Stockholders of CNL Growth Properties, Inc. and Subsidiaries:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of CNL Growth Properties, Inc. (formerly Global Growth Trust, Inc.) and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Orlando, Florida

March 18, 2015

 

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Table of Contents

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     December 31,
2014
    December 31,
2013
 
ASSETS     

Real estate assets, net:

    

Operating real estate assets, net (including VIEs $222,732,008 and $83,276,981, respectively)

   $ 254,565,765      $ 84,563,063   

Construction in process, including land (including VIEs $134,484,720 and $98,722,670, respectively)

     141,949,638        103,828,508   
  

 

 

   

 

 

 

Total real estate assets, net

  396,515,403      188,391,571   

Real estate held for sale (including VIEs $27,020,559 and $26,911,910, respectively)

  27,020,559      41,488,051   

Cash and cash equivalents (including VIEs $6,689,103 and $3,192,616, respectively)

  47,691,457      35,827,614   

Restricted cash (including VIEs $2,268,472 and $2,155,352, respectively)

  2,466,585      2,155,352   

Loan costs, net (including VIEs $2,852,828 and $2,249,698, respectively)

  3,671,109      2,560,176   

Other assets (including VIEs $698,765 and $1,948,011, respectively)

  911,387      2,069,629   
  

 

 

   

 

 

 

Total Assets

$ 478,276,500    $ 272,492,393   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY

Liabilities:

Mortgage and construction notes payable (including VIEs $226,346,599 and $109,382,967, respectively)

$ 254,561,600    $ 117,360,210   

Accrued development costs (including VIEs $23,768,886 and $15,707,886, respectively)

  23,768,886      15,707,886   

Due to related parties

  1,510,550      1,380,341   

Accounts payable and other accrued expenses (including VIEs $2,047,929 and $954,511, respectively)

  2,542,519      1,359,453   

Other liabilities (including VIEs $1,903,520 and $1,732,951, respectively)

  1,982,012      2,306,392   
  

 

 

   

 

 

 

Total Liabilities

  284,365,567      138,114,282   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

Equity:

Stockholders’ equity:

Preferred stock, $0.01 par value per share, authorized and unissued 200,000,000 shares

  —        —     

Common stock, $0.01 par value per share, 1,120,000,000 shares authorized; 22,702,363 and 15,529,061 issued and 22,526,171 and 15,393,316 outstanding, respectively

  225,262      153,933   

Capital in excess of par value

  170,792,081      120,627,485   

Accumulated deficit

  (12,007,405   (9,818,401
  

 

 

   

 

 

 

Total Stockholders’ Equity

  159,009,938      110,963,017   

Noncontrolling interests

  34,900,995      23,415,094   
  

 

 

   

 

 

 

Total Equity

  193,910,933      134,378,111   
  

 

 

   

 

 

 

Total Liabilities and Equity

$ 478,276,500    $ 272,492,393   
  

 

 

   

 

 

 

The abbreviation VIEs above means Variable Interest Entities.

See accompanying notes to consolidated financial statements.

 

54


Table of Contents

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended December 31,  
     2014     2013     2012  

Revenues:

      

Rental income from operating leases

   $ 15,309,618      $ 3,542,226      $ 5,460   
  

 

 

   

 

 

   

 

 

 

Total revenues

  15,309,618      3,542,226      5,460   
  

 

 

   

 

 

   

 

 

 

Expenses:

Property operating expenses

  8,488,871      2,658,774      124,764   

General and administrative

  2,893,328      2,088,144      1,737,230   

Asset management fees, net of amounts capitalized

  1,070,864      322,955      4,222   

Property management fees

  763,681      275,707      28,210   

Acquisition fees and expenses, net of amounts capitalized

  76,046      47,103      75,682   

Depreciation

  5,946,416      2,039,968      —     
  

 

 

   

 

 

   

 

 

 

Total operating expenses

  19,239,206      7,432,651      1,970,108   
  

 

 

   

 

 

   

 

 

 

Operating loss

  (3,929,588   (3,890,425   (1,964,648
  

 

 

   

 

 

   

 

 

 

Other income (expense):

Fair value adjustments and other income (expense)

  55,165      (40,005   929   

Interest expense and loan cost amortization, net of amounts capitalized

  (1,545,485   (554,186   —     
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

  (1,490,320   (594,191   929   
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations

  (5,419,908   (4,484,616   (1,963,719

Income (loss) from discontinued operations

  2,378,499      586,384      (1,172,768
  

 

 

   

 

 

   

 

 

 

Net loss

  (3,041,409   (3,898,232   (3,136,487

Net (income) loss attributable to noncontrolling interests:

Continuing operations

  897,670      645,371      9,498   

Discontinued operations

  (45,265   (29,358   3,037   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to non-controlling interests

  852,405      616,013      12,535   
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

$ (2,189,004 $ (3,282,219 $ (3,123,952
  

 

 

   

 

 

   

 

 

 

Net loss per share of common stock (basic and diluted):

Continuing operations

$ (0.21 $ (0.32 $ (0.24

Discontinued operations

  0.11      0.05      (0.14
  

 

 

   

 

 

   

 

 

 

Net loss per share of common stock (basic and diluted)

$ (0.10 $ (0.27 $ (0.38
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

  21,361,725      12,249,900      8,262,638   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

 

    Common Stock     Capital in           Total              
  Number of
Shares
    Par Value     Excess of Par
Value
    Accumulated
Deficit
    Stockholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance at December 31, 2011

    4,314,917      $ 43,149      $ 34,457,642      $ (3,412,230   $ 31,088,561      $ 357,300      $ 31,445,861   

Subscriptions received for common stock through public offering

    2,734,656        27,346        27,271,161        —          27,298,507        —          27,298,507   

Redemptions of common stock

    (65,046     (650     (611,557     —          (612,207     —          (612,207

Stock issuance and offering costs

    —          —          (4,053,929     —          (4,053,929     —          (4,053,929

Stock distributions

    472,462        4,725        (4,725     —          —          —          —     

Contributions from noncontrolling interests

    —          —          —          —          —          9,525,445        9,525,445   

Distributions to noncontrolling interests

    —          —          —          —          —          (20,550     (20,550

Net loss

    —          —          —          (3,123,952     (3,123,952     (12,535     (3,136,487
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

  7,456,989      74,570      57,058,592      (6,536,182   50,596,980      9,849,660      60,446,640   

Subscriptions received for common stock through public offering

  7,190,074      71,900      75,323,160      —        75,395,060      —        75,395,060   

Redemptions of common stock

  (70,699   (707   (686,901   —        (687,608   —        (687,608

Stock issuance and offering costs

  —        —        (11,059,196   —        (11,059,196   —        (11,059,196

Stock distributions

  816,952      8,170      (8,170   —        —        —        —     

Contributions from noncontrolling interests

  —        —        —        —        —        14,644,810      14,644,810   

Distributions to noncontrolling interests

  —        —        —        —        —        (463,363   (463,363

Net loss

  —        —        —        (3,282,219   (3,282,219   (616,013   (3,898,232
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  15,393,316      153,933      120,627,485      (9,818,401   110,963,017      23,415,094      134,378,111   

Subscriptions received for common stock through public offering

  5,985,914      59,859      65,336,467      —        65,396,326      —        65,396,326   

Redemptions of common stock

  (40,447   (404   (399,781   —        (400,185   —        (400,185

Stock issuance and offering costs

  —        —        (9,490,715   —        (9,490,715   —        (9,490,715

Stock distributions

  1,187,388      11,874      (11,874   —        —        —        —     

Purchase of noncontrolling interest

  —        —        (5,269,501   —        (5,269,501   (256,324   (5,525,825

Contributions from non-controlling interests

  —        —        —        —        —        14,744,367      14,744,367   

Return of capital to non-controlling interest

  —        —        —        —        —        (1,488,162   (1,488,162

Distributions to noncontrolling interests

  —        —        —        —        —        (661,575   (661,575

Net loss

  —        —        —        (2,189,004   (2,189,004   (852,405   (3,041,409
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  22,526,171    $ 225,262    $ 170,792,081    $ (12,007,405 $ 159,009,938    $ 34,900,995    $ 193,910,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
     2014     2013     2012  

Operating Activities:

      

Net loss, including amounts attributable to noncontrolling interests

   $ (3,041,409   $ (3,898,232   $ (3,136,487

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation and amortization

     6,811,281        3,528,879        2,019,223   

Amortization of above- and below-market leases

     —          17,983        135,197   

Amortization of loan costs

     212,182        142,282        —     

Amortization of lease costs

     —          23,474        21,038   

Loss on extinguishment of debt

     92,361        69,276        —     

Gain on sale of real estate held for sale

     (1,219,693     —          —     

Unrealized loss (gain) from change in fair value of interest rate caps

     243,045        (19,827     —     

Straight line rent adjustments

     (374,359     (61,161     (342,275

Changes in operating assets and liabilities:

      

Other assets

     120,300        (349,311     (96,599

Due to related parties

     226,736        216,155        357,796   

Accounts payable and other accrued expenses

     1,167,872        794,940        125,508   

Other liabilities

     42,825        207,625        46,709   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  4,281,141      672,083      (869,890
  

 

 

   

 

 

   

 

 

 

Investing Activities:

Development property costs, including land and capital expenditures

  (203,727,989   (123,852,264   (69,767,652

Collection of advance to municipality utility district

  1,313,975      —        —     

Advance to municipality utility district

  —        (1,313,975   —     

Capital expenditures on real estate held for sale

  (181,951   (381,125   (656,220

Payment of lease costs on real estate held for sale

  —        (315,488   (281,924

Proceeds from sale of property

  14,986,333      —        —     

Changes in restricted cash

  (311,233   (2,155,352   —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (187,920,865   (128,018,204   (70,705,796
  

 

 

   

 

 

   

 

 

 

Financing Activities:

Subscriptions received for common stock through public offering

  65,396,326      75,395,060      27,298,507   

Stock issuance and offering costs

  (9,587,242   (11,074,820   (4,046,141

Redemptions of common stock

  (767,390   (828,116   (104,494

Proceeds from mortgage and construction notes payable

  173,864,602      94,124,637      37,300,666   

Payments of mortgage and construction notes payable

  (36,663,212   (21,244,077   —     

Payment of loan costs

  (2,478,530   (2,029,976   (1,221,479

Purchase of interest rate caps

  (126,780   (145,980   —     

Purchase of non-controlling interest

  (5,525,825   —        —     

Advance from affiliate of noncontrolling interest

  461,000      1,500,000      —     

Repayment of advance from affiliate of non-controlling interest

  (1,164,012   —        —     

Return of capital to non-controlling interest

  (1,488,162   —        —     

Contributions from noncontrolling interests

  14,244,367      12,944,063      9,332,700   

Distributions to noncontrolling interests

  (661,575   (463,363   (20,550
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

  195,503,567      148,177,428      68,539,209   
  

 

 

   

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

  11,863,843      20,831,307      (3,036,477

Cash and Cash Equivalents at Beginning of Year

  35,827,614      14,996,307      18,032,784   
  

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents at End of Year

$ 47,691,457    $ 35,827,614    $ 14,996,307   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

Cash paid for interest, net of amounts capitalized of approximately $3.5 million, $1.2 million and $0.8 million, respectively

$ 1,298,571    $ 1,039,071    $ —     
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

     Year Ended December 31,  
     2014      2013      2012  

Supplemental Disclosure of Non-Cash Investing and Financing Transactions:

        

Amounts incurred but not paid:

        

Development costs

   $ 23,768,886       $ 15,805,117       $ 7,579,208   
  

 

 

    

 

 

    

 

 

 

Loan costs

$ 1,193    $ 1,094    $ 6,788   
  

 

 

    

 

 

    

 

 

 

Stock issuance and offering costs

$ —      $ 96,527    $ 112,151   
  

 

 

    

 

 

    

 

 

 

Redemptions of common stock

$ —      $ 367,205    $ 507,713   
  

 

 

    

 

 

    

 

 

 

Loan costs amortization capitalized on development properties

$ 1,063,153    $ 507,601    $ 285,982   
  

 

 

    

 

 

    

 

 

 

Noncontrolling interests non-cash contributions

$ 500,000    $ 1,700,747    $ 192,745   
  

 

 

    

 

 

    

 

 

 

Noncontrolling interests construction advance

$ 703,012    $ —      $ —     
  

 

 

    

 

 

    

 

 

 

Stock distributions declared (at par)

$ 11,874    $ 8,170    $ 4,725   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

1. Business and Organization

CNL Growth Properties, Inc., formerly known as Global Growth Trust, Inc., was organized in Maryland on December 12, 2008. The term “Company” includes, unless the context otherwise requires, CNL Growth Properties, Inc., Global Growth, LP, a Delaware limited partnership (the “Operating Partnership”), Global Growth GP, LLC and other subsidiaries (including variable interest entities) of CNL Growth Properties, Inc. The Company operates, and has elected to be taxed, as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2010.

The Company is externally advised by CNL Global Growth Advisors, LLC (the “Advisor”) and its property manager is CNL Global Growth Managers, LLC (the “Property Manager”), each of which is a Delaware limited liability company and a wholly owned affiliate of CNL Financial Group, LLC, the Company’s sponsor. CNL Financial Group, LLC is an affiliate of CNL Financial Group, Inc. (“CNL”). The Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company pursuant to an advisory agreement among the Company, the Operating Partnership and the Advisor.

Substantially all of the Company’s acquisition, operating, administrative and certain property management services, are provided by sub-advisors to the Advisor and sub-property managers to the Property Manager. In addition, certain sub-property managers have been engaged by the Company to provide certain property management services.

On October 20, 2009, we commenced our initial public offering (the “Initial Offering”) which closed on April 7, 2013. On August 19, 2013, we commenced a follow-on offering (the “Follow-On Offering”) which terminated on April 11, 2014. Through the close of the Follow-On Offering, we received aggregate offering proceeds of approximately $208.3 million from our Initial and Follow-On Offerings.

As of December 31, 2014, the Company owned interests in sixteen Class A multifamily properties, seven of which were operational and as to which development was complete and nine of which were under development, including three of which were partially operational. As of December 31, 2014, one of the Company’s seven operational properties was held for sale due to favorable market conditions in the multifamily development. The Company had a total of 2,323 (excluding the property held for sale) completed apartment units as of December 31, 2014 and expects to have approximately 4,400 units once construction is completed on its properties under development.

Fifteen of the Company’s multifamily properties are owned through a joint venture in which it has co-invested with an affiliate of a national or regional multifamily developer (including the property held for sale). The Company also wholly owns one property. As of December 31, 2014, the Company also owned a multifamily family development that was held for sale. As of December 31, 2013, the Company also owned a multi-tenant, three building office complex that was held for sale and subsequently sold in March 2014.

 

2. Summary of Significant Accounting Policies

Consolidation and Variable Interest Entities – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries over which it has control. All intercompany accounts have been eliminated in consolidation. In accordance with the guidance for the consolidation of a variable interest entity (“VIE”), the Company analyzes its variable interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which it has a variable interest is a VIE. The Company’s analysis includes both quantitative and qualitative reviews. The Company bases its quantitative analysis on the forecasted cash flows of the entity, and its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. The Company also uses its quantitative and qualitative analyses to determine if it is the primary beneficiary of the VIE, and if such determination is made, it includes the accounts of the VIE in its consolidated financial statements.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Real Estate Under Development – The Company records acquisition and development costs of properties under development at cost, including acquisition fees and expenses incurred. The cost of real estate under development includes direct and indirect costs of development, including interest and miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. In addition, during active development, all operating expenses related to the project, including property expenses such as real estate taxes, are capitalized rather than expensed and incidental revenue is recorded as a reduction of capitalized project (i.e., construction) costs. Preleasing costs are expensed as incurred. Assets are placed into service once certificates of occupancy are issued.

Capitalized Interest – The Company capitalizes interest and the amortization of loan costs as a cost of development using the weighted average interest rate of the Company’s total outstanding indebtedness and based on its weighted average expenditures for its development properties for the period. Capitalization of interest for a particular development project begins when expenses related to the project have been made, activities necessary to get the project ready for its intended use are in progress and when interest costs have been incurred. Capitalization of interest ceases when the project is substantially complete and ready for occupancy. During the years ended December 31, 2014, 2013 and 2012, the Company incurred interest expense and loan cost amortization of approximately $5.5 million, $1.7 million and $0.2 million, respectively, of which $4.0 million, $1.1 million and $0.2 million, respectively, was capitalized according to this policy.

Real Estate – Upon the acquisition of its property in 2011 (“Gwinnett Center”), the Company’s only operating property, the Company estimated the fair value of acquired tangible assets (consisting of land, building and improvements, and tenant improvements) and identifiable intangible assets (consisting of above- and below-market leases and in-place leases), and allocated the purchase price to the assets acquired and liabilities assumed. In estimating the fair value of the tangible and intangible assets acquired, the Company considered information obtained about this property as a result of its due diligence and utilized various valuation methods, such as estimated cash flow projections using appropriate discount and capitalization rates, estimates of replacement costs net of depreciation and available market information.

The fair value of the tangible assets of this acquired leased property was determined by estimating the value of the property as if it were vacant, and the “as-if-vacant” value was then allocated to land, building and improvements based on the determination of the fair values of the assets.

Above- and below-market lease intangibles were recorded based on the present value of the difference between the contractual rents to be paid pursuant to the lease and management’s estimate of the fair market lease rates for each in-place lease. The purchase price was further allocated to in-place lease intangibles based on management’s evaluation of the specific characteristics of the acquired lease. Factors considered included estimates of carrying costs during hypothetical expected lease-up periods, including estimates of lost rental income during the expected lease-up periods, and costs to execute similar leases such as leasing commissions, legal and other related expenses.

Most of the Company’s leases at its Gwinnett Center involved some form of improvements to leased space. When the Company was required to provide improvements under the terms of a lease, the Company determined whether the improvements constituted landlord assets or tenant assets. If the improvements were landlord assets, the Company capitalized the cost of the improvements and recognized depreciation expense associated with such improvements over the term of the lease. If the improvements were tenant assets, the Company deferred the cost of improvements funded by the Company as a lease incentive asset and amortized it over the lease term as a reduction of rental income.

In determining whether improvements constituted landlord or tenant assets, the Company considered numerous factors that required subjective or complex judgments, including: whether the improvements were unique to the tenant or reusable by other tenants; whether the tenant was permitted to alter or remove the improvements without the Company’s consent or without compensating the Company for any lost fair value; whether the ownership of the improvements remained with the Company or remained with the tenant at the end of the lease term; and whether the economic substance of the lease terms was properly reflected.

The Company sold the Gwinnett Center during 2014 as described further in Note 6.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Buildings and improvements are depreciated on the straight-line method over their estimated useful lives, which generally are 39 and 15 years, respectively. Tenant improvements were depreciated on the straight-line method over the shorter of the useful life of the assets or the term of the lease.

Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations and replacements, which improve or extend the life of the asset, are capitalized.

Intangible Assets – Amortization of intangible assets related to Gwinnett Center was computed using the straight-line method of accounting over the respective lease term or estimated useful life. Above-market or below-market lease intangibles were amortized to rental income over the estimated remaining term of the respective leases including consideration of any renewal options on below-market leases. In-place lease intangibles were amortized over the remaining terms of the respective leases. If a lease were to be terminated prior to its scheduled expiration, all unamortized costs relating to that lease were expensed. Intangible assets were evaluated for impairment on an annual basis or upon a triggering event.

Deferred Leasing Costs – The Company deferred costs related to the Gwinnett Center that it incurred to obtain new tenant leases or extend existing tenant leases and classified these costs as intangible assets, net of accumulated amortization. The Company amortized these costs evenly over the lease term. If a lease was terminated early, the Company expensed any applicable unamortized deferred leasing costs.

Real Estate Held For Sale – The Company presents the assets of any properties which have been sold, or otherwise qualify as held for sale, separately in the consolidated balance sheets. In addition, the results of operations for those assets that meet the definition of discontinued operations are presented as such in the Company’s consolidated statements of operations. Held for sale and discontinued operations classifications are provided in both the current and prior periods presented. Real estate assets held for sale are measured at the lower of the carrying amount or the fair value less costs to sell. Subsequent to classification of an asset as held for sale, no further depreciation, amortization or straight-line rent adjustments relating to the asset are recorded. For those assets qualifying for classification as discontinued operations, the specific components of net income (loss) presented as discontinued operations include operating income (loss) and interest expense directly attributable to the property held for sale, net. In addition, the net gain or loss (including any impairment loss) on the eventual disposal of assets held for sale will be presented as discontinued operations when recognized. The Company combines the operating, investing and financing portions of cash flows attributable to discontinued operations with the respective cash flows from continuing operations in the accompanying consolidated statements of cash flows.

Derivative Instruments – The Company currently holds four interest rate caps. As required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 815, “Derivatives and Hedging” (“ASC 815”), the Company records all derivatives on the balance sheet at fair value. The Company does not use derivatives for speculative purposes but instead uses derivatives to manage its exposure to increases in interest rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in fair value adjustments and other income (expense) in the accompanying consolidated statements of operations. For all interest rate caps held during the years ended December 31, 2014, 2013 and 2012, management determined not to elect hedge accounting for financial reporting purposes.

Other Liabilities – In connection with obtaining the construction loan for Remington Fairfield Joint Venture, an affiliate of the Company’s co-venture partner funded $1.5 million in cash required by the lender to serve as additional collateral for the loan. The advance, which is held in a restricted account by Remington Fairfield Joint Venture, for use by the lender, may be drawn upon for the purpose of paying construction and development costs and to pay lease-up operating deficits expected to be incurred. Upon completion of the Remington Fairfield Property and achievement of a 1.20x debt service coverage ratio, any funds remaining in the restricted cash account, plus accrued interest earned on such account, will be payable to the affiliate of the Company’s co-venture partner.

Advance from Noncontrolling Interest – In March 2014, the Company acquired an ownership interest in a consolidated joint venture that acquired a parcel of land on which it plans to develop a multifamily community located in Hanover, Maryland (the “Oxford Square Property”). During 2014, the Company’s co-venture partner temporarily advanced approximately $1.2 million of construction and development costs relating to the Oxford Square Property pending the joint venture obtaining a construction loan for the development of the property. The advance was repaid to the Company’s co-venture partner upon the closing of the construction loan in 2014.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Other Comprehensive Income (Loss) – The Company has no items of other comprehensive income (loss) in the periods presented and therefore, has not included other comprehensive income (loss) or total comprehensive income (loss) in the accompanying consolidated financial statements.

Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. For example, significant estimates and assumptions are made in connection with the analysis of real estate impairments. Actual results could differ from those estimates.

Impairment of Real Estate Assets – Real estate assets are reviewed on an ongoing basis to determine whether there are any indicators, including property operating performance and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) may be impaired. To assess if a property value is potentially impaired, management compares the estimated current and projected undiscounted cash flows, including estimated net sales proceeds, of the property over its remaining useful life to the net carrying value of the property. Such cash flow projections consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition, and other factors. In the event that the carrying value exceeds the undiscounted operating cash flows, the Company would recognize an impairment provision to adjust the carrying value of the asset to the estimated fair value of the property.

Cash and Cash Equivalents – Cash and cash equivalents consist of cash on hand and highly liquid investments purchased with original maturities of three months or less.

As of December 31, 2014, the Company’s cash deposits exceeded federally insured amounts. However, the Company continues to monitor the third-party depository institutions that hold the Company’s cash, primarily with the goal of safety of principal. The Company attempts to limit cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on cash.

Restricted Cash – Restricted cash is generally comprised of resident security deposits for the Company’s operational multifamily properties located in certain states, and certain escrow deposits for real estate taxes and property insurance. In addition, the Company had $1.4 million and $1.5 million of restricted cash at December 31, 2014 and 2013, respectively, which serves as additional collateral for the construction loan for the Remington Fairfield Joint Venture.

Rental Income from Operating Leases – Rental income related to leases is recognized on an accrual basis when due from residents or commercial tenants, on a monthly basis. Rental revenues for leases with uneven payments are recognized on a straight-line basis over the term of the lease.

Acquisition Fees and Expenses – Acquisition fees and expenses, including investment services fees and expenses, and closing costs in connection with purchase of the property, associated with transactions deemed to be business combinations, are expensed as incurred. Acquisition fees and expenses associated with making loans and with transactions deemed to be an asset purchase are capitalized. The Company incurred approximately $3.5 million, $3.9 million and $3.3 million in acquisition fees and expenses during the year ended December 31, 2014, 2013 and 2012, respectively, including approximately $3.4 million, $3.9 million and $3.2 million, respectively, which have been capitalized as a part of the costs of the properties under development.

Loan Costs – Financing costs paid in connection with obtaining debt are deferred and amortized over the estimated life of the debt using the effective interest rate method. As of December 31, 2014 and 2013, accumulated amortization of loan costs was approximately $2.4 million and $1.1 million, respectively.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

Income Taxes – The Company has elected and qualified as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations beginning with the year ended December 31, 2010. As a REIT, the Company generally is subject to federal corporate income taxes on undistributed taxable income.

As a REIT, the Company may be subject to certain state and local taxes on its income and property, and U.S. federal income and excise taxes on its undistributed income.

As a REIT and to the extent it distributes all its taxable income, the Company will not have any federal income tax liability. As of December 31, 2014, the Company had net operating loss carryforwards of approximately $7.3 million which will begin to expire in 2030. The Company analyzed its tax positions and determined that it has not taken any uncertain tax positions. The tax years 2009 through 2014 remain subject to examination by taxing authorities.

Net Loss per Share – Net loss per share was calculated based upon the weighted average number of shares of common stock outstanding. For purposes of determining the weighted average number of shares of common stock outstanding, stock distributions are treated as if they were issued and outstanding as of the beginning of each period presented. Therefore, the weighted average number of shares outstanding for the quarters ended March 31, 2014 and June 30, 2014 and the years ended December 31, 2013 and 2012 has been revised to include stock distributions declared and issued through September 30, 2014, as if they were outstanding as of the beginning of each period presented. The Company declared no stock distributions after October 1, 2014.

Segment Information – Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company has determined that it operates in one business segment, real estate ownership. Accordingly, the Company does not report more than one segment.

Redemptions – Under the Company’s stock redemption plan, a stockholder’s shares are deemed to have been redeemed as of the date that the Company accepts the stockholder’s request for redemption. From and after such date, the stockholder by virtue of such redemption is no longer entitled to any rights of a stockholder in the Company, and the Company records the related obligation to make payment for the shares, which is required to occur within 30 days of the end of the month. Shares redeemed are retired and not available for reissue. The Company suspended its stock redemption plan effective September 10, 2014.

Fair Value Measurements – GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:

 

    Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

 

    Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

 

    Level 3 – Unobservable inputs for the asset or liability, which are typically based on the Company’s own assumptions, as there is little, if any, related market activity.

 

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CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

2. Summary of Significant Accounting Policies (continued)

 

When market data inputs are unobservable, the Company utilizes inputs that it believes reflect the Company’s best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Reclassifications — Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported total assets and total liabilities, net loss or stockholders’ equity. The results of operations of the real estate properties that are classified as held for sale, along with properties sold during the period, are reflected in discontinued operations for all periods presented.

Recent Accounting Pronouncements – In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update changes the criteria for reporting discontinued operations where only disposals representing a strategic shift, such as a major line of business or geographical area, should be presented as a discontinued operation. This ASU is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 with early adoption permitted. The Company will adopt ASU No. 2014-08 commencing January 1, 2015. This ASU will impact the determination of which future property disposals qualify as discontinued operations, as well as, require additional disclosures about discontinued operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” as a new ASC topic (Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard further provides guidance for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, lease contracts). This ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. ASU 2014-09 can be adopted using one of two retrospective application methods: i) retrospectively to each prior reporting period presented or ii) as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating ASU 2014-09; however, this amendment could potentially have a significant effect on the Company’s consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis”, which requires amendments to both the variable interest entity and voting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify the identification of variable interests (fees paid to a decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using either a modified retrospective or full retrospective approach. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

3. Acquisitions

During each of the years ended December 31, 2014 and 2013, the Company acquired an ownership interest in five consolidated joint ventures, each of which was developing one of the following properties:

 

Property Name and Location

   Date
Acquired
  

Operator/Developer

   Ownership
Interest (1)
    Land Contract
Purchase Price
(in millions)
 

2014 Acquisitions

          

Crescent Gateway Altamonte Springs, FL

(the “Crescent Gateway Property”)

   01/31/14   

Crescent Communities,

LLC (2)

     60   $ 4.5   

Aura at The Rim San Antonio, TX

(the “Aura at The Rim Property”)

   02/18/14   

Trinsic Residential

Group LP (2)

     54     5.8   

Oxford Square Hanover, MD

(the “Oxford Square Property”)

   03/07/14   

Woodfield Investments,

LLC (2)

     95 %(3)      9.9   

Haywood Place Greenville, SC

(the “Haywood Place Property”)

   10/15/14   

Daniel Haywood,

LLC (2)

     90     4.3   

Aura on Broadway Tempe, AZ

(the “Aura on Broadway Property”)

   12/12/14   

Trinsic Residential

Group, LP (2)

     90     6.0   
          

 

 

 

Total

$ 30.5   
          

 

 

 

Property Name and Location

   Date
Acquired
  

Operator/Developer

   Ownership
Interest (1)
    Land Contract
Purchase Price
(in millions)
 

2013 Acquisitions

          

REALM Patterson Place Durham, NC

   06/27/13   

The Bainbridge

Companies, LLC (2)

     90   $ 4.5   

Crescent Cool Springs Nashville, TN

   06/28/13   

Crescent Communities,

LLC (2)

     60     5.0   

Remington Fairfield Cypress, TX

   09/24/13    Allen Harrison Development (2)      80     3.2   

City Walk Roswell, GA

   11/15/13    Lennar Corporation (2)      75     8.0   

Premier at Spring Town Center Spring, TX

   12/20/13   

Mill Creek Residential

Trust, LLC (2)

     95     5.1   
          

 

 

 

Total

$ 25.8   
          

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

3. Acquisitions (continued)

 

FOOTNOTES:

 

(1)  The properties were acquired through joint ventures with third parties. In each of the joint venture arrangements, the Company is the managing member and the joint venture partner or its affiliates manage the development, construction and certain day-to-day operations of the property subject to the Company’s oversight. Generally, distributions of operating cash flow will be distributed pro rata based on each member’s ownership interest. In addition, generally, proceeds from a capital event, such as a sale of the property or refinancing of the debt, will be distributed pro rata until the members of the joint venture receive the return of their invested capital and a specified minimum return thereon, and thereafter, the respective co-venture partner will receive a disproportionately higher share of any remaining proceeds at varying levels based on the Company having received certain minimum threshold returns.
(2)  This property is owned through a joint venture in which this entity or one of its affiliates (i) is the Company’s joint venture partner, (ii) serves as developer, and in some cases, the general contractor of the project, and (iii) provides any lender required guarantees on the loan. In addition, for certain properties an affiliate of this entity will serve as property manager of the property once operations commence.
(3)  As of the date of acquisition, the Company’s initial ownership interest in the Oxford Square Property was 60%. However, in accordance with the terms of the joint venture agreement, the joint venture obtained a construction loan in June 2014 and the Company’s ownership interest in the joint venture increased to 95% with an additional capital contribution by the Company and a partial return of capital to the Company’s joint venture partner.

 

4. Variable Interest Entities

The Company has entered into sixteen separate joint venture arrangements in connection with the development and ownership of its multifamily properties (including the property held for sale). In connection therewith, the Company determined that each of the joint ventures in which it has invested is a VIE because it believes there is insufficient equity at risk due to the development nature of each venture. As a result of rights held under each of the respective agreements, the Company has determined that it is the primary beneficiary of these VIEs and holds a controlling financial interest in the ventures due to the Company’s authority to direct the activities that most significantly impact the economic performance of the entities, as well as its obligation to absorb the losses and its right to receive benefits from the ventures that could potentially be significant to the entity.

In April 2014, the Company’s consolidated subsidiary that owns the Whitehall Property in Charlotte, North Carolina (the “Whitehall Joint Venture”) refinanced its original construction loan. In connection therewith, the Company received a return of a portion of its equity investment in the Whitehall Joint Venture, of which it used approximately $5.5 million to purchase its joint venture partner’s 5% interest in the Whitehall Joint Venture. Effective April 2014, the Company owned a 100% interest in Whitehall Joint Venture. Since the Company controlled the Whitehall Joint Venture prior to the purchase of its joint venture partner’s interest, there was no change in control of the Whitehall Joint Venture and the purchase, including related transaction costs, has been accounted for as a reclassification of equity. The Company’s acquisition of the noncontrolling interest was deemed a reconsideration event and the Company determined that this now wholly-owned entity was no longer a variable interest entity. As a result, as of December 31, 2014, the transactions and accounts for the remaining fifteen joint ventures determined to be VIEs, are included in the accompanying consolidated financial statements. The creditors of the VIEs do not have general recourse to the Company.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

5. Real Estate Assets

As of December 31, 2014 and 2013, real estate assets consisted of the following:

 

     December 31,
2014
     December 31,
2013
 

Operating real estate assets:

     

Land and land improvements

   $ 55,989,015       $ 18,457,691   

Buildings and improvements

     188,618,129         60,326,697   

Furniture, fixtures and equipment

     17,944,936         7,818,574   

Less: accumulated depreciation

     (7,986,315      (2,039,899
  

 

 

    

 

 

 

Operating real estate assets, net

  254,565,765      84,563,063   

Construction in process, including land

  141,949,638      103,828,508   
  

 

 

    

 

 

 

Total real estate, net

$ 396,515,403    $ 188,391,571   
  

 

 

    

 

 

 

For the years ended December 31, 2014 and 2013, depreciation expense on the Company’s real estate assets was approximately $5.9 million and $2.0 million, respectively. There was no depreciation expense incurred in 2012 from continuing operations.

 

6. Real Estate Held for Sale

As of December 31, 2014 and 2013, real estate held for sale consisted of the following:

 

     December 31,
2014
     December 31,
2013
 

Land and land improvements

   $ 6,263,691       $ 9,222,352   

Buildings and improvements

     20,890,469         28,909,047   

Tenant improvements

     —           841,599   

Furniture, fixtures and equipment

     2,332,533         2,622,353   

Less: accumulated depreciation

     (2,468,569      (2,140,760
  

 

 

    

 

 

 

Operating real estate held for sale

  27,018,124      39,454,591   

Lease intangibles, net

  —        1,690,231   

Deferred rent

  2,435      379,441   

Other liabilities

  —        (36,212
  

 

 

    

 

 

 

Total real estate held for sale

$ 27,020,559    $ 41,488,051   
  

 

 

    

 

 

 

In 2011, the Company acquired the Long Point Property, a Class A multifamily property that completed construction in the fourth quarter of 2012. During 2014, due to favorable market conditions in multifamily development, the Company decided to pursue a potential sale of the Long Point Property and classified the Long Point Property as held for sale. As a result, the financial statements reflect the reclassifications of rental income, interest expense and other categories relating to the Long Point Property from income (loss) from continuing operations to income(loss) from discontinued operations for all periods presented. The Long Point Property sold in January 2015 as described in Note 14, “Subsequent Events.”

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

6. Real Estate Held for Sale (continued)

 

In 2011, the Company acquired the Gwinnett Center, a three building office complex that was a lender owned, or “REO,” property with the investment objective of increasing net operating income through the lease-up of existing vacancies and repositioning of the property. During 2013, due to continuing trends and favorable market conditions in multifamily development and the Company’s increased focus on multifamily development, the Company decided to pursue a potential sale of the Gwinnett Center. As a result, the financial statements reflect the reclassifications of rental income, interest expense and other categories relating to the Gwinnett Center from income (loss) from continuing operations to income (loss) from discontinued operations for all periods presented. In March 2014, the Company sold the Gwinnett Center and received net sales proceeds of approximately $15.0 million, resulting in a gain of approximately $1.2 million for financial reporting purposes, which was included in income (loss) from discontinued operations for the year ended December 31, 2014 in the accompanying consolidated statements of operations.

The following is a summary of income (loss) from discontinued operations for the years ended December 31:

 

     2014      2013      2012  

Revenues

   $ 5,297,476       $ 6,546,821       $ 3,317,373   

Expenses

     (2,787,177      (3,760,722      (2,470,918

Depreciation and amortization

     (864,865      (1,488,912      (2,019,223
  

 

 

    

 

 

    

 

 

 

Operating income (loss)

  1,645,434      1,297,187      (1,172,768

Fair value adjustments and other expense

  (137,120   —        —     

Interest expense, net of amounts capitalized

  (349,508   (710,803   —     

Gain on sale of property

  1,219,693      —        —     
  

 

 

    

 

 

    

 

 

 

Income (loss) from discontinued operations

$ 2,378,499    $ 586,384    $ (1,172,768
  

 

 

    

 

 

    

 

 

 

 

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DECEMBER 31, 2014

 

7. Indebtedness

The following table provides details of the Company’s indebtedness as of December 31, 2014 and 2013:

 

     Outstanding
Principal
Balance
(in millions)
               Maturity    Total Loan
Capacity
Amount
    Net Book
Value of
Collateral
as of
December 31,
2014
 

Property and Related Loan

   2014      2013     

Interest Rate

  

Payment Terms

  

Date

   (in millions)     (in millions)  

Class A Multifamily:

                   

Operating:

                   

Whitehall Property Mortgage Loan (1)

   $ 28.2       $ —        

LIBOR plus 2.31%, adjusted

monthly(2)(4)

  

Monthly interest only payments through May 2016, then principal and interest monthly installments calculated based on a 30-year

amortization.

   5/1/21    $ 28.2      $ 27.0   

Whitehall Property Mortgage Construction Loan (1)

     —           22.3       (1)    (1)    (1)         (1)      —     

Crescent Crosstown Property Mortgage Construction Loan (3) (4)

     26.5         24.5      

LIBOR plus

2.5%, adjusted

monthly(2)

  

Monthly interest only payments through the initial term. If extended, then P&I monthly installments calculated based on a 30-year

amortization(2)

  

3/27/15 (plus

two additional

12-month

extensions) (2)

     26.7        34.1   

Aura Castle Hills Property Mortgage Construction Loan

     23.8         17.3      

Lender’s prime

rate plus 0.1%,

or LIBOR plus

2.6%, adjusted

monthly(2)

  

Monthly interest only payments through the initial term. If extended, then P&I monthly installments calculated based on a 30-year

amortization

  

11/30/15 (plus

two additional

12-month

extensions)

     24.4        33.2   

Aura Grand Property Mortgage Construction Loan

     21.0         11.7      

Lender’s prime

rate plus 0.5%,

or LIBOR plus

2.75%, adjusted

monthly(2)

  

Monthly interest only payments through the initial term. If extended, then P&I monthly installments calculated based on a 30-year

amortization

  

12/20/15 (plus

two additional

12-month

extensions)

     21.5        30.5   

REALM Patterson Place Deed of Trust Construction Loan

     24.2         —        

LIBOR plus

2.0%, adjusted

monthly, with a

minimum interest rate of

3.25% (2) (4)

   Monthly interest only payments throughout the term. Principal due on maturity, including extension periods.   

6/16/16

3 year initial term (plus two

additional

12-month extensions)

     28.1        38.0   

Crescent Cool Springs Deed of Trust Construction Loan(5)

     25.6         0.7       LIBOR plus 2.5%, adjusted monthly(2)    Monthly interest only payments throughout the initial term. If extended, then P&I monthly installments calculated based on a 30-year amortization and an assumed interest rate of 6.5% per annum   

6/28/16 (plus

two additional

12-month

extensions)

     28.2        40.6   

 

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DECEMBER 31, 2014

 

7. Indebtedness (continued)

 

     Outstanding
Principal
Balance
(in millions)
               Maturity    Total Loan
Capacity
Amount
     Net Book
Value of
Collateral
as of
December 31,
2014
 

Property and Related Loan

   2014      2013     

Interest Rate

  

Payment Terms

  

Date

   (in millions)      (in millions)  

Under Development:

                    

Crescent Alexander Village Property Mortgage Construction Loan

     20.8         2.7      

LIBOR plus

2.5%, adjusted

monthly(2)

  

Monthly interest only payments through the initial term.

If extended, then P&I monthly installments calculated based on a 30-year amortization

  

11/27/15 (plus

two additional

12-month extensions)

     25.0         32.6   

Remington Fairfield Mortgage Construction Loan

     18.0         1.7      

LIBOR plus

2.65%, adjusted

monthly(2)

   Monthly interest only payments throughout the initial term. If extended, then P&I monthly installments calculated based on a 30-year amortization   

9/24/16 (plus

two additional

12-month

extensions)

     21.7         30.4   

City Walk Mortgage Construction Loan

     11.0         —        

LIBOR plus

2.20%, adjusted

monthly(2)

  

Monthly interest only payments throughout the initial term.

If extended, then P&I monthly installments calculated based on a 30-year amortization

  

11/15/16 (plus

two additional

12-month

extensions)

     32.5         29.1   

Premier at Spring Town Center Mortgage Construction Loan

     18.5         —        

LIBOR plus

2.25%, adjusted

monthly(2) (4)

  

Monthly interest only payments throughout the initial term.

If extended, then P&I monthly installments calculated based on a 30-year amortization

  

6/20/17 (plus

one additional

18-month

extension)

     32.1         36.5   

Crescent Gateway Property Construction Loan

     5.0         —        

LIBOR plus

2.40%, adjusted

monthly(2)

  

Monthly interest only payments throughout the initial term.

If extended, then monthly interest payments, plus principal payments of $31,000.

  

7/31/17 (plus

additional

18-month

extension)

     28.5         17.7   

Aura at The Rim Property Construction Loan

     1.9         —        

LIBOR plus

2.25%, adjusted

monthly(2)

  

Monthly interest only payments through the initial term.

If extended, then monthly and principal payments of $29,200.

  

4/17/17 (plus

an additional

2-year extension)

     27.7         15.3   

Oxford Square Property Construction Loan

     1.8         —        

LIBOR plus

2.50%, adjusted

monthly(2)

   Monthly interest only payments through the initial term, then principal and interest monthly installments calculated based on a 30-year amortization.   

6/26/18 (plus

additional

1-year

extension)

     35.9         19.4   

Haywood Place Construction Loan (6)

     —           —        

LIBOR plus

2.15%, adjusted

monthly(2)

  

Monthly interest only payments throughout the initial term.

If extended, then P&I monthly installments calculated based on a 30-year amortization and an assumed interest rate of 6.0% per annum

  

4/15/18 (plus

additional

18-month

extension)

     25.0         6.0   

Aura on Broadway Construction Loan (6)

     —           —        

LIBOR plus

2.45%, adjusted

monthly(2)

   Monthly interest only payments through the initial term, then monthly principal installments of $19,241 plus interest until maturity   

12/1/17 (plus

two additional

12-month

extensions)

     20.7         6.2     

 

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DECEMBER 31, 2014

 

7. Indebtedness (continued)

 

    

Outstanding
Principal

Balance
(in millions)

               Maturity    Total Loan
Capacity
Amount
    Net Book
Value of
Collateral
as of
December 31,
2014
 

Property and Related Loan

   2014     2013     

Interest Rate

  

Payment Terms

  

Date

   (in millions)     (in millions)  

Real Estate Held for Sale:

                  

Gwinnett Center Mortgage Loan (7)

        (7)      8.0       (7)    (7)    (7)         (7)         (7) 

Long Point Property Mortgage Loan

     28.3        28.5      

LIBOR plus

2.33%, adjusted

monthly (2) (8)

   Monthly interest only payments through 6/2014, then P&I monthly installments calculated based on a 30-year amortization    6/1/23      28.5        27.0   
  

 

 

   

 

 

             

 

 

   

 

 

 

Total

$ 254.6   $ 117.4    $ 434.7    $ 423.6   
  

 

 

   

 

 

             

 

 

   

 

 

 

FOOTNOTES:

 

(1)  In April 2014, the Whitehall Joint Venture refinanced its original construction loan which had an outstanding amount of $22.3 million, and entered into a new $28.2 million variable rate seven year loan. In connection with obtaining the Whitehall Mortgage Loan, the Company purchased an interest rate cap with a $28.2 million notional principal amount, pursuant to which LIBOR is capped at 3.94% for an initial term expiring in April 2017. The loan is collateralized by the Whitehall Property.
(2)  As of December 31, 2014, one month LIBOR was 0.17%.
(3)  In February 2015, the Crosstown Joint Venture, the Company’s consolidated joint venture which developed the Crosstown Property, modified its original development and construction loan which had an outstanding principal balance of $26.5 million which matured in March 2015. The Company modified the original loan with the existing lender into a new $30 million variable rate loan with an interest rate of LIBOR plus 1.95% and extended the maturity by one year to March 27, 2016.
(4)  The joint venture entered into a LIBOR based interest rate cap agreement to hedge against certain increases in the interest rate on this construction loan. See Note 8, “Derivatives.”
(5)  The capacity amount under the loan is $28.2 million, which is in addition to unused letters of credit of $1.8 million as of December 31, 2014 and 2013.
(6)  This loan will be used to fund the majority of development and construction costs related to the multifamily property. Additionally, the construction loan is collateralized by its respective property and all improvements constructed thereon.
(7)  Gwinnett Center was sold in March 2014. Upon the sale, the Company repaid this debt.
(8)  The Long Point Joint Venture entered into a LIBOR based interest rate cap agreement to hedge against certain increases in the interest rate on this mortgage loan. See Note 8, “Derivatives”.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2014

 

7. Indebtedness (continued)

 

Certain of the Company’s loan documents contain customary affirmative, negative and financial covenants, including, debt service coverage ratio, interest coverage ratio, loan to value ratio and liquidation compliance. These covenant requirements are effective after the respective property is operational. As of December 31, 2014, the Company was in compliance with all applicable debt covenants.

Maturities of indebtedness for the next five years and thereafter, in aggregate, assuming the terms of the loans are not extended, were the following as of December 31, 2014:

 

2015

$ 92,579,191   

2016

  79,703,647   

2017

  26,416,112   

2018

  2,976,880   

2019

  1,160,075   

Thereafter

  51,725,695   
  

 

 

 
$ 254,561,600   
  

 

 

 

In January 2015, the Long Point Joint Venture sold the Long Point Property and repaid $28.6 million in debt which was scheduled to mature in 2023. In addition, in February 2015, the Crosstown Joint Venture extended the maturity date of its debt, which had an outstanding principal balance of $26.5 million, from March 2015 to March 2016 as described in the “Subsequent Events” Note 14 below.

The estimated fair market value and carrying value of the Company’s debt were approximately $256.0 million and $254.6 million, respectively, as of December 31, 2014. As of December 31, 2013, the estimated fair market value and carrying value of the Company’s debt were approximately $118.1 million and $117.4 million, respectively. The estimated fair market value of the Company’s debt was determined based upon then-current rates and spreads the Company would expect to obtain for similar borrowings. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to the Company’s mortgage and construction notes payable are categorized as Level 3 on the three-level valuation hierarchy used for GAAP. The estimated fair values of accounts payable and accrued expenses approximated the carrying values as of December 31, 2014 and 2013 because of the relatively short maturities of the obligations.

 

8. Derivatives

For all interest rate caps, management determined not to elect hedge accounting for financial reporting purposes. Changes in the fair value of the interest rate caps are recorded in fair value adjustments and other income (expense) in the accompanying consolidated statements of operations.

In March 2014, the Whitehall Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $28.2 million mortgage note secured by the Whitehall Property in connection with the refinancing described in Note 7, “Indebtedness.” The Whitehall Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 3.94% by obtaining a maximum interest rate cap through April 2017.

In September 2014, the Spring Town Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $18.5 million mortgage note secured by the Spring Town Property. The Spring Town Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 1% by obtaining a maximum interest rate cap through December 2015.

In April 2013, the Long Point Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $28.5 million mortgage note secured by the Long Point Property in connection with the refinancing described in Note 7, “Indebtedness.” The Long Point Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 5.18% by obtaining a maximum interest rate cap through May 2018.

 

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DECEMBER 31, 2014

 

8. Derivatives (continued)

 

In June 2013, the Patterson Place Joint Venture also entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $28.1 million construction loan collateralized by the REALM Patterson Place Property. The interest rate cap became effective in November 2013 and will expire in July 2015. The Patterson Place Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above the 1.25% rate.

The fair value of the Company’s interest rate caps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each interest rate cap. This analysis reflects the contractual terms of the interest rate caps, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate caps utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate cap positions and has determined that the credit valuation adjustments on the overall valuation adjustments are not significant to the overall valuation of its interest rate caps. As a result, the Company determined that its interest rate cap valuation in its entirety is classified in Level 2 of the fair value hierarchy. Determining fair value requires management to make certain estimates and judgments. Changes in assumptions could have a positive or negative impact on the estimated fair values of such instruments which could, in turn, impact the Company‘s results of operations.

As of December 31, 2014, the aggregate fair value of the interest rate caps was approximately $0.05 million and was included in other assets on the Company’s consolidated balance sheet. For the years ended December 31, 2014 and 2013, the Company recognized an unrealized loss of ($0.2) million and an unrealized gain of $0.02 million, respectively, in fair value adjustments and other income (expense) due to changes in the fair value of the interest rate caps.

 

9. Related Party Arrangements

The Company is externally advised and has no direct employees. Certain directors and officers hold similar positions with CNL Securities Corp., the managing dealer of the offerings and a wholly owned subsidiary of CNL (the “Managing Dealer”), the Advisor and their affiliates. In connection with services provided to the Company, affiliates are entitled to the following fees:

Managing Dealer – The Managing Dealer receives selling commissions and marketing support fees of up to 7% and 3%, respectively, of gross offering proceeds for shares sold in the Company’s offerings, excluding shares sold pursuant to the Company’s distribution reinvestment plan, all or a portion of which may be paid to participating broker dealers by the Managing Dealer.

Advisor – The Advisor and certain affiliates are entitled to receive fees and compensation in connection with the acquisition, management and sale of the Company’s assets, as well as the refinancing of debt obligations of the Company or its subsidiaries. In addition, the Advisor and its affiliates are entitled to reimbursement of actual costs incurred on behalf of the Company in connection with the Company’s organizational, offering, acquisition and operating activities. Pursuant to the advisory agreement, the Advisor receives investment services fees equal to 1.85% of the purchase price of properties (including its proportionate share of properties acquired through joint ventures) for services rendered in connection with the selection, evaluation, structure and purchase of assets. For development properties, the Company pays the investment services fee to the Advisor based upon the estimated budget for the development project. Upon completion of the project, the Company trues up the investment services fee based upon actual amounts spent. In addition, the Advisor is entitled to receive a monthly asset management fee of 0.08334% of the real estate asset value (as defined in the advisory agreement) of the Company’s properties, including its proportionate share of properties owned through joint ventures, as of the end of the preceding month.

 

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9. Related Party Arrangements (continued)

 

The Advisor will also receive a financing coordination fee for services rendered with respect to refinancing of any debt obligations of the Company or its subsidiaries equal to 1.0% of the gross amount of the refinancing.

The Company will pay the Advisor a disposition fee in an amount equal to (i) in the case of the sale of real property, the lesser of (A) one-half of a competitive real estate commission, or (B) 1% of the sales price of such property, and (ii) in the case of the sale of any asset other than real property or securities, 1% of the sales price of such asset, if the Advisor, its affiliates or related parties provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more assets (including a sale of all of its assets or the sale of it or a portion thereof). The Company will not pay its Advisor a disposition fee in connection with the sale of investments that are securities; however, a disposition fee in the form of a usual and customary brokerage fee may be paid to an affiliate or related party of the Advisor if, such affiliate is properly licensed. No disposition fee was payable on the sale of Gwinnett.

Under the advisory agreement and the Company’s articles of incorporation, the Advisor will be entitled to receive certain subordinated incentive fees upon (a) sales of assets and/or (b) a listing (which would also include the receipt by the Company’s stockholders of securities that are approved for trading on a national securities exchange in exchange for shares of the Company’s common stock as a result of a merger, share acquisition or similar transaction). However, if a listing occurs, the Advisor will not be entitled to receive an incentive fee on subsequent sales of assets. The incentive fees are calculated pursuant to formulas set forth in both the advisory agreement and the Company’s articles of incorporation. All incentive fees payable to the Advisor are subordinated to the return to investors of their invested capital plus a 6% cumulative, noncompounded annual return on their invested capital. Upon termination or non-renewal of the advisory agreement by the Advisor for good reason (as defined in the advisory agreement) or by the Company other than for cause (as defined in the advisory agreement), a listing or sale of assets after such termination or non-renewal will entitle the Advisor to receive a pro rated portion of the applicable subordinated incentive fee.

In addition, the Advisor or its affiliates may be entitled to receive fees that are usual and customary for comparable services in connection with the financing, development, construction or renovation of a property, subject to approval of the Company’s board of directors, including a majority of its independent directors.

Property Manager – Pursuant to a master property management agreement, the Property Manager receives property management fees of up to 4.5% of gross revenues for management of the Company’s properties.

CNL Capital Markets Corp. – CNL Capital Markets Corp., an affiliate of CNL, received fees for investor set up and annual maintenance for providing certain administrative services to the Company pursuant to a services agreement. These fees are presented in the table below in investor administrative service fees.

 

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9. Related Party Arrangements (continued)

 

For the years ended December 31, 2014, 2013 and 2012, the Company incurred the following fees and reimbursable expenses due to related parties, including the managing dealer of the Company’s offerings, which is an affiliate of the Company’s Advisor, the Advisor, its affiliates and other related parties:

 

     Year Ended December 31,  
     2014      2013      2012  

Selling commissions (1)

   $ 4,332,800       $ 5,066,677       $ 1,880,621   

Marketing support fees (1)

     1,869,583         2,207,823         805,980   
  

 

 

    

 

 

    

 

 

 
  6,202,383      7,274,500      2,686,601   
  

 

 

    

 

 

    

 

 

 

Reimbursable expenses:

Offering costs(1)(2)

  3,279,232      3,784,696      1,367,328   

Investor administrative service fees(3)

  135,000      63,001      39,325   

All other operating and acquisition expenses(4)(5)

  1,161,441      969,583      1,179,972   
  

 

 

    

 

 

    

 

 

 
  4,575,673      4,817,280      2,586,625   
  

 

 

    

 

 

    

 

 

 

Investment services fees(6)

  2,623,446      2,805,989      1,994,830   

Asset management fees(6)

  2,390,738      1,098,709      444,674   

Property management fees(7)

  55,682      86,752      69,761   

Financing coordination fee(8)

  282,150      285,000      —     
  

 

 

    

 

 

    

 

 

 
$ 16,130,072    $ 16,368,230    $ 7,782,491   
  

 

 

    

 

 

    

 

 

 

FOOTNOTES:

 

(1)  Selling commissions, marketing support fees, and offering costs are included in stock issuance and offering costs in the consolidated statement of equity for each period presented.
(2)  Includes $0.01 million for reimbursable expenses to the Advisor for services provided to the Company for its executive officers during the year ended December 31, 2013. The reimbursable expenses include components of salaries, benefits and other overhead charges. No such reimbursable expenses were incurred during the years ended December 31, 2014 and 2012.
(3)  Investor administrative service fees are included in general and administrative expenses for each period presented.
(4)  All other operating and acquisition expenses of $1.1 million, $0.93 million, and $1.14 million are included in general and administrative expenses for the years ended December 31, 2014, 2013 and 2012, respectively. The remaining operating and acquisition expenses are recorded in acquisition fees and expenses, net of amounts capitalized, for all periods presented.
(5)  Includes $0.07 million, $0.08 million and $0.02 million for reimbursable expenses to the Advisor for services provided to the Company for its executive officers during the years ended December 31, 2014, 2013 and 2012. The reimbursable expenses include components of salaries, benefits and other overhead charges.
(6)  For the years ended December 31, 2014, 2013 and 2012, all of the investment services fees and approximately $1.0 million, $0.4 million, and $0.2 million, respectively, of asset management fees incurred by the Company above were capitalized as part of the cost of development properties. Asset management fees, net of amounts capitalized, are included in asset management fees, net of amounts capitalized. Asset management fees related to Gwinnett Center and the Long Point Property, included in the amounts above, are included in income (loss) from discontinued operations for each period presented.
(7)  Property management fees included in the amounts above related to Gwinnett Center and Long Point Property are included in income (loss) from discontinued operations for each period presented.
(8)  Financing coordination fee is included in loan costs, net.

 

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9. Related Party Arrangements (continued)

 

Amounts due to related parties for fees and reimbursable costs and expenses described above were as follows as of December 31:

 

     2014      2013  

Due to Managing Dealer:

     

Selling commissions

   $ —         $ 12,246   

Marketing support fees

     —           30,688   
  

 

 

    

 

 

 
  —        42,934   
  

 

 

    

 

 

 

Due to Property Manager:

Property management fees

  12,255      29,634   
  

 

 

    

 

 

 

Due to the Advisor and its affiliates:

Reimbursable offering costs

  —        53,592   

Reimbursable operating expenses

  1,498,295      1,254,181   
  

 

 

    

 

 

 
  1,498,295      1,307,773   
  

 

 

    

 

 

 
$ 1,510,550    $ 1,380,341   
  

 

 

    

 

 

 

Operating expenses did not exceed the Limitation for the Expense Year 2014. For the Expense Years ended December 31, 2013 and 2012, the Company incurred $0.29 million and $0.8 million, respectively, of operating expenses in excess of the Limitation. The Company’s independent directors determined that such amounts in excess of the Limitation were justified based upon a number of factors including:

 

    The time necessary to educate financial advisors and investors about the growth-orientation of the Company, and its stock distributions,

 

    The Company’s strategy of investing in assets that require repositioning or development and the timing and amount of its initial investments, and

 

    The operating expenses necessary as a public company.

Transactions with Other Related Parties – During the year ended December 31, 2013, an executive officer of CNL joined the board of directors of Crescent Communities, LLC, formerly Crescent Resources, LLC (“Crescent”), a joint venture partner of the Company with four of its multifamily development projects. In August 2014, the executive officer began serving the Company as chief executive officer and president, and he serves as chief executive officer and president of the Company’s Advisor. In connection with the development of such projects, each consolidated joint venture has agreed to pay Crescent or its affiliates development fees based on a percent of the development costs of the applicable projects. In January 2014, the Crescent Gateway Joint Venture purchased the land located in Altamonte Springs, Florida for approximately $4.5 million from Crescent. In addition, during the years ended December 31, 2014 and 2013, approximately $2.1 million and $1.3 million, respectively, in development fees payable to Crescent or its affiliates were incurred and are included the Company’s condensed consolidated financial statements as part of the cost of the applicable development projects.

 

10. Stockholders’ Equity

Public Offering – As of December 31, 2014, the Company had received aggregate offering proceeds of approximately $208 million from its Initial Offering and Follow-On Offering.

 

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10. Stockholders’ Equity (continued)

 

Stock Issuance and Offering Costs – The Company incurred costs in connection with the offering and issuance of shares, including selling commissions, marketing support fees, filing fees, legal, accounting, printing and due diligence expense reimbursements, which were recorded as stock issuance and offering costs and deducted from stockholders’ equity. In accordance with the Company’s articles of incorporation, the total amount of selling commissions, marketing support fees, and other organizational and offering costs paid by the Company did not exceed 15% of the aggregate gross offering proceeds. Offering costs were funded by the Advisor and subsequently reimbursed by the Company subject to this limitation. For the years ended December 31, 2014, 2013 and 2012, the Company incurred approximately $9.5 million, $11.1 million and $4.1 million, respectively, in stock issuance and other offering costs.

Distributions – On June 24, 2010, the Company’s board of directors authorized a daily stock distribution equal to 0.000219178 of a share of common stock on each outstanding share of common stock (which was equal to an annualized distribution rate of 0.08 of a share based on a 365-day calendar year), payable to all common stockholders of record as of the close of business on each day. Distributions pursuant to this policy began on July 1, 2010. Effective October 1, 2012, the Company’s board of directors authorized the declaration of a monthly stock distribution of 0.006666667 of a share of common stock on each outstanding share of common stock (which represented an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month and distributed quarterly until the policy was terminated or amended by the board.

The Company’s board approved the termination of our distribution policy effective as of October 1, 2014 because the board believed that additional stock distributions no longer provided an economic benefit, and believed that stock distributions were not in the best interests of our existing stockholders. As a result, the Company did not declare any further stock distributions effective October 1, 2014.

During the years ended December 31, 2014, 2013 and 2012, the Company declared 1,187,388 shares, 816,952 shares and 472,462 shares of common stock, respectively, as stock distributions. These distributions of new common shares are not taxable to the recipient stockholders when received.

Redemption Plan – The Company had adopted a share redemption plan that allowed a stockholder who held shares for at least one year to request that the Company redeem their shares subject to conditions and limitations within the Redemption Plan. On September 15, 2014, our board approved the suspension of the Company’s Redemption Plan, terminated distributions and terminated the distribution reinvestment plan effective as of October 1, 2014.

Through June 30, 2014, the Company had fully utilized all funds available for redemption requests under the Redemption Plan so there were no funds available to redeem any additional requests subsequent to June 30, 2014. On September 15, 2014, the Company’s board approved the suspension of our Redemption Plan, and terminated the distribution reinvestment plan. Outstanding redemption requests of approximately 51,000 shares received in good order prior to September 10, 2014, were placed in the redemption queue, however, the Company will not accept or otherwise process any additional redemption requests after September 10, 2014 unless the Redemption Plan is reinstated by the board. There is no guarantee that the Redemption Plan will be reinstated by the board.

 

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10. Stockholders’ Equity (continued)

 

During the year ended December 31, 2014, prior to the utilizing of funds available for redemption requests, the Company received and accepted redemption requests for 40,447 shares of common stock at an average redemption price of $9.90 per share for approximately $0.4 million. During the year ended December 31, 2013, the Company received and accepted redemption requests for 70,699 shares of common stock at an average redemption price of $9.73 per share for approximately $0.7 million. During the year ended December 31, 2012, the Company received and accepted redemption requests for 65,046 shares of common stock at an average redemption price of $9.41 per share for approximately $0.6 million. Redemptions were funded with offering