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EX-32 - SECTION 1350 CERTIFICATIONS - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.arcrca12312014ex32.htm
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER OF THE COMPANY - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.arcrca12312014ex312.htm
EX-10.34 - PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.v404794_ex10-34.htm
EX-10.24 - A&R CREDIT AGREEMENT AMONG THE OP, REGIONS BANK AND BMO HARRIS BANK - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.v404794_ex10-24.htm
EX-23.1 - CONSENT OF KPMG LLP - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex231arcrca12312014.htm
EX-21.1 - LIST OF SUBSIDIARIES - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex211arcrca12312014.htm
EX-23.2 - CONSENT OF GRANT THORNTON LLP - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex232arcrca12312014.htm
EX-10.41 - SEVENTH AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1041arcrca12312014.htm
EX-10.42 - EIGHTH AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1042arcrca12312014.htm
EX-10.37 - THIRD AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1037arcrca12312014.htm
EX-10.39 - FIFTH AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1039arcrca12312014.htm
EX-10.33 - INDEMNIFICATION AGREEMENT DATED DECEMBER 31, 2014 - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1033arcrca12312014.htm
EX-10.38 - FOURTH AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1038arcrca12312014.htm
EX-10.40 - SIXTH AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1040arcrca12312014.htm
EX-10.35 - FIRST AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1035arcrca12312014.htm
EX-10.36 - SECOND AMENDMENT TO PSA BETWEEN AD WEST END AND AMERICAN REALTY CAPITAL IV - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.ex1036arcrca12312014.htm
EXCEL - IDEA: XBRL DOCUMENT - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.Financial_Report.xls
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER OF THE COMPANY - AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.arcrca12312014ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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
o
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: 000-55198

AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Maryland
  
27-3279039
(State or other  jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)
  
  
  
405 Park Ave., 14th Floor New York, NY      
  
 10022
(Address of principal executive offices)
  
(Zip Code)
(212) 415-6500   
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, $0.01 par value per share (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 o 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 o 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o No x

There is no established public market for the registrant's shares of common stock. The registrant completed its initial public offering of its shares of common stock pursuant to its Registration Statement on Form S-11 (File No. 333-169355) on September 12, 2014, which shares were sold at a purchase price of $10.00 per share, with discounts available for certain categories of purchasers. The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, was $384.6 million based on a per share value of $10.00.

As of March 31, 2015, the registrant had 95,359,426 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant's proxy statement to be delivered to stockholders in connection with the registrant's 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.


AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

FORM 10-K
Year Ended December 31, 2014

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital — Retail Centers of America, Inc. (the "Company," "we," "our" or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
All of our executive officers are also officers, managers or holders of a direct or indirect controlling interest in American Realty Capital Retail Advisor, LLC, our external affiliated advisor (the "Advisor"), our dealer manager, Realty Capital Securities, LLC (the "Dealer Manager"), and other entities affiliated with AR Capital, LLC (the "Parent of our Sponsor"), the parent of our sponsor, American Realty Capital IV, LLC (the "Sponsor"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's and its affiliates' compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions.
Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln"), and its affiliates may have conflicts of interest in determining which investment opportunities to recommend to our Advisor for presentation to us and to other programs for which they may provide these services.
Lincoln and its affiliates have to allocate their time between providing services to our Advisor and other real estate programs and other activities in which they are presently involved or may be involved in the future.
Because investment opportunities that are suitable for us may also be suitable for other investment programs advised by affiliates of the Parent of our Sponsor, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants.
Our tenants may not achieve the rental rate incentives in certain lease agreements, which may impact our results of operations.
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
We may not generate cash flows sufficient to pay our distributions to stockholders, as such, we may be forced to borrow at unfavorable rates or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations. There is no assurance that our Advisor will waive reimbursement of expenses or fees.
We may be unable to pay or maintain cash distributions or increase distributions over time.
If we and our Advisor are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions with cash flows from operations.
We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates, including fees upon the sale of properties.
No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.
Our organizational documents permit us to pay distributions from unlimited amounts of any source. Until substantially all the proceeds from our initial public offering of common stock (the "IPO") are invested, we may use proceeds from our IPO and financings to fund distributions until we have sufficient cash flow. There are no established limits on the amounts of net proceeds and borrowings that we may use to fund such distribution payments. Any of these distributions may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact the value of your investment.
We have not generated, and in the future may not generate, cash flows sufficient to cover our distributions to stockholders, and, as such, we may be forced to source distributions from borrowings, which may be at unfavorable rates, or depend on our Advisor to waive reimbursement of certain expenses and fees to fund our operations. There is no assurance that our Advisor will waive reimbursement of expenses or fees.

ii


We are subject to risks associated with any dislocation or liquidity disruptions that may exist or occur in the credit markets of the United States of America from time to time.
We may fail to continue to qualify to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes, which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and the cash available for distributions.
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus be subject to regulation under the Investment Company Act.
We own 20 properties as of December 31, 2014.
In addition, we describe risks and uncertainties that could cause actual results and events to differ materially in "Risk Factors" (Part I, Item 1A of this Annual Report on Form 10-K), "Quantitative and Qualitative Disclosures about Market Risk" (Part II, Item 7A), and "Management's Discussion and Analysis" (Part II, Item 7).

iii


PART I
Item 1. Business.
We were incorporated on July 29, 2010 as a Maryland corporation and qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2012. On March 17, 2011, we commenced our IPO on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-169355) (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders were able to elect to have their distributions reinvested in additional shares of our common stock at a price initially equal to $9.50 per share, which was 95.0% of the per share offering price in the IPO.
On March 9, 2012, we raised proceeds sufficient to break escrow in connection with our IPO. On March 4, 2013, our board of directors approved an extension of the termination date of our IPO from March 17, 2013 to March 17, 2014. On March 14, 2014, we filed a registration statement on Form S-11 (File No. 333-194586) (the "Follow-On Registration Statement") with the SEC to register a follow-on offering of up to 75.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, and 12.5 million shares of common stock pursuant to the DRIP. However, as permitted by Rule 415 under the Securities Act, we continued offering and selling shares in our IPO until September 12, 2014.
Our IPO closed on September 12, 2014. On September 17, 2014, we withdrew our Follow-On Registration Statement, from which no securities were sold. On September 19, 2014, we registered an additional 25.0 million shares of common stock to be used under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3D (File No. 333-198864).
As of December 31, 2014, we had 94.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from our IPO and the DRIP of $938.7 million.
We have acquired and intend to acquire and own existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20.0 million) and other need-based shopping centers which are located in the United States and at least 80.0% leased at the time of acquisition. All properties will be acquired and operated by us or acquired and operated by us jointly with another party. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first property and commenced active operations in June 2012. As of December 31, 2014, we owned 20 properties with an aggregate purchase price of $716.3 million, comprised of 4.3 million rentable square feet which were 94.5% leased on a weighted-average basis.
Substantially all of our business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. We are the sole general partner and hold substantially all the units of limited partner interest in the OP ("OP Units"). Our Advisor, a limited partner in the OP, holds 202 OP Units, which represents a nominal percentage of the aggregate OP ownership. After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of our common stock or, at the option of the OP, a corresponding number of shares of our common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
We have no direct employees. We have retained the Advisor to manage our affairs on a day-to-day basis. The Advisor has entered into a service agreement with Lincoln, pursuant to which Lincoln has agreed to provide, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. Our Dealer Manager served as the dealer manager of the IPO. The Advisor and the Dealer Manager are under common control with the Parent of our Sponsor, as a result of which they are related parties, and each of which has received or will receive compensation, fees and expense reimbursements for services related to our IPO and the investment and management of our assets. Such entities have received or may receive, as applicable, fees during the offering, acquisition, operational and liquidation stages. The Advisor has paid and will continue to pay Lincoln a substantial portion of the fees payable to the Advisor for the performance of real estate-related services.
Investment Objectives
Our investment objectives are:
Preserve and protect capital;
Provide attractive and stable cash distributions; and
Increase the value of our assets in order to generate capital appreciation.

1


We have implemented and intend to continue to implement our investment objectives as follows:
Large Retail Focus — We are pursuing an investment strategy focused on acquiring a diversified portfolio of existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20 million), and other need-based shopping centers, or collectively, large retail assets, which are located in the United States and at least 80.0% leased at the time of acquisition. We expect the cost of each of these properties to be up to $100 million, and in some cases, in excess of $100 million. By the time we are fully invested, we expect our portfolio to consist of at least 65.0% of large retail assets. In addition, we may invest in existing enclosed mall opportunities for de-malling and reconfiguration into an open air format in an amount expected not to exceed 20.0% of our assets.
Necessity-Based Retail — Up to 20.0% of our portfolio may consist of existing grocery-anchored shopping centers with a purchase price of $20 million dollars or less, typically anchored by drug stores, grocery stores, convenience stores and discount stores, or collectively, necessity based retail assets.
Real Estate Related Assets — Up to 15.0% of our portfolio may consist of real estate related assets, including loans and debt securities secured by our targeted assets.
Discount to Replacement Cost — We purchase properties valued at a substantial discount to replacement cost using current market rents, and with significant potential for appreciation.
Low Leverage — We finance our portfolio opportunistically at a target leverage level of not more than 50% loan-to-value, which ratio will be determined after the close of our IPO and once we have invested substantially all the proceeds of our IPO.
Diversified Tenant Mix — We lease our properties to a diversified group of tenants with a bias toward national tenants.
Lease Term — We expect the average lease term on leases on our properties with anchor tenants to be five years or greater.
Monthly Distributions — We pay distributions monthly out of funds from operations, as adjusted.
Maximize Total Returns — We intend to maximize total returns to our stockholders through a combination of realized appreciation and current income.
Exit Strategy — We intend to maximize stockholder total returns through a highly disciplined acquisition strategy, with a constant view towards a seamless and profitable exit.
Acquisition and Investment Policies
Primary Investment Focus
We focus our investment activities on acquiring primarily existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers and other need-based shopping centers and originating or acquiring real estate-related debt and other investments backed by these types of properties. The real estate-related debt we originate or acquire is expected to be primarily first mortgage debt but also may include bridge loans, mezzanine loans, preferred equity or securitized loans.
There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of our IPO that may be invested in a single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition of properties.
Investing in Real Property
We have invested, and expect to continue to invest, primarily in existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20 million), and other need-based shopping centers, or collectively, large retail assets, which are located in the United States and at least 80.0% leased at the time of acquisition. We expect the cost of each of these properties to be up to $100 million, and in some cases, in excess of $100 million. When we are fully invested, our portfolio is expected to consist of at least 65.0% of large retail assets. In addition, we may make the following investments in the United States: existing grocery-anchored shopping centers, the purchase price of which is $20 million or less, in an amount expected not to exceed 20.0% of our assets; existing enclosed mall opportunities for de-malling and reconfiguration into an open air format in an amount expected not to exceed 20.0% of our assets; and real estate-related debt and investments secured by, or which represent a direct or indirect interest in, the assets described above in an amount expected not to exceed 15.0% of our assets.

2


When evaluating prospective investments in real property, our management and our Advisor considers relevant real estate and financial factors, including the location of the property, the leases and other agreements affecting the property, the creditworthiness of major tenants, its income-producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations and other factors. In this regard, our Advisor has substantial discretion with respect to the selection of specific investments, subject to board approval.
As of December 31, 2014, we did not have any tenants whose annualized rental income on a straight-line basis represented 10.0% or greater of total portfolio annualized rental income on a straight-line basis.
Investing In and Originating Loans
We may originate or acquire real estate loans with respect to the same types of properties in which we may invest directly. Although we do not have a formal policy, our criteria for investing in loans will be substantially the same as those involved in our investment in properties. We may originate or invest in real estate loans (including, but not limited to, investments in first, second and third mortgage loans, wraparound mortgage loans, construction mortgage loans on real property, and loans on leasehold interest mortgages). We also may invest in participations in mortgage, bridge or mezzanine loans. Further, we may invest in unsecured loans; however, we will not make unsecured loans or loans not secured by mortgages unless such loans are approved by a majority of our independent directors. We currently do not intend to invest in, or originate, as applicable, real estate-related debt or investments, including commercial mortgage backed securities ("CMBS") and other real estate-related investments, in excess of 15% of the aggregate value of our assets as of the close of our IPO and thereafter.
We will not make or invest in mortgage, bridge or mezzanine loans on any one property if the aggregate amount of all mortgage, bridge or mezzanine loans outstanding on the property, including our borrowings, would exceed an amount equal to 85% of the appraised value of the property, as determined by our board of directors, including a majority of our independent directors unless substantial justification exists, as determined by our board of directors, including a majority of our independent directors. Our board of directors may find such justification in connection with the purchase of mortgage, bridge or mezzanine loans in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and, in respect of transactions with our affiliates, in which the cost of the mortgage loan investment does not exceed the appraised value of the underlying property. Our board of directors may find such justification in connection with the purchase of mortgage, bridge or mezzanine loans that are in default where we intend to foreclose upon the property in order to acquire the underlying assets and, in respect of transactions with our affiliates, where the cost of the mortgage loan investment does not exceed the appraised value of the underlying property.
We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or may purchase existing loans that were originated by other lenders. Our Advisor will evaluate all potential loan investments to determine if the term of the loan, the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. An officer, director, agent or employee of our Advisor will inspect the property securing the loan, if any, during the loan approval process. We do not expect to make or invest in mortgage or mezzanine loans with a maturity of more than ten years from the date of our investment, and anticipate that most loans will have a term of five years. We do not expect to make or invest in bridge loans with a maturity of more than one year (with the right to extend the term for an additional one year) from the date of our investment. Most loans that we will consider for investment would provide for monthly payments of interest and some also may provide for principal amortization, although many loans of the nature that we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.
While we do not expect to invest more than 15% of the net proceeds of our IPO in real estate-related debt or investments, our charter does not limit the amount of gross offering proceeds that we may apply to loan originations or investments. Our charter also does not place any limit or restriction on:
the percentage of our assets that may be invested in any type or any single loan; or
the types of properties subject to the mortgages or other loans in which we invest.
Investing in Real Estate Securities
We may invest in securities of non-majority owned publicly traded and private companies primarily engaged in real estate businesses, including REITs and other real estate operating companies, and securities issued by pass-through entities of which substantially all the assets consist of qualifying assets or real estate-related assets. We may purchase the common stock, preferred stock, debt, or other securities of these entities or options to acquire such securities. We currently do not intend to invest in, or originate, as applicable, real estate-related debt or investments (including real estate securities), such as commercial mortgage-backed securities ("CMBS"), in excess of 15% of the net proceeds of our IPO. Any investment in equity securities (including any preferred equity securities) that are not traded on a national securities exchange or included for quotation on an inter-dealer quotation system must be approved by a majority of directors, including a majority of independent directors, not otherwise interested in the transaction as fair, competitive and commercially reasonable.

3


Acquisition Structure
To date, we have acquired fee interests (a "fee interest" is the absolute, legal possession and ownership of land, property, or rights) and leasehold interests (a "leasehold interest" is a right to enjoy the exclusive possession and use of an asset or property for a stated definite period as created by a written lease) in properties. We anticipate continuing to do so if we acquire properties in the future, although other methods of acquiring a property may be utilized if we deem it to be advantageous. For example, we may acquire properties through the acquisition of substantially all of the interests of an entity which in turn owns the real property.
International Investments
We do not intend to invest in real estate outside of the United States or the Commonwealth of Puerto Rico or make other real estate investments related to assets located outside of the United States.
Development and Construction of Properties
We do not intend to acquire undeveloped land, develop new properties, or substantially redevelop existing properties, except for instances where we may invest in existing enclosed mall opportunities for de-malling and reconfiguration into an open air format, in an amount expected not to exceed 20.0% of our assets.
Joint Ventures
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset, or to benefit from certain expertise that a partner might have.
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer's interest in the joint venture if the co-venturer elects to sell such interest. If the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer's interest in the property held by the joint venture. If any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
Financing Strategies and Policies
We may obtain financing for acquisitions and investments at the time an asset is acquired or an investment is made or at a later time. In addition, debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes but may do so in order to manage or mitigate our interest rate risks on variable rate debt.
Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined in our charter), as of the date of any borrowing, which is equal to 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, calculated after the close of our IPO and once we have invested substantially all the proceeds of our IPO, does not apply to individual real estate assets or investments.
In addition, we intend to limit our aggregate borrowings to 50% of the aggregate fair market value of our investments, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation is calculated after the close of our IPO and once we have invested substantially all the proceeds of our IPO. This limitation will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
We will not borrow from our Sponsor, our Advisor, any of our directors or any of their respective affiliates unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our financing policies without a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, our expected investment opportunities, the ability of our investments to generate sufficient cash flows to cover debt service requirements and other similar factors.

4


Tax Status
We qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2012. Commencing with such taxable year, we were organized and operating in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. In order to qualify and continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income to our stockholders. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income.
Competition
The retail real estate market is highly competitive. We compete for tenants in all of our markets with other owners and operators of retail real estate. We compete based on a number of factors that include location, rental rates, security, suitability of the property's design to prospective tenants' needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire, tenants to occupy our properties and purchasers to buy our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are also other REITs, including American Realty Capital - Retail Centers of America II, Inc., which is also sponsored by our Sponsor, with asset acquisition objectives similar to ours and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to us. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In addition, competition for desirable investments could delay the investment of proceeds from our IPO in desirable assets, which may in turn reduce our earnings per share and negatively affect our ability to maintain distributions to stockholders.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. We hire third parties to conduct Phase I environmental reviews of the real property that we intend to purchase.
Employees
As of December 31, 2014, we have no direct employees. Instead, the employees of the Advisor, Lincoln and their respective affiliates perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale brokerage, transfer agent and investor relations services. We are dependent on these affiliates for services that are essential to us, including asset acquisition decisions, property management and other general administrative responsibilities. In the event that any of these companies were unable to provide these services to us, we would be required to provide such services ourselves or obtain such services from other sources at potentially higher cost.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, investing in and disposing of real estate assets. All of our consolidated revenues are from our consolidated real estate properties. We internally evaluate operating performance on an individual property level and view all of our real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment.

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Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. We also filed with the SEC our Registration Statement in connection with our IPO. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.americanrealtycap.com. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.
Item 1A. Risk Factors.
This "Risk Factors" section contains references to our "stockholders." Unless expressly stated otherwise, the references to our "stockholders" represent holders of our common stock and any class or series of our preferred stock.
Risks Related to an Investment in American Realty Capital - Retail Centers of America, Inc.
We have limited operating history, and the prior performance of programs sponsored by affiliates of our Sponsor should not be used to predict our future results.
We have limited operating history. You should consider an investment in our shares in light of the risks, uncertainties and difficulties frequently encountered by other newly formed companies with similar objectives. To be successful in this market, we and our Advisor must, among other things:
identify and acquire investments that further our investment strategies;
increase awareness of our name within the investment products market;
respond to competition for our targeted real estate properties and other investments as well as for potential investors; and
continue to build and expand our operations structure to support our business.
We cannot guarantee that we will succeed in achieving these goals, and our failure to do so could cause our stockholders to lose all or a portion of their investment.
Stockholders may be more likely to sustain a loss on their investment because our Sponsor does not have as strong an economic incentive to avoid losses as does a sponsor who has made significant equity investments in its company.
Our Sponsor has invested only $2.4 million in us through the purchase of 242,222 shares of our common stock at $10.00 per share. Our Sponsor will have little exposure to loss in the value of our shares. Without this exposure, our investors may be at a greater risk of loss because our Sponsor may have less to lose from a decrease in the value of our shares as does a sponsor that makes more significant equity investments in its company.
There is no established trading market for our shares and there may never be one; therefore, it will be difficult for our stockholders to sell their shares.
There currently is no established trading market for our shares and there may never be one. If our stockholders are able to find a buyer for their shares, our stockholders may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase our stockholders' shares. Moreover, our share repurchase program includes numerous restrictions that would limit our stockholders' ability to sell their shares to us. Our board of directors may reject any request for repurchase of shares, or amend, suspend or terminate our share repurchase program upon notice. Therefore, it will be difficult for our stockholders to sell their shares promptly or at all. If our stockholders are able to sell their shares, our stockholders likely will have to sell them at a substantial discount to the price they paid for the shares. It also is likely that their shares would not be accepted as the primary collateral for a loan.

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Because transferees will be ineligible to sell their shares pursuant to our share repurchase program, the value of their shares may be adversely affected.
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the share repurchase program. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the share repurchase program. Because transferees will be unable to sell their shares to us and the market for resale of our shares may be limited, the fair market value of the shares may be less than the amount our stockholders would receive if transferees were able to sell their shares pursuant to our share repurchase program.
Our stockholders' interest in us may be diluted if the price we pay in respect of shares repurchased under our share repurchase program exceeds the net asset value, at such time as we calculate the net asset value of our share.
The prices we may pay for shares repurchased under our share repurchase program may exceed the net asset value of such shares at the time of repurchase, which may reduce the net asset value of the remaining shares.
If Lincoln and its affiliates, acting on behalf of and under the oversight of our Advisor, are unable to find suitable investments, then we may not be able to achieve our investment objectives or pay distributions.
Our ability to achieve our investment objectives and to pay distributions is dependent upon the performance of Lincoln and its affiliates with respect to locating suitable investments, selecting tenants for our properties and securing independent financing arrangements and upon the performance of our Advisor, which oversees Lincoln's performance with respect to such real estate-related services and ultimately makes recommendations to our board of directors in respect of potential investments, financings and dispositions. As of December 31, 2014, we owned 20 properties. We cannot be sure that our Advisor or Lincoln or their respective affiliates will be successful in locating suitable investments on financially attractive terms or that, if we make an investment, our objectives will be achieved. If they are unable to find suitable investments, we will hold the proceeds of our IPO in an interest-bearing account and invest the proceeds in short-term, investment-grade investments. In this event, our ability to pay distributions to our stockholders would be adversely affected.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions and the value of our stockholders' investment.
We could suffer from delays in locating suitable investments. Delays we encounter in the selection, acquisition and, if we develop properties, development of properties, likely would adversely affect our ability to make distributions and the value of your overall returns. In particular, where we acquire properties which we intend to re-develop into open-air properties, it typically will take several months to complete construction and rent available space. Therefore, you could suffer delays in the receipt of cash distributions attributable to those particular properties. If our Advisor or Lincoln and its affiliates, acting on behalf of and under the oversight of our Advisor, are unable to locate further suitable investments, we will hold the proceeds of our IPO in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. This will reduce our return and could reduce distributions to our stockholders.
We may change our targeted investments without stockholder consent.
We have primarily invested and expect to primarily invest in existing anchored, stabilized core retail properties, including power centers, lifestyle centers and grocery-anchored shopping centers (with a purchase price in excess of $20 million), and other need based shopping centers, which are at least 80.0% leased at the time of acquisition and located in the United States. Though this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in our prospectus and this annual report. A change in our targeted investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the value of our common stock and our ability to make distributions to our stockholders.
Our properties may be adversely affected by an economic downturn.
The capital and credit markets could experience volatility and disruption. A protracted economic downturn could have a negative impact on our portfolio. If real property or other real estate related asset values were to decline after we acquired them, we could have a difficult time making new acquisitions or generating returns on our stockholders' investment. If an unfavorable market environment were to emerge, we might need to modify our investment strategy in order to optimize our portfolio performance. Our options would include limiting or eliminating the use of debt and focusing on those investments that do not require the use of leverage to meet our portfolio goals.

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We rely on our Advisor, and our Advisor relies on Lincoln and its affiliates, acting on behalf of and under the oversight of our Advisor, to identify, structure and negotiate our investments, manage our properties and provide asset management and disposition services in connection with our investments. If Lincoln does not succeed in implementing our investment strategy, our performance will suffer.
Our Advisor has retained Lincoln to perform some of the services for which our Advisor is responsible under the advisory agreement on its behalf. Although our Advisor ultimately will determine whether to recommend particular investments, financing and dispositions to our board of directors, our Advisor will rely primarily on Lincoln and its affiliates, subject to the oversight of our Advisor, for identifying, structuring and negotiating investments, managing and leasing our properties and providing asset management and disposition services in connection with our investments. Personnel of our Advisor do not have significant experience in connection with the types of properties in which we propose to invest and, as a result, have engaged Lincoln and its affiliates. Accordingly, our future success and our ability to implement our investment strategy will depend, to a certain extent, on Lincoln's and its affiliates' performance of these services. If Lincoln does not succeed in implementing our investment strategy, our performance will suffer. In addition, since the services agreement will be automatically renewed unless terminated by our Advisor or Lincoln for cause, or by our Advisor in the event that the advisory agreement is terminated, it may be difficult and costly to terminate and replace Lincoln.
If we internalize our management functions, we may be unable to obtain key personnel, and our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholders and the value of their investment.
We may engage in an internalization transaction and become self-managed in the future. If we internalize our management functions, certain key employees may not become our employees but may instead remain employees of our Advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs, and our management's attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with the internalization transaction.
If our Advisor, Lincoln or their respective affiliates lose or are unable to obtain key personnel, including in the event another American Realty Capital-sponsored program internalizes its advisor, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders investment.
Our success also depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor, including Mr. Kahane, and key personnel of Lincoln and its affiliates, each of whom would be difficult to replace. If any of the key personnel were to cease their affiliation with our Advisor or Lincoln, our operating results could suffer. This could occur, among other ways, if another American Realty Capital-sponsored program internalizes its advisor. If that occurs, key personnel of our Advisor, who also are key personnel of the internalized advisor, would become employees of the other program and would no longer be available to our Advisor. Further, we do not intend to separately maintain key person life insurance on Mr. Kahane or any other person. We believe that our future success depends, in large part, upon our Advisor's and Lincoln's and its affiliates' ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for these personnel is intense, and we cannot assure our stockholders that our Advisor or Lincoln or its affiliates will be successful in attracting and retaining these skilled personnel. If our Advisor or Lincoln or its affiliates lose or are unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of their investment may decline.
We may be unable to pay or maintain cash distributions to our stockholders or increase distributions to our stockholders over time, which could adversely affect the return on their investment.
There are many factors that can affect the availability and timing of cash distributions to stockholders, including the amount of cash flows from operations. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties as DRIP or financing proceeds become available, rental income from these properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. With a limited operating history, we cannot assure our stockholders that we will be able to pay or maintain our current level of distributions or that distributions will increase over time. We cannot give any assurance that rents from the properties we acquire will increase, that the securities we buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real properties, mortgage, bridge or mezzanine loans or any investments in securities will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. We may not have sufficient cash from operations to make a distribution required to qualify for or maintain our qualification as a REIT.

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We may pay distributions from unlimited amounts of any source, including proceeds of our IPO, which may reduce the amount of capital we are able to invest and reduce the value of your investment.
We may pay distributions from unlimited amounts of any source, including borrowing funds, using proceeds from our IPO, issuing additional securities or selling assets. We have not established any limit on the amount of proceeds from our IPO that may be used to fund distributions, except in accordance with our organizational documents and Maryland law. Distributions from the proceeds of our IPO or from borrowings also reduce the amount of capital we ultimately invest in properties and other permitted investments. This, in turn, could reduce the value of your investment.
Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will reduce the funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect stockholders' overall return.
Our cash flows used in operations for the year ended December 31, 2014 were $4.0 million. During the year ended December 31, 2014, we paid distributions of $27.0 million, of which $2.7 million, or 9.9%, was funded from cash flows provided by operations, $9.5 million, or 35.3%, was funded from proceeds from the issuances of common stock and $14.8 million, or 54.8%, was funded from proceeds proceeds from our IPO which were reinvested in common stock issued under our DRIP. Additionally, we may in the future continue to pay distributions from sources other than from our cash flows from operations. Using proceeds from our IPO to pay distributions, especially if the distributions are not reinvested through our DRIP, reduces cash available for investment in assets or other purposes and reduces our per share stockholder equity.
Until we acquire additional properties or other real estate-related investments, we may not generate sufficient cash flows from operations to pay distributions. If we are unable to acquire additional properties or other real estate-related investments, it may result in a lower return on stockholders' investment than our stockholders expect. If we have not generated sufficient cash flows from our operations and other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, or our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, in order to fund distributions, we may continue to use the proceeds from our IPO. Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. Distributions made from offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with our IPO. We have not established any limit on the amount of proceeds from our IPO that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
Funding distributions from borrowings may restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets or the proceeds of our IPO could affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder’s interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability and/or affect the distributions payable to our stockholders upon a liquidity event, any or all of which may have an adverse effect on their investment.
Our rights and the rights of our stockholders to recover claims against our officers, directors, our Advisor and Lincoln are limited, which could reduce our stockholders' and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, our officers, our Advisor and our Advisor's affiliates and Lincoln and Lincoln's affiliates and permits us to indemnify our employees and agents. However, as required by our charter, we may not indemnify a director, our Advisor or an affiliate of our Advisor for any loss or liability suffered by any of them or hold harmless such indemnitee for any loss or liability suffered by us unless: (1) the indemnitee determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests, (2) the indemnitee was acting on behalf of or performing services for us, (3) the liability or loss was not the result of (A) negligence or misconduct, in the case of a director (other than an independent director), the Advisor or an affiliate of the Advisor, or (B) gross negligence or willful misconduct, in the case of an independent director, and (4) the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from our stockholders. We have entered into an indemnification agreement with each of our directors and officers, and certain former directors and officers, providing for indemnification of such directors and officers consistent with the provisions of our charter.

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Although our charter does not allow us to indemnify or hold harmless an indemnitee to a greater extent than permitted under Maryland law and the North American Securities Administrators Association ("NASAA") REIT Guidelines, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor, Lincoln and their respective affiliates, than might otherwise exist under common law, which could reduce our stockholders' and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor, Lincoln and their respective affiliates in some cases which would decrease the cash otherwise available for distribution to our stockholders.
The occurrence of cyber incident, or a deficiency in our cyber security, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. In addition, the risk of a cyber incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and instructions from around the world have increased.
Our remediation costs and lost revenues could be significant if we fall victim to a cyber incident. We may be required to expend significant resources to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. Security breaches could also result in and could subject us to significant liability or loss that may not be covered by insurance, damage to our reputation, or a loss of confidence in our security measures, which could harm our business. We also may be found liable for any stolen assets or misappropriated confidential information. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.
Disclosures made by American Realty Capital Properties, Inc. (“ARCP”) an entity previously sponsored by the Parent of our Sponsor may adversely affect our ability to raise capital.
On October 29, 2014, ARCP announced that its audit committee had concluded that the previously issued financial statements and other financial information contained in certain public filings should no longer be relied upon. This conclusion was based on the preliminary findings of an investigation conducted by ARCP’s audit committee which concluded that certain accounting errors were made by ARCP personnel that were not corrected after being discovered, resulting in an overstatement of adjusted funds from operations ("AFFO") and an understatement of ARCP’s net loss for the three and six months ended June 30, 2014. ARCP also announced the resignations of its chief accounting officer and its chief financial officer. ARCP’s former chief financial officer is one of the non-controlling owners of the Parent of our Sponsor. While ARCP’s former chief financial officer does not have a current role in the management of our Sponsor’s or our business, he did serve as our chief financial officer from July 2010 to December 2013. In December 2014, ARCP announced the resignation of its executive chairman, who was also our chief executive officer and the executive chairman of our board of directors until his resignation on December 29, 2014. This individual also is one of the controlling members of the Parent of our Sponsor.
On March 2, 2015, ARCP announced the completion of its audit committee’s investigation and filed amendments to its Form 10-K for the year ended December 31, 2013 and its Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. According to these filings, these amendments corrected errors in ARCP’s financial statements and in its calculation of AFFO that resulted in overstatements of AFFO for the years ended December 31, 2011, 2012 and 2013 and the quarters ended March 31, 2013 and 2014 and June 30, 2014 and described certain results of its investigations, including matters relating to payments to, and transactions with, affiliates of the Parent of our Sponsor and certain equity awards to certain officers and directors. In addition, ARCP disclosed that the audit committee investigation had found material weaknesses in ARCP’s internal control over financial reporting and its disclosure controls and procedures. ARCP also disclosed that the SEC has commenced a formal investigation, that the United States Attorney’s Office for the Southern District of New York contacted counsel for both ARCP’s audit committee and ARCP with respect to the matter and that the Secretary of the Commonwealth of Massachusetts has issued a subpoena for various documents. On March 30, 2015, ARCP filed its Form 10-K for the year ended December 31, 2014. ARCP's filings with the SEC are available at the internet site maintained by the SEC, www.sec.gov.

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Since the initial announcement in October, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-listed REITs sponsored directly or indirectly by the Parent of our Sponsor have temporarily suspended their participation in the distribution of those offerings. Although certain of these broker-dealers have reinstated their participation, we cannot predict the length of time the remaining temporary suspensions will continue or whether all participating broker-dealers will reinstate their participation in the distribution of those offering. Although we have completed our initial public offering, we may seek to raise additional capital in connection with the operation our business. Similarly to other entities sponsored directly or indirectly by the Parent of our Sponsor, the disclosures made by ARCP, as well as any future disclosures by ARCP, may have an adverse effect on our ability to access capital through, among other things, equity offerings or lending arrangements. If we are unable to access additional capital it may have a material adverse effect on our business including, among other things, our ability to achieve our investment objectives.
We have identified material weaknesses in our internal control over financial reporting.
Our management has identified material weaknesses in our internal control over financial reporting and as a result concluded that our disclosure controls and procedures were not effective as of December 31, 2014.  Management concluded that the Company failed to maintain information technology system access controls supporting the general ledger and accounts payable system applications, specifically controls that are designed to address appropriate segregation of duties and to restrict IT and financial users’ access to the underlying entities and IT functions and data commensurate with their job responsibilities, design and maintain appropriate end-user controls over the use of significant spreadsheets supporting the financial reporting process and design and maintain appropriate controls over the authorization of manual journal entries made to the general ledger.  While the control deficiencies did not result in any material or immaterial misstatements in the financial statement accounts, the control deficiencies could increase the likelihood of inaccuracies in our financial statements.  Our management concluded that the deficiencies represent material weaknesses in our internal control over financial reporting and that, as a result, our internal controls over financial reporting were not effective as of December 31, 2014.  Although management is in the process of developing and implementing a plan to remediate the deficiencies in internal control, there is no assurance that the plan will remediate the material weaknesses or ensure that our internal controls over financial reporting will be effective in the future which could have a material adverse effect on our business including, among other things, our ability to access the capital markets and our ability to provide accurate financial information. 
Risks Related to Conflicts of Interest
We will be subject to conflicts of interest, including conflicts arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below.
Our Advisor faces conflicts of interest relating to the acquisition of assets and leasing of properties and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could limit our ability to make distributions and reduce our stockholders’ overall investment return.
We rely on our Sponsor and the executive officers and other key real estate professionals at our Advisor to identify suitable investment opportunities for us. Several of the other key real estate professionals of our Advisor are also the key real estate professionals at the Parent of our Sponsor and their other public programs. Many investment opportunities that are suitable for us may also be suitable for other programs sponsored directly or indirectly by the Parent of our Sponsor. For example, American Realty Capital — Retail Centers of America II, Inc. seeks, like us, to primarily acquire existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20.0 million) and other need-based shopping centers which are located in the United States and at least 80.0% leased at the time of acquisition. The investment opportunity allocation agreement we have entered into with American Realty Capital — Retail Centers of America II, Inc. may result in us not being able to acquire separate properties identified by our Advisor and its affiliates. Thus, the executive officers and real estate professionals of our Advisor could direct attractive investment opportunities to other entities or investors. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions.
We and other programs sponsored directly or indirectly by the Parent of our Sponsor also rely on these real estate professionals to supervise the property management and leasing of properties. Our executive officers and key real estate professionals are not prohibited from engaging, directly or indirectly, in any business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, leasing or sale of real estate investments.

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Lincoln and its affiliates will face conflicts of interest relating to the selection, purchase, leasing and management of properties, and these conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Lincoln and/or its affiliates are responsible for, and may in the future be responsible for, the selection, acquisition, leasing and management of one or more real estate investment programs in addition to us (including persons or entities with contractual arrangements with Lincoln and/or its affiliates). We may buy properties at the same time as one or more of these other real estate investment programs. As a result, there may be a conflict between our interests and the interests of Lincoln and its affiliates in connection with acquisitions of investments, which result may have an adverse impact on us. We cannot be sure that officers and key personnel acting on behalf of Lincoln and its affiliates will act in our best interests when deciding whether to allocate any particular investment to us. In addition, we may acquire properties in geographic areas where other real estate investment programs or properties managed by Lincoln and its affiliates own properties. If one of the other real estate investment programs managed by Lincoln and its affiliates attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. Our stockholders will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making their investment. Similar conflicts of interest may apply to Lincoln's determination of whether to recommend to our Advisor the making or purchase of mortgage, bridge or mezzanine loans or participations therein, since other real estate investment programs Lincoln may manage may be competing with us for these investments.
Our Advisor and Lincoln will face conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense and adversely affect the return on our stockholders' investment.
We may enter into joint ventures with other American Realty Capital-sponsored programs and real estate investment programs for which Lincoln and/or its affiliates provide services for the acquisition, development or improvement of properties. Our Advisor and Lincoln and its affiliates may have conflicts of interest in determining which program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor and/or Lincoln and its affiliates may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Because our Advisor and its affiliates, or Lincoln and its affiliates, as applicable, will control or have a services relationship with both the co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to that joint venture will not have the benefit of arm's-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceeds the percentage of our investment in the joint venture.
Our Advisor and Lincoln and its affiliates and their officers and employees and certain of our executive officers and other key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor, Lincoln and its affiliates and their officers and employees and certain of our key personnel and their respective affiliates are key personnel of general partners, sponsors, managers, owners and advisors of other real estate investment programs, including, with respect to our Advisor, certain of our key personnel and their respective affiliates, American Realty Capital-sponsored REITs, some of which have investment objectives and legal and financial obligations similar to ours, and may own real properties or provide services with respect to other real properties, some of which compete with us, as well as owning other business interests. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may suffer.
We disclose funds from operations (“FFO”) and modified funds from operations ("MFFO"), each a non-GAAP financial measure, in communications with investors, including documents filed with the SEC; however, FFO and MFFO are not equivalent to our net income or loss as determined under accounting principles generally accepted in the United States of America ("GAAP"), and our stockholders 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 ''Management's Discussion and Analysis of Financial Condition and Results of Operations - Funds from Operations and Modified Funds from Operations.'' FFO and MFFO are not equivalent to our net income or loss or cash flows from operations as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant to evaluating our operating performance and ability to pay distributions. FFO and MFFO and GAAP net income differ because FFO and MFFO exclude gains or losses from sales of property and asset impairment write-downs, and add back depreciation and amortization and adjust for unconsolidated partnerships and joint ventures. MFFO further excludes acquisition-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests.
Because of these differences, FFO and MFFO may not be accurate indicators of our operating performance. In addition, FFO and MFFO are not indicative of cash flows available to fund cash needs and investors should not consider FFO and MFFO as alternatives 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 distributions to our stockholders.

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Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and MFFO. Also, because not all companies calculate FFO and MFFO the same way, comparisons with other companies may not be meaningful.
American National Stock Transfer, LLC, our affiliated transfer agent, has a limited operating history and a failure by our transfer agent to perform its functions for us effectively may adversely affect our operations.
Our transfer agent is a related party of the Parent of our Sponsor that has been providing certain transfer agency services for programs sponsored directly or indirectly by the Parent of our Sponsor since 2013. Because of its limited experience, there is no assurance that our transfer agent will be able to effectively provide transfer agency and registrar services to us. Furthermore, our transfer agent will be responsible for supervising third party service providers who may, at times, be responsible for executing certain transfer agency and registrar services. If our transfer agent fails to perform its functions for us effectively, our operations may be adversely affected.
The management of multiple REITs and other direct investment programs by our executive officers and officers of our Advisor and any service provider may significantly reduce the amount of time our executive officers and officers of our Advisor and any service provider are able to spend on activities related to us and may cause other conflicts of interest, which may cause our operating results to suffer.
Certain officers of our Advisor are part of the senior management or are key personnel of several other REITs sponsored directly or indirectly by the Parent of our Sponsor, as well as their advisors and their respective affiliates. Some of these REITs have registration statements that became effective in the past twelve months. As a result, such REITs will have concurrent or overlapping acquisition, operational and disposition and liquidation phases as us, which may cause conflicts of interest to arise throughout the life of our company with respect to, among other things, locating and acquiring properties, entering into leases and disposing of properties. Additionally, based on the experience of the Parent of our Sponsor, a significantly greater time commitment is required of senior management when the REIT is being organized, funds are initially being raised and funds are initially being invested, and less time is required as additional funds are raised and the IPO matures. The conflicts of interest each of the officers of our Advisor faces may delay the investment of our proceeds due to the competing time demands.
Our officers and directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.
Certain of our executive officers, including William M. Kahane, chairman of our board of directors, chief executive officer and president, also are officers of our Advisor, our dealer manager and other affiliated entities, including the other REITs sponsored by the American Realty Capital group of companies. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the other entities, (b) our purchase of properties from, or sale of properties to, affiliated entities, (c) the timing and terms of the investment in or sale of an asset, (d) development of our properties by affiliates, (e) investments with affiliates of our Advisor, (f) compensation to our Advisor, and (g) our relationship with our Dealer Manager. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets. If these individuals act or fail to act in a manner that is detrimental to our business or favor one entity over another, they may be subject to liability for breach of fiduciary duty.

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Our Advisor and its affiliates and Lincoln face conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under our advisory agreement, our Advisor and its affiliates are entitled to fees, a substantial portion of which will be paid to Lincoln and its affiliates, that are structured in a manner intended to provide incentives to perform in our best interests and in the best interests of our stockholders. However, because our Advisor and Lincoln do not maintain a significant equity interest in us and are entitled to receive substantial minimum compensation regardless of performance, our Advisor's and Lincoln's interests are not wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend to our board of directors, or Lincoln could be motivated to recommend to our Advisor, riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to fees. In addition, our Advisor's or affiliates' entitlement to fees and distributions upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending to our board or directors, sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor to compensation relating to those sales, even if continued ownership of those investments might be in our best long-term interest. In addition, our Advisor is entitled to receive certain fees in connection with selling and reinvesting assets. As a result, our Advisor could be motivated to recommend selling and reinvesting assets to our board of directors because our Advisor would be entitled to receive fees, regardless of the quality of the investment. Our advisory agreement requires us to pay a performance-based termination distribution to our Advisor or its affiliates (a substantial portion of which will be paid by our Advisor to Lincoln or its affiliates) if we terminate the advisory agreement prior to the listing of our shares for trading on an exchange or, absent a listing, in respect of its participation in net sales proceeds. To avoid paying this fee, our independent directors may decide against terminating the advisory agreement prior to our listing of our shares or disposition of our investments even if, but for the termination distribution, termination of the advisory agreement would be in our best interest. In addition, the requirement to pay the distribution to our Advisor or its affiliates at termination could cause us to make different investment or disposition decisions than we would otherwise make, in order to satisfy our obligation to pay the distribution to the terminated Advisor. Moreover, our Advisor has the right to terminate the advisory agreement upon a change of control of our company and thereby trigger the payment of the performance distribution, which could have the effect of delaying, deferring or preventing the change of control.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest and such conflicts may not be resolved in our favor, which could adversely affect the value of our stockholders' investment.
Proskauer Rose LLP acts as legal counsel to us and also represents our Advisor and some of its affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Proskauer Rose LLP may be precluded from representing any one of or all such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Proskauer Rose LLP may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or number, whichever is more restrictive) of any class or series of the outstanding shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350.0 million shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any class or series of stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.

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Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders' ability to exit the investment.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns 10% or more of the voting power of the corporation's outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
80.0% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any of its affiliates. As a result, our Advisor and any of its affiliates may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

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Our stockholders' investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register ourself or any of our subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register ourself or any of our subsidiaries as an investment company, the registered entity 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.
We conduct, and intend to continue conducting, our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our subsidiaries are exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an "investment company" if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an "investment company" if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, which we refer to as the "40% test." "Investment securities" excludes (A) government securities, (B) securities issued by employees' securities companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment companies, and (ii) are not relying on the exception from the definition of investment company under Section 3(c)(1) or 3(c)(7) of the Investment Company Act.
Because we are primarily engaged in the business of acquiring real estate, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of "investment company," we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires an entity to maintain at least 55% of its assets directly in qualifying assets and at least 80.0% of the entity's assets in qualifying assets and in a broader category of real estate related assets to qualify for this exception. Mortgage-related securities may or may not constitute qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that the entity has with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than 20 years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an "investment company" provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of "investment company" and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the Company or any of its subsidiaries as an investment company under the Investment Company Act, 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 forgo 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 the Company as an investment company but failed to do so, we would be prohibited from engaging in our business, 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.

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Our board of directors may change our investment policies without stockholder approval, which could alter the nature of our stockholders' investments.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies also may vary, as new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of our stockholders' investment could change without their consent.
We will not calculate the net asset value per share for our shares until 18 months after completion of our last offering; therefore, our stockholders will not be able to determine the net asset value of their shares on an on-going basis during our IPO and for a substantial period of time thereafter.
We do not intend to calculate the net asset value per share for our shares until 18 months after the completion of our last offering. Beginning 18 months after the completion of the last offering of our shares (excluding offerings under our distribution reinvestment plan), our board of directors will determine the value of our properties and our other assets based on the information our board determines appropriate, including independent valuations of our properties. We will disclose this net asset value to stockholders in our filings with the SEC. Therefore, our stockholders will not be able to determine the net asset value of their shares on an on-going basis during our IPO. Furthermore, the value determined by our board of directors after 18 months will be only an estimate and may not represent the actual value of our stockholders' shares or the price at which a third party would be willing to purchase their shares.
Our stockholders are bound by the majority vote on matters on which our stockholders are entitled to vote, and therefore, their vote on a particular matter may be superseded by the vote of others.
Our stockholders' may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, our stockholders will be bound by the majority vote on matters requiring approval of a majority of the stockholders even if our stockholders do not vote with the majority on any such matter.
Our stockholders are limited in their ability to sell their shares pursuant to our share repurchase program and may have to hold their shares for an indefinite period of time.
Our board of directors may amend the terms of our share repurchase program without stockholder approval. Our board of directors also is free to amend, suspend or terminate the program upon notice or to reject any request for repurchase. There is no assurance that funds available for our share repurchase program will be sufficient to accommodate all requests. In addition, the share repurchase program includes numerous restrictions that would limit our stockholders' ability to sell their shares. Generally stockholders must have held their shares for at least one year in order to participate in our share repurchase program. Subject to funds being available, until we establish estimated values for our shares, the purchase price for shares repurchased under our share repurchase program will be based on the amount paid to us for the purchase of common stock (which will equal a percentage ranging from 92.5% to 97.5% until a stockholder has continuously held his shares for at least four years, at which point such percentage will be 100%). We expect to begin establishing an estimated value of our shares based on the value of our real estate and real estate-related investments beginning 18 months after the close of our IPO. We do not currently anticipate obtaining appraisals for our investments (other than investments in transactions with our Sponsor, Advisor or directors or their respective affiliates) and, accordingly, the estimated value of our investments should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. The limits on repurchases under our share repurchase plan might prevent us from accommodating all repurchase requests made in any year. These restrictions severely limit our stockholders’ ability to sell their shares should our stockholders require liquidity, and limit their ability to recover the value our stockholders invested or the fair market value of their shares.
Because our Advisor is wholly owned by our Sponsor through American Realty Capital Retail Special Limited Partnership, LLC (the "Special Limited Partner"), the interests of the Advisor and the Sponsor are not separate and as a result the Advisor may act in a way that is not necessarily in the investors' interest.
Our Advisor is indirectly wholly owned by our Sponsor through the Special Limited Partner. Therefore, the interests of our Advisor and our Sponsor are not separate and the Advisor's decisions may not be independent from the Sponsor and may result in the Advisor making decisions to act in ways that are not in the investors' interests.

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Our stockholders' interest in us will be diluted if we issue additional shares, which could adversely affect the value of their investment.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 350.0 million shares of stock, of which 300.0 million shares are classified as common stock and 50.0 million are classified as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock, or the number of authorized shares of any class or series of stock, or may classify or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of our shares may be issued in the discretion of our board of directors, except that the issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Our stockholders likely will suffer dilution of their equity investment in us, if we: (a) sell additional shares in the future, including those issued pursuant to our distribution reinvestment plan; (b) sell securities that are convertible into shares of our common stock; (c) issue shares of our common stock in a private offering of securities to institutional investors; (d) issue restricted share awards to our directors; (e) issue shares to our Advisor or its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement; or (f) issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our OP. In addition, the partnership agreement for our OP contains provisions that would allow, under certain circumstances, other entities, including other American Realty Capital-sponsored programs, to merge into or cause the exchange or conversion of their interest for OP units. Because the OP units may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our OP and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these reasons, among others, our stockholders should not expect to be able to own a significant percentage of our shares.
Future offerings of equity securities which are senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the value of an investment in our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of equity securities. Under our charter, we may issue, without stockholder approval, preferred stock or other classes of common stock with rights that could dilute the value of our stockholders' shares of common stock. Any issuance of preferred stock must also be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Upon liquidation, holders of our shares of preferred stock will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.
Payment of fees to our Advisor and its affiliates reduces cash available for investment and distribution.
Our advisor and its affiliates will perform services for us in connection with conducting our operations and managing the portfolio of real estate and real estate-related debt and investments. Our advisor has entered into agreements with Lincoln, pursuant to which Lincoln and its affiliates will perform some of the services for which the advisor is responsible under the advisory agreement. Our advisor is paid substantial fees for these services (a substantial portion of which will be paid to Lincoln), which reduces the amount of cash available for investment in properties or distribution to stockholders. At its discretion, our advisor may elect, from time to time, to waive or defer payment of certain fees payable to the advisor in connection with services performed on our behalf, which may affect cash flows provided by operations and result in the availability of additional cash for distribution to stockholders. Any such waiver or deferral would also impact applicable distribution coverage ratios and may affect the usefulness of such coverage ratios as indicators of a program’s ability to cover future distributions to stockholders.

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We depend on our OP and its subsidiaries for cash flows and we are structurally subordinated in right of payment to the obligations of our OP and its subsidiaries, which could adversely affect our ability to make distributions to our stockholders.
Our primary asset is our investment in our OP. We have no business operations of our own. Our only significant asset is and will be the general partnership interests of our OP. We conduct, and intend to conduct, all of our business operations through our OP. Accordingly, our only source of cash to pay our obligations is distributions from our OP and its subsidiaries of their net earnings and cash flows. There is no assurance that our OP or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our OP's subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from these entities. In addition, because we are a holding company, our stockholders' claims as stockholders will be structurally subordinated to all existing and future liabilities and obligations of our OP and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our OP and its subsidiaries will be able to satisfy our stockholders' claims as stockholders only after all of our and our OPs and its subsidiaries liabilities and obligations have been paid in full.
Our Dealer Manager signed a Letter of Acceptance, Waiver and Consent (“AWC”) with the Financial Industry Regulatory Authority (“FINRA”); any further action, proceeding or litigation with respect to the substance of the Letter of Acceptance, Waiver and Consent, or in connection with any other similar action, proceeding or litigation that may occur, could adversely affect our IPO or the pace at which we raise proceeds.
In April 2013, our Dealer Manager received notice and a proposed AWC from FINRA, the self-regulatory organization that oversees broker dealers, that certain violations of SEC and FINRA rules, including Rule 10b-9 under the Exchange Act and FINRA Rule 2010, occurred in connection with its activities as a co-dealer manager for a public offering. Without admitting or denying the findings, our Dealer Manager submitted an AWC, which FINRA accepted on June 4, 2013. In connection with the AWC, our Dealer Manager consented to the imposition of a censure and a fine of $60,000.
To the extent any action would be taken against our Dealer Manager in connection with the above AWC, or in connection with any other similar action, proceeding or litigation that may occur, our Dealer Manager could be adversely affected.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
changes in general, economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.
These and other risks may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We are subject to tenant geographic concentrations that make us more susceptible to adverse events with respect to certain geographic areas.
As of December 31, 2014, the following states had concentrations of properties where annualized rental income on a straight-line basis represented 5.0% or greater of our consolidated annualized rental income on a straight-line basis:
State
 
December 31, 2014
Minnesota
 
17.0%
Texas
 
14.1%
Florida
 
13.4%
Oklahoma
 
11.2%
Pennsylvania
 
9.4%
North Carolina
 
8.6%
Missouri
 
6.8%
Ohio
 
5.0%

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Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Factors that may negatively affect economic conditions in these states include:
business layoffs or downsizing;
industry slowdowns;
relocations of businesses;
changing demographics;
a shift to e-commerce;
infrastructure quality;
any oversupply of, or reduced demand for, real estate;
concessions or reduced rental rates under new leases for properties where tenants defaulted; and
increased insurance premiums.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could adversely affect our financial condition and ability to make distributions to our stockholders.
Any of our tenants, or any guarantor of a tenant's lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. A bankruptcy filing of our tenants or any guarantor of a tenant's lease obligations would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments that would mean a reduction in our cash flows and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flows and the amounts available for distributions to our stockholders may be adversely affected.
If a sale-leaseback transaction is re-characterized in a tenant's bankruptcy proceeding, our financial condition and ability to make distributions to our stockholders could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant, in which case, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flows and the amount available for distribution to our stockholders.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
If we enter into sale-leaseback transactions, we will use commercially reasonable efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a "true lease" for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, we cannot assure our stockholders that the Internal Revenue Service (the "IRS") will not challenge such characterization. In the event that any such sale-leaseback is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification "asset tests" or "income tests" and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.

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Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on our stockholders' investment.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in less cash to be distributed to stockholders. In addition, because properties' market values depend principally upon the value of the properties' leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce our stockholders' return.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property, which could adversely affect our financial condition and ability to make distributions to our stockholders.
The seller of a property often sells its property in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some of or all our invested capital in the property as well as the loss of rental income from that property.
We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to make distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops, even if our leases with tenants require tenants to pay routine property maintenance costs. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct these defects or to make these improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased that property, which may lead to a decrease in the value of our assets.
Many of our leases do not contain rental increases over time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell that property, may lead to a sale price less than the price that we paid to purchase the property.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties, which could have an adverse effect on our stockholders' investment.
Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Lock out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing that indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to those properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

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Rising expenses could reduce cash flows and could adversely affect our ability to make future acquisitions and to pay cash distributions to our stockholders.
Any properties that we buy in the future will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. We expect that many of our properties will require the tenants to pay all or a portion of these costs and expenses and, accordingly, if the tenants are unable to pay these costs and expenses, we will have to pay these costs and expenses. We may, however, enter into leases or renewals of leases that do not require tenants to pay these costs and expenses. If we are unable to lease properties on a basis requiring the tenants to pay all or some of these costs and expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs, which could adversely affect funds available for future acquisitions or cash available for distributions.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage, including due to the non-renewal of the Terrorism Risk Insurance Act of 2002 (the “TRIA”) could reduce our cash flows and the return on our stockholders’ investments.
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 are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The TRIA, under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event the TRIA is not renewed or replace, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance our properties could be impaired. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses.
Real estate related taxes may increase and if these increases are not passed on to tenants, our income will be reduced, which could adversely affect our ability to make distributions to our stockholders.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. There is no assurance that leases will be negotiated on a basis that passes such tax onto the tenant, even if some tenant leases permit us to pass through such tax increases to the tenants for payment. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.
Properties may be subject to restrictions on their use that affect our ability to operate a property, which may adversely affect our operating costs and reduce the amount of funds available to pay distributions to our stockholders.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with these properties, there are significant covenants, conditions and restrictions, known as "CC&Rs," restricting the operation of these properties and any improvements on these properties, and related to granting easements on these properties. Moreover, the operation and management of the contiguous properties may impact these properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.

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Our operating results may be negatively affected by potential construction delays and resultant increased costs and risks.
We may use proceeds from our IPO or from other sources to acquire properties, upon which we may construct improvements. We will be subject to uncertainties associated with re-zoning, environmental concerns of governmental entities and/or community groups, and our builder's ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder's performance also may be affected or delayed by conditions beyond the builder's control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. 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 price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on our stockholders' investment.
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 REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and our stockholders may experience a lower return on their investment.
Our properties face competition that may affect tenants' ability to pay rent and the amount of rent paid to us may affect the cash available for distribution and the amounts of distributions.
Our properties typically are, and we expect properties we acquire in the future will be, located in developed areas. In these cases, there are and will be numerous other properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. This could result in decreased cash flows from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions, and the amount available for distributions to our stockholders.
Delays in acquisitions of properties may have an adverse effect on our stockholders' investment.
There may be a substantial period of time before the proceeds of our offering are invested. Delays we encounter in the selection, acquisition and/or development of properties could adversely affect our stockholders' returns. Where properties are acquired prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, our stockholders could suffer delays in the payment of cash distributions attributable to those particular properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws 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 provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and 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.
In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our projects could require us to undertake a costly remediation program to contain or remove the mold from the affected property or development project, which would adversely affect our operating results.

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The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us or our property manager and its assignees from operating such properties. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows and our ability to make distributions to our stockholders.
If we decide to sell any of our properties, we intend to sell them for cash, if possible. However, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale 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. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Our recovery of an investment in a mortgage, bridge or mezzanine loan that has defaulted may be limited, resulting in losses to us and reducing the amount of funds available to pay distributions to our stockholders.
There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway relocations and failure by the borrower to maintain the property. In addition, we may incur the costs of litigation in our efforts to enforce our rights under defaulted loans.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
Our costs associated with complying with the Americans with Disabilities Act of 1990 (the “Disabilities Act”) may affect cash available for distributions.
Our properties are subject to the Disabilities Act. 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, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act's requirements 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 cannot assure our stockholders that we will be able to acquire properties that comply with the Disabilities Act or that allocate the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. If we cannot acquire properties or allocate responsibilities in this manner, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions to our stockholders.

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Retail Industry Risks
Economic conditions in the United States have had, and may continue to have, an adverse impact on the retail industry generally. Slow or negative growth in the retail industry could result in defaults by retail tenants which could have an adverse impact on our financial operations.
U.S. and international markets continue to experience constrained growth. This slow growth may, among other things, impact demand for space and support for rents and property values. Since we cannot predict when the real estate markets will fully recover, the value of our properties may decline if recent market conditions persist or worsen.
Economic conditions in the United States have had an adverse impact on the retail industry generally. As a result, the retail industry has recently faced reductions in sales revenues and increased bankruptcies throughout the United States. The continuation of adverse economic conditions may result in an increase in distressed or bankrupt retail companies, which in turn would result in an increase in defaults by tenants at our retail properties. Additionally, slow economic growth is likely to hinder new entrants into the retail market which may make it difficult for us to fully lease the real properties that we plan to acquire. Tenant defaults and decreased demand for retail space would have an adverse impact on the value of the retail properties that we plan to acquire and our results of operations.
Disruptions in the financial markets and challenging economic conditions could adversely affect our ability to secure debt financing on attractive terms, our ability to service any future indebtedness that we may incur and the values of our investments.
If liquidity in the global credit market were to contract due to market disruptions, it might become costly to obtain new lines of credit. We will rely on debt financing to finance our properties and possibly other real estate-related investments. In the event of credit market turmoil, we may not be able to obtain debt financing on attractive terms. As such, we may be forced to use a greater proportion of our offering proceeds to finance our acquisitions, reducing the number of acquisitions we would otherwise make, and/or to dispose of some of our assets. In the event of liquidity disruptions, we might be forced to modify our investment strategy in order to optimize our portfolio performance. Our options would include limiting or eliminating the use of debt and focusing on those higher yielding investments that do not require the use of leverage to meet our portfolio goals.
Disruptions in the financial markets and challenging economic conditions could adversely affect the values of investments we will acquire. Turmoil in the capital markets could constrain equity and debt capital available for investment in commercial real estate, resulting in fewer buyers seeking to acquire commercial properties and increases in capitalization rates and lower property values. Furthermore, these challenging economic conditions could further negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values of real estate properties and in the collateral securing any loan investments we may make. These could have the following negative effects on us:
the values of our investments in retail properties could decrease below the amounts we will pay for these investments;
the value of collateral securing any loan investment that we may make could decrease below the outstanding principal amounts of these loans;
revenues from properties we acquire could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to pay dividends or meet our debt service obligations on future debt financings; and/or
revenues on the properties and other assets underlying any loan investments we may make could decrease, making it more difficult for the borrower to meet its payment obligations to us, which could in turn make it more difficult for us to pay dividends or meet our debt service obligations on future debt financings.
All of these factors could impair our ability to make distributions to our investors and decrease the value of an investment in us.
Retail conditions may adversely affect our income and our ability to make distributions to our stockholders.
A retail property's revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. Our properties will be located in public places such as shopping centers and malls, and any incidents of crime or violence would result in a reduction of business traffic to tenant stores in our properties. Any such incidents may also expose us to civil liability. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our common stock may be negatively impacted.
Some of our leases may provide for base rent plus contractual base rent increases. A number of our retail leases also may include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases which contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue which we may derive from percentage rent leases could be adversely affected by a general economic downturn.

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Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space.
In the retail sector, any tenant occupying a large portion of the gross leasable area of a retail center, a tenant of any of the triple-net single-user retail properties outside the primary geographical area of investment, commonly referred to as an anchor tenant, or a tenant that is our anchor tenant at more than one retail center, may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases permit cancellation or rent reduction if another tenant's lease is terminated. We may own properties where the tenants may have rights to terminate their leases if certain other tenants are no longer open for business. These "co-tenancy" provisions also may exist in some leases where we own a portion of a retail property and one or more of the anchor tenants leases space in that portion of the center not owned or controlled by us. If these tenants were to vacate their space, tenants with co-tenancy provisions would have the right to terminate their leases with us or seek a rent reduction from us. In such event, we may be unable to re-lease the vacated space. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases at the retail center. If we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to remodel the space to be able to re-lease the space to more than one tenant.
Competition with other retail channels may reduce our profitability and the return on our stockholders' investment.
Our retail tenants will face potentially changing consumer preferences and increasing competition from other forms of retailing, such as e-commerce, discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues and other forms of direct marketing, discount shopping clubs and telemarketing. Other retail centers within the market area of our properties will compete with our properties for customers, affecting their tenants' cash flows and thus affecting their ability to pay rent. In addition, some of our tenants' rent payments may be based on the amount of sales revenue that they generate. If these tenants experience competition, the amount of their rent may decrease and our cash flows will decrease.
Competition may impede our ability to renew leases or re-let space as leases expire and require us to undertake unbudgeted capital improvements, which could harm our operating results.
We may face competition from retail centers that are near our properties with respect to the renewal of leases and re-letting of space as leases expire. Any competitive properties that are developed close to our existing properties also may impact our ability to lease space to creditworthy tenants. Increased competition for tenants may require us to make capital improvements to properties that we would not have otherwise planned to make. Any unbudgeted capital improvements may negatively impact our financial position. Also, to the extent we are unable to renew leases or re-let space as leases expire, it would result in decreased cash flows from tenants and reduce the income produced by our properties. Excessive vacancies (and related reduced shopper traffic) at one of our properties may hurt sales of other tenants at that property and may discourage them from renewing leases.
We anticipate that our properties will consist primarily of retail properties. Our performance, therefore, is linked to the market for retail space generally and a downturn in the retail market could have an adverse effect on the value of our stockholders' investment.
The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to these stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center. A reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.

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We expect that most of our assets will be public places such as shopping centers. Because these assets will be public places, acts of terror, crimes, mass shootings and other incidents beyond our control may occur, which could result in a reduction of business traffic at our properties and could expose us to civil liability.
Because most of our assets will be open to the public, they will be exposed to a number of incidents that may take place within their premises and that are beyond our control or our ability to prevent, which may harm our consumers and visitors. Some of our assets may be located in large urban areas or areas of high gun ownership, which can be subject to elevated levels of crime and violence. If an act of terror, a mass shooting or other violence were to occur, we may lose tenants or be forced to close our assets for some time. If any of these incidents were to occur, the relevant asset could face material damage to its image and the property could experience a reduction of business traffic due to lack of confidence in the premises' security. In addition, we may be exposed to civil liability and be required to indemnify the victims, and our insurance premiums could rise, any of which could adversely affect us. Should any of our assets be involved in incidents of this kind, our business, financial condition and results of operations could be adversely affected.
If we enter into long-term leases with retail tenants, those leases may not result in fair value over time, which could adversely affect our revenues and ability to make distributions.
Long-term leases do not allow for significant changes in rental payments and do not expire in the near term. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases, significant increases in future property operating costs could result in receiving less than fair value from these leases. These circumstances would adversely affect our revenues and funds available for distribution.
Risks Associated with Debt Financing
We have broad authority to incur debt, and high levels of debt could hinder our ability to make distributions and could decrease the value of our stockholders' investment.
We generally acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and may pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. In addition, we may borrow if we need additional funds to satisfy the REIT tax qualification requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes.
Our Advisor believes that utilizing borrowing is consistent with our investment objective of maximizing the return to investors. There is no limitation on the amount we may borrow against any single improved property. Under our charter, our borrowings may not exceed 300% of our total "net assets" (as defined in our charter) as of the date of any borrowing, which is equal to 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, calculated after the close of our IPO and once we have invested substantially all the proceeds of our IPO, does not apply to individual real estate assets or investments. In addition, it is our intention to limit our borrowings to not more than 50% of the aggregate fair market value of our assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for such excess borrowing. This limitation is calculated once we have invested substantially all the proceeds of our IPO. This limitation will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. We expect that during the period of our IPO we will seek independent director approval of borrowings in excess of these limitations since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of our stockholders' investment.

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If there is a shortfall between the cash flows from a property and the cash flows needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our stockholders' investment. For U.S. federal income tax purposes, a foreclosure of any of our properties would be 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. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected which could result in our losing our REIT status and would result in a decrease in the value of our stockholders' investment.
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic and international commercial real estate debt markets are subject to changing levels of volatility, resulting in, from time to time, the tightening of underwriting standards by lenders and credit rating agencies. If our overall cost of borrowings increases, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance maturing indebtedness. In addition, the state of the debt markets could have an impact on the overall amount of capital investing in real estate, which may result in price or value decreases of real estate assets. This could negatively impact the value of our assets after the time we acquire them.
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flows would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, replace our Advisor as our advisor or our Advisor's ability to replace Lincoln as the service provider. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
We expect that we will incur indebtedness in the future. To the extent that we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on these investments.

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Risks Associated with Real Estate-Related Debt and Other Investments
Any real estate debt security that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a real estate debt security secured by an income-producing property depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the real estate debt security may be impaired. A property's net operating income can be affected by, among other things:
increased costs, added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements;
property management decisions;
property location and condition;
competition from comparable types of properties;
changes in specific industry segments;
declines in regional or local real estate values, or occupancy rates; and
increases in interest rates, real estate tax rates and other operating expenses.
We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the real estate debt security, which could have a material adverse effect on our cash flows from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a borrower, the real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed real estate debt security. We also may be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.
Disruptions in the financial markets and challenging economic conditions could adversely impact the commercial mortgage market as well as the market for real estate-related debt investments generally, which could hinder our ability to implement our business strategy and generate returns to our stockholders.
We may allocate a percentage of our portfolio to real estate-related investments such as mortgage, mezzanine, bridge and other loans; debt and derivative securities related to real estate assets, including mortgage-backed securities; and the equity securities of other REITs and real estate companies. The returns available to investors in these investments are determined by: (1) the supply and demand for these investments, (2) the performance of the assets underlying the investments and (3) the existence of a market for these investments, which includes the ability to sell or finance these investments.
During periods of volatility, the number of investors participating in the market may change at an accelerated pace. As liquidity or "demand" increases the returns available to investors on new investments will decrease. Conversely, a lack of liquidity will cause the returns available to investors on new investments to increase.
We may invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.
Our mortgage loan assets may be non-recourse loans. With respect to our non-recourse mortgage loan assets, in the event of a borrower default, the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan, may be less than the amount owed under the mortgage loan. As to those mortgage loan assets that provide for recourse against the borrower and its assets generally, we cannot assure our stockholders that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.
Interest rate fluctuations will affect the value of our mortgage assets, net income and common stock.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors, all of which are beyond our control. Interest rate fluctuations can adversely affect our income in many ways and present a variety of risks including the risk of variances in the yield curve, a mismatch between asset yields and borrowing rates, and changing prepayment rates.

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Variances in the yield curve may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Short-term interest rates are ordinarily lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our assets may bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our mortgage loan assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested in mortgage loans, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.
Prepayment rates on our mortgage loans may adversely affect our yields.
The value of our mortgage loan assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, these prepayment rates cannot be predicted with certainty. To the extent we originate mortgage loans, we expect that these mortgage loans will have a measure of protection from prepayment in the form of prepayment lock-out periods or prepayment penalties. However, this protection may not be available with respect to investments that we acquire but do not originate. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of these prepayments received during these periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.
Before making any investment, we will consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment. These considerations will affect our decision whether to originate or purchase such an investment and the price offered for such an investment. No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including competitive conditions in the local real estate market, local and general economic conditions and the quality of management of the underlying property. Our inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may adversely affect the value of our stockholders' investments.
Volatility of values of mortgaged properties may adversely affect our mortgage loans.
Real estate property values and net operating income derived from real estate properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described in this Annual Report on Form 10-K relating to general economic conditions and owning real estate investments. In the event its net operating income decreases, a borrower may have difficulty paying our mortgage loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could also cause us to suffer losses.
Mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.
We may make and acquire mezzanine loans. These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.
Any hedging strategies we utilize may not be successful in mitigating our risks.
We may enter into hedging transactions to manage risk of interest rate changes or price changes with respect to borrowings made or to be made to acquire or carry real estate assets. To the extent that we use derivative financial instruments in connection with these risks, we will be exposed to credit, basis and legal enforceability risks. Derivative financial instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. 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. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to our stockholders will be adversely affected.

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U.S. Federal Income Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We have qualified to be taxed as a REIT commencing with the taxable year ended December 31, 2012 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured our activities in a manner designed to satisfy all requirements for qualification as a REIT. However, the REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to remain qualified as a REIT is not binding on the IRS and is not a guarantee that we will continue to qualify as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to continue to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even with our REIT qualification, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even with our REIT qualification, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are "dealer" properties sold by a REIT (a "prohibited transaction" under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital gain we earn from the sale or other disposition of our property 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. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our OP or at the level of the other companies through which we indirectly own our assets, such as our taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders' overall return.
In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our annual REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for distributions paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U. S federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.

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Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders' investment.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our OP, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary (but such taxable REIT subsidiary will incur corporate rate income taxes with respect to any income or gain recognized by it), (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our OP, but generally excluding our taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 25% of the value of a REIT's assets may consist of stock or securities of one or more taxable REIT subsidiaries.
A taxable REIT subsidiary may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. We may use taxable REIT subsidiaries that lease such properties from us. We may also use taxable REIT subsidiaries generally to hold properties for sale in the ordinary course of business or to hold assets or conduct activities that we cannot conduct directly as a REIT. A taxable REIT subsidiary will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules which are applicable to us as a REIT also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm's-length basis.
If our OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
We intend to maintain the status of the OP as a partnership or a disregarded entity for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of the OP as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the OP could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on our stockholders' investment. In addition, if any of the partnerships or limited liability companies through which the OP owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the OP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount ("OID") or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flows from the assets. In addition, in the event a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.

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As a result of the foregoing, we may generate less cash flows than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms, (3) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (4) make a taxable distribution of our shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the loan must be secured by real property. We may acquire mezzanine loans that are not directly secured by real property but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all of the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests, we may be disqualified as a REIT.
We may choose to make distributions in our own stock, in which case our stockholders may be required to pay income taxes in excess of the cash dividends they receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U. S, tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock. Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder's investment in our common stock.

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Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
If our stockholders participate in our distribution reinvestment plan, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the shares of common stock received.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20.0%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.
If we were considered to actually or constructively pay a "preferential dividend" to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute to our stockholders at least 90% of our annual REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be "preferential dividends." A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS's position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan inadvertently causing a greater than 5% discount on the price of such stock purchased). There is no de minimis exception with respect to preferential dividends. Therefore, if the IRS were to take the position that we inadvertently paid a preferential dividend, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax on the undistributed portion or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure. While we believe that our operations have been structured in such a manner that we will not be treated as inadvertently paying preferential dividends, we can provide no assurance to this effect.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets, if properly identified under applicable Treasury Regulations, does not constitute "gross income" for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.

34


Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we elected to be taxed as a REIT, we may terminate our REIT election if we determine that qualifying as a REIT is no longer in the best interests of our stockholders. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. 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 our stockholders that any such changes will not adversely affect the taxation of a stockholder. 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. Also, our counsel's tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, 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 treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides 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 regular corporation, without the vote of our stockholders.
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of a taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors (prospectively or retroactively), for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with such restrictions is no longer necessary in order for us to continue to qualify as a REIT.

35


These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as "effectively connected" with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), Capital gain distributions attributable to sales or exchanges of "U.S. real property interests" ("USRPIs") generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business. However, a capital gain distribution will not be treated as effectively connected income if (1) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (2) the non-U.S. stockholder does not own more than 5% of the class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be "regularly traded" on an established securities market for the foreseeable future, and therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI within the meaning of FIRPTA. Our common stock will not constitute a USRPI so long as we are a "domestically-controlled qualified investment entity." A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT's stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure our stockholders, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a -USRPI if: (1) our common stock is "regularly traded," as defined by applicable Treasury regulations, on an established securities market, and (2) such non-U.S. stockholder owned, actually and constructively, 5% or less of our common stock at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our common stock will be "regularly traded" on an established market. We encourage our non-U.S. stockholders to consult their tax advisor to determine the tax consequences applicable them.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (1) we are a "pension-held REIT," (2) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock or (3) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Item 1B. Unresolved Staff Comments.
None.

36


Item 2. Properties.
As of December 31, 2014, we owned 20 properties, comprised of 4.3 million rentable square feet that were 94.5% leased on a weighted-average basis with a weighted-average remaining lease term of 5.6 years.
The following table represents certain additional information about the properties we own at December 31, 2014:
Property
 
Acquisition Date
 
Property Type
 
Rentable
Square
Feet
 
Occupancy
 
Remaining Lease
Term (1)
 
Base Purchase
Price (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Liberty Crossing
 
Jun. 2012
 
Power Center
 
105,970

 
93.8%
 
4.4
 
$
21,582

 
San Pedro Crossing
 
Dec. 2012
 
Power Center
 
201,965

 
100.0%
 
5.2
 
32,600

 
Tiffany Springs MarketCenter
 
Sep. 2013
 
Power Center
 
238,382

 
89.4%
 
4.0
 
52,856

(3) 
The Streets of West Chester
 
Apr. 2014
 
Lifestyle Center
 
167,155

 
91.8%
 
3.8
 
40,500

 
Prairie Towne Center
 
Jun. 2014
 
Power Center
 
289,277

 
95.3%
 
9.2
 
25,300

 
Southway Shopping Center
 
Jun. 2014
 
Power Center
 
181,809

 
100.0%
 
3.6
 
28,900

 
Stirling Slidell Centre
 
Aug. 2014
 
Power Center
 
134,276

 
77.2%
 
5.6
 
15,272

 
Northwoods Marketplace
 
Aug. 2014
 
Power Center
 
236,078

 
97.1%
 
4.9
 
34,818

 
Centennial Plaza
 
Aug. 2014
 
Power Center
 
233,797

 
100.0%
 
3.5
 
27,600

 
Northlake Commons
 
Sep. 2014
 
Lifestyle Center
 
109,112

 
94.4%
 
4.3
 
31,203

 
Shops at Shelby Crossing
 
Sep. 2014
 
Power Center
 
236,081

 
89.3%
 
3.7
 
29,924

 
Shoppes of West Melbourne
 
Sep. 2014
 
Power Center
 
144,399

 
89.1%
 
5.8
 
16,618

 
The Centrum
 
Sep. 2014
 
Power Center
 
270,747

 
99.4%
 
4.3
 
34,914

 
Shoppes at Wyomissing
 
Oct. 2014
 
Lifestyle Center
 
103,064

 
94.7%
 
3.8
 
27,175

 
Southroads Shopping Center
 
Oct. 2014
 
Power Center
 
429,359

 
93.2%
 
5.7
 
57,328

 
Parkside Shopping Center
 
Nov. 2014
 
Power Center
 
172,622

 
92.2%
 
7.7
 
32,573

 
West Lake Crossing
 
Nov. 2014
 
Power Center
 
75,928

 
95.8%
 
6.3
 
14,048

 
Colonial Landing
 
Dec. 2014
 
Power Center
 
263,559

 
100.0%
 
5.1
 
37,226

 
The Shops at West End
 
Dec. 2014
 
Lifestyle Center
 
381,831

 
92.6%
 
9.5
 
114,707

 
Township Marketplace
 
Dec. 2014
 
Power Center
 
298,630

 
96.8%
 
3.6
 
41,120

 
Portfolio, December 31, 2014
 
 
 
 
 
4,274,041

 
94.5%
 
5.6
 
$
716,264

 
_____________________
(1)
Remaining lease term as of December 31, 2014, calculated on a weighted-average basis.
(2)
Contract purchase price, net of purchase price adjustments, excluding acquisition related costs.
(3)
Excludes a $0.6 million related to an outparcel of land sale completed during April 2014.

37


The following table details the geographic distribution, by state, of our portfolio as of December 31, 2014
State
 
Number of Properties
 
Rentable Square Feet
 
Rentable Square Foot %
 
Annualized Rental Income (1)
 
Annualized Rental
Income %
 
 
 
 
 
 
 
 
(In thousands)
 
 
Florida
 
3
 
644,039

 
15.1
%
 
$
8,178

 
13.4
%
Illinois
 
1
 
289,277

 
6.8
%
 
2,181

 
3.6
%
Kentucky
 
1
 
172,622

 
4.0
%
 
2,488

 
4.1
%
Louisiana
 
1
 
134,276

 
3.1
%
 
1,303

 
2.1
%
Minnesota
 
1
 
381,831

 
8.9
%
 
10,351

 
17.0
%
Missouri
 
1
 
238,382

 
5.7
%
 
4,178

 
6.9
%
North Carolina
 
2
 
379,859

 
8.9
%
 
5,279

 
8.6
%
Ohio
 
1
 
167,155

 
3.9
%
 
3,075

 
5.0
%
Oklahoma
 
2
 
663,156

 
15.5
%
 
6,866

 
11.2
%
Pennsylvania
 
2
 
401,694

 
9.4
%
 
5,748

 
9.4
%
South Carolina
 
1
 
236,078

 
5.5
%
 
2,827

 
4.6
%
Texas
 
4
 
565,672

 
13.2
%
 
8,588

 
14.1
%
 
 
20
 
4,274,041

 
100.0
%
 
$
61,062

 
100.0
%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases in the portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
Future Minimum Lease Payments
The following table presents future minimum base rent payments, on a cash basis, due to us over the next ten years and thereafter as of December 31, 2014. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items:
(In thousands)
 
Future Minimum
Base Rent Payments
2015
 
$
58,321

2016
 
56,416

2017
 
53,015

2018
 
41,159

2019
 
27,868

2020
 
23,032

2021
 
18,551

2022
 
16,743

2023
 
14,799

2024
 
11,154

Thereafter
 
23,380

 
 
$
344,438


38


Future Lease Expirations
The following is a summary of lease expirations for the next ten years as of December 31, 2014:
Year of Expiration
 
Number of
Leases
Expiring
 
Annualized
Rental
Income (1)
Expiring
 
Percent of
Portfolio
Annualized
Rental Income Expiring
 
Leased
Rentable
Square Feet
Expiring
 
Percent of
Portfolio
Rentable Square
Feet Expiring (2)
 
 
 
 
(In thousands)
 
 
 
 
 
 
2015
 
24

 
$
1,160

 
1.9
%
 
68,557

 
1.6
%
2016
 
46

 
3,627

 
5.9
%
 
230,071

 
5.7
%
2017
 
50

 
5,825

 
9.5
%
 
490,190

 
12.1
%
2018
 
83

 
13,413

 
22.0
%
 
967,639

 
23.9
%
2019
 
72

 
12,089

 
19.8
%
 
785,158

 
19.4
%
2020
 
27

 
3,787

 
6.2
%
 
182,451

 
4.5
%
2021
 
22

 
4,351

 
7.1
%
 
273,703

 
6.8
%
2022
 
12

 
1,835

 
3.0
%
 
121,427

 
3.1
%
2023
 
12

 
1,668

 
2.7
%
 
114,034

 
2.8
%
2024
 
24

 
4,029

 
6.6
%
 
286,368

 
7.1
%
Total
 
372

 
$
51,784

 
84.7
%
 
3,519,598

 
87.0
%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases in the portfolio on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
(2)
Excludes the rentable square feet associated with our fee simple interest in a ground lease.
Tenant Concentration
As of December 31, 2014, we did not have any tenants whose rentable square feet or annualized rental income on a straight-line basis represented greater than 10.0% of total portfolio rentable square feet or annualized rental income on a straight-line basis.
Significant Portfolio Properties
The rentable square feet or annualized rental income on a straight-line basis of San Pedro Crossing, Tiffany Springs MarketCenter, The Streets of West Chester, Prairie Towne Center, Northwoods Marketplace, Centennial Plaza, Shops at Shelby Crossing, The Centrum, Southroads Shopping Center, Colonial Landing, The Shops at West End and Township Marketplace each represent 5.0% or more or our total portfolio's rentable square feet or annualized rental income on a straight-line basis. The tenant concentration for each of these properties is summarized below.
San Pedro Crossing
The following table lists tenants at San Pedro Crossing whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of San Pedro Crossing as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet as a % of San Pedro Crossing Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income as a % of
San Pedro Crossing Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Toys "R" Us, Inc.
 
1
 
60,687
 
30.0%
 
January 2021
 
6.1
 
5 five-year options
 
$
910

 
27.1%
Barnes and Noble Booksellers, Inc.
 
1
 
35,475
 
17.6%
 
February 2021
 
6.2
 
None
 
$
619

 
18.5%
The Container Store, Inc.
 
1
 
22,817
 
11.3%
 
January 2018
 
3.1
 
3 five-year options
 
$
552

 
16.5%
Office Depot, Inc.
 
1
 
21,074
 
10.4%
 
December 2019
 
5.0
 
2 five-year options
 
$
161

 
4.8%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.

39


Tiffany Springs MarketCenter
The following table lists tenants at Tiffany Springs MarketCenter whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Tiffany Springs MarketCenter as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet as a % of Tiffany Springs MarketCenter Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Tiffany Springs MarketCenter Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Best Buy Co., Inc.
 
1
 
45,676
 
19.2%
 
January 2019
 
4.1
 
4 five-year options
 
$
795

 
19.0%
Sports Authority, Inc.
 
1
 
41,770
 
17.5%
 
January 2019
 
4.1
 
4 five-year options
 
$
647

 
15.5%
PetSmart, Inc.
 
1
 
25,464
 
10.7%
 
July 2018
 
3.6
 
3 five-year options
 
$
526

 
12.6%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
The Streets of West Chester
The following table lists tenants at The Streets of West Chester whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of The Streets of West Chester as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
The Streets of West Chester Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
The Streets of West Chester Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
AMC Entertainment, Inc.
 
1
 
82,000
 
49.1%
 
January 2019
 
4.1
 
5 five-year options
 
$
1,789

 
58.2%
Barnes and Noble Booksellers, Inc.
 
1
 
25,000
 
15.0%
 
March 2016
 
1.2
 
2 five-year options
 
$
300

 
9.8%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
Prairie Towne Center
The following table lists tenants at Prairie Towne Center whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Prairie Towne Center as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Prairie Towne Center Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Prairie Towne Center Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Lowe's Companies, Inc.
 
1
 
157,900
 
54.6%
 
July 2025
 
10.6
 
6 five-year options
 
$
1,221

 
56.0%
Kohl's Corporation
 
1
 
106,745
 
36.9%
 
January 2024
 
9.1
 
10 five-year options
 
$
767

 
35.2%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.

40


Northwoods Marketplace
The following table lists tenants at Northwoods Marketplace whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Northwoods Marketplace as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Northwoods Marketplace Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Northwoods Marketplace Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Best Buy Co., Inc.
 
1
 
43,278
 
18.3%
 
November 2018
 
3.9
 
3 five-year options
 
$
434

 
15.3%
Big Lots Stores, Inc.
 
1
 
34,000
 
14.4%
 
January 2018
 
3.1
 
3 five-year options
 
$
221

 
7.8%
Barnes and Noble Booksellers, Inc.
 
1
 
25,046
 
10.6%
 
February 2019
 
4.2
 
None
 
$
301

 
10.6%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
Centennial Plaza
The following table lists tenants at Centennial Plaza whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Centennial Plaza as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Centennial Plaza Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Centennial Plaza Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Home Depot U.S.A., Inc.
 
1
 
102,962
 
44.0%
 
January 2019
 
4.1
 
5 five-year options
 
$
855

 
39.3%
Gordmans Stores, Inc.
 
1
 
50,000
 
21.4%
 
October 2018
 
3.8
 
3 five-year options
 
$
500

 
23.0%
Best Buy Co., Inc.
 
1
 
45,753
 
19.6%
 
January 2018
 
3.1
 
1 five-year option
 
$
400

 
18.4%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.

41


Shops at Shelby Crossing
The following table lists tenants at Shops at Shelby Crossing whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Shops at Shelby Crossing as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Shops at Shelby Crossing Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Shops at Shelby Crossing Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Gold's Gym International, Inc.
 
1
 
30,937
 
13.1%
 
November 2019
 
4.9
 
3 five-year options
 
$
378

 
13.6%
Ross Stores, Inc.
 
1
 
29,940
 
12.7%
 
January 2018
 
3.1
 
4 five-year options
 
$
329

 
11.8%
TJX Companies, Inc.
 
1
 
28,634
 
12.1%
 
September 2017
 
2.8
 
4 five-year options
 
$
279

 
10.0%
Petco Animal Supplies, Inc.
 
1
 
17,296
 
7.3%
 
December 2017
 
3.0
 
3 five-year options
 
$
311

 
11.2%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
The Centrum
The following table lists tenants at The Centrum whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of The Centrum as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
The Centrum Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
The Centrum Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Sears Holdings Corporation
 
1
 
105,015
 
38.8%
 
September 2017
 
2.8
 
10 five-year options
 
$
724

 
24.7%
Stein Mart, Inc.
 
1
 
36,000
 
13.3%
 
August 2022
 
7.7
 
None
 
$
317

 
10.8%
TJX Companies, Inc.
 
1
 
30,000
 
11.1%
 
January 2018
 
3.1
 
1 five-year option
 
$
263

 
9.0%
Sky Zone Indoor Trampoline Park
 
1
 
25,536
 
9.4%
 
August 2024
 
9.7
 
2 five-year options
 
$
295

 
10.1%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.

42


Southroads Shopping Center
The following table lists tenants at Southroads Shopping Center whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Southroads Shopping Center as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Southroads Shopping Center Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Southroads Shopping Center Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Reasor LLC
 
1
 
75,000
 
17.5%
 
August 2018
 
3.7
 
4 five-year options
 
$
636

 
13.6%
AMC Entertainment, Inc.
 
1
 
74,182
 
17.3%
 
December 2025
 
11.0
 
4 five-year options
 
$
1,067

 
22.7%
TSA Stores, Inc.
 
1
 
59,451
 
13.8%
 
January 2018
 
3.1
 
3 five-year options
 
$
386

 
8.2%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
Colonial Landing
The following table lists tenants at Colonial Landing whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Colonial Landing as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Colonial Landing Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Colonial Landing Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
TSA Stores, Inc.
 
1
 
44,493
 
16.9%
 
January 2018
 
3.1
 
4 five-year options
 
$
533

 
13.8%
Jo-Ann Stores, LLC
 
1
 
37,308
 
14.2%
 
April 2017
 
2.3
 
3 five-year options
 
$
349

 
9.0%
hhgregg, Inc.
 
1
 
30,662
 
11.6%
 
May 2018
 
3.4
 
4 five-year options
 
$
521

 
13.5%
Bed Bath & Beyond, Inc.(2)
 
1
 
27,761
 
10.5%
 
January 2024
 
9.1
 
4 five-year options
 
$
291

 
7.5%
Buy Buy Baby, Inc.(2)
 
1
 
26,405
 
10.0%
 
January 2024
 
9.1
 
4 five-year options
 
$
378

 
9.8%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
(2)
Buy Buy Baby, Inc. is a subsidiary of Bed Bath & Beyond, Inc.

43


The Shops at West End
The following table lists tenants at The Shops at West End whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of The Shops at West End as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
The Shops at West End Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
The Shops at West End Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Kerasotes Showplace Theatres, LLC
 
1
 
59,500
 
15.6%
 
November 2029
 
14.9
 
2 five-year options
 
$
2,116

 
20.4%
SUPERVALU Inc.
 
1
 
55,288
 
14.5%
 
December 2029
 
15.0
 
4 five-year options
 
$
1,354

 
13.1%
Latitude 360 Minneapolis, LLC(2)
 
1
 
43,808
 
11.5%
 
May 2025
 
10.4
 
1 five-year option
 
$
1,101

 
10.6%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
(2)
As of December 31, 2014, payment rent for Latitude 360 Minneapolis, LLC had not yet commenced.
Township Marketplace
The following table lists tenants at Township Marketplace whose rentable square feet or annualized rental income on a straight-line basis is greater than 10.0% of the total rentable square feet or total annualized rental income on a straight-line basis of Township Marketplace as of December 31, 2014, respectively:
Tenant 
 
Number of
Units
Occupied
by Tenant
 
Rentable Square
Feet
 
Rentable Square Feet
as a % of
Township Marketplace Total
 
Lease 
Expiration
 
Remaining
Lease
Term
 
Renewal
Options
 
Annualized
Rental
Income (1)
 
Annualized Rental Income
as a % of
Township Marketplace Total
 
 
 
 
 
 
 
 
 
 
(In years)
 
 
 
(In thousands)
 
 
Lowe's Companies, Inc.
 
1
 
125,789
 
42.1%
 
August 2017
 
2.7
 
1 five-year option & 1 four-year option
 
$
985

 
30.7%
Cinemark USA, Inc.
 
1
 
39,470
 
13.2%
 
June 2019
 
4.5
 
2 five-year options & 1 four-year option
 
$
701

 
21.8%
_____________________
(1)
Annualized rental income as of December 31, 2014 for the in-place leases at the property on a straight-line basis, which includes tenant concessions such as free rent, as applicable.
Property Financing
Our mortgage notes payable as of December 31, 2014 consists of the following:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate as of
 
 
 
 
Property
 
Encumbered Properties
 
December 31, 2014
 
December 31, 2014
 
Interest Rate
 
Maturity Date
 
 
 
 
(In thousands)
 
 
 
 
 
 
Liberty Crossing - Refinanced Loan
 
1
 
$
11,000

 
4.66
%
 
Fixed
 
Jul. 2018
San Pedro Crossing - Senior Loan (1)
 
1
 
17,985

 
3.79
%
 
Fixed
 
Jan. 2018
Tiffany Springs MarketCenter
 
1
 
33,802

 
3.92
%
 
Fixed
(2) 
Oct. 2018
Shops at Shelby Crossing
 
1
 
24,144

 
4.97
%
 
Fixed
 
Mar. 2024
Total
 
4
 
$
86,931

 
4.28
%
(3) 
 
 
 
_________________________________
(1)
Payments and obligations pursuant to this mortgage agreement are guaranteed by the Parent of our Sponsor.
(2)
Fixed through an interest rate swap agreement.
(3)
Calculated on a weighted-average basis for all mortgages outstanding as of December 31, 2014.

44


Item 3. Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.

45


PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our shares of common stock are not traded on a national securities exchange. No established public market currently exists for our shares and there may never be one. If our stockholders are able to find a buyer for their shares, they may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors. Consequently, there is risk that our stockholders may not be able to sell their shares at a time or price acceptable to them.
In order for Financial Industry Regulatory Authority ("FINRA") members and their associated persons to participate in the IPO and sale of shares of common stock pursuant to our IPO, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, we prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of the Employee Retirement Income Security Act of 1974 in the preparation of their reports relating to an investment in our shares.
Holders
As of March 31, 2015, we had 95.4 million shares of common stock outstanding held by a total of 20,415 stockholders.
Distributions
We qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2012. As a REIT, we are required, among other things, to distribute at least 90% of our REIT taxable income to our stockholders annually. The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable and annual distribution requirements needed to qualify and maintain our status as a REIT under the Code. From a tax perspective, of the amounts distributed during the years ended December 31, 2014 and 2013, 88.7% and 4.6%, or $0.57 and $0.03 per share per annum represented a return of capital, and 11.3% and 95.4%, or $0.07 and $0.61 per share per annum, represented ordinary dividend income, respectively.
On September 19, 2011, our board of directors authorized, and we declared, distributions which is calculated based on stockholders of record each day during the applicable period of $0.0017534247 per day, which is equivalent to $0.64, based on a 365-day year.
Our distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distributions payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distributions payments are not assured. The following table reflects distributions declared and paid in cash and through the DRIP to common stockholders, excluding distributions related to Class B Units (as described below) as these distributions are recorded as expense in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2014 and 2013:
(In thousands)
 
Distributions
Paid in Cash
 
Distributions
Reinvested through
DRIP
 
Distributions Paid on Unvested Restricted Stock
 
Total
Distributions
Paid
 
Total
Distributions
Declared
1st Quarter, 2014
 
$
830

 
$
603

 
$
3

 
$
1,436

 
$
2,080

2nd Quarter, 2014
 
1,942

 
1,893

 
4

 
3,839

 
4,689

3rd Quarter, 2014
 
3,542

 
4,220

 
3

 
7,765

 
10,066

4th Quarter, 2014
 
5,880

 
8,108

 
4

 
13,992

 
14,960

Total
 
$
12,194

 
$
14,824

 
$
14

 
$
27,032

 
$
31,795


46


(In thousands)
 
Distributions
Paid in Cash
 
Distributions
Reinvested through
DRIP
 
Distributions Paid on Unvested Restricted Stock
 
Total
Distributions
Paid
 
Total
Distributions
Declared
1st Quarter, 2013
 
$
103

 
$
30

 
$

 
$
133

 
$
154

2nd Quarter, 2013
 
165

 
88

 
1

 
254

 
332

3rd Quarter, 2013
 
313

 
160

 
2

 
475

 
615

4th Quarter, 2013
 
494

 
385

 
2

 
881

 
970

Total
 
$
1,075

 
$
663

 
$
5

 
$
1,743

 
$
2,071

We, our board of directors and the Advisor share a similar philosophy with respect to paying our distributions. Distributions should principally be derived from cash flows generated from operations. In order to improve our operating cash flows and our ability to pay distributions from operating cash flows, our Advisor may waive certain recurring fees.
Prior to October 1, 2013, we paid the Advisor an asset management fee of up to 0.75% of average invested assets, less amounts paid as an oversight fee. Effective October 1, 2013, the payment of asset management fees in the form of cash, shares or restricted stock grants was eliminated. Instead, we cause the OP to issue (subject to periodic approval by the board of directors) to the Advisor restricted performance-based restricted partnership units of the OP, designated as "Class B Units" for asset management services, which are intended to be profits interests and are issued in an amount equal to the cost of our assets multiplied by 0.1875%, divided by the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $9.00 (the initial offering price in the IPO minus selling commissions and dealer manager fees). As of December 31, 2014, our board of directors has approved the issuance of 169,992 Class B Units to the Advisor in connection with this arrangement on a cumulative basis.
In connection with property management and leasing services, unless we contract with a third party, we will pay our Advisor a property management fee of 2.0% of gross revenues from our stand-alone single-tenant net leased properties which are not part of a shopping center and 4.0% of gross revenues from all other types of properties, respectively. If we contract directly with third parties for such services, we will pay them customary market fees and, prior to January 28, 2014, would pay the Advisor an oversight fee of up to 1.0% of the gross revenues of the property managed. Effective January 28, 2014 the Advisor eliminated the oversight fee. No such fees were incurred from our Advisor for the year ended December 31, 2014.
The Advisor may elect to waive its fees, and will determine if a portion or all of such fees will be waived in subsequent periods on a quarter-to-quarter basis. The fees that are waived are not deferrals and accordingly, will not be paid by us. Because the Advisor may waive certain fees that we may owe, cash flows from operations that would have been paid to the Advisor will be available to pay distributions to our stockholders. During the year ended December 31, 2014, the Advisor did not waive any such fees incurred. During the year ended December 31, 2013, the Advisor elected to waive $0.1 million of aggregate asset management and property management fees.
In certain instances, to improve our working capital, the Advisor may elect to absorb a portion of our general and administrative costs and/or property operating costs that would otherwise have been paid by us. The Advisor absorbed $0.3 million and $0.7 million of general and administrative costs during the years ended December 31, 2014 and 2013, respectively. No property operating costs were absorbed by the Advisor during the year ended December 31, 2014. The Advisor absorbed approximately $41,000 of property operating costs during the year ended December 31, 2013.
During the years ended December 31, 2014 and 2013, distributions paid to common stockholders totaled $27.0 million and $1.7 million, inclusive of $14.8 million and $0.7 million of distributions reinvested pursuant to the DRIP, respectively. During the year ended December 31, 2014, cash used to pay our distributions was generated from cash flows from operations, proceeds from the issuance of common stock and from common stock issued pursuant to our DRIP. During the year ended December 31, 2013, cash used to pay our distributions was generated from proceeds from the issuance of common stock and from common stock issued pursuant to our DRIP. As we continue to build our portfolio of investments, we expect that we will use funds received from operating activities to pay a greater proportion of our distributions and will be able to reduce and in the future eliminate the use of funds from our issuance of common stock to pay distributions. As the cash flows from operations become more significant our Advisor may discontinue its practice of forgiving fees and may charge the full fee owed to it in accordance with our agreements with the Advisor. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.

47


Share-Based Compensation
Stock Option Plan
We have a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to our independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be fixed at $10.00 per share until the termination of the IPO, and thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan.
Notwithstanding any other provisions of our Plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Code. The following table sets forth information regarding securities authorized for issuance under our Plan as of December 31, 2014:
Plan Category
 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)
 
 
(a)
 
(b)
 
(c)
Equity Compensation Plans approved by security holders
 

 
$

 

Equity Compensation Plans not approved by security holders
 

 

 
500,000

Total
 

 
$

 
500,000

Restricted Share Plan
We have an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further approval by our board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the date of grant in increments of 20.0% per annum. The RSP provides us with the ability to grant awards of restricted shares to our directors, officers and employees (if we ever have employees), employees of our Advisor and its affiliates, employees of entities that provide services to us, directors of our Advisor or of entities that provide services to us, certain consultants to us and our Advisor and its affiliates or to entities that provide services to us. The total number of shares of common stock granted under the RSP may not exceed 5.0% of our outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from us under terms that provide for vesting over a specified period of time. Such awards would typically be forfeited forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with us. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in common shares will be subject to the same restrictions as the underlying restricted shares. As of December 31, 2014 and 2013, we had 15,600 and 19,800 unvested restricted shares, respectively, that were granted pursuant to the RSP.
Recent Sale of Unregistered Equity Securities
For its asset management services, we cause the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B Units" which are intended to be profit interests and will be subject to forfeiture unless certain events happen and certain conditions are met. See Note 10 — Related Party Transactions and Arrangements of the accompanying notes to the consolidated financial statements. During the year ended December 31, 2014, our board of directors approved the issuance of 169,992 Class B Units to the Advisor in connection with this arrangement.

48


Use of Proceeds from Sales of Registered Securities
On March 17, 2011, we commenced our IPO on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to our Registration Statement, filed with the SEC under the Securities Act. The Registration Statement also covered up to 25.0 million shares available pursuant to the DRIP under which our common stockholders were able to elect to have their distributions reinvested in additional shares of our common stock. On March 4, 2013, our board of directors approved an extension of the termination date of our IPO from March 17, 2013 to March 17, 2014. On March 14, 2014, we filed the Follow-On Registration Statement with the SEC to register a follow-on offering of up to 75.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, and 12.5 million shares of common stock pursuant to the DRIP. However, as permitted by Rule 415 under the Securities Act, we continued offering and selling shares in our IPO until September 12, 2014. The IPO closed on September 12, 2014. On September 17, 2014, we withdrew our Follow-On Registration Statement, from which no securities were sold. On September 19, 2014, we registered an additional 25.0 million shares of common stock to be used under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3D (File No. 333-198864). As of December 31, 2014, we had 94.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total gross proceeds from the IPO and the DRIP of $938.7 million.
The following table reflects the offering costs associated with issuances of common stock:
(In thousands)
 
Period from
July 29, 2010
(date of inception) to
December 31, 2014
Selling commissions and dealer manager fees
 
$
88,000

Other offering costs
 
13,364

Total offering costs
 
$
101,364

The Dealer Manager reallowed the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of shares of common stock:
(In thousands)
 
Period from
July 29, 2010
(date of inception) to
December 31, 2014
Total commissions paid to the Dealer Manager
 
$
88,000

Less:
 
 
  Commissions to participating broker-dealers
 
(60,322
)
  Reallowance to participating broker-dealers
 
(9,849
)
Net to the Dealer Manager
 
$
17,829

As of December 31, 2014, cumulative offering costs included $7.7 million incurred from the Advisor and Dealer Manager. We are responsible for offering and related costs from our IPO, excluding selling commissions and dealer manager fees, up to a maximum of 1.5% of gross proceeds received from our IPO, measured at the end of the IPO. Offering costs, excluding selling commissions and dealer manager fees, in excess of the 1.5% cap as of the end of our IPO are the Advisor's responsibility. As of the close of our IPO, cumulative offering and related costs, excluding commissions and dealer manager fees, did not exceed the 1.5% threshold.
We have used and continue to use the proceeds from our IPO to primarily acquire existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20.0 million) and other need-based shopping centers which are located in the United States and at least 80.0% leased at the time of acquisition. We may originate or acquire first mortgage loans secured by real estate. As of December 31, 2014, we have used the net proceeds from our IPO and debt financings to purchase 20 properties with an aggregate base purchase price of $716.3 million. We have used and may continue to use net proceeds from our IPO to fund a portion of our distributions. Once we have used all of the proceeds from our IPO to acquire properties, management expects that cash flow from our properties will be sufficient to fund operating expenses and the payment of our monthly distributions.

49


Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our common stock is currently not listed on a national securities exchange and we will not seek to list our stock until such time as our independent directors believe that the listing of our stock would be in the best interest of our stockholders. In order to provide stockholders with interim liquidity, our board of directors has adopted a Share Repurchase Program (the "SRP") that enables our stockholders to sell their shares back to us after having held them for at least one year, subject to significant conditions and limitations. Our Sponsor, Advisor, directors and affiliates are prohibited from receiving a fee on any share repurchases.
 Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in the SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in the SRP.
Repurchases of shares of our common stock, when requested, are at our sole discretion and generally will be made quarterly. We will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, we are only authorized to repurchase shares in a given quarter up to the amount of proceeds we receive from our DRIP in that same quarter.
 Unless the shares of our common stock are being repurchased in connection with a stockholder's death, the purchase price for shares repurchased under our SRP will be as set forth below until we establish an estimated value of our shares. We obtain independent third-party appraisals in connection with our acquisition of investment properties; however, we do not currently anticipate obtaining revised appraisals for our investments (other than investments in transactions with our Sponsor, Advisor, directors or their respective affiliates) and, accordingly, the estimated value of our investments should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. We expect to begin establishing an estimated value of our shares based on the value of our real estate and real estate-related investments beginning 18 months after the close of our IPO. We will retain persons independent of us and our Advisor to prepare the estimated value of our shares.
We will repurchase shares as of the last business day of each quarter (and in all events on a date other than a dividend payment date). Prior to establishing the estimated value of our shares, the price per share that we will pay to repurchase shares of our common stock will be as follows:
the lower of $9.25 or 92.5% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least one year;
the lower of $9.50 or 95.0% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least two years;
the lower of $9.75 or 97.5% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least three years; and
the lower of $10.00 or 100% of the price paid to acquire the shares from us for stockholders who have continuously held their shares for at least four years (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock).
Upon the death or disability of a stockholder, upon request, we will waive the one-year holding requirement that otherwise will apply to redemption requests made prior to such time. Shares repurchased in connection with the death or disability of a stockholder will be repurchased at a purchase price equal to the price actually paid for the shares during the IPO, or if not engaged in the IPO, the per share purchase price will be based on the greater of $10.00 or the then-current net asset value of the shares as determined by our board of directors (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). Our board of directors has the discretion to exempt shares purchased pursuant to our DRIP from the one-year holding requirement, if a stockholder sells back all of his or her shares. In addition, we may waive the holding period in the event of a stockholder's bankruptcy or other exigent circumstances.

50


When a stockholder requests a redemption and the redemption is approved, we will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table summarizes the repurchases of shares under the SRP cumulatively through December 31, 2014:
 
 
Number of Requests
 
Number of Shares Repurchased
 
Cost of Shares Repurchased
 
Weighted-Average Price per Share
 
 
 
 
 
 
(In thousands)
 
 
Cumulative repurchase requests as of December 31, 2013
 
1

 
8,674

 
$
87

 
$
9.98

Year ended December 31, 2014
 
18

 
64,818

 
635

 
9.80

Cumulative repurchase requests as of December 31, 2014 (1)
 
19

 
73,492

 
722

 
$
9.82

Value of shares issued through DRIP
 
 
 
 
 
15,506

 
 
Excess
 
 
 
 
 
$
14,784

 
 
_____________________
(1)
Includes 11 unfulfilled repurchase requests consisting of 33,024 shares with a weighted-average repurchase price per share of $9.89, which were approved for repurchase as of December 31, 2014 and were completed during the first quarter of 2015. This liability is included in accounts payable and accrued expenses on our consolidated balance sheet as of December 31, 2014.
The SRP will immediately terminate if our shares are listed on any national securities exchange. In addition, our board of directors may amend, suspend (in whole or in part) or terminate the SRP at any time upon 30 days' prior written notice to our stockholders. Further, our board of directors reserves the right, in its sole discretion, to reject any requests for repurchases.
Item 6. Selected Financial Data.
The following selected financial data as of and for the four years ended December 31, 2014 and as of December 31, 2010 and for the period from July 29, 2010 (date of inception) to December 31, 2010 should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" below:
 
 
December 31,
Balance sheet data (in thousands)
 
2014
 
2013
 
2012
 
2011
 
2010
Total real estate investments, at cost
 
$
764,785

 
$
107,493

 
$
55,057

 
$

 
$

Total assets
 
$
935,810

 
$
119,942

 
$
55,724

 
$
36

 
$
1,156

Mortgage notes payable
 
$
86,931

 
$
63,083

 
$
40,725

 
$

 
$

Notes payable
 
$

 
$

 
$
7,235

 
$

 
$

Total liabilities
 
$
152,710

 
$
73,061

 
$
57,046

 
$
3,755

 
$
956

Total stockholders' equity (deficit)
 
$
783,100

 
$
46,881

 
$
(1,322
)
 
$
(3,719
)
 
$
200


51


 
 
Year Ended December 31,
 
For the Period from July 29, 2010 (date of inception) to December 31,
Operating data (In thousands, except share and per share data)
 
2014
 
2013
 
2012
 
2011
 
2010
Total revenues
 
$
28,109

 
$
7,161

 
$
1,266

 
$

 
$

Total operating expenses
 
36,887

 
8,974

 
2,635

 
313

 

Operating loss
 
(8,778
)
 
(1,813
)
 
(1,369
)
 
(313
)
 

Total other expenses, net
 
(3,854
)
 
(2,891
)
 
(833
)
 

 

Net loss
 
$
(12,632
)
 
$
(4,704
)
 
$
(2,202
)
 
$
(313
)
 
$

Other data:
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in) operating activities
 
$
4,044

 
$
(786
)
 
$
187

 
$
(260
)
 
$

Cash flows used in investing activities
 
$
(586,368
)
 
$
(12,740
)
 
$
(12,902
)
 
$

 
$

Cash flows provided by financing activities
 
$
739,992

 
$
26,543

 
$
12,993

 
$
259

 
$
1

Per share data:
 
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(0.26
)
 
$
(1.46
)
 
$
(6.15
)
 
$
(14.90
)
 
$

Distributions declared per common share
 
$
0.64

 
$
0.64

 
$
0.64

 
$

 
$

Basic and diluted weighted-average shares outstanding
 
49,231,737

 
3,216,903

 
358,267

 
21,000

 
20,000


52


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties.
Overview
American Realty Capital — Retail Centers of America, Inc. (the "Company," "we," "our" or "us"), incorporated on July 29, 2010, is a Maryland corporation that qualified as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2012. On March 17, 2011, we commenced our initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-169355) (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which our common stockholders were able to elect to have their distributions reinvested in additional shares of our common stock at a price initially equal to $9.50 per share, which was 95.0% of the per share offering price in the IPO.
On March 9, 2012, we raised proceeds sufficient to break escrow in connection with our IPO. On March 4, 2013, our board of directors approved an extension of the termination date of the IPO from March 17, 2013 to March 17, 2014. On March 14, 2014, we filed a registration statement on Form S-11 (File No. 333-194586) (the "Follow-On Registration Statement") with the SEC to register a follow-on offering of up to 75.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, and 12.5 million shares of common stock pursuant to the DRIP. However, as permitted by Rule 415 under the Securities Act, we continued offering and selling shares in our IPO until September 12, 2014.
The IPO closed on September 12, 2014. On September 17, 2014, we withdrew our Follow-On Registration Statement, from which no securities were sold. On September 19, 2014, we registered an additional 25.0 million shares of common stock to be used under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3D (File No. 333-198864).
As of December 31, 2014, we had 94.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $938.7 million.
We have acquired and intend to acquire and own existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20.0 million) and other need-based shopping centers which are located in the United States and at least 80.0% leased at the time of acquisition. All properties will be acquired and operated by us or acquired and operated by us jointly with another party. We may also originate or acquire first mortgage loans secured by real estate. We purchased our first property and commenced active operations in June 2012. As of December 31, 2014, we owned 20 properties with an aggregate purchase price of $716.3 million, comprised of 4.3 million rentable square feet which were 94.5% leased on a weighted-average basis.
Substantially all of our business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. We are the sole general partner and hold substantially all the units of limited partner interest in the OP ("OP Units"). Our external affiliated advisor, American Realty Capital Retail Advisor, LLC (the "Advisor"), a limited partner in the OP, holds 202 OP Units, which represents a nominal percentage of the aggregate OP ownership. After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of our common stock or, at the option of the OP, a corresponding number of shares of our common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.

53


We have no direct employees. We have retained the Advisor to manage our affairs on a day-to-day basis. The Advisor has entered into a service agreement with an independent third party, Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln"), pursuant to which Lincoln has agreed to provide, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO. The Advisor and the Dealer Manager are under common control with AR Capital, LLC, the parent of our sponsor, as a result of which they are related parties, and each of which has received or will receive compensation, fees and expense reimbursements for services related to our IPO and the investment and management of our assets. Such entities have received or may receive, as applicable, fees during the offering, acquisition, operational and liquidation stages. The Advisor has paid and will continue to pay Lincoln a substantial portion of the fees payable to the Advisor for the performance of real estate-related services.
Significant Accounting Estimates and Critical Accounting Policies
 Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Offering and Related Costs
Offering and related costs include all expenses incurred in connection with our IPO. Offering costs (other than selling commissions and the dealer manager fees) include costs that may be paid by the Advisor, the Dealer Manager or their affiliates on our behalf. These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow service related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse itemized and detailed due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. We are obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our IPO exceed 1.5% of gross offering proceeds from the IPO. As a result, these costs are only our liability to the extent aggregate selling commissions, dealer manager fees and other organization and offering costs do not exceed 11.5% of the gross proceeds determined at the end of our IPO. As of the close of the IPO, offering costs were less than 11.5% of the gross proceeds received in the IPO.
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates. When we acquire a property, the terms of the existing leases are considered to commence as of the acquisition date for the purposes of this calculation.
We own certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, we defer the recognition of contingent rental income until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the accompanying consolidated statements of operations.
Cost recoveries from tenants are included in operating expense reimbursements on the accompanying consolidated statements of operations in the period the related costs are incurred, as applicable.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. If the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statement of operations.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.

54


We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.
In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations, prepared by independent valuation firms. We also consider information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the consolidated statements of operations and comprehensive loss for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on our operations and financial results. Properties that are intended to be sold are to be designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale.
Depreciation and Amortization
We are required to make subjective assessments as to the useful lives of the components of our real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our real estate investments, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.

55


Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the "FASB") issued guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2014, the FASB amended the requirements for reporting discontinued operations. Under the revised guidance, in addition to other disclosure requirements, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale, disposed of by sale or other than by sale. The revised guidance is effective for annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. We have adopted the provisions of this guidance effective January 1, 2014, and have applied the provisions prospectively. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers 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 revised guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is not permitted under accounting principles generally accepted in the United States of America ("GAAP"). The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. We have not yet selected a transition method and are currently evaluating the impact of the new guidance.
In August 2014, the FASB issued guidance relating to disclosure of uncertainties about an entity's ability to continue as a going concern. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about the entity's ability to continue as a going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going concern and management's plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability to continue as a going concern. There is no disclosure required unless there are conditions or events that have raised substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. We have elected to adopt the provisions of this guidance effective December 31, 2014, as early application is permitted. The adoption of this guidance did not have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If we decide to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact of the new guidance.

56


In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If we decide to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact of the new guidance.
Results of Operations
We purchased our first property and commenced active operations in June 2012. As of December 31, 2014, we owned 20 properties with an aggregate base purchase price of $716.3 million, comprised of 4.3 million rentable square feet that were 94.5% leased on a weighted-average basis.
Comparison of the Year Ended December 31, 2014 to Year Ended December 31, 2013
As of January 1, 2013, we owned two properties (our "Same Store") with an aggregate base purchase price of $54.2 million, comprised of 0.3 million rentable square feet that were 96.5% leased on a weighted-average basis. We have acquired 18 properties since January 1, 2013 for an aggregate base purchase price of $662.1 million, comprised of 4.0 million rentable square feet that were 94.3% leased on a weighted-average basis as of December 31, 2014 (our "Acquisitions"). Accordingly, our results of operations for the year ended December 31, 2014 as compared to the year ended December 31, 2013 reflect significant increases in most categories.
During the year ended December 31, 2014, we entered into five new leases comprising a total of 12,821 rentable square feet. These leases will generate annualized rental income on a straight-line basis of $0.3 million, representing average rent per square foot of $23.53 In addition, we executed renewals on nine leases comprising a total of 81,957 rentable square feet. These leases will generate annualized rental income on a straight-line basis of $1.1 million, representing average rent per square foot of $13.59. Prior to the renewals, the average annualized rental income on a straight-line basis was $11.58 per square foot. The one-time cost of executing the leases and renewals, including leasing commissions, tenant improvement costs and tenant concessions, was $8.01 per square foot.
Rental Income
Rental income increased $16.1 million to $21.5 million for the year ended December 31, 2014, compared to $5.4 million for the year ended December 31, 2013. This increase in rental income was primarily due to our Acquisitions, which resulted in an increase in rental income of $15.8 million for the year ended December 31, 2014. In addition, Same Store rental income increased by $0.2 million, primarily due to the increase in rental rates resulting from renewed leases of $0.1 million and an increase in contingent rental income of $0.1 million due to the increased duration of our ownership during tenants' lease years during the year ended December 31, 2014 as compared to the year ended December 31, 2013.
Operating Expense Reimbursements
Operating expense reimbursements from tenants increased $4.9 million to $6.7 million for the year ended December 31, 2014, compared to $1.8 million for the year ended December 31, 2013. This increase in operating expense reimbursements was primarily due to our Acquisitions, which resulted in a $4.8 million increase for the year ended December 31, 2014. Same Store operating expense reimbursements remained consistent at $1.4 million for the years ended December 31, 2014 and 2013. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent.
Property Operating Expenses
Property operating expenses increased $6.5 million to $8.8 million for the year ended December 31, 2014, compared to $2.3 million for the year ended December 31, 2013. This increase in property operating expenses was primarily due to our Acquisitions, which resulted in a $6.3 million increase for the year ended December 31, 2014. In addition, Same Store property operating expenses increased by $0.1 million, which primarily related to an increase in real estate taxes and third party management fees, coupled with the absorption of approximately $41,000 of property operating costs by the Advisor for the year ended December 31, 2013. No property operating costs were absorbed by the Advisor during the year ended December 31, 2014. Property operating expenses primarily relate to the costs associated with maintaining our properties including property management fees incurred from Lincoln, real estate taxes, utilities, and repairs and maintenance.
Impairment Charges
We incurred $0.2 million of impairment charges during the year ended December 31, 2014. These charges related to the write-off of intangible assets in connection with an unsuccessful contractual arrangement associated with acquisition of Stirling Slidell Centre. No impairment charges were incurred during the year ended December 31, 2013.

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Fair Value Adjustment to Contingent Purchase Price Obligation
During the year ended December 31, 2014, we recorded a $0.7 million fair value adjustment related to the write-off of a contingent consideration purchase price obligation in connection with an unsuccessful contractual arrangement associated with the acquisition of Stirling Slidell Centre. No such fair value adjustments were made during the year ended December 31, 2013.
Operating Fees to Affiliates
Until October 1, 2013, our affiliated Advisor was entitled to asset management fees in connection with providing asset management services and oversight fees for properties managed by Lincoln. Our Advisor elected to waive these fees for the year ended December 31, 2013. For the year ended December 31, 2013, we would have incurred aggregate asset management and oversight fees of $0.1 million had these fees not been waived. Effective October 1, 2013, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated, in addition to the oversight fee. Instead, we cause the OP to issue (subject to periodic approval by our board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B Units," which will be forfeited unless certain conditions are met. During the year ended December 31, 2014, the board of directors approved the issuance of 169,992 Class B Units to the Advisor in connection with this arrangement. During the year ended December 31, 2013, no Class B Units were issued to the Advisor in connection with this arrangement.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses increased $10.9 million to $11.9 million for the year ended December 31, 2014, compared to $1.0 million for the year ended December 31, 2013. This increase was primarily due to our acquisition of 17 properties with a base purchase price of $609.2 million during the year ended December 31, 2014. The acquisition and transaction related expenses of $1.0 million for the year ended December 31, 2013 primarily related to our acquisition of Tiffany Springs MarketCenter in September 2013.
General and Administrative Expenses
General and administrative expenses increased $2.1 million to $2.6 million for the year ended December 31, 2014, compared to $0.5 million for the year ended December 31, 2013. This increase related primarily to higher legal and accounting fees, audit fees, transfer agent fees, state and local income taxes and support from affiliate fees to support our current real estate portfolio. Additionally, this increase resulted from the $0.4 million decrease in general and administrative costs absorbed by the Advisor during the year ended December 31, 2014 compared to the year ended December 31, 2013.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $8.9 million to $14.1 million for the year ended December 31, 2014, compared to $5.2 million for the year ended December 31, 2013. This increase was primarily attributable to our Acquisitions, which resulted in an increase in depreciation and amortization expenses of $9.9 million for the year ended December 31, 2014. This increase was partially offset by a $1.0 million decrease in Same Store depreciation and amortization, primarily due to the expiration of identifiable intangible assets associated with existing leases in-place at acquisition. The base purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives.
Interest Expense
Interest expense increased $1.1 million to $3.9 million for the year ended December 31, 2014, compared to $2.8 million for the year ended December 31, 2013. Interest expense for the year ended December 31, 2014 resulted from our mortgage notes payable, which had a weighted-average balance of $70.3 million and a weighted-average effective interest rate of 4.11%, as well as unused fees on our Credit Facility and amortization of deferred financing costs. Interest expense for the year ended December 31, 2013 resulted from our mortgage notes payable, which had a weighted-average balance of $45.6 million and a weighted-average interest rate of 4.78%, our unsecured notes payable, which had a weighted-average balance of $5.2 million and a weighted-average effective interest rate of 7.15% and amortization of deferred financing costs.
Extinguishment of Debt
We incurred $0.1 million for our extinguishment of debt during the year ended December 31, 2013 in connection with our refinancing of the Liberty Crossing property during June 2013. In connection with the refinancing, which qualified as an extinguishment of debt based on the significance of changes to the terms of the loan, we wrote off approximately $74,000 of related deferred financing costs and incurred approximately $56,000 of penalties, interest and fees during the year ended December 31, 2013. We did not extinguish any debt during the year ended December 31, 2014.

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Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012
Rental Income
Rental income increased $4.4 million to $5.4 million for the year ended December 31, 2013, compared to $1.0 million for the year ended December 31, 2012. $0.9 million of this $4.4 million increase was attributable to our acquisition and operation of Tiffany Springs MarketCenter, which was acquired on September 26, 2013 for a base purchase price of $53.5 million, comprised of 0.2 million rentable square feet that were 88.8% leased on a weighted-average basis as of December 31, 2013. $0.6 million of the increase was driven by our operation of Liberty Crossing for the full year ended December 31, 2013, as compared to the period from June 8, 2012 (date of Liberty Crossing acquisition) to December 31, 2012. $2.9 million of the increase in rental income was driven by our operation of San Pedro Crossing for the full year ended December 31, 2013, as compared to the period from December 21, 2012 (date of San Pedro Crossing acquisition) to December 31, 2012.
Operating Expense Reimbursements
Operating expense reimbursements increased $1.5 million to $1.8 million for the year ended December 31, 2013, compared to $0.3 million for the year ended December 31, 2012. Pursuant to many of our lease agreements, tenants are required to pay their pro rata share of property operating expenses, in addition to base rent. $0.4 million of this $1.5 million increase was attributable to our acquisition and operation of Tiffany Springs MarketCenter in 2013. $0.2 million of the increase was driven by our operation of Liberty Crossing for the full year ended December 31, 2013, as compared to the period from June 8, 2012 (date of Liberty Crossing acquisition) to December 31, 2012. $0.9 million of the increase was driven by our operation of San Pedro Crossing for the full year ended December 31, 2013, as compared to the period from December 21, 2012 (date of San Pedro Crossing acquisition) to December 31, 2012.
Property Operating Expense
Property operating expense increased $2.0 million to $2.3 million for the year ended December 31, 2013, compared to $0.3 million for the year ended December 31, 2012. These costs primarily relate to the costs associated with maintaining our properties including property management fees incurred from our Service Provider, real estate taxes, utilities, and repairs and maintenance. $0.4 million of this $2.0 million increase was attributable to our acquisition and operation of Tiffany Springs MarketCenter in 2013. $0.3 million of the increase was driven by our operation of Liberty Crossing for the full year ended December 31, 2013, as compared to the period from June 8, 2012 (date of Liberty Crossing acquisition) to December 31, 2012. $1.3 million of the increase was driven by our operation of San Pedro Crossing for the full year ended December 31, 2013, as compared to the period from December 21, 2012 (date of San Pedro Crossing acquisition) to December 31, 2012. The $2.0 million increase in property operating expenses includes the absorption of approximately $41,000 of property operating costs by the Advisor during the year ended December 31, 2013, as compared to approximately $44,000 of property operating costs absorbed by the Advisor during the year ended December 31, 2012.
Operating Fees to Affiliates
Until October 1, 2013, our affiliated Advisor was entitled to asset management fees in connection with providing asset management services and oversight fees for properties managed by our Service Provider. Our Advisor elected to waive these fees for the years ended December 31, 2013 and 2012. For each of the years ended December 31, 2013 and 2012, we would have incurred aggregate asset management and oversight fees of $0.1 million had these fees not been waived. Effective October 1, 2013, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor was eliminated. Instead, we expect to issue (subject to periodic approval by our board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B Units," which will be forfeited unless certain conditions are met. As of December 31, 2013, no Class B Units have been issued to the Advisor in connection with this arrangement.
Acquisition and Transaction Related Expense
Acquisition and transaction related costs remained relatively constant at $1.0 million for the years ended December 31, 2013 and 2012. The acquisition and transaction related expense for the year ended December 31, 2013 primarily related to our acquisition of Tiffany Springs MarketCenter on September 26, 2013 for a base purchase price of $53.5 million. The $1.0 million of acquisition and transaction related expense for the year ended December 31, 2012 related to our acquisition of the Liberty Crossing and San Pedro Crossing centers in 2012 for an aggregate base purchase price of $54.2 million.
General and Administrative Expenses
General and administrative expenses increased $0.3 million to $0.5 million for the year ended December 31, 2013, compared to $0.2 million for the year ended December 31, 2012. The increase in costs was primarily due to an increase in board member compensation, directors and officers insurance and professional fees to support our larger portfolio and increased number of stockholders during the year ended December 31, 2013 compared to the year ended December 31, 2012. This $0.3 million increase in general and administrative expense includes the absorption of $0.7 million of general and administrative costs by the Advisor during the year ended December 31, 2013, as compared to $0.1 million of general and administrative costs absorbed by the Advisor for the year ended December 31, 2012.

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Depreciation and Amortization Expense
Depreciation and amortization expense increased $4.1 million to $5.2 million for the year ended December 31, 2013, compared to $1.1 million for the year ended December 31, 2012. The base purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over their estimated useful lives. $0.8 million of this $4.1 million increase was attributable to our acquisition and operation of Tiffany Springs MarketCenter in 2013. $0.3 million of the increase was driven by our operation of Liberty Crossing for the full year ended December 31, 2013, as compared to the period from June 8, 2012 (date of Liberty Crossing acquisition) to December 31, 2012. $3.0 million of the increase was driven by our operation of San Pedro Crossing for the full year ended December 31, 2013, as compared to the period from December 21, 2012 (date of San Pedro Crossing acquisition) to December 31, 2012.
Interest Expense
Interest expense increased $2.0 million to $2.8 million for the year ended December 31, 2013, compared to $0.8 million for the year ended December 31, 2012. $2.4 million of interest expense for the year ended December 31, 2013 related to our mortgage notes payable of $63.1 million with a weighted-average effective interest rate of 4.29% as of December 31, 2013, which were used to fund a portion of the aggregate base purchase price of our three properties, and the unsecured notes payable which were fully paid down as of December 31, 2013. Additionally, interest expense for the year ended December 31, 2013 included $0.4 million of amortization of deferred financing costs. $0.7 million of interest expense for the year ended December 31, 2012 related to our mortgage notes payable of $40.7 million with a weighted-average effective interest rate of 5.52% as of December 31, 2012 and our unsecured notes payable of $7.2 million with a weighted-average effective interest rate of 6.92% as of December 31, 2012. Interest expense for the year ended December 31, 2012 also included $0.1 million of amortization of deferred financing costs.
Extinguishment of Debt
We incurred $0.1 million of debt extinguishment costs during the year ended December 31, 2013 in connection with our refinancing of Liberty Crossing in June 2013. In connection with the refinancing, which qualified as an extinguishment of debt based on the significance of changes to the terms of the loan, we expensed approximately $74,000 of related deferred financing costs and incurred approximately $56,000 of penalties, interest and fees related to the refinancing during the year ended December 31, 2013. We did not incur any debt extinguishment costs during the year ended December 31, 2012.
Cash Flows for the Year Ended December 31, 2014
During the year ended December 31, 2014, net cash provided by operating activities was $4.0 million. The level of cash flows provided by or used in operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows from operating activities during the year ended December 31, 2014 included $11.9 million of acquisition and transaction related costs. Cash inflows primarily related to an increase in accounts payable and accrued expenses of $5.1 million, a net loss adjusted for non-cash items of $2.0 million (net loss of $12.6 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred costs, impairment charges, share-based compensation, loss on disposition of land and the ineffective portion of the derivative, partially offset by amortization of mortgage premium and fair value adjustment to contingent purchase price obligation totaling $14.6 million) and an increase in deferred rent and other liabilities due to the timing of the receipt of rental payments and payment of our expenses of $1.2 million. Cash inflows were partially offset by an increase in prepaid expenses and other assets of $4.2 million resulting from rent receivables and unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid insurance and accrued income for real estate tax reimbursements.
Net cash used in investing activities during the year ended December 31, 2014 of $586.4 million included $584.0 million related to our acquisition of 17 properties, $1.5 million related to capital expenditures and $1.3 million related to deposits for future real estate acquisitions, partially offset by $0.5 million of proceeds from the disposition of an outparcel of land.
Net cash provided by financing activities during the year ended December 31, 2014 of $740.0 million related to proceeds from the issuance of common stock of $853.5 million. These inflows were partially offset by payments related to offering costs of $90.1 million, cash distributions of $12.2 million, payments of deferred financing costs of $7.1 million, an increase in restricted cash of $2.5 million and payments to affiliates, net of $1.0 million.

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Cash Flows for the Year Ended December 31, 2013
During the year ended December 31, 2013, net cash used in operating activities was $0.8 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the year, as well as the receipt of scheduled rent payments. Cash flows used in operating activities during the year ended December 31, 2013 include $1.0 million of acquisition and transaction costs. Cash outflows included an increase in prepaid expenses and other assets of $1.5 million due to rent receivables and unbilled rent receivables recorded in accordance with straight-line basis accounting, prepaid property and directors and officers insurance and prepaid strategic advisory fees and a decrease in accounts payable and accrued expenses of $0.9 million primarily related to a decrease in due to affiliate of $1.2 million partially offset by an increase in accrued property. These cash outflows were partially offset by cash inflows including net loss adjusted for non-cash items of $1.4 million (net loss of $4.7 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred costs and share-based compensation totaling $6.1 million).
Net cash used in investing activities during the year ended December 31, 2013 of $12.7 million primarily related to our acquisition of Tiffany Springs MarketCenter for a base purchase price of $53.5 million, which was partially offset by acquisition financing of $40.9 million.
Net cash provided by financing activities during the year ended December 31, 2013 of $26.5 million related to proceeds from the issuances of common stock of $62.3 million and proceeds from mortgage notes payable of $11.0 million. These inflows were partially offset by payments of mortgage notes payable of $29.5 million, payments of notes payable of $7.2 million, payments related to offering costs of $7.2 million and cash distributions of $1.1 million.
Cash Flows for the Year Ended December 31, 2012
During the year ended December 31, 2012, net cash provided by operating activities was $0.2 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments. Cash flows provided by operating activities during the year ended December 31, 2012 included $1.0 million of acquisition and transaction costs. Cash outflows included net loss adjusted for non-cash items of $0.9 million (net loss of $2.2 million adjusted for depreciation and amortization of tangible and intangible real estate assets, amortization of deferred financing costs and share based compensation totaling $1.3 million). These cash outflows were partially offset by an increase of $1.5 million in accounts payable and accrued expenses mainly due to interest payable related to mortgage and notes payable and accrued property operating expenses.
Net cash used in investing activities of $12.9 million during the year ended December 31, 2012 primarily related to the acquisition of two properties with an aggregate purchase price of $54.2 million, which were financed at acquisition with $40.7 million of mortgage notes payable.
Net cash provided by financing activities of $13.0 million during the year ended December 31, 2012 related to proceeds from the issuance of common stock of $7.7 million and proceeds from notes payable of $7.2 million. These inflows were partially offset by payments related to offering costs of $1.3 million.
Liquidity and Capital Resources
In March 2012, we raised proceeds sufficient to break escrow in connection with our IPO.  We received and accepted aggregate subscriptions in excess of the $2.0 million minimum and issued shares of common stock to our initial investors who were simultaneously admitted as stockholders. We continued offering and selling shares in our IPO until September 12, 2014. Our IPO closed on September 12, 2014. On September 17, 2014, we withdrew our Follow-On Registration Statement, from which no securities were sold. On September 19, 2014, we registered an additional 25.0 million shares of common stock to be used under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3D (File No. 333-198864). As of December 31, 2014, we had 94.4 million shares of common stock outstanding, including unvested restricted stock and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $938.7 million. We purchased our first property and commenced active operations in June 2012.
As of December 31, 2014, we had cash and cash equivalents of $171.0 million. Our principal demands for funds will continue to be for property acquisitions, either directly or through investment interests, for the payment of operating expenses, distributions to our stockholders and for the payment of principal and interest on our outstanding indebtedness. Generally, capital needs for property acquisitions are met through net proceeds received from our IPO, as well as proceeds from secured financings. We may also from time to time enter into other agreements with third parties whereby third parties will make equity investments in specific properties or groups of properties that we acquire. Expenditures other than property acquisitions are expected to be met from cash flows from operations.

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We expect to meet our future short-term operating liquidity requirements through a combination of net cash provided by our current property operations, the operations of properties to be acquired in the future and proceeds from the sale of common stock.  Management expects that in the future, as our portfolio matures, cash flows from our properties will be sufficient to fund operating expenses and the payment of our monthly distribution. Other potential future sources of capital include proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations.
We also expect to use proceeds from secured and unsecured financings from banks or other lenders as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined by our charter) as of the date of any borrowing, which is equal to 75% of the cost of our investments. We may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, calculated after the close of our IPO and once we have invested substantially all the proceeds of our IPO, does not apply to individual real estate assets or investments. In addition, it is currently our intention to limit our aggregate borrowings to approximately 50% of the aggregate fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation is calculated once we have invested substantially all the proceeds of our IPO. This limitation will not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits.
On June 11, 2014, we, through the OP, entered into a credit agreement (the "Credit Agreement") relating to a credit facility that provides for aggregate revolving loan borrowings of up to $100.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility (but not to exceed 10.0% of the commitments then in effect) and a $5.0 million letter of credit subfacility. On December 2, 2014, we, through the OP and certain of our subsidiaries acting as guarantors, entered into an unsecured amended and restated credit agreement (the “Amended Credit Agreement”) relating to a revolving credit facility (the “Amended Credit Facility”), which amends and restates the Credit Agreement. The Amended Credit Facility provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions. Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Amended Credit Facility to up to $575.0 million. Borrowings under the Amended Credit Facility, along with cash on hand from our IPO, are expected to be used to finance portfolio acquisitions and for general corporate purposes. As of December 31, 2014, our unused borrowing capacity was $120.9 million, based on the assets assigned to the Credit Facility. On February 9, 2015, we assigned additional assets to the Credit Facility, increasing our unused borrowing capacity to $325.0 million. As of December 31, 2014, we had no outstanding borrowings under the Amended Credit Facility.
The Amended Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Amended Credit Facility will mature on December 2, 2018, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to December 2, 2019. The Amended Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. We, certain of our subsidiaries and certain subsidiaries of the OP will guarantee the obligations under the Amended Credit Facility.
Our board of directors has adopted a Share Repurchase Program ("SRP") that enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash to the extent we have sufficient funds available to fund such repurchase. There are limits on the number of shares we may repurchase under this program during any 12-month period. Further, we are only authorized to repurchase shares using the proceeds secured from the DRIP in any given quarter.
The following table summarizes the repurchases of shares under the SRP cumulatively through December 31, 2014:
 
 
Number of Requests
 
Number of Shares Repurchased
 
Weighted-Average Price per Share
Cumulative repurchase requests as of December 31, 2013
 
1

 
8,674

 
$
9.98

Year ended December 31, 2014
 
18

 
64,818

 
9.80

Cumulative repurchase requests as of December 31, 2014 (1)
 
19

 
73,492

 
$
9.82


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_____________________
(1)
Includes 11 unfulfilled repurchase requests consisting of 33,024 shares with a weighted-average repurchase price per share of $9.89, which were approved for repurchase as of December 31, 2014 and were completed during the first quarter of 2015. This liability is included in accounts payable and accrued expenses on our consolidated balance sheet as of December 31, 2014.
Acquisitions
Our Advisor, with the assistance of Lincoln, evaluates potential acquisitions of real estate and real estate related assets and engages in negotiations with sellers and borrowers on our behalf. As of April 15, 2015, we owned 22 properties with an aggregate purchase price of $757.7 million. We currently have $161.9 million of assets under contract. Pursuant to the terms of the purchase and sale agreements, our obligation to close upon these acquisitions is subject to certain conditions customary to closing, including the successful completion of due diligence and fully negotiated binding agreements. There can be no assurance that we will complete these acquisitions.
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"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of 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 (the "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 and asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may not be fully informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book, value exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, because impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

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There have been changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation, but have a limited and defined acquisition period. We are using the proceeds raised in our offering to, among other things, acquire properties. We intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national stock exchange, a merger or sale or another similar transaction) within three to five years of the completion of the offering. Thus, unless we raise, or recycle, a significant amount of capital after we complete our offering, we will not be continuing to purchase assets at the same rate as during our offering. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association ("IPA"), an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to purchase a significant amount of new assets after we complete our offering. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is stabilized. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our IPO has been completed and our portfolio has been stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition and transaction-related fees and expenses; amounts relating to deferred rent receivables and amortization of above- and below-market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.
Our MFFO calculation complies with the IPA's Practice Guideline described above. In calculating MFFO, we exclude acquisition and transaction-related expenses, amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to non-controlling interests. Under GAAP, acquisition and transaction-related fees and expenses are characterized as operating expenses in determining operating net income during the period in which the asset is acquired. These expenses are paid in cash by us, and therefore such funds will not be available to invest in other assets, pay operating expenses or fund distributions. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flows from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. While we are responsible for managing interest rate, hedge and foreign exchange risk, we will retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to our investors.

64


We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, which have defied acquisition periods and targeted exit strategies, and allow us to evaluate our performance against other non-listed REITs. By excluding expensed acquisition and transaction-related costs, the use of MFFO provides information consistent with management's analysis of the operating performance of the properties.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. 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 distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure while an offering is ongoing such as our IPO where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
The below table reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the periods presented:
 
 
Three Months Ended
 
 
(In thousands)
 
March 31, 2014
 
June 30, 2014
 
September 30, 2014
 
December 31, 2014
 
Year Ended December 31, 2014
Net loss (in accordance with GAAP)
 
$
(599
)
 
$
(2,913
)
 
$
(4,773
)
 
$
(4,347
)
 
$
(12,632
)
Loss on disposition of land
 

 
19

 

 

 
19

Impairment charges
 

 

 

 
186

 
186

Depreciation and amortization
 
1,644

 
2,797

 
4,251

 
5,388

 
14,080

FFO
 
1,045

 
(97
)
 
(522
)
 
1,227

 
1,653

Acquisition fees and expenses
 
20

 
1,768

 
3,483

 
6,620

 
11,891

Amortization of mortgage premium
 

 

 

 
(12
)
 
(12
)
Amortization of above-market lease assets and accretion of below-market lease liabilities, net
 
214

 
216

 
256

 
(514
)
 
172

Mark-to-market adjustments
 

 
5

 
(2
)
 
2

 
5

Straight-line rent
 
(23
)
 
(36
)
 
(119
)
 
(355
)
 
(533
)
Fair value adjustment to contingent purchase price obligation
 

 

 

 
(672
)
 
(672
)
MFFO
 
$
1,256

 
$
1,856

 
$
3,096

 
$
6,296

 
$
12,504

Distributions
On September 19, 2011, our board of directors authorized, and we declared, distributions payable to stockholders of record each day during the applicable period, equal to $0.0017534247 per day, which is equivalent to $0.64 based on a 365-day year. Distributions began to accrue to record holders on June 8, 2012, the date of our initial property acquisition. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to qualify and maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the year ended December 31, 2014, distributions paid to common stockholders totaled $27.0 million, inclusive of $14.8 million of distributions reinvested pursuant to the DRIP. During the year ended December 31, 2014, cash used to pay distributions was generated from cash flows from operations, proceeds from the IPO and proceeds from our IPO that were reinvested in common stock issued pursuant to our DRIP.

65


The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock, for the periods indicated:
 
 
Three Months Ended
 
Year Ended
 
 
March 31, 2014
 
June 30, 2014
 
September 30, 2014
 
December 31, 2014
 
December 31, 2014
(Dollar amounts in thousands)
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
 
 
 
Percentage of Distributions
Distributions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid in cash
 
$
830

 
 
 
$
1,942

 
 
 
$
3,542

 
 
 
$
5,880

 
 
 
$
12,194

 
 
Distributions reinvested
 
603

 
 
 
1,893

 
 
 
4,220

 
 
 
8,108

 
 
 
14,824

 
 
Distributions on unvested restricted stock
 
3

 
 
 
4

 
 
 
3

 
 
 
4

 
 
 
14

 
 
Total distributions
 
$
1,436

 
 
 
$
3,839

 
 
 
$
7,765

 
 
 
$
13,992

 
 
 
$
27,032

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source of distribution coverage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in) by operations (1)
 
$
291

 
20.3
%
 
$
(291
)
 
(7.6
)%
 
$
3,545

 
45.7
%
 
$
(884
)
 
(6.3
)%
 
$
2,661

 
9.9
%
Proceeds from issuance of common stock
 
542

 
37.7
%
 
2,237

 
58.3
 %
 

 
%
 
6,768

 
48.4
 %
 
9,547

 
35.3
%
Common stock issued pursuant to the DRIP / offering proceeds
 
603

 
42.0
%
 
1,893

 
49.3
 %
 
4,220

 
54.3
%
 
8,108

 
57.9
 %
 
14,824

 
54.8
%
Proceeds from financings
 

 
%
 

 
 %
 

 
%
 

 

 

 
%
Total source of distribution coverage
 
$
1,436

 
100.0
%
 
$
3,839

 
100.0
 %
 
$
7,765

 
100.0
%
 
$
13,992

 
100.0
 %
 
$
27,032

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by (used in) operations (GAAP basis)
 
$
291

 
 
 
$
(3,530
)
 
 
 
$
8,167

 
 
 
$
(884
)
 
 
 
$
4,044

 
 
Net loss (in accordance with GAAP)
 
$
(599
)
 
 
 
$
(2,913
)
 
 
 
$
(4,773
)
 
 
 
$
(4,347
)
 
 
 
$
(12,632
)
 
 
_____________________
(1)
Cash flows provided by (used in) operations for the year ended December 31, 2014 include acquisition and transaction related expenses of $11.9 million.
For the year ended December 31, 2014, cash flows provided by operations were $4.0 million. As shown in the table above, we funded distributions with cash flows from operations, proceeds from our IPO and proceeds from our IPO that were reinvested in common stock issued pursuant to our DRIP. To the extent we pay distributions in excess of cash flows provided by operations, your investment may be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO. See “Risk Factors - Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will reduce the funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return.” under Item 1A in this Annual Report on Form 10-K.

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The following table compares cumulative distributions paid, including distributions related to unvested restricted shares, to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) and cumulative FFO for the period from July 29, 2010 (date of inception) through December 31, 2014:
(In thousands)
 
Period from
July 29, 2010
(date of inception) to
December 31, 2014
Distributions paid:
 
 
Common stockholders in cash
 
$
13,390

Common stockholders pursuant to DRIP / offering proceeds
 
15,506

Distributions on unvested restricted stock
 
19

Total distributions paid
 
$
28,915

 
 
 
Reconciliation of net loss:
 
 
Revenues
 
$
36,536

Acquisition and transaction related
 
(13,856
)
Depreciation and amortization
 
(20,390
)
Other operating expenses
 
(14,563
)
Other non-operating expenses
 
(7,578
)
Net loss (in accordance with GAAP) (1)
 
$
(19,851
)
 
 
 
Cash flows provided by operations
 
$
3,185

 
 
 
FFO
 
$
743

_____________________
(1)
Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.
Dilution
Our net tangible book value per share is a mechanical calculation using amounts from our balance sheet, and is calculated as (1) total book value of our assets less the net value of intangible assets, (2) minus total liabilities less the net value of intangible liabilities, (3) divided by the total number of shares of common stock and OP Units outstanding. It assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common and preferred stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments, (ii) the funding of distributions from sources other than our cash flows from operations, and (iii) fees paid in connection with our IPO, including commissions, dealer manager fees and other offering costs. As of December 31, 2014, our net tangible book value per share was $7.56. The offering price of shares under the primary portion of our IPO (excluding purchase price discounts for certain categories of purchasers) at December 31, 2014 was $10.00.
Our offering price was not established on an independent basis and was not based on the actual or projected net value of our assets. Further, even without depreciation in the value of our assets, the other factors described above with respect to the dilution in the value of our common stock are likely to cause our offering price to be higher than the amount you would receive per share if we were to liquidate at this time.
Loan Obligations
The payment terms of certain of our mortgage loan obligations require principal and interest payments monthly, with all unpaid principal and interest due at maturity. Our loan agreements require us to comply with specific reporting covenants. As of December 31, 2014, we were in compliance with the financial covenants under our loan agreements.

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Our Advisor may, with approval from our independent board of directors, seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third parties on a case-by-case basis as acquisition opportunities present themselves. We view the use of short-term borrowings as an efficient and accretive means of acquiring real estate. As of December 31, 2014, our secured debt leverage ratio (secured mortgage notes payable divided by the base purchase price of acquired real estate investments) approximated 12.2%.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and Credit Facility over the next five years and thereafter as of December 31, 2014:
 
 
 
 
2015
 
Years Ended December 31,
 
 
(In thousands)
 
Total
 
 
2016-2017
 
2018-2019
 
Thereafter
Principal on mortgage notes payable
 
$
86,931

 
$
363

 
$
778

 
$
63,651

 
$
22,139

Interest on mortgage notes payable
 
19,258

 
3,714

 
7,382

 
3,701

 
4,461

Interest on Credit Facility
 
3,232

 
824

 
1,650

 
758

 

Ground lease rental payments due
 
11,731

 
464

 
956

 
995

 
9,316

 
 
$
121,152

 
$
5,365

 
$
10,766

 
$
69,105

 
$
35,916

Election as a REIT 
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2012. Commencing with such taxable year, we were organized and operating in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. In order to qualify and continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income to our stockholders. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties, as well as federal income and excise taxes on our undistributed income.
Inflation
Some of our leases with our tenants contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the term of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on the leases that do not contain indexed escalation provisions. However, our net leases require the tenant to pay its allocable share of operating expenses, which may include common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates of our Sponsor, under which we have paid or may in the future pay certain fees or reimbursements to our Advisor, its affiliates and entities under common control with our Advisor in connection with items such as acquisition and financing activities, sales and maintenance of common stock under our IPO, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 10 — Related Party Transactions and Arrangements to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees.
In addition, the limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to our Advisor, a limited partner of the OP.  In connection with this special allocation, our Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP. Our Advisor is directly or indirectly controlled by certain of our officers and directors.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

68


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed rates. 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 these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of December 31, 2014, our debt consisted of fixed-rate secured mortgage financings with a carrying value of $87.2 million and a fair value of $89.3 million. Changes in market interest rates on our fixed-rate debt impacts its fair value, but it has no impact on interest incurred or cash flow. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their December 31, 2014 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $2.6 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $2.8 million. These amounts were determined by considering the impact of hypothetical interest rates changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of December 31, 2014 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual Report of Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 promulgated under the Exchange Act, the Company is required to establish and maintain disclosure controls and procedures as defined in subparagraph (e) of that rule. Management is required to evaluate, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of each fiscal quarter. As described below, management has identified material weaknesses in the Company’s internal control over financial reporting and management, including each of the Chief Executive Officer and Chief Financial Officer, has concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2014 due to these material weaknesses. Management believes the consolidated financial statements contained herein present fairly, in all material respects, our financial position as of the specified dates and our results of operations and cash flows for the specified periods.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) promulgated under the Exchange Act and as set forth below. Under Rule 13a-15(c), management must evaluate, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness, as of the end of each calendar year, of the Company’s internal control over financial reporting. The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1)
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
(2)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and
(3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.

69


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2014 due to the material weaknesses in internal control over financial reporting, as described below.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Management concluded that as of December 31, 2014 the Company failed to:
Maintain information technology system access controls supporting the general ledger and accounts payable system applications, specifically controls that are designed to address appropriate segregation of duties and to restrict IT and financial users’ access to the underlying entities and IT functions and data commensurate with their job responsibilities;
Design and maintain appropriate end-user controls over the use of significant Excel spreadsheets supporting the financial reporting process; and
Design and maintain appropriate controls over the authorization of manual journal entries made to the general ledger.
While the control deficiencies did not result in any material or immaterial misstatements in the financial statement accounts, the control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. Accordingly, our management concluded that the deficiencies represent material weaknesses in our internal control over financial reporting as of December 31, 2014.
KPMG LLP, an independent registered public accounting firm was engaged to audit the consolidated financial statements included in this Annual Report on Form 10-K and their audit report is included on Page F-2 of this Annual Report on Form 10-K. KPMG LLP was not engaged to audit the effectiveness of the Company's internal control over financial reporting as of December 31, 2014 and accordingly you will not find a report from KPMG LLP regarding their assessment of the effectiveness of internal controls over financial reporting in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Remediation Plan
Management, and our Board of Directors, is focused on improving the Company’s processes and internal controls. The Audit Committee of the Board of Directors of the Company has directed management to proceed with a remediation plan. Accordingly, management is in the process of developing and implementing a plan to remediate the deficiencies in internal control referenced above. Specifically:
Management will continue to evaluate and revise its business process review to ensure that information systems, processes, internal controls, monitoring activities and personnel are fully aligned with our financial reporting objectives.
Management has begun to establish appropriate and more restrictive access controls with respect to the general ledger IT application and supporting systems and to establish appropriate segregation of duties within the accounts payable and cash disbursements process. Additional staffing will be added to manage system administration.
Excel tools and sub-ledgers will be removed from the enterprise-wide shared drives, and appropriate computing and access controls will be implemented.
Management will improve the documentation of the Company’s system of internal control over financial reporting, specifically its control environment, business processes and control activities responsive to the risks of misstatement, operating policies and procedures, and monitoring activities.

70


We intend to execute our remediation plan as soon as feasible. We will test the ongoing effectiveness of the new controls and will consider the material weakness remediated after the new controls operate effectively for a sufficient period of time. There is no assurance, however, that these measures will remediate the material weakness or ensure that our internal controls over financial reporting will be effective in the future. If we are unable to remediate this material weakness, we may not timely file our periodic reports with the SEC which will have a material adverse effect on our ability to access the capital markets and affect our ability to provide accurate financial information.
Item 9B. Other Information.
None.

71


PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office – 405 Park Avenue – 14th Floor, New York, NY 10022, Attention: Chief Financial Officer. Our code of ethics is also publicly available on our website at www.americanrealtycap.com/documents/ARCRCACodeofEthics.pdf. If we make any substantive amendments to the code of ethics or grant any waiver, including any implicit waiver, from a provision of the code of ethics to our chief executive officer, chief financial officer, chief accounting officer or controller or persons performing similar functions, we will disclose the nature of the amendment or waiver on that website or in a report on Form 8-K.
The information required by this Item is incorporated by reference to our proxy statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders (the "Proxy Statement").
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our Proxy Statement to be filed with the SEC with respect to our 2015 annual meeting of stockholders.

72


PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)    Financial Statement Schedules
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-34 of this report:
Schedule III — Real Estate and Accumulated Depreciation
(b)    Exhibits
EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2014 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit
No.
  
Description
3.1 (3)
 
Articles of Amendment and Restatement of the Company
3.2 (2)
 
Bylaws of the Company
4.1 (11)
 
Second Amended and Restated Agreement of Limited Partnership of American Realty Capital Retail Operating Partnership, L.P., dated as of October 24, 2014, among the Company and American Realty Capital Retail Advisor, LLC, Lincoln Retail REIT Services, LLC and other Limited Partners
10.1 (4)
 
Amended and Restated Escrow Agreement, dated July 30, 2012, among the Company, UMB Bank, N.A. and Realty Capital Securities, LLC
10.2 (1)
 
Property Management Agreement, dated March 17, 2011, between the Company and American Realty Capital Retail Advisor, LLC
10.3 (1)
 
Leasing Agreement, dated March 17, 2011, between the Company and American Realty Capital Retail Advisor, LLC
10.4 (5)
 
Company's Restricted Share Plan
10.5 (5)
 
Company's Stock Option Plan
10.15 (6)
 
Purchase and Sale Agreement, dated as of June 28, 2013, among Cousins Tiffany Springs Marketcenter LLC, CP-Tiffany Springs Investments LLC, and American Realty Capital IV, LLC
10.16 (6)
 
Amendment to Purchase and Sale Agreement, dated as of July 29, 2013, among Cousins Tiffany Springs Marketcenter LLC, CP-Tiffany Springs Investments LLC, and American Realty Capital IV, LLC
10.17 (6)
 
Second Amendment to Purchase and Sale Agreement, dated as of August 1, 2013, among Cousins Tiffany Springs Marketcenter LLC, CP-Tiffany Springs Investments LLC, and American Realty Capital IV, LLC
10.18 (7)
 
Term Loan Agreement, dated as of September 26, 2013, between ARC TSKCYMO001, LLC and Bank of America, N.A.
10.19 (10)
 
Second Amended and Restated Advisory Agreement, dated as of January 14, 2014, among the Company, American Realty Capital Operating Partnership, L.P. and American Realty Capital Advisor, LLC
10.20 (10)
 
First Amendment to Second Amended and Restated Advisory Agreement, entered into as of January 28, 2014, among the Company, American Realty Capital Operating Partnership, L.P. and American Realty Capital Advisor, LLC
10.21 (11)
 
Agreement of Purchase and Sale dated as of January 28, 2014, among Streets of West Chester-Phase II, LLC, RREEF America REIT II Corp. CCC and American Realty Capital IV, LLC

10.22 (11)
 
Agreement of Purchase and Sale dated as of April 2, 2014, between Prairie Towne LLC and American Realty Capital IV, LLC
10.23 (11)
 
Agreement of Purchase and Sale of Real Property and Escrow Instructions dated as of April 4, 2014, between FP Southway, LLC and American Realty Capital IV, LLC
10.24 *
 
Amended and Restated Credit Agreement dated as of December 2, 2014, among American Realty Capital Retail Operating Partnership, L.P., the guarantors party thereto, the lenders party thereto, Regions Bank and BMO Harris Bank N.A.
10.25 (12)
 
Contract of Sale dated as of June 11, 2014, between DRA-RCG North Charleston SPE LLC and American Realty Capital IV, LLC
10.26 (12)
 
Purchase and Sale Agreement dated as of July 14, 2014, between American Realty Capital IV, LLC and Northlake Commons, L.L.C.
10.27 (9)
 
Agreement of Sale, dated July 17, 2014, between Centennial Plaza 555, LLC and American Realty Capital IV, LLC

73


Exhibit
No.
  
Description
10.28 (9)
 
Contract of Sale, dated August 13, 2014, between Pineville Centrum Limited Partnership and American Realty Capital IV, LLC
10.29 (9)
 
Purchase and Sale Agreement, dated August 19, 2014, between Southroads, L.L.C. and American Realty Capital IV, LLC
10.30 (9)
 
Loan Agreement, dated as of March 6, 2014, between Sebring Landing, LLC and Goldman Sachs Mortgage Company
10.31 (9)
 
Assumption and Release Agreement, dated as of September 5, 2014, among Sebring Landing, LLC, Debartolo Real Estate Investments, LLC, ARC SSSEBFL001, the Company and American Realty Capital Retail Operating Partnership, L.P.
10.32 (9)
 
Guaranty, dated September 5, 2014, between the Company and American Realty Capital Operating Partnership, L.P. for the benefit of Wells Fargo Bank, National Association
10.33 *
 
Indemnification Agreement, dated as of December 31, 2014, between the Company and certain current and former directors, officers and service providers of the Company
10.34 *
 
Agreement for Purchase and Sale, dated as of November 3, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.35 *
 
First Amendment to Agreement for Purchase and Sale, dated as of December 3, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.36 *
 
Second Amendment to Agreement for Purchase and Sale, dated as of December 5, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.37 *
 
Third Amendment to Agreement for Purchase and Sale, dated as of December 10, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.38 *
 
Fourth Amendment to Agreement for Purchase and Sale, dated as of December 16, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.39 *
 
Fifth Amendment to Agreement for Purchase and Sale, dated as of December 18, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.40 *
 
Sixth Amendment to Agreement for Purchase and Sale, dated as of December 19, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.41 *
 
Seventh Amendment to Agreement for Purchase and Sale, dated as of December 22, 2014, between AD West End, LLC and American Realty Capital IV, LLC
10.42 *
 
Eighth Amendment to Agreement for Purchase and Sale, dated as of December 23, 2014, between AD West End, LLC and American Realty Capital IV, LLC
14.1 (8)
 
Code of Ethics
16.1 (13)
 
Letter from Grant Thornton LLP to the Securities and Exchange Commission dated January 28, 2015
21.1 *
 
List of Subsidiaries
23.1 *
 
Consent of KPMG LLP
23.2 *
 
Consent of Grant Thornton LLP
31.1 *
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 *
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Stockholders' Equity (Deficit), (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
_____________________
*
Filed herewith.
(1)
Filed as an exhibit to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 1 to the Company's Registration Statement filed with the SEC on August 12, 2011.
(2)
Filed as an exhibit to the Company's Registration Statement on Form S-11/A filed with the SEC on February 4, 2011.
(3)
Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on July 3, 2012.

74


(4)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed with the SEC on August 8, 2012.
(5)
Filed as an exhibit to Pre-Effective Amendment No. 4 to the Company's Registration Statement filed with the SEC on March 15, 2011.
(6)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 14, 2013.
(7)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 filed with the SEC on November 12, 2013.
(8)
Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on  March 11, 2013.
(9)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 filed with the SEC on November 14, 2014.
(10)
Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 10, 2014.
(11)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 7, 2014.
(12)
Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 11, 2014.
(13)
Filed as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on January 28, 2015.

75


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized this 15th day of April, 2015.
 
AMERICAN REALTY CAPITAL - RETAIL CENTERS OF AMERICA, INC.
 
By:
/s/ WILLIAM M. KAHANE
 
 
WILLIAM M. KAHANE
 
 
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
 
Capacity
 
Date
 
 
 
 
 
/s/ William M. Kahane
 
Chief Executive Officer, President and Chairman of the Board of Directors
(Principal Executive Officer)
 
April 15, 2015
William M. Kahane
 
 
 
 
 
 
 
 
/s/ Patrick Goulding
 
Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
 
April 15, 2015
Patrick Goulding
 
 
 
 
 
 
 
 
/s/ Kase Abusharkh
 
Chief Investment Officer
 
April 15, 2015
Kase Abusharkh

 
 
 
 
 
 
 
 
/s/ David Gong
 
Lead Independent Director
 
April 15, 2015
David Gong
 
 
 
 
 
 
 
 
/s/ Edward G. Rendell
 
Independent Director
 
April 15, 2015
Edward G. Rendell
 
 
 

76

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Stockholders and Board of Directors
American Realty Capital — Retail Centers of America, Inc.
We have audited the accompanying consolidated balance sheet of American Realty Capital — Retail Centers of America, Inc. (a Maryland Corporation) and subsidiaries (the "Company") as of December 31, 2014, and the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity, and cash flows for the year ended December 31, 2014. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule III, real estate and accumulated depreciation. 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 financial statement schedule based on our audit.
We conducted our audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Realty Capital — Retail Centers of America, Inc. and subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP
New York, New York
April 15, 2015

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors
American Realty Capital — Retail Centers of America, Inc.
We have audited the accompanying consolidated balance sheets of American Realty Capital - Retail Centers of America, Inc. (a Maryland Corporation) and subsidiaries (the "Company") as of December 31, 2013 and 2012 (not presented herein), and the related consolidated statements of operations and comprehensive loss, stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2013. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a). 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 financial statement schedule based on our audits.
 We conducted our audits 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Realty Capital - Retail Centers of America, Inc. and subsidiaries as of December 31, 2013 and 2012 (not presented herein), and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

New York, New York
March 10, 2014



F-3

AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


 
December 31,
 
2014
 
2013
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
158,787

 
$
28,192

Buildings, fixtures and improvements
478,854

 
62,702

Acquired intangible lease assets
127,144

 
16,599

       Total real estate investments, at cost
764,785

 
107,493

       Less: accumulated depreciation and amortization
(19,115
)
 
(6,097
)
Total real estate investments, net
745,670

 
101,396

Cash and cash equivalents
170,963

 
13,295

Restricted cash
3,469

 
1,018

Prepaid expenses and other assets
7,591

 
2,272

Deferred costs, net
8,117

 
1,397

Land held for sale

 
564

Total assets
$
935,810

 
$
119,942

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 

Mortgage notes payable
$
86,931

 
$
63,083

Mortgage premium, net
292

 

Below-market lease liabilities, net
48,113

 
912

Derivatives, at fair value
332

 
98

Accounts payable and accrued expenses
10,329

 
8,211

Deferred rent and other liabilities
1,575

 
382

Distributions payable
5,138

 
375

Total liabilities
152,710

 
73,061

Preferred stock, $0.01 par value per share, 50,000,000 authorized, none issued or outstanding at December 31, 2014 and 2013

 

Common stock, $0.01 par value per share, 300,000,000 shares authorized, 94,448,748 and 7,253,833 shares issued and outstanding at December 31, 2014 and 2013, respectively
944

 
72

Additional paid-in capital
836,387

 
56,384

Accumulated other comprehensive loss
(327
)
 
(98
)
Accumulated deficit
(53,904
)
 
(9,477
)
Total stockholders' equity
783,100

 
46,881

Total liabilities and stockholders' equity
$
935,810

 
$
119,942


The accompanying notes are an integral part of these statements.



F-4

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share data)


 
Year Ended December 31,
 
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
Rental income
$
21,450

 
$
5,406

 
$
990

Operating expense reimbursements
6,659

 
1,755

 
276

Total revenues
28,109

 
7,161

 
1,266

Operating expenses:
 

 
 
 
 
Property operating
8,844

 
2,337

 
295

Impairment charges
186

 

 

Fair value adjustment to contingent purchase price obligation
(672
)
 

 

Acquisition and transaction related
11,891

 
978

 
987

General and administrative
2,558

 
457

 
245

Depreciation and amortization
14,080

 
5,202

 
1,108

Total operating expenses
36,887

 
8,974

 
2,635

Operating loss
(8,778
)
 
(1,813
)
 
(1,369
)
Other (expense) income:
 
 
 
 
 
Interest expense
(3,907
)
 
(2,761
)
 
(833
)
Extinguishment of debt

 
(130
)
 

Loss on disposition of land
(19
)
 

 

Other income
72

 

 

Total other expense, net
(3,854
)
 
(2,891
)
 
(833
)
Net loss
$
(12,632
)
 
$
(4,704
)
 
$
(2,202
)
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
Change in unrealized loss on derivative
(229
)
 
(98
)
 

Comprehensive loss
$
(12,861
)
 
$
(4,802
)
 
$
(2,202
)
 
 
 
 
 
 
Basic and diluted weighted-average shares outstanding
49,231,737

 
3,216,903

 
358,267

Basic and diluted net loss per share
$
(0.26
)
 
$
(1.46
)
 
$
(6.15
)

The accompanying notes are an integral part of these statements.

F-5

AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)


 
Common Stock
 
 
 
 
 
 
 
 
 
Number of Shares
 
Par Value
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity (Deficit)
Balance, December 31, 2011
33,056

 
$

 
$
(3,406
)
 
$

 
$
(313
)
 
$
(3,719
)
Issuances of common stock
793,069

 
8

 
7,663

 

 

 
7,671

Common stock offering costs, commissions and dealer manager fees

 

 
(2,919
)
 

 

 
(2,919
)
Common stock issued through distribution reinvestment plan
1,993

 

 
19

 

 

 
19

Common stock repurchases

 

 

 

 

 

Share-based compensation, net of forfeitures
6,000

 

 
15

 

 

 
15

Distributions declared

 

 

 

 
(187
)
 
(187
)
Net loss

 

 

 

 
(2,202
)
 
(2,202
)
Balance, December 31, 2012
834,118

 
8

 
1,372

 

 
(2,702
)
 
(1,322
)
Issuances of common stock
6,349,720

 
63

 
62,708

 

 

 
62,771

Common stock offering costs, commissions and dealer manager fees

 

 
(8,309
)
 

 

 
(8,309
)
Common stock issued through distribution reinvestment plan
69,669

 
1

 
662

 

 

 
663

Common stock repurchases
(8,674
)
 

 
(87
)
 

 

 
(87
)
Share-based compensation
9,000

 

 
38

 

 

 
38

Distributions declared

 

 

 

 
(2,071
)
 
(2,071
)
Net loss

 

 

 

 
(4,704
)
 
(4,704
)
Other comprehensive loss

 

 

 
(98
)
 

 
(98
)
Balance, December 31, 2013
7,253,833

 
72

 
56,384

 
(98
)
 
(9,477
)
 
46,881

Issuances of common stock
85,692,602

 
857

 
852,213

 

 

 
853,070

Common stock offering costs, commissions and dealer manager fees

 

 
(86,477
)
 

 

 
(86,477
)
Common stock issued through distribution reinvestment plan
1,560,476

 
16

 
14,808

 

 

 
14,824

Common stock repurchases
(64,818
)
 
(1
)
 
(634
)
 

 

 
(635
)
Share-based compensation, net of forfeitures
6,655

 

 
93

 

 

 
93

Distributions declared

 

 

 

 
(31,795
)
 
(31,795
)
Net loss

 

 

 

 
(12,632
)
 
(12,632
)
Other comprehensive loss

 

 

 
(229
)
 

 
(229
)
Balance, December 31, 2014
94,448,748

 
$
944

 
$
836,387

 
$
(327
)
 
$
(53,904
)
 
$
783,100

 
The accompanying notes are an integral part of this statement.

F-6

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
Year Ended December 31,
 
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net loss
$
(12,632
)
 
$
(4,704
)
 
$
(2,202
)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

 
 

Depreciation
6,857

 
3,116

 
657

Amortization of in-place lease assets
7,177

 
2,079

 
451

Amortization (including accelerated write-off) of deferred costs
758

 
472

 
141

Amortization of mortgage premium
(12
)
 

 

Amortization of above-market lease assets and accretion of below-market lease liabilities, net
172

 
428

 
18

Fair value adjustment to contingent purchase price obligation
(672
)
 

 

Impairment charges
186

 

 

Loss on disposition of land
19

 

 

Share-based compensation
93

 
38

 
15

Ineffective portion of derivative
5

 

 

Changes in assets and liabilities:
 

 
 

 
 

Prepaid expenses and other assets
(4,244
)
 
(1,527
)
 
(527
)
Accounts payable and accrued expenses
5,144

 
(922
)
 
1,486

Deferred rent and other liabilities
1,193

 
234

 
148

Net cash provided by (used in) operating activities
4,044

 
(786
)
 
187

Cash flows from investing activities:
 
 
 
 
 
Investments in real estate and other assets
(584,018
)
 
(12,575
)
 
(12,902
)
Deposits for real estate acquisitions
(1,344
)
 

 

Proceeds from disposition of land
543

 

 

Capital expenditures
(1,549
)
 
(165
)
 

Net cash used in investing activities
(586,368
)
 
(12,740
)
 
(12,902
)
Cash flows from financing activities:
 

 
 

 
 
Proceeds from mortgage notes payable

 
11,000

 

Payments of mortgage notes payable
(384
)
 
(29,517
)
 

Proceeds from notes payable

 

 
7,235

Payments of notes payable

 
(7,235
)
 

Payments of deferred financing costs
(7,061
)
 
(949
)
 
(783
)
Proceeds from issuances of common stock
853,535

 
62,311

 
7,671

Common stock repurchases
(308
)
 
(87
)
 

Payments of offering costs and fees related to stock issuances
(90,112
)
 
(7,209
)
 
(1,286
)
Distributions paid
(12,208
)
 
(1,080
)
 
(121
)
Advances from (payments to) affiliate, net
(1,019
)
 

 
604

Restricted cash
(2,451
)
 
(691
)
 
(327
)
Net cash provided by financing activities
739,992

 
26,543

 
12,993

Net change in cash and cash equivalents
157,668

 
13,017

 
278

Cash and cash equivalents, beginning of period
13,295

 
278

 

Cash and cash equivalents, end of period
$
170,963

 
$
13,295

 
$
278

 
 
 
 
 
 

F-7

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 
Year Ended December 31,
 
2014
 
2013
 
2012
Supplemental Disclosures:
 
 
 
 
 
Cash paid for interest
$
3,088

 
$
2,311

 
$
599

Cash paid for income taxes
$
411

 
$
12

 
$

Offering costs in accounts payable and accrued expenses
$
1,180

 
$
4,815

 
$
3,715

Receivables for issuances of common stock
$

 
$
465

 
$
5

Accrued common stock repurchases
$
327

 
$

 
$

Capital improvements in accounts payable and accrued expenses
$
1,284

 
$

 
$

 
 
 
 
 
 
Non-Cash Investing and Financing Activities:
 
 
 
 
 
Mortgage notes payable assumed or used to acquire investments in real estate
$
24,232

 
$
40,875

 
$
40,725

Premium assumed on mortgage note payable
$
304

 
$

 
$

Common stock issued through distribution reinvestment plan
$
14,824

 
$
663

 
$
19


The accompanying notes are an integral part of these statements.

F-8

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014


Note 1 — Organization
American Realty Capital — Retail Centers of America, Inc. (the "Company"), incorporated on July 29, 2010, is a Maryland corporation that qualified as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2012. On March 17, 2011, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11, as amended (File No. 333-169355) (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covered up to 25.0 million shares available pursuant to a distribution reinvestment plan (the "DRIP") under which the Company's common stockholders were able to elect to have their distributions reinvested in additional shares of the Company's common stock at a price initially equal to $9.50 per share, which was 95.0% of the per share offering price in the IPO.
On March 9, 2012, the Company raised proceeds sufficient to break escrow in connection with its IPO. On March 4, 2013, the Company's board of directors approved an extension of the termination date of the IPO from March 17, 2013 to March 17, 2014. On March 14, 2014, the Company filed a registration statement on Form S-11 (File No. 333-194586) (the "Follow-On Registration Statement") with the SEC to register a follow-on offering of up to 75.0 million shares of common stock, $0.01 par value per share, at a price of $10.00 per share, subject to certain volume and other discounts, and 12.5 million shares of common stock pursuant to the DRIP. However, as permitted by Rule 415 under the Securities Act, the Company continued offering and selling shares in its IPO until September 12, 2014.
The IPO closed on September 12, 2014. On September 17, 2014, the Company withdrew its Follow-On Registration Statement, from which no securities were sold. On September 19, 2014, the Company registered an additional 25.0 million shares of common stock to be used under the DRIP (as amended to include a direct stock purchase component) pursuant to a registration statement on Form S-3D (File No. 333-198864).
As of December 31, 2014, the Company had 94.4 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $938.7 million.
The Company has acquired and intends to acquire and own existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers (with a purchase price in excess of $20.0 million) and other need-based shopping centers which are located in the United States and at least 80.0% leased at the time of acquisition. All properties will be acquired and operated by the Company or acquired and operated by the Company jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate. The Company purchased its first property and commenced active operations in June 2012. As of December 31, 2014, the Company owned 20 properties with an aggregate purchase price of $716.3 million, comprised of 4.3 million rentable square feet which were 94.5% leased on a weighted-average basis.
Substantially all of the Company's business is conducted through American Realty Capital Retail Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company is the sole general partner and holds substantially all the units of limited partner interest in the OP ("OP Units"). The Company's external affiliated advisor, American Realty Capital Retail Advisor, LLC (the "Advisor"), a limited partner in the OP, holds 202 OP Units, which represents a nominal percentage of the aggregate OP ownership. After holding the OP Units for a period of one year, or upon liquidation of the OP or sale of substantially all of the assets of the OP, holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.

F-9

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

The Company has no direct employees. The Company has retained the Advisor to manage its affairs on a day-to-day basis. The Advisor has entered into a service agreement with an independent third party, Lincoln Retail REIT Services, LLC, a Delaware limited liability company ("Lincoln"), pursuant to which Lincoln has agreed to provide, subject to the Advisor's oversight, real estate-related services, including locating investments, negotiating financing, and providing property-level asset management services, property management services, leasing and construction oversight services and disposition services, as needed. Realty Capital Securities, LLC (the "Dealer Manager") served as the dealer manager of the IPO. The Advisor and the Dealer Manager are under common control with AR Capital, LLC, the parent of the Company's sponsor (the "Parent of the Sponsor"), as a result of which they are related parties, and each of which has received or will receive compensation, fees and expense reimbursements for services related to the IPO and the investment and management of the Company's assets. Such entities have received or may receive, as applicable, fees during the offering, acquisition, operational and liquidation stages. The Advisor has paid and will continue to pay Lincoln a substantial portion of the fees payable to the Advisor for the performance of real estate-related services.
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, real estate taxes and fair value measurements, as applicable.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the Company's estimate of fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease, including any below-market fixed rate renewal options for below-market leases.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates.

F-10

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

In allocating non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including real estate valuations, prepared by independent valuation firms. The Company also considers information and other factors including: market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e.: location, size, demographics, value and comparative rental rates, tenant credit profile, store profitability and the importance of the location of the real estate to the operations of the tenant’s business.
Acquired intangible assets and lease liabilities consist of the following as of December 31, 2014 and 2013:
 
 
December 31, 2014
 
December 31, 2013
(In thousands)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
In-place leases
 
$
112,997

 
$
7,949

 
$
105,048

 
$
11,601

 
$
2,090

 
$
9,511

Above-market leases
 
12,569

 
1,751

 
10,818

 
4,998

 
489

 
4,509

Below-market ground lease
 
1,578

 

 
1,578

 

 

 

Total acquired intangible lease assets
 
$
127,144

 
$
9,700

 
$
117,444

 
$
16,599

 
$
2,579

 
$
14,020

Intangible liabilities:
 
 

 
 

 
 
 
 
 
 
 
 
Below-market lease liabilities
 
$
49,315

 
$
1,202

 
$
48,113

 
$
986

 
$
74

 
$
912

The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the consolidated statements of operations and comprehensive loss for all periods presented to the extent the disposal of a component represents a strategic shift that has or will have a major effect on the Company’s operations and financial results. Properties that are intended to be sold are to be designated as "held for sale" on the consolidated balance sheets at the lesser of carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are classified as held for sale.
Depreciation and Amortization
The Company is required to make subjective assessments as to the useful lives of the components of Company’s real estate investments for purposes of determining the amount of depreciation to record on an annual basis. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s real estate investments, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.

F-11

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

The following table provides the weighted-average amortization and accretion periods as of December 31, 2014, for intangible assets and liabilities and the projected amortization expense and adjustments to revenue and property operating expense for the next five years:
(in thousands)
 
Weighted-Average Amortization Period
 
2015
 
2016
 
2017
 
2018
 
2019
In-place leases
 
6.6 years
 
$
22,879

 
$
20,274

 
$
17,820

 
$
12,060

 
$
7,331

Total to be included in depreciation and amortization
 
 
 
$
22,879

 
$
20,274

 
$
17,820

 
$
12,060

 
$
7,331

 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market lease assets
 
5.8 years
 
$
2,331

 
$
2,224

 
$
2,138

 
$
1,441

 
$
736

Below-market lease liabilities
 
17.3 years
 
(4,604
)
 
(4,094
)
 
(3,869
)
 
(3,375
)
 
(2,940
)
Total to be included in rental income
 
 
 
$
(2,273
)
 
$
(1,870
)
 
$
(1,731
)
 
$
(1,934
)
 
$
(2,204
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Below-market ground lease asset
 
40.7 years
 
$
39

 
$
39

 
$
39

 
$
39

 
$
39

Total to be included in property operating expense
 
 
 
$
39

 
$
39

 
$
39

 
$
39

 
$
39

For the years ended December 31, 2014, 2013 and 2012, amortization of in-place leases of $7.2 million, $2.1 million and $0.5 million, respectively, is included in depreciation and amortization on the consolidated statements of operations and comprehensive loss. For the years ended December 31, 2014, 2013 and 2012, net amortization and accretion of above- and below-market lease intangibles of $0.2 million, $0.4 million and approximately $18,000, respectively, is included in rental income on the consolidated statements of operations and comprehensive loss. No amortization of the below-market ground lease asset was recognized in property operating expense for the years ended December 31, 2014, 2013 and 2012.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the property for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property's use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less. As of December 31, 2014 and 2013, approximately $47,000 and $0.1 million, respectively, were held in an overnight repurchase agreement with the Company's financial institution, in which excess funds over an established threshold were being swept daily.
The Company deposits cash with high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company ("FDIC") up to an insurance limit. As of December 31, 2014, the Company had deposits of $171.0 million of which $170.2 million were in excess of the amount insured by the FDIC. As of December 31, 2013, the Company had deposits of $13.3 million of which $12.6 million were in excess of the amount insured by the FDIC. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result thereof.
Restricted Cash
Restricted cash primarily consists of reserves related to lease expirations as well as maintenance, structural, and debt service reserves.
Deferred Costs, Net
Deferred costs, net, consists of deferred financing costs net of accumulated amortization and deferred leasing costs net of accumulated amortization.

F-12

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity.  Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Deferred leasing costs, consisting primarily of lease commissions and payments made to execute new leases, are deferred and amortized over the term of the lease.
As of December 31, 2014, the Company had $8.1 million of deferred costs, net, consisting of $7.5 million of deferred financing costs, net and $0.6 million of deferred leasing costs, net. As of December 31, 2013, the Company had $1.4 million of deferred costs, net, consisting of $1.1 million of deferred financing costs, net and $0.3 million of deferred leasing costs, net.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designated and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any change in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the accompanying consolidated statement of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation.
The Company owns certain properties with leases that include provisions for the tenant to pay contingent rental income based on a percent of the tenant's sales upon the achievement of certain sales thresholds or other targets which may be monthly, quarterly or annual targets. As the lessor to the aforementioned leases, the Company defers the recognition of contingent rental income, until the specified target that triggered the contingent rental income is achieved, or until such sales upon which percentage rent is based are known. Contingent rental income is included in rental income on the accompanying consolidated statements of operations and comprehensive loss.

F-13

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the Company's consolidated statements of operations and comprehensive loss.
Cost recoveries from tenants are included in operating expense reimbursements on the accompanying consolidated statements of operations and comprehensive loss in the period the related costs are incurred, as applicable.
Offering and Related Costs
Offering and related costs include all expenses incurred in connection with the Company's IPO. Offering costs (other than selling commissions and the dealer manager fee) include costs that may be paid by the Advisor, the Dealer Manager or their affiliates on behalf of the Company. These costs include but are not limited to (i) legal, accounting, printing, mailing, and filing fees; (ii) escrow related fees; (iii) reimbursement of the Dealer Manager for amounts it may pay to reimburse the itemized and detailed due diligence expenses of broker-dealers; and (iv) reimbursement to the Advisor for a portion of the costs of its employees and other costs in connection with preparing supplemental sales materials and related offering activities. The Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on behalf of the Company, provided that the Advisor is obligated to reimburse the Company to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by the Company in its offering exceed 1.5% of gross offering proceeds. As a result, these costs are only a liability of the Company to the extent aggregate selling commissions, the dealer manager fee and other organization and offering costs do not exceed 11.5% of the gross proceeds determined at the end of the IPO. As of the end of the IPO, offering costs were less than 11.5% (See Note 10 — Related Party Transactions and Arrangements).
Share-Based Compensation
The Company has a stock-based award plan, which is accounted for under the guidance for share based payments. The expense for such awards is included in general and administrative expenses and is recognized over the vesting period or when the requirements for exercise of the award have been met (See Note 12 — Share-Based Compensation).
Income Taxes
The Company qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the taxable year ended December 31, 2012. Commencing with such taxable year, it was organized and operating in such a manner as to qualify for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner to qualify for taxation as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify or remain qualified as a REIT. In order to qualify and continue to qualify for taxation as a REIT, the Company must, among other things, distribute annually at least 90% of its REIT taxable income to the Company's stockholders. REITs are subject to a number of other organizational and operational requirements. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and properties, as well as federal income and excise taxes on its undistributed income.
The amount of distributions payable to the Company's stockholders is determined by the board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable, and annual distribution requirements needed to qualify and maintain the Company's status as a REIT under the Code. From a tax perspective, of the amounts distributed during the year ended December 31, 2014, 88.7%, or $0.57 per share per annum, and 11.3%, or $0.07 per share per annum, represented a return of capital and ordinary dividend income, respectively. Of the amounts distributed during the year ended December 31, 2013, 4.6%, or $0.03 per share per annum, and 95.4%, or $0.61 per share per annum, represented a return of capital and ordinary dividend income, respectively. Of the amounts distributed during the year ended December 31, 2012, 100.0%, or $0.64 per share per annum, represented a return of capital.
Per Share Data
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share considers the effect of potentially dilutive instruments outstanding during such period.

F-14

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Reportable Segments
The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company's investments in real estate generate rental revenue and other income through the leasing of properties, which comprise 100% of its total consolidated revenues. Management evaluates the operating performance of the Company's investments in real estate on an individual property level.
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the "FASB") issued guidance clarifying the accounting and disclosure requirements for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In April 2014, the FASB amended the requirements for reporting discontinued operations. Under the revised guidance, in addition to other disclosure requirements, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale, disposed of by sale or other than by sale. The revised guidance is effective for annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. The Company has adopted the provisions of this guidance effective January 1, 2014, and has applied the provisions prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers 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 revised guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of the new guidance.
In August 2014, the FASB issued guidance relating to disclosure of uncertainties about an entity's ability to continue as a going concern. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about the entity's ability to continue as a going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going concern and management's plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability to continue as a going concern. There is no disclosure required unless there are conditions or events that have raised substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. The Company has elected to adopt the provisions of this guidance effective December 31, 2014, as early application is permitted. The adoption of this guidance did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact of the new guidance.

F-15

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact of the new guidance.
Note 3 — Real Estate Investments
The Company owned 20 properties as of December 31, 2014. The rentable square feet or annualized rental income on a straight-line basis of the 12 properties summarized below represented 5.0% or more of the Company's total portfolio's rentable square feet or annualized rental income on a straight-line basis as of December 31, 2014.
San Pedro Crossing
On December 21, 2012, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in San Pedro Crossing, a power center located in San Antonio, Texas ("San Pedro Crossing"). The seller had no preexisting relationship with the Company. The purchase price of San Pedro Crossing was $32.6 million, exclusive of closing costs. The acquisition of San Pedro Crossing was funded with proceeds from the Company's IPO and the creation of new mortgage debt secured by San Pedro Crossing. The Company accounted for the purchase of San Pedro Crossing as a business combination and incurred acquisition related costs of $0.6 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Tiffany Springs MarketCenter
On September 26, 2013, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Tiffany Springs MarketCenter, a power center located in Kansas City, Missouri ("Tiffany Springs MarketCenter"). The sellers had no preexisting relationship with the Company. The purchase price of Tiffany Springs MarketCenter was $53.5 million, exclusive of closing costs. The acquisition of Tiffany Springs MarketCenter was funded with proceeds from the Company's IPO and the assumption of existing mortgage debt secured by Tiffany Springs MarketCenter. The Company accounted for the purchase of Tiffany Springs MarketCenter as a business combination and incurred acquisition related costs of $0.9 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
The Streets of West Chester
On April 3, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in The Streets of West Chester, a lifestyle center located in West Chester Township, Ohio ("The Streets of West Chester"). The sellers had no preexisting relationship with the Company. The purchase price of The Streets of West Chester was $40.5 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of The Streets of West Chester as a business combination and incurred acquisition related costs of $0.7 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Prairie Towne Center
On June 4, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Prairie Towne Center, a power center located in Schaumburg, Illinois (the "Prairie Towne Center"). The seller had no preexisting relationship with the Company. The purchase price of Prairie Towne Center was $25.3 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Prairie Towne Center as a business combination and incurred acquisition related costs of $0.4 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Northwoods Marketplace
On August 15, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Northwoods Marketplace, a power center located in North Charleston, South Carolina ("Northwoods Marketplace"). The seller had no preexisting relationship with the Company. The purchase price of Northwoods Marketplace was $34.8 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Northwoods Marketplace as a business combination and incurred acquisition related costs of $0.7 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.

F-16

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Centennial Plaza
On August 27, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Centennial Plaza, a power center located in West Chester Township, Ohio ("Centennial Plaza"). The seller had no preexisting relationship with the Company. The purchase price of Centennial Plaza was $27.6 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Centennial Plaza as a business combination and incurred acquisition related costs of $0.5 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Shops at Shelby Crossing
On September 5, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Shops at Shelby Crossing, a power center located in Sebring, Florida ("Shops at Shelby Crossing"). The sellers had no preexisting relationship with the Company. The purchase price of Shops at Shelby Crossing was $29.9 million, exclusive of closing costs. The acquisition of Shops at Shelby Crossing was funded with proceeds from the Company's IPO and the assumption of existing mortgage debt secured by Shops at Shelby Crossing. The Company accounted for the purchase of Shops at Shelby Crossing as a business combination and incurred acquisition related costs of $0.5 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
The Centrum
On September 29, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Centrum, a power center located in Pineville, North Carolina ("The Centrum"). The seller had no preexisting relationship with the Company. The purchase price of The Centrum was $34.9 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of The Centrum as a business combination and incurred acquisition related costs of $0.6 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Southroads Shopping Center
On October 29, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Southroads Shopping Center, a power center located in Tulsa, Oklahoma ("Southroads Shopping Center"). The seller had no preexisting relationship with the Company. The purchase price of Southroads Shopping Center was $57.3 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Southroads Shopping Center as a business combination and incurred acquisition related costs of $1.0 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
Colonial Landing
On December 18, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the leasehold interest in Colonial Landing, a power center located in Orlando, Florida ("Colonial Landing"). The seller had no preexisting relationship with the Company. The purchase price of Colonial Landing was $37.2 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Colonial Landing as a business combination and incurred acquisition related costs of $0.7 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
The Shops at West End
On December 23, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in The Shops at West End, a lifestyle center located in St. Louis Park, Minnesota ("The Shops at West End"). The seller had no preexisting relationship with the Company. The purchase price of The Shops at West End was $114.7 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of The Shops at West End as a business combination and incurred acquisition related costs of $1.9 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.

F-17

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Township Marketplace
On December 23, 2014, the Company, through an indirect wholly-owned subsidiary of the OP, closed its acquisition of the fee simple interest in Township Marketplace, a power center located in Monaca, Oklahoma ("Township Marketplace"). The seller had no preexisting relationship with the Company. The purchase price of Township Marketplace was $41.1 million, exclusive of closing costs, and was funded with proceeds from the Company's IPO. The Company accounted for the purchase of Township Marketplace as a business combination and incurred acquisition related costs of $1.2 million, which are reflected in the acquisition and transaction related line item of the consolidated statements of operations and comprehensive loss.
The following table presents the allocation of the assets acquired and liabilities assumed during the years ended December 31, 2014, 2013 and 2012:
 
 
Year Ended December 31,
(Dollar amounts in thousands)
 
2014
 
2013
 
2012
Real estate investments, at cost:
 
 
 
 
 
 
Land
 
$
134,146

 
$
15,757

 
$
12,435

Buildings, fixtures and improvements
 
411,322

 
28,834

 
33,957

Total tangible assets
 
545,468

 
44,591

 
46,392

Acquired intangibles:
 
 
 
 
 
 
In-place leases
 
102,911

 
5,305

 
6,736

Above-market lease assets
 
7,609

 
3,101

 
1,929

Below-market lease liabilities
 
(48,340
)
 
(111
)
 
(875
)
Below-market ground lease asset
 
1,578

 

 

Total intangible real estate investments, net
 
63,758

 
8,295

 
7,790

Land held for sale
 

 
564

 

Total assets acquired, net
 
609,226

 
53,450

 
54,182

Mortgage notes payable assumed or used to acquire real estate investments
 
(24,232
)
 
(40,875
)
 
(40,725
)
Premium on mortgage note payable assumed
 
(304
)
 

 

Other liabilities assumed
 

 

 
(555
)
Contingent purchase price obligation
 
(672
)
 

 

Cash paid for acquired real estate investments
 
$
584,018

 
$
12,575

 
$
12,902

Number of properties purchased
 
17

 
1

 
2

The following table presents unaudited pro forma information as if the acquisitions during the year ended December 31, 2014 had been consummated on January 1, 2013. Additionally, the unaudited pro forma net loss was adjusted to reclassify acquisition and transaction related expense of $11.9 million from the year ended December 31, 2014 to the year ended December 31, 2013:
 
 
Year Ended December 31,
(In thousands)
 
2014 (1)
 
2013
Pro forma revenues
 
$
80,083

 
$
76,160

Pro forma net income
 
$
20,615

 
$
9,369

_____________________
(1)
For the year ended December 31, 2014, aggregate revenues and net income derived from the Company's 2014 acquisitions (for the Company's period of ownership) were $17.0 million and $4.4 million, respectively.

F-18

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

The following table presents future minimum base rent payments on a cash basis due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items:
(In thousands)
 
Future Minimum
Base Rent Payments
2015
 
$
58,321

2016
 
56,416

2017
 
53,015

2018
 
41,159

2019
 
27,868

Thereafter
 
107,659

 
 
$
344,438

The following table lists the tenants (including, for this purpose, all affiliates of such tenants) whose annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis for all portfolio properties as of December 31, 2014 and 2013:
 
 
December 31,
Tenant
 
2014
 
2013
Toys "R" Us
 
*
 
10.3%
____________________________
*
Tenant's annualized rental income on a straight-line basis was not greater than or equal to 10.0% of consolidated annualized rental income on a straight-line basis for all portfolio properties as of the date specified.
No other tenant represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2014 and 2013.
The following table lists the states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2014 and 2013:
 
 
December 31,
State
 
2014
 
2013
Minnesota
 
17.0%
 
*
Texas
 
14.1%
 
53.2%
Florida
 
13.4%
 
*
Oklahoma
 
11.2%
 
*
Missouri
 
*
 
46.8%
____________________________
*
State's annualized rental income on a straight-line basis was not greater than or equal to 10.0% of consolidated annualized rental income on a straight-line basis for all portfolio properties as of the date specified.
The Company did not own properties in any other state that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of December 31, 2014 and 2013.
Note 4 — Credit Facility
On June 11, 2014, the Company, through the OP, entered into a credit agreement (the "Credit Agreement") relating to a credit facility (the "Credit Facility") that provided for aggregate revolving loan borrowings of up to $100.0 million (subject to borrowing base availability), with a $25.0 million swingline subfacility (but not to exceed 10.0% of the commitments then in effect) and a $5.0 million letter of credit subfacility. Through an uncommitted "accordion feature," the OP, subject to certain conditions, was able to increase commitments under the Credit Facility to up to $250.0 million.

F-19

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

On December 2, 2014, the Company, through the OP and certain subsidiaries of the Company acting as guarantors, entered into an unsecured amended and restated credit agreement (the “Amended Credit Agreement”) relating to a revolving credit facility (the “Amended Credit Facility”), which amends and restates the Credit Agreement. The Amended Credit Facility provides for aggregate revolving loan borrowings of up to $325.0 million (subject to unencumbered asset pool availability), with a $25.0 million swingline subfacility and a $20.0 million letter of credit subfacility, subject to certain conditions. Through an uncommitted “accordion feature,” the OP, subject to certain conditions, may increase commitments under the Amended Credit Facility to up to $575.0 million. Borrowings under the Amended Credit Facility, along with cash on hand from the Company’s IPO, are expected to be used to finance portfolio acquisitions and for general corporate purposes. As of December 31, 2014, the Company's unused borrowing capacity was $120.9 million, based on the assets assigned to the Credit Facility. On February 9, 2015, the Company assigned additional assets to the Credit Facility, increasing its unused borrowing capacity to $325.0 million. As of December 31, 2014, the Company had no outstanding borrowings under the Amended Credit Facility.
BMO Capital Markets acted as joint bookrunner and joint lead arranger for the Amended Credit Facility and its affiliate, BMO Harris Bank N.A., is the administrative agent, letter of credit issuer, swingline lender and a lender thereunder. Regions Capital Markets and SunTrust Robinson Humphrey acted as joint bookrunners and joint lead arrangers for the Amended Credit Facility and its affiliate, Regions Bank and SunTrust Bank are the syndication agents and are lenders thereunder.
Borrowings under the Amended Credit Facility bear interest, at the OP's election, at either (i) the base rate (which is defined in the Credit Agreement as the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.50%, and (c) LIBOR for a one month interest period plus 1.0%) plus an applicable spread ranging from 0.35% to 1.00%, depending on the Company's consolidated leverage ratio, or (ii) LIBOR for the applicable interest period plus an applicable spread ranging from 1.35% to 2.00%, depending on the Company's consolidated leverage ratio.
The Credit Facility required the Company to pay an unused fee per annum of 0.35% and 0.25%, if the unused balance of the Credit Facility exceeded, or was equal to or less than, 50.0% of the available facility, respectively. The Amended Credit Facility requires the Company to pay an unused fee per annum of 0.25% and 0.15%, if the unused balance of the Amended Credit Facility exceeds, or is equal to or less than, 50.0% of the available facility, respectively. The Company incurred $0.3 million in unused borrowing fees during the year ended December 31, 2014. No such fees were incurred during the years ended December 31, 2013 and 2012.
The Amended Credit Facility provides for quarterly interest payments for each base rate loan and periodic interest payments for each LIBOR loan, based upon the applicable interest period (though no longer than three months) with respect to such LIBOR loan, with all principal outstanding being due on the maturity date. The Amended Credit Facility will mature on December 2, 2018, provided that the OP, subject to certain conditions, may elect to extend the maturity date one year to December 2, 2019. The Amended Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty. In the event of a default, the lenders have the right to terminate their obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Company, certain of its subsidiaries and certain subsidiaries of the OP will guarantee the obligations under the Amended Credit Facility.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of December 31, 2014, the Company was in compliance with the financial covenants under the Credit Agreement.

F-20

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Note 5 — Mortgage Notes Payable
The Company's mortgage notes payable as of December 31, 2014 and 2013 consist of the following:
 
 
 
 
Outstanding Loan Amount as of
 
Effective Interest Rate as of
 
 
 
 
 
 
 
 
December 31,
 
December 31,
 
 
 
 
Portfolio
 
Encumbered Properties
 
2014
 
2013
 
2014
 
2013
 
Interest Rate
 
Maturity Date
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
 
 
Liberty Crossing - Refinanced Loan (1)
 
1
 
$
11,000

 
$
11,000

 
4.66
%
 
4.66
%
 
Fixed
 
Jul. 2018
San Pedro Crossing - Senior Loan (2)
 
1
 
17,985

 
17,985

 
3.79
%
 
3.79
%
 
Fixed
 
Jan. 2018
Tiffany Springs MarketCenter
 
1
 
33,802

 
34,098

 
3.92
%
 
4.44
%
 
Fixed
(3) 
Oct. 2018
Shops at Shelby Crossing
 
1
 
24,144

 

 
4.97
%
 
%
 
Fixed
 
Mar. 2024
Total
 
4
 
$
86,931

 
$
63,083

 
4.28
%
(4) 
4.29
%
(4) 
 
 
 
_________________________________
(1)
The Company refinanced the Liberty Crossing property in June 2013.
(2)
Payments and obligations pursuant to this mortgage agreement are guaranteed by the Parent of the Sponsor.
(3)
Fixed as a result of entering into a swap agreement.
(4)
Calculated on a weighted-average basis for all mortgages outstanding as of December 31, 2014 and 2013.
In June 2013, the Company refinanced the Liberty Crossing property. The refinancing qualified as an extinguishment of debt based on the significant changes made to the terms of the loan. In June 2013, in connection with the Company's extinguishment of debt, the Company wrote off approximately $74,000 of related deferred financing costs and incurred approximately $56,000 of penalties, interest and fees related to the refinancing.
The following table summarizes the scheduled aggregate principal payments for the Company's mortgage notes payable for the five years subsequent to December 31, 2014:
(In thousands)
 
Future Principal Payments
2015
 
$
363

2016
 
378

2017
 
400

2018
 
63,208

2019
 
443

Thereafter
 
22,139

 
 
$
86,931

The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of December 31, 2014, the Company was in compliance with financial covenants under its mortgage notes payable agreements.

F-21

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Note 6 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with this derivative utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparty. However, as of December 31, 2014 and 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivative. As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
The following table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013, aggregated by the level in the fair value hierarchy within which those instruments fall:
(In thousands)
 
Quoted Prices
in Active
Markets
Level 1
 
Significant Other
Observable
Inputs
Level 2
 
Significant
Unobservable
Inputs
Level 3
 
Total
December 31, 2014
 
 
 
 
 
 
 
 
Interest rate swap
 
$

 
$
(332
)
 
$

 
$
(332
)
December 31, 2013
 
 
 
 
 
 
 
 
Interest rate swap
 
$

 
$
(98
)
 
$

 
$
(98
)
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets and liabilities. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2014 or 2013.

F-22

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable and accrued expenses and distributions payable approximates their carrying value on the accompanying consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the accompanying consolidated balance sheets are reported in the following table:
 
 
 
 
Carrying Amount at
 
Fair Value at
 
Carrying Amount at
 
Fair Value at
(In thousands)
 
Level
 
December 31, 2014
 
December 31, 2014
 
December 31, 2013
 
December 31, 2013
Mortgage notes payable and premium, net
 
3
 
$
87,223

 
$
89,347

 
$
63,083

 
$
62,824

The fair value of mortgage notes payable is estimated by using a discounted cash flow analysis.
Note 7 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships.
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and collars as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate collars designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above the cap strike rate on the contract and payments of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2014 and 2013, such derivatives have been used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $0.4 million will be reclassified from other comprehensive loss as an increase to interest expense.
As of December 31, 2014 and 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
 
December 31, 2014
 
December 31, 2013
Interest Rate Derivative
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest Rate Swap
 
1
 
$
34,098

 
1
 
$
34,098


F-23

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the accompanying consolidated balance sheets as of December 31, 2014 and 2013:
(In thousands)
 
Balance Sheet Location
 
December 31, 2014
 
December 31, 2013
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest Rate Swap
 
Derivatives, at fair value
 
$
(332
)
 
$
(98
)
The table below details the location in the accompanying consolidated financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2014 and 2013. The Company did not have derivative instruments during the year ended December 31, 2012:
 
 
Year Ended December 31,
(In thousands)
 
2014
 
2013
Amount of gain (loss) recognized in accumulated other comprehensive loss from interest rate derivatives (effective portion)
 
$
(734
)
 
$
(225
)
Amount of gain (loss) reclassified from accumulated other comprehensive loss into income as interest expense (effective portion)
 
$
(505
)
 
$
(127
)
Amount of gain (loss) recognized in income on derivative (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing) *
 
$
(5
)
 
$

_________________________________
* The Company reclassified approximately $5,000 of other comprehensive loss to interest expense during the year ended December 31, 2014, which represented the ineffective portion of the change in fair value of the derivative.
Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of December 31, 2014 and 2013. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets:
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 
(In thousands)
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Liabilities presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received (Posted)
 
Net Amount
December 31, 2014
 
$
(332
)
 
$

 
$
(332
)
 
$

 
$

 
$
(332
)
December 31, 2013
 
$
(98
)
 
$

 
$
(98
)
 
$

 
$

 
$
(98
)
Derivatives Not Designated as Hedges
Derivatives not designated as hedges are not speculative. These derivatives may be used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements to be classified as hedging instruments. The Company does not have any hedging instruments that do not qualify for hedge accounting.
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of December 31, 2014, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $0.4 million. As of December 31, 2014, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of $0.4 million at December 31, 2014.

F-24

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Note 8 — Common Stock
As of December 31, 2014 and 2013, the Company had 94.4 million and 7.3 million shares of common stock outstanding, including unvested restricted shares and shares issued pursuant to the DRIP, and had received total proceeds from the IPO and the DRIP of $938.7 million and $71.3 million, respectively.
On September 19, 2011, the Company's board of directors authorized, and the Company declared, distributions payable to stockholders of record each day during the applicable period at a rate equal to $0.0017534247 per day or $0.64 annually per share of common stock. Distributions began to accrue on June 8, 2012, the date of the Company's initial property acquisition. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. The board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share Repurchase Program
 The Company's board of directors has adopted a Share Repurchase Program ("SRP") that enables stockholders to sell their shares to the Company in limited circumstances. The SRP permits investors to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below.
Prior to the time that the Company's shares are listed on a national securities exchange and until the Company establishes an estimated value for the shares, the purchase price per share will depend on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $9.25 or 92.5% of the amount they actually paid for each share; after two years from the purchase date —the lower of $9.50 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $9.75 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $10.00 or 100.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations). The Company expects to begin establishing an estimated value for its shares based on the value of its real estate and real estate-related investments beginning 18 months after the close of its offering. Beginning 18 months after the completion of the Company's offering (excluding common shares issued under the DRIP), the board of directors will determine the value of the properties and the other assets based on such information as the board determines appropriate, which is expected to include independent valuations of properties or of the Company as a whole, prepared by third-party service providers.
The Company is only authorized to repurchase shares pursuant to the SRP up to the value of the shares issued under the DRIP and will limit the amount spent to repurchase shares in a given quarter to the value of the shares issued under the DRIP in that same quarter. In addition, the board of directors may reject a request for redemption, at any time. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests. Purchases under the SRP by the Company will be limited in any calendar year to 5.0% of the weighted-average number of shares outstanding during the prior calendar year.
The Company's board of directors reserves the right, in its sole discretion, at any time and from time to time, to reject any request for repurchase, change the purchase price for repurchases or otherwise amend the terms of, suspend or terminate the SRP.
When a stockholder requests repurchases and the repurchases are approved by the Company's board of directors, it will reclassify such obligation from equity to a liability based on the settlement value of the obligation. The following table summarizes the repurchases of shares under the SRP cumulatively through December 31, 2014:
 
 
Number of Requests
 
Number of Shares Repurchased
 
Weighted-Average Price per Share
Cumulative repurchase requests as of December 31, 2013
 
1

 
8,674

 
$
9.98

Year ended December 31, 2014
 
18

 
64,818

 
9.80

Cumulative repurchase requests as of December 31, 2014 (1)
 
19

 
73,492

 
$
9.82

_____________________
(1)
Includes 11 unfulfilled repurchase requests consisting of 33,024 shares with a weighted-average repurchase price per share of $9.89, which were approved for repurchase as of December 31, 2014 and were completed during the first quarter of 2015. This liability is included in accounts payable and accrued expenses on the Company's consolidated balance sheet as of December 31, 2014.

F-25

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP.  Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the IPO. The board of directors may designate that certain cash or other distributions be excluded from the DRIP.  The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying consolidated balance sheet in the period distributions are declared.  During the years ended December 31, 2014, 2013 and 2012, the Company issued 1.6 million, 0.1 million and approximately 2,000 shares of common stock with a value of $14.8 million, $0.7 million and approximately $19,000, respectively, and a par value per share of $0.01, pursuant to the DRIP.
Note 9 — Commitments and Contingencies
Future Minimum Ground Lease Payments
The Company entered into lease agreements related to certain acquisitions under leasehold interest arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter:
(In thousands)
 
Future Minimum Base Rent Payments
2015
 
$
464

2016
 
473

2017
 
483

2018
 
493

2019
 
502

Thereafter
 
9,316

 
 
$
11,731

Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on its financial position or results of operations.
Note 10 — Related Party Transactions and Arrangements
The Sponsor and American Realty Capital Retail Special Limited Partnership, LLC, an entity controlled by the Sponsor, owned 242,222 shares of the Company's outstanding common stock as of December 31, 2014 and 2013. As of December 31, 2014 and 2013, the Advisor owned 202 OP Units.

F-26

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Fees Paid in Connection with the IPO
During the IPO, the Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock. The Dealer Manager was paid a selling commission of up to 7.0% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager received up to 3.0% of the gross proceeds from the sale of common stock, before reallowance to participating broker-dealers, as a dealer manager fee. The Dealer Manager was entitled to reallow its dealer manager fee to participating broker-dealers, based on such factors as the volume of shares sold by respective participating broker-dealers and marketing support incurred as compared to those of other participating broker-dealers. The following table details total selling commissions and dealer manager fees incurred by the Company during the years ended December 31, 2014, 2013 and 2012 and payable to the Dealer Manager as of December 31, 2014 and 2013:
 
 
Year Ended December 31,
 
Payable as of December 31,
(In thousands)
 
2014
 
2013
 
2012
 
2014
 
2013
Total commissions and fees to the Dealer Manager
 
$
81,728

 
$
5,711

 
$
561

 
$

 
$
46

The Advisor and its affiliates were paid compensation and received expense reimbursements for services relating to the IPO. The Company utilizes transfer agent services provided by an affiliate of the Dealer Manager. All offering costs relating to the IPO incurred by the Company or its affiliated entities on behalf of the Company are charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details offering costs and reimbursements incurred during the years ended December 31, 2014, 2013 and 2012 and payable to the Advisor and Dealer Manager as of December 31, 2014 and 2013:
 
 
Year Ended December 31,
 
Payable as of December 31,
(In thousands)
 
2014
 
2013
 
2012
 
2014
 
2013
Fees and expense reimbursements to the Advisor and Dealer Manager
 
$
2,854

 
$
1,361

 
$
1,596

 
$
1,152

 
$
4,609

The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 1.5% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs in excess of the 1.5% cap as of the end of the IPO are the Advisor's responsibility. As of the close of the IPO, cumulative offering and related costs, excluding commissions and dealer manager fees, did not exceed the 1.5% threshold.
Fees Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for any loan or other investment. The Advisor is also paid for services provided for which it incurs investment-related expenses, or insourced expenses. Such insourced expenses will be fixed initially at, and may not exceed, 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company pays third party acquisition expenses. Once the proceeds from the IPO have been fully invested, the aggregate amount of acquisition fees and financing coordination fees (as described below) will not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment, as applicable, for all the assets acquired. In no event will the total of all acquisition fees and acquisition expenses (including any financing coordination fees) payable with respect to the Company's portfolio of investments or reinvestments exceed 4.5% of the contract purchase price to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 1.0% of the amount available or outstanding under such financing, subject to certain limitations.

F-27

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Prior to October 1, 2013, the Company paid the Advisor an annual fee of up to 0.75% of average invested assets to provide asset management services. Average invested assets is defined as the average of the aggregate book value of assets invested, directly or indirectly, in properties, mortgage loans and other debt financing investments and other real estate-related investments secured by real estate before reserves for depreciation or bad debts or other similar non-cash expenses. However, the asset management fee was reduced by any amounts payable to the Advisor as an oversight fee, such that the aggregate of the asset management fee and the oversight fee did not exceed 0.75% per annum of average invested assets. Such asset management fee was payable, at the discretion of the Company's board, in cash, common stock or restricted stock grants, or any combination thereof. The asset management fee was reduced to the extent that the Company's funds from operations, as adjusted, during the six months ending on the last calendar quarter immediately preceding the date the asset management fee was payable was less than the distributions declared with respect to such six month period.
Effective October 1, 2013, the payment of asset management fees in cash, shares or restricted stock grants, or any combination thereof to the Advisor and the reduction of the asset management fee to the extent, if any, that the Company's funds from operations, as adjusted, during the six months ending on the last calendar quarter immediately preceding the date the asset management fee was payable was less than the distributions declared with respect to such six month period were eliminated. Instead, the Company causes the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted partnership units of the OP designated as "Class B Units," which are intended to be profit interests and which will vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 7.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Such Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated other than by an affirmative vote of a majority of the Company's independent directors without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met.
The Class B Units are intended to be profits interests and are issued in an amount equal to the cost of the Company's assets multiplied by 0.1875%, divided by the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $9.00 (the initial offering price in the IPO minus selling commissions and dealer manager fees). When and if approved by the board of directors, the Class B Units are issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. As of December 31, 2014, the Company cannot determine the probability of achieving the performance condition. The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. The Advisor receives distributions on the vested and unvested Class B Units it receives in connection with its asset management subordinated participation at the same rate as distributions received on the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss until the performance condition is considered probable to occur. As of December 31, 2014, the Company's board of directors has approved the issuance of and the OP has issued 169,992 Class B Units to the Advisor in connection with this arrangement on a cumulative basis.
In connection with property management and leasing services, unless the Company contracts with a third party, the Company will pay to an affiliate of the Advisor a property management fee of 2.0% of gross revenues from the Company's stand-alone single-tenant net leased properties which are not part of a shopping center and 4.0% of gross revenues from all other types of properties. The Company will also reimburse the affiliate for property level expenses. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees and, prior to January 28, 2014, would pay the Advisor an oversight fee of up to 1.0% of the gross revenues of the property managed. In no event would the Company pay the Advisor or any affiliate both a property management fee and an oversight fee with respect to any particular property. Effective January 28, 2014, the Advisor eliminated the oversight fee.
In connection with any construction, renovation or tenant finish-out on any property, the Company will pay the Advisor 6.0% of the hard costs of the construction, renovation and/or tenant finish-out, as applicable.

F-28

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Effective March 1, 2013, the Company entered into an agreement with the Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees were amortized over the estimated remaining term of the IPO and, as such, have been fully amortized as of December 31, 2014. These fees are included in general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss. The Dealer Manager and its affiliates also provide transfer agency services, as well as transaction management and other professional services. These fees are also included in general and administrative expenses on the accompanying consolidated statements of operations and comprehensive loss during the period the service was provided.
The following table details amounts incurred and forgiven during the years ended December 31, 2014, 2013 and 2012 and amounts contractually due as of December 31, 2014 and 2013 in connection with the operations related services described above:
 
 
Year Ended December 31,
 
 
 
 
 
 
2014
 
2013
 
2012
 
Payable as of December 31,
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
2014
 
2013
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements
 
$
9,214

 
$

 
$
802

 
$

 
$
820

 
$

 
$

 
$

Financing coordination fees (1)
 
3,492

 

 
409

 

 
407

 

 

 

Ongoing fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees (2)
 

 

 

 
18

 

 
93

 

 

Property management and leasing fees
 

 

 

 
72

 

 
13

 

 

Transfer agent and other professional fees
 
663

 

 

 

 

 

 
617

 

Strategic advisory fees
 
425

 

 
495

 

 

 

 

 

Distributions on Class B Units
 
41

 

 

 

 

 

 

 

Total related party operation fees and reimbursements
 
$
13,835

 
$

 
$
1,706

 
$
90

 
$
1,227

 
$
106

 
$
617

 
$

_________________________________
(1)
These fees have been capitalized to deferred costs, net on the consolidated balance sheets.
(2)
Effective October 1, 2013, the Company causes the OP to issue (subject to approval by the board of directors) to the Advisor restricted performance-based Class B Units for asset management services, which will be forfeited immediately if certain conditions occur.
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that it will not reimburse the Advisor for any amount by which the Company's operating expenses (including the asset management fee, as applicable) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets, or (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash expenses and excluding any gain from the sale of assets for that period. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services during the operational stage; however, the Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions. The Company will not reimburse the Advisor for salaries and benefits paid to the Company's executive officers. No reimbursements were incurred from the Advisor for providing services during the years ended December 31, 2014, 2013 or 2012.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flows from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs and/or property operating costs. The Advisor absorbed $0.3 million, $0.7 million and $0.1 million of general and administrative costs during the years ended December 31, 2014, 2013 and 2012, respectively. No property operating costs were absorbed by the Advisor during the year ended December 31, 2014. The Advisor absorbed approximately $41,000 and approximately $44,000 of property operating costs during the years ended December 31, 2013 and 2012, respectively. General and administrative expenses and property operating expenses are presented net of costs absorbed by the Advisor on the accompanying consolidated statements of operations and comprehensive loss.

F-29

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
 The Company will pay a brokerage commission to the Advisor or its affiliates on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and one-half of the total brokerage commission paid, if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in light of the size, type and location of the property, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. During the year ended December 31, 2014, the Company incurred approximately $6,000 of brokerage commissions in connection with an outparcel land sale completed during April 2014. No such fees were incurred during the years ended December 31, 2013 or 2012.
If the Company is not simultaneously listed on an exchange, the Company will pay the Advisor a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 7.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors.  The Company cannot assure that it will provide this 7.0% annual return but the Advisor will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received a 7.0% cumulative non-compounded annual return on their capital contributions plus the 100.0% repayment of capital committed by such investors. No such amounts were incurred during the years ended December 31, 2014, 2013 or 2012.
The Company will pay the Advisor a subordinated incentive listing distribution of 15.0%, payable in the form of a non-interest bearing promissory note, of the amount by which the adjusted market value plus distributions paid prior to listing exceeds the aggregate capital contributed by investors plus an amount equal to a 7.0% cumulative, pre-tax non-compounded annual return to investors.  The Company cannot assure that it will provide this 7.0% annual return but the Advisor will not be entitled to the subordinated incentive listing distribution unless investors have received a 7.0% cumulative, pre-tax non-compounded annual return on their capital contributions plus the 100.0% repayment of capital committed by such investors. No such amounts were incurred during the years ended December 31, 2014, 2013 or 2012. Neither the Advisor nor any of its affiliates can earn both the subordinated participation in the net sales proceeds and the subordinated listing distribution.
Upon termination or non-renewal of the advisory agreement, the Advisor will receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 7.0% cumulative, pre-tax non-compounded return to investors, payable in the form of a non-interest bearing promissory note. The Advisor may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Note 11 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services, transaction management services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 12 — Share-Based Compensation
Stock Option Plan
 The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be fixed at $10.00 per share until the termination of the IPO, and thereafter the exercise price for stock options granted to the independent directors will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of December 31, 2014 and 2013, no stock options were issued under the Plan.

F-30

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 3,000 restricted shares of common stock to each of the independent directors, without any further approval by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholders' meeting. Restricted stock issued to independent directors will vest over a five-year period following the date of grant in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of shares of common stock granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock will be subject to the same restrictions as the underlying restricted shares. The following table reflects restricted share award activity for the years ended December 31, 2014, 2013 and 2012:
 
Number of Shares of Restricted Stock
 
Weighted-Average Issue Price Per Share
Unvested, December 31, 2011
9,000

 
$
10.00

Granted
15,000

 
9.20

Vested
(1,200
)
 
10.00

Forfeitures
(9,000
)
 
9.67

Unvested, December 31, 2012
13,800

 
9.35

Granted
9,000

 
9.00

Vested
(3,000
)
 
9.43

Forfeitures

 

Unvested, December 31, 2013
19,800

 
9.18

Granted
9,000

 
9.00

Vested
(4,800
)
 
9.25

Forfeitures
(8,400
)
 
9.14

Unvested, December 31, 2014
15,600

 
$
9.08

As of December 31, 2014, the Company had $0.1 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. That cost is expected to be recognized over a weighted-average period of 3.5 years.
The fair value of the restricted shares is being expensed on a straight-line basis over the service period of five years. Compensation expense related to restricted stock was approximately $39,000, $27,000 and $15,000 during the years ended December 31, 2014, 2013 and 2012, respectively.

F-31

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors, at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. The following table reflects the shares of common stock issued to directors in lieu of cash compensation:
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Shares issued in lieu of cash
 
6,055

 

 

Value of shares issued in lieu of cash (in thousands)
 
$
55

 
$

 
$

Note 13 — Net Loss Per Share
 The following is a summary of the basic and diluted net loss per share computation for the years ended December 31, 2014, 2013 and 2012:
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Net loss (in thousands)
 
$
(12,632
)
 
$
(4,704
)
 
$
(2,202
)
Basic and diluted weighted-average shares outstanding
 
49,231,737

 
3,216,903

 
358,267

Basic and diluted net loss per share
 
$
(0.26
)
 
$
(1.46
)
 
$
(6.15
)
The following common stock equivalents as of December 31, 2014, 2013 and 2012 were excluded from diluted net loss per share computations as their effect would have been antidilutive for the periods presented:
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Unvested restricted stock
 
15,600

 
19,800

 
13,800

OP Units
 
202

 
202

 
202

Class B Units
 
169,992

 

 

Total common stock equivalents
 
185,794

 
20,002

 
14,002

Note 14 – Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2014 and 2013:
 
 
Quarters Ended
(In thousands, except share and per share data)
 
March 31,
2014
 
June 30,
2014
 
September 30,
2014
 
December 31,
2014
Total revenues
 
$
2,799

 
$
4,278

 
$
6,755

 
$
14,277

Net loss
 
$
(599
)
 
$
(2,913
)
 
$
(4,773
)

$
(4,347
)
Basic and diluted weighted-average shares outstanding
 
12,997,881

 
29,000,403

 
61,255,619

 
92,685,013

Basic and diluted net loss per share
 
$
(0.05
)
 
$
(0.10
)
 
$
(0.08
)
 
$
(0.05
)
 
 
Quarters Ended
(In thousands, except share and per share data)
 
March 31,
2013
 
June 30,
2013
 
September 30,
2013
 
December 31,
2013
Total revenues
 
$
1,397

 
$
1,386

 
$
1,694

 
$
2,684

Net loss
 
$
(1,052
)
 
$
(1,051
)
 
$
(1,510
)
 
$
(1,091
)
Basic and diluted weighted-average shares outstanding
 
969,506

 
2,063,622

 
3,785,878

 
5,987,213

Basic and diluted net loss per share
 
$
(1.09
)
 
$
(0.51
)
 
$
(0.40
)
 
$
(0.18
)

F-32

AMERICAN REALTY CAPITAL – RETAIL CENTERS OF AMERICA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014

Note 15 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements except for the following disclosures:
Acquisitions
The following table presents certain information about the properties the Company acquired from January 1, 2015 to April 15, 2015:
(Dollar amounts in thousands)
 
Number of Properties
 
Base Purchase Price (1)
 
Rentable Square Feet
Total portfolio — December 31, 2014
 
20

 
$
716,264

 
4,274,041

Acquisitions
 
2

 
41,450

 
320,185

Total portfolio — April 15, 2015
 
22

 
$
757,714

 
4,594,226

_______________________________
(1) Contract purchase price, net of purchase price adjustments, excluding acquisition related costs.

F-33

AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(In thousands)

 
 
 
 
 
 
 
 
Initial Costs
 
Costs Capitalized Subsequent to Acquisition
 
 
 
 
Property
 
State
 
Acquisition
Date
 
Encumbrances at
December 31,
2014
 
Land
 
Building and
Improvements
 
Land
 
Building and
Improvements
 
Gross Amount
Carried at
December  31,
2014 (2) (3) (4)
 
Accumulated
Depreciation (5) (6)
Liberty Crossing
 
TX
 
6/8/2012
 
$
11,000

 
$
2,887

 
$
17,084

 
$

 
$
182

 
$
19,817

 
$
(2,066
)
San Pedro Crossing
 
TX
 
12/21/2012
 
17,985

 
9,548

 
16,873

 

 
656

 
26,398

 
(2,260
)
Tiffany Springs MarketCenter
 
MO
 
9/26/2013
 
33,802

 
15,757

 
28,834

 

 
8

 
44,401

 
(2,320
)
The Streets of West Chester
 
OH
 
4/3/2014
 

(1) 
11,812

 
25,946

 

 

 
37,758

 
(584
)
Prairie Towne Center
 
IL
 
6/4/2014
 

(1) 
11,033

 
11,185

 

 

 
22,218

 
(211
)
Southway Shopping Center
 
TX
 
6/6/2014
 

(1) 
10,330

 
17,908

 

 

 
28,238

 
(292
)
Stirling Slidell Centre
 
LA
 
8/8/2014
 

(1) 
3,517

 
10,067

 

 

 
13,584

 
(132
)
Northwoods Marketplace
 
SC
 
8/15/2014
 

(1) 
12,886

 
19,853

 

 

 
32,739

 
(244
)
Centennial Plaza
 
OK
 
8/27/2014
 

(1) 
3,538

 
21,405

 

 

 
24,943

 
(202
)
Northlake Commons
 
NC
 
9/4/2014
 

(1) 
16,930

 
12,729

 

 

 
29,659

 
(140
)
Shops at Shelby Crossing
 
FL
 
9/5/2014
 
24,144

 
4,575

 
21,396

 

 
408

 
26,379

 
(262
)
Shoppes of West Melbourne
 
FL
 
9/18/2014
 

 
3,546

 
12,528

 

 

 
16,074

 
(90
)
The Centrum
 
NC
 
9/29/2014
 

 
11,530

 
21,182

 

 
261

 
32,973

 
(165
)
Shoppes at Wyomissing
 
PA
 
10/16/2014
 

 
3,406

 
21,207

 

 
174

 
24,787

 
(105
)
Southroads Shopping Center
 
OK
 
10/29/2014
 

 
6,770

 
46,543

 

 
359

 
53,672

 
(203
)
Parkside Shopping Center
 
KY
 
11/12/2014
 

 
11,537

 
17,903

 

 
355

 
29,795

 
(115
)
West Lake Crossing
 
TX
 
11/20/2014
 

 
2,082

 
9,981

 

 

 
12,063

 
(26
)
Colonial Landing
 
FL
 
12/18/2014
 

 

 
32,821

 

 

 
32,821

 

The Shops at West End
 
MN
 
12/23/2014
 

 
12,799

 
76,727

 

 

 
89,526

 

Township Marketplace
 
PA
 
12/23/2014
 

 
7,855

 
31,941

 

 

 
39,796

 

 
 
 
 
 
 
$
86,931

 
$
162,338

 
$
474,113

 
$

 
$
2,403

 
$
637,641

 
$
(9,417
)
________________
(1)
These unencumbered properties collateralize a credit facility of up to $325.0 million, which had no outstanding borrowings as of December 31, 2014.
(2)
Acquired intangible lease assets allocated to individual properties in the amount of $127.1 million are not reflected in the table above.
(3)
The tax basis of aggregate land, buildings and improvements as of December 31, 2014 is $724.7 million.
(4)
Gross amount carried is net of tenant improvement dispositions of $1.2 million due to tenant lease expirations.
(5)
The accumulated depreciation column excludes $9.7 million of accumulated amortization associated with acquired intangible lease assets.
(6)
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements.

F-34

AMERICAN REALTY CAPITAL — RETAIL CENTERS OF AMERICA, INC.

Real Estate and Accumulated Depreciation
Schedule III
December 31, 2014
(In thousands)

A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2014, 2013 and 2012:
 
 
Year Ended December 31,
 
 
2014
 
2013
 
2012
Real estate investments, at cost:
 


 
 
 
 
Balance at beginning of year
 
$
90,894

 
$
46,392

 
$

Additions - acquisitions and improvements
 
547,706

 
44,756

 
46,392

Disposals
 
(959
)
 
(254
)
 

Balance at end of the year
 
$
637,641

 
$
90,894

 
$
46,392

Accumulated depreciation and amortization:
 
 
 
 
 
  

Balance at beginning of year
 
$
3,519

 
$
657

 
$

Depreciation expense
 
6,857

 
3,116

 
657

Disposals
 
(959
)
 
(254
)
 

Balance at end of the year
 
$
9,417

 
$
3,519

 
$
657


F-35