CNL Growth Properties, Inc. - FORM 10-Q

CNL Growth Properties, Inc. - FORM 10-Q - November 5, 2015

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EX-31.2 - CERTIFICATION - CNL Growth Properties, Inc.	d98789dex312.htm
EX-32.1 - CERTIFICATION - CNL Growth Properties, Inc.	d98789dex321.htm
EX-31.1 - CERTIFICATION - CNL Growth Properties, Inc.	d98789dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

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

For the transition period from to

Commission file number: 000-54686

CNL Growth Properties, Inc.

(Exact name of registrant as specified in its charter)


Maryland		26-3859644
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

CNL Center at City Commons 450 South Orange Avenue Orlando, Florida		32801
(Address of principal executive offices)		(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares of common stock of the registrant outstanding as of November 2, 2015 was 22,526,171.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets		1

	Condensed Consolidated Statements of Operations		2

	Condensed Consolidated Statements of Equity		3

	Condensed Consolidated Statements of Cash Flows		4

	Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33

Item 4.	Controls and Procedures		33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		34

Item 1A.	Risk Factors		34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3.	Defaults Upon Senior Securities		34

Item 4.	Mine Safety Disclosures		34

Item 5.	Other Information		34

Item 6.	Exhibits		34

Signatures			35

Exhibits			36

Item 1.

Financial Statements

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2015			December 31, 2014
ASSETS

Real estate assets, net:
Operating real estate assets, net (including VIEs $233,369,804 and $129,124,537, respectively)	$	265,190,776		$	158,589,952
Construction in process, including land (including VIEs $116,968,716 and $123,940,126, respectively)		122,760,830			130,627,327

Total real estate assets, net		387,951,606			289,217,279
Real estate held for sale (including VIEs $71,007,474 and $131,170,189, respectively)		72,476,562			134,316,248
Cash and cash equivalents (including VIEs $9,781,711 and $6,689,103, respectively)		32,094,015			47,691,457
Restricted cash (including VIEs $2,422,315 and $2,268,472, respectively)		2,962,548			2,466,585
Loan costs, net (including VIEs $1,945,931 and $2,852,828, respectively)		2,458,824			3,671,109
Other assets (including VIEs $1,284,898 and $701,200, respectively)		1,836,343			913,822

Total Assets	$	499,779,898		$	478,276,500


LIABILITIES AND EQUITY

Liabilities:
Mortgage and construction notes payable (including VIEs $267,076,844 and $226,346,599, respectively)	$	295,291,844		$	254,561,600
Accrued development costs (including VIEs $18,107,096 and $23,768,886, respectively)		18,107,096			23,768,886
Due to related parties		1,703,840			1,510,550
Accounts payable and other accrued expenses (including VIEs $4,700,891 and $2,047,929, respectively)		5,337,797			2,542,519
Other liabilities (including VIEs $2,116,026 and $1,903,520, respectively)		2,193,992			1,982,012

Total Liabilities		322,634,569			284,365,567


Commitments and contingencies (Note 10)

Equity:
Stockholders’ equity:
Preferred stock, $0.01 par value per share, authorized and unissued 200,000,000 shares		—			—
Common stock, $0.01 par value per share, 1,120,000,000 shares authorized; 22,702,363 issued and 22,526,171 outstanding		225,262			225,262
Capital in excess of par value		170,792,081			170,792,081
Accumulated earnings (deficit)		3,969,571			(12,007,405	)
Accumulated cash distributions		(29,284,024	)		—

Total Stockholders’ Equity		145,702,890			159,009,938
Noncontrolling interests		31,442,439			34,900,995

Total Equity		177,145,329			193,910,933

Total Liabilities and Equity	$	499,779,898		$	478,276,500

The abbreviation VIEs above means Variable Interest Entities.

See accompanying notes to condensed consolidated financial statements.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenues:
Rental income from operating leases	$	9,284,498		$	4,010,294		$	22,441,810		$	9,021,008
Other property revenues		691,041			352,281			1,775,857			814,853

Total revenues		9,975,539			4,362,575			24,217,667			9,835,861


Expenses:
Property operating expenses		5,036,001			2,356,776			12,034,722			5,775,807
General and administrative		700,036			595,206			2,469,186			2,146,571
Asset management fees, net of amounts capitalized		645,544			283,974			1,698,073			705,170
Property management fees		356,149			237,022			923,574			502,195
Acquisition fees and expenses, net of amounts capitalized		—			16,026			16,462			44,926
Depreciation		2,338,221			1,681,555			7,669,155			3,823,742

Total expenses		9,075,951			5,170,559			24,811,172			12,998,411

Operating income (loss)		899,588			(807,984	)		(593,505	)		(3,162,550	)


Other income (expense):
Fair value adjustments and other income (expense)		(25,292	)		31,693			(26,008	)		25,383
Interest expense and loan cost amortization, net of amounts capitalized		(1,491,920	)		(324,567	)		(3,772,451	)		(789,870	)
Loss on extinguishment of debt		(11,216	)		—			(11,216	)		—

Total other expense		(1,528,428	)		(292,874	)		(3,809,675	)		(764,487	)


Loss from continuing operations		(628,840	)		(1,100,858	)		(4,403,180	)		(3,927,037	)

Income from discontinued operations, net of tax		491,000			242,922			26,556,668			2,021,905

Net income (loss) before gains on sale of real estate and easement		(137,840	)		(857,936	)		22,153,488			(1,905,132	)
Gain on sale of real estate		18,158,938			—			18,158,938			—
Gain on easement		—			—			603,400			—

Net income (loss) including noncontrolling interests		18,021,098			(857,936	)		40,915,826			(1,905,132	)

Net (income) loss attributable to noncontrolling interest:
Continuing operations		(11,737,771	)		230,057			(11,479,364	)		733,874
Discontinued operations		—			(11,877	)		(13,459,486	)		(27,276	)

Net (income) loss attributable to noncontrolling interests		(11,737,771	)		218,180			(24,938,850	)		706,598

Net income (loss) attributable to common stockholders	$	6,283,327		$	(639,756	)	$	15,976,976		$	(1,198,534	)

Net income (loss) per share of common stock (basic and diluted):
Continuing operations	$	0.26		$	(0.04	)	$	0.13		$	(0.16	)
Discontinued operations		0.02			0.01			0.58			0.10


Net income (loss) per share of common stock (basic and diluted)	$	0.28		$	(0.03	)	$	0.71		$	(0.06	)

Weighted average number of shares of common stock outstanding (basic and diluted)		22,526,171			22,526,171			22,526,171			20,969,311

See accompanying notes to condensed consolidated financial statements.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2015 and 2014 (Unaudited)


	Common Stock						Capital in Excess of Par Value			Accumulated Earnings (Deficit)			Accumulated Cash Distributions			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Number of Shares			Par Value			Capital in Excess of Par Value			Accumulated Earnings (Deficit)			Accumulated Cash Distributions			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
Balance at December 31, 2013		15,393,316		$	153,933		$	120,627,485		$	(9,818,401	)	$	—		$	110,963,017		$	23,415,094		$	134,378,111
Subscriptions received for common stock through public offering		5,985,914			59,859			65,336,467			—			—			65,396,326			—			65,396,326
Redemptions of common stock		(40,447	)		(404	)		(399,781	)		—			—			(400,185	)		—			(400,185	)
Stock issuance and offering costs		—			—			(9,490,715	)		—			—			(9,490,715	)		—			(9,490,715	)
Stock distributions		1,187,388			11,874			(11,874	)		—			—			—			—			—
Purchase of noncontrolling interest		—			—			(5,269,501	)		—			—			(5,269,501	)		(256,324	)		(5,525,825	)
Contributions from noncontrolling interests		—			—			—			—			—			—			13,182,912			13,182,912
Return of capital to non-controlling interest		—			—			—			—			—			—			(1,488,162	)		(1,488,162	)
Distributions to noncontrolling interests		—			—			—			—			—			—			(497,625	)		(497,625	)
Net loss		—			—			—			(1,198,534	)		—			(1,198,534	)		(706,598	)		(1,905,132	)

Balance at September 30, 2014		22,526,171		$	225,262		$	170,792,081		$	(11,016,935	)	$	—		$	160,000,408		$	33,649,297		$	193,649,705


Balance at December 31, 2014		22,526,171		$	225,262		$	170,792,081		$	(12,007,405	)	$	—		$	159,009,938		$	34,900,995		$	193,910,933
Cash distributions, declared and paid ($1.30 per share)		—			—			—			—			(29,284,024	)		(29,284,024	)		—			(29,284,024	)
Contributions from noncontrolling interests		—			—			—			—			—						1,877,931			1,877,931
Return of capital to noncontrolling interests		—			—			—			—			—			—			(3,813,491	)		(3,813,491	)
Distributions to noncontrolling interests		—			—			—			—			—			—			(26,461,846	)		(26,461,846	)
Net income		—			—			—			15,976,976			—			15,976,976			24,938,850			40,915,826

Balance at September 30, 2015		22,526,171		$	225,262		$	170,792,081		$	3,969,571		$	(29,284,024	)	$	145,702,890		$	31,442,439		$	177,145,329

See accompanying notes to condensed consolidated financial statements.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2015			2014
Operating Activities:
Net income (loss), including amounts attributable to noncontrolling interests	$	40,915,826			(1,905,132	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		7,669,155			4,688,604
Amortization of loan costs		411,559			115,854
Loss on extinguishment of debt		829,620			92,361
Prepayment penalties on loans		(282,485	)		—
Gain on sale of real estate held for sale		(45,573,135	)		(1,219,693	)
Gain on easement		(603,400	)		—
Unrealized loss from change in fair value of interest rate caps		76,492			207,420
Straight-line rent adjustments		(144,048	)		(292,993	)
Changes in operating assets and liabilities:
Other assets		(820,790	)		(78,901	)
Due to related parties		193,290			229,021
Accounts payable and other accrued expenses		2,730,924			1,504,807
Other liabilities		196,980			64,934

Net cash provided by operating activities		5,599,988			3,406,282


Investing Activities:
Development property costs, including land and capital expenditures		(110,095,588	)		(148,283,362	)
Collection of advance to municipality utility district		—			1,313,975
Capital expenditures on real estate held for sale		—			(160,793	)
Proceeds from sale of property		106,093,743			14,986,333
Proceeds from easement		675,000			—
Changes in restricted cash		(495,963	)		(428,534	)

Net cash used in investing activities		(3,822,808	)		(132,572,381	)


Financing Activities:
Subscriptions received for common stock through public offering		—			65,396,326
Stock issuance and offering costs		—			(9,587,241	)
Redemptions of common stock		—			(767,390	)
Cash distributions paid on common stock		(29,284,024	)		—
Proceeds from mortgage and construction notes payable		94,278,219			132,968,434
Payments of mortgage and construction notes payable		(53,547,975	)		(36,790,335	)
Payment of loan costs		(366,236	)		(2,020,428	)
Purchase of interest rate cap		(72,200	)		(126,780	)
Purchase of noncontrolling interest		—			(5,525,825	)
Advance from affiliate of noncontrolling interest		15,000			461,000
Repayment of advance from affiliate of noncontrolling interest		—			(1,164,012	)
Return of capital to noncontrolling interest		(3,813,491	)		(1,488,162	)
Contributions from noncontrolling interests		1,877,931			12,682,912
Distributions to noncontrolling interests		(26,461,846	)		(497,625	)

Net cash (used in) provided by financing activities		(17,374,622	)		153,540,874


Net (Decrease) Increase in Cash and Cash Equivalents		(15,597,442	)		24,374,775
Cash and Cash Equivalents at Beginning of Period		47,691,457			35,827,614

Cash and Cash Equivalents at End of Period	$	32,094,015		$	60,202,389

See accompanying notes to condensed consolidated financial statements.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)


	Nine Months Ended September 30,
	2015		2014

Supplemental Disclosure of Non-Cash Investing and Financing Transactions:
Amounts incurred but not paid:
Development costs	$	18,107,096	$	25,616,637

Loan cost amortization capitalized on development properties	$	640,700	$	815,358

Noncontrolling interests non-cash contributions	$	—	$	500,000

Noncontrolling interests construction advance	$	—	$	703,012

Stock distributions declared (at par)	$	—	$	11,874

See accompanying notes to condensed consolidated financial statements.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

1.	Business and Organization

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

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

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

From October 20, 2009 through April 11, 2014, the Company received aggregate offering proceeds of approximately $208.3 million from its initial and follow-on offering (the “Offerings”). Having taken into consideration the closing of the Company’s Offerings, completion of the acquisition phase in April 2015, and the estimated time needed to complete the development phase and achieve substantial stabilization of the Company’s assets, the Company and its Advisor have begun to explore strategic alternatives available for future stockholder liquidity. In August 2015, the Company’s board of directors appointed a special committee comprised of the Company’s independent directors (the “Special Committee”) to oversee the process of exploring strategic alternatives for future stockholder liquidity. In September 2015 the Company engaged CBRE Capital Advisors, Inc. (“CBRE Cap”) to act as exclusive financial advisor to the Company to assist the Company and the Special Committee with this process.

As of September 30, 2015, the Company owned interests in 15 Class A multifamily properties, nine of which were operational and as to which development was complete and six of which were under development, including one that was partially operational. The Company had a total of 2,357 completed apartment units as of September 30, 2015 and expects to have approximately 3,700 units (excluding 596 units relating to the Crescent Crosstown and the Crescent Cool Springs properties which are included in real estate held for sale) once construction is completed on its properties under development. As of September 30, 2015, two of the Company’s nine operational properties were held for sale as described in Note 6. “Real Estate Held for Sale.”

Fourteen of the Company’s multifamily properties are owned through joint ventures in which the Company has co-invested with an affiliate of a national or regional multifamily developer. The Company also wholly owns one property.

2.	Summary of Significant Accounting Policies

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles of the United States (“GAAP”).

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

2.	Summary of Significant Accounting Policies (continued)

The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 2015 may not be indicative of the results expected for the year ending December 31, 2015. Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date but do not include all disclosures required by GAAP.

These accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of December 31, 2014, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

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

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

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 as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. For example, significant estimates and assumptions are made in connection with the analysis of real estate impairments. Actual results could differ from those estimates.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

2.	Summary of Significant Accounting Policies (continued)

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

As a REIT, the Company may be subject to certain state and local taxes on its income and property, and U.S. federal income and excise taxes on its undistributed income. As a REIT and to the extent it distributes all its taxable income, the Company will not have any federal income tax liability. The Company analyzed its tax positions and determined that it has not taken any uncertain tax positions.

Adopted Accounting Pronouncements – In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update changes the criteria for reporting discontinued operations where only disposals representing a strategic shift that has (or will have) major effect on an entity’s operations and financial results, such as a major line of business or geographical area, should be presented as a discontinued operation. This ASU is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur on or after the effective date. As a result, no changes were made for properties classified as held for sale prior to January 1, 2015. Effective January 1, 2015, the Company adopted this ASU. This ASU imparts the determination of which property disposals qualify as discontinued operations, as well as requires additional disclosures about discontinued operations.

Recent Accounting Pronouncements – In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” as a new Accounting Standard Concept (“ASC”) topic (Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard further provides guidance for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, lease contracts). The FASB subsequently issued ASU 2015-14 to defer the effective date of ASU 2014-09 until annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with earlier adoption permitted. ASU 2014-09 can be adopted using one of two retrospective transition methods: 1) retrospectively to each prior reporting period presented or 2) as a cumulative-effect adjustment as of the date of adoption. The Company has not yet selected a transition method and is currently evaluating the impact of ASU 2014-09; however, its adoption could potentially have a significant effect on the Company’s consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which requires amendments to both the variable interest entity and voting models. The amendments (i) modify the identification of variable interests (fees paid to a decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination under the VIE model, and (ii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using either a modified retrospective or full retrospective approach. The Company has determined that it will not early adopt this ASU and is currently evaluating the effect the guidance will have on its consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that loan 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, consistent with debt discounts or premiums. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

2.	Summary of Significant Accounting Policies (continued)

adoption permitted. The ASU is to be applied retrospectively for each period presented. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company has determined that it will not early adopt this ASU and that the amendments will not materially impact the presentation of the Company’s consolidated financial position, and will not have a material impact on the Company’s results of operations or cash flows.

3.	Acquisitions

During the nine months ended September 30, 2015, the Company acquired an ownership interest in its last consolidated joint venture, which is developing a Class A, multifamily project at the following location:

Property Name and Location

Date
Acquired

Operator/Developer

Ownership
Interest ⁽¹⁾

Contract
Purchase Price
(in millions)

Hampton Roads Crossing II Suffolk, VA

(the “Hampton Roads Property”)

4/30/15

Bainbridge

Development

Company, LLC

(“Bainbridge”) ⁽²⁾

5.2

Total

5.2

⁽³⁾

FOOTNOTES:

⁽¹⁾

The property was acquired through a joint venture with a Bainbridge affiliate, which is affiliated with another multifamily project owned by the Company. In the joint venture arrangement, the Company is the managing member. Generally, distributions of operating cash flow will be distributed pro rata based on each member’s ownership interest. In addition, proceeds from a capital event, such as a sale of the property or refinancing of the debt, generally will be distributed pro rata until the members of the joint venture receive the return of their invested capital and a specified minimum return thereon; and thereafter, the Bainbridge affiliate will receive a disproportionately higher share of any remaining proceeds at varying levels based on the Company having received certain minimum threshold returns.

⁽²⁾

This property is owned through a joint venture in which Bainbridge or a Bainbridge affiliate (i) is the Company’s joint venture partner, (ii) serves as developer and the general contractor of the project, and (iii) provides any lender required guarantees on the loan. In addition, a Bainbridge affiliate may serve as property manager of the property once operations commence.

⁽³⁾	The total development budget for the property is $36.1 million.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

4.	Variable Interest Entities

During the nine months ended September 30, 2015, the Company entered into a separate joint venture arrangement in connection with the development and ownership of the multifamily property described in Note 3. “Acquisitions.” The Company determined that the joint venture in which it has invested is a VIE generally because there is insufficient equity at risk due to the development nature of the venture. As a result of rights held under the respective agreement, the Company has determined that it is the primary beneficiary of the VIE and holds a controlling financial interest in the venture due to the Company’s authority to direct the activities that most significantly impact the economic performance of the entity, as well as its obligation to absorb the losses of and its right to receive benefits from the venture that could potentially be significant to the entity. As such, the transactions and accounts of the joint ventures are consolidated in the Company’s accompanying financial statements.

5.	Real Estate Assets, net

As of September 30, 2015 and December 31, 2014, real estate assets consisted of the following:


	September 30, 2015			December 31, 2014

Operating real estate assets, net:
Land and land improvements	$	60,258,670		$	31,225,633
Buildings and improvements		194,790,581			122,152,091
Furniture, fixtures and equipment		21,250,173			10,372,371
Less: accumulated depreciation		(11,108,648	)		(5,160,143	)

Total operating real estate assets, net		265,190,776			158,589,952
Construction in process, including land		122,760,830			130,627,327

Total real estate, net	$	387,951,606		$	289,217,279

For the nine months ended September 30, 2015 and 2014, depreciation expense on the Company’s real estate assets, excluding assets classified as discontinued operations, was approximately $7.7 million and $3.8 million, respectively, including approximately $2.3 million and $1.7 million for the quarters ended September 30, 2015 and 2014, respectively.

6.	Real Estate Held for Sale

As of December 31, 2014, the Company had classified its Long Point Property, a Class A multifamily property, as held for sale. The Company sold this property during January 2015. In 2012 and 2013, the Company acquired and began developing the Crescent Crosstown, Crescent Alexander Village and the Crescent Cool Springs properties (“Crescent Properties”). Construction of these Class A multifamily properties was completed between 2013 and 2015. In May 2015, the three joint ventures owning the Crescent Properties each decided to pursue a potential sale of its respective property, and as of such time, the Company classified the Crescent Properties as held for sale. In September 2015, the Crescent Alexander Village Property sold and the Company received sales proceeds net of closing costs of approximately $51.7 million, resulting in a gain of approximately $18.2 million for financial reporting purposes, which was included in income from continuing operations in the accompanying condensed consolidated statement of operations. Of the $18.2 million gain, $6.8 million is allocable to common stockholders. The Crescent Crosstown Property was sold in October 2015 as described in Note 11. “Subsequent Events.”

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

6.	Real Estate Held for Sale (continued)

As of September 30, 2015, real estate held for sale consisted of the following:


	Long Point Property		Crescent Properties			Total

Land and land improvements	$	—	$	19,736,696		$	19,736,696
Buildings and improvements		—		51,059,571			51,059,571
Furniture, fixtures and equipment		—		5,420,755			5,420,755
Less: accumulated depreciation		—		(3,740,460	)		(3,740,460	)

Total real estate held for sale	$	—	$	72,476,562		$	72,476,562

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


	Long Point Property			Crescent Properties			Total

Land and land improvements	$	6,263,691		$	24,763,382		$	31,027,073
Buildings and improvements		20,890,469			66,466,038			87,356,507
Furniture, fixtures and equipment		2,332,533			7,572,565			9,905,098
Less: accumulated depreciation		(2,468,569	)		(2,826,172	)		(5,294,741	)

Operating real estate held for sale		27,018,124			95,975,813			122,993,937
Construction in progress		—			11,322,311			11,322,311

Total real estate held for sale	$	27,018,124		$	107,298,124		$	134,316,248

The financial statements reflect the reclassifications of rental income, interest expense and other categories relating to the Long Point Property and Gwinnett Center from loss from continuing operations to income from discontinued operations for all periods presented. In January 2015 and March 2014, the Company sold the Long Point Property and Gwinnett Center, respectively, and received sales proceeds net of closing costs of approximately $54.4 million and $15.0 million, respectively, resulting in a gain of approximately $27.4 million and $1.2 million, respectively, for financial reporting purposes, which were included in income from discontinued operations for the applicable nine months ended September 30, 2015 and 2014 in the accompanying condensed consolidated statements of operations. Of the $27.4 million gain recognized on the sale of the Long Point Property, $13.9 million is allocable to common stockholders.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

6.	Real Estate Held for Sale (continued)

The following is a summary of income from discontinued operations for the quarters and nine months ended September 30:


	Quarter Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015			2014

Revenues	$	—	$	1,229,919		$	190,068		$	4,083,787
Expenses		—		(604,440	)		(184,920	)		(2,070,272	)
Depreciation and amortization		—		(288,128	)		—			(864,862	)

Operating income		—		337,351			5,148			1,148,653

Fair value adjustments and other expense		—		(8,955	)		1			(121,487	)
Interest expense and loan cost amortization, net of amounts capitalized		—		(85,474	)		(44,274	)		(192,167	)
Loss on extinguishment of debt		—		—			(818,404	)		(32,787	)
Gain on sale of property, net of tax		491,000		—			27,414,197			1,219,693

Total other income (expense)		491,000		(94,429	)		26,551,520			873,252

Income from discontinued operations	$	491,000	$	242,922		$	26,556,668		$	2,021,905

The Company accounted for the revenues and expenses related to the Crescent Properties classified as held for sale as income from continuing operations because the disposition of these three properties would neither cause a strategic shift in the Company nor are they considered to have a major impact on the Company’s business. Therefore, they did not qualify as discontinued operations under ASU 2014-08.

However, the dispositions of the Crescent Properties represent individually significant components. The Company recorded net income (loss) from continuing operations attributable to common stockholders related to the Crescent Properties held for sale of approximately $7.3 million and $6.9 million for the quarter and nine months ended September 30, 2015, respectively, of which approximately $6.8 million for both the quarter and nine months related to the gain on sale of the Crescent Alexander Village property, and ($0.1) million and ($0.3) million for the quarter and nine months ended September 30, 2014, respectively.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

7.	Indebtedness

During the nine months ended September 30, 2015, the Company entered into the following loan agreement:

Property and Related Loan

Outstanding
Principal
Balance as of
September 30,
2015
(in millions)

Interest Rate

Payment Terms

Maturity Date

Total Loan
Capacity
Amount
(in millions)

Hampton Roads Property Construction Loan ⁽¹⁾

0.2

LIBOR⁽²⁾ plus 2%, minimum 3% interest rate adjusted monthly ⁽³⁾

Monthly interest only payments through April 2018; principal due on maturity, including extension periods.

April 2018 (plus additional 1-year extension)

25.3

FOOTNOTES:

⁽¹⁾	The loan will be used to fund the majority of development and construction costs related to the property. The construction loan is collateralized by the property and all improvements thereon.

⁽²⁾	As of September 30, 2015, LIBOR was 0.19%.

⁽³⁾	In connection with obtaining the property, the Company purchased an interest rate cap with a maximum notional principal amount of $25.3 million, pursuant to which LIBOR is capped at 1% for an initial term expiring April 2017.

During the nine months ended September 30, 2015, the Company borrowed approximately $94.3 million in connection with its multifamily development projects and repaid approximately $53.5 million related to the Long Point Property and the Crescent Alexander Village Property as a result of the sale of these properties.

The Company recognized a loss on extinguishment of debt of approximately $0.8 million and $0.03 million during the nine months ended September 30, 2015 and 2014, respectively, as a result of the payoff of the mortgage loans on the Long Point Property and Gwinnett Center, respectively. The loss on extinguishment of debt was related to unamortized loan costs and a prepayment penalty and was included in income from discontinued operations in the accompanying condensed consolidated statements of operations. The Company also recognized a loss on extinguishment of debt related to unamortized loan costs of approximately $0.01 million during the quarter and nine months ended September 30, 2015 as a result of the payoff of the construction loan in conjunction with the sale of the Crescent Alexander Village Property. The loss on extinguishment of debt was included in continuing operations for the quarter and nine months ended September 30, 2015.

During the nine months ended September 30, 2015, the Company, through the Crosstown Joint Venture, the Company’s consolidated joint venture which developed the Crescent Crosstown Property, modified its original development and construction loan which had an outstanding principal balance of $26.5 million which was scheduled to mature in March 2015. The Company modified the original loan with the existing lender into a new $30 million variable rate loan with an interest rate of LIBOR plus 1.95% and extended the maturity by one year to March 2016. The Company repaid this loan in October 2015 in conjunction with the sale of the property as described in Note 11. “Subsequent Event.”

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

7.	Indebtedness (continued)

The Crescent Cool Springs Property decreased its unused letters of credit from $1.8 million as of December 31, 2014 to $0.4 million as of September 30, 2015.

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

Maturities of indebtedness for the remainder of 2015 and the next four years and thereafter, in aggregate, assuming the terms of the loans are not extended, were the following as of September 30, 2015:


2015	$	45,908,192
2016		132,960,051
2017		65,966,984
2018		23,937,889
2019		686,084
Thereafter		25,832,644

	$	295,291,844

The estimated fair market value and carrying value of the Company’s debt were approximately $295.8 million and $295.3 million, respectively, as of September 30, 2015. The estimated fair market value of the Company’s debt was determined based upon then-current rates and spreads the Company would expect to obtain for similar borrowings. Because this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair values related to the Company’s mortgage and construction notes payable are categorized as Level 3 on the three-level valuation hierarchy used for GAAP. The estimated fair values of accounts payable and accrued expenses approximated the carrying values as of September 30, 2015 because of the relatively short maturities of the obligations.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

8.	Related Party Arrangements

During the quarters and nine months ended September 30, 2015 and 2014, the Company incurred the following fees and reimbursable expenses due to related parties, including the managing dealer of the Company’s Offerings, which is an affiliate of the Company’s Advisor, the Advisor, its affiliates and other related parties:


	Quarter Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014

Selling commissions⁽¹⁾	$	—	$	—	$	—	$	4,332,800
Marketing support fees⁽¹⁾		—		—		—		1,869,583

		—		—		—		6,202,383

Reimbursable expenses:
Offering costs⁽¹⁾		—		—		—		3,279,232
Investor administrative service fees⁽²⁾		33,750		33,750		101,250		101,250
Other operating and acquisition expenses⁽³⁾⁽⁴⁾		261,209		315,648		903,056		892,065

		294,959		349,398		1,004,306		4,272,547


Investment services fees⁽⁵⁾		15,326		—		609,370		1,582,359
Asset management fees⁽⁶⁾		890,390		700,476		2,477,596		1,681,605
Property management fees⁽⁷⁾		19,331		10,072		47,050		43,428
Financing coordination fees⁽⁸⁾		—		—		—		282,150

	$	1,220,006	$	1,059,946	$	4,138,322	$	14,064,472

FOOTNOTES:

⁽¹⁾	Selling commissions, marketing support fees, and offering costs are included in stock issuance and offering costs in the condensed consolidated statement of equity as of December 31, 2014.

⁽²⁾

Investor administrative service fees of $0.1 million and $0.1 million are included in general and administrative expenses for the nine months ended September 30, 2015 and 2014, respectively, including $0.03 million and $0.03 million for the quarters ended September 30, 2015 and 2014, respectively. The remaining investor administrative service fees are included in stock issuance and offering costs in the condensed consolidated statement of equity as of December 31, 2014.

⁽³⁾

Other operating and acquisition expenses of $0.9 million and $0.9 million are included in general and administrative expenses for the nine months ended September 30, 2015 and 2014, respectively, including $0.3 million and $0.3 million for the quarters ended September 30, 2015 and 2014, respectively. The remaining operating and acquisition expenses are recorded in acquisition fees and expenses, net of amounts capitalized, for the periods presented.

⁽⁴⁾

Includes $0.07 million and $0.04 million for reimbursable expenses to the Advisor for services provided to the Company for its executive officers during the nine months ended September 30, 2015 and 2014, respectively, including $0.02 million and $0.02 million for the quarters ended September 30, 2015 and 2014, respectively. The reimbursable expenses include components of salaries, benefits and other overhead charges.

⁽⁵⁾	For the quarter ended September 30, 2015 and for the nine months ended September 30, 2015 and 2014, all of the investment services fees incurred by the Company above were capitalized as part of the cost of development properties.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

8.	Related Party Arrangements (continued)

⁽⁶⁾

For the nine months ended September 30, 2015 and 2014, approximately $0.8 million and $0.7 million, respectively, of the asset management fees incurred by the Company above were capitalized as part of the cost of development properties. Asset management fees, net of amounts capitalized, are included in asset management fees, net of amounts capitalized for the periods presented. Asset management fees related to the Long Point Property and the Gwinnett Center are included in income from discontinued operations for all periods presented.

⁽⁷⁾	Property management fees included in the September 30, 2014 amount above related to Gwinnett Center and the Long Point Property are included in income from discontinued operations for the nine months ended September 30, 2014.

⁽⁸⁾	Financing coordination fee is included in loan costs, net.

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


	September 30, 2015		December 31, 2014
Due to Property Manager:
Property management fees	$	19,331	$	12,255


Due to the Advisor and its affiliates:
Reimbursable operating expenses		1,669,184		1,498,295
Investment services fees		15,325		—

		1,684,509		1,498,295

	$	1,703,840	$	1,510,550

Transactions with Other Related Parties – The Company’s chief executive officer and president serves on the board of directors of Crescent Communities, LLC (“Crescent”), a joint venture partner of the Company in four of its multifamily development projects. In connection with the development of such projects, each consolidated joint venture has agreed to pay Crescent or its affiliates development fees based on a percent of the development costs of the applicable projects. During the nine months ended September 30, 2015 and 2014, approximately $0.6 million and $1.7 million, respectively, in development fees payable to Crescent or its affiliates, were incurred and are included the Company’s condensed consolidated financial statements as part of the cost of the applicable development projects.

9.	Stockholder’s Equity

Special Cash Distributions – In February 2015, the Company’s board of directors declared and paid special cash distribution of $29.3 million representing $1.30 per share of common stock (the “Special Cash Distribution”).

Stock Distributions – On September 15, 2014, the Company’s board approved the termination of our stock distribution policy, and as a result no stock distributions were declared after September 1, 2014.

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2015

(UNAUDITED)

10.	Commitments and Contingencies

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

Pursuant to the development agreements for the Company’s multifamily development properties under construction as of September 30, 2015, the Company has committed to fund approximately $95.5 million in remaining development and other costs as of September 30, 2015. The remaining development costs are expected to be funded primarily by the construction loans relating to such properties. The Company’s joint venture partners and certain of their affiliates have committed to fund any cost overruns related to the development projects.

11.	Subsequent Events

In October 2015, the Company, through its consolidated Crosstown Joint Venture, completed the sale of the Crescent Crosstown Property. The sales proceeds net of closing costs from the sale of this property were approximately $57.4 million, and resulted in a gain of approximately $23.9 million for financial reporting purposes. The Company used a portion of the net sales proceeds to repay the development and construction loan related to this property, as well as pay a distribution to our co-venture partner in accordance with the terms of the joint venture agreement. No disposition fee was payable to the Advisor on the sale of the Crescent Crosstown property.

In October and November 2015, the Company, through its consolidated Aura Castle Hills and Aura Grand joint ventures, respectively, exercised its options to extend the maturity dates of the construction loans collaterialized by the Aura Castle Hills property and Aura Grand property to November 30, 2016 and December 20, 2016, respectively.

Item 2.

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

INTRODUCTION

The following discussion is based on the unaudited condensed consolidated financial statements as of September 30, 2015 and December 31, 2014, and for the quarters and nine months ended September 30, 2015 and 2014. Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as, the audited consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. Capitalized terms used in this Item 2 have the same meaning as in the accompanying condensed consolidated financial statements in Item 1 unless otherwise defined herein.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q for the quarter and the nine months ended September 30, 2015 (this “Quarterly Report”) may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated per share net asset value of the Company’s common stock, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.

Important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to, government regulation, economic, strategic, political and social conditions, and the following: a worsening economic environment in the U.S. or globally, including financial market fluctuations; risks associated with the Company’s investment strategy, including its focus on the multifamily sector and the geographic concentration of properties; the impact of regulations requiring periodic valuation of the Company on a per share basis, including the uncertainties inherent in such valuations and that the amount that a stockholder would ultimately realize upon liquidation may vary significantly from the valuation; risks associated with real estate markets, including declining real estate values; risks associated with the limited capital raised and the limited number of investments made; risks associated with the Company’s limited capital resources, including the risk of the Company’s failure to obtain, renew or extend necessary financing or to access the debt or equity markets; the use of debt to finance the Company’s business activities, including refinancing and interest rate risk and the Company’s failure to comply with debt covenants; failure to successfully manage growth; the Company’s inability to make necessary improvements to properties on a timely or cost-efficient basis; risks related to development projects, including construction delays, construction cost overruns, the Company’s inability to obtain necessary permits, and/or public opposition to these activities; competition for tenants; defaults on or non-renewal of leases by tenants; failure to lease properties on favorable terms or at all; the impact of current and future environmental, zoning and other governmental regulations affecting the Company’s properties; the impact of

changes in accounting rules; inaccuracies of the Company’s accounting estimates; unknown liabilities of acquired properties or liabilities caused by property managers or operators; material adverse actions or omissions by joint venture partners; consequences of the Company’s net operating losses; increases in operating costs and other expenses; uninsured losses, or losses in excess of the Company’s insurance coverage; the impact of outstanding and/or potential litigation; risks associated with the Company’s tax structuring; failure to qualify for and maintain the Company’s qualification as a real estate investment trust for federal income tax purposes; risks associated with the Company’s inability to satisfy the safe harbor rules of the Internal Revenue Code in connection with dispositions of the Company’s properties; and the Company’s inability to protect its intellectual property and the value of its brand.

For further information regarding risks and uncertainties associated with the Company’s business, and other important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described in the Company’s reports filed from time to time with the Securities and Exchange Commission, including, but not limited to, the Company’s quarterly reports on Form 10-Q and the Company’s annual report on Form 10-K, copies of which may be obtained from the Company’s website at CNLGrowthProperties.com.

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

Overview

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

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

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

Our Common Stock Offerings

From October 20, 2009 through April 11, 2014, we received aggregate offering proceeds of approximately $208.3 million from our Initial Offering and Follow-On Offering (collectively, our “Offerings”).

We completed our acquisition phase and invested part of our uninvested available cash in one final multifamily development property during April 2015. We will continue to focus on completing the development of our properties, operations, and evaluating potential exit strategies for our stockholders.

Our Real Estate Portfolio

As of September 30, 2015, we owned interests in 15 Class A multifamily properties in the southeastern and sunbelt regions of the United States, nine of which had substantially completed development and were operational. The remaining six properties were under development, including one of which was partially operational, with completion expected in phases by the third quarter of 2016. Generally, the development period for our properties is up to 24 months with the properties becoming partially operational as buildings within the project are completed and certificates of occupancy obtained. We generally expect our multifamily properties to reach stabilization within 24 months after completion.

In May 2015, the joint ventures that own three of our nine operational properties (the Crescent Crosstown, Crescent Alexander Village and the Crescent Cool Springs properties, collectively, the “Crescent Properties”) each decided to pursue a potential sale of its respective property. The Crescent Alexander Village property sold in September 2015. Crescent Crosstown and Crescent Cool Springs remained classified as held for sale as of September 30, 2015, as further described below in “Liquidity and Capital Resources – Real Estate Held for Sale”.

We had a total of 2,357 completed apartment units as of September 30, 2015 (excluding 596 units relating to the Crescent Crosstown and the Crescent Cool Springs properties which are included in real estate held for sale), and expect to have more than 3,700 units once construction is completed on our remaining properties under development.

Our multifamily properties are typically owned through a joint venture in which we have co-invested with an affiliate of a national or regional multifamily developer. As of September 30, 2015, excluding the Whitehall Property that we wholly own, we had co-invested in fourteen separate joint ventures with nine separate developers or affiliates thereof. Our joint ventures are structured such that we serve as the managing member and own a majority interest. Under the terms of the limited liability company agreements of each joint venture, operating cash flow is generally distributed to the members of the joint venture on a pro rata basis. Generally, in a capital event, such as a sale or refinancing of the joint venture’s property, net proceeds will be distributed pro rata to each member until each member’s invested capital is returned and a minimum return on capital is achieved, and thereafter our joint venture partner will receive a disproportionately higher share of any proceeds at varying levels based on our having received certain minimum threshold returns. We have determined that all of the joint ventures in which we have co-invested as of September 30, 2015 are variable interest entities in which we are the primary beneficiary. As such, the transactions and accounts of the joint ventures are consolidated in our accompanying financial statements.

Exit Strategy

In accordance with our investment objectives, our board of directors will consider strategic alternatives for future stockholder liquidity, including opportunities to merge with another company, the listing of our common stock on a national securities exchange, our sale or the sale of all of our assets. Due to the completion of our Offerings in April 2014, the completion of our acquisition phase in April 2015 and the estimated time needed to complete our development phase and have our assets substantially stabilize, our Advisor has begun to explore strategic alternatives. In August 2015, our board of directors appointed a special committee comprised of our independent board members (the “Special Committee”) to oversee the process of exploring strategic alternatives for future stockholder liquidity. In September 2015 we engaged CBRE Capital Advisors, Inc. (“CBRE Cap”) to act as our exclusive financial advisor and assist us and the Special Committee with this process.

Although we have engaged CBRE Cap to assist us and our board of directors with the exploration and consummation of strategic alternatives, we are not obligated to enter into any particular transaction. Further, although we have begun the process of exploring strategic alternatives, there is no specific date by which we must have a liquidity event, and there is no assurance we will have a liquidity event in the near term or that, in the event of a transaction, that the process will result in stockholder liquidity, that we will be able to meet our investment objectives, or provide a return to stockholders that equals or exceeds the price per share stockholders paid for shares of our common stock.

LIQUIDITY AND CAPITAL RESOURCES

General

As a REIT, we are required to distribute at least 90% of our taxable income without regard to net capital gain. Therefore, as with other REITs, we must obtain debt and/or equity capital in order to fund our growth. Our primary sources of capital were proceeds from our Offerings (which closed in April 2014), debt financings and refinancing, and to some extent, net sales proceeds from sales of properties.

We invested a portion of our uninvested net proceeds from our Offerings in our final multifamily development property in April 2015. We expect to use the remaining uninvested net proceeds to fund development costs on current properties. Thereafter, our ongoing principal demands for funds are expected to be for funding development costs, operating fees and expenses and the payment of debt service.

To date, we have met and expect to continue to meet cash needs for acquisitions and acquisition-related expenses from net proceeds from our equity offerings and financings. Generally, we expect to meet cash needs for our operating expenses and debt service from our cash flow from operations once our properties are operating and stabilized. We generated positive cash flows from operations during the nine months ended September 30, 2015 and generally expect to do so as our remaining properties become operational in phases and stabilize.

We have borrowed in connection with the development of our properties. Although, in general, our articles of incorporation allow us to borrow up to 300% of our net assets and our board of directors has adopted a policy to permit our aggregate borrowings to approximately 75% of the aggregate value of our assets. However, if needed, our articles of incorporation and the borrowing policy limitation adopted by our board of directors permit borrowings in certain circumstances, in excess of such levels if approved by a majority of our independent directors. As of September 30, 2015, we had an aggregate debt leverage ratio of approximately 59% of the aggregate book value of our consolidated assets; however, due to the fact that we generally have obtained construction financing to fund up to approximately 65% to 75% of the development budget of our development properties, we expect this ratio to increase as we incur additional development costs as our properties under development are completed and we use construction financing to fund such development.

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

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

Sources of Liquidity and Capital Resources

Common Stock Offering

Since inception and through the close of our Offerings on April 11, 2014, our main sources of capital were from proceeds of our Offerings. We currently have no plans for an additional equity offering.

As of September 30, 2015, our cash totaled $32.1 million and consisted primarily of proceeds from the sale of the Crescent Alexander Village Property and unused offering proceeds from our Offerings. We intend to use a portion of the proceeds from the sale of the Crescent Alexander Village Property and unused offering proceeds for general corporate purposes, including a special distribution to stockholders.

Net Cash Provided by Operating Activities

Our net cash flows provided by operating activities were approximately $5.6 million and $3.4 million for the nine months ended September 30, 2015 and 2014, respectively. Cash flows from operating activities improved during the nine months ended September 30, 2015, primarily as a result of more properties and units being operational during 2015 than 2014 and an increase in occupancy as the units become operational and leased.

Borrowings

As described above, we have obtained construction financing on our multifamily development projects equal to approximately 65% to 75% of the development budgets. During the nine months ended September 30, 2015, we borrowed $90.8 million under our various construction loans to pay for development costs relating to several of our properties owned.

In February 2015, the Crescent Crosstown Joint Venture, our consolidated joint venture which developed the Crescent Crosstown Property, modified its original development and construction loan which had an outstanding principal balance of $26.5 million and which had an initial maturity date in March 2015. We modified the original loan with the existing lender into a new $30 million variable rate loan with an interest rate of LIBOR plus 1.95% and extended the maturity by one year to March 2016. We were able to increase the level of indebtedness on the Crescent Crosstown Property by approximately $3.5 million based on an appraised value that exceeded our original cost. This loan was repaid in October 2015 in connection with the sale of the Crescent Crosstown Property.

In April 2015, as part of acquiring the Hampton Roads Property, we entered into a construction loan with a maximum capacity of $25.3 million that matures in April 2018, with the option for a one year extension, as described in Note 7. “Indebtedness.” In connection with obtaining this construction loan, the Hampton Roads Property also entered into a LIBOR-based interest rate cap agreement to hedge the interest rate with a $25.3 million notional principal amount, pursuant to which LIBOR is capped at 1% for an initial term expiring April 2017.

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

Net Sales Proceeds From Real Estate Held for Sale

In January 2015, we sold our Long Point Property and received net sales proceeds of approximately $54.4 million, resulting in a gain of approximately $27.4 million for financial reporting purposes, which was included in income from discontinued operations for the nine months ended September 30, 2015 in the accompanying condensed consolidated statements of operations. We used the net sales proceeds from the sale of the Long Point Property to repay the Long Point mortgage note and to pay a special cash distribution as described below in “Liquidity and Capital Resources-Special Cash Distribution”.

In May 2015, each of the joint ventures that own the Crescent Properties decided to pursue a potential sale of its respective property. In September 2015, the Crescent Alexander Village Property sold and we received sales proceeds net of closing costs of approximately $51.7 million, resulting in a gain of approximately $18.2 million for financial reporting purposes, which was included in continuing operations for the quarter and nine months ended September 30, 2015 in the accompanying condensed consolidated statements of operations. We classified the remaining two Crescent Properties as held for sale as of September 30, 2015. The sale of the Crescent Crosstown property was completed in October 2015. The sales proceeds net of closing costs from the sale of the Crescent Crosstown property were approximately $57.4 million, and resulted in a gain of approximately $23.9 million for financial reporting purposes. The Company used a portion of the net sales proceeds to repay the development and construction loan related to this property, as well as pay a distribution to our co-venture partner in accordance with the terms of the joint venture agreement. The Crescent Cool Springs Property is expected to sell before the end of 2015; however, there can be no assurance that the sale of the property will be completed within the contemplated time, or at all.

We intend to use a portion of the net sales proceeds from the sales of the Crescent Properties for general corporate purposes, including a special distribution to stockholders.

As discussed in “Exit Strategy” above, our Advisor has begun to explore potential exit strategies for our stockholders and in connection with this process we have engaged CBRE Cap as our exclusive financial advisor.

Capital Contributions from Noncontrolling Interests

During the nine months ended September 30, 2015 and 2014, our co-venture partners made capital contributions aggregating to approximately $1.9 million and $12.7 million, respectively. In accordance with the terms of our joint venture agreements relating to the multifamily development properties, our co-venture partners have commitments to fund additional capital contributions aggregating approximately $0.06 million as of September 30, 2015. These amounts, as well as amounts previously funded, will be or have been used to fund part of the land acquisition and initial development costs of the development projects. In connection with our last acquisition in April 2015, we entered into a joint venture arrangement with terms similar to the ones in place as of September 30, 2015, whereby our co-venture partner is responsible for its pro rata share of the equity investment in the property.

Uses of Liquidity and Capital Resources

Acquisition and Development of Properties

In connection with our development projects, we funded approximately $110.1 million in development costs during the nine months ended September 30, 2015. Pursuant to the development agreements for the six properties under development, as of September 30, 2015 we had commitments to fund approximately $95.5 million in additional development and other costs. We expect to fund the remaining development costs primarily from the construction loans on each property, cash on hand, and to a lesser extent, from additional equity contributions from noncontrolling interests of $0.06 million.

Debt Service

During the nine months ended September 30, 2015, we used a portion of the net sales proceeds from the sale of the Long Point Property to repay approximately $28.3 million relating to the Long Point Property mortgage note payable and $0.3 million in a related prepayment penalty. Additionally, we used a portion of the net sales proceeds from the sale of the Crescent Alexander Village Property to repay approximately $25.2 million relating to the Crescent Alexander Village construction loan payable.

In October and November 2015, we, through our consolidated Aura Castle Hills and Aura Grand joint ventures, respectively, exercised our options to extend the maturity dates of the construction loans collaterialized by the Aura Castle Hills property and Aura Grand property by one year to November 30, 2016 and December 20, 2016, respectively.

Stock Distributions

Our board of directors previously authorized a monthly stock distribution equal to 0.006666667 of a share of common stock on each outstanding share of common stock (which was equal to an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month. On September 15, 2014, our board approved the termination of our stock distribution policy, and as a result no stock distributions were declared after September 1, 2014. The board believed that additional stock distributions no longer provided an economic benefit and that stock distributions were not in the best interests of our existing stockholders. In addition, on September 15, 2014, our board also approved the termination of the distribution reinvestment plan and the suspension of our amended Redemption Plan.

The following table presents total stock distributions declared and issued and FFO for each of the quarters in the nine months ended September 30, 2015 and 2014:


Periods	Share Distribution Declared Per Share Held			Stock Distributions Declared (Shares) ⁽¹⁾⁽²⁾		Stock Distributions Declared ⁽³⁾		FFO Attributable To Common Stockholders ⁽⁴⁾
2015 Quarter
First		—	⁽⁵⁾		—	$	—	$	(1,576,931	)
Second		—	⁽⁵⁾		—		—		953,804
Third		—	⁽⁵⁾		—		—		1,463,283

Total					—	$	—	$	840,156


2014 Quarter
First		0.006666667 per month			325,315	$	3,220,619	$	(97,142	)
Second		0.006666667 per month			420,384		4,161,802		500,648
Third		0.006666667 per month			441,689		4,372,721		906,566

Total					1,187,388	$	11,755,142	$	1,310,072

FOOTNOTES:

⁽¹⁾	Represents amount of shares declared and distributed.

⁽²⁾	The distribution of new common shares is non-taxable to the recipients when issued. Stock distributions may cause the interest of later investors in our common stock to be diluted as a result of the stock distributions issued to earlier investors.

⁽³⁾	We have calculated the dollar amount of stock distributions declared using our net asset value as of December 31, 2013 (the “December 2013 NAV”) of $9.90 per share for shares issued after December 31, 2013.

⁽⁴⁾	See reconciliation of net income attributable to common stockholders to funds from operations in “Funds from Operations and Modified Funds from Operations” below.

⁽⁵⁾	Our board approved the termination of our stock distribution policy effective as of October 1, 2014. As a result, we did not declare any further stock distributions effective October 1, 2014.

Special Cash Distribution

In February 2015, our board of directors declared a special cash distribution in the amount of $1.30 per share of common stock (the “Special Cash Distribution”). The Special Cash Distribution of approximately $29.3 million was paid in cash and was funded from the proceeds of refinancings and asset sales, including the January 2015 sale of the Long Point Property. As required, Form 1099-DIV will be provided after year-end and will disclose the character of the distributions which may constitute dividend income, capital gain, or a return of capital for federal income tax purposes based on the taxable results for the year ended December 31, 2015.

We currently intend to use the net proceeds from the sale of the Crescent Alexander Village Property and the Crescent Crosstown Property for general corporate purposes, including a special distribution to stockholders.

Distributions and Return of Capital to Noncontrolling Interests

The terms of each joint venture structure are generally market driven and consider the assumption of certain risks by our joint venture partners, including; entitlements, permitting, exposure to costs in excess of the project budget, interest rates, and lender guarantees. In accordance with preferred return provisions in the respective joint venture agreements, upon a sale of the joint venture’s property, the joint venture partner may be entitled to a disproportionately higher share of proceeds than their member interest if certain threshold returns are met. Each structure is individually negotiated and terms of the waterfall structure can be influenced by market size and attractiveness of the investment fundamentals, leverage assumptions, and equity contributions from our joint venture partners.

During the nine months ended September 30, 2015, our consolidated joint ventures paid distributions of approximately $26.5 million to our co-venture partners representing their pro rata share of positive operating cash flows, plus a disproportionate share of proceeds from capital events, which included proceeds received in connection with modifying our indebtedness related to the Crescent Crosstown Property and approximately $12.5 million and $9.8 million in net sales proceeds from the sale of the Long Point Property and the Crescent Alexander Village Property, respectively, in accordance with the terms of our joint venture agreements. In connection with the 2015 sales of the Long Point Property and the Crescent Alexander Village Property, the joint ventures also paid approximately $3.8 million as returns of capital for financial reporting purposes, to our joint venture partners. In October 2015, in connection with the sale of the Crescent Crosstown Property, the joint venture paid distributions of approximately $15.4 million in net sales proceeds, which included a return of capital to our co-venture partner, in accordance with the terms of our joint venture agreement.

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

RESULTS OF OPERATIONS

As of September 30, 2015, we owned interests in 15 Class A multifamily properties, nine of which were operational and as to which development was substantially complete and six of which were under development, including one which was partially operational. The following table presents the number of completed apartment units, percent leased, as well as, revenues and property operating expenses for each of our properties with operations during the quarters and nine months ended September 30, 2015 and 2014:


	Start Date of Operations	Completion Date	Units Expected Upon Completion		Completed Apartment Units as of September 30,					% Leased ⁽¹⁾ as of September 30,						Quarter Ended September 30,				Nine Months Ended September 30,
					2015			2014		2015			2014			2015		2014		2015		2014
Revenues:
Whitehall Property	Q4 2012	Q2 2013		298		298			298		97	%		96	%	$	1,033,993	$	1,008,404	$	3,033,943	$	2,946,265
Crescent Crosstown Property ⁽²⁾	Q2 2013	Q3 2013		344		344			344		93	%		98	%		1,309,483		1,182,509		3,800,982		2,957,610
Aura Castle Hills Property	Q3 2013	Q2 2014		316		316			316		98	%		92	%		1,145,840		906,486		3,364,866		1,847,240
Aura Grand Property	Q4 2013	Q2 2014		291		291			291		95	%		97	%		1,059,082		902,333		3,137,715		1,715,504
REALM Patterson Place Property	Q2 2014	Q4 2014		322		322			170		98	%		32	%		1,068,299		120,280		2,345,310		121,105
Crescent Cool Springs Property ⁽²⁾	Q3 2014	Q4 2014		252		252			36		85	%		15	%		1,042,239		15,693		2,098,435		15,693
Crescent Alexander Village Property ⁽³⁾	Q2 2014	Q2 2015		320			⁽³⁾		132			⁽³⁾		25	%		767,279		128,402		1,781,233		133,976
Fairfield Ranch Property	Q3 2014	Q1 2015		294		294			90		92	%		25	%		1,013,131		98,468		2,318,429		98,468
Premier at Spring Town Center Property	Q4 2014	Q3 2015		396		396			—		67	%		—			822,809		—		1,412,589		—
City Walk Property	Q2 2015	Q3 2015		320		320			—		79	%		—			693,787		—		904,568		—
Oxford Square Property	Q3 2015	Est. Q4 2015		248		120			—		21	%		—			18,747		—		18,747		—
Other																	850		—		850		—

Total						2,953			1,677							$	9,975,539	$	4,362,575	$	24,217,667	$	9,835,861

Property operating expenses:
Whitehall Property																$	411,249	$	382,432	$	1,088,230	$	1,038,530
Crescent Crosstown Property ⁽²⁾																	531,545		433,675		1,437,610		1,225,048
Aura Castle Hills Property																	480,664		483,453		1,333,060		1,216,775
Aura Grand Property																	460,480		353,161		1,346,266		1,031,349
REALM Patterson Place Property																	475,422		151,833		1,199,454		295,406
Crescent Cool Springs Property ⁽²⁾																	465,646		153,584		1,199,290		224,942
Crescent Alexander Village Property ⁽³⁾																	409,619		192,234		912,864		363,614
Fairfield Ranch Property																	475,827		176,850		1,337,238		190,343
Premier at Spring Town Center Property																	650,599		—		1,193,161		—
City Walk Property																	344,424		—		605,521		—
Oxford Square Property																	265,528		—		272,404		—
Other ⁽⁴⁾																	64,998		29,554		109,624		189,800

Total																$	5,036,001	$	2,356,776	$	12,034,722	$	5,775,807

FOOTNOTES:

⁽¹⁾	The percentage leased presented in the table above represents the number of units leased as of the end of the applicable period as a percentage of the total number of expected units of the property, whether or not currently available for lease.

⁽²⁾	Properties are held for sale as of September 30, 2015. The Crescent Crosstown Property was sold in October 2015.

⁽³⁾	Property sold September 2015.

⁽⁴⁾	Expenses incurred for these properties primarily relate to pre-leasing and marketing activities.

We had a total of 2,357 and 1,677 completed apartment units as of September 30, 2015 and 2014, respectively, and expect to have more than 3,700 units (excluding 596 units relating to the Crescent Cool Springs and Crescent Crosstown properties which is included in real estate held for sale) once all of our properties owned as of September 30, 2015 are fully developed.

Our results of operations for the respective periods presented reflect increases in most categories due to the growth of our multifamily portfolio. Management expects increases in revenues and operating expenses as our existing multifamily development properties become operational, with a partial offset as a result of the sale of the Crescent Properties. Six properties became fully operational and one property became partially operational from October 1, 2014 to September 30, 2015.

We classified the revenues and expenses related to the Gwinnett Center and the Long Point Property, which were sold during 2014 and 2015, respectively, as discontinued operations in the accompanying unaudited condensed consolidated statements of operations for all periods presented. We accounted for the revenues and expenses related to the three Crescent Properties (one of which was sold in September 2015 and two which were classified as held for sale as of September 30, 2015) as income from continuing operations because the proposed disposition of these three Crescent Properties would not cause a strategic shift in the Company nor are they considered to have a major impact on the Company’s business; therefore, they did not qualify as discontinued operations under ASU 2014-08.

Comparison of the quarter and nine months ended September 30, 2015 to the quarter and nine months ended September 30, 2014

Analysis of Revenues and Expenses from Continuing Operations:

Revenues. Rental income from operating leases from continuing operations and other property revenues are derived from base rent, garage and storage income, application fees, lease cancellation fees, and miscellaneous administrative fees. These revenues were approximately $10.0 million and $24.2 million for the quarter and nine months ended September 30, 2015, respectively, as compared to $4.4 million and $9.8 million for the quarter and nine months ended September 30, 2014. Rental income from continuing operations and other property revenues increased primarily due to the increased stabilization of several properties (either fully operational or partially operational, as described above). We expect additional increases in revenue as additional units are completed, leased and our properties become more fully operational and as additional portions of our properties under development become operational.

Property Operating Expenses. Property operating expenses from continuing operations for the quarter and nine months ended September 30, 2015 were $5.0 million and $12.0 million, respectively, as compared to $2.4 million and $5.8 million, respectively, for the comparable periods in 2014. Property operating expenses increased primarily due to the additional properties becoming either fully operational or partially operational, as described above. Property operating expenses also increased in 2015 due to pre-leasing and marketing activities at our properties under development with partial operations. Property operating expenses are expected to increase as additional units are completed and our properties become fully operational, and as portions of our other properties under development become operational.

General and Administrative Expenses. General and administrative expenses from continuing operations for the quarter and nine months ended September 30, 2015 were approximately $0.7 million and $2.5 million, respectively, as compared to $0.6 million and $2.1 million, respectively, for the comparable periods in 2014. General and administrative expenses were comprised primarily of reimbursable personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, accounting and legal fees, and board of directors’ fees. The increase in general and administrative expenses for the quarter and nine months ended September 30, 2015, is primarily the result of the additional legal, accounting and other professional services necessary to account and report on our growing portfolio of assets. Although we anticipate general and administrative expenses will increase as more properties become operational, due to the relatively fixed nature of the majority of these expenses we believe the increase will be relatively small in relation to the growth in our revenues and the ratio of general and administrative expenses to revenues will continue to decrease.

Asset Management Fees. We incurred approximately $0.9 million and $2.5 million in asset management fees from continuing operations payable to our Advisor during the quarter and nine months ended September 30, 2015, respectively, (of which approximately $0.3 million and $0.8 million, respectively, were capitalized as part of the

cost of our properties that were under development), as compared to $0.6 million and $1.4 million, respectively, for comparable periods in 2014, of which approximately $0.3 million and $0.7 million, respectively, were capitalized. We incur asset management fees at an annual rate of 1% of our “real estate asset value” as defined in the advisory agreement (which generally equals our acquisition and development capitalized costs and excludes pro rata portions attributable to our joint venture partners); therefore, asset management fees increased for the nine-month period ended September 30, 2015 as compared to the prior year’s period as a result of the increase in our real estate assets under management subsequent to September 30, 2014 and as a result of several multifamily projects becoming operational. Asset management fees relating to development are capitalized as part of the cost of development. Accordingly, we expect increases in asset management fees in the future as our multifamily projects become fully developed and we invest in additional properties. However, we expect certain asset management fees incurred on properties under development to continue to be capitalized as part of the cost of the development until such time as the applicable property becomes operational.

Property Management Fees. We incurred approximately $0.4 million and $0.9 million in property management fees from continuing operations during the quarter and nine months ended September 30, 2015, respectively, as compared to approximately $0.2 million and $0.5 million, respectively, for the comparable periods in 2014. Property management fees generally range from 2.25% to 4% of property revenues, subject to minimum monthly fees from third party property managers during initial lease-up periods. Property management fees increased during 2015 primarily as a result of increased property revenues. We expect additional increases in these fees as property revenues increase as more of our development properties become operational.

Acquisition Fees and Expenses. We incurred approximately $1.1 million in acquisition fees and expenses, including closing costs, during the nine months ended September 30, 2015, of which approximately $1.1 million were capitalized as of September 30, 2015 as part of the costs of our properties under development, as compared to approximately $2.1 million for the comparable period in 2014, of which approximately $2.1 million were capitalized. The decrease in acquisition fees and expenses in 2015 was due to the fact that we had one acquisition during the nine months ended September 30, 2015, as compared to three acquisitions during the nine months ended September 30, 2014. We incurred acquisition fees and expenses, consisting primarily of investment services fees and other acquisition expenses, through April 2015 with the purchase of our last property and capitalized most of these fees and expenses as part of the cost of the development.

Depreciation. Depreciation from continuing operations for the quarter and nine months ended September 30, 2015 was approximately $2.3 million and $7.7 million, respectively, as compared to approximately $1.7 million and $3.8 million, respectively, for the comparable periods in 2014. Depreciation expense increased primarily due to more properties being fully operational in 2015, as compared to the same period in 2014, as described above. We expect increases in depreciation in the future as additional phases of other properties become fully operational and other development properties become operational.

Interest Expense and Loan Cost Amortization, Net of Amounts Capitalized. During the quarter and nine months ended September 30, 2015, we incurred approximately $2.4 million and $6.7 million, respectively, of interest expense and loan cost amortization from continuing operations relating to debt outstanding on our properties, $0.9 million and $2.9 million, respectively, of which was capitalized as development costs relating to our properties under development. This compares to approximately $1.5 million and $3.7 million, respectively, of such expenses during the quarter and nine months ended September 30, 2014, respectively, of which approximately $1.2 million and $2.9 million, respectively, was capitalized as development costs.

Interest costs incurred during the quarter and nine months ended September 30, 2015, increased as a result of an increase in our average debt outstanding during the quarter and nine months ended September 30, 2015 to approximately $293.4 million and $274.9 million, respectively, from approximately $195.6 million and $165.4 million during the same periods in 2014, respectively, resulting in an increase of approximately $0.9 million and $3.0 million, respectively, in interest cost and loan cost amortization. Interest expense also increased as a result of less interest expense being eligible for capitalization due to the completion of construction activity on several properties that became operational during the quarter and nine months ended September 30, 2015.

We expect interest cost to continue to increase over the next 12 months as we continue to borrow under our construction loans to fund construction costs and as we complete construction on buildings that become operational. We expect to continue to capitalize interest expense and loan cost amortization incurred as costs relating to our development properties. As our development properties become operational, we expect that these expenses will be recognized in our consolidated statement of operations, as opposed to capitalized.

As of September 30, 2015, even though all of our loans were variable rate, we had purchased interest rate caps relating to four of our loans to reduce our exposure to future increases in LIBOR rate. Any increases to LIBOR rates will result in increased interest expense, but the interest rate caps will partially offset the full impact of an increase in the LIBOR rate. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for an estimate of how a 1% change in LIBOR would impact our annual interest expense incurred.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was approximately $0.01 million for the quarter and nine months ended September 30, 2015, related to the early repayment of the Crescent Alexander Village Property loan due to the sale of the property in 2015. Loss on extinguishment of debt included the write-off of unamortized loan costs. There was no loss on extinguishment of debt in 2014.

Gain on Sale of Real Estate. Gain from sale of real estate from continuing operations was approximately $18.2 million for the quarter and nine months ended September 30, 2015. The gain on sale of real estate related to the sale of Crescent Alexander Village Property. There was no gain on sale of real estate in 2014.

Gain on Easement. During the nine months ended September 30, 2015, we recorded a gain on a property easement of $0.6 million. There was no gain on easement during the nine months ended September 30, 2014.

Analysis of Discontinued Operations

We had income from discontinued operations of approximately $0.5 million and $26.1 million, respectively, for the quarter and nine months ended September 30, 2015, as compared to $2.0 million for the nine months ended September 30, 2014. During 2014 and 2013, we entered into contracts to sell the Long Point Property and Gwinnett Center, respectively. As a result, we accounted for the revenues and expenses associated with the Long Point Property and Gwinnett Center as discontinued operations for all periods presented in accordance with GAAP. In January 2015 and March 2014, we sold the Long Point Property and Gwinnett Center, respectively, to unrelated parties and recorded a gain on sale of approximately $27.4 million and $1.2 million, respectively, for financial reporting purposes. Income from discontinued operations was partially offset by a loss on extinguishment of debt of approximately $0.8 million and $0.03 million related to the repayment of the indebtedness of the Long Point Property and Gwinnett Center, respectively, for unamortized loan costs and a prepayment penalty on the Long Point Property due to the sales of these properties.

Net (Income) Loss Attributable to Noncontrolling Interests

In accordance with the provisions of each joint venture agreement, we allocate (income) loss from operations to our co-venture partners based on their percentage ownership in each joint venture. To the extent we have a capital event, such as a sale of a property, the gain is allocated to first provide minimum gain allocations to each joint venture partner, and thereafter, our co-venture partner will receive a disproportionately higher gain allocation, as set forth in each in each joint venture agreement.

During the quarter and nine months ended September 30, 2015, net income from continuing and discontinued operations attributable to our co-venture partners were approximately $11.7 million and $24.9 million, respectively, as compared to net loss of approximately $0.2 million and $0.7 million for the comparable periods of 2014. Net (income) loss attributable to noncontrolling interests during the quarter and nine months ended September 30, 2015, included pro rata share of income from operations attributable to noncontrolling interests of approximately $0.4 million and $0.1 million, respectively, and a disproportionate share of gains from the sales of the Long Point and Alexander Village properties, in accordance with the gain allocation provisions for capital events, of approximately $11.3 million and $24.8 million, respectively. All of the net loss attributable to noncontrolling interests for the quarter and nine months ended September 30, 2014, were a result of pro rata share of income from operations.

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of properties, loans and other permitted investments, other than those described above, risk factors, if any, identified in Part II, Item 1A of this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014.

FUNDS FROM OPERATIONS AND MODIFIED FUNDS FROM OPERATIONS

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

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

We may, in the future, make other adjustments to net loss in arriving at FFO as identified above at the time that any such other adjustments become applicable to our results of operations. FFO, for example, may exclude impairment

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

Notwithstanding the widespread reporting of FFO, changes in accounting and reporting rules under GAAP that were adopted after NAREIT’s definition of FFO have prompted a significant increase in the magnitude of non-operating items included in FFO. For example, acquisition fees and expenses, which we funded from the proceeds of our offerings and which we do not view as an operating expense of a property, are now deducted as expenses in the determination of GAAP net income for non-development projects. As a result, the Investment Program Association (“IPA”), an industry trade group, has standardized a measure known as modified FFO (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-traded REITs and which we believe to be another additional supplemental measure to reflect the operating performance of a non-traded REIT. Under the IPA Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITS: MFFO, issued in November 2010 (the “IPA Guideline”), MFFO excludes from FFO additional non-cash or non-recurring items, including the following:

•

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

•

non-cash amounts related to straight-line rent;

•

accretion of discounts and amortization of premiums on debt investments;

•

impairments of loans receivable, and equity and debt investments;

•

realized gains or losses from the early extinguishment of debt;

•

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

•

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

•

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

•

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

•

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

We consider MFFO as a supplemental measure when assessing our operating performance. We have calculated MFFO in accordance with the IPA Guideline. For the quarters and nine months ended September 30, 2015 and 2014, our MFFO represents FFO, excluding acquisition fees and expenses, straight-line rent adjustments, loss on early extinguishment of debt and unrealized gains or losses related to fair value adjustments for derivatives, which we believe is helpful in evaluating our results of operations for the reasons discussed below.

•

Acquisition fees and expenses. In evaluating investments in real estate, management’s investment models and analyses differentiate between costs to acquire the investment and the operating results derived from

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

•

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

•

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

•

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

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

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

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

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


	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net income (loss) attributable to common stockholders	$	6,283,327		$	(639,756	)	$	15,976,976		$	(1,198,534	)
Adjustments:
Gain on sale of property:
Continuing operations		(6,837,489	)		—			(6,837,489	)		—
Discontinued operations		—			—			(13,923,477	)		(1,219,693	)
Gain on easement:
Continuing operations		—			—			(543,060	)		—
Depreciation and amortization:
Continuing operations		2,017,445			1,272,310			6,167,206			2,905,807
Discontinued operations		—			274,012			—			822,492

FFO attributable to common stockholders		1,463,283			906,566			840,156			1,310,072
Acquisition fees and expenses⁽¹⁾:
Continuing operations		—			15,984			16,462			44,876
Straight-line rent adjustments⁽²⁾:
Continuing operations		9,327			(143,048	)		(123,075	)		(214,641	)
Discontinued operations		—			2,194			—			17,042
Loss on extinguishment of debt⁽³⁾:
Continuing operations		6,729			—			6,729			56,739
Discontinued operations		—			—			788,886			32,787
Unrealized loss related to changes in fair value of derivatives⁽⁴⁾:
Continuing operations		31,408			18,665			70,549			83,557
Discontinued operations		—			8,586			—			115,518

MFFO attributable to common stockholders	$	1,510,747		$	808,947		$	1,599,707		$	1,445,950


Weighted average number of shares of common stock outstanding (basic and diluted)		22,526,171			22,526,171			22,526,171			20,969,311

Net income per share (basic and diluted)	$	0.28		$	(0.03	)	$	0.71		$	(0.06	)

FFO per share (basic and diluted)	$	0.06		$	0.04		$	0.04		$	0.06

MFFO per share (basic and diluted)	$	0.07		$	0.04		$	0.07		$	0.07

FOOTNOTES:

⁽¹⁾

In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-traded REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs from business combinations that are not capitalized as part of the cost of the development properties and are expensed for GAAP purposes, management believes MFFO provides useful supplemental information that is comparable for real estate investments and is consistent with management’s analysis of the investing and operating performance of our properties. These acquisition fees and expenses include payments to our Advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Acquisition fees and expenses will have negative effects on returns to investors, the potential for future cash distributions, if any, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.

⁽²⁾

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

⁽³⁾

Management believes that adjusting for the realized loss on the early extinguishment of debt is appropriate because the write-off of unamortized loan costs are non-cash adjustments that are not reflective of our ongoing operating performance and aligns results with management’s analysis of operating performance. The loss on extinguishment of debt includes non-recurring prepayment penalties.

⁽⁴⁾

These items relate to fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding, because these items may not be directly attributable to our current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, where we are not speculating or trading assets, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses.

RELATED PARTY ARRANGEMENTS

We have entered into agreements with our Advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition and advisory services, asset and property management fees and reimbursement of operating costs. In addition, our chief executive officer and president serves on the board of directors of Crescent Communities, LLC, an affiliate of three joint venture partners for four of our multifamily development projects as of September 30, 2015. See Note 8. “Related Party Arrangements” in the accompanying condensed consolidated financial statements and “Item 13. Certain Relationships and Related Transactions, and Director Independence” in our Form 10-K for the year ended December 31, 2014 for a discussion of the various related party transactions, agreements and fees.

OFF BALANCE SHEET ARRANGEMENTS

As of September 30, 2015, we had no off balance sheet arrangements.

CONTRACTUAL OBLIGATIONS

As of September 30, 2015, we were subject to contractual payment obligations as described in the table below.


	Payments Due by Period
	2015		2016-2017		2018-2019		More than 5 years		Total
Development contracts on development properties ⁽¹⁾	$	33,473,760	$	80,093,496	$	—	$	—	$	113,567,256
Mortgage notes payable (principal and interest) ⁽²⁾		173,543		2,396,374		2,661,645		26,716,699		31,948,261
Construction notes payable (principal and interest) ⁽²⁾		47,712,290		203,812,480		23,585,089		—		275,109,859

	$	81,359,593	$	286,302,350	$	26,246,734	$	26,716,699	$	420,625,376

FOOTNOTES:

⁽¹⁾	The amounts presented above represent accrued development costs as of September 30, 2015 and development costs, including start-up costs, not yet incurred of the aggregate budgeted development costs in accordance with the development agreements, and the expected timing of such costs.

⁽²⁾

For purposes of this table, management has assumed the mortgage and construction notes payable are repaid as of the initial maturity dates and are not extended beyond such dates as allowed pursuant to the loan agreements. Additionally, management has calculated estimated interest payments based on interest rates of our mortgage and construction notes payables as of September 30, 2015.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See Item 1. “Financial Statements” and our Annual Report on Form 10-K for the year ended December 31, 2014 for a summary of our Critical Accounting Policies and Estimates.

IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

See Item 1. “Financial Statements” for a summary of the impact of recent accounting pronouncements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

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


	2015			2016			2017			2018			2019			Thereafter			Total			Approximate Fair Value
Variable rate debt	$	45,908,192		$	132,960,051		$	65,966,984		$	23,937,889		$	686,084		$	25,832,644		$	295,291,844		$	295,800,000

Average interest rate⁽¹⁾		2.86	%		2.64	%		2.49	%		2.69	%		2.50	%		2.50	%		2.63	%

FOOTNOTE

⁽¹⁾	As of September 30, 2015, we were paying the interest rate floor on certain of our variable rate debts.

Management estimates that a hypothetical one-percentage point increase in LIBOR compared to the LIBOR rate as of September 30, 2015, would increase interest expense by approximately $0.7 million and $2.0 million on our variable rate debt for the quarter and nine months ended September 30, 2015, respectively. This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and our actual results will likely vary.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the most recent fiscal quarter, there was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings – None.

Item 1A.

Risk Factors

Sales of the Company’s properties in transactions that do not fall within the safe harbor rules of the Internal Revenue Code would subject the Company to tax penalties, which would diminish stockholder return.

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

In cases where a property disposition does not satisfy the safe harbor rules, the Internal Revenue Service (the “IRS”) could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net taxable gain from the sale of such property will be payable as a tax. As a result, the amount available for distribution to our stockholders would be substantially less than if the transaction was not successfully characterized by the IRS as a prohibited transaction.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the period covered by this Quarterly Report, we did not sell any equity securities that were not registered under the Securities Act of 1933.

Use of Proceeds from Registered Securities

As of December 31, 2013, all offering proceeds from our Initial Offering had been deployed.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures – Not applicable

Item 5.

Other Information - None

Item 6.

Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 5th day of November, 2015.


CNL GROWTH PROPERTIES, INC.

By:		/s/ Thomas K. Sittema
		THOMAS K. SITTEMA
		Chief Executive Officer and President
		(Principal Executive Officer)

By:		/s/ Tammy J. Tipton
		TAMMY J. TIPTON
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

EXHIBIT INDEX

Exhibits:

The following exhibits are included, or incorporated by reference in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).


10.51		Purchase and Sale Agreement dated effective September 8, 2015, by and between GGT Crescent Alexander NC Venture, LLC and Alexander Village Acquisition LP. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on October 5, 2015 and incorporated herein by reference.)

10.52		Purchase and Sale Agreement dated effective September 8, 2015, by and between GGT Crescent Crosstown FL Venture, LLC and Centennial Holding Company, LLC. (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 7, 2015 and incorporated herein by reference.)

31.1		Certification of Chief Executive Officer of CNL Growth Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

31.2		Certification of Chief Financial Officer of CNL Growth Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

32.1		Certification of Chief Executive Officer and Chief Financial Officer of CNL Growth Properties, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

101		The following materials from CNL Growth Properties, Inc. Quarterly Report on Form 10-Q for the quarter and nine months ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements.

Large accelerated filer

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Smaller reporting company