Resource Real Estate Opportunity REIT, Inc. - FORM 10-K - March 30, 2016

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EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Opportunity REIT, Inc.rreo-20151231xex322.htm
EX-23.1 - EXHIBIT 23.1 - Resource Real Estate Opportunity REIT, Inc.rreo-20151231xex231.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT, Inc.rreo-20151231xex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT, Inc.rreo-20151231xex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT, Inc.rreo-20151231xex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-54369
Resource Real Estate Opportunity REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
27-0331816
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1845 Walnut Street, 18th Floor, Philadelphia, PA 19103
(Address of principal executive offices) (Zip code)
(215) 231-7050
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
None
 
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(a) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
There is no established market for the Registrant's shares of common stock. On March 29, 2016, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $10.83. For a full description of the methodologies used to calculate the Registrant’s estimated value per share as of December 31, 2015, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” There were approximately 70,233,493 shares of common stock held by non-affiliates at June 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter.
As of March 21, 2016, there were 71,924,504 outstanding shares of common stock of Resource Real Estate Opportunity REIT, Inc.
Registrant incorporates by reference portions of the Resource Real Estate Opportunity REIT, Inc. Definitive Proxy Statement for the 2016 Annual Meeting of Stockholders (Items 10, 11, 12, 13, and 14 of Part III).


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K

 
 
PAGE
 
 
PART 1
 
 
  Item 1.
  Item 1A.
  Item 1B.
  Item 2.
  Item 3.
  Item 4.
 
 
 
PART II
 
 
  Item 5.
  Item 6
  Item 7.
  Item 7A.
  Item 8.
  Item 9.
  Item 9A.
  Item 9B.
 
 
 
PART III
 
 
  Item 10.
  Item 11.
  Item 12.
 60
  Item 13.
  Item 14.
 
 
 
PART IV.
 
 
  Item 15.
 
 
 





Forward-Looking Statements

Certain statements included in this Annual Report on Form 10-K are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Such statements are subject to the risks and uncertainties more particularly described in Item 1A of this Annual Report on Form 10-K. These risks and uncertainties could cause actual results to differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.



PART I
ITEM 1.
BUSINESS
General
Resource Real Estate Opportunity REIT, Inc. is a Maryland corporation that was formed on June 3, 2009. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT, Inc., a Maryland corporation, and Resource Real Estate Opportunity OP, LP, a Delaware limited partnership, and to its subsidiaries. We focus primarily on acquiring under performing or distressed real estate and real estate loans that are being sold at discounted prices. We have elected to be taxed as a real estate investment trust, or REIT, and to operate as a REIT beginning with our taxable year ended December 31, 2010. Our objectives are to preserve stockholder capital, realize growth in the value of our investments, increase cash distributions through increased cash flow from operations or asset sales, and enable stockholders to realize a return on their investments. As of December 31, 2015, we owned 36 multifamily properties, as described further in “Item 2. Properties” below, one performing loan and one preferred equity interest. In the future, we may reinvest proceeds from property sales to purchase discounted U.S. commercial real estate and real estate-related debt that has been specifically discounted due to the effects of macro-economic events and high levels of leverage on U.S. commercial real estate, including properties that may benefit from extensive renovations that may increase their long-term values.
We are externally managed by Resource Real Estate Opportunity Advisor, LLC, which we refer to as our Advisor, an indirect wholly owned subsidiary of Resource America, Inc., or RAI, a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors. To provide its services, the Advisor draws upon RAI, its management team and their collective investment experience.
Our Offerings
On September 15, 2009, we commenced a private placement offering to accredited investors for the sale of up to 5,000,000 shares of common stock at a price of $10 per share, with discounts available to certain categories of purchasers.  The offering, which closed on June 9, 2010, resulted in aggregate gross proceeds of $12.8 million, ($11.3 million, net of syndication costs) and resulted in the issuance of 1,283,727 common shares, including 20,000 shares purchased by our Advisor. Also, in conjunction with the private offering, we offered 5,000 shares of convertible stock at a price of $1 per share.  Investors acquired 937 shares of the convertible stock; the Advisor purchased the remaining 4,063 shares.
On June 16, 2010, we commenced our initial primary public offering of up to 75,000,000 shares and a public offering of up to an additional 7,500,000 shares pursuant to our distribution reinvestment plan. An affiliate of our Advisor, Resource Securities, Inc., or Resource Securities, served as the dealer manager. We offered shares of our common stock in our primary offering for $10 per share, with discounts available to certain categories of investors. 
The primary portion of our initial public offering closed on December 13, 2013, having raised aggregate gross proceeds of $633.1 million through the issuance of 63,647,084 shares of our common stock, including 276,056 shares purchased by our Advisor and 1,161,623 shares sold pursuant to our distribution reinvestment plan.  On December 26, 2013, the unsold primary offering shares were deregistered and, on December 30, 2013, the registration of the shares issuable pursuant to the distribution reinvestment plan was continued pursuant to a Registration Statement on Form S-3. We continue to offer shares pursuant to our distribution reinvestment plan at a purchase price equal to our current estimated value per share. In the years ended December 31, 2015 and 2014, we issued an additional 5,275,075 shares through our distribution reinvestment plan for gross proceeds of $51.9 million.
    



Our Business Strategy
Our business strategy has a particular focus on multifamily assets, although we may also purchase interests in other types of commercial property assets consistent with our investment objectives. Our targeted portfolio consists of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”). However, we are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate and, accordingly, we may invest in other real estate assets or debt secured by real estate assets. At December 31, 2015, we currently hold approximately 44% of our total assets in category (i) and 56% of our total assets in category (ii). We may make adjustments to our portfolio based on real estate market conditions and investment opportunities. We will not forego a potential investment because it does not precisely fit our expected portfolio composition. We continually monitor the portfolio of optimized, renovated properties seeking sales opportunities that will maximize our return. Today, we generally expect to reinvest the return of capital from such sales and to distribute gains from such sales to our stockholders in the form of distributions.
We anticipate providing our stockholders with a liquidity event or events by some combination of the following: (i) liquidating all, or substantially all, of our assets and distributing the net proceeds to stockholders, or (ii) listing our shares for trading on a national securities exchange. Our board anticipates evaluating a liquidity event within three to six years after termination of our primary offering (which occurred in December 2013), subject to prevailing market conditions. In making the decision to liquidate or apply for listing of our shares, our directors will determine whether liquidating our assets or listing our shares will result in a greater value for our stockholders. If we do not begin the process of liquidating our assets or listing our shares by December 2019, upon the request of stockholders holding 10% or more of our outstanding shares of common stock, our charter requires that we hold a stockholders meeting to vote on a proposal for our orderly liquidation unless a majority of our board of directors and a majority of our independent directors vote to defer the meeting beyond December 2019.
Our Operating Policies and Strategies
Our Advisor has the primary responsibility for the selection of investments, the negotiation of the acquisition of these investments, and financing, asset-management and disposition decisions. A majority of our Board of Directors and a majority of the Conflicts Committee, which includes only our three independent directors, approve all proposed real estate property investments and certain significant real estate-related debt investments. Our Board of Directors meets regularly to monitor the execution of our investment strategies and our progress in achieving our investment objectives.
We may use leverage for our acquisitions in the form of both REIT level financing and individual investment financing. Such financing, both at the REIT level and at the individual investment level, may also be obtained from the seller of an investment. Although there is no limit on the amount we can borrow to acquire a single real estate investment, we may not leverage our assets with debt financing such that our total liabilities exceed 75% of the aggregate value of our assets unless a majority of our independent directors finds substantial justification for borrowing a greater amount.
Our Advisor and our Property Manager
Our Advisor manages our day-to-day operations and our portfolio of real estate investments, and provides asset management, marketing, investor relations, and other administrative services on our behalf, all subject to the supervision of our Board of Directors. Our Advisor has invested approximately $2.5 million in us and as of December 31, 2015, it owned 276,056 shares of our common stock and 32,685 shares of our convertible stock. Under certain circumstances, the convertible shares may be converted into shares of our common stock. As of December 31, 2015, our Advisor has granted 21,210 shares of its convertible stock to employees of RAI and its subsidiaries and affiliates. Of these shares, 2,217 have been forfeited and returned to the Advisor as of December 31, 2015. The outstanding shares will vest ratably over the next three years, and 16,445 of these shares have vested as of December 31, 2015.
We have a management agreement with Resource Real Estate Opportunity Manager, LLC, an affiliate of our Advisor, or our Manager, to provide property management services, as applicable, for most of the properties or other real estate related assets, in each case where our Advisor is able to control the operational management of such properties. Our Manager may subcontract with an affiliate or third party to provide day-to-day property management, construction management and/or other property specific functions as applicable for the properties it manages. Our Manager also manages our real estate-related debt investments.


Resource Real Estate Management, Inc., d/b/a “Resource Residential,” an affiliate of RAI, is a property management company that as of December 31, 2015, managed 64 multifamily rental properties in 20 states with over 17,000 units. Resource Residential has over 450 employees. Our Manager has subcontracted with Resource Residential to manage most of the real estate assets that we own. The senior managers and employees of Resource Residential, acting through our Manager, assist in providing property management as well as construction management services to us.
Distributions
During the year ended December 31, 2015, we paid aggregate distributions of $42.2 million, including $13.3 million of distributions paid in cash and $29.0 million of distributions reinvested through our distribution reinvestment plan, as follows (in thousands, except per share data):
Record Date
 
Per
Common
Share
 
Distribution Date
 
Distribution
invested in
shares of Common Stock
 
Net Cash
Distribution
 
Total
Aggregate
Distribution
January 29, 2015
 
$0.05
 
January 30, 2015
 
$
2,391

 
$
1,070

 
$
3,461

February 26, 2015
 
0.05
 
February 27, 2015
 
2,392

 
1,081

 
3,473

March 30, 2015
 
0.05
 
March 31, 2015
 
2,400

 
1,080

 
3,480

April 29, 2015
 
0.05
 
April 30, 2015
 
2,408

 
1,084

 
3,492

May 28, 2015
 
0.05
 
May 29, 2015
 
2,418

 
1,088

 
3,506

June 29, 2015
 
0.05
 
June 30, 2015
 
2,423

 
1,093

 
3,516

July 30, 2015
 
0.05
 
July 31, 2015
 
2,424

 
1,103

 
3,527

August 28, 2015
 
0.05
 
August 31, 2015
 
2,416

 
1,119

 
3,535

September 29, 2015
 
0.05
 
September 30, 2015
 
2,417

 
1,124

 
3,541

October 29, 2015
 
0.05
 
October 30, 2015
 
2,418

 
1,134

 
3,552

November 27, 2015
 
0.05
 
November 30, 2015
 
2,427

 
1,137

 
3,564

December 30, 2015
 
0.05
 
December 31, 2015
 
2,425

 
1,144

 
3,569

 
 
$0.60
 
 
 
$
28,959

 
$
13,257

 
$
42,216

    
Cash distributions paid since our inception were as follows (in thousands, except per share data):
Fiscal Year Paid
 
Per
Common
Share
 
Distribution
invested in
shares of Common Stock
 
Net
Cash
Distribution
 
Total
Aggregate Distribution
2012
 
$0.15
 
$
1,052

 
$
841

 
$
1,893

2013
 
0.4067
 
9,984

 
4,757

 
14,741

2014
 
0.4833
 
22,898

 
9,959

 
32,857

2015
 
0.60
 
28,959

 
13,257

 
42,216

 
 
$1.64
 
$
62,893

 
$
28,814

 
$
91,707

Since our formation, we have also declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of our common stock outstanding. In connection with these stock distributions, we have increased our accumulated deficit by $21.3 million in the aggregate as of December 31, 2015.
Competition
We believe that the current market for properties that meet our investment objectives is extremely competitive and many of our competitors have greater resources than we do. We believe that our multifamily communities are suitable for their intended purposes and adequately covered by insurance. There are a number of comparable properties located in the same submarkets that might compete with our properties. We compete with numerous other entities engaged in real estate investment activities, including individuals, corporations, banks and insurance company investment accounts, other REITs, real estate limited partnerships, the


U.S. government and other entities, to acquire, manage and sell real estate properties and real estate related assets. Many of our expected competitors enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Employees and Economic Dependency
We have no paid employees. The employees of our Advisor and its affiliates provide management, acquisition, advisory and certain administrative services for us. We are dependent on our Advisor and its affiliates for certain services that are essential to us, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments; management of the daily operations of our portfolio; and other general and administrative responsibilities. In the event that these affiliated companies are unable to provide the respective services, we will be required to obtain such services from other sources.
Access to Company Information
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, proxy statement, Current Reports on Form 8-K and all amendments to those reports with the United States Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, proxy statement, Current Reports on Form 8-K and all amendments to those reports on our website, www.resourcereit.com, or by responding to requests addressed to our investor relations group. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.
ITEM 1A.     RISK FACTORS
Below are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to our business, operating results, prospects, and financial condition. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.
Risks Related to an Investment in Us
There is no established public trading market for our shares; therefore, it will be difficult for you to sell your shares.
There is no current established public market for our shares and we currently have no plans to list our shares on a national securities exchange. Our charter limits your ability to transfer or sell your shares unless the prospective stockholder meets the applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% of our stock, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase your shares. Moreover, our share redemption program includes numerous restrictions that limit your ability to sell your shares to us, and our board of directors may amend, suspend or terminate our share redemption program upon 30 days’ notice and without stockholder approval. Therefore, it will be difficult for you to sell your shares promptly or at all. If you are able to sell your shares, you would likely have to sell them at a substantial discount to their public offering price. It is also likely that your shares would not be accepted as the primary collateral for a loan. You should purchase our shares only as a long-term investment because of the illiquid nature of the shares.



Because of the concentration of a significant portion of our assets in three geographic areas, any adverse economic, real estate or business conditions in these areas could affect our operating results and our ability to make distributions to our stockholders.
As of December 31, 2015, our real estate investments in Texas, California and Georgia represented approximately 26%, 17% and 18% of the net book value of our rental properties, respectively. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse economic developments in the Texas, California and Georgia real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect our operating results and our ability to make distributions to stockholders.
Because we are dependent upon our Advisor and its affiliates to conduct our operations, any adverse changes in the financial health of our Advisor or its affiliates or our relationship with them could hinder our operating performance and the return on our stockholders’ investment.
We are dependent on our Advisor to manage our operations and our portfolio of real estate assets. Our Advisor has a limited operating history and it depends largely upon the fees and other compensation that it receives from us in connection with the purchase, management and sale of assets to conduct its operations. Any adverse changes in the financial condition of our Advisor or our relationship with our Advisor could hinder its ability to successfully manage our operations and our portfolio of investments.
Our ability to achieve our investment objectives and to conduct our operations is dependent upon the performance of our Advisor, which is a subsidiary of our sponsor and its parent company, RAI. Our sponsor’s business is sensitive to trends in the general economy, as well as the commercial real estate and credit markets. To the extent that any decline in our sponsor’s revenues and operating results impacts the performance of our Advisor, our results of operations, and financial condition could also suffer.
The loss of or the inability to hire additional or replacement key real estate and debt finance professionals at Resource Real Estate, Inc. could delay or hinder implementation of our investment strategies, which could limit our ability to make distributions and decrease the value of your investment.
Our success depends to a significant degree upon the contributions of Alan Feldman, our Chief Executive Officer, and Kevin Finkel, our President, each of whom would be difficult to replace. Neither we nor our Advisor have employment agreements with these individuals. Messrs. Feldman and Finkel may not remain associated with Resource Real Estate, Inc. (a subsidiary of RAI). If either of these persons were to cease their association with us, our operating results could suffer. We do not intend to maintain key person life insurance on any person.
We believe that our future success depends, in large part, upon Resource Real Estate and its affiliates’ ability to retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense, and Resource Real Estate and its affiliates may be unsuccessful in attracting and retaining such skilled individuals. If Resource Real Estate loses or is unable to obtain the services of highly skilled professionals, our ability to implement our investment strategies could be delayed or hindered and the value of your investment may decline.
If we make distributions from sources other than our cash flow from operations, we will have fewer funds available for the acquisition of properties and your overall return may be reduced.
We will declare distributions when our board of directors determines we have sufficient cash flow. We generally expect to fund distributions from interest and rental income on investments, the maturity, payoff or settlement of investments and from strategic sales of loans, debt securities, properties and other assets. However, we may set distribution rates at levels we believe we will be able to cover with anticipated future cash flows from operating activities. In order to make these cash distributions, we may be required to use alternative funding sources.
Our organizational documents permit us to make distributions from any source. If we fund distributions from borrowings, sales of properties or offering proceeds, we will have less funds available for the acquisition of real estate and real estate-related assets and your overall return may be reduced. Further, to the extent distributions exceed our cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain. There is no limit on the amount we can fund distributions from sources other than from cash flows from operations.
For the year ended December 31, 2015, we paid aggregate cash distributions of $42.2 million including $13.3 million of distributions paid in cash and $29.0 million of distributions reinvested in our shares through our distribution reinvestment plan.

7

Our net loss attributable to common stockholders for the year ended December 31, 2015 was $16.9 million and net cash used in operating activities was $1.3 million. Our cumulative cash distributions and net loss attributable to common stockholders from inception through December 31, 2015 are $91.7 million and $100.5 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flow from operations, proceeds from disposal of real estate, and proceeds from debt financing. During 2015, distributions were funded as follows: 11.5% from operating activities, 49.6% from debt financing and 38.9% from the proceeds of property dispositions. To the extent that we pay distributions from sources other than our cash flow from operating activities or gains from asset sales, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.
The value of a share of our common stock has been diluted as a result of our payment of stock distributions and will be further diluted if we make additional stock distributions.
We have issued stock distributions to our stockholders and may continue to issue such stock distributions in the future. We seek to purchase assets that may have limited operating cash flows. While our objective is to acquire assets that appreciate in value, there can be no assurance that assets we acquire will appreciate in value. Therefore, investors who purchased shares early in our offering, as compared with later investors, received more shares for the same cash investment as a result of any stock distributions. Because they own more shares, upon a sale or liquidation of the company, these early investors will receive more sales proceeds or liquidating distributions relative to their invested capital compared to later investors. Furthermore, unless our assets appreciate in an amount sufficient to offset the dilutive effect of the prior stock distributions, the value per share for investors who purchased our stock later in the offering will be below the value per share of earlier investors.
Future interest rate increases in response to inflation may inhibit our ability to conduct our business and acquire or dispose of real property or real estate-related debt investments at attractive prices and your overall return may be reduced.
While we expect a significant amount of our leases to be short-term multifamily leases that will not be affected by inflation, we will be exposed to inflation risk with respect to income from any long-term leases on real property and from related real estate debt investments as these may constitute a source of our cash flows from operations. Although inflation has been generally low in recent years, high inflation may in the future tighten credit and increase prices. Further, if interest rates rise, such as during an inflationary period, the cost of acquisition capital to purchasers may also rise, which could adversely impact our ability to dispose of our assets at attractive sales prices. Should we be required to acquire, hold or dispose of our assets during a period of inflation, our overall return may be reduced.
Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he performs his duties in good faith, in a manner he reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter provides that no independent director shall be liable to us or our stockholders for monetary damages and that we will generally indemnify them for losses unless they are grossly negligent or engage in willful misconduct. As a result, you and we may have more limited rights against our independent directors than might otherwise exist under common law, which could reduce our and your recovery from these persons if they act in a negligent manner. In addition, we may be obligated to fund the defense costs incurred by our independent directors (as well as by our other directors, officers, employees (if we ever have employees) and agents) in some cases, which would decrease the cash otherwise available for distributions to you. The SEC takes the position that indemnification against liabilities arising under the Securities Act is against public policy and unenforceable.
We may change our targeted investments, our policies and our operations without stockholder consent.
We expect to allocate a majority of our portfolio to investments in multifamily rental properties, which includes student housing and senior residential, and debt secured by multifamily rental properties, but we may also purchase investments in condominium, office, retail, industrial, mixed-use, hospitality and healthcare properties and other real estate asset classes throughout the United States. Also, we are not restricted as to the following:
•
where we may acquire real estate investments;
•
the amounts that may be invested in properties as compared with the amounts that we may invest in real estate-related debt investments or mortgage loans, each of which may be leveraged and will have differing risks and profit potential; or
•
the amounts that may be invested in any one real estate investment (the greater the amounts invested in one asset, the greater the potential adverse effect on us if that asset is unprofitable).

8

Though this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments we currently intend to acquire. A change in our targeted investments or investment guidelines could adversely affect the value of our common stock and our ability to make distributions to you.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks you face as a stockholder.
Because the offering price in our distribution reinvestment plan offering exceeds our net tangible book value per share, investors in the offering will experience immediate dilution in the net tangible book value of their shares.
We are currently offering shares pursuant to our distribution reinvestment plan at $10.83 per share. Our current offering price exceeds our net tangible book value per share. Our net tangible book value per share is a rough approximation of value calculated as total book value of assets (exclusive of certain intangible items, including deferred financing costs) minus total liabilities, divided by the total number of shares of common stock outstanding. It assumes that the value of real estate assets diminishes predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the company in accordance with our investment objectives. Our net tangible book value reflects dilution in value of our common stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments, (ii) fees paid in connection with our initial public offering, including selling commissions and marketing fees re-allowed by our dealer manager to participating broker dealers, and (iii) stock distributions we have made. As of December 31, 2015, our net tangible book value per share was $5.82.
The actual value of shares that we repurchase under our share redemption program may be substantially less than what we pay.
Under our share redemption program, shares currently may be repurchased at varying prices depending on (a) the purchase price paid for the shares and (b) whether the redemptions are sought upon a stockholder’s death, “qualifying disability” (as defined in the program), or confinement to a long-term care facility. The current maximum price that may be paid under the program is $10.83 per share. This redemption price is likely to differ from the price at which a stockholder could resell his or her shares for the reasons discussed in the risk factor above. Thus, when we repurchase shares of our common stock at $10.83 per share, the actual value of the shares that we repurchase will be less, and the repurchase will be dilutive to our remaining stockholders. Even at lower repurchase prices, the actual value of the shares may be substantially less than what we pay and the repurchase may be dilutive to our remaining stockholders.
Risks Related to Conflicts of Interest
Our Advisor and its affiliates, including all of our executive officers, some of our directors and other key real estate professionals face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
All of our executive officers and some of our directors are also officers, directors, managers or key professionals of our Advisor, and other affiliated Resource Real Estate entities. Our Advisor and its affiliates receive substantial fees from us. These fees could influence our Advisor’s advice to us as well as the judgment of affiliates of our Advisor. Among other matters, these compensation arrangements could affect their judgment with respect to:
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the continuation, renewal or enforcement of our agreements with our Advisor and its affiliates, including the advisory agreement and the management agreement;
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sales of properties and other investments, which may entitle our Advisor to disposition fees and the possible issuance to our Advisor of shares of our common stock through the conversion of our convertible stock;
•
acquisitions of properties and investments in loans, which entitle our Advisor to acquisition and asset management fees, and, in the case of acquisitions or investments from other Resource Real Estate-sponsored programs, might entitle affiliates of our Advisor to disposition fees in connection with its services for the seller;
•
borrowings to acquire properties and other investments, which borrowings will increase the acquisition, debt financing, and asset management fees payable to our Advisor;

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•
whether and when we seek to list our common stock on a national securities exchange, which listing could entitle our Advisor to the issuance of shares of our common stock through the conversion of our convertible stock;
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whether we internalize our management, which may entail significant payments to affiliates of our Advisor; and
•
whether and when we seek to sell the company or its assets, which sale could entitle our Advisor to disposition fees and to the issuance of shares of our common stock through the conversion of our convertible stock.
The fees our Advisor receives in connection with the acquisition and management of assets are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us.
Our Advisor will face conflicts of interest relating to the acquisition of assets and such conflicts may not be resolved in our favor, which could limit our ability to make distributions and reduce your overall investment return.
We rely on our sponsor and other key real estate professionals at our Advisor to identify suitable investment opportunities for us. The executive officers and several of the other key real estate professionals at our Advisor are also the key real estate professionals at the advisors to other Resource Real Estate-sponsored programs and joint ventures. As such, Resource Real Estate-sponsored programs and joint ventures rely on many of the same real estate professionals as will future programs. Many investment opportunities that are suitable for us may also be suitable for other Resource Real Estate programs and joint ventures. When these real estate professionals direct an investment opportunity to any Resource Real Estate-sponsored program or joint venture, they, in their sole discretion, will offer the opportunity to the program or joint venture for which the investment opportunity is most suitable based on the investment objectives, portfolio and criteria of each program or joint venture. For so long as we are externally advised, our charter provides that it shall not be a proper purpose of the corporation for us to purchase real estate or any significant asset related to real estate unless our Advisor has recommended the investment to us. Thus, the real estate professionals of our Advisor could direct attractive investment opportunities to other entities. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions to you.
Our Advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our Advisor, which conflicts could result in a disproportionate benefit to the other joint venture partners at our expense.
If approved by the unanimous vote of our conflicts committee, we may enter into joint venture agreements with other Resource Real Estate-sponsored programs or affiliated entities for the acquisition, development or improvement of properties or other investments. Our Advisor and the advisors to the other Resource Real Estate-sponsored programs have the same executive officers and key employees; and these persons will face conflicts of interest in determining which Resource Real Estate program or investor should enter into any particular joint venture agreement. These persons may also face a conflict in structuring the terms of the relationship between our interests and the interests of the Resource Real Estate-affiliated co-venturer and in managing the joint venture. Any joint venture agreement or transaction between us and a Resource Real Estate-affiliated co-venturer will not have the benefit of arm’s length negotiation of the type normally conducted between unrelated co-venturers. The Resource Real Estate-affiliated co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. These co-venturers may thus benefit to our and your detriment.
Our Advisor, the real estate professionals assembled by our Advisor, their affiliates and our officers face competing demands relating to their time, and this may cause our operations and your investment to suffer.
We rely on our Advisor, the real estate professionals our Advisor has assembled and their affiliates and officers for the day-to-day operation of our business. Our Advisor, its real estate professionals and affiliates, including our officers and employees, have interests in other Resource Real Estate programs and engage in other business activities. As a result of their interests in other Resource Real Estate programs and the fact that they have engaged in and they will continue to engage in other business activities, they face conflicts of interest in allocating their time among us, our Advisor and other Resource Real Estate-sponsored programs and other business activities in which they are involved. Should our Advisor breach its fiduciary duty to us by inappropriately devoting insufficient time or resources to our business, the returns on our investments may suffer.
Our executive officers and some of our directors face conflicts of interest related to their positions in our Advisor and its affiliates, including our property manager, which could hinder our ability to implement our business strategy and to generate returns to you.
Our executive officers and some of our directors are also executive officers, directors, managers and key professionals of our Advisor, our property manager and other affiliated Resource Real Estate entities. Their loyalties to these other entities could result in actions or inactions that breach their fiduciary duties to us and are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. If we do not successfully implement our

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business strategy, we may be unable to generate the cash needed to make distributions to you and to maintain or increase the value of our assets.
Your investment will be diluted upon conversion of the convertible stock.
In connection with the commencement of our initial public offering, our Advisor exchanged 4,500 shares of common stock for 45,000 shares of our convertible stock and purchased 4,063 shares of our convertible stock that were not sold in our private offering. As of December 31, 2015, our Advisor and affiliated persons owned 49,063 shares of our convertible stock, outside investors owned a total of 937 shares of our convertible stock and a total of 50,000 shares of convertible stock were issued and outstanding. Under limited circumstances, these shares may be converted into shares of our common stock, resulting in dilution of our stockholders’ interest in us.  Our convertible stock will convert into shares of common stock on one of two events.  First, it will convert if we have paid distributions to common stockholders such that aggregate distributions are equal to 100% of the price at which we sold our outstanding shares of common stock plus an amount sufficient to produce a 10% cumulative, non-compounded, annual return at that price.  Alternatively, the convertible stock will convert if we list our shares of common stock on a national securities exchange and, on the 31st trading day after listing, the value of our company based on the average trading price of our shares of common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold for our common stockholders.  Each of these two events is a “Triggering Event.”  Upon a Triggering Event, our convertible stock will, unless our advisory agreement has been terminated or not renewed on account of a material breach by our Advisor, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:
•
(A) the lesser of
◦
(i) 25% of the amount, if any, by which
▪
(1) the value of the company as of the date of the event triggering the conversion plus the total distributions paid to our stockholders through such date on the then outstanding shares of our common stock exceeds
▪
(2) the sum of the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, or
◦
(ii) 15% of the amount, if any, by which
▪
(1) the value of the company as of the date of the event triggering the conversion plus the total distributions paid to our stockholders through such date on the then outstanding shares of our common stock exceeds
▪
(2) the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by
•
(B) the value of the company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion. 
However, if our advisory agreement expires without renewal or is terminated (other than because of a material breach by our Advisor) prior to a Triggering Event, then upon a Triggering Event the holder of the convertible stock will be entitled to a prorated portion of the number of shares of common stock determined by the foregoing calculation, where such proration is based on the percentage of time we were advised by our Advisor.  As a result, following conversion, the holder of the convertible stock will be entitled to a portion of amounts distributable to our stockholders, which such amounts distributable to the holder could be significant.
Our Advisor can influence whether our common stock is listed for trading on a national securities exchange.  Accordingly, our Advisor can influence the conversion of the convertible stock issued to it and the resulting dilution of other stockholders’ interests.
Risks Related to Our Distribution Reinvestment Plan Offering and Our Corporate Structure
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, our charter prohibits a person from directly or constructively owning more than 9.8% of our outstanding shares, unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all, or substantially all, of our assets) that might provide a premium price for holders of our common stock.

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Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
Our board of directors may increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Our board of directors could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all, or substantially all, of our assets) that might provide a premium price to holders of our common stock. A majority of our independent directors who do not have an interest in the transaction must approve any issuance of preferred stock.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we or our subsidiaries become an unregistered investment company, we could not continue our business.
Neither we nor any of our subsidiaries intend to register as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”). If we or our subsidiaries were obligated to register as investment companies, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
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limitations on capital structure;
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restrictions on specified investments;
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prohibitions on transactions with affiliates; and
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compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.
Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:
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pursuant to Section 3(a)(1)(A), is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities (the “primarily engaged test”); or
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pursuant to Section 3(a)(1)(C), is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the “40% test”). “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) (relating to private investment companies).
We believe that we and our operating partnership will not be required to register as an investment company. With respect to the 40% test, most of the entities through which we and our operating partnership will own our assets will be majority-owned subsidiaries that will not themselves be investment companies and will not be relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7).
With respect to the primarily engaged test, we and our operating partnership will be holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our operating partnership, we and our operating partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.
If any of the subsidiaries of our operating partnership fail to meet the 40% test, we believe they will usually, if not always, be able to rely on Section 3(c)(5)(C) of the Investment Company Act for an exception from the definition of an investment company. (Otherwise, they should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act.) As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate,” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that any of the subsidiaries of our operating partnership relying on Section 3(c)(5)(C) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. If any subsidiary relies on Section 3(c)(5)(C), we expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets.

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Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exception from the definition of an investment company under the Investment Company Act.
If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, we may need to modify our investment portfolio in order to maintain our REIT qualification or exception from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
You may not be able to sell your shares under our share redemption program and, if you are able to sell your shares under the program, you may not be able to recover the amount of your investment in our shares.
Our board of directors has approved the share redemption program, but may amend, suspend or terminate our share redemption program upon 30 days’ notice and without stockholder approval. Our board of directors may reject any request for redemption of shares. Further, there are many limitations on your ability to sell your shares pursuant to the share redemption program. Any stockholder requesting repurchase of their shares pursuant to our share redemption program will be required to certify to us that such stockholder acquired the shares by either (1) a purchase directly from us or (2) a transfer from the original investor by way of (i) a bona fide gift not for value to, or for the benefit of, a member of the stockholder’s immediate or extended family, (ii) a transfer to a custodian, trustee or other fiduciary for the account of the stockholder or his or her immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or (iii) operation of law.
In addition, our share redemption program contains other restrictions and limitations. Shares will be redeemed on a quarterly basis, pro rata among all stockholders requesting redemption in such quarter, with a priority given to redemptions upon the death or qualifying disability of a stockholder or redemptions sought upon a stockholder’s confinement to a long-term care facility; next, to stockholders who demonstrate, in the discretion of our board of directors, another involuntary, exigent circumstance, such as bankruptcy; next, to stockholders subject to a mandatory distribution requirement under such stockholder’s IRA; and, finally, to other redemption requests. You must hold your shares for at least one year prior to seeking redemption under the share redemption program, except that our board of directors may waive this one-year holding requirement with respect to redemptions sought upon the death or qualifying disability of a stockholder or redemptions sought upon a stockholder’s confinement to a long-term care facility or for other exigent circumstances and that if a stockholder is redeeming all of his or her shares the board of directors may waive the one-year holding requirement with respect to shares purchased pursuant to the distribution reinvestment plan. We will not redeem more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption. Our board of directors will determine from time to time, and at least quarterly, whether we have sufficient excess cash to repurchase shares. Generally, the cash available for redemption will be limited to proceeds from our distribution reinvestment plan plus 1% of the operating cash flow from the previous fiscal year (to the extent positive).
Other than redemptions following the death or qualifying disability of a stockholder or redemptions sought upon a stockholder’s confinement to a long-term care facility, the purchase price for such shares we repurchase under our proposed redemption program equaled the greater of (a) 100% of the average issue price per share for all of your shares (as adjusted for any stock distributions, stock combinations, splits, recapitalizations and the like with respect to our common stock) or (b) 100% of the estimated value per share. Accordingly, you may receive less by selling your shares back to us than you would receive if our investments were sold for their estimated values and such proceeds were distributed in our liquidation.
Therefore, in making a decision to purchase shares of our common stock, you should not assume that you will be able to sell any of your shares back to us pursuant to our share redemption program. 
Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.
Our stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 1,010,050,000 shares of capital stock, of which 1,000,000,000 shares are designated as common stock, 50,000 shares are designated as convertible stock and 10,000,000 are designated as preferred stock. Our board of directors may increase the number of authorized shares of capital stock without stockholder approval. Our board may also elect to (1) sell additional equity securities in future public or private offerings; (2) issue shares of our common stock upon the exercise of the options we may grant to our independent directors or to our Advisor's or our Manager's employees; (3) issue shares to our Advisor, its successors or assigns, in payment of an outstanding obligation or as consideration in a related-party transaction; (4) issue shares of common stock upon the conversion of our convertible stock; or (5) issue shares of our common stock to sellers of properties we acquire in connection with an exchange

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of limited partnership interests of our operating partnership. To the extent we issue additional equity interests, your percentage ownership interest in us will be diluted. Further, depending upon the terms of such transactions, most notably the offering price per share, which may be less than the price paid per share in any public offering, and the value of our properties, existing stockholders may also experience a dilution in the book value of their investment in us.
If we are unable to obtain funding for future capital needs, cash distributions to our stockholders could be reduced and the value of our investments could decline.
If we need additional capital in the future to improve or maintain our properties or for any other reason, we may have to obtain financing from sources beyond our cash flow from operations, such as borrowings, sales of assets or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both, which would limit our ability to make distributions to you and could reduce the value of your investment.
Our board of directors could opt into certain provisions of the Maryland General Corporation Law in the future, which may discourage others from trying to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders or affiliates of interested stockholders are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Also under Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation are excluded from the vote on whether to accord voting rights to the control shares. Should our board opt into these provisions of Maryland law, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Similarly, provisions of Title 3, Subtitle 8 of the Maryland General Corporation Law could provide similar anti-takeover protection.
Risks Related to Investments in Real Estate
Economic and regulatory changes that impact the real estate market generally may decrease the value of our investments and weaken our operating results.
The properties we acquire and their performance are subject to the risks typically associated with real estate, including:
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downturns in national, regional and local economic conditions;
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competition;
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adverse local conditions, such as oversupply or reduction in demand and changes in real estate zoning laws that may reduce the desirability of real estate in an area;
•
vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;
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changes in the supply of or the demand for similar or competing properties in an area;
•
changes in interest rates and the availability of permanent mortgage financing, which may render the sale of a property or loan difficult or unattractive;
•
changes in governmental regulations, including those involving tax, real estate usage, environmental and zoning laws; and
•
periods of high interest rates and tight money supply.
Any of the above factors, or a combination thereof, could result in a decrease in the value of our investments, which would have an adverse effect on our results of operations, reduce the cash available for distributions and the return on your investment.
We are subject to the risks associated with acquiring discounted real estate assets.
We are subject to the risks generally incident to the ownership of discounted real estate assets. Such assets may be purchased at a discount from historical cost due to substantial deferred maintenance, abandonment, undesirable locations or markets, or poorly structured financing of the real estate or debt instruments underlying the assets, which has since lowered their value. Further, instability in the financial markets may limit the availability of lines of credit and the degree to which people and entities have access to cash to pay rents or debt service on the underlying assets. Such illiquidity would have the effect of increasing

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vacancies, increasing bankruptcies and weakening interest rates commercial entities can charge consumers, which can all decrease the value of already discounted real estate assets. Should economic conditions worsen, an inability of the underlying real estate assets to produce income may weaken our return on our investments, which in turn, may weaken your return on investment.
Further, irrespective of the instability the financial markets may have on the return produced by discounted real estate assets, the evolving efforts to correct the instability make the valuation of such assets highly unpredictable. Though we have purchased, and may continue to purchase, real estate assets at a discount from historical cost, the fluctuation in market conditions make judging the future performance of such assets difficult. There is a risk that we may not purchase real estate assets at absolute discounted rates and that such assets may continue to decline in value.
Residents of multifamily rental properties or tenants of other property classes we intend to acquire as discounted real estate assets that have experienced personal financial problems or a downturn in their business may delay enforcement of our rights, and we may incur substantial costs attempting to protect our investment.
The discounted real estate assets may involve investments in residential or commercial leases with residents or tenants who have experienced a downturn in their residential or business leases and with residents or tenants that have experienced difficulties with their personal financial situations such as a job loss, bankruptcy or bad credit rating, resulting in their failure to make timely rental payments or their default under their leases or debt instruments. In the event of any default by residents or tenants at our properties, we may experience delays in enforcing our rights and may incur substantial costs attempting to protect our investment.
The bankruptcy or insolvency of any resident or tenant also may adversely affect the income produced by our properties. If any resident or tenant becomes a debtor in a case under the U.S. Bankruptcy Code, our actions may be restricted by the bankruptcy court and our financial condition and results of operations could be adversely affected.
The operating costs of our properties will not necessarily decrease if our income decreases.
Certain expenses associated with ownership and operation of a property may be intentionally increased to enhance the short- and long-term success of the property in the form of capital gain and current income, such as:
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increased staffing levels;
•
enhanced technology applications; and
•
increased marketing efforts.
Certain expenses associated with the ownership and operation of a property are not necessarily reduced by events that adversely affect the income from the property, such as:
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real estate taxes;
•
insurance costs; and
•
maintenance costs.
For example, if the leased property loses tenants or rents are reduced, then those costs described in the preceding sentence are not necessarily reduced. As a result, our cost of owning and operating leased properties may, in the future, exceed the income the property generates even though the property’s income exceeded its costs at the time it was acquired. This would decrease the amount of cash available to us to distribute to you and could negatively affect your return on investment.
We will be subject to the risks associated with acquiring bank-owned properties, commonly referred to as REO (“real estate owned” by a bank after foreclosure).
We will be subject to the risks generally incident to the acquisition and ownership of REO. An investment in REO assets may be riskier than traditional real estate transactions. For example, such additional risks may include:
•
REO assets often will require certain additional planned capital expenditures to repair and maintain the property in order to prepare the property for sale, due to the previous owners’ inadequate maintenance of the property;
•
REO assets may result in the purchaser discovering additional latent defects with the property requiring additional unplanned expenditures not initially budgeted for as part of the redevelopment and repositioning capital expenditures; and
•
the timing and closing of an REO acquisition may be delayed and we may incur additional costs because of the bank’s lack of adequate staff assigned to the bank’s REO portfolio or the deliberate process of following the bank’s specific rules and requirements for obtaining its approval prior to closing the transaction.

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The risks associated with REO may adversely affect our results of operations, reduce the cash available for distributions and the return on your investment.
We will compete with third parties in acquiring, managing and selling properties and other investments, which could reduce our profitability and the return on your investment.
We believe that the current market for properties that meet our investment objectives is extremely competitive and many of our competitors have greater resources than we do. We will compete with numerous other entities engaged in real estate investment activities, including individuals, corporations, banks and insurance company investment accounts, other REITs, real estate limited partnerships, the U.S. government and other entities, to acquire, manage and sell real estate and real estate-related assets. Many of our expected competitors enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase.     
Competition with these entities may result in the following:
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greater demand for the acquisition of real estate and real estate-related assets, which results in increased prices we must pay for our real estate and real estate-related assets;
•
delayed investment of our capital;
•
decreased availability of financing to us; or
•
reductions in the size or desirability of the potential tenant base for one or more properties that we lease.
If such events occur, you may experience a lower return on your investment.
Our joint venture partners could take actions that decrease the value of an investment to us and lower our stockholders’ overall return.
We are a party to joint ventures through which we own certain of our properties. We may also purchase and renovate additional properties in joint ventures or in partnerships, co‑tenancies or other co‑ownership arrangements. Such investments involve risks not otherwise present with other methods of investment, including, for example, the following risks:
•
that our co‑venturer, co‑tenant or partner in an investment could become insolvent or bankrupt;
•
that such co‑venturer, co‑tenant or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals; or
•
that such co‑venturer, co‑tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment and therefore your return on investment.
Properties that have significant vacancies, especially discounted real estate assets, may experience delays in leasing up or could be difficult to sell, which could diminish our return on these properties.
A property may incur vacancies either by the expiration of tenant leases or the continued default of tenants under their leases. Further, our potential investments in value-add multifamily rental properties or other types of discounted properties may have significant vacancies at the time of acquisition. If vacancies continue for a prolonged period of time beyond the expected lease-up stage that we anticipate will follow any redevelopment or repositioning efforts, we may suffer reduced revenues resulting in less cash available for distributions. In addition, the resale value of the property could be diminished because the market value of a particular property depends principally upon the value of the cash flow generated by the leases associated with that property. Such a reduction on the resale value of a property could also reduce your return on investment.
We may have difficulty re-leasing underperforming or discounted properties because of the location or reputation of the property.
The nature of discounted real estate assets carries the risk that the properties underlying certain real estate investments may be located in areas of slow, stagnant, or declining economic growth. Such areas may experience high levels of crime and unemployment. In addition to the risks these conditions impose on the current tenants and owners of properties underlying the real estate investments, these conditions may harm the reputation of the property making it difficult to attract future more productive tenants and owners to the areas where the properties are located. The inability to re-lease or re-sell property abandoned, foreclosed upon, or purchased in these areas may result in an unproductive use of our resources and could negatively affect our performance and your return on investment.

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Because we rely on our Manager, its affiliates and third parties to manage the day-to-day affairs of any properties we acquire, should the staff of a particular property perform poorly, our operating results for that property will similarly be hindered and our net income may be reduced.
We depend upon the performance of our property managers to effectively manage our properties and real estate-related assets. Rising vacancies across real estate properties have resulted in increased pressure on real estate investors and their property managers to maintain adequate occupancy levels. In order to do so, we may have to offer inducements, such as free rent and resident amenities, to compete for residents. Poor performance by those sales, leasing and other management staff members operating a particular property will necessarily translate into poor results of operations for that particular property. Should our Manager, its affiliates or third parties fail to identify problems in the day-to-day management of a particular property or fail to take the appropriate corrective action in a timely manner, our operating results may be hindered and our net income reduced.
If we are unable to sell a property for the price, on the terms or within the time frame we desire, it could limit our ability to pay cash distributions to you.
Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to make distributions to you and could reduce the value of your investment.
Government entities, community associations and contractors may cause unforeseen delays and increase costs to redevelop and reposition value-add properties that we may acquire, which may reduce our net income and cash available for distributions to you.
We may seek to or be required to incur substantial capital obligations to redevelop or reposition existing properties that we acquire at a discount as a result of neglect of the previous owners or tenants of the properties and to sell the properties. Our Advisor and its key real estate professionals will do their best to acquire properties that do not require excessive redevelopment or modifications and that do not contain hidden defects or problems. There could, however, be unknown and excessive costs, expenses and delays associated with a discounted property’s redevelopment, repositioning or value-add upgrades. We will be subject to risks relating to the uncertainties associated with rezoning for redevelopment and other concerns of governmental entities, community associations and our construction manager’s ability to control costs and to build in conformity with plans and the established timeframe. We will pay a construction management fee to a construction manager, which may be our Manager or its affiliates, if new capital improvements are required.
If we are unable to increase rental rates or sell the redeveloped property at a price consistent with our value-add projections due to local market or economic conditions to offset the cost of the redevelopment or repositioning the property, the return on your investment may suffer. To the extent we acquire discounted properties in major metropolitan areas where the local government has imposed rent controls, we may be prohibited from increasing the rental rates to a level sufficient to cover the particular property’s redevelopment costs and expenses.
Costs of responding to both known and previously undetected environmental contamination and hazardous conditions may decrease our cash flows and limit our ability to make distributions.
Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials, and other health and safety-related concerns.
Some of these laws and regulations may impose joint and several liability on the tenants, current or previous owners or operators of real property for the costs to investigate or remediate contaminated properties, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Our tenants’ operations, the condition of properties at the time we buy them, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties.

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Environmental laws also may impose liens on a property or restrictions on the manner in which a property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances.
The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Any material expenditures, fines, penalties, or damages we must pay will reduce our ability to make distributions and may reduce the value of your investment.
Properties acquired by us may have toxic mold that could result in substantial liabilities to us.
Litigation and concern about indoor exposure to certain types of toxic molds has been increasing as the public becomes aware that exposure to mold can cause a variety of health effects and symptoms, including allergic reactions. It is impossible to eliminate all mold and mold spores in the indoor environment. Although we will attempt to acquire properties and loans secured by properties that do not contain toxic mold, there can be no assurance that none of the properties acquired by us will contain toxic mold. The difficulty in discovering indoor toxic mold growth could lead to an increased risk of lawsuits by affected persons and the risk that the cost to remediate toxic mold will exceed the value of the property. There is a risk that we may acquire properties that contain toxic mold and such properties may negatively affect our performance and your return on investment.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows and the return on your investment.
There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Such insurance policies may not be available at reasonable costs, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions.
Our costs associated with and the risk of failing to comply with the Americans with Disabilities Act, the Fair Housing Act and other tax credit programs may adversely affect cash available for distributions.
Our properties are generally expected to be subject to the Americans with Disabilities Act of 1990, as amended (the "Disabilities Act").  Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons.  The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities.  The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.  We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party to ensure compliance with such laws.  However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner.  If we cannot, our funds used for compliance with these laws may affect cash available for distributions and the amount of distributions to you.
The multifamily rental properties we acquire must comply with Title III of the Disabilities Act, to the extent that such properties are “public accommodations” or “commercial facilities” as defined by the Disabilities Act. Compliance with the Disabilities Act could require removal of structural barriers to handicapped access in certain public areas of our apartment communities where such removal is readily achievable.  The Disabilities Act does not, however, consider residential properties, such as multifamily rental properties, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as the leasing office, are open to the public.
We also must comply with the Fair Housing Amendment Act of 1988 (“FHAA”), which requires that multifamily rental properties first occupied after March 13, 1991 be accessible to handicapped residents and visitors.  Compliance with the FHAA

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could require removal of structural barriers to handicapped access in a community, including the interiors of apartment units covered under the FHAA. Recently there has been heightened scrutiny of multifamily rental properties for compliance with the requirements of the FHAA and the Disabilities Act and an increasing number of substantial enforcement actions and private lawsuits have been brought against multifamily rental properties to ensure compliance with these requirements.  Noncompliance with the FHAA and the Disabilities Act could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation.
Certain of our properties may be subject to the low income housing tax credits, historic preservation tax credits or other similar tax credit rules at the federal, state or municipal level. The application of these tax credit rules is extremely complicated and noncompliance with these rules may have adverse consequences for us. Noncompliance with applicable tax regulations may result in the loss of future or other tax credits and the fractional recapture of these tax credits already taken. Accordingly, noncompliance with these tax credit rules and related restrictions may adversely affect our ability to distribute any cash to our investors.
Our properties may be dispersed geographically and across various markets and sectors.
We may acquire and operate properties in different locations throughout the United States and in different markets and sectors. The success of our properties will depend largely on our ability to hire various managers and service providers in each area, market and sector where the properties are located or situated. It may be more challenging to manage a diverse portfolio. Failure to meet such challenges could reduce the value of your investment.
A high concentration of our properties in a particular geographic area would magnify the effects of downturns in that geographic area.
We expect that our properties will be diverse according to geographic area. However, in the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio.
Newly constructed and existing multifamily rental properties or other properties that compete with any properties we may acquire in any particular location could adversely affect the operating results of our properties and our cash available for distribution.
We may acquire properties in locations that experience increases in construction of multifamily rental or other properties that compete with our properties. This increased competition and construction could:
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make it more difficult for us to find residents to lease units in our apartment communities;
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force us to lower our rental prices in order to lease units in our apartment communities; or
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substantially reduce our revenues and cash available for distribution.
Our efforts to upgrade multifamily rental properties to increase occupancy and raise rental rates through redevelopment and repositioning may fail, which may reduce our net income and the cash available for distributions to you.
The success of our ability to upgrade any multifamily rental properties that we may acquire and realize capital gains and current income for you on these investments materially depends upon the status of the economy where the multifamily rental property is located. Our revenues will be lower if the rental market cannot bear the higher rental rate that accompanies the upgraded multifamily rental property due to job losses or other economic hardships. Should the local market be unable to substantiate a higher rental rate for a multifamily rental property that we upgraded, we may not realize the premium rental we had assumed by a given upgrade and we may realize reduced rental income or a reduced gain or even loss upon the sale of the property. These events could cause us to reduce the cash available for distributions.
Repositioning risks could affect our profitability.
A component of our strategy is to renovate and reposition multifamily communities in order to effect long-term growth. Our renovation and repositioning activities generally entail certain risks, including the following:
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funds may be expended and management’s time devoted to projects that may not be completed due to a variety of factors, including without limitation, the inability to obtain necessary governmental approvals;
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construction costs of a renovation or repositioning project may exceed original estimates, possibly making the project economically unfeasible or the economic return on a repositioned property less than anticipated;
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increased material and labor costs, problems with subcontractors, or other costs due to errors and omissions which occur in the renovation process;

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projects may be delayed due to required governmental approvals, adverse weather conditions, labor shortages or other unforeseen complications;
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occupancy rates and rents at a repositioned property may be less than anticipated; and
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the operating expenses at a repositioned property may be higher than anticipated.
These risks may reduce the funds available for distribution to our stockholders. Further, the renovation and repositioning of properties is also subject to the general risks associated with real estate investments.
A concentration of our investments in any one property sector may leave our profitability vulnerable to a downturn or slowdown in such sector.
At any one time, a majority of our investments are likely to be in the multifamily sector.  Vacancy rates in multifamily rental properties and other commercial real estate properties may be related to jobless rates. As a result, we will be subject to risks inherent in investments in a single type of property.  If our investments are substantially in any one property sector, then the potential effects on our revenues, and as a result, on cash available for distribution, resulting from increased jobless rates as well as a general downturn or slowdown in such property sector could be more pronounced than if we had more fully diversified our investments.
Increased competition and the increased affordability of single-family and multifamily homes and condominiums for sale or rent could limit our ability to retain residents, lease apartment units or increase or maintain rents.
The multifamily rental properties that we own will most likely compete with numerous housing alternatives in attracting residents, including single-family and multifamily homes and condominiums. Due to the current economic conditions, competitive housing in a particular area and the increasing affordability of single-family and multifamily homes and condominiums to buy caused by relatively low mortgage interest rates and generous federal and state government programs to promote home ownership could adversely affect our ability to fully occupy any multifamily rental properties we may acquire. Further, single-family homes and condominiums available for rent could also adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.
Short-term multifamily leases expose us to the effects of declining market rent, which could adversely impact our ability to make cash distributions.
We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term or earlier in certain situations, such as when a resident loses his/her job, without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.
If we acquire condominium properties or mixed-use properties that combine hotel, multifamily or condominiums, a fire or other accident could occur in a single unit that causes the entire building to be uninhabitable.
We may experience greater risks in the condominium and mixed-use property investments because there could be a higher likelihood of an accident occurring in a building containing numerous individuals where we do not have the same ability to monitor or review the building as other property classes. A fire or other accident in a single unit could in turn cause the entire building to be uninhabitable. Even if there is insurance on the building, it may not be enough to cover all of the losses as a result of a fire or other accident.
Risks Related to Investments in Real Estate-Related Debt Assets
Our investments in real estate-related debt investments are subject to the risks typically associated with real estate.
Our investments in mortgage, mezzanine or other real estate loans will generally be directly or indirectly secured by a lien on real property (or the equity interests in an entity that owns real property) that, upon the occurrence of a default on the loan, could result in our acquiring ownership of the property. We will not know whether the values of the properties ultimately securing our loans will remain at the levels existing on the dates of origination of those loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans. In this manner, real estate values could impact the values of our loan investments. Our investments in other real estate-related debt investments may be similarly affected by real estate property values. Therefore, our real estate-related debt investments are subject to the risks typically associated with real estate, which are described above under the heading “-Risks Related to Investments in Real Estate.”

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If we make or invest in mortgage, mezzanine, bridge or other real estate loans, our loans will be subject to interest rate fluctuations that will affect our returns as compared to market interest rates; accordingly, the value of our stockholders’ investment would be subject to fluctuations in interest rates.
If we make or invest in fixed rate, long‑term loans and interest rates rise, the loans could yield a return that is lower than then‑current market rates. If interest rates decrease, we will be adversely affected to the extent that loans are prepaid because we may not be able to reinvest the proceeds at as high of an interest rate. If we invest in variable‑rate loans and interest rates decrease, our revenues will also decrease. For these reasons, if we invest in mortgage, mezzanine, bridge or other real estate loans, our returns on those loans and the value of our stockholders’ investment will be subject to fluctuations in interest rates.
Delays in liquidating defaulted mortgage loans could reduce our investment returns.
If we make or invest in mortgage loans and there are defaults under those mortgage loans, we may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our investment in the defaulted mortgage loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
Government action may reduce recoveries on defaulted loans.
Legislative or regulatory initiatives by federal, state or local legislative bodies or administrative agencies, if enacted or adopted, could delay foreclosure, provide new defenses to foreclosure or otherwise impair our ability to foreclose on real estate-related debt investments in default. Various jurisdictions have considered or are currently considering such actions, and the nature or extent of the limitation on foreclosure that may be enacted cannot be predicted. Bankruptcy courts could, if this legislation is enacted, reduce the amount of the principal balance on a mortgage loan that is secured by a lien on the mortgaged property, reduce the interest rate, extend the term to maturity or otherwise modify the terms of a bankrupt borrower’s mortgage loan.
Property owners filing for bankruptcy may adversely affect us.
The filing of a petition in bankruptcy automatically stops or “stays” any actions to enforce the terms of all debt of the debtor, including a mortgage loan. The length of the stay and the costs associated with it will generally have an adverse impact on our profitability. Further, the bankruptcy court may take other actions that prevent us from foreclosing on the property. Any bankruptcy proceeding will, at a minimum, delay us in achieving our investment objectives and may adversely affect our profitability.
Investment in non‑conforming and non‑investment-grade loans may involve increased risk of loss.
Loans we may acquire may not conform to conventional loan criteria applied by traditional lenders and may not be rated or may be rated as non‑investment grade. Non-investment-grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result, loans we acquire may have a higher risk of default and loss than conventional loans. Any loss we incur may reduce distributions to stockholders and adversely affect the value of our common stock.
Our investments in subordinated loans may be subject to losses.
We may acquire subordinated loans. In the event a borrower defaults on a subordinated loan and lacks sufficient capacity to cure the default, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill periods”), and control decisions made in bankruptcy proceedings relating to borrowers.
Investments in non-performing real estate assets involve greater risks than investments in stabilized, performing assets and make our future performance more difficult to predict.
Traditional performance metrics of real estate assets are generally not as reliable for non-performing real estate assets as they are for performing real estate assets. Non-performing properties, for example, do not have stabilized occupancy rates. Similarly, non-performing loans do not have a consistent stream of loan servicing or interest payments. In addition, for non-performing loans, often there is greater uncertainty that the face amount of the note will be paid in full.

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In addition, we may pursue more than one strategy to create value in a non-performing real estate investment. With respect to a property, these strategies may include development, redevelopment, or lease-up of such property. With respect to a loan, these strategies may include negotiating with the borrower for a reduced payoff, restructuring the terms of the loan or enforcing our rights as lender under the loan and foreclosing on the collateral securing the loan.
The factors described above make it challenging to evaluate non-performing investments.
Delays in restructuring or liquidating non‑performing real estate securities could reduce the return on our stockholders’ investment.
Real estate securities may become non‑performing after acquisition for a wide variety of reasons. Such non‑performing real estate investments may require a substantial amount of workout negotiations or restructuring, which may entail, among other things, a substantial reduction in the interest rate and a substantial write‑down of such loan or asset. However, even if a restructuring is successfully accomplished, upon maturity of such real estate security, replacement “takeout” financing may not be available. We may find it necessary or desirable to foreclose on some of the collateral securing one or more of our investments. Inter-creditor provisions may substantially interfere with our ability to do so. Even if foreclosure is an option, the foreclosure process can be lengthy and expensive. Borrowers often resist foreclosure actions by asserting numerous claims, counterclaims and defenses, including, without limitation, lender liability claims and defenses, in an effort to prolong the foreclosure action. In some states, foreclosure actions can take up to several years or more to litigate. At any time during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure action and further delaying the foreclosure process. Foreclosure litigation tends to create a negative public image of the collateral property and may result in disrupting ongoing leasing and management of the property. Foreclosure actions by senior lenders may substantially affect the amount that we may earn or recover from an investment.
We depend on debtors for our revenue, and, accordingly, our revenue and our ability to make distributions to our stockholders will be dependent upon the success and economic viability of such debtors.
The success of our real estate-related debt investments such as loans and debt and derivative securities materially depend on the financial stability of the debtors underlying such investments. The inability of a single major debtor or a number of smaller debtors to meet their payment obligations could result in reduced revenue or losses. In the event of a debtor default or bankruptcy, we may experience delays in enforcing our rights as a creditor, and such rights may be subordinated to the rights of other creditors. These events could negatively affect the cash available for distribution to our stockholders and the value of our stockholders’ investment.
Prepayments can adversely affect the yields on our investments.
Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. If we are unable to invest the proceeds of such prepayments received, the yield on our portfolio will decline. Under certain interest rate and prepayment scenarios, we may fail to recoup fully our cost of acquisition of certain investments.
Our investments in real estate-related debt securities and preferred and common equity securities will be subject to the specific risks relating to the particular issuer of the securities and may involve greater risk of loss than secured debt financings.
Subject to certain REIT asset and income tests, we may make equity investments in REITs and other real estate companies. We may target a public company that owns commercial real estate or real estate-related assets when we believe its stock is trading at a discount to that company’s net asset value. We may eventually seek to acquire or gain a controlling interest in the companies that we target. We do not expect our non‑controlling equity investments in other public companies to represent a substantial portion of our assets at any one time. We may also invest in debt securities and preferred equity securities issued by REITs and other real estate companies. Our investments in debt securities and preferred and common equity securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers that are REITs and other real estate companies are subject to the inherent risks associated with real estate and real estate-related debt investments. Furthermore, debt securities and preferred and common equity securities may involve greater risk of loss than secured debt financings due to a variety of factors, including that such investments are generally unsecured and may also be subordinated to other obligations of the issuer. As a result, investments in debt securities and preferred and common equity securities are subject to risks of (i) limited liquidity in the secondary trading market, (ii) substantial market price volatility resulting from changes in prevailing interest rates, (iii) subordination to the prior claims of banks and other senior lenders to the issuer, (iv) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (v) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (vi) the declining creditworthiness and potential for insolvency of the

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issuer during periods of rising interest rates and economic downturn. These risks may adversely affect the value of outstanding debt securities and preferred and common equity securities and the ability of the issuers thereof to make principal, interest or distribution payments to us.
Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions, and we cannot assure you that those ratings will not be downgraded.
Some of our investments may be rated by Moody’s Investors Service, Fitch Ratings or Standard & Poor's. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value of these investments could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us. In addition, changes to the methodology and assumptions in rating commercial mortgage-backed securities by rating agencies may decrease the amount or availability of new issue commercial mortgage-backed securities rated in the highest investment grade rating category.
Risks Associated with Debt Financing
We have incurred, and may continue to incur, mortgage indebtedness and other borrowings, which increases our risk of loss due to foreclosure.
We have obtained, and may continue to obtain, lines of credit and long-term financing that may be secured by our properties and other assets. In some instances, we may acquire real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt. We have also incurred, and may continue to incur, mortgage debt on properties that we already own in order to obtain funds to acquire additional properties. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the dividends paid deduction and excluding net capital gain). We, however, can give you no assurance that we will be able to obtain such borrowings on satisfactory terms.
If we do mortgage a property and there is a shortfall between the cash flow from that property and the cash flow needed to service mortgage debt on that property, then the amount of cash available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of your investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We may give full or partial guaranties to lenders of mortgage debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
We may also obtain recourse debt to finance our acquisitions and meet our REIT distribution requirements. If we have insufficient income to service our recourse debt obligations, our lenders could institute proceedings against us to foreclose upon our assets. If a lender successfully forecloses upon any of our assets, our ability to pay cash distributions to our stockholders will be limited and you could lose all or part of your investment.
High mortgage interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable interest rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

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We may not be able to access financing sources on attractive terms, which could adversely affect our ability to execute our business plan.
We may finance our assets over the long term through a variety of means, including credit facilities, issuance of commercial mortgage-backed securities, and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long‑term financing for our assets. If our strategy is not viable, we will have to find alternative forms of long‑term financing for our assets. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders and funds available for operations, as well as for future business opportunities.
Disruptions in the financial and real estate markets could adversely affect the multifamily property sector’s ability to obtain financing from Fannie Mae and Freddie Mac, which could adversely impact us.
Fannie Mae and Freddie Mac are major sources of financing for the multifamily sector. Until recently, Fannie Mae and Freddie Mac had reported substantial losses and required significant amounts of additional capital. These losses coupled with the credit market’s poor perception of Fannie Mae and Freddie Mac, add to the considerable uncertainty surrounding the capital structure of both Fannie Mae and Freddie Mac. In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the credit market disruption that began in 2007, the U.S. Congress and Treasury undertook a series of actions to stabilize these government-sponsored enterprises and the financial markets. Pursuant to legislation enacted in 2008, the U.S. government placed both Fannie Mae and Freddie Mac under its conservatorship. Despite additional funding for both government-sponsored entities, the U.S. government has stated that it remains committed to reducing their portfolios. In August 2012, the U.S. Treasury modified its investment in Fannie Mae and Freddie Mac to accelerate the reduction of Fannie Mae’s and Freddie Mac’s investment portfolios and to require a sweep of all quarterly profits generated by Fannie Mae and Freddie Mac. In May 2014, the U.S. Senate Banking Committee approved legislation to wind down Fannie Mae and Freddie Mac and redesign the U.S. mortgage finance system, which legislation has to date not been acted on in the broader Senate. If new U.S. government legislation or regulations (i) heighten Fannie Mae’s and Freddie Mac’s underwriting standards, (ii) adversely affect interest rates and (iii) continue to reduce the amount of capital they can make available to the multifamily sector, it could reduce or remove entirely a vital resource for multifamily financing. Any potential reduction in loans, guarantees and credit enhancement arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s available financing and decrease the amount of available liquidity and credit that could be used to acquire and diversify our portfolio of multifamily assets as well as dispose of our multifamily assets upon our liquidation.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations may limit our flexibility and our ability to achieve our operating plans.
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.
We expect that we will incur additional indebtedness in the future. Increases in interest rates may increase our interest costs, which would reduce our cash flows and our ability to pay distributions. In addition, if we need to repay existing debt during periods of higher interest rates, we might have to sell one or more of our investments in order to repay the debt, which sale at that time might not permit realization of the maximum return on such investments.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and decrease the value of your investment.
Although, based on current lending market conditions, we do not expect to incur debt financing that would cause our total liabilities to exceed approximately 50% to 55% of the aggregate value of our assets, our charter limits our leverage to 300% of our net assets, and we may exceed this limit with the approval of the conflicts committee of our board of directors. High debt levels would cause us to incur higher interest charges and higher debt service payments and may also be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.

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Federal Income Tax Risks
Failure to qualify as a REIT would reduce our net earnings available for investment or distribution.
Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Internal Revenue Code. If we fail to qualify as a REIT for any taxable year after electing REIT status, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
You may have current tax liability on distributions you elect to reinvest in our common stock.
If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, you will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the shares of common stock received.
Failure to qualify as a REIT would subject us to federal income tax, which would reduce the cash available for distribution to you.
We expect to operate in a manner that is intended to cause us to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to you. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you.
Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:
•
In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (which is determined without regard to the dividends paid deduction or net capital gain). As a REIT, we are not subject to federal corporate income tax to the extent that we distributes 100% of our REIT taxable income each year.
•
We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
•
If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
•
If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by one of our taxable REIT subsidiaries or the sale met certain “safe harbor” requirements under the Internal Revenue Code.

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Our investments in debt instruments may cause us to recognize “phantom income” for federal income tax purposes even though no cash payments have been received on the debt instruments.
We may acquire debt instruments in the secondary market for less than their face amount. The amount of such discount will generally be treated as “market discount” for federal income tax purposes. Moreover, we may acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value.
In general, we will be required to accrue original issue discount on a debt instrument as taxable income in accordance with applicable federal income tax rules even though no cash payments may be received on such debt instrument.
In the event a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income. Similarly, we may be required to accrue interest income with respect to subordinate mortgage-backed securities at the stated rate regardless of when their corresponding cash payments are received.
As a result of these factors, there is a significant risk that we may recognize substantial taxable income in excess of cash available for distribution. In that event, we may need to borrow funds or take other action to satisfy the REIT distribution requirements for the taxable year in which this “phantom income” is recognized.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.
From time to time, we may generate taxable income greater than our net income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, where a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce your overall return.
To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of your investment.
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders incur and may limit the manner in which we conduct securitizations.
We may be deemed to be, or we may make investments in entities that own or are themselves deemed to be, taxable mortgage pools. Similarly, certain of our securitizations or other borrowings could be considered to result in the creation of a taxable mortgage pool for federal income tax purposes. As a REIT, provided that we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. However, certain categories of stockholders, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities that are

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not subject to tax on unrelated business income, we will incur a corporate-level tax on a portion of our income from the taxable mortgage pool. In that case, we are authorized to reduce and intend to reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax by the amount of such tax paid by us that is attributable to such stockholder’s ownership. Moreover, we would generally be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for federal income tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions or other financing arrangements.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (1) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (2) we are a “pension-held REIT,” (3) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or (4) the residual interests in any real estate mortgage investment conduits (“REMICs”), we acquire (if any) generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (3), gains realized on the sale of common stock by such tax-exempt stockholder may be subject to federal income tax as unrelated business taxable income under the Internal Revenue Code.
Classification of a securitization or financing arrangement we enter into as a taxable mortgage pool could subject us or certain of you to increased taxation.
We intend to structure our securitization and financing arrangements as to not create a taxable mortgage pool. However, if we have borrowings with two or more maturities and (1) those borrowings are secured by mortgages or mortgage-backed securities and (2) the payments made on the borrowings are related to the payments received on the underlying assets, then the borrowings and the pool of mortgages or mortgage-backed securities to which such borrowings relate may be classified as a taxable mortgage pool under the Internal Revenue Code. If any part of our investments were to be treated as a taxable mortgage pool, then our REIT status would not be impaired, provided we own 100% of such entity, but a portion of the taxable income we recognize may, under regulations to be issued by the Treasury Department, be characterized as “excess inclusion” income and allocated among our stockholders to the extent of and generally in proportion to the distributions we make to each stockholder. Any excess inclusion income would:
•
not be allowed to be offset by a stockholder’s net operating losses;
•
be subject to a tax as unrelated business income if a stockholder were a tax-exempt stockholder;
•
be subject to the application of federal income tax withholding at the maximum rate (without reduction for any otherwise applicable income tax treaty) with respect to amounts allocable to foreign stockholders; and
•
be taxable (at the highest corporate tax rate) to us, rather than to you, to the extent the excess inclusion income relates to stock held by disqualified organizations (generally, tax-exempt companies not subject to tax on unrelated business income, including governmental organizations).
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans that would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of assets, other than foreclosure property, deemed held primarily for sale to customers in the ordinary course of business where such sales do not qualify for a safe harbor under the Internal Revenue Code. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us.
It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through taxable REIT subsidiaries. However, to the extent that we engage in such activities through taxable REIT subsidiaries, the income associated with such activities may be subject to full corporate income tax.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets

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(other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% (20% for taxable years after 2017) of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Liquidation of assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.
Characterization of any repurchase agreements we enter into to finance our investments as sales for tax purposes rather than as secured lending transactions would adversely affect our ability to qualify as a REIT.
We may enter into repurchase agreements with a variety of counterparties to achieve our desired amount of leverage for the assets in which we invest. When we enter into a repurchase agreement, we generally sell assets to our counterparty to the agreement and receive cash from the counterparty. The counterparty is obligated to resell the assets back to us at the end of the term of the transaction. We believe that for federal income tax purposes we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that we did not own these assets during the term of the repurchase agreements, in which case we could fail to qualify as a REIT if tax ownership of these assets was necessary for us to meet the necessary income or asset tests.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (i) interest rate risk on liabilities incurred to carry or acquire real estate, (ii) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, or (iii) to manage risk with respect to the termination of prior hedging transactions described in (i) or (ii) above and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
Ownership limitations may restrict change of control or business combination opportunities in which you might receive a premium for your shares.
In order for us to qualify as a REIT for each taxable year beginning with the December 31, 2015 taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, and certain other entities including private foundations. To preserve our REIT qualification, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of any class or series of the outstanding shares of our capital stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.
Our ownership of and relationship with our taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall,

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no more than 25% (20% for taxable years after 2017) of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A domestic taxable REIT subsidiary will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. We cannot assure you that we will be able to comply with the 25% (or 20%, as applicable) value limitation on ownership of taxable REIT subsidiary stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s length transactions.
The IRS may challenge our characterization of certain income from offshore taxable REIT subsidiaries.
We may form offshore corporate entities treated as taxable REIT subsidiaries. If we form such subsidiaries, we may receive certain “income inclusions” with respect to our equity investments in these entities. We intend to treat such income inclusions, to the extent matched by repatriations of cash in the same taxable year, as qualifying income for purposes of the 95% gross income test but not the 75% gross income test. Because there is no clear precedent with respect to the qualification of such income inclusions for purposes of the REIT gross income tests, no assurance can be given that the IRS will not assert a contrary position. If such income does not qualify for the 95% gross income test, we could be subject to a penalty tax or we could fail to qualify as a REIT, in both events only if such inclusions (along with certain other non-qualifying income) exceed 5% of our gross income.
Dividends payable by REITs do not qualify for the reduced tax rates.
In general, the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates. While this tax treatment does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates, to perceive investments in REITs to be relatively less attractive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
Retirement Plan Risks

If you fail to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, you could be subject to criminal and civil penalties.
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit-sharing, section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. Fiduciaries and IRA owners investing the assets of such a plan or account in our common stock should satisfy themselves that:
•
the investment is consistent with their fiduciary and other obligations under ERISA and the Internal Revenue Code;
•
the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;
•
the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;
•
the investment in our shares, for which no trading market may exist, is consistent with the liquidity needs of the plan or IRA;
•
the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;
•
our stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually; and
•
the investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
     
With respect to the annual valuation requirements described above, we will provide an estimated value for our shares annually. We can make no claim whether such estimated value will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the Internal Revenue Service may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common stock. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages,

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penalties or other sanctions. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities - Market Information” of this Annual Report on Form 10-K.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties, and can subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. Additionally, the investment transaction may be undone. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries and IRA owners should consult with counsel before making an investment in our common shares.
If you invest in our shares through an IRA or other retirement plan, you may be limited in your ability to withdraw required minimum distributions.
If you establish an IRA or other retirement plan through which you invest in our shares, federal law may require you to withdraw required minimum distributions ("RMDs") from such plan in the future. Our share redemption program limits the amount of redemptions that can be made in a given year. Additionally, you will not be eligible to have your shares redeemed until you have held your shares for at least one year. As a result, you may not be able to have your shares redeemed at a time in which you need liquidity to satisfy the RMD requirements under your IRA or other retirement plan. Even if you are able to have your shares redeemed, such redemption may be at a price less than the price at which the shares were initially purchased, depending on how long you have held your shares. If you fail to withdraw RMDs from your IRA or other retirement plan, you may be subject to certain tax penalties.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.

ITEM 2.
PROPERTIES
Real Estate Investments
As of December 31, 2015, we owned interests in 36 multifamily properties. The following is a summary of our real estate properties as of December 31, 2015 (dollars in thousands):

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Multifamily Community Name
 
 
City and State
 
Number of Units
 
Date of Acquisition (2)
 
Purchase Price (1)
 
Year of Construction
 
Average Unit Size (Sq. Ft.)
 
Physical Occupancy Rate (3)
 
Effective Monthly Revenue per Unit (4)
Vista Apartment Homes
(5)(6) 
 
Philadelphia, PA
 
133
 
6/17/2011
 
$12,000
 
1961
 
876
 
88.7%
 
$1,494
Cannery Lofts
(7) (8) 
 
Dayton, OH
 
156
 
5/13/2011
 
$7,100
 
1838
 
1,030
 
95.5%
 
$1,072
Williamsburg
 
 
Cincinnati, OH
 
976
 
6/20/2012
 
$41,250
 
1966
 
1,099
 
91.6%
 
$891
Mosaic
 
 
Oklahoma City, OK
 
216
 
12/6/2012
 
$2,050
 
1974
 
721
 
88.4%
 
$614
Deerfield
(9) 
 
Hermantown, MN
 
166
 
3/21/2012
 
$10,300
 
1993
 
1,539
 
95.2%
 
$1,251
Ivy at Clear Creek
 
 
Houston, TX
 
244
 
3/28/2013
 
$11,750
 
1979
 
929
 
94.7%
 
$1,039
Retreat at Rocky Ridge
 
 
Hoover, AL
 
206
 
4/18/2013
 
$8,500
 
1986
 
869
 
92.2%
 
$870
Trailpoint at the Woodlands
 
 
Houston, TX
 
271
 
6/24/2013
 
$27,200
 
1981
 
859
 
87.8%
 
$1,211
Affinity at Winter Park
 
 
Winter Park, FL
 
192
 
6/27/2013
 
$10,100
 
1969
 
1,074
 
94.3%
 
$952
The Westside Apartments
 
 
Plano, TX
 
412
 
7/25/2013
 
$32,200
 
1984
 
862
 
93.9%
 
$1,094
Tech Center Square
 
 
Newport News, VA
 
208
 
9/9/2013
 
$18,250
 
1985
 
803
 
87.0%
 
$1,022
Verona Apartment Homes
 
 
Littleton, CO
 
276
 
9/30/2013
 
$30,600
 
1985
 
744
 
80.1%
 
$1,218
Skyview Apartment Homes
 
 
Westminster, CO
 
224
 
9/30/2013
 
$24,250
 
1985
 
748
 
92.4%
 
$1,155
The Nesbit Palisades
 
 
Alpharetta, GA
 
437
 
10/25/2013
 
$25,050
 
1985
 
954
 
92.7%
 
$978
Maxwell Townhomes
 
 
San Antonio, TX
 
314
 
12/16/2013
 
$22,500
 
1982
 
1,015
 
90.1%
 
$1,067
Meridian Pointe
 
 
Burnsville, MN
 
339
 
12/20/2013
 
$33,149
 
1988
 
982
 
81.7%
 
$1,193
Evergreen at Coursey Place
(10) 
 
Baton Rouge, LA
 
352
 
1/28/2014
 
$15,499
 
2003
 
999
 
86.1%
 
$1,225
Champion Farms
(11) 
 
Louisville, KY
 
264
 
1/28/2014
 
$6,395
 
1998
 
941
 
93.2%
 
$980
Fieldstone
(11) 
 
Woodlawn, OH
 
266
 
1/28/2014
 
$6,781
 
1928
 
942
 
92.9%
 
$1,015
Pinehurst
(12) 
 
Kansas City, MO
 
146
 
1/28/2014
 
$3,588
 
1983
 
816
 
92.5%
 
$795
Pheasant Run
(12) 
 
Lee's Summit, MO
 
160
 
1/28/2014
 
$4,277
 
1985
 
700
 
93.8%
 
$828
Retreat at Shawnee
(12) 
 
Shawnee, KS
 
342
 
1/28/2014
 
$5,369
 
1984
 
674
 
96.2%
 
$710
Conifer Place
(11) 
 
Norcross, GA
 
420
 
1/28/2014
 
$4,870
 
1981
 
1233
 
97.9%
 
$1,045
Stone Ridge
(11) 
 
Columbia, SC
 
188
 
1/28/2014
 
$5,176
 
1974
 
1026
 
86.7%
 
$766
Pines of York
(13) 
 
Yorktown, VA
 
248
 
1/28/2014
 
$8,087
 
1974
 
987
 
91.1%
 
$998
The Estates at Johns Creek
 
 
Alpharetta, GA
 
403
 
3/28/2014
 
$70,500
 
1999
 
1457
 
90.1%
 
$1,629
Chisholm Place
 
 
Plano, TX
 
142
 
5/5/2014
 
$15,000
 
1981
 
1149
 
97.9%
 
$1,265
Perimeter Circle
 
 
Atlanta, GA
 
194
 
5/19/2014
 
$29,500
 
1995
 
961
 
92.3%
 
$1,318
Perimeter 5550
 
 
Atlanta, GA
 
165
 
5/19/2014
 
$22,250
 
1995
 
906
 
94.6%
 
$1,148
Aston at Cinco Ranch
 
 
Katy, TX
 
228
 
6/26/2014
 
$32,300
 
2000
 
1015
 
84.2%
 
$1,297
Sunset Ridge
 
 
San Antonio, TX
 
324
 
9/4/2014
 
$35,000
 
1949
 
861
 
86.7%
 
$1,126
Calloway at Las Colinas
 
 
Irving, TX
 
536
 
9/29/2014
 
$48,500
 
1984
 
850
 
89.4%
 
$994
South Lamar Village
 
 
Austin, TX
 
208
 
2/26/2015
 
$24,000
 
1981
 
729
 
79.3%
 
$1,179
Heritage Pointe
 
 
Gilbert, AZ
 
458
 
3/19/2015
 
$36,000
 
1986
 
697
 
90.6%
 
$781
Yorba Linda
 
 
Yorba Linda, CA
 
400
 
6/1/2015
 
$118,000
 
1986
 
995
 
96.3%
 
$1,758
Villages at Bonita Glen
 
 
Chula Vista, CA
 
295
 
6/16/2015
 
$49,050
 
1979
 
716
 
95.3%
 
$1,340
 
 
 
 
 
10,509
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Purchase price excludes closing costs and acquisition expenses. For properties acquired through foreclosure, the purchase price reflects the contract purchase price of the note.
(2)
The date of acquisition reflects the date we acquired the note or the initial joint venture interest, where applicable.
(3)
Physical occupancy rate is defined as the units occupied as of December 31, 2015 divided by the total number of residential units
(4)
Effective monthly rental revenue per unit has been calculated based on the leases in effect as of December 31, 2015, adjusted for any tenant concessions, such as free rent. Effective monthly rental revenue per unit only includes base rents for occupied units, including affordable housing payments and subsidies. It includes other charges for storage, parking, pets, cleaning, clubhouse or other miscellaneous amounts.
(5)
In addition to its apartment units, Vista Apartment Homes contains five commercial spaces, one of which is occupied, and a number of antennae on the roof of the property that generate additional income.


(6)
Vista Apartment Homes originally served as the collateral for a non-performing promissory note that we purchased on June 17, 2011. The contract purchase price for the note was $12.0 million, excluding closing costs. On August 2, 2011, we were the successful bidder at a sheriff's sale and formally received title to the property.
(7)
In addition to its apartment units, Cannery Lofts contains twelve commercial spaces, nine of which are occupied, and one parking garage with parking spaces available to rent.
(8)
Cannery Lofts originally served as the collateral for a non-performing note that we purchased on May 13, 2011. On December 21, 2011, we entered into a settlement agreement with the borrower whereby the borrower agreed to a consensual foreclosure of the Cannery Note. We formally received title to the property on June 6, 2012.
(9)
Deerfield originally served as the collateral for a non-performing note that we purchased on March 21, 2012. On July 19, 2012, we were the successful bidder at a foreclosure sale and we formally received title to the property on January 22, 2013.
(10)
Joint venture interests in this property were originally purchased as a part of the Paladin acquisition in January 2014. The remaining interests in this joint venture were acquired on March 31, 2014.
(11)
Joint venture interests in this property were originally purchased as a part of the Paladin acquisition in January 2014. Purchase price includes allocated portion of total Paladin purchase price.
(12)
Joint venture interests in this property were originally purchased as a part of the Paladin acquisition in January 2014. The remaining interests in this joint venture were acquired on July 1, 2014.
(13)
Joint venture interests in this property were originally purchased as a part of the Paladin acquisition in January 2014. The remaining interests in this joint venture were acquired on November 25, 2014.
Paladin Acquisition - 2014
On July 18, 2013, Resource Real Estate Opportunity OP, LP (the “Operating Partnership”), our operating partnership, entered into an Agreement and Plan of Merger with RRE Charlemagne Holdings, LLC, a wholly-owned subsidiary of the Operating Partnership (“Merger Sub”), Paladin, and Paladin Realty Income Properties, L.P. (“Paladin OP”), whose sole general partner was Paladin, pursuant to which Paladin OP was to merge with and into Merger Sub (the “Merger”), with Merger Sub surviving as a wholly-owned subsidiary of the Operating Partnership.
On January 28, 2014, the parties completed the Merger resulting in the acquisition by the Operating Partnership of interests in 11 joint ventures that owned a total of 10 multifamily communities with more than 2,500 rentable units and two office properties that contained more than 75,000 rentable square feet. The Operating Partnership also acquired, as part of the Merger, a promissory note in the principal amount of $3.5 million issued by a consolidated joint venture which is eliminated in consolidation. This promissory note was secured by the co-venturer’s interests in such joint venture. The promissory note was repaid in 2015. The consideration for the Merger was $51.2 million exclusive of transaction costs.
At December 31, 2015, we have purchased the remaining joint venture interests in five of the joint ventures and sold our interests in two joint ventures, with the following joint ventures interests remaining:    
Joint Venture
 
Ownership %
 
Apartment Complex
 
Number
of Units
 
Property Location
Springhurst Housing Partners, LLC (1)
 
70%
 
Champion Farms
 
264
 
Louisville, KY
Glenwood Housing Partners I, LLC
 
83%
 
Fieldstone
 
266
 
Woodlawn, OH
FPA/PRIP Conifer, LLC (2)
 
42.5%
 
Conifer Place
 
420
 
Norcross, GA
DT Stone Ridge, LLC (3)
 
83.4%
 
Stone Ridge
 
188
 
Columbia, SC
(1) - On January 29, 2016, we sold our interest in Champion Farms to our joint venture partner.    
(2) - On January 27, 2016, we, along with our joint venture partner, sold Conifer Place.
(3) - During 2015, we increased our ownership in the joint venture from 77.7% to 83.4%.

The following chart describes the geographic breakdown of our multifamily rental properties as of December 31, 2015 (based on net book value of rental properties):
                                





ITEM 3.     LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.



PART II.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stockholder Information
As of March 21, 2016, we had 71,924,504 shares of common stock outstanding held by a total of 17,265 stockholders.
Market Information
There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder.
Estimated Value Per Share
On March 29, 2016, our board of directors approved an estimated value per share of the Company’s common stock of $10.83 based on the estimated market value of the Company’s portfolio of investments as of December 31, 2015. There have been no material changes between December 31, 2015 and the date of this filing that would impact the overall estimated value per share. We are providing this estimated value per share to assist broker-dealers that participated in our public offerings in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340 as required by the Financial Industry Regulatory Authority (“FINRA”). This valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association (“IPA”) in April 2013 (the “IPA Valuation Guidelines”).
Our conflicts committee, composed solely of all of our independent directors, is responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine the estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. With the approval of the conflicts committee, we engaged Duff & Phelps, LLC (“Duff & Phelps”) to provide a calculation of the range in estimated value per share of the our common stock as of December 31, 2015. Duff & Phelps held discussions with senior management of our Advisor and conducted appraisals, investigations, research, review and analysis as it deemed necessary. Duff & Phelps based this range in estimated value per share upon its estimates of the “as is” market values of our interests in 36 multifamily properties and one debt and one preferred equity investment. Duff & Phelps made adjustments to the aggregate estimated values of our investments to reflect balance sheet assets and liabilities provided by our management, which are disclosed in the this Annual Report on Form 10-K before calculating a range of estimated values based on the number of outstanding shares of our common stock as of December 31, 2015. The valuation report that Duff & Phelps prepared (the “Valuation Report”) summarized the key inputs and assumptions involved in the appraisal of each of our investments. Duff & Phelps’s valuation was designed to follow the prescribed methodologies of the IPA Valuation Guidelines. The methodologies and assumptions used to determine the estimated value of our investments are described further below.
Upon the conflicts committee’s receipt and review of the Valuation Report and in light of other factors considered by our conflicts committee and the conflicts committee’s own extensive knowledge of our assets and liabilities, the conflicts committee concluded that the range in estimated value per share of $10.15 to $11.57, with an approximate midpoint value of $10.83 per share, as indicated in the Valuation Report, was appropriate. Upon recommendation by the Advisor, the Conflicts Committee recommended to our board of directors that it adopt $10.83 as the estimated value per share of our common stock, which approximates the midpoint value. Our board of directors unanimously agreed to accept the recommendation of the conflicts committee and approved $10.83 as the estimated value per share of our common stock, which determination is ultimately and solely the responsibility of the board of directors.
The following table summarizes the material components of the December 31, 2015 net asset value (in thousands, except per share amounts):
 


 
Net Asset Value as of 12/31/15
 
Net Asset Value as of 12/31/15 (per share)
Investments
$
1,278,654

 
$
17.85

Cash
78,046

 
1.09

Other Assets
13,334

 
0.19

Mortgage Notes Payable and Credit Facilities
(572,663
)
 
(8.00
)
Other Liabilities
(21,497
)
 
(0.30
)
Net asset value
$
775,874

 
$
10.83


The table below sets forth the calculation of our estimated net asset value per share as of December 31, 2015, as well as the calculation of our prior estimated net asset value per share as of March 31, 2015:

 
 
December 31, 2015 Net Asset Value per Share
 
March 31, 2015 Net Asset Value per Share (1)
 
Change in Estimated Value per Share
Investments (2)
 
$
17.85

 
$
14.89

 
$
2.96

Cash (2)
 
1.09

 
1.93

 
(0.84
)
Other Assets (2)
 
0.19

 
0.48

 
(0.29
)
Mortgage Notes Payable and Credit Facilities (2)
 
(8.00
)
 
(6.47
)
 
(1.53
)
Other Liabilities
 
(0.30
)
 
(0.24
)
 
(0.06
)
 
 
$
10.83

 
$
10.59

 
$
0.24


(1)     For information relating to the March 31, 2015 net asset value per share and the assumptions and methodologies used by Duff and Phelps and our management, see our Current Report on Form 8-K filed on June 9, 2015.
(2)    The increase in both Investments and Mortgage Notes Payable and Credit Facilities, and decreases in both Other Assets and Cash were primarily due to the acquisitions of Yorba Linda Apartment Homes and Villages at Bonita Glen in June 2015.
    
As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. In particular, due in part to (i) the high concentration of our total assets in real estate, and (ii) the number of shares of our common stock outstanding, even modest changes in key assumptions made in appraising our real estate properties could have a very significant impact on the estimated value of our shares. The estimated value per share is not audited and does not represent the fair value of our assets less the fair value of our liabilities according to U.S. generally accepted accounting principles (“GAAP”), nor does it represent a liquidation value of the our assets and liabilities or the amount our shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt.

Methodology

Our goal in calculating an estimated value per share is to arrive at a value that is reasonable and supportable using what we deem to be appropriate valuation and appraisal methodologies and assumptions and a process that is in accordance with the IPA Valuation Guidelines. The following is a summary of the valuation and appraisal methodologies used to calculate the estimated value per share:

Real Estate
Independent Valuation Firm



Duff & Phelps was recommended by the Advisor, and approved by the conflicts committee. Duff & Phelps is engaged in the business of appraising commercial real estate properties and is not affiliated with the Company or the Advisor. Neither we, the Advisor or any of its affiliates have engaged Duff & Phelps for any other types of services during the two years prior to the date of this filing. Duff & Phelps and its affiliates may from time to time in the future perform other commercial real estate, appraisal and valuation services for us and our affiliates in transactions related to the properties that are the subjects of the appraisals, so long as such other services do not adversely affect the independence of the applicable Duff & Phelps appraiser as certified in the applicable appraisal reports.

The compensation Duff & Phelps received for its appraisal of our real estate properties was based on the scope of work and was not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of us, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of the appraisal. The appraisal was performed in accordance with the Code of Ethics & Standards of Professional Appraisal Practice of the Appraisal Institute and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The Valuation Report was reviewed, approved and signed by an individual with the professional designation of MAI (Member of the Appraisal Institute). The use of the Valuation Report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing the Valuation Report, Duff & Phelps did not, and was not requested to, solicit third party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.

Duff & Phelps collected all reasonably available material information that it deemed relevant in estimating the market value of our real estate properties and other investments. In conducting its investigations and analyses, Duff & Phelps took into account customary and accepted financial and commercial procedures and considerations as it deemed relevant. Although Duff & Phelps reviewed information supplied or otherwise made available by us or the Advisor for reasonableness, each assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to it by any other party and did not independently verify any such information. Duff & Phelps relied on our management or the Advisor to advise it promptly if any information previously provided became inaccurate or was required to be updated during the period of its review.

In performing its analysis of our real estate properties and other investments, Duff & Phelps made numerous other assumptions as of various points in time with respect to industry performance, general business, economic and regulatory conditions and other matters, many of which are beyond its control and our control, as well as certain factual matters. For example, unless specifically informed to the contrary, Duff & Phelps assumed that we had clear and marketable title to each real estate property appraised, that no title defects existed, that no hazardous materials had been present or were present previously, that no deed restrictions existed, and that the properties were responsibly owned and managed by competent property management. Furthermore, Duff & Phelps’s analyses, opinions and conclusions were necessarily based upon market, economic, financial and other circumstances and conditions existing as of or prior to the date of the appraisals, and any material change in such circumstances and conditions may affect Duff & Phelps’s analyses and conclusions. The Valuation Report contains other assumptions, qualifications and limitations that qualify the analysis, opinions and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from their appraised values. The Valuation Report, including the analyses, opinions and conclusions set forth in such report, is qualified by the assumptions, qualifications and limitations set forth in the Valuation Report.

The foregoing is a summary of the standard assumptions, qualifications and limitations that generally apply to the Valuation Report.

Real Estate Valuation

Duff & Phelps estimated the “as is” market value of each of our real estate properties owned as of December 31, 2015, using various methodologies, including the direct capitalization approach, discounted cash flow analyses and sales comparison approach, and relied primarily on the direct capitalization approach for our stabilized properties and discounted cash flow analyses for our unstabilized properties. The sales comparison approach was utilized as a secondary approach to value. The direct capitalization approach applies a current market capitalization rate to the properties’ net operating income. The capitalization rate was based on recent national overall capitalization rates, and the net operating income (NOI) was estimated based on Duff & Phelps’s expertise in appraising commercial real estate. The direct capitalization approach was utilized for 11 of our properties that have finished renovations and stabilized their operations. Discounted cash flow analyses focus on the operating cash flows expected from the properties and the anticipated proceeds of hypothetical sales at the end of assumed


holding periods, which are then discounted to their present value. Discounted cash flow analyses were utilized for 22 of our properties that were recently acquired and either not yet stabilized or are currently undergoing renovations. Three properties were valued at their sales price as they were sold shortly after December 31, 2015. Real estate is currently carried in our financial statements at its amortized cost basis. Duff & Phelps performed its appraisals as of December 31, 2015.

The following summarizes the range of overall capitalization rates used to arrive at the estimated market values of our 11 stabilized properties:
 
Range in Values
 
Weighted Average Basis
Overall Capitalization Rate
5.50% to 6.75%
 
6.32%

The following summarizes the range of terminal capitalization rates and discount rates used to arrive at the estimated market values of 19 unstabilized properties and three stabilized properties that are currently undergoing renovations:

 
Range in Values
 
Weighted Average Basis
Terminal Capitalization Rate
5.00% to 7.00%
 
5.62%
Discount Rate
6.75% to 8.50%
 
7.27%

While we believe that Duff & Phelps’ assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the calculation of the appraised value of our real estate properties and other assets and, thus, its estimated value per share. As of December 31, 2015, the majority of our real estate assets have non-stabilized occupancies. Appraisals may provide a sense of the value of the investment, but any appraisal of the property will be based on numerous estimates, judgments and assumptions that significantly affect the appraised value of the underlying property. An appraisal of a non-stabilized property, in particular, involves a high degree of subjectivity due to higher vacancy levels and uncertainties with respect to future market rental rates and timing of lease-up and stabilization. Accordingly, different assumptions may materially change the appraised value of the property.

The total appraised value of our real estate properties using the appraisal methodologies described above was $1.3 billion compared to a total of purchase price and capital expenditures, through December 31, 2015, of $950.3 million.

The table below illustrates the impact on the estimated value per share if the overall capitalization rates, terminal capitalization rates or discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to the real estate properties referenced in the table above. Additionally, the table below illustrates the impact on the estimated value per share if the overall capitalization rates, terminal capitalization rates or discount rates were adjusted by 5% in accordance with the IPA Valuation Guidelines, assuming all other factors remain unchanged. The table is only hypothetical to illustrate possible results if only one change in assumptions was made, with all other factors held constant. Further, each of these assumptions could change by more than 25 basis points or 5%.
 
 
Change in Estimated Value per Share
 
 
Increase of 25 Basis Points
 
Decrease of 25 Basis Points
 
Increase of 5%
 
Decrease of 5%
Overall Capitalization Rate
 
$10.70
 
$10.98
 
$10.66
 
$11.02
Terminal Capitalization Rate
 
$10.30
 
$11.42
 
$10.23
 
$11.51
Discount Rate
 
$10.77
 
$10.90
 
$10.74
 
$10.92

Debt and Preferred Equity Investments

Duff & Phelps estimated the market value of our debt and preferred equity investments, which totaled approximately $5.3 million, or less than 1% of our assets, by making mark-to-market adjustments to the outstanding balances owed to us under these investments as of December 31, 2015.






Other Assets and Liabilities
 
Duff & Phelps made adjustments to the aggregate estimated values of our investments to reflect balance sheet assets and liabilities provided by our management, which are disclosed in this Annual Report on Form 10-K.
 
Limitations of Estimated Value Per Share

As mentioned above, we are providing this estimated value per share to assist broker dealers that participated in our public offering in meeting their customer account statement reporting obligations. This valuation was performed in accordance with the provisions of the IPA Valuation Guidelines. The estimated value per share set forth above will first appear on the March 31, 2016 customer account statements that will be mailed in April 2016. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and this difference could be significant. The estimated value per share is not audited and does not represent the fair value of our assets or liabilities according to GAAP.

Accordingly, with respect to the estimated value per share, we can give no assurance that:

•
a stockholder would be able to resell his or her shares at the estimated value per share;

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

•
our shares of common stock would trade at the estimated value per share on a national securities exchange;

•
a third party would offer the estimated value per share in an arm’s-length transaction to purchase all or substantially all of our shares of common stock;

•
another independent third-party appraiser or third-party valuation firm would agree with the our estimated value per share; or

•
the methodology used to calculate our estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.
 
Further, the estimated value per share as of December 31, 2015 is based on the estimated value of our investments as of December 31, 2015. We did not make any adjustments to the valuation for the impact of other transactions occurring subsequent to December 31, 2015, including, but not limited to, (i) the issuance of common stock under the distribution reinvestment plan, (ii) net operating income earned and distributions declared, (iii) the redemption of shares and (iv) the potential conversion of convertible stock into common stock. The value of our shares will fluctuate over time in response to developments related to individual assets in our portfolio and the management of those assets and in response to the real estate and finance markets. Because of, among other factors, our high concentration of total assets in real estate and the number of shares of our common stock outstanding, any change in the value of individual assets in the portfolio, particularly changes affecting our real estate properties, could have a very significant impact on the value of our shares. The estimated value per share does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees for real estate properties, debt prepayment penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of debt.

Distribution Reinvestment Plan

In accordance with our distribution reinvestment plan, participants in the distribution reinvestment plan acquire shares of common stock under the plan at a price equal to the estimated value per share of our common stock. Commencing on the next distribution reinvestment plan purchase date, which is on March 31, 2016, participants will acquire shares of our common stock under the plan at a price equal to $10.83 per share.

As provided under the distribution reinvestment plan, for a participant to terminate participation effective for a particular distribution, we must have received notice of termination from the participant at least ten business days prior to the last day of the month to which the distribution relates. If a participant wishes to terminate participation in the distribution reinvestment


plan effective for the April 29, 2016 purchase date, participants must notify the Company in writing of such decision, and we must receive the notice by the close of business on April 14, 2016, which is ten business days prior to the last day of April 2016, as provided under the distribution reinvestment plan.

Notice of termination should be sent by facsimile to 877-894-1124 or by mail to c/o Resource Real Estate Opportunity REIT, Inc., P.O. Box 219169, Kansas City, Missouri 64121.

Share Redemption Program

The redemption price for shares eligible for redemption will be the greater of (a) 100% of the average issue price per share for all of the stockholder’s shares (as adjusted for any stock distributions, stock combinations, splits, recapitalizations and the like) or (b) 100% of the estimated value per share.

On March 29, 2016, our board of directors approved an estimated value per share of our common stock of $10.83. As a result, the price at which shares will now be redeemed under the share redemption program is $10.83. For a stockholder’s shares to be eligible for redemption in April 2016 or to withdraw a redemption request, we must receive a written notice from the stockholder or from an authorized representative of the stockholder in good order and on a form approved by the Company by March 31, 2016.

The complete share redemption program plan document is filed as an exhibit to our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011 and is available at the SEC’s website at http://www.sec.gov.
Unregistered Sale of Equity Securities
All securities sold by us during the year ended December 31, 2015 were sold in an offering registered under the Securities Act.
Redemption of Securities
During the quarter ended December 31, 2015, we redeemed shares as follows:
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of a
Publicly Announced
Plan or Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
October 2015
 
—
 
$—
 
—
 
(3)
November 2015
 
—
 
—
 
—
 
(3)
December 2015
 
103,895
 
10.59
 
103,895
 
(3)
 
 
103,895
 
 
 
 
 
 

(1)
All purchases of our equity securities by us in the three months ended December 31, 2015 were made pursuant to our share redemption program.
(2)
We announced the commencement of the program on June 16, 2010, and it was subsequently amended on September 29, 2011.
(3)
We currently limit the dollar value and number of shares that may yet be redeemed under the program as described below.
There are several limitations on our ability to repurchase shares under the program:      
We will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. Our board of directors will determine at least quarterly whether we have sufficient excess cash to repurchase shares. Generally, the cash available for redemption will be limited to proceeds from our distribution reinvestment plan plus, if we had positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.
Our share redemption program, including redemptions sought upon a stockholder's death or disability or upon confinement of a stockholder to a long-term care facility, will be available only for stockholders who purchase their shares directly from us or the transferees mentioned below, and is not intended to provide liquidity to any stockholder who acquired his or her shares by purchase from another stockholder. In connection with a request for redemption, the stockholder or his or her estate, heir or beneficiary will be required to certify to us that the stockholder acquired the shares to be repurchased either (1) directly from us


or (2) from the original investor by way of (i) a bona fide gift not for value to, or for the benefit of, a member of the investor's immediate or extended family (including the investor's spouse, parents, siblings, children or grandchildren and including relatives by marriage), (ii) through a transfer to a custodian, trustee or other fiduciary for the account of the investor or members of the investor's immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or (iii) operation of law.
Our board of directors, in its sole discretion, may suspend, terminate or amend our share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in our best interest. Our board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.
All redemption requests tendered were honored for the year ended December 31, 2015.
Distribution Information
During the year ended December 31, 2014, we paid aggregate distributions of $32.9 million, including $10.0 million of distributions paid in cash and $22.9 million of distributions reinvested in shares of our common stock through our distribution reinvestment plan. During the year ended December 31, 2015, we paid aggregate distributions of $42.2 million, including $13.3 million of distributions paid in cash and $29.0 million of distributions reinvested in shares of common stock through our distribution reinvestment plan, as follows:
Record Date
 
Per
Common
Share
 
Distribution Date
 
Distribution
invested in
shares of Common Stock
 
Net Cash
Distribution
 
Total
Aggregate
Distribution
January 29, 2015
 
$0.05
 
January 30, 2015
 
$
2,391

 
$
1,070

 
$
3,461

February 26, 2015
 
0.05
 
February 27, 2015
 
2,392

 
1,081

 
3,473

March 30, 2015
 
0.05
 
March 31, 2015
 
2,400

 
1,080

 
3,480

April 29, 2015
 
0.05
 
April 30, 2015
 
2,408

 
1,084

 
3,492

May 28, 2015
 
0.05
 
May 29, 2015
 
2,418

 
1,088

 
3,506

June 29, 2015
 
0.05
 
June 30, 2015
 
2,423

 
1,093

 
3,516

July 30, 2015
 
0.05
 
July 31, 2015
 
2,424

 
1,103

 
3,527

August 28, 2015
 
0.05
 
August 31, 2015
 
2,416

 
1,119

 
3,535

September 29, 2015
 
0.05
 
September 30, 2015
 
2,417

 
1,124

 
3,541

October 29, 2015
 
0.05
 
October 30, 2015
 
2,418

 
1,134

 
3,552

November 27, 2015
 
0.05
 
November 30, 2015
 
2,427

 
1,137

 
3,564

December 30, 2015
 
0.05
 
December 31, 2015
 
2,425

 
1,144

 
3,569

 
 
$0.60
 
 
 
$
28,959

 
$
13,257

 
$
42,216

Distributions declared, distributions paid and cash flows used in operating activities were as follows for the year ended December 31, 2015 and 2014 (in thousands):


 
 
For the Year Ended
Distributions Declared:
 
December 31, 2015
Cash
 
$
13,257

 
 
Distributions Reinvested (DRIP)
 
28,959

 
 
 
 
$
42,216

 
 
 
 
 
 
 
Sources of Distributions:
 
 
 
 
Debt financing
 
$
20,928

 
49.6
%
Dispositions
 
16,407

 
38.9
%
Operating activities
 
4,881

 
11.5
%
 
 
$
42,216

 
100
%
 
 
 
 
 
Cash Flow Used in Operations
 
$
(1,269
)
 
 
We have elected to be taxed as a REIT and to operate as a REIT beginning with our taxable year ended December 31, 2010. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our common stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our Board of Directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our Board of Directors deems relevant.
Our Board of Directors considers many factors before authorizing a cash distribution, including current and projected cash flow from operations, capital expenditure needs, general financial conditions and REIT qualification requirements. To the extent permitted by Maryland law, we may borrow funds, issue new securities or sell assets to make and cover our declared distributions, all or a portion of which could be deemed a return of capital. We may also fund such distributions from advances from our Advisor or sponsor or from our Advisor's deferral of its asset management fee, although we have no present intention to do so. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations.
Our net loss attributable to common stockholders for the year ended December 31, 2015 was $16.9 million and net cash used in operating activities was $1.3 million. Our cumulative cash distributions and net loss attributable to common stockholders from inception through December 31, 2015 are $91.7 million and $100.5 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flow from operating activities, proceeds from disposals of real estate assets and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities or gains from asset sales, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders. We will make distributions with respect to the shares of common stock in our sole discretion. No distributions will be made with respect to shares of our convertible stock.
Convertible Stock Grants by our Advisor
As of December 31, 2015, our Advisor has granted 21,210 shares of its convertible stock to employees of RAI and its subsidiaries and affiliates. Of these shares, 2,217 have been forfeited and returned to the Advisor as of December 31, 2015. The outstanding shares will vest ratably over the next three years, and 16,445 of these shares have vested as of December 31, 2015.

ITEM 6.
SELECTED FINANCIAL DATA
Selected financial data has been omitted as permitted under rules applicable to smaller reporting companies.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to our financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.  Statements contained in this “Management's Discussion and Analysis of


Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. See also “Forward-Looking Statements” preceding Part I.
Overview
We were formed on June 3, 2009.  We commenced active real estate operations on September 7, 2010 when we raised the minimum offering amount in our initial public offering.
We have acquired a diversified portfolio of discounted U.S. commercial real estate and real estate-related debt that has been significantly discounted due to the effects of recent economic events and high levels of leverage on U.S. commercial real estate, including properties that may benefit from extensive renovations that may increase their long-term values. Our targeted portfolio will consist of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”). However, we are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate and, accordingly, we may invest in other real estate assets or debt secured by real estate assets. At December 31, 2015, we currently hold approximately 44% of our total assets in categories (i) and 56% of our total assets in category (ii).
We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent our Advisor presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code and to maintain our exclusion from regulation as an investment company pursuant to the Investment Company Act, our portfolio composition may vary from what we have initially disclosed.
The primary portion of our initial public offering commenced on June 16, 2010 and closed on December 13, 2013. We continue to offer shares to our existing stockholders pursuant to our distribution reinvestment plan. We describe these offerings further in “Liquidity and Capital Resources” below.
Results of Operations
 As of December 31, 2015, we owned interests in a total of 36 multifamily properties. We also owned one performing loan and one preferred equity interest for which we earn interest and dividend income. During the year ended December 31, 2015, we acquired interests in four multifamily properties and we disposed of six properties.
Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
The following table sets forth the results of our operations (in thousands):


 
 
Years Ended
 
 
December 31,
 
 
2015
 
2014
Revenues:
 
 
 
 
Rental income
 
$
117,687

 
$
99,910

Interest and dividend income
 
638

 
359

Total revenues
 
118,325

 
100,269

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating - expenses
 
34,225

 
34,801

Rental operating - payroll
 
16,769

 
14,784

Rental operating - real estate taxes
 
13,154

 
9,611

  Subtotal- rental operating
 
64,148

 
59,196

Acquisition costs
 
5,811

 
9,833

Management fees
 
15,453

 
11,544

General and administrative
 
12,718

 
10,813

Provision for loan loss
 
130

 
—

Loss on disposal of assets
 
3,093

 
5,308

Depreciation and amortization expense
 
48,273

 
47,771

Total expenses
 
149,626

 
144,465

Loss before other (expenses) income
 
(31,301
)
 
(44,196
)
 
 
 
 
 
Other (expense) income:
 
 

 
 

Net gains on dispositions
 
36,041

 
10,484

Interest expense
 
(22,080
)
 
(14,911
)
Insurance proceeds in excess of cost basis
 
407

 
425

Net loss
 
(16,933
)
 
(48,198
)
Net loss attributable to noncontrolling interests
 
38

 
2,021

Net loss attributable to stockholders
 
$
(16,895
)
 
$
(46,177
)

The following table presents the results of operations separated into two categories, the results of operations of the 16 properties that we owned for the entirety of both periods presented and all other properties (including company level expenses to aide in comparability) for the years ended December 31, 2015 and 2014 (in thousands):


 
For the year ended
 
For the year ended
 
December 31, 2015
 
December 31, 2014
 
Properties owned both periods
 
All other
 
Total
 
Properties owned both periods
 
All other
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
  Rental income
$
50,751

 
$
66,936

 
$
117,687

 
$
45,714

 
$
54,196

 
$
99,910

  Interest and dividend income
2

 
636

 
638

 
5

 
354

 
359

      Total revenues
50,753

 
67,572

 
118,325

 
45,719

 
54,550

 
100,269

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
  Rental operating - expenses
15,713

 
18,512

 
34,225

 
16,381

 
18,420

 
34,801

  Rental operating - payroll
7,790

 
8,979

 
16,769

 
7,461

 
7,323

 
14,784

  Rental operating - real estate taxes
4,840

 
8,314

 
13,154

 
4,719

 
4,892

 
9,611

  Subtotal - rental operating expenses
28,343

 
35,805

 
64,148

 
28,561

 
30,635

 
59,196

  Acquisition costs
—

 
5,811

 
5,811

 
—

 
9,833

 
9,833

  Management fees
2,263

 
13,190

 
15,453

 
1,999

 
9,545

 
11,544

  General and administrative
2,667

 
10,051

 
12,718

 
2,552

 
8,261

 
10,813

  Provision for loan loss
—

 
130

 
130

 
—

 
—

 
—

  Loss on disposal of assets
861

 
2,232

 
3,093

 
2,558

 
2,750

 
5,308

  Depreciation and amortization expense
19,339

 
28,934

 
48,273

 
20,768

 
27,003

 
47,771

     Total expenses
53,473

 
96,153

 
149,626

 
56,438

 
88,027

 
144,465

    Loss before other expenses
(2,720
)
 
(28,581
)
 
(31,301
)
 
(10,719
)
 
(33,477
)
 
(44,196
)
 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
  Net gains on dispositions
—

 
36,041

 
36,041

 
—

 
10,484

 
10,484

  Interest expense
(5,827
)
 
(16,253
)
 
(22,080
)
 
(5,553
)
 
(9,358
)
 
(14,911
)
  Insurance proceeds in excess of cost basis
—

 
407

 
407

 
56

 
369

 
425

Net loss
(8,547
)
 
(8,386
)
 
(16,933
)
 
(16,216
)
 
(31,982
)
 
(48,198
)
Net loss attributable to noncontrolling interests
—

 
38

 
38

 
—

 
2,021

 
2,021

Net loss attributable to stockholders
$
(8,547
)
 
$
(8,348
)
 
$
(16,895
)
 
$
(16,216
)
 
$
(29,961
)
 
$
(46,177
)

Revenues: Rental income increased by $17.8 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The $5.0 million increase in rental revenue for the 16 properties that we owned during the years ended December 31, 2015 and 2014 reflects implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations and was primarily comprised of:


Multifamily Community Name
 
Rental increase (in thousands)
 
Increase/(decrease) in occupancy
 
Increase in Effective Monthly Revenue per Unit (in dollars)
The Westside Apartments
 
$
725

 
3.7%
 
$126
The Nesbit Palisades
 
628

 
(0.5)%
 
$143
Retreat at Rocky Ridge
 
489

 
16.4%
 
$83
Maxwell Townhomes
 
484

 
4.6%
 
$111
Williamsburg
 
420

 
1.2%
 
$28
Skyview
 
410

 
4.3%
 
$124
Verona
 
372

 
(0.1)%
 
$135
Trailpoint at the Woodlands
 
351

 
1.8%
 
$108
Ivy at Clear Creek
 
350

 
4.4%
 
$83
Affinity at Winter Park
 
330

 
8.3%
 
$91
All other, net
 
478

 
2.8%
 
$251
 
 
$
5,037

 
 
 
 
    
The $12.7 million increase in the All Other category includes $27.4 million of revenue from the operations of 20 properties purchased from January 2014 to December 2015 offset by a decrease of $14.7 million related to the eight properties that were sold during the same period.
    
Expenses:  Rental operating expense increased by $5.0 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. Rental operating expenses for the 16 properties owned during both the year ended December 31, 2015 and the year ended December 31, 2014 decreased by $218,000, and was comprised primarily of insurance costs and uncapitalizable construction related expenses at these properties. Rental operating expenses in the All Other category increased by $5.2 million primarily due to a $3.4 million increase in real estate taxes related to the acquisition of additional properties and a $1.7 million increase in payroll related costs.
    
Acquisition costs decreased by $4.0 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014. In the year ended December 31, 2014, we acquired 18 multifamily properties, including the Paladin acquisition, as compared to the acquisition of four properties during the year ended December 31, 2015.
    
Management fees increased by $3.9 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 primarily due to the $3.0 million increase in the asset management fee paid to the Advisor due to recent acquisitions. The asset management fee is based on the higher of the cost or appraised value of real estate investments.

General and administrative expenses increased by $1.9 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 primarily due to a $1.8 million increase in payroll-related expenses due to the increase in the number of assets managed by our Advisor.

In May 2015, we agreed to receive $130,000 less than the book value of one of our loans held for investment. As a result, we recorded a provision for loan loss related to this payoff. There were no such charges during the year ended December 31, 2014.
Loss on disposal of assets decreased by $2.2 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 due to the timing of the replacement of appliances at our rental properties in conjunction with unit upgrades.

Depreciation and amortization is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases which are amortized over a period of approximately six to eight months after acquisition. The differences in depreciation and amortization during the year ended December 31, 2015, as compared to the year ended December 31, 2014, were as follows:


 
Properties owned both periods
 
All Other
 
Total
Depreciation
$
3,553

 
$
5,563

 
$
9,116

Amortization of intangibles
(4,982
)
 
(3,632
)
 
(8,614
)
 
$
(1,429
)
 
$
1,931

 
$
502


Gain on sale on investments increased by $25.6 million due to the sale of six properties during the year ended December 31, 2015 as compared to the sale of four properties during the year ended December 31, 2014, as follows (in thousands):
Multifamily Community
 
Location
 
Sales Date
 
Contract Sales price
 
Gain (Loss) on Sale
2015 Dispositions
 

 

 

 

The Alcove Apartments
 
Houston, Texas
 
January 26, 2015
 
$
11,050

 
$
3,784

107th Avenue Apartments
 
Omaha, Nebraska
 
January 29, 2015
 
250

 
50

The Redford Apartments
 
Houston, Texas
 
February 27, 2015
 
32,959

 
15,303

Cityside Apartments
 
Houston, Texas
 
March 2, 2015
 
24,500

 
10,028

One Hundred Chevy Chase
 
Lexington, Kentucky
 
June 30, 2015
 
13,500

 
4,386

The Reserve at Mt. Moriah
 
Memphis, Tennessee
 
September 18, 2015
 
5,425

 
2,490


 

 

 
$
87,684

 
$
36,041


 

 

 

 

2014 Dispositions:
 

 

 

 

Governor Park
 
San Diego, California
 
March 6, 2014
 
$
456

 
$
—

Campus Club
 
Tampa, Florida
 
June 16, 2014
 
10,500

 
2,602

Hilltop Village
 
Kansas City, Missouri
 
July 1, 2014
 
—

 
(493
)
Arcadia at Westheimer
 
Houston, Texas
 
September 19, 2014
 
18,100

 
8,375


 

 

 
$
29,056

 
$
10,484


Interest expense increased by $7.2 million for the year ended December 31, 2015 as compared to the year ended December 31, 2014 as a result of 22 additional mortgages either entered into or assumed during or after the year ended December 31, 2014.
Liquidity and Capital Resources
We have derived the capital required to purchase real estate investments and conduct our operations from the proceeds of our private and public offerings, secured or unsecured financings from banks, proceeds from the sale of real estate, and cash flow generated by our real estate and real estate-related investments.
We have allocated a portion of the funds we raised in our initial public offering to preserve capital for our investors by supporting the maintenance and viability of the properties we have acquired and those properties that we may acquire in the future.  If these allocated amounts and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold.  We cannot assure you that we will be able to access additional funds upon acceptable terms when we need them.
Capital Expenditures.
We deployed a total of $43.0 million during the year ended December 31, 2015 for capital expenditures. The properties in which we deployed the most capital during the year are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties below: (in thousands):


 
 
Capital deployed
during the
year ended
 
Remaining capital
budgeted
Property
 
December 31, 2015
 
The Estates At John's Creek
 
$
4,733

 
$
1,685

Sunset Ridge
 
2,631

 
$
1,924

Calloway at Las Colinas
 
2,939

 
$
4,740

Meridian Pointe
 
2,880

 
$
490

Aston at Cinco Ranch
 
3,797

 
$
941

All other properties
 
26,038

 
$
35,656

 
 
$
43,018

 
 
Initial Public Offering.  
The primary portion of our initial public offering closed on December 13, 2013. On December 26, 2013, the unsold primary offering shares were deregistered and, on December 30, 2013, the registration of the shares issuable pursuant to the distribution reinvestment plan was continued pursuant to a Registration Statement on Form S-3.
We continue to offer up to 7.5 million shares of common stock pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares at a price equal to our current estimated value per share at that time, which is currently $10.83.
Gross offering proceeds.
As of December 31, 2015, an aggregate of 72.3 million shares of our $0.01 par value common stock have been issued as follows (dollars in thousands):
 
 
Shares Issued
 
Gross Proceeds
Shares issued through private offering
 
1,263,727

 
$
12,582

Shares issued through primary public offering
 
62,485,461

 
622,077

Shares issued through stock distributions
 
2,132,266

 
—

Shares issued through distribution reinvestment plan
 
6,436,698

 
62,893

Shares issued in conjunction with the Advisor's initial investment,
net of 4,500 share conversion
 
15,500

 
155

    Total
 
72,333,652

 
$
697,707

Shares redeemed
 
(716,535
)
 
 
Total shares outstanding as of December 31, 2015
 
71,617,117

 
 
Credit Facilities
The following is a summary of our credit facilities:
 
 
Balance Outstanding at
 
Current Availability at
 
Balance Outstanding at
 
 
 
 
 
 
 
Weighted Average Interest Rate for the Year Ended
Lender
 
December 31, 2015
 
December 31, 2014
 
Maturity
Date
 
Interest Rate Basis
 
Current Interest Rate
 
December 31, 2015
 
December 31, 2014
Bank of America
 
$
21,894

 
$
5,732

 
$
10,086

 
5/23/2017
 
LIBOR plus 3%
 
3.43%
 
3.26%
 
3.11%
US Bank
 
23,000

 
—

 
23,000

 
12/27/2017
 
LIBOR plus 1.95%
 
2.38%
 
2.19%
 
2.17%
PNC Bank
 
12,500

 
—

 
12,500

 
12/20/2018
 
LIBOR plus 2%
 
2.43%
 
2.22%
 
2.19%
 
 
$
57,394

 
$
5,732

 
$
45,586

 
 
 
 
 
 
 
 
 
 
On December 2, 2011, through our operating partnership, we entered into a secured revolving credit facility, or the Bank of America Credit Facility, with Bank of America, N.A.  On May 23, 2013, we amended the Bank of America Credit Facility to


increase the amount we may borrow under the Credit Facility from $25.0 million to $50.0 million, or the Facility Amount. Draws under the Bank of America Credit Facility are secured by certain of our properties with an aggregate value of $55.5 million and are guaranteed by us. We are able to draw up to 50% of the aggregate value of the properties securing the facility. 
      The Bank of America Credit Facility, as amended, matures on May 23, 2017, and may be extended to May 23, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Bank of America Credit Facility. We are required to make monthly interest-only payments.  We also may prepay the Bank of America Credit Facility in whole or in part at any time without premium or penalty. For the years ended December 31, 2015 and 2014, we had weighted average borrowings of $13.8 million and $9.0 million, respectively, under the Bank of America Credit Facility.
Our operating partnership’s obligations with respect to the Bank of America Credit Facility are guaranteed by us, pursuant to the terms of a guaranty dated as of December 2, 2011, or the Guaranty.  The Bank of America Credit Facility and the Guaranty contain restrictive covenants for maintaining a certain tangible net worth and a certain level of liquid assets, and for restricting the securing of additional debt as follows:
•
we must maintain a minimum tangible net worth equal to at least (i) 200% of the outstanding principal amount of the Bank of America Credit facility and (ii) $20.0 million;
•
we must also maintain unencumbered liquid assets with a market value of not less than the greater of (i) $5.0 million or (ii) 20% of the outstanding principal amount of the Bank of America Credit Facility; and
•
we may not incur any additional secured or unsecured debt without Bank of America's prior written consent and approval, which consent and approval is not to be unreasonably withheld.
We are currently in compliance with all such covenants. Although we expect to remain in compliance with these covenants for the duration of the term of the Bank of America Credit Facility, depending upon our future operating performance, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.
On December 20, 2013, we, through a wholly-owned subsidiary, entered into a secured revolving credit facility, (the "Jefferson Point Credit Facility") with PNC Bank, National Association.  Draws under the Jefferson Point Credit Facility are secured by the assets of Tech Center Square Apartments (formerly known as the Jefferson Point Apartments). We provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance.)
The Jefferson Point Credit Facility includes both a debt service coverage covenant and a tangible net worth covenant. In November 2014 and March 2016, we amended the Jefferson Point Credit Facility. In accordance with the amendments, the debt service coverage covenant is only required to be complied with as of September 30, 2016 and periods thereafter. We were in compliance with all covenants at December 31, 2015.    
On December 27, 2013, we, through a wholly-owned subsidiary, entered into a secured revolving credit facility, ("the Brentdale Credit Facility") with U.S. Bank National Association.  Draws under the Brentdale Credit Facility are secured by the assets of Westside Apartments. We provided a $6.5 million repayment guarantee. The Brentdale Credit Facility matures on December 27, 2017, and may be extended to December 27, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Brentdale Credit Facility.
The Brentdale Credit Facility includes both a net worth, liquidity and leverage covenant and a property debt service coverage covenant. In June 2015, we amended the Brentdale Credit Facility to amend the property debt service coverage ratio. We were in compliance with the covenant requirements at December 31, 2015.
Mortgage Debt
During the year ended December 31, 2015, we borrowed an additional $139.3 million through additional mortgages on our rental properties.     


The following is a summary of our mortgage notes payable (in thousands, except percentages):
 
 
 
 
Premium (Discount)
 
Carrying Value
 
Carrying Value
 
 
 
 
 
 
 
 
 
 
Outstanding borrowings
 
 
 
 
 
 
 
 
 
 
 
Collateral
 
December 31, 2015
 
December 31,
2014
 
Maturity
Date
 
Margin
 
Annual
Interest Rate
 
Average
Monthly Debt
Service
Vista Apartment Homes
 
$
15,573

 
$
—

 
$
15,573

 
$
15,900

 
1/1/2022
 
2.29%
 
2.72
%
(1)(5) 
$
65

Cannery Lofts
 
8,148

 
—

 
8,148

 
8,190

 
9/1/2020
 
3.30%
 
3.73
%
(1)(5) 
40

Deerfield
 
10,517

 
—

 
10,517

 
10,530

 
11/1/2020
 
—
 
4.66
%
(2)(5) 
54

Ivy at Clear Creek
 
8,431

 
—

 
8,431

 
8,574

 
11/1/2023
 
2.41%
 
2.84
%
(1)(4) 
31

Trailpoint at the Woodlands
 
19,013

 
—

 
19,013

 
19,335

 
11/1/2023
 
2.41%
 
2.84
%
(1)(4) 
69

Verona Apartment Homes
 
22,402

 
—

 
22,402

 
22,843

 
1/1/2019
 
—
 
3.60
%
(2)(5) 
106

Skyview Apartment Homes
 
18,089

 
—

 
18,089

 
18,446

 
1/1/2019
 
—
 
3.60
%
(2)(5) 
85

The Nesbit Palisades
 
20,298

 
—

 
20,298

 
20,298

 
7/1/2024
 
1.95%
 
2.38
%
(1)(3) 
58

Maxwell Townhomes
 
13,850

 
—

 
13,850

 
14,089

 
1/1/2022
 
—
 
4.32
%
(2)(5) 
71

Champion Farms (6)
 
—

 
—

 
—

 
16,634

 
7/1/2016
 
—
 
6.14
%
(2)(3) 
85

Fieldstone
 
15,332

 
—

 
15,332

 
15,804

 
6/26/2016
 
2.40%
 
2.83
%
(1)(4) 
76

Pinehurst
 
4,111

 
—

 
4,111

 
4,239

 
1/1/2017
 
—
 
5.58
%
(2)(5) 
23

Pheasant Run
 
6,250

 
100

 
6,350

 
6,407

 
10/1/2017
 
—
 
5.95
%
(2)(3) 
31

Retreat of Shawnee
 
13,090

 
164

 
13,254

 
13,522

 
2/1/2018
 
—
 
5.58
%
(2)(5) 
78

Conifer Crossing
 
27,074

 
—

 
27,074

 
27,762

 
9/1/2016
 
2.50%
 
2.93
%
(1)(5) 
122

Evergreen at Coursey Place
 
27,548

 
123

 
27,671

 
28,117

 
8/1/2021
 
—
 
5.07
%
(2)(5) 
154

Pines of York
 
15,267

 
(363
)
 
14,904

 
15,097

 
12/1/2021
 
—
 
4.46
%
(2)(5) 
80

Estates at Johns Creek
 
50,000

 
—

 
50,000

 
50,000

 
7/1/2020
 
—
 
3.38
%
(2)(3) 
211

Chisholm Place
 
11,587

 
—

 
11,587

 
11,587

 
6/1/2024
 
2.39%
 
2.82
%
(1)(3) 
39

Perimeter Circle
 
17,657

 
—

 
17,657

 
18,007

 
7/1/2019
 
—
 
3.42
%
(2)(5) 
81

Perimeter 5550
 
13,935

 
—

 
13,935

 
14,211

 
7/1/2019
 
—
 
3.42
%
(2)(5) 
64

Aston at Cinco Ranch
 
23,772

 
—

 
23,772

 
24,162

 
10/1/2021
 
—
 
4.34
%
(2)(5) 
120

Sunset Ridge 1
 
20,121

 
329

 
20,450

 
20,930

 
11/1/2020
 
—
 
4.58
%
(2)(5) 
113

Sunset Ridge 2
 
3,002

 
45

 
3,047

 
3,109

 
11/1/2020
 
—
 
4.54
%
(2)(5) 
16

Calloway at Las Colinas
 
35,740

 
—

 
35,740

 
36,375

 
12/1/2021
 
—
 
3.87
%
(2)(5) 
171

South Lamar Village
 
12,682

 
—

 
12,682

 
—

 
8/1/2019
 
—
 
3.64
%
(2)(5) 
59

Heritage Pointe
 
26,280

 
—

 
26,280

 
—

 
4/1/2025
 
1.88
 
2.31
%
(1)(3) 
87

Yorba Linda
 
67,500

 
—

 
67,500

 
—

 
6/1/2020
 
1.75
 
2.18
%
(1)(3) 
154

Villages at Bonita Glen
 
27,265

 
2,276

 
29,541

 
—

 
10/1/2023
 
—
 
5.33
%
(2)(5) 
152

Stone Ridge
 
5,350

 
—

 
5,350

 
—

 
12/1/2022
 
1.86%
 
2.29
%
(1)(5) 
21

 
 
$
559,884

 
$
2,674

 
$
562,558

 
$
444,168

 
 
 
 
 
 
 
 
 
(1)
Variable rate based on one-month LIBOR (0.4295% as of December 31, 2015).
(2)
Fixed rate.
(3) Monthly interest-only payment required.
(4) Monthly fixed principal plus variable interest payment required.
(5) Fixed monthly principal and interest payment required.
(6)
Mortgage note payable for Champion Farms included in liabilities of assets held for sale at December 31, 2015.



At December 31, 2015, the weighted average interest rate of all our outstanding indebtedness was 3.55%.
Based on current lending market conditions, we expect that the debt financing we incur, on a total portfolio basis, will not exceed 50% to 55% of the cost of our real estate investments (before deducting depreciation or other non-cash reserves) plus the value of our other assets (53% as of December 31, 2015). We may also increase the amount of debt financing we use with respect to an investment over the amount originally incurred if the value of the investment increases subsequent to our acquisition and if credit market conditions permit us to do so. Our charter limits us from incurring debt such that our total liabilities may not exceed 75% of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets, although we may exceed this limit under certain circumstances. We expect that our primary liquidity source for acquisitions and long-term funding will include proceeds from dispositions and, to the extent we co-invest with other entities, capital from any future joint venture partners. We may also pursue a number of potential other funding sources, including mortgage loans, portfolio level credit lines and government financing.
Organization and Offering Costs
Our Advisor has advanced funds to us for certain organization and offering costs.  We reimbursed the Advisor for all of the expenses paid or incurred by our Advisor or its affiliates on behalf of us or in connection with the services provided to us in relation to our initial public offering.  This includes all organization and offering costs of up to 2.5% of gross offering proceeds, but only to the extent that such reimbursement did not cause organization and offering expenses (other than selling commissions and the dealer manager fee) to exceed 2.5% of gross offering proceeds as of the date of such reimbursement. As of December 31, 2015, we had directly paid for organization and offering costs totaling $6.7 million.    
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor. We make payments to our Advisor in connection with the acquisition of real estate investments and for the management of our assets and costs incurred by our Advisor in providing services to us. We describe these payments in more detail in Note 16 of the notes to our consolidated financial statements.
Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended December 31, 2015 did not exceed the charter imposed limitation.
Distributions
For the year ended December 31, 2014, we paid aggregate cash distributions of $32.9 million, including $10.0 million of distributions paid in cash and $22.9 million of distributions reinvested in shares of our common stock through our distribution reinvestment plan. For the year ended December 31, 2015, we paid aggregate distributions of $42.2 million, including $13.3 million of distributions paid in cash and $29.0 million of distributions reinvested in shares of our common stock through our distribution reinvestment plan, as follows:


Record Date
 
Per
Common
Share
 
Distribution Date
 
Distribution
invested in
shares of Common Stock
 
Net Cash
Distribution
 
Total
Aggregate
Distribution
January 29, 2015
 
$0.05
 
January 30, 2015
 
$
2,391

 
$
1,070

 
$
3,461

February 26, 2015
 
0.05
 
February 27, 2015
 
2,392

 
1,081

 
3,473

March 30, 2015
 
0.05
 
March 31, 2015
 
2,400

 
1,080

 
3,480

April 29, 2015
 
0.05
 
April 30, 2015
 
2,408

 
1,084

 
3,492

May 28, 2015
 
0.05
 
May 29, 2015
 
2,418

 
1,088

 
3,506

June 29, 2015
 
0.05
 
June 30, 2015
 
2,423

 
1,093

 
3,516

July 30, 2015
 
0.05
 
July 31, 2015
 
2,424

 
1,103

 
3,527

August 28, 2015
 
0.05
 
August 31, 2015
 
2,416

 
1,119

 
3,535

September 29, 2015
 
0.05
 
September 30, 2015
 
2,417

 
1,124

 
3,541

October 29, 2015
 
0.05
 
October 30, 2015
 
2,418

 
1,134

 
3,552

November 27, 2015
 
0.05
 
November 30, 2015
 
2,427

 
1,137

 
3,564

December 30, 2015
 
0.05
 
December 31, 2015
 
2,425

 
1,144

 
3,569

 
 
$0.60
 
 
 
$
28,959

 
$
13,257

 
$
42,216



Cash distributions paid since the inception were as follows (in thousands, except per share data):
Fiscal Year Paid
 
Per
Common
Share
 
Distribution
invested in
shares of Common Stock
 
Net Cash
Distribution
 
Total
Aggregate
Distribution
2012
 
$0.15
 
$
1,052

 
$
841

 
$
1,893

2013
 
0.4067
 
9,984

 
4,757

 
14,741

2014
 
0.4833
 
22,898

 
9,959

 
32,857

2015
 
0.60
 
28,959

 
13,257

 
42,216

 
 
$1.64
 
$
62,893

 
$
28,814

 
$
91,707


Since our formation, we have declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of its common stock outstanding. On December 31, 2013, there was a stock dividend declared that was distributed on January 13, 2014. In connection with these stock distributions, we have increased our accumulated deficit by $21.3 million as of December 31, 2015.
Our net loss attributable to common shareholders for the year ended December 31, 2015 was $16.9 million and net cash used in operating activities was $1.3 million. Our cumulative cash distributions and net loss attributable to common stockholders from inception through December 31, 2015 were $91.7 million and $100.5 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from the disposal of real estate and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities or gains from asset sales, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.
Funds from Operations, Modified Funds from Operations and Adjusted Funds from Operations attributable to common stockholders
Funds from operations attributable to common stockholders, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined


by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests.  We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient.  As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance.  Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.  In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but are not limited to: i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”) and (iii) other commercial real estate assets, principally non-performing or distressed loans, including but not limited to first- and second-priority mortgage loans, mezzanine loans, B-Notes and other loans.
Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations attributable to common stockholders, or MFFO, as defined by the Investment Program Association, or IPA.  MFFO excludes from FFO the following items:
(1)
acquisition fees and expenses;
(2)
straight-line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges;
(6)
gains or losses from the early extinguishment of debt;
(7)
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;
(8)
gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our acquisition stage is complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired.  Although MFFO includes other adjustments, the exclusion of acquisition expenses is the most significant adjustment to us at the present time, as we are currently in our acquisition stage.  Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.    
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations.  Many of the adjustments in arriving at MFFO are not applicable to us.  Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:
•
Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed.  Both of these acquisition costs have been and will continue to be funded from the proceeds of our offering and not from operations.  We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment


and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those paid to our Advisor or third parties.
•
Adjustments for straight-line rents and amortization of discounts and premiums on debt investments.  In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
•
Adjustments for amortization of above or below market intangible lease assets.  Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue.  Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
•
Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments.  Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance.  As these gains or losses relate to underlying long-term assets and liabilities, 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. In particular, because GAAP impairment charges 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 MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.
•
Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price.  Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations.  By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our acquisition stage is completed.  We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry.  MFFO is useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments.  However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our acquisition stage is completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.
As an opportunity REIT, a core element of our investment strategy and operations is the acquisition of distressed and value-add properties and the rehabilitation and renovation of such properties in an effort to create additional value in such properties.  As part of our operations, we intend to realize gains from such value-add efforts through the strategic disposition of such properties after we have added value through the execution of our business plan.  As we do not intend to hold any of our properties for a specific amount of time, we intend to take advantage of opportunities to realize gains from our value-add efforts on a regular basis during the course of our operations as such opportunities become available, in all events subject to the rules regarding "prohibited transactions" of real estate investment trusts of the Internal Revenue Code.  Therefore, we also use adjusted funds from operations attributable to common stockholders, or AFFO, in addition to FFO and MFFO when evaluating our operations.  We calculate AFFO by adding/subtracting gains/losses realized on sales of our properties from MFFO.  We believe that AFFO presents useful information that assists investors and analysts in the assessment of our operating performance as it is reflective of the impact that regular, strategic property dispositions have on our continuing operations.
Core to our business plan is the acquisition of distressed assets at deep discounts.  These assets are operationally distressed at the time of purchase. Such assets often require substantial investments of capital and increased operating costs after acquisition to convert these assets into stable, cash flowing properties.  These capital expenditures are central to our revitalization strategy and are critical to creating value and restoring assets to their optimal performance.  These planned expenditures are necessary


primarily during the first 12 to 24 months after we take operating control of an asset and often result in negative, or reduced, net operating income, MFFO and AFFO during this turnaround stage.
Neither FFO, MFFO nor AFFO should be considered as an alternative to net income (loss) attributable to common stockholders, nor as an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions.  In particular, as we may continue to acquire properties as part of our ongoing operations, acquisition costs and other adjustments that are increases to MFFO and AFFO are, and may continue to be, a significant use of cash.  Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements.  Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs.
The following section presents our calculation of FFO, MFFO and AFFO and provides additional information related to our operations (in thousands, except per share amounts).  Amounts reported in the tables below include adjustments attributable to noncontrolling interests.
 
Years Ended December 31,
 
2015
 
2014
Net loss attributable to common stockholders – GAAP
$
(16,895
)
 
$
(46,177
)
Net gain on dispositions
(36,041
)
 
(10,484
)
Depreciation expense
40,808

 
31,296

FFO attributable to common stockholders
(12,128
)
 
(25,365
)
Adjustments for straight-line rents (1)
(176
)
 
—

Amortization of intangible lease assets
6,360

 
13,913

Debt premium amortization
(602
)
 
(388
)
Acquisition costs
5,811

 
9,833

MFFO attributable to common stockholders
(735
)
 
(2,007
)
Net gain on dispositions
36,041

 
10,484

AFFO attributable to common stockholders
$
35,306

 
$
8,477

 
 
 
 
Basic and diluted net loss per common share - GAAP
$
(0.24
)
 
$
(0.68
)
FFO per share
$
(0.17
)
 
$
(0.37
)
MFFO per share
$
(0.01
)
 
$
(0.03
)
AFFO per share
$
0.50

 
$
0.12

 
 
 
 
Weighted average shares outstanding (2)
70,397

 
68,008


(1)    Adjustments to prior period to conform to current year presentation.
(2)    Excludes any dilution from the potential conversion of convertible stock as the actual number of shares that will be issuable upon conversion, if any, is indeterminable at December 31, 2015 and 2014.

Critical Accounting Policies
We consider these policies critical because they involve significant management judgments and assumptions, they require estimates about matters that are inherently uncertain, and they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of our assets and liabilities and our disclosure of contingent assets and liabilities on the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Real Estate Assets
Depreciation. We make subjective assessments as to the useful lives of our depreciable assets. These assessments have a direct impact on our net income, because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual


basis throughout the expected useful lives of these investments. We consider the period of future benefit of an asset to determine its appropriate useful life. The estimated useful lives of our assets by class are as follows:
Buildings
27.5 years
Building improvements
3-27.5 years
Tenant improvements
Shorter of lease term or expected useful life

Improvements and replacements in excess off $1,000 are capitalized when they extend the useful life of the asset. The Manager, an affiliate of the Advisor, earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.
Real Estate Purchase Price Allocation. We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases, which we expect will range from one month to ten years.
We measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management's estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
We consider information obtained about each property as a result of our preacquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired will be further allocated to in-place lease values and customer relationship intangible values based on management's evaluation of the specific characteristics of each tenant's lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with a tenant, growth prospects for developing new business with the tenant, the tenant's credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
We amortize the value of in-place leases to expense over the initial term of the respective leases. The value of customer relationship intangibles will be amortized to expense over the initial term and, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense in that period.
Estimates of the fair values of the tangible and intangible assets will require us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate estimates would result in an incorrect assessment of our purchase price allocation, which would impact the amount of our net income.
Valuation of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, we will assess the recoverability of the assets by estimating whether we will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. If based on this analysis we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset.


Projections of future cash flows require us to estimate the expected future operating income and expenses related to an asset as well as market and other trends. The use of inappropriate assumptions in our future cash flows analysis would result in an incorrect assessment of our assets' future cash flows and fair values and could result in the overstatement of the carrying values of our real estate assets and an overstatement of our net income.
For properties held and used, an impairment loss will be recorded to the extent that the carrying value of a property exceeds the estimated fair value of the property.  For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset. 
Loans Held for Investment, Net
Real estate loans held for investment are recorded at cost and reviewed for potential impairment at each balance sheet date. A loan held for investment is considered impaired when it becomes probable, based on current information, that we will be unable to collect all amounts due according to the loan's contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or the fair value of the collateral. If a loan was deemed to be impaired, we would record a reserve for loan losses through a charge to income for any shortfall. Failure to recognize impairment would result in the overstatement of the carrying values of our real estate loans receivable and an overstatement of our net income.
Preferred Equity Investment
We record our preferred equity investments at amortized cost. Investments, carried at amortized cost are evaluated for impairment at each reporting date. When an investment is impaired and that impairment is considered other than temporary, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to its estimated fair value.
Dividend income is recognized when earned based on the contractual terms of the preferred equity agreement. 
Discontinued Operations
Prior to January 1, 2014, assuming no significant continuing involvement by us after the sale, the sale of a property was considered a discontinued operation.
In April 2014, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. We have adopted this guidance and such guidance became effective for us as of January 1, 2014.

Goodwill

We record the excess of the cost of an acquired entity over the difference between the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment at a level of reporting referred to as a reporting unit during the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Revenue Recognition
We recognize minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and we will include amounts expected to be received in later years in deferred rents. We record property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period in which the related expenses are incurred.
We make estimates of the collectability of our tenant receivables in relation to base rents, including straight-line rentals, expense reimbursements and other revenue or income. We specifically analyze accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, we will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the


ultimate resolution of these claims can exceed one year. These estimates have a direct impact on our net income because a higher bad debt reserve results in less net income.
Interest income from performing loans receivable is recognized based on the contractual terms of the loan agreement. Fees related to any buy-down of the interest rate will be deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income. Closing costs related to the purchase of a performing loan held for investment will be amortized using effective yield method over the term of the loan and accreted as an adjustment against interest income.
Adoption of New Accounting Standards
Accounting Standards Issued But Not Yet Effective
In May 2014, FASB issued Accounting Standards Update (“ASU") No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  The core principle of ASU No. 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services.  ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU No. 2014-09 will be effective for us beginning January 1, 2017, including interim periods in 2017, and allows for both retrospective and prospective methods of adoption. We are in the process of determining the method of adoption and assessing the impact of this guidance on our consolidated financial position, results of operations and cash flows.
In August 2014, FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." Under the new guidance, an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on our consolidated balance sheet, statement of operations, or statement of cash flows.
In January 2015, FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU No. 2015-01 eliminates from GAAP the concept of extraordinary items. Although ASU No. 2015-01 will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect the adoption of ASU No. 2015-01 to have a significant impact on our financial statements.
In February 2015, FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis", which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for the annual period beginning January 1, 2016. We are continuing to evaluate this guidance; however, we do not expect the adoption of ASU 2015-02 to have a significant impact on our consolidated financial statements.
In April 2015, FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, we will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance is effective for the annual period beginning January 1, 2016. We are continuing to evaluate this guidance; however, we do not expect the adoption of ASU 2015-03 to have a significant impact on our consolidated financial statements.
In September 2015, FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments", which eliminates the requirement to retroactively revise comparative financial information for prior periods presented in financial statements due to changes in provisional amounts recorded for acquisitions in subsequent periods. Upon adoption, disclosure of the amounts recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date are required. ASU 2015-16 is effective for the annual period beginning January 1, 2016. We are continuing to evaluate this guidance; however, we do not expect the adoption of ASU 2015-16 to have a significant impact on our consolidated financial statements.


In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which requires lessees to recognize at the commencement date for all leases, with the exception of short-term leases, (a) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for the annual period beginning January 1, 2019. We are evaluating this guidance; however, we do not expect the adoption of ASU 2016-02 to have a significant impact on our consolidated financial statements.
Off-Balance Sheet Arrangements
As of December 31, 2015 and 2014, we were obligated to fund up to an additional $1.1 million and $1.5 million, respectively, for the Spring Hill preferred equity investment in increments of $150,000 upon request as long as no triggering event has occurred. We did not have any other off-balance sheet arrangements or obligations.
Subsequent Events
On January 27, 2016, we and our joint venture partner sold the Conifer Place Apartments, located in Norcross, Georgia, for $42.5 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2016.
On January 29, 2016, we sold our interest in the joint venture that owned Champion Farms in Louisville, Kentucky for $7.6 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2016.
On February 17, 2016, we sold Ivy at Clear Creek, in Houston, Texas for $19.4 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2016.
We have evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.    
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements at page F-1 of this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent registered public accountants during the year ended December 31, 2015.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.
Management's Report on Internal Control over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth in the 2013 version of the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management believes that our internal control over financial reporting is effective as of December 31, 2015.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.


PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our chief executive officer and chief financial officer. Our Code of Conduct and Ethics may be found at http://www.resourcereit.com, on the Prospectus/SEC Filings page.
The other information required by this Item is incorporated by reference from our 2016 Proxy Statement.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our 2016 Proxy Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from our 2016 Proxy Statement.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from our 2016 Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference from our 2016 Proxy Statement.


PART IV

ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
(a)
Financial Statements
1.
See the Index to Consolidated Financial Statements at page F-1 of this report.
(b)
Financial Statement Schedules
i.
Schedule III Real Estate and Accumulated Depreciation
ii.
Schedule IV - Mortgage Loans on Real Estate

(c)
Exhibits
Exhibit No.
 
Description
2.1
 
Agreement and Plan of Merger, dated July 18, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.2
 
Second Amendment to Agreement and Plan of Merger, dated September 13, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.3
 
Third Amendment to Agreement and Plan of Merger, dated December 16, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to Post-Effective Amendment No. 15 to the Company's Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
3.1
 
Amended and Restated Articles of Incorporation (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
3.2
 
Bylaws (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
4.1
 
Form of Distribution Reinvestment Plan Enrollment Form, included as Appendix B to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
4.2
 
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed November 12, 2009)
4.3
 
Amended and Restated Distribution Reinvestment Plan, included as Appendix A to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
10.1
 
Third Amended and Restated Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed March 3, 2011)
10.2
 
Management Agreement (incorporated by reference to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed September 15, 2009)
10.3
 
Purchase and Sale Contract and Joint Escrow Instruments between LMI Riverbend, LLC and Resource Real Estate Opportunity OP, LP dated April 28, 2015 (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed August 13, 2015)
10.4
 
Renewal Agreement, dated September 15, 2015, between Resource Real Estate Opportunity REIT, Inc. and Resource Real Estate Opportunity Advisor, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 12, 2015)
10.5
 
Amendment to Third Amended and Restated Advisory Agreement dated March 24, 2015 between Resource Real Estate Opportunity REIT, Inc. and Resource Real Estate Opportunity Advisor, LLC (incorporated by reference to the Company's Annual Report on Form 10-K filed March 31, 2015)


21.1
 
Subsidiaries of the Company
23.1
 
Consent of Grant Thornton LLP
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
 
Amended and Restated Share Redemption Program (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 14, 2011)
99.2
 
Consent of Duff & Phelps, LLC
101.1
 
Interactive Data Files







SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
 
 
 
March 30, 2016
By:
/s/ Alan F. Feldman
 
 
ALAN F. FELDMAN
 
 
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Jonathan Z. Cohen
 
Chairman of the Board
March 30, 2016
JONATHAN Z. COHEN
 
 
 
 
 
 
 
/s/ Andrew Ceitlin
 
Director
March 30, 2016
ANDREW CEITLIN
 
 
 
 
 
 
 
/s/ Gary Lichtenstein
 
Director
March 30, 2016
GARY LICHTENSTEIN
 
 
 
 
 
 
 
/s/ Lee F. Shlifer
 
Director
March 30, 2016
LEE F. SHLIFER
 
 
 
 
 
 
 
/s/ Alan F. Feldman
 
Chief Executive Officer and Director
March 30, 2016
ALAN F. FELDMAN
 
(Principal Executive Officer)
 
 
 
 
 
/s/ Steven R. Saltzman
 
Chief Financial Officer, Senior Vice President
March 30, 2016
STEVEN R. SALTZMAN
 
and Treasurer (Principal Financial Officer
and Principal Accounting Officer)
 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Resource Real Estate Opportunity REIT, Inc.:
We have audited the accompanying consolidated balance sheets of Resource Real Estate Opportunity REIT, Inc. (a Maryland corporation) and subsidiaries (collectively, the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for each of the two years in the period ended December 31, 2015. Our audits of the basic consolidated financial statements included the financial statement schedules listed in the index appearing under Item 15(b). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Resource Real Estate Opportunity REIT, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Philadelphia, Pennsylvania

March 30, 2016


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
December 31,
 
2015
 
2014
ASSETS
 
 

Investments:
 
 
 
Rental properties, net
$
916,498

 
$
775,254

Loans held for investment, net
757

 
1,523

Preferred equity investments
3,886

 
3,462

Identified intangible assets, net
374

 
2,081

Assets held for sale - rental properties, net
69,350

 
36,764

 Total investments
990,865

 
819,084

 
 
 
 
Cash
78,442

 
140,129

Restricted cash
9,987

 
6,930

Due from related parties
1,421

 
1,148

Tenant receivables, net
211

 
527

Deposits
230

 
666

Prepaid expenses and other assets
1,825

 
2,302

Deferred financing costs, net
6,915

 
6,392

Goodwill
1,231

 
1,231

Other assets associated with rental properties held for sale
81

 
—

Total assets
$
1,091,208

 
$
978,409

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Mortgage notes payable
$
562,558

 
$
444,168

Credit facilities
57,394

 
45,586

Accounts payable
1,583

 
2,689

Accrued expenses and other liabilities
7,932

 
6,473

Accrued real estate taxes
6,856

 
5,689

Due to related parties
1,185

 
1,630

Tenant prepayments
1,212

 
1,383

Security deposits
2,626

 
2,437

Other liabilities associated with rental properties held for sale
16,763

 
—

Total liabilities
658,109

 
510,055

 
 
 
 
Equity:
 

 
 

Preferred stock (par value $.01; 10,000,000 shares authorized, none issued)
—

 
—

Common stock (par value $.01; 1,000,000,000 shares authorized; 72,333,652 and 69,469,001 shares issued, respectively; and 71,617,117 and 69,254,165 shares outstanding, respectively)
716

 
693

Convertible stock (“promote shares”; par value $.01; 50,000 shares authorized, issued and outstanding)
1

 
1

Additional paid-in capital
638,335

 
614,024

Accumulated other comprehensive loss
(440
)
 
(266
)
Accumulated deficit
(213,366
)
 
(154,319
)
Total stockholders’ equity
425,246

 
460,133

Noncontrolling interests
7,853

 
8,221

Total equity
$
433,099

 
$
468,354

Total liabilities and equity
$
1,091,208

 
$
978,409


The accompanying notes are an integral part of these consolidated statements.
F-2

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
 
Years Ended
 
December 31,
 
2015
 
2014
Revenues:
 
 

Rental income
$
117,687

 
$
99,910

Interest and dividend income
638

 
359

Total revenues
118,325

 
100,269

Expenses:
 

 
 

Rental operating - expenses
34,225

 
34,801

Rental operating - payroll
16,769

 
14,784

Rental operating - real estate taxes
13,154

 
9,611

    Subtotal - Rental operating expenses
64,148

 
59,196

Acquisition costs
5,811

 
9,833

Management fees
15,453

 
11,544

General and administrative
12,718

 
10,813

Provision for loan loss
130

 
—

Loss on disposal of assets
3,093

 
5,308

Depreciation and amortization expense
48,273

 
47,771

Total expenses
149,626

 
144,465

Loss before other (expenses) income
(31,301
)
 
(44,196
)
Other (expense) income:
 
 
 
Net gains on dispositions
36,041

 
10,484

Interest expense
(22,080
)
 
(14,911
)
Insurance proceeds in excess of cost basis
407

 
425

Net loss
$
(16,933
)
 
$
(48,198
)
Net loss attributable to noncontrolling interests
38

 
2,021

Net loss attributable to common stockholders
$
(16,895
)
 
$
(46,177
)
 
 
 
 
 
 
 
 
Net loss
$
(16,933
)
 
$
(48,198
)
Other comprehensive loss:
 
 
 
     Designated derivatives, fair value adjustment
(174
)
 
(286
)
Comprehensive loss
(17,107
)
 
(48,484
)
Comprehensive loss attributable to noncontrolling interests
38

 
2,021

Total comprehensive loss attributable to stockholders
$
(17,069
)
 
$
(46,463
)
 
 
 
 
Weighted average common shares outstanding
70,397

 
68,008

Basic and diluted loss per common share:
 
 
 
Net loss per share
$
(0.24
)
 
$
(0.68
)


The accompanying notes are an integral part of these consolidated statements.
F-3

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(in thousands)
 
Common Stock
 
Convertible Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
Stockholders’ Equity
 
Noncontrolling
interests
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2014
66,667

 
$
668

 
50

 
$
1

 
$
590,591

 
$
20

 
$
(74,233
)
 
$
517,047

 
$
—

 
$
517,047

Common stock issued through distribution reinvestment plan
2,410

 
24

 
—

 
—

 
22,874

 
—

 
—

 
22,898

 
—

 
22,898

Distributions of common stock
333

 
3

 
—

 
—

 
3,330

 
—

 
(3,333
)
 
—

 
—

 
—

Distributions declared
—

 
—

 
—

 
—

 
—

 
—

 
(30,635
)
 
(30,635
)
 
—

 
(30,635
)
Share redemptions
(156
)
 
(2
)
 
—

 
—

 
(1,445
)
 
—

 
59

 
(1,388
)
 
—

 
(1,388
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(286
)
 
—

 
(286
)
 
—

 
(286
)
Noncontrolling interests retained in the Paladin merger
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
18,901

 
18,901

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(119
)
 
(119
)
Acquisitions of noncontrolling interests
—

 
—

 
—

 
—

 
(1,326
)
 
—

 
—

 
(1,326
)
 
(8,540
)
 
(9,866
)
Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(46,177
)
 
(46,177
)
 
(2,021
)
 
(48,198
)
Balance at December 31, 2014
69,254

 
693

 
50

 
1

 
614,024

 
(266
)
 
(154,319
)
 
460,133

 
8,221

 
468,354

Common stock issued through distribution reinvestment plan
2,865

 
28

 
—

 
—

 
28,931

 
—

 
—

 
28,959

 
—

 
28,959

Distributions declared
—

 
—

 
—

 
—

 
—

 
—

 
(42,216
)
 
(42,216
)
 
—

 
(42,216
)
Share redemptions
(502
)
 
(5
)
 
—

 
—

 
(5,101
)
 
—

 
64

 
(5,042
)
 
—

 
(5,042
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(174
)
 
—

 
(174
)
 
—

 
(174
)
Contributions of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
151

 
151

Acquisitions of noncontrolling interests
—

 
—

 
—

 
—

 
481

 
—

 
—

 
481

 
(481
)
 
—

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(16,895
)
 
(16,895
)
 
(38
)
 
(16,933
)
Balance at December 31, 2015
71,617

 
$
716

 
50

 
$
1

 
$
638,335

 
$
(440
)
 
$
(213,366
)
 
$
425,246

 
$
7,853

 
$
433,099




The accompanying notes are an integral part of these consolidated statements.
F-4

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Years Ended
 
December 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(16,933
)
 
$
(48,198
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

     Loss on disposal of assets
3,093

 
5,308

     Casualty losses
782

 
—

Provision for loan loss
130

 
—

Net gain on disposition
(36,041
)
 
(10,484
)
Depreciation and amortization
48,273

 
47,771

Amortization of deferred financing costs
1,839

 
1,365

Amortization of fair value adjustment of debt
(779
)
 
(598
)
Accretion of discount and direct loan fees and costs
(39
)
 
(28
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Restricted cash
(2,708
)
 
(351
)
Tenant receivables, net
313

 
161

Deposits
3

 
(775
)
Prepaid expenses and other assets
886

 
363

Due to related parties, net
(722
)
 
(1,236
)
Accounts payable and accrued expenses
583

 
5,289

Tenant prepayments
(40
)
 
554

Security deposits
91

 
(127
)
Net cash used in operating activities from continuing operations
(1,269
)
 
(986
)
Cash flows from investing activities:
 

 
 

Proceeds from disposal of properties, net of closing costs
60,258

 
27,082

Property acquisitions
(96,953
)
 
(229,041
)
Ownership acquisitions, net of cash received
—

 
(58,720
)
Insurance proceeds received for casualty losses
794

 
—

Preferred equity acquisition
(408
)
 
(3,460
)
Capital expenditures
(43,018
)
 
(37,384
)
Principal payments received on loans
601

 
227

Net cash used in investing activities of continuing operations
(78,726
)
 
(301,296
)
Cash flows from financing activities:
 

 
 

Redemptions of common stock
(5,042
)
 
(1,389
)
Payment of deferred financing costs
(402
)
 
(4,155
)
Increase in borrowings on mortgages
31,473

 
182,213

Principal payments on mortgages
(6,150
)
 
(3,027
)
Increase in borrowings on credit facilities
33,918

 
85,520

Payments on credit facilities
(22,288
)
 
(76,975
)
Purchase of interest rate swaps
(95
)
 
(110
)
Distributions paid on common stock
(13,257
)
 
(9,958
)
Contributions of noncontrolling interests
151

 
—

Distributions to noncontrolling interests
—

 
(119
)
Net cash provided by financing activities of continuing operations
18,308

 
172,000

Net cash used in continuing operations
(61,687
)
 
(130,282
)
Cash flows from discontinued operations:
 
 
 
Net cash provided by discontinued operations
—

 
88

Net decrease in cash
(61,687
)
 
(130,194
)
Cash at beginning of period
140,129

 
270,323

Cash at end of period
$
78,442

 
$
140,129


The accompanying notes are an integral part of these consolidated statements.
F-5
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015


NOTE 1 – NATURE OF BUSINESS AND OPERATIONS
Resource Real Estate Opportunity REIT, Inc. (the “Company”) was organized in Maryland on June 3, 2009 to purchase a diversified portfolio of discounted U.S. commercial real estate and real estate-related assets in order to generate gains to stockholders from the potential appreciation in the value of the assets and to generate current income for stockholders by distributing cash flow from the Company’s investments. Resource Real Estate Opportunity Advisor, LLC (the “Advisor”), an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors, has been engaged to manage the day-to-day operations of the Company. 
Through its private offering and primary public offering, which concluded on December 13, 2013, the Company raised aggregate gross offering proceeds of $645.8 million, which resulted in the issuance of 64.9 million shares of common stock, including 276,056 shares purchased by the Advisor and 1.2 million shares sold in the Company's distribution reinvestment plan. During the years ended December 31, 2015 and 2014, the Company issued 5.3 million additional shares for $51.9 million pursuant to its distribution reinvestment plan.
The Company has acquired, and may continue to acquire, real estate-related debt and equity that has been significantly discounted due to the effects of economic events and high levels of leverage, as well as stabilized properties that may benefit from extensive renovations that may increase their long-term values.  The Company has a particular focus on acquiring and operating multifamily assets, and it has targeted, and intends to continue to target, this asset class while also acquiring interests in other types of commercial property assets consistent with its investment objectives.  The Company’s targeted portfolio consists of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate that was foreclosed upon and sold by financial institutions and (ii) multifamily rental properties to which the Company can add value with a capital infusion (“value add properties”).  However, the Company is not limited in the types of real estate assets in which it may invest and, accordingly, it may invest in other real estate-related assets either directly or together with a co-investor or joint venture partner.
The Company is organized and conducts its operations in a manner intended to allow it to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended.  The Company also operates its business in a manner intended to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary

Apartment Complex

Number
of Units

Property Location
RRE Opportunity Holdings, LLC

N/A

N/A

N/A
Resource Real Estate Opportunity OP, LP

N/A

N/A

N/A
RRE Charlemagne Holdings, LLC
 
N/A
 
N/A
 
N/A
RRE 107th Avenue Holdings, LLC (“107th Avenue”)

N/A (e)

N/A

N/A
RRE Westhollow Holdings, LLC (“Westhollow”)

N/A (d)

N/A

N/A
RRE Crestwood Holdings, LLC (“Crestwood”)

N/A (c)

N/A

N/A
RRE Iroquois, LP (“Vista”)

Vista Apartment Homes

133

Philadelphia, PA
RRE Iroquois Holdings, LLC

N/A

N/A

N/A
RRE Campus Club Holdings, LLC (“Campus Club”)

N/A (d)

N/A

N/A
RRE Bristol Holdings, LLC (“Bristol”)

N/A (e)

N/A

N/A
RRE Cannery Holdings, LLC (“Cannery”)

Cannery Lofts

156

Dayton, OH
RRE Williamsburg Holdings, LLC (“Williamsburg”)

Williamsburg

976

Cincinnati, OH
WPL Holdings, LLC

(a)

N/A

Cincinnati, OH

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



RRE Skyview Holdings, LLC ("Skyview")

N/A (e)

N/A

N/A
RRE Park Forest Holdings, LLC ("Park Forest")

Mosaic

216

Oklahoma City, OK
RRE Foxwood Holdings, LLC ("Foxwood")

N/A (e)

N/A

N/A
RRE Flagstone Holdings, LLC ("Flagstone")

N/A (e)

N/A

N/A
RRE Deerfield Holdings, LLC ("Deerfield")

Deerfield

166

Hermantown, MN
RRE Kenwick Canterbury Holdings, LLC ("Kenwick & Canterbury")

N/A (e)

N/A

N/A
RRE Armand Place Holdings, LLC ("Armand")

Ivy at Clear Creek (f)

244

Houston, TX
RRE Autumn Wood Holdings, LLC ("Autumn Wood")

Retreat at Rocky Ridge

206

Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")

Trailpoint at the Woodlands

271

Houston, TX
RRE Nob Hill Holdings, LLC ("Nob Hill")

Affinity at Winter Park

192

Winter Park, FL
RRE Brentdale Holdings, LLC ("Brentdale")

The Westside Apartments

412

Plano, TX
RRE Jefferson Point Holdings, LLC ("Jefferson Point")

Tech Center Square

208

Newport News, VA
RRE Centennial Holdings, LLC ("Centennial")

Verona Apartment Homes

276

Littleton, CO
RRE Pinnacle Holdings, LLC ("Pinnacle")

Skyview Apartment Homes

224

Westminster, CO
RRE Jasmine Holdings, LLC ("Jasmine")

The Nesbit Palisades

437

Alpharetta, GA
RRE River Oaks Holdings, LLC ("River Oaks")

Maxwell Townhomes

314

San Antonio, TX
RRE Nicollet Ridge Holdings, LLC ("Nicollet Ridge")

Meridian Pointe

339

Burnsville, MN
RRE Addison Place, LLC ("Addison Place")
 
The Estates at Johns Creek
 
403
 
Alpharetta, GA
PRIP Coursey, LLC ("Evergreen at Coursey Place")
 
Evergreen at Coursey Place (b)
 
352
 
Baton Rouge, LA
PRIP 3700, LLC ("Champion Farms")
 
N/A (b) (f)
 
N/A
 
N/A
PRIP 10637, LLC ("Fieldstone")
 
N/A (b)
 
N/A
 
N/A
PRIP 500, LLC ("Pinehurst")
 
Pinehurst (b)
 
146
 
Kansas City, MO
PRIP 1102, LLC ("Pheasant Run")
 
Pheasant Run (b)
 
160
 
Lee's Summit, MO
PRIP 11128, LLC ("Retreat at Shawnee")
 
Retreat at Shawnee (b)
 
342
 
Shawnee, KS
PRIP 6700, LLC ("Hilltop Village")
 
N/A (b) (d)
 
N/A
 
N/A
PRIP 3383, LLC ("Conifer Place")
 
N/A (b) (f)
 
N/A
 
N/A
PRIP Stone Ridge, LLC ("Stone Ridge")
 
N/A (b)
 
N/A
 
N/A
PRIP Pines, LLC ("Pines of York")
 
Pines of York (b)
 
248
 
Yorktown, VA
PRIP 5060/6310, LLC ("Governor Park")
 
N/A (b) (d)
 
N/A
 
N/A
RRE Chisholm Place Holdings LLC ("Chisholm Place")
 
Chisholm Place
 
142
 
Plano, TX
RRE Berkeley Run Holdings, LLC ("Berkley Run")
 
Perimeter Circle
 
194
 
Atlanta, GA
RRE Berkeley Trace Holdings LLC ("Berkley Trace")
 
Perimeter 5550
 
165
 
Atlanta, GA
RRE Merrywood LLC ("Merrywood")
 
Aston at Cinco Ranch
 
228
 
Katy, TX
RRE Sunset Ridge Holdings, LLC ("Sunset Ridge")
 
Sunset Ridge
 
324
 
San Antonio, TX
RRE Parkridge Place Holdings, LLC ("Parkridge Place")
 
Calloway at Las Colinas
 
536
 
Irving, TX
RRE Spring Hill Holdings, LLC ("Spring Hill")
 
N/A
 
N/A
 
N/A

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



RRE Woodmoor Holdings, LLC ("Woodmoor")
 
South Lamar Village
 
208
 
Austin, TX
RRE Gilbert Holdings, LLC ("Springs at Gilbert")
 
Heritage Pointe
 
458
 
Gilbert, AZ
RRE Bonita Glen Holdings, LLC ("Bonita")
 
Villages at Bonita Glen
 
295
 
Chula Vista, CA
RRE Yorba Linda Holdings, LLC ("Yorba Linda")
 
Yorba Linda
 
400
 
Yorba Linda, CA
                                              
N/A - Not Applicable
(a) - Subsidiary holds a portion of the Williamsburg parking lot.
(b) - Wholly-owned subsidiary of RRE Charlemagne Holdings, LLC.
(c) - Real estate assets sold in 2013.
(d) - Real estate assets sold in 2014.
(e) - Real estate assets sold in 2015.
(f) - Real estate assets included in Assets Held for Sale at December 31, 2015.
All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” and accordingly consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it has been determined that the Company holds a variable interest in a VIE, management performs a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and re-evaluate the requirement to consolidate them. For consolidated entities (including VIEs of which the Company is the primary beneficiary), noncontrolling interests are presented and disclosed as a separate component of stockholders' equity (not as a liability or other item outside of stockholders' equity). Consolidated net income (loss) includes the noncontrolling interests’ share of income (loss). All changes in the Company’s ownership interest in a subsidiary are accounted for as stockholders' equity transactions if the Company retains its controlling financial interest in the subsidiary. The portions of these entities that the Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. The consolidated financial statements include the accounts of the Company's majority-owned and/or controlled subsidiaries, which are VIEs, as follows:
Subsidiary
 
Ownership %
 
Apartment Complex
 
Number
of Units
 
Property Location
Springhurst Housing Partners, LLC (1)
 
70%
 
Champion Farms
 
264
 
Louisville, KY
Glenwood Housing Partners I, LLC
 
83%
 
Fieldstone
 
266
 
Woodlawn, OH
FPA/PRIP Conifer, LLC (2)
 
42.5%
 
Conifer Place
 
420
 
Norcross, GA
DT Stone Ridge, LLC (3)
 
83.4%
 
Stone Ridge
 
188
 
Columbia, SC
                                              
(1) - On January 29, 2016, the Company sold its interest in Champion Farms to its joint venture partner. (See Note 22)    
(2) - On January 27, 2016, the Company and its joint venture partner sold the Conifer Place Apartments. (See Note 22)
(3) - During 2015, the Company increased its ownership in the joint venture from 77.7% to 83.4%. (See Note 7)
The Company's preferred equity investment is a VIE for which the Company has determined it is not the primary beneficiary and therefore, the Company does not consolidate the entity. The Company is not considered the primary beneficiary of the preferred equity investee because it does not possess the unilateral power to direct the key activities of investee that are considered most significant.  Information with respect to the nature of the preferred equity investment, the carrying amount of the investment, and the Company’s maximum exposure to the losses (which equals the carrying amount of the investment plus additional funding commitments) are disclosed in Note 6.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
Assets Held for Sale
The Company presents the assets and liabilities of any rental properties which have been sold subsequent to the reporting period, or otherwise qualify as held for sale, separately in the consolidated balance sheets. Real estate assets held for sale are measured at the lower of carrying amount or fair value less cost to sell. Both the real estate and the corresponding liabilities are presented separately in the Consolidated Balance Sheets. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. The Company had three rental properties included in assets held for sale as of December 31, 2015 and 2014.
In December 2015, the Company agreed to sell its 70% interest in the joint venture that owns Champion Farms Apartments to its joint venture partner. The sale was completed in January 2016. As such, all assets and liabilities of the consolidated entity have been reclassified to held for sale as of December 31, 2015 in the consolidated balance sheets.
Rental Properties
The Company records acquired rental properties at fair value. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates using the straight line method.  The Company anticipates the estimated useful lives of its assets by class as follows:
Buildings
27.5 years
Building improvements
3.0 to 27.5 years
Tenant improvements
Shorter of lease term or expected useful life

Improvements and replacements in excess off $1,000 are capitalized when they extend the useful life of the asset. Resource Real Estate Opportunity Manager, LLC (the “Manager”), an affiliate of the Advisor, earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist of periodic temporary deposits of cash. At December 31, 2015, the Company had $89.8 million of deposits at various banks, $74.9 million of which were over the insurance limit of the Federal Deposit Insurance Corporation. No losses have been experienced on such deposits.
As of December 31, 2015, the Company's real estate investments in Texas, Georgia, and California represented approximately 26%, 18%, and 17% of the net book value of its rental property assets, respectively. As a result, the geographic concentration of the Company's portfolio makes it particularly susceptible to adverse economic developments in the Texas, Georgia, and California real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect the Company's operating results and its ability to make distributions to stockholders.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for permanent impairment.  This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition.  The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used.  For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset. There were no impairment losses recorded on long lived assets during the year ended December 31, 2015 and 2014.
Loans Held for Investment, Net
The Company records acquired performing loans held for investment at cost and reviews them for potential impairment at each balance sheet date.  The Company considers a loan to be impaired if one of two conditions exists.  The first condition is if, based on current information and events, management believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  A TDR may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and/or guarantees made by the borrowers.
The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or, as a practical expedient, the fair value of the collateral.  If a loan is deemed to be impaired, the Company records a reserve for loan losses through a charge to income for any shortfall.    
Interest income from performing loans held for investment is recognized based on the contractual terms of the loan agreement.  Fees related to any buy down of the interest rate are deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income.  The initial investment made in a purchased performing loan includes the amount paid to the seller plus fees.  The initial investment frequently differs from the related loan’s principal amount at the date of the purchase.  The difference is recognized as an adjustment of the yield over the life of the loan.  Closing costs related to the purchase of a performing loan held for investment are amortized over the term of the loan and accreted as an adjustment to interest income.
The Company may acquire real estate loans at a discount due to the credit quality of such loans and the respective borrowers under such loans.  Revenues from these loans are recorded under the effective interest method.  Under this method, an effective interest rate (“EIR”) is applied to the cost basis of the real estate loan held for investment.  The EIR that is calculated when the loan held for investment is acquired remains constant and is the basis for subsequent impairment testing and income recognition.  However, if the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate receivable on the cost recovery method.  Under the cost recovery method of accounting, no income is recognized until the basis of the loan held for investment has been fully recovered.
Preferred Equity Investment
The Company records its preferred equity investments at amortized cost. Investments, carried at amortized cost are evaluated for impairment at each reporting date. When an investment is impaired and that impairment is considered other than temporary, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to its estimated fair value.
Dividend income is recognized when earned based on the contractual terms of the preferred equity agreement. 
Allocation of the Purchase Price of Acquired and Foreclosed Assets
The cost of rental properties acquired directly as fee interests and through foreclosing on a loan are allocated to net tangible and intangible assets based on their relative fair values.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and to identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships. Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports along with the aforementioned information available to the Company's management is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.
In allocating the purchase price, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period.  Management also estimates costs to execute similar leases, including leasing commissions and legal and other related expenses, to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.  The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant.  Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis).  Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant.  Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the average remaining term of the respective leases.  The value of customer relationship intangibles are amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles associated with that tenant would be charged to expense in that period.
The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables.  The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.  Initial purchase price allocations are subject to change until all information is finalized, which is generally within one year of the acquisition date.
Goodwill

The Company records the excess of the cost of an acquired entity over the difference between the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment at a level of reporting referred to as a reporting unit during the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company tested goodwill as of December 31, 2015 and found no indications of impairment.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents.  The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period in which the related expenses are incurred.
The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are $54.2 million and $265,000 for the years ending December 31, 2016 and 2017, respectively, and none thereafter. The future minimum rental payments to be received from noncancelable operating leases for commercial rental properties and antenna rentals are $333,000, $276,000, $165,000, $123,000, $69,000, and $3,000 for the years ending December 31, 2016, 2017, 2018, 2019, 2020, and thereafter, respectively.
Tenant Receivables
Tenant receivables are stated in the financial statements at amounts due from tenants net of an allowance for uncollectible receivables.  Payment terms vary and receivables outstanding longer than the payment terms are considered past due.  The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



general economy and the industry as a whole.  The Company writes off receivables when they become uncollectible.  At December 31, 2015 and 2014, there were allowances for uncollectible receivables of $24,100 and $57,300, respectively.
Income Taxes
To maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests.  As a REIT, the Company is not subject to federal corporate income tax to the extent the that it distributes 100% of its REIT taxable income each year. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it fails its REIT qualification.  Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends-paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements.  Generally, taxable income differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as a taxable REIT subsidiary (“TRS”). In general, the Company’s TRSs may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business.  A TRS is subject to U.S. federal, state and local corporate income taxes.  As of December 31, 2015 and 2014, the Company had no TRSs.
The Company evaluates the benefits from tax positions taken or expected to be taken in its tax return. Only the largest amount of benefits from tax positions that will more likely than not be sustainable upon examination are recognized by the Company.  The Company does not have any unrecognized tax benefits, nor interest and penalties, recorded in its consolidated financial statements and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next 12 months.
The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations.  The Company is not currently undergoing any examinations by taxing authorities. The Company is not subject to IRS examination for tax return years 2011 and prior.
Earnings Per Share
Basic earnings per share are calculated on the basis of the weighted-average number of common shares outstanding during the year.  Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period.  Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock.  Due to reported losses for the periods presented, 50,000 of the convertible shares (discussed in Note 17) are not included in the diluted earnings per share calculations.  For the purposes of calculating earnings per share, all common shares and per common share information in the financial statements have been adjusted retroactively for the effect of seven 1.5% stock distributions, two 0.75% stock distributions, one 0.585% stock distribution and two 0.5% stock distributions issued to stockholders. Common stock shares issued on the consolidated balance sheets have also been adjusted retroactively for the effect of these 12 distributions.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current-year presentation. The impact of the reclassifications made to prior year amounts are not material and did not affect net income (loss).
Adoption of New Accounting Standards
Accounting Standards Issued But Not Yet Effective
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  The core principle of ASU No. 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services.  ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



judgments and changes in judgments. ASU No. 2014-09 will be effective for the Company beginning January 1, 2018, including interim periods in 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this guidance on the Company’s consolidated financial position, results of operations and cash flows.
In August 2014, FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." Under the new guidance, an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on the Company's consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items". The amendments in ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendment will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU No. 2015-01 to have a significant impact on its consolidated financial statements.
In February 2015, FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis", which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-02 to have a significant impact on its consolidated financial statements.
In April 2015, FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, the Company will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-03 to have a significant impact on its consolidated financial statements.
In September 2015, FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments", which eliminates the requirement to retroactively revise comparative financial information for prior periods presented in financial statements due to changes in provisional amounts recorded for acquisitions in subsequent periods. Upon adoption, disclosure of the amounts recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date are required. ASU 2015-16 is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-16 to have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which requires lessees to recognize at the commencement date for all leases, with the exception of short-term leases, (a) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for the Company beginning January 1, 2019. The Company is evaluating this guidance; however, it does not expect the adoption of ASU 2016-02 to have a significant impact on its consolidated financial statements.
NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental cash flow information (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



 
Years Ended
 
December 31,
 
2015
 
2014
Non-cash activities:
 
 
 
Assets and liabilities assumed in acquisitions:
 
 
 
     Other assets assumed
$
—

 
$
3,231

     Debt assumed
40,185

 
158,061

     Other liabilities assumed
99

 
3,204

     Noncontrolling interests
—

 
18,901

     Rental properties, net
40,284

 
176,935

 
 
 
 
Stock issued from distribution reinvestment plan
28,959

 
22,898

Stock distributions issued
—

 
3,333

Deferred financing costs and escrow deposits funded directly by mortgage note and revolving credit facility
11,167

 
4,404

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
20,752

 
$
12,832

NOTE 4 – RENTAL PROPERTIES, NET
The Company’s investments in rental properties consisted of the following (in thousands):
 
December 31,
 
2015
 
2014
 
 
 

Land
$
180,533

 
$
122,137

Building and improvements
775,239

 
666,912

Furniture, fixtures and equipment
28,928

 
21,495

Construction in progress
2,949

 
3,005

 
987,649

 
813,549

Less: accumulated depreciation
(71,151
)
 
(38,295
)
 
$
916,498

 
$
775,254

Depreciation expense for the years ended December 31, 2015 and 2014 was $41.9 million and $32.8 million, respectively.
During the three months ended December 31, 2015 and 2014, the Company entered into agreements to sell two and three rental properties, respectively, with respective total net book values of $43.9 million and $36.8 million. The Company confirmed the intent and ability to sell all of the properties in their present condition and all properties qualified for held for sale accounting treatment upon meeting all applicable criteria on or prior to December 31, 2015 and 2014, at which time depreciation ceased. As such, the assets associated with these properties are separately classified and included as assets held for sale on the Company's consolidated balance sheets at December 31, 2015 and 2014. However, the anticipated sale of these properties did not qualify for discontinued operations, and, therefore the operations for all periods presented continue to be classified within continuing operations on the Company's consolidated statements of operations. The Company completed the sales of Conifer Place and Ivy at Clear Creek during the three months ending March 31, 2016 (see Note 22). The Company completed the sales of The Alcove, Cityside Crossing and The Redford during the three months ended March 31, 2015 (see Note 9).
In December 2015, the Company agreed to sell its 70% interest in the joint venture that owns Champion Farms Apartments to its joint venture partner. The sale was completed in January 2016. As such, all assets and liabilities of the consolidated entity have been reclassified to held for sale as of December 31, 2015 in the consolidated balance sheets. Carrying amounts of major classes of assets and liabilities included in held for sale related to Champion Farms at December 31, 2015 were as follows (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Assets:
 
Rental properties, net
$
25,436

 
 
Restricted cash
$
54

Tenant receivables, net
2

Prepaid expenses and other assets
25

Subtotal - other assets associated with rental properties held for sale
$
81

 
 
Liabilities:
 
Mortgage note payable, net
$
16,443

Accounts payable
44

Accrued expenses and other liabilities
176

Tenant prepayments
57

Security deposits
43

Subtotal- other liabilities associated with rental properties held for sale
$
16,763

Included in the consolidated balance sheet at December 31, 2015 is $7.9 million of noncontrolling interests, of which $5.7 million relate to interests held for sale.

NOTE 5 − LOANS HELD FOR INVESTMENT, NET

On March 15, 2011, the Company purchased, at a discount, two non-performing promissory notes (the "Oberlin Note” and the "Heatherwood Note”) and two performing promissory notes (the "Peterson Note” and the "Trail Ridge Note”), collectively referred to as the “Notes”, each of which was secured by a first priority mortgage on multifamily rental apartment communities. The contract purchase price for the Notes was a total of $3.1 million, excluding closing costs. The Oberlin Note was resolved in prior years.

On August 18, 2011, the Company was the successful bidder at a foreclosure sale of the property collateralizing the Heatherwood Note. Possession of the Heatherwood Apartments was obtained in February 2012 and the property was subsequently sold in April 2013. On April 18, 2013, in connection with the sale of the Heatherwood Apartments, the Company originated an $800,000 mortgage loan (the "Heatherwood Sale Note") to the purchaser of the Heatherwood Apartments on the same date. In May 2015, the Company agreed to accept $583,000 from the borrower and apply $58,000 of escrow balances in full satisfaction of the loan. As such, the Company recorded a provision for loan loss of $130,000 during the year ended December 31, 2015 related to this payoff.

On December 31, 2011, the Peterson Note matured with an unpaid balance of $238,000. Accordingly, the Company and the borrower under this note entered into a forbearance agreement in January 2012 which expired on December 31, 2014. The borrower did not pay the outstanding balance at the expiration of the forbearance period, which caused the borrower under the Peterson Note to be in default of such agreement. This forbearance agreement was considered a troubled debt restructuring. On February 27, 2014, the Company was the successful bidder at a foreclosure sale of the property collateralizing the Peterson Note. On April 6, 2014, the Company sold its interest in the sheriff's deed for the Peterson Apartments for $195,000.

The following table provides the aging of the Company’s loans held for investment (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



 
December 31, 2015
 
December 31, 2014
Current
$757
 
$1,523
 
 
 
 
Delinquent:
 
 
 
30−89 days
—
 
—
90−180 days
—
 
—
Greater than 180 days
—
 
—
 
$757
 
$1,523
The following table provides information about the credit quality of the Company’s loans held for investment, net (in thousands):
 
December 31,
 
2015
 
2014
Loans:
 
 
 
Performing
$
757

 
$
1,523

Nonperforming
—

 
—

Total
$
757

 
$
1,523

The following table presents details of the balance and terms of the loan held for investment at December 31, 2015 (in thousands):
 
Unpaid Principal Balance
 
Unamortized Discount
 
Deferred (fees) expenses, net
 
Net book value
 
Maturity Date
 
Interest Rate
 
Average monthly payment
Loan- Trail Ridge
$
981

 
$
(231
)
 
$
7

 
$
757

 
10/28/2021
 
7.5%
 
$8
The following table presents details of the balance and terms of loans held for investment at December 31, 2014 (in thousands):
 
Unpaid Principal Balance
 
Unamortized (Discount)
 
Deferred (fees) expenses, net
 
Net book value
Loan- Trail Ridge
$
994

 
$
(261
)
 
$
14

 
$
747

Loan- Heatherwood
776

 
—

 
—

 
776

 
$
1,770

 
$
(261
)
 
$
14

 
$
1,523

The Company has individually evaluated the loan for impairment and determined that, as of December 31, 2015, it was impaired. 
There were no allowances for credit losses as of both December 31, 2015 and 2014. There were $130,000 and $24,000 of charge-offs for the years ended December 31, 2015 and 2014, respectively.

NOTE 6 − PREFERRED EQUITY INVESTMENT

On November 12, 2014, the Company, through its wholly owned subsidiary, RRE Spring Hill Holdings, LLC, made a $3.5 million preferred equity investment in Spring Hill Investors Limited Partner, LLC (the “Investment Vehicle”) and became the Preferred Member. Presidium AMC Spring Hill Venture, LLC, (“Presidium”), a Texas limited liability company, owns the common equity and acts as the Managing Member of the Investment Vehicle. In October 2015, the Company funded an additional $400,000. The Company is obligated to fund up to an additional $1.1 million in increments of $150,000 as long as no triggering event has occurred.

The Investment Vehicle is the sole member of Spring Hill Investors GP, LLC, which is the general partner of Spring Hill Investors, LP, the owner of a 606-unit multifamily residential apartment community commonly known as Spring Hill Apartments (“Spring Hill”) and located in Dallas, Texas. The Company’s preferred equity investment will be predominately utilized for capital improvements and deferred maintenance projects.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015




The Company is to be paid a dividend equal to 12% of the total amount invested, 7% of which must be paid monthly and the remaining amount accrues and is to be paid when the property cash flow allows for the repayment. The mandatory redemption date for the investment is the earliest of (i) April 2017 or (ii) any earlier date that the mortgage loan secured by Spring Hill Apartments becomes due and payable as a result of the acceleration of the loan maturity date by the lender, or (iii) the date on which a defeasance is effected pursuant to the loan documents.

The Company evaluated the investment and determined that there was no impairment at December 31, 2015.
NOTE 7 – ACQUISITIONS AND FORECLOSURES
Real Estate Investments
As of December 31, 2015, the Company owned 36 properties, including nine of the 12 properties purchased on January 28, 2014 as part of the Paladin Realty Income Properties, Inc. (“Paladin”) portfolio acquisition, discussed below. The Company recognized goodwill on the Paladin transaction as the excess of purchase price over the fair value of the property acquired. The Company estimated the fair values of certain of the acquired assets and liabilities based on preliminary valuations at the date of purchase. The Company has received final appraisals for all recent acquisitions.
The table below summarizes these acquisitions and the respective fair values assigned, excluding non-wholly owned properties acquired through the Paladin merger (dollars in thousands):

Multifamily
Community Name
 
City and State
 
Date of
Acquisition
 
Purchase
Price (1)
 
 
Land
 
Building and Improvements
 
Furniture, Fixture and Equipment
 
Intangible Assets
 
Other Assets
 

Liabilities
 
Fair Valued
Assigned
Villages at Bonita Glen
 
Chula Vista, CA
 
6/16/2015
 
$
49,050

 
 
$
17,208

 
$
32,651

 
$
506

 
$
1,130

 
$
9

 
$
(30,008
)
 
$
21,496

Yorba Linda
 
Yorba Linda, CA
 
6/1/2015
 
118,000

 
 
39,322

 
76,124

 
590

 
1,964

 
76

 
(232
)
 
117,844

Heritage Pointe
 
Gilbert, AZ
 
3/19/2015
 
36,000

 
 
8,487

 
25,867

 
716

 
931

 
—

 
(152
)
 
35,849

South Lamar Village
 
Austin, TX
 
2/26/2015
 
24,000

 
 
5,586

 
17,493

 
291

 
629

 
—

 
(12,961
)
 
11,038

Prior years' acquisitions:
Pines of York
 
Yorktown, VA
 
1/28/2014
 
$
8,087

(2) 
 
$
4,464

 
$
16,340

 
$
400

 
$
715

 
$
416

 
$
(15,447
)
 
$
6,888

Calloway at Las Colinas
 
Irving, TX
 
9/29/2014
 
48,500

 
 
6,707

 
39,543

 
825

 
1,425

 
9

 
(636
)
 
47,873

Sunset Ridge
 
San Antonio, TX
 
9/4/2014
 
35,000

 
 
15,425

 
18,615

 
514

 
931

 
—

 
(24,737
)
 
10,748

Pinehurst
 
Kansas City, MO
 
1/28/2014
 
3,588

(3) 
 
1,250

 
8,241

 
200

 
290

 
142

 
(4,548
)
 
5,575

Pheasant Run
 
Lee's Summit, MO
 
1/28/2014
 
4,277

(3) 
 
800

 
10,798

 
300

 
317

 
172

 
(6,559
)
 
5,828

Retreat at Shawnee
 
Shawnee, KS
 
1/28/2014
 
5,369

(3) 
 
3,200

 
14,550

 
500

 
608

 
186

 
(14,088
)
 
4,956

Aston at Cinco Ranch
 
Katy, TX
 
6/26/2014
 
32,300

 
 
5,831

 
25,247

 
307

 
915

 
—

 
(377
)
 
31,923

Perimeter 5550
 
Atlanta, GA
 
5/19/2014
 
22,250

 
 
4,002

 
17,600

 
194

 
453

 
—

 
(110
)
 
22,139

Perimeter Circle
 
Atlanta, GA
 
5/19/2014
 
29,500

 
 
4,723

 
23,969

 
219

 
588

 
—

 
(156
)
 
29,343

Chisholm Place
 
Plano, TX
 
5/5/2014
 
15,000

 
 
1,981

 
12,383

 
198

 
438

 
—

 
(96
)
 
14,904

Evergreen at Coursey
 
Baton Rouge, LA
 
1/28/2014
 
15,499

(4) 
 
3,430

 
38,041

 
530

 
1,080

 
680

 
(28,844
)
 
14,917

The Estates at Johns Creek
 
Alpharetta, GA
 
3/28/2014
 
70,500

 
 
6,353

 
62,249

 
509

 
1,389

 
49

 
(392
)
 
70,157

Meridian Pointe
 
Burnsville, MN
 
12/20/2013
 
33,149

 
 
4,134

 
26,992

 
1,016

 
1,008

 
36

 
(107
)
 
33,079

Maxwell Townhomes
 
San Antonio, TX
 
12/16/2013
 
22,500

 
 
3,830

 
17,510

 
491

 
669

 
48

 
(14,363
)
 
8,185


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



The Nesbit Palisades
 
Alpharetta, GA
 
10/25/2013
 
25,050

 
 
7,582

 
16,023

 
587

 
859

 
37

 
(161
)
 
24,927

Verona Apartment Homes
 
Littleton,
CO
 
9/30/2013
 
30,600


 
5,702

 
23,609

 
198

 
1,090

 
24

 
(190
)
 
30,433

Skyview Apartment Homes
 
Westminster,
CO
 
9/30/2013
 
24,250


 
2,923

 
20,301

 
97

 
928

 
20

 
(147
)
 
24,122

Tech Center Square
 
Newport News,
VA
 
9/9/2013
 
18,250


 
3,951

 
13,048

 
584

 
667

 
23

 
(59
)
 
18,214

The Westside Apartments
 
Plano,
TX
 
7/25/2013
 
32,200


 
5,785

 
24,418

 
798

 
1,199

 
52

 
(317
)
 
31,935

Affinity at Winter Park
 
Winter Park,
FL
 
6/27/2013
 
10,100


 
2,512

 
6,459

 
523

 
606

 
50

 
(61
)
 
10,089

Trailpoint at the Woodlands
 
Spring,
TX
 
6/24/2013
 
27,200


 
3,785

 
22,014

 
697

 
704

 
40

 
(170
)
 
27,070

Retreat at Rocky Ridge
 
Hoover,
AL
 
4/18/2013
 
8,500

 
 
1,616

 
6,418

 
30

 
436

 
2

 
(89
)
 
8,413

Ivy at Clear Creek
 
Houston,
TX
 
3/28/2013
 
11,750


 
1,877

 
9,175

 
28

 
670

 
8

 
(127
)
 
11,631

Deerfield
 
Hermantown
MN
 
3/21/2012
 
10,300

(5) 
 
1,660

 
11,110

 
500

 
423

 
1

 
(4
)
 
13,690

Mosaic
 
Oklahoma City,
OK
 
12/6/2012
 
2,050


 
1,000

 
2,609

 
30

 
123

 
14

 
(14
)
 
3,762

Williamsburg
Apartments
 
Cincinnati,
OH
 
6/20/2012
 
41,250

 
 
3,223

 
35,111

 
1,007

 
1,909

 
49

 
(274
)
 
41,025

Cannery Lofts
 
Dayton,
OH
 
5/13/2011
 
7,100

(6) 
 
160

 
7,913

 
200

 
609

 
35

 
—

 
8,917

Vista Apartment
Homes
 
Philadelphia,
PA
 
6/17/2011
 
12,000

(7) 
 
1,163

 
9,913

 
—

 
535

 
530

 
(141
)
 
12,000

 
(1)
Purchase price excludes closing costs and acquisition expenses. For properties acquired through foreclosure, the purchase price reflects the contract purchase price of the note.
(2)
The Company originally acquired a 90% interest in the joint venture that owned Pines of York on January 28, 2014. On November 25, 2014, the Company purchased the remaining 10% ownership interest of its joint venture partner, bringing the Company's ownership percentage to 100%.
(3)
The Company originally acquired a 97.5% interest in each of the joint ventures that owned Pinehurst, Pheasant Run and Retreat at Shawnee on January 28, 2014. On July 1, 2014, the Company purchased the remaining 2.5% ownership interest of its joint venture partner in each entity, bringing the Company's ownership percentage in each entity to 100%.
(4)
The Company originally acquired a 51.7% interest in the joint venture that owned Evergreen at Coursey on January 28, 2014. On March 31, 2014, the Company purchased the remaining 48.3% ownership interest of its joint venture partner, bringing the Company's ownership percentage to 100%.
(5)
Deerfield originally served as the collateral for a non-performing note that the Company purchased on March 21, 2012. On July 19, 2012, the Company was the successful bidder at a foreclosure sale and formally received title to the property on January 22, 2013. The date of acquisition reflects the date the Company acquired the note.
(6)
Cannery Lofts originally served as the collateral for a non-performing note that the Company purchased on May 13, 2011. On December 21, 2011, the Company entered into a settlement agreement with the borrower and, subsequently, the Company foreclosed and formally received title to the property on June 6, 2012. The date of acquisition reflects the date the Company acquired the note.
(7)
Vista Apartment Homes, formerly known as Iroquois Apartments, originally served as the collateral for a non-performing promissory note that the Company purchased on June 17, 2011. On August 2, 2011, the Company was the successful bidder at a sheriff's sale and formally received title to the property.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Acquisitions
The Company acquired interests in 4 properties during the year ended December 31, 2015. In order to finalize the fair values of the acquired assets and liabilities, third-party appraisals were obtained for all of the properties acquired. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property. All valuations have been finalized as of December 31, 2015.
The supplemental pro forma financial information set forth below is based upon historical financial statements giving effect to the Yorba Linda acquisition as of the beginning of the period presented (in thousands):
 
 
For the Year Ended
 
 
December 31, 2014
 
 
(unaudited)
Revenues
 
108,005

Net loss attributable to common stockholders
 
(50,043
)
Basic and diluted loss per share
 
$
(0.74
)
Paladin Acquisition -2014
On July 18, 2013, Resource Real Estate Opportunity OP, LP (the “Operating Partnership”), the operating partnership of the Company, entered into an Agreement and Plan of Merger with RRE Charlemagne Holdings, LLC, a wholly-owned subsidiary of the Operating Partnership (“Merger Sub”), Paladin, and Paladin Realty Income Properties, L.P. (“Paladin OP”), whose sole general partner was Paladin, pursuant to which Paladin OP was to merge with and into Merger Sub (the “Merger”), with Merger Sub surviving as a wholly-owned subsidiary of the Operating Partnership.
On January 28, 2014, the parties completed the Merger resulting in the acquisition by the Operating Partnership of interests in 11 joint ventures that owned a total of 10 multifamily communities with more than 2,500 rentable units and two office properties that contained more than 75,000 rentable square feet. The Operating Partnership also acquired, as part of the Merger, a promissory note in the principal amount of $3.5 million issued by a consolidated joint venture which is eliminated in consolidation. This promissory note is secured by the co-venturer’s interests in such joint venture. The consideration for the Merger was $51.2 million exclusive of transaction costs. The names of each community, location and the Company's joint venture ownership interests on the date of acquisition are presented below:    
Multifamily
Community Name
 
City
and
State
 
Ownership % at Date of Acquisition
Champion Farms
 
Louisville, KY
 
70%
Fieldstone
 
Woodlawn, OH
 
83%
Pinehurst
 
Kansas City, MO
 
97.5%
Pheasant Run
 
Lee's Summit, MO
 
97.5%
Retreat at Shawnee
 
Shawnee, KS
 
97.5%
Hilltop Village
 
Kansas City, MO
 
49%
Conifer Place
 
Norcross, GA
 
42.5%
Stone Ridge
 
Columbia, SC
 
68.5%
Evergreen at Coursey Place
 
Baton Rouge, LA
 
51.7%
Pines of York
 
Yorktown, VA
 
90%
Governor Park
(sold March 6, 2014)
 
San Diego, CA
 
47.65%
On March 6, 2014, the Company, through a wholly-owned subsidiary, sold its 47.65% membership interest in one of the Paladin joint ventures, FPA/PRIP Governor Park, LLC ("Governor Park"), to its joint venture partner, FPA Governor Park

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Associates, LLC for $456,000. The sale price approximated the fair value, therefore no gain or loss was recognized on the transaction.
The allocation of the purchase price for the interests in the 11 Paladin joint ventures, which was completed during the year ended December 31, 2014, is included below (in thousands):
Multifamily
Community Name
 
Land
 
Building
and
Improvements
 
Intangible
Assets
 
Fair Value
of
Property
 
Other Assets
 
Liabilities
 
Non-controlling
Interest
 
Total
Company
Equity
 
Goodwill
 
Allocation of
Purchase
Price
Champion Farms
 
$
3,168

 
$
23,464

 
$
579

 
$
27,211

 
$
575

 
$
(17,015
)
 
$
(3,231
)
 
$
7,540

 
$
171

 
$
7,711

Fieldstone
 
1,420

 
18,472

 
648

 
20,540

 
661

 
(16,462
)
 
(806
)
 
3,933

 
130

 
4,063

Pinehurst
 
1,250

 
8,241

 
290

 
9,781

 
332

 
(4,548
)
 
(139
)
 
5,426

 
72

 
5,498

Pheasant Run
 
800

 
10,798

 
317

 
11,915

 
472

 
(6,559
)
 
(146
)
 
5,682

 
76

 
5,758

Retreat at Shawnee
 
3,200

 
14,550

 
608

 
18,358

 
686

 
(14,088
)
 
(124
)
 
4,832

 
117

 
4,949

Hilltop Village
 
800

 
4,289

 
195

 
5,284

 
267

 
(4,612
)
 
(479
)
 
460

 
33

 
493

Conifer Place
 
5,040

 
28,712

 
1,007

 
34,759

 
749

 
(28,776
)
 
(3,869
)
 
2,863

 
219

 
3,082

Stone Ridge
 
1,300

 
4,612

 
326

 
6,238

 
985

 
(178
)
 
(2,218
)
 
4,827

 
42

 
4,869

Evergreen at Coursey Place
 
3,430

 
38,041

 
1,080

 
42,551

 
1,210

 
(28,844
)
 
(7,200
)
 
7,717

 
268

 
7,985

Pines of York
 
4,464

 
16,340

 
715

 
21,519

 
816

 
(15,446
)
 
(689
)
 
6,200

 
136

 
6,336

 
 
$
24,872

 
$
167,519

 
$
5,765

 
$
198,156

 
$
6,753

 
$
(136,528
)

$
(18,901
)
 
$
49,480

 
$
1,264

 
$
50,744

Governor Park
(sold March 6, 2014)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
456

Total purchase price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
51,200

On March 31, 2014, the Company purchased the remaining 48.3% ownership interest in Evergreen at Coursey Place ("Coursey Place") from its joint venture partner for $7.5 million. A summary of the transaction is as follows (in thousands):
Purchase price
 
$
7,500

 
 
 
Noncontrolling interest assumed
 
$
7,200

Losses attributable to noncontrolling interest
 
(191
)
Distribution to noncontrolling interest
 
(116
)
Adjusted noncontrolling interest balance
 
6,893

Adjustment to additional paid in capital
 
$
(607
)
    
On July 1, 2014, the Company purchased the remaining 2.5% ownership interest in Pinehurst, Pheasant Run and Retreat at Shawnee from its joint venture partner for a total of $1.1 million. A summary of the transactions is as follows (in thousands):
 
 
Pinehurst
 
Pheasant Run
 
Retreat at Shawnee
Purchase price
 
$
570

 
$
515

 
$
15

 
 
 
 
 
 
 
Noncontrolling interests assumed
 
139

 
146

 
124

Losses attributable to noncontrolling interests
 
(7
)
 
(8
)
 
(15
)
Adjusted noncontrolling interest balance
 
132

 
138

 
109

Adjustment to additional paid in capital
 
$
(438
)
 
$
(377
)
 
$
94



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



In the years ended December 31, 2015 and 2014, the Company contributed $356,000 and $1.1 million, respectively, to the joint venture partnership that owns Stone Ridge. The joint venture partner did not contribute its pro-rata share, which resulted in a reduction of its partnership interest. As a result, the Company obtained an additional 5.7% and 9.2%, respectively, interest in the joint venture, increasing its ownership interest to 83.4% at December 31, 2015.

In November 2014, the Company purchased the remaining 10% ownership interest in Pines of York from its joint venture partner for $900,000. A summary of the transaction is as follows (in thousands):
    
 
 
Pines of York
Purchase price
 
$
900

 
 
 
Noncontrolling interests assumed
 
690

Losses attributable to noncontrolling interests
 
(98
)
Adjusted noncontrolling interest balance
 
592

Adjustment to additional paid in capital
 
$
(308
)

The table below summarizes the total revenues, net losses, and acquisition costs of the Company's acquisitions during the year ended December 31, 2015 (dollars in thousands):
Multifamily Community
     Total Revenues
 
     Net Loss
 
     Acquisition Costs
South Lamar Village
$
2,086

 
$
(1,580
)
 
$
(692
)
Heritage Pointe
3,019

 
(2,173
)
 
(1,005
)
Yorba Linda
4,584

 
(3,405
)
 
(2,761
)
Villages at Bonita Glen
2,431

 
(2,144
)
 
(1,353
)
 
$
12,120

 
$
(9,302
)
 
$
(5,811
)

The table below summarizes the total revenues, net losses, and acquisition costs of the Company's acquisitions during the year ended December 31, 2014 (dollars in thousands):

Multifamily Community
     Total Revenues
 
     Net Loss
 
     Acquisition Costs
South Lamar Village (1)
$
—

 
$
—

 
$
(66
)
Calloway at Las Colinas
1,445

 
(1,234
)
 
(1,290
)
Sunset Ridge
1,214

 
(1,216
)
 
(968
)
Aston at Cinco Ranch
1,718

 
(1,144
)
 
(832
)
Perimeter 5550
1,172

 
(1,024
)
 
(606
)
Perimeter Circle
1,501

 
(1,272
)
 
(748
)
Chisholm Place
1,196

 
(1,042
)
 
(494
)
The Estates at Johns Creek
4,828

 
(3,287
)
 
(1,720
)
Paladin Properties
22,645

 
(10,190
)
 
(3,109
)
 
$
35,719

 
$
(20,409
)
 
$
(9,833
)

(1)
Acquisition that was completed during the first quarter of fiscal 2015.

NOTE 8 - MEASUREMENT PERIOD ADJUSTMENTS
The Company obtains third party appraisals for all of its acquisitions. If the appraisals are not finalized in the period in which the property or interest was acquired, a measurement period adjustment is recorded. For the Estates at Johns Creek acquisition,

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



which was completed in the three months ended March 31, 2014, the measurement period adjustments were finalized during the three months ended June 30, 2014. For the Paladin acquisition, which was completed in the three months ended March 31, 2014, the measurement period adjustments were finalized during the three months ended December 31, 2014.     
Changes in the Paladin and the Estates at Johns Creek acquisitions are reflected in the tables below (in thousands):
Paladin
 
January 28, 2014
(As initially reported)
 
Measurement
period adjustment (1)
 
January 28, 2014
(As adjusted)
Land
$
44,292

 
$
(19,420
)
 
$
24,872

Building
149,155

 
18,364

 
167,519

Personal property
—

 
3,530

 
3,530

Intangible assets
5,861

 
(96
)
 
5,765

Other assets
3,231

 
(9
)
 
3,222

Goodwill
6,412

 
(5,148
)
 
1,264

Liabilities
(140,970
)
 
4,442

 
(136,528
)
Total net identifiable net assets
$
67,981

 
$
1,663

 
$
69,644

 
(1)
Remaining balance ($1.7 million) of measurement period adjustments impacted the noncontrolling interest balance.      

The results of operations for the three months ended June 30, 2014 include an additional $867,000 of depreciation and amortization that would have been included in the three months ended March 31, 2014 had the final appraisals for the Paladin properties been received and recorded during that period.
Estates at Johns Creek
 
March 28, 2014
(As initially reported)
 
Measurement
period adjustment
 
March 28, 2014
(As adjusted)
Land
$
18,137

 
$
(11,784
)
 
$
6,353

Building
51,843

 
10,406

 
62,249

Personal property
—

 
509

 
509

Intangible assets
520

 
869

 
1,389

Total net identifiable net assets
$
70,500

 
$
—

 
$
70,500

    
The measurement period adjustment for the Estates at Johns Creek had no impact on depreciation and amortization for the three months ended March 31, 2014.
NOTE 9 – DISPOSITION OF PROPERTIES
The following table presents details of our disposition activity during the years ended December 31, 2015 and 2014 (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Multifamily Community
 
Location
 
Sales Date
 
Contract Sales price
 
Gain (Loss) on Sale
 
2015 Net Income Attributable to Properties Sold
2015 Dispositions
 

 

 

 

 
 
The Alcove Apartments
 
Houston, Texas
 
January 26, 2015
 
$
11,050

 
$
3,784

 
$
3,819

107th Avenue Apartments
 
Omaha, Nebraska
 
January 29, 2015
 
250

 
50

 
50

The Redford Apartments
 
Houston, Texas
 
February 27, 2015
 
32,959

 
15,303

 
15,652

Cityside Apartments
 
Houston, Texas
 
March 2, 2015
 
24,500

 
10,028

 
10,290

One Hundred Chevy Chase
 
Lexington, Kentucky
 
June 30, 2015
 
13,500

 
4,386

 
4,027

The Reserve at Mt. Moriah
 
Memphis, Tennessee
 
September 18, 2015
 
5,425

 
2,490

 
2,202


 

 

 
$
87,684

 
$
36,041

 
$
36,040


 

 

 

 

 
 
2014 Dispositions:
 

 

 

 

 
2014 Net Income (Loss) Attributable to Properties Sold
Governor Park
 
San Diego, California
 
March 6, 2014
 
$
456

 
$
—

 
$
—

Campus Club
 
Tampa, Florida
 
June 16, 2014
 
10,500

 
2,602

 
2,723

Hilltop Village (1)
 
Kansas City, Missouri
 
July 1, 2014
 
—

 
(493
)
 
(707
)
Arcadia at Westheimer
 
Houston, Texas
 
September 19, 2014
 
18,100

 
8,375

 
8,327


 

 

 
$
29,056

 
$
10,484

 
$
10,343

    
 
(1)    Included in the net loss for 2014 was a $112,000 loss attributable to a noncontrolling interest.

NOTE 10 – IDENTIFIED INTANGIBLE ASSETS, NET

Identified intangible assets, net, consist of rental and antennae leases. The value of the acquired in-place leases totaled $374,000 and $2.1 million as of December 31, 2015 and 2014, respectively, net of accumulated amortization of $28.4 million and $26.5 million, respectively.  The weighted-average remaining life of the rental leases is 1 month and 5 months as of December 31, 2015 and 2014, respectively. Expected amortization for the antennae leases at the Vista Apartment Homes is $16,000 annually through 2025.  Amortization of the rental and antennae leases for the years ended December 31, 2015 and 2014 was $6.4 million and $15.0 million, respectively.
Expected amortization for the rental and antennae leases for the next five years ending December 31, and thereafter, is as follows (in thousands): 
2016
$
229

2017
16

2018
16

2019
16

2020
16

Thereafter
81

 
$
374




RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



NOTE 11 – GOODWILL

The table below presents a rollforward of the activity in goodwill for the years ended December 31, 2015 and 2014 (in thousands):
Balance, January 1, 2014
$
—

Acquisition of Paladin joint venture interests
6,412

Measurement period adjustments
(5,148
)
Disposition of Hilltop
(33
)
Balance, December 31, 2014
$
1,231

Activity - 2015
—

Balance, December 31, 2015
$
1,231


NOTE 12 – MORTGAGE NOTES PAYABLE

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



The following is a summary of the mortgage notes payable (in thousands, except percentages):
 
 
 
 
Premium (Discount)
 
Carrying Value
 
Carrying Value
 
 
 
 
 
 
 
 
 
 
Outstanding borrowings
 
 
 
 
 
 
 
 
 
 
 
Collateral
 
December 31, 2015
 
December 31,
2014
 
Maturity
Date
 
Margin
 
Annual
Interest Rate
 
Average
Monthly Debt
Service
Vista Apartment Homes
 
$
15,573

 
$
—

 
$
15,573

 
$
15,900

 
1/1/2022
 
2.29%
 
2.72
%
(1)(5) 
$
65

Cannery Lofts
 
8,148

 
—

 
8,148

 
8,190

 
9/1/2020
 
3.30%
 
3.73
%
(1)(5) 
40

Deerfield
 
10,517

 
—

 
10,517

 
10,530

 
11/1/2020
 
—
 
4.66
%
(2)(5) 
54

Ivy at Clear Creek
 
8,431

 
—

 
8,431

 
8,574

 
11/1/2023
 
2.41%
 
2.84
%
(1)(4) 
31

Trailpoint at the Woodlands
 
19,013

 
—

 
19,013

 
19,335

 
11/1/2023
 
2.41%
 
2.84
%
(1)(4) 
69

Verona Apartment Homes
 
22,402

 
—

 
22,402

 
22,843

 
1/1/2019
 
—
 
3.60
%
(2)(5) 
106

Skyview Apartment Homes
 
18,089

 
—

 
18,089

 
18,446

 
1/1/2019
 
—
 
3.60
%
(2)(5) 
85

The Nesbit Palisades
 
20,298

 
—

 
20,298

 
20,298

 
7/1/2024
 
1.95%
 
2.38
%
(1)(3) 
58

Maxwell Townhomes
 
13,850

 
—

 
13,850

 
14,089

 
1/1/2022
 
—
 
4.32
%
(2)(5) 
71

Champion Farms (6)
 
—

 
—

 
—

 
16,634

 
7/1/2016
 
—
 
6.14
%
(2)(3) 
85

Fieldstone
 
15,332

 
—

 
15,332

 
15,804

 
6/26/2016
 
2.40%
 
2.83
%
(1)(4) 
76

Pinehurst
 
4,111

 
—

 
4,111

 
4,239

 
1/1/2017
 
—
 
5.58
%
(2)(5) 
23

Pheasant Run
 
6,250

 
100

 
6,350

 
6,407

 
10/1/2017
 
—
 
5.95
%
(2)(3) 
31

Retreat of Shawnee
 
13,090

 
164

 
13,254

 
13,522

 
2/1/2018
 
—
 
5.58
%
(2)(5) 
78

Conifer Crossing
 
27,074

 
—

 
27,074

 
27,762

 
9/1/2016
 
2.50%
 
2.93
%
(1)(5) 
122

Evergreen at Coursey Place
 
27,548

 
123

 
27,671

 
28,117

 
8/1/2021
 
—
 
5.07
%
(2)(5) 
154

Pines of York
 
15,267

 
(363
)
 
14,904

 
15,097

 
12/1/2021
 
—
 
4.46
%
(2)(5) 
80

Estates at Johns Creek
 
50,000

 
—

 
50,000

 
50,000

 
7/1/2020
 
—
 
3.38
%
(2)(3) 
211

Chisholm Place
 
11,587

 
—

 
11,587

 
11,587

 
6/1/2024
 
2.39%
 
2.82
%
(1)(3) 
39

Perimeter Circle
 
17,657

 
—

 
17,657

 
18,007

 
7/1/2019
 
—
 
3.42
%
(2)(5) 
81

Perimeter 5550
 
13,935

 
—

 
13,935

 
14,211

 
7/1/2019
 
—
 
3.42
%
(2)(5) 
64

Aston at Cinco Ranch
 
23,772

 
—

 
23,772

 
24,162

 
10/1/2021
 
—
 
4.34
%
(2)(5) 
120

Sunset Ridge 1
 
20,121

 
329

 
20,450

 
20,930

 
11/1/2020
 
—
 
4.58
%
(2)(5) 
113

Sunset Ridge 2
 
3,002

 
45

 
3,047

 
3,109

 
11/1/2020
 
—
 
4.54
%
(2)(5) 
16

Calloway at Las Colinas
 
35,740

 
—

 
35,740

 
36,375

 
12/1/2021
 
—
 
3.87
%
(2)(5) 
171

South Lamar Village
 
12,682

 
—

 
12,682

 
—

 
8/1/2019
 
—

 
3.64
%
(2)(5) 
59

Heritage Pointe
 
26,280

 
—

 
26,280

 
—

 
4/1/2025
 
1.88%
 
2.31
%
(1)(3) 
87

Yorba Linda
 
67,500

 
—

 
67,500

 
—

 
6/1/2020
 
1.75%
 
2.18
%
(1)(3) 
154

Villages at Bonita Glen
 
27,265

 
2,276

 
29,541

 
—

 
10/1/2023
 
—
 
5.33
%
(2)(5) 
152

Stone Ridge
 
5,350

 
—

 
5,350

 
—

 
12/1/2022
 
1.86%
 
2.29
%
(1)(5) 
21


 
$
559,884

 
$
2,674

 
$
562,558

 
$
444,168

 
 
 
 
 
 

 
 
(1)
Variable rate based on one-month LIBOR of 0.4295% (as of December 31, 2015).
(2)
Fixed rate.
(3) Monthly interest-only payment currently required.
(4) Monthly fixed principal plus interest payment required.
(5) Fixed monthly principal and interest payment required.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



(6)
Included in other liabilities associated with rental properties held for sale at December 31, 2015. (See Note 4)
Loans assumed as part of the Villages at Bonita Glen, South Lamar Village, Paladin, Sunset Ridge and Maxwell acquisitions were recorded at fair value. The premium or discount is amortized over the remaining term of the loans and included in interest expense. For the year ended December 31, 2015 and 2014, interest expense was reduced by $779,000 and $598,000 for the amortization of the premium or discount.
All mortgage notes are collateralized by a first mortgage lien on the assets of the respective property as named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty on the majority of mortgages held.
As of December 31, 2015 and 2014, the Company had $10.0 million and $6.9 million of restricted cash related to escrow deposits held by mortgage lenders for real estate taxes, insurance and capital reserves.
Annual principal payments on the mortgage notes payable for each of the next five years ending December 31 and thereafter are as follows (in thousands):
2016
 
$
48,993

2017
 
17,878

2018
 
21,225

2019
 
87,059

2020
 
156,042

Thereafter
 
228,687

 
 
$
559,884

     The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. The Company has guaranteed the mortgage notes by executing a guarantee with respect to the properties.  These exceptions are referred to as “carveouts.”  In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents.  The exceptions also require the Company to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary. The Company has also guaranteed the completion and payment of costs of completion of no less than $7.0 million of renovations to The Estates at Johns Creek by July 1, 2018, of which $6.6 million were completed at December 31, 2015.
The mortgage obtained in connection with the acquisition of Yorba Linda in June 2015 includes a $7.5 million earn-out holdback which may be borrowed when certain debt service coverage and loan to value criteria are met. The Yorba Linda loan includes a net worth and liquidity covenant. The Company was in compliance with all covenants at December 31, 2015. The loan also includes an additional debt service coverage covenant that is only required to be met as of December 31, 2017 and for periods thereafter.
For the Fieldstone mortgage the property must maintain a certain level of debt service coverage. The Company was in compliance with all debt covenants for the Fieldstone mortgage at December 31, 2015.


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



NOTE 13 – CREDIT FACILITIES
The following is a summary of the credit facilities (in thousands, except percentages):
 
 
Balance Outstanding at
 
Current Availability at
 
Balance Outstanding at
 
 
 
 
 
 
 
Weighted Average Interest Rate for the Year Ended
Lender
 
December 31, 2015
 
December 31, 2014
 
Maturity
Date
 
Interest Rate Basis (1)
 
Current Interest Rate
 
December 31,
2015
 
December 31,
2014
Bank of America
 
$
21,894

 
$
5,732

 
$
10,086

 
5/23/2017
 
LIBOR plus 3%
 
3.43
%
 
3.26
%
 
3.11
%
US Bank
 
23,000

 
—

 
23,000

 
12/27/2017
 
LIBOR plus 1.95%
 
2.38
%
 
2.19
%
 
2.17
%
PNC Bank
 
12,500

 
—

 
12,500

 
12/20/2018
 
LIBOR plus 2%
 
2.43
%
 
2.22
%
 
2.19
%
 
 
$
57,394

 
$
5,732

 
$
45,586

 
 
 
 
 
 
 
 
 
 
 
(1)
Variable rate based on one-month LIBOR of 0.4295% (as of December 31, 2015).
On December 2, 2011, the Company, through the Operating Partnership, entered into a secured revolving credit facility (the “Bank of America Credit Facility”) with Bank of America, N.A. (“Bank of America”).  On May 23, 2013 the Company amended the Bank of America Credit Facility to increase the amount it may borrow from $25 million to $50 million (the “Facility Amount”). Draws under the Bank of America Credit Facility are secured by certain of the Company's properties with an aggregate value (lower of acquisition cost or appraised value) of $55.5 million and are guaranteed by the Company. The Company is able to draw up to 50% of the aggregate value of the properties securing the facility.  The Company paid certain closing costs in connection with the Bank of America Credit Facility, including loan fees totaling $413,305.
      The Bank of America Credit Facility, as amended, matures on May 23, 2017, and may be extended to May 23, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed.  The Company is required to make monthly interest-only payments.  The Company also may prepay the Bank of America Credit Facility in whole or in part at any time without premium or penalty. For the years ended December 31, 2015 and 2014, the Company had weighted average borrowings of $13.8 million and $9.0 million under the Bank of America Credit Facility.
The Operating Partnership's obligations with respect to the Bank of America Credit Facility are guaranteed by the Company, pursuant to the terms of a guaranty dated as of December 2, 2011, or the Guaranty.  The Bank of America Credit Facility and the Guaranty contain restrictive covenants for maintaining a certain tangible net worth and a certain level of liquid assets, and for restricting the securing of additional debt as follows:
•
the Company must maintain a minimum tangible net worth equal to at least (i) 200% of the outstanding principal amount of the Bank of America Credit facility and (ii) $20.0 million;
•
the Company must also maintain unencumbered liquid assets with a market value of not less than the greater of (i) $5.0 million or (ii) 20% of the outstanding principal amount of the Bank of America Credit Facility; and
•
the Company may not incur any additional secured or unsecured debt without Bank of America's prior written consent and approval, which consent and approval is not to be unreasonably withheld.
The Company was in compliance with all such covenants at December 31, 2015.  
On December 20, 2013, the Company, through a wholly-owned subsidiary, entered into a secured revolving credit facility, ("Jefferson Point Credit Facility") with PNC Bank, National Association.  Draws under the Jefferson Point Credit Facility are secured by the assets of Tech Center Square Apartments (formerly known as the Jefferson Point Apartments). The Company provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance.) The Company paid certain closing costs in connection with the Jefferson Point Credit Facility, including loan fees totaling $75,000.
The Jefferson Point Credit Facility includes both a debt service coverage covenant and a tangible net worth covenant. In November 2014 and March 2016, the Company amended the Jefferson Point Credit Facility. In accordance with the amendment,

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



the debt service coverage covenant is only required to be complied with as of September 30, 2016 and periods thereafter. The Company was in compliance with all covenants at December 31, 2015.    
On December 27, 2013, the Company, through a wholly-owned subsidiary, entered into a secured revolving credit facility, ("Brentdale Credit Facility") with U.S. Bank National Association for $29.7 million.  Draws under the Brentdale Credit Facility are secured by the assets of Westside Apartments. The Company provided a $6.5 million repayment guarantee. The Brentdale Credit Facility matures on December 27, 2017, and may be extended to December 27, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Brentdale Credit Facility. The Company paid certain closing costs in connection with the Brentdale Credit Facility, including loan fees totaling $222,000.
The Brentdale Credit Facility includes both a net worth, liquidity and leverage covenant and a property debt service coverage covenant. In June 2015, the Company amended the Brentdale Credit Facility to amend the property debt service coverage ratio. The Company was in compliance with the requirements at December 31, 2015.
Annual principal payments on the revolving credit facilities for each of the next five years ending December 31 and thereafter are as follows (in thousands):
2016
 
$
—

2017
 
45,053

2018
 
12,341

2019
 
—

2020
 
—

Thereafter
 
—

 
 
$
57,394

NOTE 14 – DEFERRED FINANCING COSTS
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt.  During the years ended December 31, 2015 and 2014, $1.8 million and $1.4 million, respectively, of amortization of deferred financing costs was included in interest expense. Accumulated amortization as of December 31, 2015 and 2014 was approximately $3.2 million and $1.5 million, respectively.  Estimated amortization of the existing deferred financing costs for the next five years ending December 31, and thereafter are as follows (in thousands):
2016
$
1,772

2017
1,531

2018
1,198

2019
937

2020
647

Thereafter
830

 
$
6,915


NOTE 15 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in accumulated other comprehensive loss for the years ended December 31, 2015 and 2014 (dollars in thousands):

Net unrealized gain (loss) on derivatives
January 1, 2014
$
20

Unrealized loss on designated derivative
(286
)
December 31, 2014
$
(266
)
Unrealized loss on designated derivative
(174
)
December 31, 2015
$
(440
)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



NOTE 16 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has ongoing relationships with several related parties. 
Relationship with RAI
Substantially all of the receivables from related parties represents escrow funds held by RAI for self insurance. The Company's properties participate in insurance pools with other properties directly and indirectly managed by RAI for both property insurance and general liability. RAI holds the escrow funds related to the insurance pool on its books. The insurance pool covers losses up to $2.5 million for property losses and the first $25,000 of each general liability loss up to an annual maximum of $1.0 million. Catastrophic insurance would cover property losses in excess of the insurance pool up to $140.0 million. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results.
Internal audit fees. RAI performs internal audit services for the Company.
Relationship with the Advisor
In September 2009, the Company entered into an advisory agreement (the “Advisory Agreement”) pursuant to which the Advisor provides the Company with investment management, administrative and related services.  The Advisory Agreement was amended in January 2010 and further amended in January 2011 and March 2015.  The Advisory Agreement has a one-year term and renews for an unlimited number of successive one-year terms upon the approval of the conflicts committee of the Company's board of directors.  The Company renewed the advisory agreement for another year on September 15, 2015. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:
Acquisition fees. The Company pays the Advisor an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments. 
Asset management fees. The Company pays the Advisor a monthly asset management fee equal to one-twelfth of 1.0% of the higher of the cost or the independently appraised value of each asset, without deduction for depreciation, bad debts or other non-cash reserves.  The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all or a majority of an asset and does not manage or control the asset.  
Disposition fees. The Advisor earns a disposition fee in connection with of the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.75% of the contract sales price.  
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its ongoing distribution reinvestment plan offering.  This includes all organization and offering costs of up to 2.5% of gross offering proceeds.
Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out of pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment.  However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.
Relationship with the Manager
The Manager manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Property management fees. The Manager earns 4.5% of the gross receipts from the Company's properties, provided that for properties that are less than 75% occupied, the Manager receives a minimum fee for the first 12 months of ownership, for performing certain property management and leasing activities. 
Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.
Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.  
Information technology fees and Operating Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared information technology fees and operating expenses on behalf of the Company. 
Relationship with Other Related Parties
The Company has also made payment for legal services to the law firm of Ledgewood P.C. (“Ledgewood”).  Until 1996, the Chairman of RAI was of counsel to Ledgewood.  In connection with the termination of his affiliation with Ledgewood and its redemption of his interest, the Chairman continues to receive certain payments from Ledgewood.  Until March 2006, a current executive of RAI was the managing member of Ledgewood.  This executive remained of counsel to Ledgewood through June 2007, at which time he became an Executive Vice President of RAI.  
The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), whose principal owner is the father of RAI’s Chief Financial Officer.  
The fees earned / expenses paid and the amounts payable to such related parties are summarized in the following tables (in thousands):
 
As of December 31,
 
2015
 
2014
Receivables from related parties:
 
 
 
RAI and affiliates
$
1,421

 
$
1,148

 
 
 
 
Payables to related parties:
 
 
 
Advisor:
 
 
 
Operating expense reimbursements
$
286

 
$
327

 
 
 
 
Resource Real Estate Opportunity Manager, LLC:
 
 
 
Property management fees
440

 
436

Operating expense reimbursements
459

 
743

 
 
 
 
  Other
—

 
124

 
$
1,185

 
$
1,630



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



 
Years Ended
 
December 31,
 
2015
 
2014
Fees earned / expenses paid to related parties:
 
 
 
Advisor:
 
 
 
Acquisition fees (1)
$
5,179

 
$
8,591

Asset management fees (2)
$
10,240

 
$
7,262

Disposition fees (3)
$
1,140

 
$
422

Debt financing fees (4)
$
697

 
$
1,623

Overhead allocation (5)
$
3,733

 
$
2,227

Internal audit fees (5)
$
41

 
$
—

 
 
 
 
Resource Real Estate Opportunity Manager LLC:
 
 
 
Property management fees (2)
$
4,748

 
$
3,661

Construction management fees (6)
$
1,895

 
$
1,685

Information technology fees (5)
$
365

 
$
306

Operating expense reimbursements (7)
$
278

 
$
276

Debt servicing fees (2)
$
33

 
$
8

 
 
 
 
Other:
 
 
 
Ledgewood
$
169

 
$
143

Graphic Images
$
59

 
$
37

 
(1)    Included in Acquisition costs on the consolidated statements of operations and comprehensive loss.
(2)    Included in Management fees on the consolidated statements of operations and comprehensive loss.
(3)    Included in Net gain on dispositions on the consolidated statements of operations and comprehensive loss.
(4)    Included in Deferred financing costs, net on the consolidated balance sheets.
(5)    Included in General and administrative costs on the consolidated statements of operations and comprehensive loss.
(6)    Included in Rental Properties, net on the consolidated balance sheets.
(7)    Included in Rental operating expenses on the consolidated statements of operations and comprehensive loss.

NOTE 17 – EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10.0 million shares of its $0.01 par value preferred stock.  As of December 31, 2015 and 2014, no shares of preferred stock were issued and outstanding.
Common Stock
As of December 31, 2015, the Company had issued an aggregate of 72,333,652 shares of its $0.01 par value common stock as follows (dollars in thousands):
 
 
Shares Issued
 
Gross Proceeds
Shares issued through private offering

1,263,727


$
12,582

Shares issued through primary public offering (1)

62,485,461


622,077

Shares issued through stock distributions

2,132,266


—

Shares issued through distribution reinvestment plan

6,436,698


62,893

Shares issued in conjunction with the Advisor's initial investment,
net of 4,500 share conversion

15,500


155

    Total
 
72,333,652

 
$
697,707

Shares redeemed
 
(716,535
)
 
 
Total shares outstanding as of December 31, 2015
 
71,617,117

 
 

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



 
(1)    Includes 276,056 shares held by the Advisor.
Convertible Stock
As of December 31, 2015 and 2014, the Company had 50,000 shares of $0.01 par value convertible stock outstanding of which the Advisor and affiliated persons own 49,063 shares and outside investors own 937 shares.  The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 10% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on the 31st trading day after listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold.
Redemption of Securities
During the year ended December 31, 2015, the Company redeemed 501,699 shares of its outstanding common stock. All redemption requests tendered were honored during the year ended December 31, 2015. The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. The Company's board of directors will determine at least quarterly whether it has sufficient excess cash to repurchase shares. Generally, the cash available for redemptions will be limited to proceeds from the Company's distribution reinvestment plan plus, if the Company has positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.
The Company's board of directors, in its sole discretion, may suspend, terminate or amend the Company's share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in the Company's best interest. The Company's board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund the Company's share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.
Distributions
For the year ended December 31, 2015, the Company paid aggregate distributions of $42.2 million, including $13.3 million of distributions paid in cash and $29.0 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands, except per share data):
Record Date
 
Per Common
Share
 
Distribution Date
 
Distributions
Invested in
Shares of
Common Stock
 
Aggregate
Cash
Distribution
 
Total
Aggregate
Distribution
January 29, 2015
 
$0.05
 
January 30, 2015
 
$
2,391

 
$
1,070

 
$
3,461

February 26, 2015
 
0.05
 
February 27, 2015
 
2,392

 
1,081

 
3,473

March 30, 2015
 
0.05
 
March 31, 2015
 
2,400

 
1,080

 
3,480

April 29, 2015
 
0.05
 
April 30, 2015
 
2,408

 
1,084

 
3,492

May 28, 2015
 
0.05
 
May 29, 2015
 
2,418

 
1,088

 
3,506

June 29, 2015
 
0.05
 
June 30, 2015
 
2,423

 
1,093

 
3,516

July 30, 2015
 
0.05
 
July 31, 2015
 
2,424

 
1,103

 
3,527

August 28, 2015
 
0.05
 
August 31, 2015
 
2,416

 
1,119

 
3,535

September 29, 2015
 
0.05
 
September 30, 2015
 
2,417

 
1,124

 
3,541

October 29, 2015
 
0.05
 
October 30, 2015
 
2,418

 
1,134

 
3,552

November 27, 2015
 
0.05
 
November 30, 2015
 
2,427

 
1,137

 
3,564

December 30, 2015
 
0.05
 
December 31, 2015
 
2,425

 
1,144

 
3,569

 
 
$0.60
 
 
 
$
28,959

 
$
13,257

 
$
42,216


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



Since its formation, the Company has declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of its common stock outstanding. In connection with these stock distributions, the Company increased its accumulated deficit by $21.3 million as of December 31, 2015.
NOTE 18 – FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. 
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, the Company expects that changes in classifications between levels will be rare.
Rental properties obtained through a foreclosed note are measured at fair value on a non-recurring basis.  The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.
Derivatives (interest rate caps), which are reported at fair value in the consolidated balance sheets, are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2)
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$
—

 
$
32

 
$
—

 
$
32

 
$
—

 
$
32

 
$
—

 
$
32

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$
—

 
$
114

 
$
—

 
$
114

 
$
—

 
$
114

 
$
—

 
$
114

The carrying and fair values of the Company’s loans held for investment, net, preferred equity investment, mortgage note payable and revolving credit facilities, each of which were not carried at fair value on the consolidated balance sheets at December 31, 2015 and 2014, were as follows (in thousands):
 
December 31, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Loans held for investment and preferred equity investment, net
$
4,643

 
$
5,059

 
$
4,985

 
$
4,985

 
 
 
 
 
 
 
 
Mortgage notes payable (1)
$
(562,558
)
 
$
(538,986
)
 
$
(444,168
)
 
$
(450,269
)
 
 
 
 
 
 
 
 
Mortgage notes payable- included in other liabilities associated with rental properties held for sale
$
(16,443
)
 
$
(16,597
)
 
$
—

 
$
—

 
 
 
 
 
 
 
 
Credit facilities
$
(57,394
)
 
$
(57,394
)
 
$
(45,586
)
 
$
(45,586
)
 
(1)
Mortgage notes payable excludes Champion Farms, due to the fact the investment was held for sale at 12.31.15.
The fair value of the loans held for investment and preferred equity investment, net was estimated using rates available to the Company for debt with similar terms and remaining maturities. The fair value of the preferred equity investment at December 31, 2014 was the same as its carrying value due to its recent acquisition.
The fair value of the mortgage notes payable was estimated using rates available to the Company for debt with similar terms and remaining maturities.
The fair values of the three credit facilities equal the carrying amounts because the interest rate of each of the credit facilities is variable, which is commensurate with market rates for similar debt.

NOTE 19 – DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also service to protect the lender.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into two and three interest rate caps that were designated as cash flow hedges during the years ended December 31, 2015 and 2014, respectively. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the years end December 31, 2015 and 2014, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the year ended December 31, 2015 and 2014, the Company recorded no hedge ineffectiveness in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During 2016, the Company estimates that $52,637 will be reclassified as an increase to interest expense.

As of December 31, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
Interest Rate Derivative
 
Number of Instruments
 
Notional
 
Maturity Dates
Interest Rate Caps
 
7
 
$
107,363

 
January 1, 2018 to April 1, 2019

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2015 and 2014 (dollars in thousands):
Asset Derivatives
 
Liability Derivatives
December 31, 2015
 
December 31, 2014
 
December 31, 2015
 
December 31, 2014
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Interest rate cap (1)
 
$
32

 
Interest rate cap
 
$
114

 
—

 
$
—

 
—

 
$
—

(1)     Interest rate caps are included on the consolidated balance sheet in prepaid expenses and other assets.
NOTE 20 – OPERATING EXPENSE LIMITATION
Under its charter, the Company must limit its total operating expenses to the lesser of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the conflicts committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.  Operating expenses for the four quarters ended December 31, 2015 were in compliance with the charter imposed limitation.


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2015



NOTE 21 – GAIN ON INSURANCE CLAIMS
One of the Paladin properties, Stone Ridge, had a large fire in 2013 which damaged 13 units. In 2015 and 2014, the Company received $247,000 and $369,000, respectively, of proceeds from the insurance company, net of expenses due to the prior owners.     
In 2015, the Company received $160,000 in proceeds from an insurer for a fire that occurred at the Chisholm Place Apartments in 2014.
In 2014, the Company received $56,000 in proceeds from an insurer for a fire that occurred at the Mosaic Apartments in 2013.         
NOTE 22 – SUBSEQUENT EVENTS
On January 27, 2016, the Company and its joint venture partner sold the Conifer Place Apartments, located in Norcross, Georgia, for $42.5 million. The Company expects to recognize a gain on the sale during the quarter ending March 31, 2016.
On January 29, 2016, the Company sold its interest in the joint venture that owns Champion Farms in Louisville, Kentucky for $7.6 million. The Company expects to recognize a gain on the sale during the quarter ending March 31, 2016.
On February 17, 2016, the Company sold Ivy at Clear Creek, in Houston, Texas for $19.4 million. The Company expects to recognize a gain on the sale during the quarter ending March 31, 2016.
The Company has evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 2015
(dollars in thousands)
Column A
 
Column B
 
Column C
 
Column D
 
Column E
 
Column F
 
Column G
 
Column H
 
Column I
Description
 
Encumbrances
 
Initial cost to Company
 
Cost capitalized subsequent to acquisition
 
Gross Amount at which carried at close of period
 
Accumulated Depreciation
 
Date of Construction
 
Date Acquired
 
Life on which depreciation in latest income is computed
 
 
 
 
Buildings and Land Improvements
 
Improvements Carrying Costs
 
Buildings and Land Improvements Total
 
 
 
 
 
 
 
 
Real estate owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
15,573

 
$
11,076

 
$
4,283

 
$
15,359

 
$
(3,100
)
 
1961
 
6/17/2011
 
3 - 27.5 years
Philadelphia, PA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
8,148

 
8,273

 
1,303

 
9,576

 
(1,602
)
 
1838
 
5/13/2011
 
3 - 27.5 years
Dayton, OH
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
—

 
39,341

 
11,662

 
51,003

 
(10,098
)
 
1966
 
6/20/2012
 
3 - 27.5 years
Cincinnati, OH
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
—

 
1,961

 
4,089

 
6,050

 
(1,189
)
 
1974
 
12/6/2012
 
3 - 27.5 years
Oklahoma City, OK
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
10,517

 
9,620

 
4,861

 
14,481

 
(1,873
)
 
1993
 
1/22/2013
 
3 - 27.5 years
Hermantown, MN
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
8,431

 
11,080

 
2,820

 
13,900

 
(1,874
)
 
1979
 
3/28/2013
 
3 - 27.5 years
Houston, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential (3)
 
—

 
8,064

 
3,398

 
11,462

 
(1,395
)
 
1986
 
4/18/2013
 
3 - 27.5 years
Hoover, AL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
19,013

 
26,496

 
3,917

 
30,413

 
(3,306
)
 
1981
 
6/24/2013
 
3 - 27.5 years
Houston, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential (3)
 
—

 
9,494

 
3,629

 
13,123

 
(1,521
)
 
1969
 
6/27/2013
 
3 - 27.5 years
Winter Park, FL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
23,000

 
31,001

 
4,373

 
35,374

 
(3,385
)
 
1984
 
7/25/2013
 
3 - 27.5 years
Plano, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
12,500

 
17,583

 
2,293

 
19,876

 
(1,912
)
 
1985
 
9/9/2013
 
3 - 27.5 years
Newport News, VA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
22,402

 
29,509

 
3,043

 
32,552

 
(2,214
)
 
1985
 
9/30/2013
 
3 - 27.5 years
Littleton, CO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
18,089

 
23,321

 
3,276

 
26,597

 
(2,520
)
 
1985
 
9/30/2013
 
3 - 27.5 years
Westminster, CO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
20,298

 
24,192

 
4,837

 
29,029

 
(2,273
)
 
1985
 
10/25/2013
 
3 - 27.5 years
Alpharetta, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 2015
(dollars in thousands)
(Continued)
Column A
 
Column B
 
Column C
 
Column D
 
Column E
 
Column F
 
Column G
 
Column H
 
Column I
Description
 
Encumbrances
 
Initial cost to Company
 
Cost capitalized subsequent to acquisition
 
Gross Amount at which carried at close of period
 
Accumulated Depreciation
 
Date of Construction
 
Date Acquired
 
Life on which depreciation in latest income is computed
 
 
 
 
Buildings and Land Improvements
 
Improvements Carrying Costs
 
Buildings and Land Improvements Total
 
 
 
 
 
 
 
 
Residential
 
13,850

 
21,831

 
5,510

 
27,341

 
(2,607
)
 
1982
 
12/16/2013
 
3 - 27.5 years
San Antonio, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential (3)
 
—

 
32,142

 
3,116

 
35,258

 
(2,570
)
 
1988
 
12/20/2013
 
3 - 27.5 years
Burnsville, MN
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential(1)
 
16,442

 
26,632

 
672

 
27,304

 
(1,868
)
 
1998
 
1/28/2014
 
3 - 27.5 years
Louisville, KY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential(1)
 
15,332

 
19,892

 
808

 
20,700

 
(1,579
)
 
1928
 
1/28/2014
 
3 - 27.5 years
Woodlawn, OH
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential(1)
 
27,074

 
33,752

 
606

 
34,358

 
(2,469
)
 
1981
 
1/28/2014
 
3 - 27.5 years
Norcross, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential(1)
 
5,350

 
5,912

 
2,530

 
8,442

 
(925
)
 
1974
 
1/28/2014
 
3 - 27.5 years
Columbia, SC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
50,000

 
69,111

 
6,122

 
75,233

 
(4,936
)
 
1999
 
3/28/2014
 
3 - 27.5 years
Alpharetta, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
27,671

 
42,001

 
437

 
42,438

 
(3,385
)
 
2003
 
5/5/2014
 
3 - 27.5 years
Baton Rouge, LA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
11,587

 
14,562

 
422

 
14,984

 
(1,000
)
 
1981
 
5/5/2014
 
3 - 27.5 years
Plano, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
17,657

 
28,911

 
1,628

 
30,539

 
(1,732
)
 
1995
 
5/19/2014
 
3 - 27.5 years
Atlanta, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
13,935

 
21,796

 
1,774

 
23,570

 
(1,304
)
 
1995
 
5/19/2014
 
3 - 27.5 years
Atlanta, GA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
23,772

 
31,385

 
2,721

 
34,106

 
(1,849
)
 
2000
 
6/26/2014
 
3 - 27.5 years
Katy, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
13,254

 
18,250

 
1,073

 
19,323

 
(1,704
)
 
1984
 
7/1/2014
 
3 - 27.5 years
Shawnee, KS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 2015
(dollars in thousands)
(Continued)
Column A
 
Column B
 
Column C
 
Column D
 
Column E
 
Column F
 
Column G
 
Column H
 
Column I
Description
 
Encumbrances
 
Initial cost to Company
 
Cost capitalized subsequent to acquisition
 
Gross Amount at which carried at close of period
 
Accumulated Depreciation
 
Date of Construction
 
Date Acquired
 
Life on which depreciation in latest income is computed
 
 
 
 
Buildings and Land Improvements
 
Improvements Carrying Costs
 
Buildings and Land Improvements Total
 
 
 
 
 
 
 
 
Residential
 
6,350

 
11,898

 
480

 
12,378

 
(1,129
)
 
1985
 
7/1/2014
 
3 - 27.5 years
Lee's Summit, MO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
4,111

 
9,691

 
680

 
10,371

 
(955
)
 
1983
 
7/1/2014
 
3 - 27.5 years
Kansas City, MO
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
23,497

 
34,554

 
3,698

 
38,252

 
(1,423
)
 
1949
 
9/4/2014
 
3 - 27.5 years
San Antonio, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
35,740

 
47,075

 
3,424

 
50,499

 
(2,205
)
 
1984
 
9/29/2014
 
3 - 27.5 years
Irving, TX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
14,904

 
21,204

 
260

 
21,464

 
(1,514
)
 
1974
 
11/25/2014
 
3 - 27.5 years
Yorktown, VA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
12,682

 
23,370

 
1,856

 
25,226

 
(684
)
 
1981
 
2/26/2015
 
3 - 27.5 years
Austin, TX
 

 


 


 


 


 

 

 

Residential
 
26,280

 
35,070

 
1,407

 
36,477

 
(849
)
 
1986
 
3/19/2015
 
3 - 27.5 years
Gilbert, AZ
 

 


 


 


 


 

 

 

Residential
 
67,500

 
116,036

 
(113
)
 
115,923

 
(1,779
)
 
1986
 
6/1/2015
 
3 - 27.5 years
Orange County, CA
 

 


 


 


 


 

 

 

Residential
 
29,541

 
50,365

 
(135
)
 
50,230

 
(635
)
 
1988
 
6/16/2015
 
3 - 27.5 years
Chula Vista, CA
 

 


 


 


 


 

 

 

 
 
$
614,500

 
$
966,451

 
$
96,760

 
$
1,063,211

(2
)
$
(77,363
)
(2
)
 
 
 
 
 
 
(1)    Acquired an interest in the property on 1/28/2014 with the Paladin merger.
(2)    Includes properties held for sale at 12/31/2015.
(3)    Rental property held as collateral for the Company's secured revolving credit facility.




RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
SCHEDULE III
Real Estate and Accumulated Depreciation
December 31, 2015
(dollars in thousands)
(Continued)

 
Years Ended
 
December 31,
 
2015
 
2014
Balance, beginning of the period
$
857,151

 
$
406,149

Additions during period:
 
 
 
Acquisitions
224,841

 
436,626

Improvements, etc.
43,018

 
37,384

Dispositions during the period
(61,799
)
 
(23,008
)
Balance, at close of period
$
1,063,211

 
$
857,151

 
 
 
 
Accumulated depreciation:
 
 
 
Balance, beginning of period
$
(45,133
)
 
$
(15,776
)
  Sales
9,031

 
2,962

  Disposals
652

 
478

  Depreciation
(41,913
)
 
(32,797
)
Balance, end of period
$
(77,363
)
 
$
(45,133
)
`





RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
SCHEDULE IV
Mortgage Loans on Real Estate
December 31, 2015
(dollars in thousands)

Column A
 
Column B
 
Column C
 
Column D
 
Column E
 
Column F
 
Column G
 
Column H
Description
 
Interest rate
 
Final maturity date
 
Periodic payment term
 
Prior liens
 
Face amount of mortgages
 
Carrying amount of mortgages
 
Principal amount of loans subject to delinquent principal or interest
Residential
Columbia City, IN
 
Fixed interest rate
of 7.5%
 
10/28/2021
 
N/A
 
N/A
 
$
1,058

 
$
757

 
$
—

 
 
 
 
 
 
 
 
 
 
$
1,058

 
$
757

 
$
—



 
Year Ended
 
December 31,
2015
Balance, beginning of the period
$
1,523

Interest accretion
23

Principal reductions
(659
)
Impairments
(130
)
Balance, end of the period
$
757


Resource Real Estate Opportunity REIT, Inc. Reports