CNL Growth Properties, Inc. - FORM 10-Q - November 10, 2016

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EX-10.2 - EXHIBIT 10.2 - CNL Growth Properties, Inc.exhibit102-cgpq316.htm
EX-32.1 - EXHIBIT 32.1 - CNL Growth Properties, Inc.exhibit321-cgpq316.htm
EX-31.2 - EXHIBIT 31.2 - CNL Growth Properties, Inc.exhibit312-cgpq316.htm
EX-31.1 - EXHIBIT 31.1 - CNL Growth Properties, Inc.exhibit311-cgpq316.htm
EX-10.5 - EXHIBIT 10.5 - CNL Growth Properties, Inc.exhibit105-cgpq316.htm
EX-10.4 - EXHIBIT 10.4 - CNL Growth Properties, Inc.exhibit104-cgpq316.htm
EX-10.3 - EXHIBIT 10.3 - CNL Growth Properties, Inc.exhibit103-cgpq316.htm
EX-10.1 - EXHIBIT 10.1 - CNL Growth Properties, Inc.exhibit101-cgpq316.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________________________
 FORM 10-Q
____________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 000-54686
 _________________________________________________________________________________
 CNL Growth Properties, Inc.
(Exact name of registrant as specified in its charter)
 _________________________________________________________________________________
 
 
 
Maryland
 
26-3859644
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
CNL Center at City Commons
450 South Orange Avenue
Orlando, Florida
 
32801
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (407) 650-1000
 ___________________________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
 
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
The number of shares of common stock of the registrant outstanding as of November 1, 2016 was 22,526,171.
 
 
 
 
 

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES

INDEX



 
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF NET ASSETS
(Liquidation Basis)
(Unaudited)
 
 
September 30,
2016
ASSETS
 
 
Real estate assets, net
 
$
493,833,000

Cash and cash equivalents
 
21,662,641

Restricted cash
 
1,142,003

Other assets
 
128,788

Total Assets
 
$
516,766,432

LIABILITIES
 
 
Mortgage and construction notes payable
 
$
254,957,111

Liability for non-controlling interests
 
64,663,786

Liability for estimated costs in excess of estimated receipts during liquidation
 
18,919,654

Accrued development costs
 
7,089,000

Accounts payable and other accrued expenses
 
5,538,233

Due to related parties
 
2,015,813

Other liabilities
 
1,157,785

Total Liabilities
 
354,341,382

Commitments and contingencies (Note 8)
 


Net assets in liquidation
 
$
162,425,050


See accompanying notes to condensed consolidated financial statements.

1

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Going Concern Basis)
(Unaudited)
 
 
December 31,
2015
ASSETS
 
 
Real estate assets, net:
 
 
Operating real estate assets, net (including VIEs $170,258,129)
 
$
175,359,303

Construction in process, including land (including VIEs $114,367,104)
 
119,031,154

Total real estate assets, net
 
294,390,457

Real estate held for sale (including VIEs $96,073,012)
 
124,092,989

Cash and cash equivalents (including VIEs $8,086,954)
 
19,016,194

Restricted cash (including VIEs $1,058,010)
 
1,369,515

Other assets (including VIEs $1,165,593)
 
1,613,635

Total Assets
 
$
440,482,790

LIABILITIES AND EQUITY
 
 
Liabilities:
 
 
Mortgage and construction notes payable (including VIEs $239,298,457)
 
$
267,025,839

Accrued development costs (including VIEs $18,265,802)
 
18,265,802

Due to related parties
 
1,650,788

Accounts payable and other accrued expenses (including VIEs $4,436,485)
 
4,973,131

Other liabilities (including VIEs $594,221)
 
678,702

Total Liabilities
 
292,594,262

Commitments and contingencies (Note 8)
 

Equity:
 
 
Stockholders’ equity:
 
 
Preferred stock, $0.01 par value per share, authorized and unissued 200,000,000 shares
 
—

Common stock, $0.01 par value per share, 1,120,000,000 shares authorized; 22,702,363 issued and 22,526,171 outstanding
 
225,262

Capital in excess of par value
 
170,792,081

Accumulated earnings
 
18,895,225

Accumulated cash distributions
 
(67,578,518
)
Total Stockholders’ Equity
 
122,334,050

Noncontrolling interests
 
25,554,478

Total Equity
 
147,888,528

Total Liabilities and Equity
 
$
440,482,790

The abbreviation VIEs above means Variable Interest Entities.
See accompanying notes to condensed consolidated financial statements.


2

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Liquidation Basis)
(Unaudited)
 
 
Period from August 1, 2016 through September 30, 2016
Net assets in liquidation, beginning of period (Note 5)
 
$
215,361,554

Liquidating distributions to stockholders
 
(52,936,504
)
Net assets in liquidation, end of period
 
$
162,425,050



See accompanying notes to condensed consolidated financial statements.


3

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Going Concern Basis)
(Unaudited)
 
 
One Month Ended
July 31,
 
Quarter Ended September 30,
 
Seven Months Ended July 31,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
Rental income from operating leases
 
$
2,667,662

 
$
9,284,498

 
$
19,609,682

 
$
22,441,810

Other property revenues
 
225,343

 
691,041

 
1,593,124

 
1,775,857

Total revenues
 
2,893,005

 
9,975,539

 
21,202,806

 
24,217,667

Expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
1,672,514

 
5,036,001

 
11,653,617

 
12,034,722

General and administrative
 
249,315

 
700,036

 
2,775,540

 
2,469,186

Asset management fees, net of amounts capitalized
 
220,244

 
645,544

 
1,604,305

 
1,698,073

Property management fees
 
111,820

 
356,149

 
965,979

 
923,574

Acquisition fees and expenses, net of amounts capitalized
 
—

 
—

 
—

 
16,462

Depreciation
 
920,528

 
2,338,221

 
5,355,949

 
7,669,155

Total operating expenses
 
3,174,421

 
9,075,951

 
22,355,390

 
24,811,172

Operating (loss) income
 
(281,416
)
 
899,588

 
(1,152,584
)
 
(593,505
)
Other income (expense):
 
 
 
 
 
 
 
 
Fair value adjustments and other income (expense)
 
76,829

 
(25,292
)
 
73,120

 
(26,008
)
Interest expense and loan cost amortization, net of amounts capitalized
 
(642,684
)
 
(1,491,920
)
 
(4,197,031
)
 
(3,772,451
)
Loss on extinguishment of debt
 
—

 
(11,216
)
 
(27,454
)
 
(11,216
)
Total other expense
 
(565,855
)
 
(1,528,428
)
 
(4,151,365
)
 
(3,809,675
)
Income tax (expense) benefit
 
(3,360
)
 
—

 
(151,217
)
 
—

Loss from continuing operations
 
(850,631
)
 
(628,840
)
 
(5,455,166
)
 
(4,403,180
)
Income from discontinued operations, net of tax
 
—

 
491,000

 
—

 
26,556,668

Net (loss) income before gain on sale of real estate and easement
 
(850,631
)
 
(137,840
)
 
(5,455,166
)
 
22,153,488

Gain on sale of real estate, net of tax
 
—

 
18,158,938

 
40,917,543

 
18,158,938

Gain on sale of easement
 
—

 
—

 
—

 
603,400

Net income (loss) including noncontrolling interests
 
(850,631
)
 
18,021,098

 
35,462,377

 
40,915,826

Net income attributable to noncontrolling interest:
 
 
 
 
 
 
 
 
Continuing operations
 
148,792

 
(11,737,771
)
 
(21,931,862
)
 
(11,479,364
)
Discontinued operations
 
—

 
—

 
—

 
(13,459,486
)
Net (income) loss attributable to noncontrolling interests
 
148,792

 
(11,737,771
)
 
(21,931,862
)
 
(24,938,850
)
Net income (loss) attributable to common stockholders
 
$
(701,839
)
 
$
6,283,327

 
$
13,530,515

 
$
15,976,976

Net income (loss) per share of common stock (basic and diluted):
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.03
)
 
$
0.26

 
$
0.60

 
$
0.13

Discontinued operations
 
—

 
0.02

 
—

 
0.58

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

 
$
0.60

 
$
0.71

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

 
22,526,171

 
22,526,171

 
22,526,171

See accompanying notes to condensed consolidated financial statements.

4

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Going Concern Basis)
(Unaudited)
 
 
Common Stock
 
Capital in
 
Accumulated
 
Accumulated
 
Total
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Excess of
Par Value
 
Earnings
(Deficit)
 
Cash
Distributions
 
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at December 31, 2014
 
22,526,171

 
$
225,262

 
$
170,792,081

 
$
(12,007,405
)
 
$
—

 
$
159,009,938

 
$
34,900,995

 
$
193,910,933

Cash distributions declared and paid ($1.30 per share)
 
—

 
—

 
—

 
—

 
(29,284,024
)
 
(29,284,024
)
 
—

 
(29,284,024
)
Contributions from noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
1,877,931

 
1,877,931

Return of capital to non-controlling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
(3,813,491
)
 
(3,813,491
)
Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
(26,461,846
)
 
(26,461,846
)
Net income
 
—

 
—

 
—

 
15,976,976

 
—

 
15,976,976

 
24,938,850

 
40,915,826

Balance at September 30, 2015
 
22,526,171

 
$
225,262

 
$
170,792,081

 
$
3,969,571

 
$
(29,284,024
)
 
$
145,702,890

 
$
31,442,439

 
$
177,145,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
22,526,171

 
$
225,262

 
$
170,792,081

 
$
18,895,225

 
$
(67,578,518
)
 
$
122,334,050

 
$
25,554,478

 
$
147,888,528

Distributions to noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

 
(27,107,808
)
 
(27,107,808
)
Net income
 
—

 
—

 
—

 
13,530,515

 
—

 
13,530,515

 
21,931,862

 
35,462,377

Balance at July 31, 2016
 
22,526,171

 
$
225,262

 
$
170,792,081

 
$
32,425,740

 
$
(67,578,518
)
 
$
135,864,565

 
$
20,378,532

 
$
156,243,097

See accompanying notes to condensed consolidated financial statements.


5

CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Going Concern Basis)
(Unaudited)
 
 
Seven Months Ended July 31,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
Operating Activities:
 
 
 
 
Net income, including amounts attributable to noncontrolling interests
 
$
35,462,377

 
$
40,915,826

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
5,355,949

 
7,669,155

Amortization of loan costs
 
441,510

 
411,559

Loss on extinguishment of debt
 
27,454

 
829,620

Prepayment penalties on loans
 
—

 
(282,485
)
Loss on retirement of fixed assets
 
1,005

 
—

Gain on sale of real estate held for sale
 
(41,017,124
)
 
(45,573,135
)
Gain on sale of easement
 
—

 
(603,400
)
Unrealized loss from change in fair value of interest rate caps
 
23,342

 
76,492

Straight-line rent adjustments
 
(413,223
)
 
(144,048
)
Changes in operating assets and liabilities:
 
 
 
 
Other assets
 
110,316

 
(820,790
)
Due to related parties
 
20,375

 
193,290

Accounts payable and other accrued expenses
 
297,385

 
2,730,924

Other liabilities
 
(11,998
)
 
196,980

Net cash provided by operating activities
 
297,368

 
5,599,988

Investing Activities:
 
 
 
 
Development property costs, including land and capital expenditures
 
(53,371,715
)
 
(110,095,588
)
Capital expenditures
 
(91,758
)
 
—

Proceeds from sale of properties
 
109,996,325

 
106,093,743

Proceeds from sale of easement
 
—

 
675,000

Changes in restricted cash
 
(124,110
)
 
(495,963
)
Net cash provided by (used in) investing activities
 
56,408,742

 
(3,822,808
)
Financing Activities:
 
 
 
 
Cash distributions paid on common stock
 
—

 
(29,284,024
)
Proceeds from mortgage and construction notes payable
 
53,606,891

 
94,278,219

Payments of mortgage and construction notes payable
 
(51,205,315
)
 
(53,547,975
)
Payment of loan costs
 
—

 
(366,236
)
Purchase of interest rate cap
 
—

 
(72,200
)
Advance from affiliate of noncontrolling interest
 
418,522

 
15,000

Repayment of advance from affiliate of noncontrolling interest
 
(15,000
)
 
—

Contributions from noncontrolling interests
 
—

 
1,877,931

Distributions to noncontrolling interests
 
(27,107,808
)
 
(30,275,337
)
Net cash used in financing activities
 
(24,302,710
)
 
(17,374,622
)
Net Increase (Decrease) in Cash and Cash Equivalents
 
32,403,400

 
(15,597,442
)
Cash and Cash Equivalents at Beginning of Period
 
19,016,194

 
47,691,457

Cash and Cash Equivalents at End of Period
 
$
51,419,594

 
$
32,094,015

 
 
 
 
 
Supplemental Disclosure of Non-Cash Investing and Financing Transactions:
 
 
 
 
Amounts incurred but not paid:
 
 
 
 
Development costs
 
$
11,315,050

 
$
18,107,096

Loan cost amortization capitalized on development properties
 
$
233,707

 
$
640,700

See accompanying notes to condensed consolidated financial statements.

6
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)



 1.
Business and Organization
CNL Growth Properties, Inc. was organized in Maryland on December 12, 2008. The term “Company” includes, unless the context otherwise requires, CNL Growth Properties, Inc., Global Growth, LP, a Delaware limited partnership (the “Operating Partnership”), Global Growth GP, LLC and other subsidiaries (including variable interest entities) of CNL Growth Properties, Inc. The Company operates, and has elected to be taxed, as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2010.
On June 17, 2016, the Company filed a definitive proxy statement with the SEC requesting, among other items, the stockholders' approval of a plan of liquidation and dissolution ("Plan of Dissolution") authorizing the Company to undertake an orderly liquidation. On August 4, 2016, the Company's stockholders approved the Plan of Dissolution. As a result of the adoption of the Plan of Dissolution, all of the Company's real estate properties are considered held for sale.
The Company is externally advised by CNL Global Growth Advisors, LLC (the “Advisor”) and its property manager is CNL Global Growth Managers, LLC (the “Property Manager”), each of which is an affiliate of CNL Financial Group, LLC, the Company’s sponsor (“CNL” or the “Sponsor”). The Advisor is responsible for managing the Company’s affairs on a day-to-day basis on behalf of the Company pursuant to an advisory agreement among the Company, the Operating Partnership and the Advisor.
Substantially all of the Company’s operating, administrative and certain property management services, are provided by sub-advisors to the Advisor and sub-property managers to the Property Manager.
As of September 30, 2016, the Company owned interests in ten Class A multifamily properties, nine of which were operational and as to which development was substantially complete and one of which was under development and partially operational. The Company had a total of 2,800 completed apartment units as of September 30, 2016.
All of the Company’s multifamily properties are owned through joint ventures in which it has co-invested with an affiliate of a national or regional multifamily developer.

2.
Plan of Dissolution
The Plan of Dissolution provides for an orderly sale of the Company's assets, payment of the Company's liabilities and other obligations, the winding up of operations and dissolution of the Company. The Company is permitted to provide for the payment of any unascertained or contingent liabilities and may do so by purchasing insurance, establishing a reserve fund or in other ways.
The Plan of Dissolution enables the Company to sell any and all of its assets without further approval of the stockholders and provides that liquidating distributions be made to the stockholders as determined by the Board. Pursuant to applicable REIT rules, in order to be able to deduct liquidating distributions as dividends, the Company must complete the disposition of its assets by August 5, 2018, two years after the date the Plan of Dissolution was adopted by stockholders. To the extent that all of the Company's assets are not sold by such date, the Company may transfer and assign its remaining assets to a liquidating trust. Upon such transfer and assignment, its stockholders will receive interests in the liquidating trust. The liquidating trust will pay or provide for all of the Company's liabilities and distribute any remaining net proceeds from the sale of its assets to the holders of interest in the liquidating trust.
The dissolution process and the amount and timing of distributions to stockholders involves risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to stockholders and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the Condensed Consolidated Statement of Net Assets.
The Company expects to continue to qualify as a REIT throughout the liquidation until such time as any remaining assets, if any, are transferred into a liquidating trust. The Board shall use commercially reasonable efforts to continue to cause the Company to maintain its REIT status, provided however, the Board may elect to terminate the Company's status as a REIT if it determines that such termination would be in the best interest of the stockholders.


7
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


3.
Summary of Significant Accounting Policies
Basis of Presentation - As a result of the approval of the Plan of Dissolution by the stockholders in August 2016, the Company’s financial position and results of operations for the nine months ended September 30, 2016 will be presented using two different presentations. The Company adopted the liquidation basis of accounting (“Liquidation Basis”) as of August 1, 2016 and for the periods subsequent to August 1, 2016. As a result, a new statement of financial position (Statement of Net Assets) is presented, which represents the estimated amount of cash that the Company will collect on disposal of assets as it carries out its Plan of Dissolution. In addition, a new statement of operations (Statement of Changes in Net Assets) will reflect changes in net assets from the original estimated values as of August 1, 2016 through the most recent period presented, as further described below.
All financial results and disclosures up through July 31, 2016, prior to adopting the Liquidation Basis of accounting, will be presented based on a going concern basis (“Going Concern Basis”), which contemplated the realization of assets and liabilities in the normal course of business. As a result, the balance sheet as of December 31, 2015, and the statements of operations and the statements of cash flows for the seven months ended July 31, 2016 and the comparative nine months ended September 30, 2015 used the Going Concern Basis presentation consistent in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as further described below.
Basis of Presentation Liquidation Basis (Post Plan of Dissolution) – As a result of the approval of the Plan of Dissolution by the stockholders, the Company has adopted the Liquidation Basis of accounting as of August 1, 2016 and for the periods subsequent to August 1, 2016 in accordance with GAAP. Accordingly, on August 1, 2016 assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Company will collect on disposal of assets as it carries out its Plan of Dissolution. The liquidation value of the Company's operating properties are presented on an undiscounted basis. Estimated costs to dispose of assets have been presented separately from the related assets. Liabilities are carried at their contractual amounts due or estimated settlement amounts.
The Company accrues costs and income that it expects to incur and earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the Condensed Consolidated Statement of Net Assets. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 4, "Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation" for further discussion. Actual costs incurred but unpaid as of September 30, 2016 are included in accrued development costs, accounts payable and other accrued expenses, due to related parties and other liabilities on the Condensed Consolidated Statement of Net Assets.
In liquidation, the presentation for joint ventures historically consolidated under going concern accounting will be determined based on the Company's planned exit strategy. The Company intends to sell all of its properties, rather than selling its interest in its properties, and therefore the properties will be presented on a gross basis with a liability to the non-controlling interest holders. Amounts due to non-controlling interests in connection with the disposition of consolidated joint ventures have been accrued and are recorded as liability for non-controlling interests.
Net assets in liquidation represents the estimated liquidation value available to stockholders upon liquidation. Due to the uncertainty in the timing of the anticipated sale dates and the estimated cash flows, actual operating results and sale proceeds may differ materially from the amounts estimated.
Noncontrolling Interesets - Liquidation Basis (Post Plan of Dissolution) - Under liquidation accounting, the presentation for joint ventures historically consolidated under going concern accounting will be presented on a gross basis with a liability to the noncontrolling interest partner.
Basis of Presentation - Going Concern Basis (Pre Plan of Dissolution)- The accompanying unaudited condensed consolidated financial statements through July 31, 2016 have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles of the United States (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are necessary for the fair presentation of the Company’s results for the interim periods presented. Operating results for the periods ended July 31, 2016 and September 30, 2015 were prepared on the going concern basis of accounting, which contemplates the realization of assets and liabilities in the normal course of business. Amounts as of December 31, 2015 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date but do not include all disclosures required by GAAP. These accompanying condensed consolidated financial statements should be read in conjunction with

8
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


3.
Summary of Significant Accounting Policies (continued)
the consolidated financial statements and notes thereto as of December 31, 2015, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Consolidation and Variable Interest Entities – The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries over which it has control. All intercompany accounts have been eliminated in consolidation. In accordance with the guidance for the consolidation of a variable interest entity (“VIE”), the Company analyzes its variable interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which it has a variable interest is a VIE. The Company’s analysis includes both quantitative and qualitative reviews. The Company bases its quantitative analysis on the forecasted cash flows of the entity and its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. The Company also uses its quantitative and qualitative analyses to determine if it is the primary beneficiary of the VIE, and if such determination is made, it includes the accounts of the VIE in its consolidated financial statements.
Other Comprehensive Income (Loss) – Going Concern Basis (Pre Plan of Dissolution) – The Company had no items of other comprehensive income (loss) through July 31, 2016 and therefore, did not include other comprehensive income (loss) or total comprehensive income (loss) in the accompanying condensed consolidated financial statements.
 
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Actual results could differ from those estimates.
Reclassifications — Real estate balances for the four properties identified for sale during the seven months ended July 31, 2016 were reclassified to real estate held for sale in the December 31, 2015 condensed balance sheet. These reclassifications had no effect on previously reported net income (loss) or equity. See Note 7. “Real Estate Held for Sale, Dispositions and Discontinued Operations” for additional information.
Income Taxes – The Company has elected and qualified as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and related regulations beginning with the year ended December 31, 2010. As a REIT, the Company generally is subject to federal corporate income taxes and may be subject to excise tax on undistributed taxable income. The Company and its subsidiaries may be subject to certain state and local taxes on is income and property.
Adopted Accounting Pronouncements – Going Concern Basis (Pre Plan of Dissolution) – In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis,” which requires amendments to both the VIE and voting models. The amendments (i) modify the identification of variable interests (fees paid to a decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination under the VIE model, and (ii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. The new guidance was effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted.
The amendments could be applied using either a modified retrospective or full retrospective approach. The Company adopted ASU 2015-02 on January 1, 2016. The adoption of this ASU did not result in any changes to conclusions about whether the Company’s ten joint ventures were VIEs or whether the Company was the primary beneficiary for each of its joint ventures.

9
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


3.
Summary of Significant Accounting Policies (continued)
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that loan costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. The new guidance was effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The ASU was required to be applied retrospectively for each period presented. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company adopted ASU 2015-03 on January 1, 2016; the adoption of which impacted the Company’s presentation of its consolidated financial position but did not have a material impact on the Company’s consolidated results of operations or cash flows. Accordingly, the Company has retrospectively adjusted the presentation of loan costs for all periods presented prior to the adoption of Liquidation Basis of accounting. The following table provides additional details by financial statement line item of the adjusted presentation in the Company’s condensed consolidated balance sheet as of December 31, 2015:
 
 
 
As Filed December 31, 2015
 
Adjustments
 
Adjusted December 31, 2015
Loan costs, net
 
2,183,777

 
(2,183,777
)
 
—

Mortgages and other notes payable, net
 
269,209,616

 
(2,183,777
)
 
267,025,839


4.
Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation
The liquidation basis of accounting requires the Company to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the Plan of Dissolution. The Company currently estimates that it will have costs in excess of estimated receipts during the liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for lease-up, the timing of property sales, direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These costs are estimated and are anticipated to be paid out over the liquidation period.
Upon transition to the liquidation basis of accounting on August 1, 2016, the Company accrued the following revenues and expenses expected to be incurred during liquidation:
Rental income from operating leases
 
$
22,182,874

Property operating expenses
 
(9,208,132
)
Interest expense
 
(4,217,407
)
Asset management fees
 
(1,920,211
)
Property management fees
 
(755,849
)
General and administrative
 
(4,201,775
)
Other income (expense)
 
(392,519
)
Income tax expense
 
(369,976
)
Development costs
 
(11,050,590
)
Liquidation transaction costs
 
(13,241,497
)
Liquidation transaction costs due to related parties
 
(2,353,834
)
Liability for estimated costs in excess of estimated receipts during liquidation
 
$
(25,528,916
)


10
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


4.
Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation (continued)
The change in the liability for estimated costs in excess of estimated receipts during liquidation as of September 30, 2016 is as follows:
 
 
August 1, 2016
 
Cash Payments
 
Remeasurement of Assets and Liabilities
 
September 30, 2016
Assets:
 
 
 
 
 
 
 
 
Estimated net inflows from investments in real estate
 
$
7,285,671

 
$
146,374

 
$
—

 
$
7,432,045

Estimated net outflows from development costs
 
(11,050,590
)
 
5,022,565

 
—

 
(6,028,025
)
 
 
(3,764,919
)
 
5,168,939

 
—

 
1,404,020

Liabilities:
 
 
 
 
 
 
 
 
Liquidation transaction costs
 
(15,595,331
)
 
460,650

 
—

 
(15,134,681
)
Corporate expenditures
 
(6,168,666
)
 
979,673

 
—

 
(5,188,993
)
 
 
(21,763,997
)
 
1,440,323

 
—

 
(20,323,674
)
Total liability for estimated costs in excess of estimated receipts during liquidation
 
$
(25,528,916
)
 
$
6,609,262

 
$
—

 
$
(18,919,654
)

5.
Net Assets in Liquidation
The following is a reconciliation of Shareholder’s Equity under the going concern basis of accounting to net assets in liquidation under the liquidation basis of accounting as of August 1, 2016:
Shareholder's Equity as of July 31, 2016
 
$
135,864,565

Increase due to estimated net realizable value of investments in real estate
 
153,971,841

Decrease due to adjustment of assets and liabilities to net realizable value
 
(3,101,218
)
Increase in non-controlling interest liability
 
(45,844,718
)
Liability for estimated costs in excess of estimated receipts during liquidation
 
(25,528,916
)
Adjustment to reflect the change to the liquidation basis of accounting
 
79,496,989

Estimated value of net assets in liquidation as of August 1, 2016
 
$
215,361,554

Net assets in liquidation decreased by approximately $52.9 million during the period August 1, 2016 through September 30, 2016. The primary reason for the decline in net assets was due to the special liquidating distributions to stockholders declared and paid of approximately $52.9 million, or $2.35 per common share, in August 2016.
The net assets in liquidation at September 30, 2016 would result in liquidating distributions of approximately $7.21 per share. This estimate of liquidating distributions includes projections of costs and expenses to be incurred during the period required to complete the Plan of Dissolution. There is inherent uncertainty with these projections, and they could change materially based on the timing of the sales, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows.

 6.
Real Estate Assets, net
As a result of adopting Liquidation Basis of accounting in August 2016, as of September 30, 2016, real estate assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Company will collect on disposal of assets as it carries out its Plan of Dissolution.

11
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


 6.
Real Estate Assets, net (continued)
Prior to adopting Liquidation Basis of accounting, and after reclassification of the four assets identified for sale during the seven months ended July 31, 2016 to real estate held for sale, real estate assets consisted of the following at December 31, 2015:
Operating real estate assets, net:
 
 
Land and land improvements
 
$
43,162,156

Buildings and improvements
 
117,650,493

Furniture, fixtures and equipment
 
18,506,603

Less: accumulated depreciation
 
(3,959,949
)
Total operating real estate assets, net
 
175,359,303

Construction in process, including land
 
119,031,154

Total real estate, net
 
$
294,390,457

 
For the seven months ended July 31, 2016 and the nine months ended September 30, 2015, depreciation expense on the Company’s real estate assets was approximately $5.4 million and $7.7 million, respectively, including approximately $0.9 million and $2.3 million for the one month ended July 31, 2016 and the quarter ended September 30, 2015, respectively.

7.
Real Estate Held for Sale, Dispositions and Discontinued Operations
During 2016, the three joint ventures owning the Aura Castle Hills, Aura Grand and REALM Patterson Place properties each decided to pursue a potential sale of its respective property. The Company also decided to pursue the sale of its wholly owned Whitehall property, and as of such time, the Company reclassified the presentation of these four properties to held for sale at December 31, 2015 as follows:
Land and land improvements
 
$
24,161,315

Buildings and improvements
 
101,121,049

Furniture, fixtures and equipment
 
8,722,188

Less: accumulated depreciation
 
(9,911,563
)
Total real estate held for sale
 
$
124,092,989

Prior to adopting the Liquidation Basis of accounting, in June 2016, the Company sold the Aura Castle Hills and REALM Patterson Place properties. No disposition fee was payable to the Advisor on the sale of these properties. In connection with the sale of the Aura Castle Hills and REALM Patterson Place properties, the Company received aggregate sales proceeds net of closing costs of approximately $110.0 million, resulting in aggregate gains of approximately $40.9 million, net of tax of approximately $0.1 million, for financial reporting purposes, which was included in income from continuing operations for the seven months ended July 31, 2016, in the accompanying Going Concern Basis condensed consolidated statement of operations. Of the aggregate gains, net of tax, of approximately $40.9 million, approximately $18.5 million was allocable to common stockholders.
In August 2016, the Company sold the Whitehall property for gross sales proceeds of approximately $51.2 million which equaled the liquidation value at August 1, 2016. After the payment of closing costs, the Company received net proceeds of approximately $50.7 million. No disposition fee was payable to the Advisor on the sale of the Whitehall property.



12
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


7.
Real Estate Held for Sale, Dispositions and Discontinued Operations (continued)
Through July 31, 2016, prior to adopting Liquidation Basis of accounting, the Company accounted for the revenues and expenses related to the four properties classified as held for sale as income from continuing operations because the disposition of these four properties on an individual basis would neither cause a strategic shift in the Company nor were they considered to have a major impact on the Company’s business. Therefore, they did not qualify as discontinued operations under ASU 2014-08, which became effective on January 1, 2015. However, the proposed dispositions of the four properties represent individually significant components. The Company recorded net income (loss) from continuing operations related to the four properties of approximately $0.1 million for the one month ended July 31, 2016, of which approximately $0.1 million is attributable to common stockholders, and approximately $43.1 million (including aggregate gain on sale of real estate, net of tax of approximately $40.9 million) for the seven months ended July 31, 2016, of which approximately $20.3 million (including aggregate gain on sale of real estate, net of tax, of approximately $18.5 million) is attributable to common stockholders.
 
During 2014, prior to the Company's adoption of ASU 2014-08, the Company entered into a contract to sell the Long Point Property. As a result, the financial statements reflect the reclassifications of rental income, interest expense and other categories relating to the Long Point Property from loss from continuing operations to income from discontinued operations for all periods presented. In January 2015, the Company sold the Long Point Property, received sales proceeds net of closing costs of approximately $54.4 million, resulting in a gain of approximately $27.4 million for financial reporting purposes (of which approximately $13.9 million is attributable to common stockholders), which were included in income from discontinued operations for the applicable nine months ended September 30, 2015 in the accompanying condensed consolidated statements of operations.
There were no discontinued operations for the one and seven months ended July 31, 2016. The following is a summary of income from discontinued operations for the quarter and nine months ended September 30, 2015:

 
 
Quarter Ended September 30, 2015
 
Nine Months Ended
September 30, 2015
Revenues
 
$
—

 
$
190,068

Expenses
 
—

 
(184,920
)
Depreciation and amortization
 
—

 
—

Operating income
 
—

 
5,148

Fair value adjustments and other expense
 
—

 
1

Interest expense and loan cost amortization, net of amounts capitalized
 
—

 
(44,274
)
Loss on extinguishment of debt
 
—

 
(818,404
)
Gain on sale of property, net of tax
 
491,000

 
27,414,197

Total other income
 
491,000

 
26,551,520

Income from discontinued operations
 
$
491,000

 
$
26,556,668


As of September 30, 2016, all of the Company's real estate assets are considered held for sale due to the adoption of Liquidation Basis of accounting effective August 1, 2016, as discussed above in Note 3, "Summary of Significant Accounting Policies."

8.
Indebtedness
During the nine months ended September 30, 2016, the Company borrowed approximately $65.1 million under its contractual loans in connection with its multifamily development projects. The Company, through joint ventures formed to make investments, generally has borrowed on a non-recourse basis to fund construction. The use of non-recourse financing allows the Company to limit its exposure on any investment to the amount invested. Non-recourse indebtedness means the indebtedness of the borrower or its subsidiaries is collateralized only by the assets to which such indebtedness relates, without recourse to the Company or any of its subsidiaries.

13
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


8.
Indebtedness (continued)
The Company repaid mortgage and construction notes payable of approximately $79.4 million during the nine months ended September 30, 2016, primarily using net proceeds from the sale of the Patterson Place, Aura Castle Hills and Whitehall properties.
Mortgage loans payable are carried at their contractual amounts due under liquidation accounting. The Company had outstanding mortgage loans payable of $255.0 million and $269.2 million at September 30, 2016 and December 31, 2015, respectively.

9.     Related Party Arrangements
During the quarters and nine months ended September 30, 2016 and 2015, the Company incurred the following fees and reimbursable expenses due to the Advisor, its affiliates and other related parties:
 
 
Quarter Ended
September 30,
 
Nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Reimbursable expenses:
 
 
 
 
 
 
 
 
Investor administrative service fees(1)
 
$
33,750

 
$
33,750

 
$
101,250

 
$
101,250

Other operating and acquisition expenses(2)
 
274,612

 
261,209

 
900,462

 
903,056

 
 
308,362

 
294,959

 
1,001,712

 
1,004,306

Investment Service Fee
 
24,383

 
15,326

 
55,095

 
609,370

Asset management fees(3)
 
779,293

 
890,390

 
2,529,720

 
2,477,596

Property management fees
 
18,007

 
19,331

 
50,101

 
47,050

 
 
$
1,130,045

 
$
1,220,006

 
$
3,636,628

 
$
4,138,322


FOOTNOTES:

(1)
Investor administrative service fees of approximately $78.8 thousand and $101.3 thousand are included in general and administrative expenses in the accompanying condensed consolidated statements of operations for the seven months ended July 31, 2016 and nine months ended September 30, 2015, respectively, including approximately $11.3 thousand and $33.8 thousand for the one month ended July 31, 2016 and quarter ended September 30, 2015, respectively.
(2)
Other operating and acquisition expenses of approximately $0.7 million and $0.9 million are included in general and administrative expenses in the accompanying condensed consolidated statements of operations for the seven months ended July 31, 2016 and nine months ended September 30, 2015, respectively, including approximately $0.1 million and $0.3 million for the one month ended July 31, 2016 and quarter ended September 30, 2015, respectively.
(3)
For the one and seven months ended July 31, 2016, approximately $0.3 million and $2.0 million, respectively, of asset management fees incurred by the Company above were included in the accompanying condensed consolidated statements of operations, of which approximately $44.4 thousand and $0.4 million, respectively, were capitalized as part of the cost of development properties through July 31, 2016. For the quarter and nine months ended September 30, 2015, approximately $0.9 million and $2.5 million of asset management fees incurred by the Company above were included in the accompanying condensed consolidated statements of operations, of which approximately $0.2 million and $0.8 million, respectively, were capitalized through September 30, 2015.

Amounts due to related parties for fees and reimbursable costs and expenses, as described above, were as follows as of:
 
 
September 30,
2016
 
December 31,
2015
Due to Property Manager:
 
 
 
 
Property management fees
 
$
15,642

 
$
16,326

Due to the Advisor and its affiliates:
 
 
 
 
Reimbursable operating expenses
 
1,753,462

 
1,634,462

       Asset management fees
 
246,708

 
—

 
 
2,000,170

 
1,634,462

 
 
$
2,015,812

 
$
1,650,788


14
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)


9.     Related Party Arrangements (continued)

In connection with the adoption of the plan of dissolution, the Company accrues costs it expects to incur through the end of the liquidation. As of September 30, 2016, the Company has accrued asset management fees of approximately $1.4 million, property management fees of approximately $0.03 million, and liquidation transaction costs of approximately $2.4 million.
10.
Stockholder’s Equity
In February and December 2015, the Company’s board of directors declared special cash distributions of approximately $29.3 million and $38.3 million, respectively, representing $1.30 and $1.70, respectively, per share of common stock (the “Special Cash Distributions”).
No special cash distributions were declared during the seven months ended July 31, 2016. In August 2016, the Company declared and paid a liquidating distribution of $52.9 million, or $2.35 per share of common stock.

11.
Commitments and Contingencies
From time to time, the Company may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, its business, including proceedings to enforce the Company's contractual or statutory rights. While the Company cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, the Company does not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on its results of operations or financial condition.
Pursuant to the development agreements for the Company’s multifamily development properties under construction as of September 30, 2016, the Company has committed to fund approximately $6.0 million in remaining development and other costs as of September 30, 2016. The remaining development costs are expected to be funded primarily by the construction loans relating to such properties. The Company’s joint venture partners and certain of their affiliates have committed to fund any cost overruns related to the development projects.

12.
Subsequent Events
In October 2016, the Company completed the sale of the Aura Grand property for gross sales proceeds of approximately $41.2 million, which equaled the property's liquidation value as of August 1, 2016 and September 30, 2016. The Company used a portion of the sales proceeds to repay the construction loan payable related to this property. No disposition fee was payable to the Advisor on the sale of the Aura Grand property.
In October 2016, the City Walk Joint Venture, the Company's consolidated joint venture which developed the City Walk Property, modified its original development and construction loan to extend the original maturity date of November 15, 2016 to December 15, 2016.


15

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as, the audited consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2015. Capitalized terms used in this Item 2 have the same meaning as in the accompanying unaudited condensed consolidated financial statements in Item 1 unless otherwise defined herein.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) that are not statements of historical or current fact may constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbor created by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events, and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated per share net asset value of the Company’s common stock, and/or other matters. The Company’s forward-looking statements are not guarantees of future performance. While the Company’s management believes its forward-looking statements are reasonable, such statements are inherently susceptible to uncertainty and changes in circumstances. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. The Company’s forward-looking statements are based on management’s current expectations and a variety of risks, uncertainties and other factors, many of which are beyond the Company’s ability to control or accurately predict. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company’s actual results could differ materially from those set forth in the forward-looking statements due to a variety of risks, uncertainties and other factors. Given these uncertainties, the Company cautions you not to place undue reliance on such statements.
Important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to, government regulation, economic, strategic, political and social conditions, and the following: risks associated with the timing and implementation of the Company's Plan of Dissolution; a worsening economic environment in the U.S. or globally, including financial market fluctuations; risks associated with real estate markets, including declining real estate values; risks associated with the Company’s limited capital resources, including the risk of the Company’s failure to obtain, renew or extend necessary financing or to access the debt or equity markets; the use of debt to finance the Company’s business activities, including refinancing and interest rate risk and the Company’s failure to comply with debt covenants; risks related to development projects, including construction delays, construction cost overruns, the Company’s inability to obtain necessary permits, and/or public opposition to these activities; competition for tenants; defaults on or non-renewal of leases by tenants; failure to lease properties on favorable terms or at all; the impact of current and future environmental, zoning and other governmental regulations affecting the Company’s properties; the impact of changes in accounting rules; the impact of regulations requiring periodic valuation of the Company on a per share basis; inaccuracies of the Company’s accounting estimates; unknown liabilities of acquired properties or liabilities caused by property managers or operators; material adverse actions or omissions by any Joint Venture partners; consequences of the Company’s net operating losses; increases in operating costs and other expenses; uninsured losses or losses in excess of the Company’s insurance coverage; the impact of outstanding and/or potential litigation; risks associated with the Company’s tax structuring; and failure to qualify for and maintain the Company’s qualification as a REIT for federal income tax purposes.
For further information regarding risks and uncertainties associated with the Company’s business, and other important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements, please refer to the factors listed and described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Risk Factors” sections of the Company’s documents filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, the Company's definitive proxy statement dated June 17, 2016 filed in connection with the approval of the Plan of Dissolution by the Company's stockholders at the Company's annual meeting held on August 4, 2016, the Company’s quarterly reports on Form 10-Q and the Company’s annual report on Form 10-K, copies of which may be obtained from the Company’s website at www.cnlgrowthproperties.com.

16

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.
OVERVIEW
CNL Growth Properties, Inc. was organized as a Maryland corporation on December 12, 2008 and has elected to be taxed, and currently qualifies as a real estate investment trust (“REIT”) for federal income tax purposes. The terms “us,” “we,” “our,” “our Company” and “CNL Growth Properties, Inc.” include CNL Growth Properties, Inc. and each of its subsidiaries.
On June 17, 2016, we filed a definitive proxy statement with the SEC requesting, among other items, our stockholders' approval of a plan of liquidation and dissolution ("Plan of Dissolution") authorizing us to undertake an orderly liquidation. In an orderly liquidation, we would sell of all of our remaining assets, pay all of our known liabilities, provide for the payment of our unknown or contingent liabilities, distribute our remaining cash to our stockholders as liquidating distributions, wind-up our operations and dissolve the Company in accordance with Maryland law. On August 4, 2016, our stockholders approved the Company's Plan of Dissolution pursuant to which our Board of Directors is authorized to undertake a sale of all of the Company's assets and distribute the net proceeds to our stockholders after payment of all of the Company's liabilities. See the Company's Form 8-K filed on August 5, 2016 for additional details.
As a result of the approval of the Plan of Dissolution by the stockholders in August 2016, we adopted the Liquidation Basis of accounting, as described further in Note 1, "Business and Organization" to the financial statements.
Our Advisor and Property Manager
We are externally advised by CNL Global Growth Advisors, LLC (the “Advisor”) and our property manager is CNL Global Growth Managers, LLC (the “Property Manager”), each of which is an affiliate of CNL Financial Group, LLC, our sponsor (“CNL” or the “Sponsor”), a private investment management firm specializing in alternative investment products. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying, recommending and executing acquisitions (through the completion of our acquisition stage in April 2015) and dispositions on our behalf pursuant to an advisory agreement.
Substantially all of our operating, administrative and property management services are provided by sub-advisors to the Advisor and by sub-property managers to the Property Manager.
Exit Strategy
Due to the completion of our Offerings in April 2014, the completion of our acquisition phase in April 2015 and the estimated time needed to complete our development phase and have our assets substantially stabilize, our Advisor began to explore strategic alternatives. In August 2015, our board of directors appointed a special committee comprised of our independent board members (the “Special Committee”) to oversee the process of exploring strategic alternatives for future stockholder liquidity, including opportunities to merge with another company, the listing of our common stock on a national securities exchange, our sale or the sale of all of our assets. In September 2015, we engaged CBRE Capital Advisors, Inc. (“CBRE Cap”) to act as our exclusive financial advisor and assist us and the Special Committee with this process. In the ordinary course of CBRE Cap’s business, CBRE Cap, its affiliates, directors and officers, may trade or otherwise structure and effect transactions in our shares or assets for its own account or for the accounts of its customers and accordingly, may at any time hold a long or short position, finance positions, or otherwise structure and effect transactions in our shares or assets. CBRE Cap is an affiliate of CBRE Group, Inc. (“CBRE”), the parent holding company of affiliated companies that are engaged in the ordinary course of business in many areas related to commercial real estate and related services. Through CBRE’s affiliates, CBRE may have in the past, and may from time to time in the future, perform one or more roles in our transactions. Refer to “Our Real Estate Portfolio” below for a discussion on properties sold during 2015 and 2016.
Although our stockholders approved our Plan of Dissolution on August 4, 2016, there is no assurance we will have a liquidity event in the near term. We expect to distribute all of the net proceeds from the sale of our assets to our stockholders within 24 months after the stockholder approval of our Plan of Dissolution. However, if we cannot sell our assets and pay our debts within 24 months, or if our Board and the Special Committee determine that it is otherwise advisable to do so, we may transfer and assign our remaining assets to a liquidating trust. Upon such transfer and assignment, our stockholders will receive interests in the liquidating trust. The liquidating trust will pay or provide for all of our liabilities and distribute any remaining net proceeds from the sale of its assets to the holders of interests in the liquidating trust.
The dissolution process and the amount and timing of distributions to stockholders involves risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to stockholders and no assurance

17

can be given that the distributions will equal or exceed the estimate of net assets presented in the Condensed Consolidated Statement of Net Assets.
We expect to continue to qualify as a REIT throughout the liquidation until such time as any remaining assets, if any, are transferred into a liquidating trust. Our board shall use commercially reasonable efforts to continue to cause us to maintain our REIT status, provided however, our board may elect to terminate our status as a REIT if it determines that such termination would be in the best interest of our stockholders.
Our Real Estate Portfolio
During the seven months ended September 30, 2016 (prior to adopting the Liquidation Basis of accounting), we, through our consolidated joint ventures, sold two real estate properties that were operational. Subsequent to adopting Liquidation Basis of accounting, we sold our wholly owned property. As of September 30, 2016, we owned interests in ten Class A multifamily properties in the southeastern and sunbelt regions of the United States, nine of which had substantially completed development and were operational. The remaining one property was under development and was partially operational, with substantial completion achieved in October 2016. We generally expect our multifamily properties to reach stabilization within 24 months after completion.
We had a total of 2,800 completed apartment units as of September 30, 2016, and will have 2,820 units once construction is completed on our remaining property under development.
Our multifamily properties are typically owned through a joint venture in which we have co-invested with an affiliate of a national or regional multifamily developer. As of September 30, 2016, we had co-invested in ten separate joint ventures with eight separate developers or affiliates thereof. Our joint ventures are structured such that we serve as the managing member and own a majority interest. Under the terms of the limited liability company agreements of each joint venture, operating cash flow is generally distributed to the members of the joint venture on a pro rata basis. Generally, in a capital event, such as a sale or refinancing of the joint venture’s property, net proceeds will be distributed pro rata to each member until each member’s invested capital is returned and a minimum return on capital is achieved, and thereafter our joint venture partner will receive a disproportionately higher share of any proceeds at varying levels based on our having received certain minimum threshold returns. We have determined that all of the joint ventures in which we have co-invested as of September 30, 2016 are variable interest entities in which we are the primary beneficiary. As such, the transactions and accounts of the joint ventures are consolidated in our accompanying condensed financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2016, our cash totaled $21.7 million and consisted primarily of net proceeds from sales of real estate and cash from unused offering proceeds.  We may retain a portion of our cash on hand or use debt and/or equity proceeds for capital needs and any other corporate purposes deemed appropriate.
Our total assets and net assets in liquidation were $516.8 million and $162.4 million, respectively, at September 30, 2016. Our ability to meet our obligations is contingent upon the disposition of our assets in accordance with our Plan of Dissolution. We estimate that the proceeds from the sale of assets pursuant to the Plan of Dissolution will be adequate to pay our obligations, however, we cannot provide any assurance as to the prices or net proceeds we will receive from the disposition of our assets.
Sources of Liquidity and Capital Resources
Borrowings
During the nine months ended September 30, 2016, we borrowed approximately $65.1 million under our various construction loans to pay for development costs relating to several of our properties owned, of which approximately $53.6 million was borrowed during the seven months ended July 31, 2016.
Sales of Real Estate
During January and February 2016, as a result of evaluation of strategic alternatives, we decided to pursue a potential sale of four additional properties. In June 2016, the REALM Patterson Place and Aura Castle Hills Properties sold and we received sales proceeds net of closing costs of $110.0 million. We used a portion of the net sales proceeds from the sale of those two properties to repay the development and construction loans related to both properties, and also paid distributions in June and July to our respective co-venture partners of each of the REALM Patterson Place Joint Venture and Aura Castle Hills Joint Venture, respectively, in accordance with the terms of the joint venture agreements.
In August 2016, subsequent to adopting Liquidation Basis of accounting, we sold the Whitehall Property for gross sales proceeds of approximately $51.2 million, which equaled the liquidation value at August 1, 2016. We received proceeds, net of closing costs, of approximately $50.7 million and used a portion of the net sales proceeds to repay the mortgage note payable related to

18

this property. In October 2016, we sold the Aura Grand property for gross sales proceeds of approximately $41.2 million, which equaled the liquidation value at August 1, 2016 and September 30, 2016.
During the nine months ended September 30, 2015, we sold the Long Point and Crescent Alexander Village properties. In connection with these transactions, the joint ventures that owned these two properties received aggregate sales proceeds net of closing costs of approximately $106.1 million, and through our consolidated joint ventures, we used the net sales proceeds from the sales of these two properties to repay the mortgage and construction note payables collateralized by the properties.
We intend to use a portion of the net sales proceeds from properties sold in 2016 for general corporate purposes and for liquidating distributions to stockholders.
Net Cash Provided by Operating Activities
Prior to the adoption of Liquidation Basis of accounting, our net cash flows provided by operating activities was approximately $0.3 million and $5.6 million for the seven months ended July 31, 2016 and the nine months ended September 30, 2015, respectively. Cash flows from operating activities declined during the seven months ended July 31, 2016, primarily due to the sale of four operational properties in 2015 and an increase in general and administrative expenses, asset management fees, and property management fees as a result of additional properties and units being operational. Cash flows from operating activities also declined due to an increase in professional fees related to our exit strategy.
Uses of Liquidity and Capital Resources
Development of Properties
In connection with our development projects, we funded approximately $65.1 million in development costs during the nine months ended September 30, 2016, of which approximately $53.4 million was funded during the seven months ended July 31, 2016. Pursuant to the development agreements for the properties under development, as of September 30, 2016 we had commitments to fund approximately $6.0 million in additional development and other costs. We expect to fund the remaining development costs primarily from the construction loans on each property.
Debt Service
We, along with our joint venture partners, have and may extend and refinance the construction loans on our development properties with longer term debt as our properties’ operations stabilize. However, our ability to continue to obtain indebtedness could be adversely affected if our joint venture partners do not agree to the extension or by credit market conditions, which result in lenders reducing or limiting funds available for loans, including loans collateralized by real estate.
During the nine months ended September 30, 2016, we paid $79.4 million of mortgage and construction loans payable (of which approximately $51.2 million was paid during the seven months ended July 31, 2016), which included the early repayment of approximately $79.1 million using a portion of the net sales proceeds from the sale of the REALM Patterson Place, Aura Castle Hills and Whitehall properties.
As our indebtedness approaches maturity, we, along with our joint venture partners, may extend and refinance the construction loans on our development properties, or may determine to sell the property and use proceeds from the sale to repay the indebtedness. In September 2016, we extended the original construction loan relating to our Remington Fairfield Property by one year to September 2017.
Distributions to Noncontrolling Interests
The terms of each joint venture structure are generally market driven and consider the assumption of certain risks by our joint venture partners, including; entitlements, permitting, exposure to costs in excess of the project budget, interest rates, and lender guarantees. In accordance with preferred return provisions in the respective joint venture agreements, upon a sale of the joint venture’s property, the joint venture partner may be entitled to a disproportionately higher share of proceeds than their member interest if certain threshold returns are met. Each structure is individually negotiated and terms of the waterfall structure can be influenced by market size and attractiveness of the investment fundamentals, leverage assumptions, and equity contributions from our joint venture partners.

Prior to adopting Liquidation Basis of accounting, during the seven months ended July 31, 2016 our consolidated joint ventures paid distributions of approximately $27.1 million to our co-venture partners representing approximately $1.3 million from their pro rata share of positive operating cash flows, plus approximately $25.8 million from a disproportionate share of proceeds from capital events relating to net sales proceeds from the sale of the REALM Patterson Place and Aura Castle Hills properties, in accordance with the terms of our joint venture agreements.

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Special Liquidating Distributions
Subsequent to adopting Liquidation Basis of accounting, in August 2016, our board approved a special liquidating distribution of $52.9 million, or $2.35 per common share, to our stockholders.
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto.
Comparability of Financial Data from Period to Period
Under going concern accounting, the comparability of financial data from period to period was primarily affected by (i) the timing of the completion of our development properties and leasing activities, and (ii) the sales of real estate assets.
RESULTS OF OPERATIONS
In light of the adoption of Liquidation Basis accounting as of August 1, 2016, the results of operations for the current year periods are not comparable to the prior year periods. Our remaining assets which had completed construction and reached stabilization in prior periods continue to perform in a manner that is relatively consistent with prior reporting periods and we have experienced no significant changes in leased percentages or rental rates at these properties. Our remaining assets which had not completed construction or reached stabilization in prior periods have continued to place additional units into service and increase overall leased percentages.
Due to the adoption of the Plan of Dissolution we are no longer reporting funds from operations as we no longer consider this to be a key performance measure.
Changes in Net Assets in Liquidation
Period from August 1, 2016 through September 30, 2016
Net assets in liquidation decreased by approximately $52.9 million during the period August 1, 2016 through September 30, 2016. The primary reason for the decline in net assets was due to the special liquidating distributions to stockholders of approximately $52.9 million, or $2.35 per common share, in August 2016.

RELATED PARTY ARRANGEMENTS
We have entered into agreements with our Advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition and advisory services, asset and property management fees and reimbursement of operating costs. See Note 9. “Related Party Arrangements” in the accompanying condensed consolidated financial statements and “Item 13. Certain Relationships and Related Transactions, and Director Independence” in our Form 10-K for the year ended December 31, 2015 for a discussion of the various related party transactions, agreements and fees.
OFF BALANCE SHEET ARRANGEMENTS
As of September 30, 2016, we had no off balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
As of September 30, 2016, we were subject to contractual payment obligations as described in the table below.
 
 
Payments Due by Period
 
 
2016
 
2017-2018
 
2019-2020
 
More than
5 years
 
Total
Development contracts on development properties (1)
 
$
11,426,542

 
$
606,171

 
$
—

 
$
—

 
$
12,032,713

Construction notes payable (principal  and interest) (2)
 
54,220,585

 
208,178,827

 
—

 
—

 
262,399,412

 
 
$
65,647,127

 
$
208,784,998

 
$
—

 
$
—

 
$
274,432,125

FOOTNOTES:
(1)
The amounts presented above represent accrued development costs as of September 30, 2016 and development costs, including start-up costs, not yet incurred of the aggregate budgeted development costs in accordance with the development agreements, and the expected timing of such costs.

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(2)
For purposes of this table, management has assumed the mortgage and construction notes payable are repaid as of the initial maturity dates and are not extended beyond such dates as allowed pursuant to the loan agreements. Additionally, management has calculated estimated interest payments based on interest rates of our mortgage and construction notes payables as of September 30, 2016.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See Note 3, "Summary of Significant Accounting Policies" within Item 1. “Financial Statements” and our Annual Report on Form 10-K for the year ended December 31, 2015 for a summary of our Critical Accounting Policies and Estimates.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
See Item 1. “Financial Statements” for a summary of the impact of recent accounting pronouncements.

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk
We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire and develop properties and to make loans and other permitted investments, if any. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
The following is a schedule of our variable rate debt maturities for each of the next five years, and thereafter, assuming the terms of the loans are not extended (principal maturities only):
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
Approximate
Fair Value
Variable rate debt
 
$
52,384,577

 
$
122,998,650

 
$
79,573,884

 
$
—

 
$
—

 
$
—

 
$
254,957,111

 
$
254,000,000

Average interest rate(1)
 
2.96
%
 
2.91
%
 
2.93
%
 
—
%
 
—
%
 
—
%
 
2.92
%
 
 
FOOTNOTE:
 
(1)
As of September 30, 2016, we were paying the interest rate floor on certain of our variable rate debts.
Management estimates that a hypothetical one-percentage point increase in LIBOR compared to the LIBOR rate as of September 30, 2016, would increase interest expense by approximately $0.6 million and $1.7 million on our variable rate debt for the quarter and nine months ended September 30, 2016, respectively. This sensitivity analysis contains certain simplifying assumptions, and although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results and our actual results will likely vary.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Exchange Act, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
Changes in Internal Control over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Other Matters
In connection with the adoption of liquidation basis accounting, during the most recent quarter (i) certain of our internal controls over financial reporting became no longer relevant primarily relating to asset impairments and (ii) we adopted additional internal controls over financial reporting primarily with respect to the calculations of our asset values for liquidation accounting purposes.

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PART II. OTHER INFORMATION
Item 1. Legal Proceedings – None.
Item 1A. Risk Factors –
The risks described below are the risks that we currently believe are the material risks of which our stockholders should be aware. However, additional risks that are not presently known to us, or that we currently believe are not material, may also prove to be important.
RISKS THAT MAY DELAY OR REDUCE OUR LIQUIDATING DISTRIBUTIONS
As we continue to pursue a complete liquidation of our remaining assets, the net proceeds are expected to range between approximately $8.41 and $9.39 per share, including the $2.35 per share we paid to stockholders in August 2016. Taking into account the special cash distributions stockholders received of $3.00 per share in 2015 in connection with the prior sales of five of our properties in 2014 and 2015, we estimate the total amount stockholders could receive is between approximately $11.41 and $12.39 per share, for which we anticipate paying the balance within 24 months after stockholder approval of the Plan of Dissolution which occurred on August 4, 2016. However, our expectations about the amount of liquidating distributions that we will make and when we will make them are based on many estimates and assumptions, one or more of which may prove to be incorrect. As a result, the actual amount of liquidating distributions we pay to stockholders may be more or less than we estimate. In addition, the liquidating distributions may be paid later than we predict. For each property, our joint venture partner must consent to the property’s listing and sale, which may further delay the sale process. Although the current net asset value per share on a liquidation basis of accounting at September 30, 2016 of our remaining assets is higher than the range of liquidation values set forth above that our Board estimated at the time the Plan of Dissolution was approved for submission to the stockholders, we note that the net asset value per share on a liquidation basis of accounting does not take into account the various valuation methodologies disclosed and discussed in the proxy statement provided to stockholders in connection with the approval of the Plan of Dissolution or reflect the remaining uncertainties associated with continuing to own and operate our remaining properties and to complete the sale of our properties. In addition to the risks that we generally face in our business, factors that could cause actual payments to be lower or made later than we expect include, among others, the risks set forth below:
If any of the parties to our future sale agreements default thereunder, or if these sales do not otherwise close, our liquidating distributions may be delayed or reduced.
In light of the approval by the Company’s stockholders on August 4, 2016 of the Plan of Dissolution, we will seek to enter into binding sale agreements for each of our properties. The consummation of the potential sales for which we will enter into sale agreements in the future will be subject to satisfaction of closing conditions. If any of the transactions contemplated by these future sale agreements do not close because of a buyer default, failure of a closing condition or for any other reason, we will need to locate a new buyer for the assets which we may be unable to do promptly or at prices or on terms that are as favorable as the original sale agreement. We will also incur additional costs involved in locating a new buyer and negotiating a new sale agreement for this asset. These additional costs are not included in our projections. In the event that we incur these additional costs, our liquidating payments to our stockholders would be delayed or reduced.
If we are unable to find buyers for our assets at our expected sales prices, our liquidating distributions may be delayed or reduced.
In calculating our estimated range of liquidating distributions, we assumed that we will be able to find buyers for all of our assets at amounts based on our estimated range of market values for each property. However, we may have overestimated the sales prices that we will ultimately be able to obtain for these assets. For example, in order to find buyers in a timely manner, we may be required to lower our asking price below the low end of our current estimate of the property’s market value. If we are not able to find buyers for these assets in a timely manner or if we have overestimated the sales prices we will receive, our liquidating payments to our stockholders would be delayed or reduced. Furthermore, the projected liquidating distribution is based upon the Advisor’s estimates of the range of market value for each property, but real estate market values are constantly changing and fluctuate with changes in interest rates, supply and demand dynamics, occupancy percentages, lease rates, the availability of suitable buyers, the perceived quality and dependability of income flows from tenancies and a number of other factors, both local and national. In addition, minority ownership matters, transactional fees and expenses, environmental contamination at our properties or unknown liabilities, if any, may adversely impact the net liquidation proceeds from those assets.
 
If our liquidation costs or unpaid liabilities are greater than we expect, our liquidating distributions may be delayed or reduced.

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Before making the final liquidating distribution, we will need to pay or arrange for the payment of all of our transaction costs in the liquidation, all other costs and all valid claims of our creditors. Our Board may also decide to acquire one or more insurance policies covering unknown or contingent claims against us, for which we would pay a premium which has not yet been determined. Our Board may also decide to establish a reserve fund to pay these contingent claims. The amounts of transaction costs in the liquidation are not yet final, so we have used estimates of these costs in calculating the amounts of our projected liquidating distributions. To the extent that we have underestimated these costs in calculating our projections, our actual net liquidation value may be lower than our estimated range. In addition, if the claims of our creditors are greater than we have anticipated or we decide to acquire one or more insurance policies covering unknown or contingent claims against us, our liquidating distributions may be delayed or reduced. Further, if a reserve fund is established, payment of liquidating distributions to our stockholders may be delayed or reduced.
Pursuing the Plan of Dissolution may cause us to fail to qualify as a REIT, which would dramatically lower the amount of our liquidating distributions.
For so long as we qualify as a REIT and distribute all of our taxable income, we generally are not subject to federal income tax. Although our Board does not presently intend to terminate our REIT status prior to the final distribution of the net proceeds from the sale of our assets and our dissolution, our Board may take actions pursuant to the Plan of Dissolution that would result in such a loss of REIT status. Upon the final distribution of the net proceeds from the sale of our assets and our dissolution, our existence and our REIT status will terminate. However, there is a risk that our actions in pursuit of the Plan of Dissolution may cause us to fail to meet one or more of the requirements that must be met in order to qualify as a REIT prior to completion of the Plan of Dissolution. For example, to qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax laws, mainly interest and dividends. We may encounter difficulties satisfying these requirements as part of the liquidation process. In addition, in connection with that process, we may recognize ordinary income in excess of the cash received. The REIT rules require us to pay out a large portion of our ordinary income in the form of a dividend to our stockholders. However, to the extent that we recognize ordinary income without any cash available for distribution, and if we were unable to borrow to fund the required dividend or find another way to meet the REIT distribution requirements, we may cease to qualify as a REIT. While we expect to comply with the requirements necessary to qualify as a REIT in any taxable year, if we are unable to do so, we will, among other things (unless entitled to relief under certain statutory provisions):
•
not be allowed a deduction for dividends paid to stockholders in computing our taxable income;
•
be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income, including recognized gains, at regular corporate rates;
•
be subject to increased state and local taxes; and
•
be disqualified from treatment as a REIT for the taxable year in which we lose our qualification and for the four following taxable years.
As a result of these consequences, our failure to qualify as a REIT could substantially reduce the funds available for distribution to our stockholders.

Pursuing the Plan of Dissolution may cause us to be subject to federal income tax, which would reduce the amount of our liquidating distributions.
We generally are not subject to federal income tax to the extent that we distribute to our stockholders during each taxable year (or, under certain circumstances, during the subsequent taxable year) dividends equal to our taxable income for the year. However, we are subject to federal income tax to the extent that our taxable income exceeds the amount of dividends paid to our stockholders for the taxable year. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of 85% of our ordinary income for that year, plus 95% of our capital gain net income for that year, plus 100% of our undistributed taxable income from prior years. While we intend to make distributions to our stockholders sufficient to avoid the imposition of any federal income tax on our taxable income and the imposition of the excise tax, differences in timing between the actual receipt of income and actual payment of deductible expenses, and the inclusion of such income and deduction of such expenses in arriving at our taxable income, could cause us to have to either borrow funds on a short-term basis to meet the REIT distribution requirements, find another alternative for meeting the REIT distribution requirements, or pay federal income and excise taxes. The cost of borrowing or the payment of federal income and excise taxes would reduce the funds available for distribution to our stockholders.

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So long as we continue to qualify as a REIT, any net gain from “prohibited transactions” will be subject to a 100% tax. “Prohibited transactions” are sales of property held primarily for sale to customers in the ordinary course of a trade or business. The prohibited transactions tax is intended to prevent a REIT from retaining any profit from ordinary retailing activities such as sales to customers of condominium units or subdivided lots in a development project. The Code provides for a “safe harbor” which, if all its conditions are met, would protect a REIT’s property sales from being considered prohibited transactions. Whether a real estate asset is property held primarily for sale to customers in the ordinary course of a trade or business is a highly factual determination. We believe that all of our properties are held for investment and the production of rental income, and that none of the sales of our properties will constitute a prohibited transaction. We do not believe that the sales of the Company’s properties pursuant to the Plan of Dissolution should be subject to the prohibited transactions tax. However, due to the anticipated sales volume and other factors, the contemplated sales may not qualify for the protective safe harbor. We have received an opinion from a nationally recognized accounting firm concluding that the sales of our properties in anticipation of, simultaneous and subsequent to the adoption of the Plan of Dissolution should not constitute prohibited transactions within the meaning of the Code. This opinion is not binding upon the Internal Revenue Service which may assert that the contemplated sales are subject to the prohibited transactions tax. There can, however, be no assurances that the IRS will not successfully challenge the characterization of properties we hold for purposes of applying the prohibited transaction tax.
Distributing interests in a liquidating trust may cause our stockholders to recognize gain prior to the receipt of cash.
The REIT provisions of the Code generally require that each year we distribute as a dividend to our stockholders 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gain). Liquidating distributions we make pursuant to the Plan of Dissolution will qualify for the dividends paid deduction, provided that they are made within 24 months of the adoption of such plan. Conditions may arise which cause us not to be able to liquidate within such 24-month period. For instance, it may not be possible to sell our assets at acceptable prices during such period. In such event, rather than retain our assets and risk losing our status as a REIT, we may elect to transfer our remaining assets and liabilities to a liquidating trust in order to meet the 24-month requirement. We may also elect to transfer our remaining assets and liabilities to a liquidating trust within such 24-month period to avoid the costs of operating as a public company. Such a transfer would be treated as a distribution of our remaining assets to our stockholders, followed by a contribution of the assets to the liquidating trust. As a result, a Company stockholder would recognize gain to the extent such stockholder’s share of the cash and the fair market value of any assets received by the liquidating trust was greater than the stockholder’s basis in the stock, notwithstanding that the stockholder would not contemporaneously receive a distribution of cash or any other assets with which to satisfy the resulting tax liability. See “Material United States Federal Income Tax Consequences -United States Federal Income Tax Consequences to U.S. Stockholders” on page 43. In addition, it is possible that the fair market value of the assets received by the liquidating trust, as estimated for purposes of determining the extent of the stockholder’s gain at the time interests in the liquidating trust are distributed to the stockholders, will exceed the cash or fair market value of property received by the liquidating trust on a sale of the assets. In this case, the stockholder would recognize a loss in a taxable year subsequent to the taxable year in which the gain was recognized, which loss may be limited under the Code.
You may not receive any profits resulting from the sale of one or more of our properties, or receive such profits in a timely manner, because we may provide financing to the purchaser of such property.
You may experience a delay before receiving your share of the net proceeds of liquidation. In a liquidation, we may sell our properties either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We do not have any limitations or restrictions on taking such purchase money obligations, however, we would do so if in the Board's discretion, it was deemed in the best interests of the stockholders. To the extent we receive promissory notes or other property in lieu of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be included in net sale proceeds until and to the extent the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. We may receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments may be spread over a number of years. In such event, you may experience a delay in the distribution of the net proceeds of a sale until such time as the installment payments are received.
OTHER RISKS OF THE PROPOSALS
Our Board may abandon or delay implementation of the Plan of Dissolution.
Our Board and stockholders have adopted and approved a Plan of Dissolution for the liquidation and dissolution of the Company. Nevertheless, our Board may terminate the Plan of Dissolution for any reason. This power of termination may be exercised both before and after any approval of the Plan of Dissolution Proposal by our stockholders, up to the time that the Articles of Dissolution have been accepted for record by the SDAT. Notwithstanding approval of the Plan of Dissolution Proposal by our

25

stockholders, our Board may modify or amend the Plan of Dissolution without further action by our stockholders to the extent permitted under then current law. Although our Board has no present intention to pursue any alternative to the Plan of Dissolution, our Board may conclude either that its duties under applicable law require it to pursue business opportunities that present themselves or that abandoning the Plan of Dissolution is otherwise in the best interests of the Company and its stockholders. If our Board elects to pursue any alternative to the Plan of Dissolution, our stockholders may not receive any of the consideration currently estimated to be available for distribution to our stockholders pursuant to the Plan of Dissolution.
Distributions, if any, to our stockholders could be delayed and our stockholders could, in some circumstances, be held liable for amounts they received from the Company in connection with our dissolution.
Although our Board has not established a firm timetable for distributions to our stockholders, our Board intends, subject to contingencies inherent in the winding-up of our business and the payment of our obligations and liabilities, to completely liquidate as soon as practicable after the adoption of the Plan of Dissolution. If we are unable to dispose of all of our assets within 24 months after adoption of the Plan of Dissolution or if it is otherwise advantageous or appropriate to do so, our Board may establish a liquidating trust to which we could distribute in kind its unsold assets. Depending upon the Company’s cash flow and cash requirements and the progress of the sale process for our assets under the Plan of Dissolution, we may not make any distributions to our stockholders until we have repaid all of our known retained obligations and liabilities, paid all of our expenses, and complied with the requirements of Maryland law for companies in dissolution, including requirements for the creation and maintenance of adequate contingency reserves as required by Maryland law. Thereafter, we anticipate making distributions to our stockholders as promptly as practicable in accordance with the Plan of Dissolution and the liquidation and dissolution process selected by our Board in its sole discretion.
If we fail to create an adequate contingency reserve for payment of its expenses and liabilities, or if we transfer our assets to a liquidating trust and the contingency reserve and the assets held by the liquidating trust are less than the amount ultimately found payable in respect of expenses and liabilities, each of our stockholders could be held liable for the payment to our creditors of such stockholder’s pro rata portion of the excess, limited to the amounts previously received by the stockholder in distributions from the Company or the liquidating trust, as applicable. If a court holds at any time that we failed to make adequate provision for its expenses and liabilities or if the amount ultimately required to be paid in respect of such liabilities exceeds the amount available from the contingency reserve and the assets of the liquidating trust, our creditors could seek an injunction to prevent us from making distributions under the Plan of Dissolution on the grounds that the amounts to be distributed are needed to provide for the payment of such expenses and liabilities. Any such action could delay or substantially diminish the cash distributions to be made to our stockholders and/or holders of beneficial interests of any liquidation trust.
We will continue to incur the expenses of complying with public company reporting requirements.
Until our liquidation and dissolution is complete, we have an obligation to continue to comply with the applicable reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), even if compliance with these reporting requirements is economically burdensome. In order to curtail expenses, we intend, after filing our Articles of Dissolution, to seek relief from the SEC from the reporting requirements under the Exchange Act. We anticipate that, if such relief is granted, we would continue to file current reports on Form 8-K to disclose material events relating to our liquidation and dissolution, along with any other reports that the SEC might require, but would discontinue filing annual and quarterly reports on Forms 10-K and 10-Q. However, the SEC may not grant any such relief. To the extent that we delay filing the Articles of Dissolution, we would be obligated to continue complying with the applicable reporting requirements of the Exchange Act. The expenses we incur in complying with the applicable reporting requirements will reduce the assets available for ultimate distribution to our stockholders.
Approval of the Plan of Dissolution may lead to stockholder litigation which could result in substantial costs and distract our management.
Historically, extraordinary corporate actions by a company, such as our Plan of Dissolution, sometimes lead to securities class action lawsuits being filed against that company. We may become involved in this type of litigation as a result of the Plan of Dissolution. As of the date of this filing, no such lawsuits relative to the Plan of Dissolution were pending or, to our knowledge, threatened. However, if such a lawsuit is filed against us, the litigation is likely to be expensive and, even if we ultimately prevail, the process will divert management’s attention from implementing the Plan of Dissolution. If we were not to prevail in such a lawsuit, we may be liable for damages. We cannot predict the amount of any such damages, however, if applicable, they may be significant and may reduce the cash available for distribution to our stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None
Item 3. Defaults Upon Senior Securities – None

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Item 4. Mine Safety Disclosures – Not applicable
Item 5. Other Information – None
Item 6. Exhibits
The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on the 10th day of November, 2016.
 
 
 
 
 
 
 
 
CNL GROWTH PROPERTIES, INC.
 
 
 
 
By:
 
/s/ Stephen H. Mauldin
 
 
 
STEPHEN H. MAULDIN
 
 
 
Chief Executive Officer and President
 
 
 
(Principal Executive Officer)
 
 
 
 
By:
 
/s/ Tammy J. Tipton
 
 
 
TAMMY J. TIPTON
 
 
 
Chief Financial Officer and Treasurer
 
 
 
(Principal Financial Officer)


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EXHIBIT INDEX
The following documents are filed or incorporated as part of this report.
Exhibit No.
Description
10.1
Purchase and Sale Agreement, dated as of August 26, 2016, between GGT TRG Grand Lakes TX, LLC and Southstar Capital Group I, LLC. (Filed herewith.)
10.2
Purchase and Sale Agreement, dated as of September 15, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Filed herewith.)
10.3
First Amendment to Purchase and Sale Agreement, dated September 19, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Filed herewith.)
10.4
Second Amendment to Purchase and Sale Agreement, dated September 30, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Filed herewith.)
10.5
Third Amendment to Purchase and Sale Agreement, dated November 3, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Filed herewith.)
31.1
Certification of Chief Executive Officer of CNL Growth Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2
Certification of Chief Financial Officer of CNL Growth Properties, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1
Certification of Chief Executive Officer and Chief Financial Officer of CNL Growth Properties, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
101
The following materials from CNL Growth Properties, Inc. Quarterly Report on Form 10-Q for the nine months ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Statement of Net Assets, (ii) Condensed Consolidated Balance Sheet, (iii) Condensed Consolidated Statement of Changes in Net Assets, (iv) Condensed Consolidated Statements of Operations, (v) Condensed Consolidated Statements of Equity, (vi) Condensed Consolidated Statements of Cash Flows, and (vii) Notes to the Condensed Consolidated Financial Statements.



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CNL Growth Properties, Inc. Reports