4

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

       As used herein, the term “the Company” refers to Hartman Short Term Income Properties XX, Inc. and its consolidated subsidiaries, except where the context requires otherwise.

Note 1 — Organization and Business

Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009.  The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2011.

Effective March 31, 2016, the Company terminated the offer and sale of its common stock to the public in its follow-on public offering.  The sale of shares of the Company’s common stock to its stockholders pursuant to the Company’s distribution reinvestment plan was discontinued as of July 16, 2016.

As of September 30, 2016, the Company had issued 18,574,461 shares of its common stock in its initial and follow-on public offerings, including 1,174,761 shares of common stock pursuant to its distribution reinvestment plan, resulting in aggregate gross offering proceeds of $181,336,480.  Total shares issued and outstanding as of September 30, 2016 include 34,875 shares of common stock issued as non-employee compensation to members of the Company’s board of directors and certain executives of the Property Manager (as defined below).

The Company was originally a majority owned subsidiary of Hartman XX Holdings, Inc., a Texas corporation wholly owned by Allen R. Hartman, the Company’s Chief Executive Officer and Chairman of the Board of Directors.  The Company sold 19,000 shares of common stock to Hartman XX Holdings, Inc. at a price of $10.00 per share.  The Company issued 1,000 shares of convertible preferred stock to its advisor, Hartman Advisors LLC (“Advisor”), at a price of $10.00 per share.   The Advisor is owned 70% by Allen R. Hartman and 30% by Hartman Income REIT Management, Inc. (the “Property Manager”). The Property Manager is a wholly owned subsidiary of Hartman Income REIT, Inc. of which approximately 20% is beneficially owned by Allen R. Hartman.

On April 11, 2014, the Company formed Hartman XX Limited Partnership, a Texas limited partnership (the “Operating Partnership”).  On March 7, 2014, the Company formed Hartman XX REIT GP LLC, a Texas limited liability company, to serve as the sole general partner of the Operating Partnership.  The Company is the sole limited partner of the Operating Partnership.  The Operating Partnership or its wholly owned subsidiaries own 100% of the membership interests in the limited liability companies through which the Company owns its properties, except for Hartman Westway One, LLC which is 54.33% owned by the Operating Partnership and 45.67% owned by a noncontrolling interest investor.

Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making acquisitions and investments on behalf of the Company pursuant to an advisory agreement (the “Advisory Agreement”) by and among the Company and Advisor. Management of the Company’s properties is through the Property Manager.  These parties receive compensation and fees for services related to the investment, management and disposition of the Company’s assets.

On April 7, 2016, the Company’s board of directors determined an estimated value per share of the Company’s common stock of $12.40 as of December 31, 2015.  In connection with its determination of an estimated value per common share, on April 26, 2016 the Company’s board of directors also determined to increase the purchase price of shares offered pursuant to the Company’s distribution reinvestment plan to $12.40 per common share, which became effective for shares purchased on or after June 1, 2016.  Effective July 16, 2016, the Company’s distribution reinvestment plan was terminated concurrent with the termination of the effective registration of the Company’s common shares.

As of September 30, 2016, the Company owned 16 commercial properties comprising approximately 2,562,000 square feet plus three pad sites, all located in Texas.  As of September 30, 2016, the Company owned eight properties located in Richardson, Arlington, Irving and Dallas, Texas, six properties located in Houston, Texas and

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

two properties located in San Antonio, Texas. As of September 30, 2015, the Company owned 14 commercial properties comprising approximately 2,200,000 square feet plus three pad sites, all located in Texas.  As of September 30, 2015, the Company owned seven properties located in Richardson, Arlington, and Dallas, Texas, six properties located in Houston, Texas and one property located in San Antonio, Texas.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements included in this report are unaudited; however, amounts presented in the consolidated balance sheet as of December 31, 2015 are derived from our audited consolidated financial statements as of that date.  The unaudited consolidated financial statements as of September 30, 2016 have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-X, on a basis consistent with the annual audited consolidated financial statements. The consolidated financial statements presented herein reflect all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the financial position of the Company as of September 30, 2016, and the results of consolidated operations for the three and nine months ended September 30, 2016 and 2015, the consolidated statement of stockholders’ equity for the nine months ended September 30, 2016 and the consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015.  The results of the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

The consolidated financial statements herein are condensed and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

        These unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries.  All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Reclassifications

The Company has reclassified certain prior period amounts in the accompanying consolidated financial statements in order to be consistent with the current period presentation.  These reclassifications had no effect on the previously reported working capital or results of operations.

Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  Cash and cash equivalents as of September 30, 2016 and December 31, 2015 consisted of demand deposits at commercial banks.

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

Restricted Cash

Restricted cash represents cash for which the use of funds is restricted by certain loan documents.  As of September 30, 2016 and December 31, 2015, the Company had a restricted cash balance of $2,371,000 and $6,900,000, respectively, representing amounts set aside as impounds to be disbursed to the Company (i) upon its achieving incremental occupancy and gross income thresholds at the Richardson Heights Property and the Bent Tree Green Property, and (ii) the completion of certain agreed upon capital repairs at the Cooper Street Property and the Mitchelldale Property.  Restricted cash as of December 31, 2015 included $6,500,000 of loan proceeds and $400,000 in cash, in an escrow account with a loan servicer.  During the three and nine months ended September 30, 2016, the Company applied for and received $4,129,000 of the restricted loan proceeds and $400,000 of the capital repair escrow.  If the Company does not meet the agreed upon requirements for the disbursement of any of the remaining $2,371,000, such amount will be applied to the outstanding term loan balance on or before December 31, 2016.

Financial Instruments

       The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, accrued rent and accounts receivable, note receivable, accounts payable and accrued expenses, notes payable and due from (to) related parties.  The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.  Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its notes payable approximates fair value.

Revenue Recognition

The Company’s leases are accounted for as operating leases.  Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases.  Revenue is recognized on a straight-line basis over the terms of the individual leases.  Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space.  When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in accrued rent and accounts receivable, net.  In accordance with Accounting Standards Codification (“ASC”) 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement and other revenues in the period the related costs are incurred.

Real Estate

Allocation of Purchase Price of Acquired Assets

       Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).

The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.

The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles are included in real estate assets in the consolidated balance sheets and are being amortized to expense over the remaining term of the respective leases.

The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net loss.

Depreciation and amortization

       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. In-place leases are amortized using the straight-line method over the weighted average years’ remaining calculated on terms of all of the leases in-place when acquired.

Impairment

       The Company reviews its real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  The Company determines whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of September 30, 2016.

Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

Fair Value Measurement

Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

The Company’s estimates of fair value were determined using available market information and appropriate valuation methods.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.  The Company classifies assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

Accrued Rent and Accounts Receivable

       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rent and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.

Deferred Leasing Commission Costs

       Leasing commissions are amortized using the straight-line method over the term of the related lease agreements.  

Goodwill

       GAAP requires the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired.  The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount.  If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test.  In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. No goodwill impairment has been recognized in the accompanying consolidated financial statements.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

Organization and Offering Expenses

The Company has incurred certain organization and offering expenses in connection with the organization of the Company and the offering of the Company’s shares of common stock in the Company’s public offerings. These costs principally relate to professional and filing fees. For the three months ended September 30, 2016 and 2015, such costs totaled $0 and $296,000, respectively.  For the nine months ended September 30, 2016 and 2015, such costs totaled $814,000 and $653,000, respectively.

Organization and offering expenses of the Company are paid directly by the Company or incurred by Advisor on behalf of the Company and reimbursed by the Company to the Advisor (subject to certain limitations). Pursuant to the Advisory Agreement, organization and offering expenses will be reimbursed by the Advisor to the Company following the completion of a public offering of the Company to the extent that total organization and offering expenses incurred by the Company in connection with such public offerings (excluding selling commissions and dealer manager fees) exceed 1.5% of gross offering proceeds from the completed public offerings.  As of September 30, 2016 and December 31, 2015, respectively, the amount of offering and organizational expenses incurred in excess of 1.5% of gross offering proceeds was cumulatively $858,000 and $668,000 for the Company’s initial and follow-on public offerings, respectively. The Company terminated the offer and sale of its common stock to the public in its follow-on offering on March 31, 2016.  The Company continued to process subscriptions dated on or before March 31, 2016 through June 30, 2016.  The Company has recorded a receivable from the Advisor and recorded a contra expense of $858,000 resulting in a net credit for organization and offering expenses of ($44,000) during the nine months ended September 30, 2016.

Stock-Based Compensation

The Company follows ASC 718, Compensation-Stock Compensation (ASC 718) with regard to issuance of stock in payment of services.  ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements.  The compensation cost is measured based on the fair value of the equity or liability instruments issued.  Stock-based compensation expense is included in general and administrative expense in the accompanying consolidated statements of operations.

Advertising

       The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses in the accompanying consolidated statements of operations.  Advertising costs totaled $15,000 and $23,000 for the three months ended September 30, 2016 and 2015, respectively.  Advertising costs totaled $52,000 and $68,000 for the nine months ended September 30, 2016 and 2015, respectively.

Income Taxes

The Company has elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with its taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP).  As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions.  Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders.  However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT. 

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

For the three months ended September 30, 2016 and 2015, the Company incurred a net loss of $2,408,000 and $2,754,000, respectively.  For the nine months ended September 30, 2016 and 2015, the Company incurred a net loss of $6,811,000 and $5,457,000, respectively.  The Company has formed a taxable REIT subsidiary which may generate future taxable income, which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance.  Accordingly, no deferred tax benefit or deferred tax asset has been recorded in the accompanying consolidated financial statements.

The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination.  Accordingly, the Company has not recognized a liability related to uncertain tax positions.

Loss Per Share

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.  The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock.  As of September 30, 2016 and 2015, there were no shares issuable in connection with these potentially dilutive securities.  These potentially dilutive securities were excluded from the computations of diluted net loss per share for the three and nine months ended September 30, 2016 and 2015 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive.

Concentration of Risk

The Company maintains cash accounts in two U.S. financial institutions.  The terms of these deposits are on demand to minimize risk.  The balances of these accounts may exceed the federally insured limits.  No losses have been incurred in connection with these deposits.

The geographic concentration of the Company’s real estate assets makes it susceptible to adverse economic developments in the State of Texas. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders

Major tenants are defined as those tenants which individually comprise more that 10% of the Company’s total rental revenues.  The sole tenant of the Company’s Gulf Plaza property represented 7.3% and 10.2% of total rental revenues for nine months ended September 30, 2016 and 2015, respectively.

Recent Accounting Pronouncements

ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. The Company has adopted this guidance for all periods presented.

In February 2016, the FASB issued guidance requiring lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting will remain largely unchanged. The guidance will also require new qualitative and quantitative disclosures to help financial statement users better understand the timing, amount and uncertainty of cash flows arising from leases. This guidance will be effective for reporting periods beginning on or after December

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance and its impact on the consolidated financial statements.

Note 3 — Real Estate

   The Company’s real estate assets consisted of the following, in thousands:

       Depreciation expense for the three months ended September 30, 2016 and 2015 was $1,742,000 and $1,182,000, respectively.  Depreciation expense for the nine months ended September 30, 2016 and 2015 was $4,705,000 and $2,914,000, respectively.  Amortization expense of in-place lease value intangible was $4,066,000 and $2,830,000 for the three months ended September 30, 2016 and 2015, respectively.  Amortization expense of in-place lease value intangible was $11,787,000 and $6,609,000 for the nine months ended September 30, 2016 and 2015, respectively.

       Acquisition fees paid to Advisor were $0 and $724,000 for the three months ended September 30, 2016 and 2015, respectively.   Acquisition fees paid to Advisor were $541,000 and $1,262,000 for the nine months ended September 30, 2016 and 2015, respectively.  Asset management fees paid to Advisor were $372,000 and $267,000 for the three months ended September 30, 2016 and 2015, respectively.  Asset management fees paid to Advisor were $1,052,000 and $696,000 for the nine months ended September 30, 2016 and 2015, respectively.  Asset management and acquisition fees are captioned as such in the accompanying consolidated statements of operations for the three and six months ended September 30, 2016 and 2015, respectively.

On June 1, 2016, Hartman Westway One, LLC, a wholly owned subsidiary of the Operating Partnership, acquired a three story office building containing approximately 166,000 square feet of office space located in Irving, Texas, commonly known as Westway One (the “Westway One Property”).  The Westway One Property was acquired for $21,638,000, exclusive of closing costs, from an unaffiliated third party seller.  The Westway One Property was 100% occupied at the acquisition date.  An acquisition fee of $541,000 was earned by the Advisor in connection with the purchase of the Westway One Property.

The following table summarizes the fair value of the assets acquired and liabilities assumed based upon the Company’s initial purchase price allocation as of the acquisition date, in thousands:

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

On June 17, 2016, Hartman Westway One, LLC admitted an unrelated independent investor as a member for $5,500,000 in exchange for a 45.67% noncontrolling member interest.

The Company identifies and records the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms.  With respect to all properties owned by the Company, we consider all of the in-place leases to be market rate leases.

The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows, in thousands:

Note 4 — Accrued Rent and Accounts Receivable, net

Accrued rent and accounts receivable, net, consisted of the following, in thousands:

As of September 30, 2016 and December 31, 2015, the Company had an allowance for uncollectible accounts of $959,000 and $493,000, respectively.  For the three months ended September 30, 2016 and 2015, the Company recorded bad debt expense in the amount of $223,000 and $159,000, respectively, related to tenant receivables that have specifically identified as potentially uncollectible based on an assessment of each tenant’s credit-worthiness.  For the nine months ended September 30, 2016 and 2015, the Company recorded bad debt expense in the amount of $508,000 and $170,000, respectively.  For the nine months ended September 30, 2016 and 2015, the Company recorded write-offs of $42,000 and $0, respectively.  Bad debt expense and any related recoveries are included in property operating expenses in the accompanying consolidated statements of operations.

Note 5 — Deferred Leasing Commission Costs, net

Costs which have been deferred consist of the following, in thousands:

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

Note 6 — Notes Payable

The Company is a party to a $30.0 million revolving credit agreement (the “TCB Credit Facility”) with Texas Capital Bank.  The borrowing base of the TCB Credit Facility may be adjusted from time to time subject to the lender’s underwriting with respect to real property collateral.  On July 2, 2014, the Company entered into a modification agreement of the TCB Credit Facility to add the Gulf Plaza Property as the sole collateral property and the borrowing base of the TCB Credit Facility was $7.0 million.  On January 23, 2015, the TCB Credit Facility was modified to add the Timbercreek and Copperfield properties as collateral and the borrowing base of the TCB Credit Facility was increased to $9.9 million.  On November 10, 2015, the TCB Credit Facility was modified to add the One Technology Center property to the borrowing base.  As modified, the borrowing base is $20.925 million.  The TCB Credit Facility note, as currently modified, bears interest at the greater of 4.25% per annum or the bank’s prime rate plus 1% per annum.  The interest rate was 4.50% per annum as of September 30, 2016 and December 31, 2015. All borrowings under the TCB Credit Facility mature on May 9, 2017.

The outstanding balance under the TCB Credit Facility was $1.3 million as of September 30, 2016 and $4.0 million as of December 31, 2015.  As of September 30, 2016 the amount available to be borrowed under the TCB Credit Facility is $19.6 million.  As of September 30, 2016, the Company was in compliance with all loan covenants under the TCB Credit Facility.

The Company is a party to a $15.52 million revolving credit agreement (the “EWB Credit Facility”) with East West Bank.  The borrowing base of the EWB Credit Facility may be adjusted from time to time subject to the lender’s underwriting with respect to real property collateral.    The EWB Credit Facility is secured by the Commerce Plaza Hillcrest, Corporate Park Place and 400 North Belt properties.  The EWB Credit Facility note bears interest at the greater of 3.75% per annum or the bank’s prime rate plus 0.50%.  The interest rate was 4% per annum as of September 30, 2016 and as of December 31, 2015.  All loans under the EWB Credit Facility mature on August 24, 2017.

On October 8, 2015 the Company entered into a second revolving credit agreement with East West Bank (the “EWB II Credit Facility”).  The borrowing base of the EWB II Credit Facility is $9.9 million and may be adjusted from time to time subject to the lender’s underwriting with respect to the real property collateral.    The EWB II Credit Facility is secured by the Ashford Crossing and Skymark Tower properties.  The EWB II Credit Facility note bears interest at the greater of 3.75% per annum or the bank’s prime rate plus 0.50%.  The interest rate was 4% per annum as of September 30, 2016 and as of December 31, 2015.  All loans under the EWB II Credit Facility mature on August 24, 2017.

The aggregate outstanding balance under the EWB Credit Facility and EWB II Credit Facility was $5.1 million as of September 30, 2016 and $14.0 million as of December 31, 2015.  As of September 30, 2016, the aggregate amount available to be borrowed under the EWB Credit Facility and EWB II Credit Facility is $20.3 million.  As of September 30, 2016, the Company was in compliance with all loan covenants under the EWB Credit Facility and EWB II Credit Facility.

In connection with the acquisition of Westway One property, the Company entered into a mortgage loan agreement with Southside Bank dated June 1, 2016, providing mortgage loan proceeds of $10.8 million (the “Westway One Loan”).  The Westway One Loan is evidenced by a loan agreement and a promissory note and secured by a deed of trust, security agreement and assignment of rents of the Westway One property.  The Westway one Loan matures and is due and payable in full on June 1, 2019.

Payments of interest only on the Westway One Loan are due monthly beginning on July 1, 2016.  The Westway One Loan bears interest at the greater of the floating rate index plus 2.50% or 2.50%.  The floating rate index is the one month London Interbank Offered Rate (LIBOR) adjusted each month as of the first day of such month.  The

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NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

floating rate index as of June 1, 2016 was 0.456% for an applicable interest rate of 2.956% as of that date and the interest rate was 3.027% per annum as of September 30, 2016.

The Company’s loan costs are amortized using the straight-line method over the terms of the loans, which approximates the interest method.  Costs which have been deferred consist of the following, in thousands:

      The following is a summary of the Company’s notes payable as of September 30, 2016, in thousands:

(1)

Each promissory note contains a call option wherein the holder of the promissory note may declare the outstanding balance due and payable on either July 1, 2024, July 1, 2029, July 1, 2034, or July 1, 2039.  

Interest expense incurred for the three months ended September 30, 2016 and 2015 was $961,000 and $825,000, respectively.  Interest expense incurred for the nine months ended September 30, 2016 and 2015 was $2,649,000 and $2,359,000, respectively.  Interest expense of $96,000 and $212,000 was payable as of September 30, 2016 and December 31, 2015, respectively, and is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

Note 7 — Loss Per Share

       Basic loss per share is computed using net loss attributable to common stockholders and the weighted average number of common shares outstanding.  Diluted earnings per share reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share, in thousands except shares and per share data.

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HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINACIAL STATEMENTS

(Unaudited)

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Occupancy

             As of September 30, 2016, our real estate properties comprised the following total square footage and occupancy by asset type and geographic location:

Base Rental Revenue, in thousands except for percentage occupancy

            As of September 30, 2016, our real estate properties comprised the following annualized base rental revenue by asset type and geographic location, in thousand dollars:

Significant Tenants

            The following table sets forth information about our five most significant tenants, in terms of annualized rental revenues, in thousand dollars, as of September 30, 2016:

Lease Expirations:

            The following table sets forth information regarding lease expirations at our properties during each of the next ten years, beginning January 1, 2017:

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Revenues – The primary source of our revenue is rental revenues and tenant reimbursements.  For the three months ended September 30, 2016 and 2015 we had total rental revenues and tenant reimbursements of $9,932,000 and $6,923,000, respectively. The $3,009,000 increase in total rental revenues and tenant reimbursements was primarily due to the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we

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owned as of September 30, 2015. Same Store property revenues increased by $279,000, or approximately 5.9%, for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.  

Operating expenses – Operating expenses consist of property operating expenses including contract services, repairs and maintenance, utilities and management fees.  For the three months ended September 30, 2016 and September 30, 2015 we had operating expenses of $3,688,000 and $2,242,000, respectively.  Same Store operating expenses increased $86,000 for the three months ended September 30, 2016 over the three months ended September 30, 2015 due to increased repair and maintenance costs which are included in property operating expenses on the accompanying consolidated statements of operations.

 Fees to affiliates – We pay acquisition fees and asset management fees to our advisor in connection with the acquisition of properties and management of our company.  Asset management fees paid to our advisor were $372,000 and $267,000 for the three months ended September 30, 2016 and September 30, 2015, respectively.  Acquisition costs related to the acquisition of our properties were $0 and $724,000 for the three months ended September 30, 2016 and September 30, 2015, respectively. The decrease in asset acquisition fees is attributable to 3 properties acquired during third quarter of 2015, and the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we owned as of September 30, 2015. We pay property management and leasing commissions to our Property Manager in connection with the management and leasing of our properties.  For the three months ended September 30, 2016 and September 30, 2015 we paid our Property Manager $345,000 and $254,000, respectively, for property management fees and $823,000 and $382,000, respectively, for leasing commissions. The decrease in property management fees we paid to our Property Manager from the three months ended September 30, 2015 to the three months ended September 30, 2016 was primarily due to lease activities on more properties.

Real estate taxes and insurance – Real estate taxes and insurance were $1,263,000 and $976,000 for the three months ended September 30, 2016 and 2015, respectively. The increase in real estate taxes and insurance from the three months ended September 30, 2015 to the three months ended September 30, 2016 was primarily due to the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we owned as of September 30, 2015.

Depreciation and amortization – Depreciation and amortization were $5,808,000 and $4,012,000 for the three months ended September 30, 2016 and 2015, respectively.  Depreciation and amortization increased from the three months ended September 30, 2015 to the three months ended September 30, 2016 primarily due to the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we owned as of September 30, 2015.

General and administrative expenses - General and administrative expenses were $539,000 and $338,000 for the three months ended September 30, 2016 and 2015, respectively.  General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, and independent director compensation. The increase in general and administrative expenses is due to increased professional fees and certain recoverable and non-recoverable property operating expenses. We expect general and administrative expenses to increase only modestly in future periods as we acquire additional real estate and real estate related assets.  We expect general and administrative expenses to decrease substantially as a percentage of total revenue.

Organizational and offering costs - We have incurred certain expenses in connection with our organization and the sale of our shares of common stock.  These costs principally relate to professional and filing fees.  As of September 30, 2016, such costs totaled $858,000 and have been expensed as incurred since February 5, 2009, the date of our inception.  For the three months ended September 30, 2016 and September 30, 2015, organization and offering costs were $0 and $296,000, respectively.

Net loss – We incurred net losses of $2,408,000 and $2,754,000 for the three months ended September 30, 2016 and 2015, respectively.  The net loss for the three months ended September 30, 2016 is primarily attributable to depreciation and amortization expense attributable to real estate assets.

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Comparison of the nine months ended September 30, 2016 versus September 30, 2015

The following is a reconciliation of our NOI to net loss for the nine months ended September 30, 2016 and 2015, respectively, computed in accordance with GAAP (in thousands):

Revenues – The primary source of our revenue is rental revenues and tenant reimbursements.  For nine months ended September 30, 2016 and 2015 we had total rental revenues and tenant reimbursements of $28,328,000 and $17,442,000, respectively. The $10,886,000 increase in total rental revenues and tenant reimbursements was primarily due to the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we

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owned as of September 30, 2015. Same Store property revenues increased by $733,000, or approximately 5.1%, for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.  

Operating expenses – Operating expenses consist of property operating expenses including contract services, repairs and maintenance, utilities and management fees.  For the nine months ended September 30, 2016 and September 30, 2015 we had operating expenses of $9,756,000 and $4,945,000, respectively.  Same Store operating expenses increased $538,000 for the nine months ended September 30, 2016 over the nine months ended September 30, 2015 due to increased repair and maintenance costs which are included in property operating expenses on the accompanying consolidated statements of operations.

 Fees to affiliates – We pay acquisition fees and asset management fees to our advisor in connection with the acquisition of properties and management of our company.  Asset management fees to our advisor were $1,052,000 and $696,000 for the nine months ended September 30, 2016 and September 30, 2015, respectively.  Acquisition costs related to the acquisition of our properties were $541,000 and $1,262,000 for the nine months ended September 30, 2016 and September 30, 2015, respectively. The decrease in acquisition and asset management fees is attributable to two acquisitions and one acquisition in the third quarters of 2015 and 2016, respectively, and the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we owned as of September 30, 2015. We pay property management and leasing commissions to our Property Manager in connection with the management and leasing of our properties.  For the nine months ended September 30, 2016 and September 30, 2015 we paid our Property Manager $996,000 and $663,000, respectively, for property management fees and $2,311,000 and $758,000, respectively, for leasing commissions. The increase in property management fees we paid to our Property Manager from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 was primarily due to more properties in 2016.

Real estate taxes and insurance – Real estate taxes and insurance were $3,612,000 and $2,522,000 for the nine months ended September 30, 2016 and 2015, respectively. The increase in real estate taxes and insurance from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 was primarily due to the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we owned as of September 30, 2015.

Depreciation and amortization – Depreciation and amortization were $16,492,000 and $9,522,000 for the nine months ended September 30, 2016 and 2015, respectively.  Depreciation and amortization increased from the nine months ended September 30, 2015 to the nine months ended September 30, 2016 primarily due to the fact that we owned 16 properties as of September 30, 2016, as compared to the 14 properties we owned as of September 30, 2015.  The Company acquired five properties during the nine months ended September 30, 2015.  Depreciation and amortization expense for the nine months ended September 30, 2015 attributable to those five properties represented  less that nine months of depreciation and amortization compared to a full nine months in the nine months ended September 30, 2016.

General and administrative expenses - General and administrative expenses were $1,785,000 and $959,000 for the nine months ended September 30, 2016 and 2015, respectively.  General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, and independent director compensation. The increase in general and administrative expenses is due to increased professional fees and certain recoverable and non-recoverable property operating expenses. We expect general and administrative expenses to increase only modestly in future periods as we acquire additional real estate and real estate related assets.  We expect general and administrative expenses to decrease substantially as a percentage of total revenue.

Organizational and offering costs - We have incurred certain expenses in connection with our organization and the sale of our shares of common stock.  These costs principally relate to professional and filing fees.  As of September 30, 2016, such costs totaled $858,000 and have been expensed as incurred since February 5, 2009, the date of our inception.  For the nine months ended September 30, 2016 and September 30, 2015, organization and offering costs were ($44,000) and $653,000, respectively.

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Net loss – We incurred net losses of $6,811,000 and $5,457,000 for the nine months ended September 30, 2016 and 2015, respectively.  The net loss for the nine months ended September 30, 2016 is primarily attributable to depreciation and amortization expense attributable to real estate assets.

Funds From Operations and Modified Funds From Operations

 Funds From Operations, or FFO, is a non-GAAP financial measure defined by the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, which we believe is an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT in conjunction with net income.  FFO is used by the REIT industry as a supplemental performance measure.  FFO is not equivalent to our net income or loss as determined under GAAP.

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

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed.  We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative.  Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time.  An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset.  Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred.  While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.

Historical accounting for real estate involves the use of GAAP.  Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP.  Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.  However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance.  The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

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Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.  Management believes these fees and expenses do not affect our overall long-term operating performance.  Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation.  While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We intend to use the remaining net proceeds raised in our follow-on offering to continue to acquire properties, and intend to begin the process of achieving a liquidity event (i.e., the listing of our common stock on a national exchange, a merger or sale or our company or another similar transaction) within ten years of the completion of our initial public offering.  The Investment Program Association, or “IPA,” an industry trade group, has standardized a measure known as Modified Funds From Operations, or “MFFO,” which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above.  MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended.  We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (i.e., the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place.  By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our public offering has been completed and our properties have been acquired.  We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.  Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our public offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our public offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

    We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010.  The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.  The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.

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Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses.  We do not currently exclude amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests.  Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income.  These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors.  All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.  Accordingly, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired.  MFFO that excludes such costs and expenses would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics to us.  Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities.  In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.  The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in our public offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

 Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter.  As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner.  We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors.  For example, acquisitions costs are funded from the remaining net proceeds of our public offerings and other financing sources and not from operations.  By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties.  Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance.  By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

       Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders.  FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance.    MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed.  FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

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Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO.  In the future, the SEC, NAREIT, or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and as a result we may have to adjust our calculation and characterization of FFO or MFFO.

The table below summarizes our calculation of FFO and MFFO for the three and nine months ended September 30, 2016 and 2015 including a reconciliation of such non-GAAP financial performance measures to our net loss, in thousands.

Distributions

Our board of directors has declared daily distributions that are paid on a monthly basis. We expect to continue paying monthly distributions unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. We may declare distributions in excess of our funds from operations. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year.

On December 17, 2010, our board of directors authorized and declared a cash distribution to our stockholders contingent upon the closing of our acquisition of our first investment. The distribution (1) began to accrue daily to our stockholders of record as of the close of business on each day commencing one business day following the closing of the acquisition of our first investment; (2) is payable in cumulative amounts on or before the 20th day of each calendar month (with respect to the prior month); and (3) is calculated at a rate of $0.001918 per share of our common stock per day, which, if paid each day over a 365-day period, is equivalent to an 7.0% annualized distribution rate based on a purchase price of $10.00 per share of our common stock.

The following table summarizes the distributions we paid in cash and pursuant to our distribution reinvestment plan for the period from January 2011 (the month we first paid distributions) through September 30, 2016, in thousands:

             The following table summarizes the distributions we paid in cash and pursuant to our distribution reinvestment plan for the period from January 2011 (the month we first paid distributions) through September 30, 2016, in thousands:

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(1)

Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid    approximately 20 days following the end of such month.

(2)

Distributions accrued for the period from December 27, 2010 through December 31, 2010 were paid on January 20, 2011, the date we first paid a distribution.

(1)

Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan.

For the nine months ended September 30, 2016, we paid aggregate distributions of $8,733,000 including distributions paid in shares of common stock pursuant to our distribution reinvestment plan.  During the same period, cash used in operating activities was $15,000 and our FFO was $9,681,000. For the nine months ended September 30, 2016, 0% of distributions were paid from cash provided by offering proceeds.   For the nine months ended September 30, 2015, we paid aggregate distributions of $5,043,000, including distributions paid in shares of common stock pursuant to our distribution reinvestment plan.  During the same period, cash provided by operating activities was $3,959,000 and our FFO was $4,066,000. For the nine months ended September 30, 2015, 79% of

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distributions were paid from offering proceeds.  For the period from our inception to September 30, 2016, we paid aggregate distributions of $26,295,000.  During the period from our inception to September 30, 2016, our cash provided by operating activities was $12,544,000, our net loss was $24,909,000 and our FFO was $18,762,000. Of the $26,295,000 in aggregate distributions paid to our stockholders from inception to September 30, 2016, approximately 48% was paid from net cash provided by operating activities and approximately 52% was funded from offering proceeds.   For a discussion of how we calculate FFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds From Operations and Modified Funds From Operations.

Liquidity and Capital Resources

 As of September 30, 2016, we had issued 18,574,461 shares of our common stock in our initial and follow-on public offerings, including 1,174,761 shares of common stock pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $181,336,480. Effective March 31, 2016, we terminated the offer and sale of our common stock to the public in our follow-on public offering. The sale of shares of our common stock to our stockholders pursuant to our distribution reinvestment plan terminated effective as of July 16, 2016.

Our principal demands for funds are and will continue to be for real estate and real estate-related acquisitions, for the payment of operating expenses, for the payment of interest on our outstanding indebtedness, and for the payment of distributions. Over time, we expect to meet our cash needs for items other than acquisitions from our cash flow from operations; provided, however, that some or all of our distributions have been and may continue to be paid from sources other than cash from operations (as discussed below).  We expect to meet our cash needs for acquisitions from the remaining net proceeds of our follow-on public offering and from secured and unsecured financings.

Some or all of our distributions have been and may continue to be paid from sources other than cash flow from operations, including proceeds of our public offerings, cash advances to us by our advisor, cash resulting from a waiver of asset management fees and borrowings secured by our assets in anticipation of future operating cash flow.  We may have little, if any, cash flow from operations available for distribution until we make substantial investments and those investments stabilize.  In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.

We use, and intend to use in the future, secured and unsecured debt to acquire properties and make other investments.  As of September 30, 2016, our outstanding secured debt is $74,797,000. There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment.  Under our charter, we are prohibited from borrowing in excess of 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; provided, however, we may exceed that limit if approved by a majority of our independent directors and if such excess is disclosed to the stockholders in the next quarterly report along with the explanation for such excess borrowings.  Our board of directors has adopted a policy to limit our aggregate borrowings to approximately 50% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Such limitation, however, does not apply to individual real estate assets and only will apply once we have ceased raising capital in our public offering and invested substantially all of our capital.  As a result, we expect to borrow more than 50% of the contract purchase price of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent.

Our advisor may, but is not required to, establish capital reserves from remaining gross offering proceeds, out of cash flow generated by operating properties and other investments or out of non-liquidating net sale proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures. Alternatively, a lender may require its own formula for escrow of capital reserves.  Our lenders may also require working capital and other reserves.

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   Potential future sources of capital include proceeds from additional private or public offerings of our securities, secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations.  If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.

Cash Flows - Operating Activities

As of September 30, 2016 we had continuing operations from 16 commercial real estate properties, as compared to 14 commercial real estate properties owned as of September 30, 2015.  During the nine months ended September 30, 2016, net cash used in operating activities was $15,000 versus $3,959,000 net cash provided by operating activities for nine months ended September 30, 2015.  The decrease in net cash provided by operating activities is primarily attributable to advances to related parties, decrease in accounts payable and accrued expenses and payment of leasing commissions. We expect cash flows provided by operating activities to increase in future periods as a result of additional acquisitions of real estate and real estate related investments.

Cash Flows - Investing Activities

During the nine months ended September 30, 2016, net cash used in investing activities was $37,152,000 versus $52,316,000 for the nine months ended September 30, 2015 and consisted primarily of cash used for additions to real estate of $25,491,000 and $51,846,000, respectively; the release of $4,529,000 of restricted cash previously held by a loan servicer, our investment of $8,959,000 in common shares of Hartman Income REIT, Inc., and the $7,231,000 financing investment by our taxable REIT subsidiary with an affiliate.

Cash Flows - Financing Activities

    Cash flows from financing activities consisted primarily of proceeds from our public offering and distributions paid to our common stockholders.  Net cash provided by financing activities for the nine months ended September 30, 2016 and 2015 was $36,416,000 and $48,264,000, respectively, and consisted of the following:

·

$41,618,000 and $36,464,000, respectively, of cash provided by offering proceeds related to our public offering, net of payments of commissions on sales of common stock of $2,103,000 and $1,722,000 respectively;

·

$1,179,000 and $181,000, respectively, of cash used to redeem common stock pursuant to our share redemption plan;

·

($1,620,000) and $16,386,000, respectively, of cash (used in) provided by term loan and revolving credit and net repayments of both;

·

$5,745,000 and $2,434,000, respectively, of net cash distributions, after giving effect to distributions reinvested by stockholders of $2,988,000 and $2,609,000, respectively;

·

$84,000 and $49,000, respectively, of insurance premium finance proceeds net of repayments;

·

$5,500,000 and $0, respectively, of investment proceeds received from non-controlling interest investor; and

·

$139,000 and $298,000, respectively, used in deferred loan costs.

Contractual Commitments and Contingencies

     We use, and intend to use in the future, secured and unsecured debt, as a means of providing additional funds for the acquisition of our properties and our real estate-related assets. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. Under our charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets. We may borrow in excess of this amount if such excess is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report, along with a justification for such excess. In such event, we will monitor our debt levels and take action to reduce any such

39

excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of September 30, 2016, our borrowings were not in excess of 300% of the value of our net assets.

In addition to using our capital resources for investing purposes and meeting our debt obligations, we expect to use our capital resources to make certain payments to our advisor. We expect to make payments to our advisor or its affiliates in connection with the selection and origination or purchase of real estate and real estate-related investments, the management of our assets, the management of the development or improvement of our assets and costs incurred by our advisor in providing services to us.

As of September 30, 2016, we had notes payable totaling an aggregate principal amount of $74,797,000. For more information on our outstanding indebtedness, see Note 6 (Notes Payable) to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

The following is a summary of our contractual obligations as of September 30, 2016, in thousands:

(1)

Amounts include principal payments only.

(2)

Projected interest payments are based on the outstanding principal amounts and weighted-average interest rates at September 30, 2016.

(3)

Purchase obligations were excluded from contractual obligations as there were no binding purchase obligations as of September 30, 2016.

Off-Balance Sheet Arrangements

           As of September 30, 2016 and December 31, 2015, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

    Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements. See Note 2 to the notes to the accompanying consolidated financial statements.

Related-Party Transactions and Agreements

    We have entered into agreements with our advisor and its affiliates whereby we have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, our advisor and its affiliates. See Note 9 (Related Party Transactions) to the consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements and fees.

Review of our Investment Policies

Our board of directors, including our independent directors, has reviewed our investment policies as described in this Quarterly Report on Form 10-Q and determined that such policies are in the best interests of our stockholders based on the following factors: (1) such policies increase the likelihood that we will be able to acquire a diversified

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portfolio of income producing properties, thereby reducing risk in our portfolio; (2) our executive officers and directors and the affiliates of our advisor have expertise with the type of real estate investments we seek; (3) there are sufficient property acquisition opportunities with the attributes that we seek; and (4) borrowings should enable us to purchase assets and earn income more quickly, thereby increasing the likelihood of generating income for our stockholders and preserving stockholder capital.

Subsequent Events

On November 14, 2016, the Company, through the Operating Partnership, entered into a limited liability agreement with Hartman vREIT XXI, Inc., an affiliate of the Company, for the purpose of acquiring a retail shopping center under contract for purchase by the Operating Partnership.  Under the terms of the limited liability agreement of Hartman Village Pointe, LLC (“Village Pointe”), the Operating Partnership will assign its interest in the contract for purchase to Village Pointe and contribute $3,675,000 in exchange for a 97.35% members interest.  Hartman vREIT XXI, Inc. will contribute $100,000 in exchange for a 2.65% members interest.  The Operating Partnership will make a secured mortgage loan of $3,525,000 to Village Pointe, to be evidenced by a promissory note, deed of trust and assignment of leases and rents.  The terms of the mortgage loan will require a 2% origination fee and payment of interest only at a rate of 10% per annum.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We will be exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. We may be also exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, as of September 30, 2016, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2016, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC under the Exchange Act is recorded, processed, summarized and reported as and when required.

Changes in Internal Control over Financial Reporting

There have been no changes during the quarter ended September 30, 2016, in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financing reporting.

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PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors contained in Part I, Item 1A set forth in our Annual Report on Form 10-K filed with the SEC on March 31, 2016.

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

During the three months ended September 30, 2016, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

During the three months ended September 30, 2016, we fulfilled redemption requests and redeemed shares of our common stock pursuant to our share redemption program as follows:

(1) We generally redeem shares in the month following the end of the fiscal quarter in which requests were received.

(2) Pursuant to the share redemption program, we currently redeem shares at prices determined as follows:

a.

For shares that have been held at least one year, the lesser of 90.0% of the price paid to acquire the shares or 90.0% of the offering price of shares in our most recent offering;

b.

For shares that have been held at least two years, the lesser of 92.5% of the price paid to acquire the shares or 92.5% of the offering price of shares in our most recent offering;

c.

For shares that have been held at least three years, the lesser of 95.0% of the price paid to acquire the shares or 95.0% of the offering price of shares in our most recent offering;

d.

For shares that have been held at least four years, the lesser of 97.5% of the price paid to acquire the shares or 97.5% of the offering price of shares in our most recent offering;

e.

Thereafter, the lesser of 100.0% of the price paid to acquire the shares or 90.0% of the net asset value per share, as determined by the board of directors.

              Notwithstanding the foregoing, the redemption price for redemptions sought upon a stockholder’s death or disability or upon confinement to a long-term care facility, is available only for stockholders who purchased their shares directly from us or the persons specifically set forth in the share redemption program.

(3) The number of shares that may be redeemed pursuant to our share redemption program will not exceed (i) 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective

42

date of the redemption and (ii) those share redemptions that can be funded with proceeds from our distribution reinvestment plan plus, if we had positive net operating cash flow for the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.

On February 9, 2010, our Registration Statement on Form S-11 (File No. 333-154750), registering a public offering of up to $273,750,000 in shares of our common stock, was declared effective by the SEC and we commenced our initial public offering.  In our initial public offering we offered up to 25,000,000 shares of our common stock to the public at $10.00 per share with discounts available to certain categories of purchasers and up to 2,500,000 shares of our common stock to our stockholders pursuant to our distribution reinvestment plan at a price of $9.50 per share.  We issued a total of 4,455,678 shares of our common stock in our initial public offering, including 162,561 shares of our common stock pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $43,943,731.  On July 16, 2013, our Registration Statement on Form S-11 (File No. 333-185336), registering our follow-on public offering of up to $219,000,000 in shares of our common stock, was declared effective by the SEC.  In our follow-on offering, we offered up to 20,000,000 shares of our common stock to the public at $10.00 per share and up to 2,000,000 common shares pursuant to our distribution reinvestment plan at $9.50 per share. We terminated the sale of shares of our common stock to the public in our follow-on offering effective as of March 31, 2016.  We terminated the offer and sale of shares of our common stock to our stockholders pursuant to our distribution reinvestment plan as of July 16, 2016.

As of September 30, 2016, we had issued 18,574,461 shares of our common stock in our initial and follow-on public offerings, including 1,174,761 shares of common stock pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of $181,336,480.

As of September 30, 2016, we had incurred selling commissions, dealer manager fees and organization and other offering costs in our initial public offering and our follow-on offering in the amounts set forth in the tables below (all figures in thousands). D.H. Hill Securities, LLLP, our dealer manager, reallowed all of the selling commissions and a portion of the dealer manager fees to participating broker-dealers.

Initial Public Offering:

Follow-On Offering:

(1)

Selling commissions and dealer manager fees previously reported here with respect to our initial public offering were overstated by $558,000 based on incorrect information reported to FINRA by our dealer manager. The error does not affect the financial statements included in this Quarterly Report on Form 10-Q or any previously issued financial statements.

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As of September 30, 2016, the aggregate net offering proceeds to us from our initial public offering and our follow-on public offering, after deducting the total expenses incurred as described above, were $152,420,000, excluding $11,370,000 in offering proceeds from shares of our common stock issued pursuant to our distribution reinvestment plan. For nine months ended September 30, 2016, the aggregate ratio of the cost of raising capital to capital raised for our initial and follow-on public offerings was approximately 6.7%.

We intend to use substantially all of the remaining net proceeds from our public offerings to continue to invest in a portfolio of real properties. As of September 30, 2016, we had used $113,388,000 of the net proceeds from our public offerings, plus debt financing, to purchase our 16 investments in commercial properties. As of September 30, 2016, we had paid $4,979,000 of acquisition fees to our advisor.

Item 3. Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6.  Exhibits

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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.

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

Date: November 14, 2016                                                        

By: /s/ Allen R. Hartman

Allen R. Hartman,

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)

Date: November 14, 2016                                               

By: /s/ Louis T. Fox, III

Louis T. Fox, III,

Chief Financial Officer,

(Principal Financial and Principal Accounting Officer)

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