Attached files

file filename
EX-10.28 - EXHIBIT 10.28 - CNL Growth Properties, Inc.exhibit1028-cgpq42016.htm
EX-32 - EXHIBIT 32 - CNL Growth Properties, Inc.exhibit32-cgpq42016.htm
EX-31.2 - EXHIBIT 31.2 - CNL Growth Properties, Inc.exhibit312-cgpq42016.htm
EX-31.1 - EXHIBIT 31.1 - CNL Growth Properties, Inc.exhibit311-cgpq42016.htm
EX-21.1 - EXHIBIT 21.1 - CNL Growth Properties, Inc.exhibits211-cgpq42016.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________________________
 FORM 10-K
____________________________________________________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
None
 
Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of class)
___________________________________________________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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
There is currently no established public market for the registrant’s shares of common stock. Based on the Company’s $8.65 estimated net asset value per share as of June 30, 2016, the aggregate market value of the stock held by non-affiliates of the registrant on such date was approximately $195 million.
The number of shares of common stock outstanding as of March 10, 2017 was 22,526,171.
 
 
 
 
 



TABLE OF CONTENTS

 
 
Page
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
Item 16.




PART I
Statement Regarding Forward Looking Information
Statements contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (this “Annual 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,” “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, estimates of 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.
For further information regarding risks and uncertainties associated with the Company’s business, and 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, this Annual Report and the Company’s quarterly reports on Form 10-Q, copies of which may be obtained from the Company’s website at http://www.cnlgrowthproperties.com.
All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to, and expressly disclaims any obligation to, publicly release the results of any revisions to its forward-looking statements to reflect new information, changed assumptions, the occurrence of unanticipated subsequent events or circumstances, or changes to future operating results over time, except as otherwise required by law.

Item 1.
BUSINESS
General
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 August 4, 2016, we obtained 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 will 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. 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 ("Liquidation Basis of Accounting"), as described further in Item 8. “Financial Statements and Supplementary Data” to the financial statements.


1




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.
Our Exit Strategy
Due to the completion of our initial public offering and follow-on offering (collectively, the "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 final 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 can be given that the distributions will equal or exceed the estimate of net assets presented in the Consolidated Statement of Net Assets (Liquidation Basis of Accounting).
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
Since our inception, and through the completion of our acquisition phase in April 2015, our Advisor and its sub-advisors evaluated various investment opportunities on our behalf and we entered into joint venture arrangements for the acquisition and development of 17 real estate properties and one three building office complex that was lender owned (“Gwinnett Center”). With the exception of the Gwinnett Center (which we sold during 2014), the investments we made focused on multifamily development projects in the southeastern and sunbelt regions of the United States due to favorable and compelling market and industry data, as well as, unique opportunities to co-invest with experienced development operators.
Prior to the formation of the Special Committee in August 2015, as discussed above in "Our Exit Strategy", our Advisor evaluated opportunities that arose from favorable market conditions in multifamily development and as part of that process, evaluated provisions within the individual joint venture agreements to consider specific asset sales. As a result of evaluating these opportunities, as well as a result of exploring strategic alternatives, as described above in “Our Exit Strategy”, during 2015, we, through our consolidated joint ventures, sold four real estate properties that were operational.

2




During the seven months ended July 31, 2016 (prior to adopting 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 real estate property and, through our consolidated joint ventures, sold three additional real estate properties, all of which were operational. See Item 7. "Liquidity and Capital Resources – Net Sales Proceeds from Sales of Real Estate" for additional information.
As of December 31, 2016, we owned interests in seven Class A multifamily properties in the southeastern and sunbelt regions of the United States, all of which had substantially completed development and were operational. We had a total of 1,960 completed apartment units as of December 31, 2016. We generally expect our multifamily properties to reach stabilization within 24 months after completion.
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 December 31, 2016, we had co-invested in seven separate joint ventures with six 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. Prior to adopting the Liquidation Basis of Accounting, we determined that all of the joint ventures in which we had co-invested were variable interest entities in which we were the primary beneficiary. As such, the transactions and accounts of the joint ventures were consolidated in our accompanying financial statements under the going concern basis of accounting.
For additional information regarding our real estate properties, see Item 2. “Properties.”
Our Borrowing Policies
Under our articles of incorporation, the maximum amount of our indebtedness cannot exceed 300% of our “net assets,” as defined by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007 (the “NASAA REIT Guidelines”) as of the date of any borrowing unless any excess borrowing is approved by a majority of our independent directors and is disclosed to stockholders in our next quarterly report, together with a justification for the excess. In addition to the limitations contained in our articles of incorporation, our board of directors has adopted a policy to limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets.
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. Many of our joint venture agreements provide for our partners’ cooperation in order to refinance our indebtedness.
Our Distribution Policy
In order to qualify as a REIT, we are required to distribute 90% of our annual REIT taxable income to our stockholders.
Stock Distributions
Due to our original investment strategy of seeking growth-oriented assets and our original investment focus of investing in development properties, the board determined to issue stock distributions in order to preserve cash as we developed properties and achieved stabilization of those properties upon completion of construction. Our board of directors authorized daily stock distributions effective July 1, 2010. On September 15, 2014, our board approved the termination of our stock distribution policy effective as of October 1, 2014. The board believed that additional stock distributions no longer provided an economic benefit, and believed that stock distributions were not in the best interests of our existing stockholders. As a result, we did not declare any further stock distributions effective October 1, 2014. See Item 5. "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for additional information.
Special Cash Distributions
As described above in “Our Exit Strategy”, we evaluated opportunities that arose from favorable market conditions in multifamily development, explored strategic alternatives and sold properties. As a result, in February 2015 and December 2015, our board of directors declared special cash distributions in the amounts of $1.30 and $1.70, respectively, per share of common stock (the “Special Cash Distributions”). The Special Cash Distributions totaling approximately $67.6 million were paid in cash

3




and were funded from the proceeds of refinancings and asset sales. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Special Cash Distributions” for additional information.
Liquidating Distributions
Subsequent to obtaining our stockholders' approval to our Plan of Dissolution, in August 2016 and December 2016, our board of directors declared liquidating distributions in the amounts of $2.35 and $2.30, respectively, per share of common stock (the "Liquidating Distributions"). The Liquidating Distributions totaling approximately $104.7 million were paid in cash and were funded from the proceeds of asset sales, including the sales of six properties in 2016. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Liquidating Distributions” for additional information.
Our Valuation Policy
The valuation process used to determine the estimated net asset value (“NAV”) was designed to follow recommendations of the Investment Program Association (“IPA”), a trade association for non-listed direct investment vehicles, in the IPA Practice Guideline 2013-01, “Valuations of Publicly Registered Non-Listed REITs,” which was issued by the IPA in April 2013. The purpose of our valuation policy is to establish guidelines to be followed in determining the net asset value per share of our common stock for regulatory and investor reporting and on-going evaluation of investment performance.
In accordance with our policy, the valuation committee of our board of directors, comprised of our independent directors, oversees our valuation process. For a discussion of the determination of our net asset value per share of our common stock, including our valuation process and methodology, see Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.”
In accordance with our valuation policy and as recommended by the IPA Valuation Guidelines, we will produce an estimated net asset value per share at least annually as of December 31 and disclose such amount as soon as possible after year end.
Our Disposition Policies
The determination of when a particular investment should be sold or otherwise disposed of may be made after considering all relevant factors, including refinancing opportunities, terms of the joint venture agreement, tax considerations, prevailing and projected economic and market conditions (including whether the value of the property or other investment is anticipated to decline substantially). On August 4, 2016, our stockholders approved our 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.

Financial Information about Industry Segments
We determined that we operate in one business segment, real estate ownership, which consists of owning, managing, leasing, acquiring, developing, investing in, and as conditions warrant, disposing of real estate assets. We internally evaluate all of our real estate assets as one industry segment and, accordingly, we do not report segment information.
Competition
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, REITs, real estate limited partnerships and other entities engaged in real estate investment activities, many of which will have greater resources than we do.
Our seven properties are located in the metropolitan areas of San Antonio, Cypress and Spring, Texas; Greenville, South Carolina; Hanover, Maryland; Tempe, Arizona and Suffolk, Virginia. Each location is in a highly competitive, large metropolitan area with multiple competing projects.
Employees
We are externally managed and as such we do not have any employees.

4




Our Advisor
Substantially all of our operating, administrative and property management services are provided by sub-advisors to our Advisor and sub-property managers to the Property Manager. Under the terms of our advisory agreement, our Advisor has responsibility for our day-to-day operations, including serving as our consultant in connection with policy decisions to be made by our board of directors, identifying and making disposition decisions on our behalf and providing asset management and administrative services. In exchange for these services, our Advisor is entitled to receive certain fees and reimbursements from us.
Our current advisory agreement may be extended annually upon mutual consent of the parties. Our independent directors are required to review and approve the terms of our advisory agreement at least annually.
For additional information on our Advisor and the fees and reimbursements we pay, see Note 12. "Related Party Arrangements" in Item 8. “Financial Statements and Supplementary Data.”
Our Tax Status
We elected to be taxed as a REIT under Sections 856(c) of the Code commencing with our taxable year ended December 31, 2010. In order to be taxed as a REIT, we are subject to a number of organizational and operational requirements, including the requirement to make distributions to our stockholders each year of at least 90 percent of our REIT taxable income (excluding any net capital gain). As a REIT, we generally will not be subject to U.S. federal corporate income tax on income distributed to our stockholders. As a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.
Prior to our tax year ended December 31, 2015, we had tax losses for federal income tax purposes and therefore were not required to make cash distributions to our stockholders. For our tax year ended December 31, 2016 and 2015, we had taxable income before net operating loss utilization and dividend paid deduction for federal income tax purposes. In August and December 2016 we paid Liquidating Distributions and in February and December 2015, we paid Special Cash Distributions, as described above under “Our Distribution Policy.”
Available Information
We maintain a website at www.CNLGrowthProperties.com containing additional information about our business, and a link to the Securities and Exchange Commission (the “SEC” or “Commission”) website (www.sec.gov), but the contents of the website are not incorporated by reference in, or otherwise a part of, this report.

We make information available free of charge through our website, as soon as practicable after we file it with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, definitive proxy statements on Form 14A and, if applicable, amendments to these reports.
 
Item 1A.
RISK FACTORS
The risks and uncertainties described below represent those risks and uncertainties that we believe are material to investors. Our stockholders or potential investors may be referred to as “you” or “your” in this Item 1A. “Risk Factors” section.
Company Related Risks
There is no public market for our shares and it is not likely that one will develop.
Our shares are not listed, there is no current public market for shares of our common stock and one is not likely to develop. We have no obligation to list our shares on any public securities market or provide any other type of liquidity to our stockholders. Additionally, our board of directors suspended our stock redemption plan. Therefore, it may be difficult for you to sell your shares promptly or at all, including in the event of an emergency; and if you are able to sell your shares, you may have to sell them at a substantial discount from your purchase price of such shares or less than your proportionate value of the net assets we own.

5




Our board of directors estimated our net asset value per share as of December 31, 2016 and in doing so, we primarily relied upon a valuation of our portfolio of properties as of December 31, 2016. Valuations and appraisals of our properties are estimates of fair value and may not necessarily correspond to realizable value upon the sale of such properties; therefore, our estimated net asset value per share may not reflect the amount that would be realized upon a sale of each of our properties.
For the purposes of determining the estimated net asset value per share of our common stock as of December 31, 2016, we retained CBRE, Inc. ("CBRE"), an independent appraisal firm to provide restricted use real estate appraisals for our seven remaining real estate properties as of December 31, 2016 (the "Appraisals"). Our Advisor developed a valuation analysis of the Company, utilizing Appraisals, and provided the analysis to the Valuation Committee, which is comprised of the independent directors of our board. The methodologies used to value our properties involved certain subjective judgments, including but not limited to, estimated future cash flows for properties recently developed for which we have limited operating history. Due to the short-term nature of multifamily leases, the value of our properties and the estimated net asset value of our shares may be more susceptible to fluctuation than REITs with longer term leases where cash flows are not subject to as much potential volatility. In addition, the ultimate realization of the value of our assets depend to a great extent on economic and other conditions beyond our control and the control of our Advisor. Moreover, valuations do not necessarily represent the price at which an asset would sell, since market prices of assets can only be determined by negotiation between a willing buyer and seller. As a result of the foregoing, as well as other factors, and despite that we considered the guidelines recommended by the IPA for determining the net asset value for shares of non-traded real estate investment trusts such as us, the valuations of our properties may not correspond to the realizable value upon a sale of those assets; and our estimated net asset value per share may not be indicative of the proceeds a stockholder would receive upon the sale of his or her shares in a market transaction or if we were liquidated or dissolved and the proceeds were distributed to the stockholders.
We and our Advisor have limited operating histories and the prior performance of real estate investment programs sponsored by our sponsor or CNL may not be indicative of our future results.
We and our Advisor have limited operating histories. Prior to April 26, 2010, the date our operations commenced, we had no previous performance history. You should not rely upon the past performance of other real estate investment programs sponsored by our sponsor or CNL to predict our future results. You should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that, like us, have a limited operating history. To be successful, our Advisor must, among other things:
attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
respond to competition for our targeted real estate properties and other investments; and
continue to build and expand its operational structure to support our business.
There can be no assurance that our Advisor will succeed in achieving these goals.
Because we rely on affiliates of CNL for advisory and property management services, if these affiliates or their executive officers and other key personnel are unable to meet their obligations to us, we may be required to find alternative providers of these services, which could disrupt our business.
CNL, through one or more of its affiliates or subsidiaries, owns and controls our Advisor and our Property Manager, as well as, one of our sub-advisors and sub-property managers. In the event that any of these affiliates or related parties are unable to meet their obligations to us, we might be required to find alternative service providers, which could disrupt our business by causing delays and/or increasing our costs.
Further, our success depends to a significant degree upon the continued contributions of certain executive officers and other key personnel of our Advisor, its affiliates and related parties, each of whom would be difficult to replace. We do not have employment agreements with our executive officers, and we cannot guarantee that they will remain affiliated with us or our Advisor. Although several of our executive officers have entered into employment agreements with affiliates of our Advisor, these agreements are terminable at will, and we cannot guarantee that such persons will remain employed by our Advisor or its affiliates. We do not maintain key person life insurance on any of our executive officers.
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our investment policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of our stockholders. Under our articles of incorporation and Maryland general corporation law, our stockholders currently have a right to vote only on the following matters:
the election or removal of directors;

6




any amendment of our articles of incorporation, except that our board of directors may amend our articles of incorporation without stockholder approval to change our name, increase or decrease the aggregate number of our shares and of any class or series that we have the authority to issue, or classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares;
effect stock splits and reverse stock splits;
our termination, liquidation and dissolution;
our reorganization;
modification or elimination of our investment limitations as set forth in our articles of incorporation; provided, however, for so long as we are subject to the NASAA REIT Guidelines, the investment limitations imposed by the NASAA REIT Guidelines that are set forth in our articles of incorporation may not be modified or amended in any manner that would be inconsistent with the NASAA REIT Guidelines; and
our being a party to any merger, consolidation, sale or other disposition of substantially all of our assets (notwithstanding that Maryland law may not require stockholder approval).
All other matters are subject to the discretion of our board of directors. Although stockholders have the right to vote on amendments to our articles of incorporation in the manner described above, under Maryland general corporation law, an amendment to our articles of incorporation must be found to be advisable by our board of directors. That requirement has the effect of limiting stockholders’ control over our articles of incorporation. In addition, our board of directors has the authority to amend, without stockholder approval, the terms of both our advisory agreement and our property management agreement, which, in either case, could result in less favorable terms to our investors.
We may be restricted in our ability to replace our Property Manager under certain circumstances.
Our ability to replace our Property Manager is limited. Under the terms of our property management agreement, we may terminate the agreement (i) in the event of our Property Manager’s voluntary or involuntary bankruptcy or a similar insolvency event or (ii) for “cause.” In this case, “cause” means a material breach of the property management agreement of any nature by the Property Manager relating to all or substantially all of the properties being managed under the agreement that is not cured within 30 days after notice to the Property Manager. We may amend the property management agreement from time to time to remove a particular property from the pool of properties managed by our Property Manager (i) if the property is sold to a bona fide unaffiliated purchaser, or (ii) for “cause.” In this case, “cause” means a material breach of the property management agreement of any nature by the Property Manager relating to that particular property that is not cured within 30 days after notice to the Property Manager. Our board of directors may find the performance of our Property Manager to be unsatisfactory. However, unsatisfactory performance by the Property Manager may not constitute “cause.” As a result, we may be unable to terminate the property management agreement even if our board concludes that doing so is in our best interest.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered as an investment company under the Investment Company Act of 1940 (the “Investment Company Act”) based on exclusions that we believe are available to us. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
In order to be excluded from regulation under the Investment Company Act, we have and intend to continue to engage primarily in the business of acquiring real property, making mortgage loans and other loans collateralized by interests in real estate and making other real estate-related investments. We intend to rely on exemptions or exclusions provided by the Investment Company Act for the direct ownership, or the functional equivalent thereof, of certain qualifying real estate assets or by engaging in business through one or more majority-owned subsidiaries. We may rely on any other exemption or exclusion under the Investment Company Act.
To maintain compliance with the Investment Company Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional

7




income- or loss-generating assets that we might not otherwise have acquired or may have to forego opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
There can be no assurance that we will be able to achieve expected results or cash flows necessary to initiate or maintain cash distributions at any particular level.
There are many factors that can affect the type, availability and timing of cash distributions to stockholders. Cash distributions generally will be based upon such factors as the amount of cash available or anticipated to be available from real estate investments and other assets, current and projected cash requirements, expected and actual cash flow from operations, the estimated total return on our assets, our overall financial condition, our objective of qualifying as a REIT for tax purposes, as well as other factors. Cash distributions declared may not reflect our income earned in that particular distribution period. The amount of cash available for distributions is affected by many factors. Actual amounts available for cash distribution may vary substantially from estimates. We cannot assure you that:
properties currently in lease-up status will be stabilized as planned;
rents from our properties will stabilize, or once stabilized, will remain stable or increase; or
our real estate portfolio will increase in value or generate or increase our cash available for distributions to stockholders.
Many of the factors that can affect the availability and timing of cash distributions to stockholders are beyond our control, and a change in any one factor could adversely affect our ability to make distributions. For instance:
Amounts available for distributions may be reduced if we are required to spend more than expected to correct defects or to make improvements to properties.
Amounts available to pay distributions may decrease if the assets we acquire have lower yields than expected.
Federal income tax laws require REITs to distribute at least 90% of their REIT taxable income to stockholders each year, limiting the earnings that we may retain for corporate growth, such as asset acquisition, development or expansion, and making us more dependent upon additional debt or equity financing than corporations that are not REITs. If we borrow more funds in the future, more of our operating cash will be needed to make debt payments and amounts available for distributions may decrease.
The payment of principal and interest required to service the debt may leave us with insufficient cash to pay distributions.
We may pay distributions to our stockholders to comply with the distribution requirements of the Code and to eliminate, or at least minimize, exposure to federal income taxes and the nondeductible REIT excise tax. Differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, could require us to borrow funds on a short term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT.
In addition, subject to the applicable REIT rules, our board of directors, in its discretion, may retain any portion of our cash on hand or use debt and/or equity proceeds for capital needs and other corporate purposes. We cannot assure you that we will generate or have sufficient amounts available to make cash distributions to you at any specified level, or that the cash distributions we make may not be decreased or be eliminated in the future.
We have experienced losses in the past and may experience losses in the future.
We incurred net losses from continuing operations before gains on sale of real estate and easement since inception. Our losses can be attributed, in part, to our operating expenses which include pre-leasing costs for our development properties and various general and administrative expenses related to being a public reporting company, as well as the fact that a significant number of our properties are under development or construction was completed recently and have not yet stabilized. In addition, depreciation and amortization expense substantially reduces our income. We cannot assure you that we will be profitable in the future, that our properties will stabilize and produce sufficient income to fund our operating expenses, or that we will realize growth in the value of our assets.

8




We are uncertain of our sources for funding of future capital needs.
Other than our mortgage loans associated with property acquisitions and development projects, neither we nor our Advisor has any established financing sources. If our capital resources, or those of our Advisor (to the extent it advances amounts to us or on our behalf), are insufficient to support our operations, we may not achieve our investment objectives.
For our operating properties, we will consider capital reserves on a property-by-property basis, as we deem appropriate, to pay operating expenses to the extent that the property does not generate operating cash flow to fund anticipated capital improvements. If we do not have enough capital reserves to supply needed funds for capital improvements throughout the life of our investment in a property and there is insufficient cash available from our operations or from other sources, we may be required to defer necessary improvements to a property. This may result in decreased cash flow and reductions in property values. If our reserves are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. Additionally, due to the volatility and uncertainty experienced in recent years by financial markets, liquidity has tightened in financial markets, including the investment grade debt and equity capital markets. Consequently, there is greater uncertainty regarding our ability to access credit markets in order to obtain financing on reasonable terms or at all. Accordingly, in the event that we develop a need for additional capital in the future for the maintenance or improvement of our properties or for any other reason, we have not identified any established sources for such funding other than our existing mortgage loans. Although our Advisor has relationships with various lenders, we cannot assure you that sources of funding will be available to us for capital needs in the future.
Changes in accounting pronouncements could materially impact our reported financial performance.
Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC, entities that create and interpret appropriate accounting standards, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements.
Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.
Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. The result of these incidents could include, but are not limited to, disrupted operations, misstated financial data, liability for stolen assets or information, increased cyber security protection costs, litigation and reputational damage adversely affecting customer or investor confidence.
Risks Relating to the Plan of Dissolution
Our board may abandon or delay implementation of the Plan of Dissolution.
Our Board and stockholders have adopted and approved the 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 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

9




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.
Risks That May Delay or Reduce Our Liquidating Distributions
As we move forward with our plan to sell and liquidate our remaining assets, we continue to estimate the total amount stockholders could receive is between approximately $11.41 and $12.39 per share, which is the range of liquidation values that our board of directors estimated at the time the Plan of Dissolution was approved for submission to the stockholders and later approved by the stockholders on August 4, 2016. This range includes special and partial liquidating distributions we paid to stockholders in 2015 and 2016. 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 sum of the special and partial liquidating distributions plus the current net asset value per share under the Liquidation Basis of Accounting at December 31, 2016 of our remaining assets is higher than the range of liquidation values set forth above, we note that the net asset value per share under the 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. Similarly, although the 2016 NAV (defined below) plus the sum of the special and partial liquidating distributions is higher than the range of liquidation values set forth above, we note that the 2016 NAV also does not take into account all of the various

10




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 remaining 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.
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

11




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.
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 ("IRS") which may assert that the contemplated sales are subject to the prohibited transactions tax. In addition to the opinion, we received a private letter ruling form the IRS indicating the sales of properties pursuant to the Plan of Dissolution will not constitute prohibited transactions. The ruling was issued based on facts and other representations made by the Advisor.
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

12




resulting tax liability. 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.
Risks Related to Conflicts of Interest and Our Relationships with Our Advisor, Its Affiliates and Related Parties
We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates and related parties, including the material conflicts discussed below.
Individuals associated with our Advisor, Property Manager and other entities affiliated with CNL that conduct our day-to-day operations will face competing demands on their time.
We rely upon our Advisor, including its investment committee, our Property Manager and the executive officers and employees of entities affiliated with CNL, to conduct our day-to-day operations. Certain of these persons also conduct the day-to-day operations of other programs sponsored by CNL, and they may have other business interests as well. We currently anticipate that our executive officers and the executive officers of our Advisor, as well as, the managers of our Advisor and the Advisor’s representatives on its investment committee, will devote the time necessary to fulfill their respective duties to us and our Advisor. However, because these persons have competing interests on their time and resources, they may find it difficult to allocate their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and resources to our business than is necessary or appropriate.
Although we have substantially completed our acquisition phase, we may have similar investment objectives to other funds with the same sponsor or executive officers as ours, and as such an investment opportunity may be suitable for both us and any such fund. Our board and our Advisor have agreed that, in the event an investment opportunity is presented to both our Advisor’s Investment Committee and the investment committee of the advisor for another fund with the same sponsor or executive officers as us, and it is determined that the opportunity may be suitable for both us and the other fund, and for which both entities have sufficient uninvested funds, the investment opportunity will be offered to the entities on an alternating basis pursuant to policies adopted by us and each such fund with similar investment objectives.
Our Advisor and its affiliates, including all of our executive officers and our affiliated director, will face conflicts of interest as a result of their compensation arrangements with us, which could result in actions that are not in the best interest of our stockholders.
We pay substantial fees to our Advisor and our Property Manager (including their sub-advisors and sub-property managers, respectively) and their affiliates. These fees could influence their advice to us, as well as the judgment of our Advisor and its affiliates performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
the continuation, renewal or enforcement of our agreements with our Advisor, its affiliates and related parties;
property sales, which may entitle our Advisor to real estate commissions;
property acquisitions, which entitle our Advisor to investment services fees and asset management fees payable to our Advisor;
borrowings to acquire assets, which increase the investment services fees and asset management fees payable to our Advisor;

13




refinancing debt, which may entitle our Advisor or its affiliates to receive a financing coordination fee in connection with assisting in obtaining such financing;
whether we seek to internalize our management functions, which could result in our retaining some of our Advisor’s and its affiliates’ key officers and employees for compensation that is greater than that which they currently earn or which could require additional payments to our Advisor or its affiliates to purchase the assets and operations of our Advisor, its affiliates and related parties performing services for us;
a liquidity event with respect to our shares of common stock, which may entitle our Advisor to a subordinated incentive fee;
a sale of assets, which may entitle our Advisor to a subordinated share of net sales proceeds; and
whether and when we seek to sell our operating partnership or its assets, which sale could entitle our Advisor to additional fees.
The fees our Advisor receives in connection with transactions involving the purchase and management of our assets are not necessarily based on the quality of the investment or the quality of the services rendered to us. The basis upon which fees are calculated may influence our Advisor to recommend riskier transactions to us.
Our officers and directors and the Advisor have conflicts of interest that may cause them to manage our liquidation in a manner not solely in the best interests of our stockholders.
Some of our directors and officers and the Advisor have interests in the liquidation that are different from your interests as a stockholder, including the following:
All of our executive officers are officers of the Advisor and/or one or more of the Advisor’s affiliates and are compensated by those entities, in part, for their service rendered to the Company. We currently do not pay any direct compensation to our executive officers.
The Advisor will be entitled to subordinated incentive fees in connection with the sale of the Company’s assets, which are estimated to be between approximately $1.6 million and $3.6 million, depending upon and correlated to the price received by us for the sale of our properties.
Consequently, our officers and directors and the Advisor may make decisions or take actions based on factors other than the best interests of our stockholders throughout the period of the liquidation process.
None of the agreements with our Advisor, Property Manager or any other affiliates and related parties were negotiated at arm’s length.
Agreements with our Advisor, Property Manager or any other affiliates and related parties may contain terms that are not in our best interest and would not otherwise apply if we entered into agreements negotiated at arm’s length with third parties.
Risks Related to Our Business
Our property acquisition strategy involves a high risk of loss.
Our strategy for acquiring properties focused on multifamily development properties, which may be located in markets undergoing positive changes or facing time-sensitive deadlines. These investments are typically riskier than stabilized properties or properties located in stable markets or markets that have validated their growth opportunities. There is no assurance that we have selected appropriate markets to affect our strategy; and there is a risk that our properties will experience declines in value.
We may suffer losses in developing properties, including losses due to environmental and other liabilities, labor disputes, occupational health and safety, cost overruns and other factors. Additionally, properties that we acquired for development may decline in value after our acquisition for reasons specific to the property or the real estate market generally.
The returns we earn on our real estate assets will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
The returns we earn on our real estate assets will be impacted by risks generally incident to the ownership of real estate, including:
changes in local conditions, including oversupply of space or reduced demand for real estate assets of the type we own;

14




inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;
changes in supply of, or demand for, similar or competing properties in a geographic area;
an inability to refinance properties on favorable terms;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
the illiquidity of real estate investments generally;
changes in tax, real estate, environmental, land use and zoning laws;
vacancies or inability to rent space on favorable terms;
acts of God, such as earthquakes, floods and hurricanes;
inability to collect rents from tenants;
discretionary consumer spending and changing consumer tastes; and
periods of high interest rates and negative capital market conditions.
We may be limited in our ability to vary our portfolio in response to changes in economic, market or other conditions, including by restrictions on transfer imposed by our joint venture partners, if any, or by our lenders. Additionally, the return on our real estate assets also may be affected by a continued or exacerbated general economic slowdown, as a whole, or by the local economies where our properties are located, including:
poor economic conditions may result in defaults by tenants of our properties;
job transfers and layoffs may cause tenant vacancies to increase; and
increasing concessions, reduced rental rates or capital improvements may be required to maintain occupancy levels.
Should capitalization rates increase, the value of our existing multifamily portfolio could decline, or if costs of developing a multifamily asset increase, we may not achieve as high of a return on our multifamily development properties as anticipated.
To date, we have invested substantially all of the available proceeds from our equity offerings in multifamily development properties. If capitalization rates increase, we would expect declines in the pricing of assets upon sale or at the time of a valuation. If we are required to sell investments into such a market, we could experience a decrease in the value of our investments. In most domestic markets, there is a spread between capitalization rates on stabilized multifamily assets and the return on cost at which new multifamily projects can be developed. The opportunity to develop at higher returns on cost and finance at today’s interest rates enables us to potentially produce higher levered returns than had we bought a stabilized multifamily property. However, if capitalization rates increase, we would expect the value of our current investments to decline. In addition, if costs of developing a multifamily asset increase, the difference between the costs to develop and the price to purchase stabilized multifamily properties will shrink and make the risk adjusted return for development less attractive.
Increases in unemployment could adversely affect multifamily property occupancy and rental rates.
Increases in unemployment in the markets in which we have acquired multifamily properties could significantly decrease occupancy and rental rates. In times of increasing unemployment, multifamily occupancy and rental rates have historically been adversely affected by:
A decline in household formation;
Rental of fewer units as a result of renters’ decision to share rental units;
A reduced demand for higher-rent units, such as those of high quality multifamily communities;
The inability or unwillingness of residents to pay rent increases; and
Increased rent collection losses.
If employment levels remain flat or increase, our properties may not perform as anticipated and we may not realize growth in the value of our multifamily properties.

15




As a result of limited geographic diversification of our properties, our operating results and the value of our real estate assets may be affected by economic changes that have an adverse impact on the real estate market in those areas.
All of our properties are located in the southeastern and sunbelt regions of the United States. As a result of this limited geographic diversification, our operating results, amounts available for cash distributions to stockholders and the value of our real estate assets are likely to be impacted by economic changes affecting the real estate markets in that area. We are subject to greater risk to the extent that we lack a geographically diversified portfolio.
Concentration of our portfolio in the multifamily sector may leave our profitability vulnerable to a downturn or slowdown in such sector.
Our portfolio is invested in multifamily properties. As a result, we are subject to risks inherent to investments in a single real estate sector. With the concentration of our investments in multifamily, the potential effects on our revenues resulting from a downturn or slowdown in the multifamily sector will be more significant than if we had a diversified portfolio.
Increased development of similar multifamily properties that compete with our properties in any particular location could adversely affect the operating results of our properties.
The areas in which our properties are located that experience demographic or other shifts that cause increases in the development of multifamily properties that compete with our properties. This increased competition and construction could:
make it more difficult to find tenants to lease units in our multifamily communities; and
drive lower rental prices in order to lease units in our multifamily communities.
As a result, our operating results, as well as the value of our multifamily properties, could be adversely affected by increased competition.
Continued market disruptions may adversely affect our operating results.
In recent years, the global financial markets have experienced pervasive and fundamental disruptions. A disruption in the financial markets often results in a significant negative impact on the financial markets. Such disruptions have had and may continue to have an adverse impact on the availability of credit to businesses, generally, and have resulted in and could lead to further weakening of the U.S. economy and the economies of other countries. Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry generally or by the local economic conditions where our properties are located, including the current dislocations in the credit markets and general global economic recession. Availability of debt financing secured by commercial real estate has been significantly restricted as a result of tightened underwriting standards. Continued declines in the financial markets may materially affect the value of our investment properties, and may affect our ability to pay cash distributions, if any, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due. Such challenging economic conditions may also negatively impact the ability of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases.
Our operating results could be negatively impacted during periods of rising inflation or during periods of deflation.
Inflationary expectations or periods of rising inflation could also be accompanied by rising prices of commodities that are critical to the development or maintenance of real estate assets or to the return expected with respect to such assets. During periods of high inflation, capital tends to move to other assets, such as (historically) gold, which may adversely affect the prices at which we are able to sell our investments. There may be limited cash available for distribution from real estate assets with fixed income streams. The market value of such investments may decline in value in times of higher inflation rates. Although multifamily leases are generally short term and we would expect increases in rent during periods of inflation, as inflation may affect both income and expenses, any increase in income may not be sufficient to cover increases in expenses.
During periods of deflation, the demand for assets in which we have invested could fall, reducing the revenues generated by, and therefore the value of, such investments, resulting in reduced returns to us and our stockholders. Where the operating costs and expenses associated with any such investments do not fall by a corresponding amount, the rate of return to us and our stockholders could be further reduced. As a result, it may be more difficult for leveraged assets to meet or service their debt obligations. Periods of deflation are often characterized by a tightening of money supply and credit, which could limit the amounts available to us with which to acquire or refinance our investments, which would limit the number and size of investments that we may make and affect the rate of return to us and our stockholders. Such economic constraints could also make the real estate assets in which we may invest more illiquid, preventing us from divesting such assets efficiently and so reducing the return to us and our stockholders from such investments.

16




Our co-venture partners or other partners in co-ownership arrangements could take actions that decrease the value of an investment to us and lower our overall return on our investments.
Generally, we have entered into co-venture arrangements with third parties in connection with our investments in multifamily development projects. Such investments may involve risks not otherwise present with other forms of real estate investment, including, for example:
the possibility that our co-venturer or partner might become bankrupt;
the possibility that a co-venturer or partner might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us or the investment;
the possibility that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;
the possibility that because a co-venturer or partner will have competing interests for their time and resources, they may find it difficult to allocate their time between our business and their other activities. During times of intense activity in other programs and ventures, they may devote less time and resources to our business than is necessary or appropriate;
the possibility that we may incur liabilities as the result of an action taken by our co-venturer or partner;
the possibility that a co-venturer or partner may exercise buy/sell rights that force us to either acquire the entire investment, or dispose of our share, at a time and price that may not be consistent with our investment objectives; or
the possibility that we may not be able to control the management of such assets and such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.
The nature of the activities at certain properties we own exposes us and our tenants or operators to potential liability for personal injuries and, in certain instances, property damage claims. In addition, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that may be uninsurable or not economical to insure, or may be insured subject to limitations such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders generally require property owners to purchase specific coverage insuring against terrorism as a condition for providing mortgage, bridge or mezzanine loans. These policies may or may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for such losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of the particular asset will likely be reduced by the uninsured loss. In addition, we cannot assure you that we will be able to fund any uninsured losses.
If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.
In some instances we may sell a property by providing financing to the purchaser. In so doing, however, we will bear the risk that the purchaser defaults on its obligation. There are no limits or restrictions on our ability to accept purchase money obligations. If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our stockholders will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
The costs of compliance with environmental laws and regulations may adversely affect our income and the amounts available for distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. These laws and

17




regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of removing or remediating could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.
Environmental laws and regulations also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. We cannot assure you that future laws, ordinances or regulations will not impose any material environmental liability on us or that the environmental condition of our properties will not be affected by the manner in which tenants operate their businesses, the existing condition of the land, operations in the vicinity of the properties such as the presence of underground storage tanks, or the activities of unrelated third parties.
We may incur significant costs to comply with the Americans with Disabilities Act or similar laws.
Our properties will generally be subject to the Americans with Disabilities Act of 1990, as amended (or “Disabilities Act”), or similar laws of foreign jurisdictions. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. In addition, with respect to any apartment properties located in the United States, we also must comply with the Fair Housing Amendment Act of 1988, or FHAA, which requires that apartment communities first occupied after March 13, 1991 be accessible to disabled residents and visitors.
The requirements of the Disabilities Act or the FHAA could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act, the FHAA or similar laws of foreign jurisdictions or place the burden on the seller or other third party, such as a tenant, to ensure compliance with these laws. However, we cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner. We may incur significant costs to comply with these laws.
Property tax increases may reduce the income from our properties.
The amount we pay in property taxes may increase from time to time due to rising real estate values and adjustments in assessments. Increases in real estate values or assessment rate adjustments will result in higher taxes. We may not be able to increase rental revenues sufficiently to cover any such increases in real estate taxes.
Short-term leases may expose us to the effects of declining market rent.
Multifamily properties typically have short-term leases for a term of one year or less. There is no assurance that we will be able to renew these leases as they expire or attract replacement tenants on comparable terms, if at all.
Governmental regulation may increase the costs of operating properties.
There are various local, state and federal fire, health, life-safety and similar regulations that we are required to comply with, and that may subject us to liability in the form of fines or damages for noncompliance. Complying, or failure to comply, with these laws or regulations could increase the cost of acquiring or operating properties. Further, there can be no assurance that new applications of laws, regulations and policies, or changes in such laws, regulations and policies, will not occur in a manner that could have a detrimental effect on the properties we owned prior to the change, which could result in us incurring added costs to comply or maintain licenses and permits.
Financing Related Risks
Mortgage indebtedness and other borrowings will increase our business risks.
We have obtained mortgage financing in connection with the acquisition and development of our properties. We may incur or increase our mortgage debt by obtaining loans secured by some or all of our assets to obtain funds to acquire additional investments or to pay distributions to our stockholders. If necessary, we also may borrow funds to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income,” or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.

18




Although our articles of incorporation impose limits on our total indebtedness, there is no limit on the amount we may invest in any single property or other asset or on the amount we can borrow to purchase any individual property or other investment. Further, we may exceed the limits set forth in our articles if approved by a majority of our independent directors.
In addition to the limitations in our articles of incorporation, our board of directors has adopted a policy to generally limit our aggregate borrowings to not exceed approximately 75% of the aggregate value of our assets, unless substantial justification exists that borrowing a greater amount is in our best interest. Our policy limitation, however, will not apply to individual real estate assets and will only apply once we have invested substantially all of our capital. As a result, we may borrow more than 75% of the initial acquisition and development budget of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is reasonable. Principal and interest payments reduce cash that would otherwise be available for other purposes. Further, incurring mortgage debt increases the risk of loss because defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. For tax purposes, a foreclosure of non-recourse debt is generally treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We also may provide full or partial guarantees to lenders of mortgage debt to the entities that own our properties. In this case, we will be responsible to the lender for satisfaction of the debt if it is not paid by the entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default.
Instability in the credit markets and real estate markets could have a material adverse effect on our results of operations, financial condition and ability to pay cash distributions.
We may not be able to continue to maintain financing for investments on terms and conditions acceptable to us, if at all. Domestic and international financial markets have experienced unusual volatility and uncertainty. If this volatility and uncertainty persists, our ability to borrow monies to refinance, or finance other activities related to, real estate assets will be significantly impacted, and the return on any properties we refinance likely will be lower. In addition, if we pay fees to lock-in a favorable interest rate, falling interest rates or other factors could require us to forfeit these fees. Additionally, the reduction in equity and debt capital resulting from turmoil in the capital markets may result in fewer buyers seeking to acquire commercial properties leading to lower property values and the continuation of these conditions could adversely impact our timing and ability to sell our properties.
In addition to volatility in the credit markets, the real estate market is subject to fluctuation and can be impacted by factors such as general economic conditions, supply and demand, availability of financing and interest rates. To the extent we purchased real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracted at the time of our purchases, or the number of parties seeking to acquire properties decreases, the value of our investments may not appreciate or may decrease significantly below the amount we paid for our investments.
Disruptions in the financial markets could adversely affect the multifamily sector’s ability to obtain financing and credit enhancements from Fannie Mae and Freddie Mac, which could adversely affect us.
The Federal National Mortgage Association (or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (or “Freddie Mac”) are government sponsored enterprises that have historically been major sources of financing for the multifamily sector. Should Fannie Mae and/or Freddie Mac have their precepts changed or reduced, be disbanded or reorganized by the government or otherwise discontinue providing liquidity to the multifamily sector, it would significantly reduce our or prospective buyers' of our properties access to debt capital and/or increase borrowing costs. If new federal regulations heighten Fannie Mae’s and Freddie Mac’s underwriting standards, adversely affect interest rates and reduce the amount of capital they can make available to the multifamily sector, it could have a material adverse effect on both the multifamily sector and us if private alternative sources of funding are reduced or unavailable. Any potential reduction in loans, guarantees and credit enhancement arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s derivative securities market, potentially causing breaches in loan covenants, and through reduced loan availability, impact the value of multifamily assets, which could impair the value of a significant portion of multifamily communities. Specifically, the potential for a decrease in liquidity made available to the multifamily sector by Fannie Mae and Freddie Mac could (i) make it more difficult for us to secure new takeout financing for current multifamily development projects; (ii) hinder our ability to refinance completed multifamily assets; (iii) decrease the amount of available liquidity and credit that could be used to further diversify our portfolio of multifamily assets; and (iv) require us to obtain other sources of debt capital with potentially different terms.
Rising interest rates negatively affect our ability to pay existing debt obligations and refinance our properties.
We may be unable to refinance or sell properties collateralized by debt that is maturing on acceptable terms and conditions, if at all. This risk may be greater in the case of interest-only loans or balloon payment loans where no or little payments

19




on the principal amount of the loan have been made. If interest rates are higher at the time we intend to refinance, we may not be able to refinance the properties at reasonable rates and our net income could be reduced. In addition, we have incurred and may continue to incur indebtedness that bears interest at a variable rate. Increases in interest rates on variable rate loans would increase our interest costs, which could have an adverse effect on our operating cash flow. An increase in interest rates, either on refinancing of properties or on variable rate loans, could increase the amount of our debt payments and reduce cash flow. In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may need to borrow more money or to liquidate one or more of our investments at inopportune times that may not permit realization of the maximum return on such investments.
To hedge against interest rate fluctuations, we may use derivative financial instruments. Using derivative financial instruments may be costly and ineffective.
We have and may continue to engage in hedging transactions to manage the risk of changes in interest rates with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by us. We may use derivative financial instruments for this purpose, collateralized by our assets and investments. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time.
To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we have additional REIT tax compliance requirements and we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. We may be unable to manage these risks effectively. To the extent the hedges are not timely designated as hedges, for tax purposes, income associated with the instrument will be non-qualifying and could jeopardize our qualifications as a REIT.
Federal Income Tax Risks
Failure to qualify as a REIT would adversely affect our operations and our ability to pay distributions to you.
We elected to be treated as a REIT in connection with the filing of our federal tax return for the taxable year ended December 31, 2010. We believe that, commencing with such year, we have been organized, have operated, and are continuing to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. However, our qualification and taxation as a REIT depends upon our ability to meet, on a continuing basis, and through actual operating results, requirements regarding the type of assets we own, and other tests imposed by the Code. Qualification as a REIT is governed by highly technical and complex provisions for which there are only limited judicial or administrative interpretations. Accordingly, there is no assurance we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT.
If we fail to qualify as a REIT for any taxable year, (i) we will be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income for that year at regular corporate rates, (ii) unless entitled to relief under relevant statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status, and (iii) we will not be allowed a deduction for distributions made to stockholders in computing our taxable income. Losing our REIT status would reduce our net earnings available for distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell properties through TRSs, each of which would diminish the return to our stockholders.
The sale of one or more of our properties may be considered prohibited transactions under the Code. If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all taxable gain we derive from such sale would be subject to a 100% federal tax penalty. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. The principal requirements of the safe harbor are that: (i) the REIT must hold the applicable property for not less than two years for the production of rental income prior to its sale; (ii) the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of sale which are includible in the basis of the property do not exceed 30% of the net selling price of the property; and (iii) the REIT does not make more than seven sales of property during the taxable year, the aggregate adjusted bases of property sold during the taxable year does not exceed 10% of the aggregate bases of all of the REIT’s assets as of the beginning of the taxable year or the fair market value of property sold during the taxable year does not exceed 10% of the fair market value of all

20




of the REIT’s assets as of the beginning of the taxable year. Given our investment strategy, the sale of one or more of our properties may not fall within the prohibited transaction safe harbor.
If we desire to sell a property pursuant to a transaction that does not fall within the safe harbor, we may be able to mitigate the 100% penalty tax if we acquired the property through a taxable REIT subsidiary (“TRS”) or acquired the property and transferred it to a TRS for a non-tax business purpose prior to the sale (i.e., for a reason other than the avoidance of taxes). However, there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor. Additionally, even if it is possible to effect a property disposition through a TRS, we may decide to forego the use of a TRS in a transaction that does not meet the safe harbor based on our own internal analysis, the opinion of counsel or the opinion of other tax advisors. In cases where a property disposition does not satisfy the safe harbor rules, the Internal Revenue Service could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net taxable gain from the sale of such property will be payable as a tax, thereby reducing the amount of cash available for distribution to stockholders. If a property is acquired or subsequently transferred to a TRS, the taxable income, including gain, will be subject to federal corporate tax and potentially state and local income taxes. This tax obligation would diminish the amount of the proceeds from the sale of such property that would be distributable to our stockholders. As a result, the timing and amount available for distribution to our stockholders would be substantially less than if the REIT had not operated and sold such property through the TRS and such transaction was not successfully characterized as a prohibited transaction. As discussed above, we have received a tax opinion from a nationally recognized accounting firm as well as a private letter ruling from the IRS, both of which indicated sales pursuant to our Plan of Dissolution should not constitute a prohibited transaction.
As a REIT, the value of our investment in all of our TRSs may not exceed 25% of the value of all of our assets at the end of any calendar quarter. If the Internal Revenue Service were to determine the value of our interests in all of our TRSs exceeded 25% of the value of our total assets at the end of any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interest to own a substantial number of our properties through one or more TRSs, then it is possible that the Internal Revenue Service may conclude that the value of our interests in our TRSs exceeds 25% of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT. The Protecting Americans from Tax Hikes Act 2015 (“PATH Acts”) modified this provision by reducing 25% to 20% for tax years beginning after December 31, 2017. Additionally, as a REIT, no more than 25% of our gross income with respect to any year may be from sources other than investments relating to real property or mortgages on real property and from certain other specified sources. Distributions paid to us from a TRS are considered to be non-qualifying income for purposes of satisfying the 75% gross income test required for REIT qualification. Therefore, we may fail to qualify as a REIT if distributions from all of our TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year.
Certain fees paid to us may affect our REIT status.
Income received in the nature of rental subsidies or rent guarantees, in some cases, may not qualify as rental income from real estate and could be characterized by the Internal Revenue Service as non-qualifying income for purposes of satisfying the 75% and 95% gross income tests required for REIT qualification. If the aggregate of non-qualifying income in any taxable year ever exceeded 5% of our gross revenues for such year, we could lose our REIT status for that taxable year and the four taxable years following the year of losing our REIT status.
If our operating partnership fails to maintain its status as a partnership or disregarded entity, its income may be subject to taxation, which would reduce the cash available to us for distribution to our stockholders.
We intend to maintain the status of our operating partnership as either a disregarded entity or an entity taxable as a partnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the operating partnership as a disregarded entity or an entity taxable as a partnership, our operating partnership would be taxable as a corporation. In such event, this would reduce the amount of distributions the operating partnership could make to us. This could also result in our losing REIT status, and becoming subject to a corporate level tax on our income. This would substantially reduce the cash available to us to pay distributions and the return on your investment. In addition, if any of the partnerships or limited liability companies through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership or disregarded entity for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
In certain circumstances, we may be subject to federal and state taxes on income as a REIT, which would reduce our cash available for distribution to our stockholders.
As a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have gain from a “prohibited transaction,” such gain will be subject to the 100% penalty tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our

21




assets and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. We may also be subject to state and local taxes on our income or property, either directly or at the level of our operating partnership or at the level of the other entities through which we indirectly own our assets.
Complying with REIT requirements may limit our ability to hedge risk effectively.
The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Except to the extent permitted by the Code and Treasury Regulations, any income we derive from a hedging transaction which is clearly identified as such as specified in the Code, including gain from the sale or disposition of such a transaction, will not constitute gross income for purposes of the 75% and 95% gross income tests, and therefore will be exempt from these tests, but only to the extent that the transaction hedges (i) indebtedness incurred or to be incurred by us to acquire or carry real estate assets or (ii) currency fluctuations with respect to any item of income that would qualify under the 75% or 95% gross income tests. To the extent that we do not properly identify such transactions as hedges, hedge with other types of financial instruments, or hedge other types of indebtedness, the income from those transactions is not likely to be treated as qualifying income for purposes of the gross income tests. As a result of these rules, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
Legislative or regulatory action could adversely affect us or your investment in us.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel’s tax opinion is based upon our representations and existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.
Although REITs continue to receive more favorable tax treatment than entities taxed as corporations (i.e. a deduction for dividends paid is afforded REITs), it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for U.S. federal income tax purposes as a corporation. As a result, our articles of incorporation provide our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders in accordance with the Maryland General Corporation Law and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
Excessive non-real estate asset values may jeopardize our REIT status.
In order to qualify as a REIT, among other requirements, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents and government securities. Accordingly, the value of any other property that is not considered a real estate asset for federal income tax purposes must represent in the aggregate not more than 25% of our total assets. In addition, under federal income tax law, we may not own securities in, or make loans to, any one company (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the voting securities or 10% of the value of all securities of that company (other than certain specified securities), or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a value in excess of 25% of our total assets.
The 75%, 25%, 10% and 5% REIT qualification tests are determined at the end of each calendar quarter. If we fail to meet any such test at the end of any calendar quarter, and such failure is not remedied within 30 days after the close of such quarter, we will cease to qualify as a REIT, unless certain requirements are satisfied.
We may have to borrow funds or sell assets to meet our distribution requirements.
Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable income to its stockholders. For the purpose of determining taxable income, we may be required to accrue interest, rent and other items treated as earned for tax purposes, but that we have not yet received. In addition, we may be required not to accrue as expenses for tax purposes some items which actually have been paid, or some of our deductions might be subject to certain disallowance rules under the Code. As a result, we could have taxable income in excess of cash available for distribution. If this occurs, we may have to borrow funds or liquidate some of our assets in order to meet the distribution requirements applicable to a REIT.

22




Despite our REIT status, we remain subject to various taxes which would reduce operating cash flow if and to the extent certain liabilities are incurred.
Even if we remain qualified as a REIT, we may be subject to certain applicable federal, foreign and state and local taxes on our income and property that could reduce operating cash flow, including but not limited to: (i) tax on any undistributed real estate investment trust taxable income; (ii) “alternative minimum tax” on our items of tax preference; (iii) certain state income and franchise taxes (because not all states treat REITs the same as they are treated for federal income tax purposes); (iv) a tax equal to 100% of net gain from “prohibited transactions;” (v) tax on gains from the sale of certain “foreclosure property;” (vi) tax on gains of sale of certain “built-in gain” properties; (vii) tax on capital gains retained; and (viii) certain taxes and penalties if we fail to comply with one or more REIT qualification requirements, but nevertheless qualify to maintain our status as a REIT.
Foreclosure property includes property with respect to which we acquire ownership by reason of a borrower’s default on a loan or possession by reason of a tenant’s default on a lease. We may elect to treat certain qualifying property as “foreclosure property,” in which case, the income from such property will be treated as qualifying income under the 75% and 95% gross income tests for three years following such acquisition. To qualify for such treatment, we must satisfy additional requirements, including that we operate the property through an independent contractor after a short grace period. We will be subject to tax on our net income from foreclosure property. Such net income generally means the excess of any gain from the sale or other disposition of foreclosure property and income derived from foreclosure property that otherwise does not qualify for the 75% gross income test, over the allowable deductions that relate to the production of such income.
We may also decide to retain income we earn from the sale or other disposition of our assets and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. Any such taxes incurred will reduce the amount of cash available for distribution.
Risks Related to Our Organizational Structure
You will be limited in your right to bring claims against our officers and directors.
Our articles of incorporation provide that a director will not have any liability as a director so long as he or she performs his or her duties in accordance with the applicable standard of conduct and without negligence or misconduct on the part of our officers and non-independent directors, our Advisor or affiliates and without gross negligence or willful misconduct by our independent directors. In addition, our articles of incorporation provide that, subject to the applicable limitations set forth therein or under Maryland law, no director or officer will be liable to us or our stockholders for monetary or other damages. Our articles of incorporation also provide that, with the approval of our board of directors, we may indemnify our employees and agents for losses they may incur by reason of their service in such capacities so long as they satisfy these requirements. We have entered into separate indemnification agreements with each of our directors and executive officers. As a result, we and our stockholders may have more limited rights against these persons than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by these persons in some cases.
The limit on the percentage of shares of our stock that any person may own may discourage a takeover or business combination that may benefit our stockholders.
Our articles of incorporation restrict the direct or indirect ownership by one person or entity to no more than 9.8%, by number or value, of any class or series of our equity stock (which includes common stock and any preferred stock we may issue), and this restriction may be waived only by our board of directors, in its sole discretion, under certain conditions. This restriction may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to stockholders or which may cause a change in our management. This ownership restriction may also prohibit business combinations that would have otherwise been approved by our board of directors and stockholders and may also decrease your ability to sell your shares of our common stock.
Our ability to issue preferred stock may include a preference in distributions superior to our common stock and to issue preferred stock or additional common stock also may deter or prevent a sale of shares of our common stock in which you could profit.
Stockholders do not have preemptive rights to any shares we may issue in the future. Our articles of incorporation authorize our board of directors to issue up to 200,000,000 shares of preferred stock. Our board of directors has the discretion to establish the preferences and rights, including a preference in distributions superior to our common stockholders, of any issued preferred stock. If we authorize and issue preferred stock with a distribution preference over our common stock, payment of any distribution preferences of outstanding preferred stock would reduce the amount of funds available for the payment of distributions on our common stock. Further, holders of preferred stock are normally entitled to receive payment in the event we liquidate, dissolve or wind up before any payment is made to our common stockholders which may reduce the amount available to common stockholders.

23




Our board of directors also may increase the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. In addition, under certain circumstances, the issuance of preferred stock or additional shares of common stock may render more difficult or tend to discourage:
a merger, offer or proxy contest;
the assumption of control by a holder of a large block of our securities; or
the removal of incumbent management, including our advisor and property manager.

Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
PROPERTIES
As of December 31, 2016, we owned interests in seven Class A multifamily properties, all of which were operational and as to which development was complete. Our properties are subject to encumbrances, as described in “Schedule III – Real Estate and Accumulated Depreciation” of Item 15. “Exhibits and Financial Statement Schedules” and Note 10, “Indebtedness” of Item 8. “Financial Statements and Supplementary Data” of this Annual Report. The following table presents information on our properties owned as of December 31, 2016:
Property Name and Location
 
Date
Acquired
 
Operator/Developer
 
Ownership
Interest
 
Number of
Units
 
Completion
Date
 
Percent Leased
Class A Multifamily:
 
 
 
 
 
 
 
 
 
 
 
 
Fairfield Ranch
Cypress, TX
 
9/24/2013
 
Allen Harrison Development,
LLC(1)
 
80%
 
294 units
 
Q1 2015
 
95%
Premier at Spring Town Center
Spring, TX
 
12/20/2013
 
MCRT Spring Town LLC(1)
 
95%
 
396 units
 
Q3 2015
 
93%
Oxford Square
Hanover, MD
 
3/7/2014
 
Woodfield Investments, LLC(1)
 
95%
 
248 units
 
Q4 2015
 
96%
Aura at The Rim
San Antonio, TX
 
2/18/2014
 
Trinsic Residential Group, L.P.(1)
 
54%
 
308 units
 
Q1 2016
 
93%
Haywood Reserve(2)
Greenville, SC
 
10/15/2014
 
Daniel Haywood, LLC(2)
 
90%
 
292 units
 
Q2 2016
 
52%
Aura on Broadway
Tempe, AZ
 
12/12/2014
 
Trinsic Residential Group, L.P.(1)
 
90%
 
194 units
 
Q3 2016
 
95%
Bainbridge 3200(3)
Suffolk, VA
 
4/30/2015
 
The Bainbridge Companies, LLC(1)
 
90%
 
228 units
 
Q4 2016
 
82%
FOOTNOTES:
(1)
This property is owned through a joint venture in which this entity or one of its affiliates (i) is our joint venture partner, (ii) serves, or in the case of the completed development properties, served, as developer of the project and (iii) provides any lender required guarantees on the loan. Generally, we fund development and the applicable joint venture makes distributions of operating cash flow on a pro rata basis using each member’s ownership interest. In addition, generally, proceeds from a capital event, such as a sale of the property or refinancing of the debt, will be distributed pro rata until the members of the joint venture receive the return of their invested capital and a specified minimum return thereon, and thereafter, the respective co-venture partner will receive a disproportionately higher share of any remaining proceeds at varying levels based on our having received certain minimum threshold returns.
(2)
Property formerly known as Haywood Place.
(3)
Property formerly known as Hampton Roads.
We had a total of 1,960 completed apartment units as of December 31, 2016. Our multifamily properties that are operational are all new, and feature the latest trends in design, construction and amenities. They are typically three and four story buildings in a landscaped setting. Our multifamily properties are typically appointed with swimming pools, a clubhouse, fitness facilities and other amenities reflective of the trend toward upscale multifamily living. The seven fully-operating properties in which we owned interests and operated at December 31, 2016 averaged 942 square feet of living area per apartment unit and averaged monthly rental revenue per apartment unit of $1,287 as of December 31, 2016. Resident lease terms generally range from 11 to 14 months.
Geographic Concentration of Our Real Estate Portfolio
As of December 31, 2016, all our properties were located in the southeastern and sunbelt regions of the U.S., including three properties in Texas.

24




 
Item 3.
LEGAL PROCEEDINGS
From time to time, we may be a party to legal proceedings in the ordinary course of, or incidental to the normal course of, our business, including proceedings to enforce our contractual or statutory rights. While we cannot predict the outcome of these legal proceedings with certainty, based upon currently available information, we do not believe the final outcome of any pending or threatened legal proceeding will have a material adverse effect on our results of operations or financial condition.
 
Item 4.
MINE SAFETY DISCLOSURE
None.


25




PART II
 
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all.
To assist our board of directors and our valuation committee, which is comprised solely of our independent directors (the “Valuation Committee”), with establishing an estimated net asset value ("NAV") per share of our common stock as of December 31, 2016, we engaged CBRE, Inc. (“CBRE”), an independent appraisal firm to provide restricted use MAI (defined below) real estate appraisals of our seven remaining real estate properties (the "Appraisals"). The engagement of CBRE was based on a number of factors including, CBRE's and its affiliates' experience as one of the world's largest commercial real estate services and investment firms, and CBRE's familiarity with our portfolio as it has provided real estate appraisals for all of the Company's previous NAV determinations. Our Advisor developed a valuation analysis, utilizing the Appraisals, and provided the analysis to the Valuation Committee containing, among other information, a NAV per share for our common stock as of December 31, 2016 (the “Valuation Report”).
In January 2017, the Valuation Committee reviewed the Valuation Report and concluded that the NAV per share for the Company’s common stock was reasonable, and unanimously approved a recommendation to the board to approve and adopt $5.01 as the Company’s estimated NAV per share as of the December 31, 2016. At a special meeting of the board held in January 2017, the board accepted the recommendation of the Valuation Committee and unanimously approved $5.01 as the Company’s estimated NAV per share as of December 31, 2016 (the “2016 NAV”). The 2016 NAV reflects various asset sales in 2015 and 2016 for which partial distributions in the amount of $3.00 and liquidating distributions in the aggregate amount of $4.65 per share were paid to the Company’s stockholders in 2015 and 2016, respectively. Total 2015 partial distributions and 2016 liquidating distributions through December 31, 2016 were $7.65.
The board of directors estimated the 2016 NAV based on certain recommendations and methodologies of the Investment Program Association, a trade association for non-listed direct investment vehicles (“IPA”), as set forth in IPA Practice Guideline 2013-01 “Valuations of Publicly Registered Non-Listed REITs” (“IPA Practice Guideline 2013-01”). The 2016 NAV is adjusted for transaction costs and anticipated expenses and income that we expect to incur or earn from the properties through the sale date of each property plus expenses related to the Plan of Dissolution approved by stockholders on August 4, 2016. The 2016 NAV as estimated will likely change prior to the completion of our Plan of Dissolution and does not necessarily represent the amount a stockholder would receive now or in the future. The 2016 NAV is based on a number of assumptions, estimates and data that are inherently imprecise and susceptible to uncertainty and changes in circumstances.
Valuation Methodologies
Our Advisor relied on the following sources in determining the major assumptions utilized in the Valuation Report: 
Restricted-use MAI (defined below) appraisals of each of the Company’s multifamily properties (“MAI Appraisals”);
The Company's filings with the SEC;
Financial materials, projections and guidance provided by our senior management and by our joint venture partners;
Market intelligence and broker opinion of value; and
The Advisor's experience from our previous property sales.
The MAI Appraisals were prepared in accordance with the Uniform Standards of Professional Appraisal Practice by CBRE, who is a member of the Appraisal Institute and has a Member of Appraisal Institute (“MAI”) designation. The individual appraisers determined capitalization rates based on comparable sales and other market intelligence.
In performing their respective analyses, CBRE and our Advisor made numerous assumptions as of various points in time with respect to industry performance, general business, economic and regulatory conditions, current and future rental market for our properties, many of which are necessarily subject to change and beyond the control of CBRE, the Advisor and the Company. The analyses performed by CBRE are not necessarily indicative of actual values, trading values or actual future results of our real estate properties that might be achieved, all of which may be significantly more or less favorable than suggested by the MAI Appraisals. The analyses performed by the Advisor are not necessarily indicative of actual values, trading values or actual future results of our common stock that might be achieved, all of which may be significantly more or less favorable than suggested by

26




the Valuation Report. The respective analyses do not purport to reflect the prices at which the properties may actually be sold, and such estimates are inherently subject to uncertainty. The actual value of our common stock may vary significantly depending on numerous factors that generally impact the price of securities, the financial condition of the Company and the state of the real estate industry more generally. Accordingly, with respect to the estimated NAV per share of our common stock, none of the Company, the Advisor or CBRE can give any assurance that:
a stockholder would be able to resell his or her shares at this estimated value per share;
a stockholder would ultimately realize distributions per share equal to our estimated net asset value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;
our shares would trade at a price equal to or greater than the estimated NAV per share if we listed them on a national securities exchange; or
the methodology used to estimate our NAV per share would be acceptable to FINRA or under the Employee Retirement Income Security Act (ERISA) for compliance with its reporting requirements.
Refer to our Form 8-K filed on January 24, 2017 for additional details on the 2016 NAV valuation, valuation methodologies, material assumptions, limitations and engagement of CBRE.
Our Common Stock Offerings
Through the close of our Offerings on April 11, 2014, we raised a total of approximately $208.3 million (22.7 million shares). As of March 10, 2017, we had 6,703 common stockholders of record.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities in the past three years.
Secondary Sales of Registered Shares between Investors
For the years ended December 31, 2016, 2015 and 2014, we are aware of transfers of 128,740, 16,435 and 1,447 shares, respectively, by investors. The shares were transferred at an average sales price of $6.00, $7.79 and $6.67 per share during 2016, 2015 and 2014, respectively. We are not aware of any other trades of our shares.
Distributions
Distributions to our stockholders are governed by the provisions of our articles of incorporation. On June 24, 2010, our board of directors authorized a distribution policy providing for daily stock distributions and distributions pursuant to this policy began on July 1, 2010. During the year ended December 31, 2014, our board of directors authorized the declaration of a monthly stock distribution of 0.006666667 of a share of common stock on each outstanding share of common stock (which represented an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month and distributed quarterly. On September 15, 2014, our board approved the termination of the stock distributions and distribution reinvestment plan, as described above in Item 1. “Business – Our Distribution Policy” section and below under “Redemption Plan and Issuer Purchases of Equity Securities."
Special Cash Distributions
As described in Item 1. “Business – Our Exit Strategy”, we evaluated opportunities that arose from favorable market conditions in multifamily development, explored strategic alternatives and sold properties. As a result, in February 2015 and December 2015, our board of directors declared Special Cash Distributions in the amounts of $1.30 and $1.70, respectively, per share of common stock. The Special Cash Distributions totaling approximately $67.6 million were paid in cash and were funded from the proceeds of refinancings and asset sales.
Liquidating Distributions
Subsequent to obtaining our stockholder's approval for our Plan of Dissolution, in August 2016 and December 2016, our board of directors declared Liquidating Distributions in the amounts of $2.35 and $2.30, respectively, per share of common stock to stockholders of record of the Company's common stock as of the close of business on August 24, 2016 and December 6, 2016, respectively. The Liquidating Distributions totaling approximately $104.7 million were paid in cash in 2016 and were funded from the proceeds of asset sales, including the sales of six properties in 2016.

27




The following table presents total cash (special and liquidating) and stock distributions declared and issued for each quarter in the years ended December 31, 2016, 2015 and 2014:
Periods
 
Cash
Distribution
per Share
 
Total Cash
Distribution
Declared
 
Share Distribution
Declared
per Share Held(1)
 
Stock
Distributions
Declared
(Shares)(1)
 
Stock
Distributions
Declared(2)
 
Total Cash and
Stock
Distributions
Declared
2016 Quarter
 
 
 
 
 
 
 
 
 
 
 
 
First
 
$

 
$

 
(3) 
 

 
$

 
$

Second
 

 

 
(3) 
 

 

 

Third
 
2.35

(5) 
52,936,504

(5) 
(3) 
 

 

 
52,936,504

Fourth
 
2.30

(5) 
51,810,196

(5) 
(3) 
 

 

 
51,810,196

Total
 
$
4.65

 
$
104,746,700

 
 
 

 
$

 
$
104,746,700

2015 Quarter
 

 
 
 
 
 
 
 
 
 
 
First
 
$
1.30

(4) 
$
29,284,024

(4) 
(3) 
 

 
$

 
$
29,284,024

Second
 

 

 
(3) 
 

 

 

Third
 

 

 
(3) 
 

 

 

Fourth
 
1.70

(4) 
38,294,494

(4) 
(3) 
 

 

 
38,294,494

Total
 
$
3.00

 
$
67,578,518

 
 
 

 
$

 
$
67,578,518

2014 Quarter
 
 
 
 
 
 
 
 
 
 
 
 
First
 
$

 
$

 
0.66667 per month
 
325,315

 
$
3,220,619

 
$
3,220,619

Second
 

 

 
0.00667 per month
 
420,384

 
4,161,802

 
4,161,802

Third
 

 

 
0.00667 per month
 
441,689

 
4,372,721

 
4,372,721

Fourth
 

 

 
(3) 
 

 

 

Total
 
$

 
$

 
 
 
1,187,388

 
$
11,755,142

 
$
11,755,142

FOOTNOTES:
(1)
Represents amount of shares declared and distributed, including shares issued subsequent to the applicable quarter end. The distribution of new common shares was non-taxable to the recipients when issued. The stock distributions may cause the interest of later investors in our common stock to be diluted as a result of the stock distributions issued to earlier investors.
(2)
For purposes of this table, we calculated the dollar amount of stock distributions declared using our NAV as of December 31, 2013, of $9.90 per share for shares issued after December 31, 2013.
(3)
Our board approved the termination of our distribution policy effective as of October 1, 2014. As a result, we did not declare any further stock distributions effective October 1, 2014.
(4)
Special cash distributions were funded using net sales proceeds received from the sale of real estate. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
(5)
Liquidating distributions were funded using net sales proceeds received from the sale of real estate. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
For the year ended December 31, 2016, all of the cash Liquidating Distributions paid to stockholders were considered liquidating distributions for federal income tax purposes. The Liquidating Distributions will be applied to reduce a stockholders' basis but not below zero. The amount of distributions in excess of a stockholders' basis will be considered a gain which should be recognized in the year the distribution is received. For the year ended December 31, 2015, approximately 6.1%, 47.4% and 46.5% of the cash distributions paid to stockholders were considered taxable as ordinary income, capital gain and return of capital, respectively, for federal income tax purposes. Of the 47.4% treated as capital gain for the year ended December 31, 2015, approximately 6.4% were taxed as 1250 unrecaptured gain. No amounts distributed to stockholders for the years ended December 31, 2016 and 2015 were required to be or have been treated as return of capital for purposes of calculating the stockholders’ return on their invested capital as described in our advisory agreement.
In determining the apportionment between taxable income and a return of capital, the amounts distributed to stockholders in excess of current or accumulated E&P are treated as a return of capital to the stockholders. E&P is a statutory calculation, which is derived from taxable income and determined in accordance with the Code. It is not intended to be a measure of the REIT’s performance, nor do we consider it to be an absolute measure or indicator of our source or ability to pay distributions to stockholders. Prior to termination of and pursuant to the stock distribution policy, the distribution of new common shares to the recipients was not taxable upon receipt. Stock distributions may cause the interest of later investors in our stock to be diluted as a result of the stock issued to earlier investors.

28




Securities Authorized for Issuance under Equity Compensation Plans
None.
Redemption Plan and Issuer Purchases of Equity Securities
We had adopted a share redemption plan that allowed a stockholder who held shares for at least one year to request that we redeem between 25% and 100% of its shares. On September 15, 2014, our board approved the suspension of our amended and restated redemption plan (the “Redemption Plan”), and terminated the distribution reinvestment plan effective as of October 1, 2014.
During the year ended December 31, 2014, we utilized all funds available for redemption requests received under the Redemption Plan and accepted redemption requests for 40,447 shares of common stock at an average redemption price of $9.90 per share for approximately $0.4 million. Upon the termination of the Redemption Plan, outstanding redemption requests of approximately 51,000 shares received in good order prior to September 10, 2014 were placed in the redemption queue. We did not accept or otherwise process any additional redemption requests after September 10, 2014. Redemptions were funded with offering proceeds. Shares redeemed were retired and not available for reissue.

Item 6.
SELECTED FINANCIAL DATA
The following selected financial data for CNL Growth Properties, Inc. should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data."
As a result of the approval of the Plan of Dissolution by the stockholders in August 2016, we adopted the liquidation basis of accounting ("Liquidation Basis of Accounting"), as described further in Item 8. “Financial Statements and Supplementary Data” to the financial statements.
    
 
 
Liquidation Basis
 
 
December 31, 2016
Statement of Net Assets Data:
 
 
Total assets
 
$
350,559,846

Mortgage and construction notes payable
 
$
179,135,370

Liability for non-controlling interests
 
$
35,080,687

Liability for estimated costs in excess of estimated receipts during liquidation
 
$
11,306,997

Total liabilities
 
$
235,510,263

Net assets in liquidation
 
$
115,049,583

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

Net assets in liquidation value per common share
 
$
5.11

Other Data:
 
 
Liquidating distributions declared
 
$
104,746,700

Liquidating distributions declared per share
 
$
4.65


29



 
 
Going Concern Basis
 
 
Seven Months Ended
July 31,
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
Operating Data:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
21,202,806

 
$
32,947,081

 
$
15,309,618

 
$
3,542,226

 
$
5,460

Operating loss
 
(1,152,584
)
 
(787,031
)
 
(3,886,892
)
 
(3,890,425
)
 
(1,964,648
)
Loss from continuing operations(1)
 
(5,455,166
)
 
(6,106,804
)
 
(5,419,908
)
 
(4,484,616
)
 
(1,963,719
)
Income (loss) from discontinued operations(1)
 

 
26,556,668

 
2,378,499

 
586,384

 
(1,172,768
)
Gain on sale of real estate, net of tax
 
40,917,543

 
61,208,195

 

 

 

Gain on sale of easement
 

 
603,400

 

 

 

(Income) loss from continuing operations attributable to non-controlling interests(1)
 
(21,931,862
)
 
(37,899,343
)
 
897,670

 
645,371

 
9,498

(Income) loss from discontinued operations attributable to non-controlling interests(1)
 

 
(13,459,486
)
 
(45,265
)
 
(29,358
)
 
3,037

Net income (loss) attributable to common stockholders(1)
 
$
13,530,515

 
$
30,902,630

 
$
(2,189,004
)
 
$
(3,282,219
)
 
$
(3,123,952
)
Income (loss) from continuing operations per share(1)
 
$
0.60

 
$
0.79

 
$
(0.21
)
 
$
(0.32
)
 
$
(0.24
)
Income (loss) from discontinued operations per share(1)
 

 
0.58

 
0.11

 
0.05

 
(0.14
)
Net income (loss) per share (basic and diluted)
 
$
0.60

 
$
1.37

 
$
(0.10
)
 
$
(0.27
)
 
$
(0.38
)
Weighted average number of shares of common stock outstanding (basic and diluted)(2)
 
22,526,171

 
22,526,171

 
21,361,725

 
12,249,900

 
8,262,638

Special cash distributions declared(3)
 

 
67,578,518

 

 

 

Special cash distributions declared per share
 

 
3.00

 

 

 

Net cash provided by (used in) operating activities
 
297,368

 
5,241,165

 
4,281,141

 
672,083

 
(869,890
)
Net cash provided by (used in) investing activities
 
56,408,742

 
81,757,496

 
(187,920,865
)
 
(128,018,204
)
 
(70,705,796
)
Net cash (used in) provided by financing activities
 
(24,302,710
)
 
(115,673,924
)
 
195,503,567

 
148,177,428

 
68,539,209

Other Data:
 
 
 
 
 
 
 
 
 
 
Properties owned at the end of period(4)
 
10

 
13

 
16

 
12

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Going Concern Basis
 
 
 
 
As of December 31,
 
 
 
 
2015
 
2014
 
2013
 
2012
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total assets(5)
 
 
 
$
440,482,790

 
$
478,276,500

 
$
272,492,393

 
$
114,890,689

Long-term debt obligations(5)
 
 
 
$
267,025,839

 
$
254,561,600

 
$
117,360,210

 
$
44,479,650

Total liabilities(5)
 
 
 
$
292,594,262

 
$
284,365,567

 
$
138,114,282

 
$
54,444,049

Noncontrolling interests
 
 
 
$
25,554,478

 
$
34,900,995

 
$
23,415,094

 
$
9,849,660

Total equity
 
 
 
$
147,888,528

 
$
193,910,933

 
$
134,378,111

 
$
60,446,640


30



FOOTNOTES:
(1)
The results of operations relating to the Long Point Property and the Gwinnett Center that were classified as held for sale were reported as discontinued operations for all applicable periods presented.
(2)
For purposes of determining the weighted average number of shares of common stock outstanding, stock distributions issued from inception through September 15, 2014 were treated as if they were outstanding as of the beginning of the periods presented. On September 15, 2014, the Company’s board approved the termination of our stock distribution policy. As a result, we did not declare any further monthly stock distributions, effective October 1, 2014.
(3)
During 2015, we declared special cash distributions of $3.00 per share. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.
(4)
As of July 31, 2016, December 31, 2015 and December 31, 2014, one, five and nine, respectively, of the properties owned were under development. All properties had been placed in service as of December 31, 2016.
(5)
Amounts as of December 31, 2014, 2013 and 2012 do not reflect the reclassification of loan costs, net, as a reduction to long-term debt obligations under the FASB issued Accounting Standard Update ("ASU") No. 2015-03, "Simplifying the Presentation of Debt Issue Costs."

31




Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 August 4, 2016, our stockholders approved our 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. The Plan of Dissolution enables our board of directors to sell any and all of our assets without further approval of the stockholders and provides that liquidating distributions be made to the stockholders as determined by the board of directors. Pursuant to REIT rules, in order to be able to deduct liquidating distributions as dividends, we must complete the disposition of our assets by August 5, 2018, two years after the date the Plan of Dissolution was approved by stockholders. To the extent that all of our assets are not sold by such date, 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 our assets to the holders of interest in the liquidating trust. 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 Item 8. “Financial Statements and Supplementary Data” 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.
Our Common Stock Offerings
From October 20, 2009, through April 11, 2014 we received aggregate offering proceeds of approximately $208.3 million from our Offerings.
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.
Plan of Dissolution
Although our stockholders approved our Plan of Dissolution on August 4, 2016, there is no assurance we will have a final liquidity event in the near term. We expect to distribute all of the net proceeds from the sale of our assets to our stockholders

32




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 can be given that the distributions will equal or exceed the estimate of net assets presented in the 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
Since our inception, and through the completion of our acquisition phase in April 2015, our Advisor and its sub-advisors evaluated various investment opportunities on our behalf and we entered into joint venture arrangements for the acquisition and development of 17 real estate properties and one three building office complex that was lender owned (“Gwinnett Center”). With the exception of the Gwinnett Center (which we sold during 2014), the investments we made focused on multifamily development projects in the southeastern and sunbelt regions of the United States due to favorable and compelling market and industry data, as well as, unique opportunities to co-invest with experienced development operators.
Prior to the formation of the Special Committee in August 2015, as discussed above in "Our Exit Strategy", our Advisor evaluated opportunities that arose from favorable market conditions in multifamily development and as part of that process, evaluated provisions within the individual joint venture agreements to consider specific asset sales. As a result of evaluating these opportunities, as well as a result of exploring strategic alternatives, as described above in "Our Exit Strategy", during 2015, we, through our consolidated joint ventures, sold four real estate properties that were operational. In 2016 we sold six properties, as further described below in Item 7. “Liquidity and Capital Resources – Net Sales Proceeds from Sales of Real Estate”. During the seven months ended July 31, 2016 (prior to adopting 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 real estate property and, through our consolidated joint ventures, sold three additional real estate properties, all of which were operational. See Item 7. "Liquidity and Capital Resources – Net Sales Proceeds from Sales of Real Estate" for additional information.
As of December 31, 2016, we owned interests in seven Class A multifamily properties in the southeastern and sunbelt regions of the United States, all of which had substantially completed development and were operational. Generally, the development period for our properties is up to 24 months with the properties becoming partially operational as buildings within the project are completed and certificates of occupancy obtained. We had a total of 1,960 completed apartment units as of December 31, 2016. We generally expect our multifamily properties to reach stabilization within 24 months after completion.
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 December 31, 2016, we had co-invested in seven separate joint ventures with six 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 December 31, 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 financial statements.
For a description of the individual properties included in our real estate portfolio, including the location, date acquired, operator/developer, completion date or estimated completion date of development, percentage leased and capitalized costs or development budget for each property, as of December 31, 2016, see Item 2. “Properties.”

33




Liquidity and Capital Resources
On August 4, 2016, our stockholders approved our Plan of Dissolution pursuant to which our board of directors is authorized to undertake a sale of all of our assets and distribute the net proceeds to our stockholders after payment of all of our liabilities. As of December 31, 2016, our cash totaled $17.9 million.  We will use our cash on hand and net sales proceeds received from the sale of real estate to pay all obligations, pay liquidating distributions and any other corporate purposes deemed appropriate. Our total assets and net assets in liquidation were $350.6 million and $115.0 million, respectively, at December 31, 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.
We believe that cash flows provided by operating activities along with sale proceeds will continue to provide adequate capital to fund our operating, administrative and other expenses incurred during liquidation as well as debt service obligations. As a REIT, we must distribute annually at least 90% of our REIT taxable income.
Sources of Liquidity and Capital Resources
Net Sales Proceeds from Sales of Real Estate
During 2014, due to favorable market conditions in multifamily development and our increased focus on multifamily development, we sold the Gwinnett Center, a three building office complex and received net sales proceeds of approximately $15.0 million. During the year ended December 31, 2015, due to continuing trends and favorable market conditions in multifamily development and exploring strategic alternatives, as described above in "Our Exit Strategy", we, through our consolidated joint ventures, sold four properties and we received aggregate net sales proceeds net of closing costs of approximately $223.0 million. We used a portion of the net sales proceeds from each property sale to repay the mortgage or development and construction loan related to each of the properties, pay distributions to our co-venture partners in accordance with the terms of the joint venture agreement, and pay Special Cash Distributions to stockholders, as described below in “Liquidity and Capital Resources — Special Cash Distributions”.
As part of continuing to evaluate strategic alternatives, from January through July 2016, we through our consolidated joint ventures, sold two additional properties. 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 these two properties to repay the development and construction loans related to both properties, and paid distributions to our respective co-venture partners, in accordance with the terms of each joint venture agreement.
In August 2016, subsequent to obtaining stockholder approval to our Plan of Dissolution and adopting Liquidation Basis of Accounting, we sold the Whitehall Property, our wholly-owned property, for gross sales proceeds of approximately $51.2 million, which equaled its liquidation value. 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 this property. In addition, we, through our consolidated joint ventures, sold three additional properties between October and December 2016, for aggregate gross sales proceeds of approximately $166.3 million, which equaled their liquidation values. We used the proceeds from the sales, net of closing costs and repaid the development and construction loans related to these three properties and paid distributions to our respective co-venture partners in accordance with the terms of each joint venture agreement.
In February 2017, we, through our consolidated joint venture, completed the sale of the Oxford Square Property for gross sales proceeds of approximately $65.7 million, which equaled its liquidation value as of December 31, 2016. We used a portion of the sales proceeds to repay the construction loan payable related to the property and also made a distribution to our joint venture partner representing their disproportionately higher share of proceeds from the sale in accordance with the Oxford Square joint venture agreement.
The sale of one or more of our properties may fall outside the prohibited transaction safe harbor. If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property held by us primarily for sale in the ordinary course of our trade or business), all taxable gain we derive from such sale would be subject to a 100% federal tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax. The principal requirements of the safe harbor are that: (i) the REIT must hold the applicable real estate asset for not less than two years for the production of rental income prior to its sale; ( ii) the aggregate expenditures made by the REIT, or any partner of the REIT, during the two-year period preceding the date of sale which are included in the basis of the property do not exceed 30% of the net selling price of the property; and (iii) the REIT does not make more than seven sales of property during the taxable year or the aggregate adjusted bases of property sold during the taxable year does not exceed 10% of the aggregate bases of all of the REIT’s assets as of the beginning of the taxable year or the fair market value of property sold during the taxable year does not exceed 10% of the fair market value of all of the REIT’s assets as of the beginning of the taxable year.

34




We requested and received a Letter Ruling from the Internal Revenue Service indicating our property sales as part of the Plan of Dissolution approved by our stockholders on August 4, 2016 would not constitute prohibited transactions. The ruling was issued based on facts and other representations made by our Advisor.
Net Cash Provided by Operating Activities
Prior to the adoption of Liquidation Basis of Accounting, our net cash flows provided by operating activities were approximately $0.3 million, $5.2 million and $4.3 million for the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014, respectively.  Cash flows from operating activities declined during the seven months ended July 31, 2016, primarily due to the sale of two properties in 2016, 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. Cash flows from operating activities improved from 2014 to 2015, primarily as a result of more properties and units being operational during 2015 than in the prior periods and an increase in occupancy as the units become operational and leased.
Our primary sources of non-operating cash flow from August 1, 2016 through December 31, 2016 include the following:
$215.6 million of net proceeds from the sale of four properties; and
$16.4 million of borrowings on our construction loans in connection with construction draws relating to the completion of our development properties.
Our primary uses of non-operating cash flow from August 1, 2016 through December 31, 2016 include the following:
$104.7 million for payment of liquidating distributions;
$108.9 million for early repayment of mortgage and construction notes payable, primarily in connection with the sale of four properties;
$37.9 million for distributions to noncontrolling interests, including approximately $37.6 million representing their disproportionate share of net sales proceeds from the sale of three properties;
$14.4 million for development property costs, including capital expenditures; and
$0.4 million for repayment of advance from an affiliate of noncontrolling interest.
Borrowings
We obtained construction financing on our multifamily development projects equal to approximately 65% to 75% of the development budgets. Generally, our construction financing provides for a term of three years, extendable for up to an additional two years, and requires monthly interest only payments during the initial term at variable rates generally equal to 2% to 2.7% above LIBOR rates. If extended, the loans typically require monthly principal and interest payments thereafter based on a 30-year amortization, with the unpaid principal balance due at maturity. To the extent we don't sell the property, we expect to consider refinancing our construction debt prior to the initial maturity date as each development property stabilizes. An affiliate of each applicable co-venture partner provided the lenders with any required completion and repayment guarantees. Although we typically have not entered into interest rate caps or other types of hedging instruments on all of our debt to hedge interest rate risk, we have entered into interest rate caps for one of our loans, as described in the notes to our consolidated financial statements, and may determine to enter into additional hedging transactions in the future.
As part of executing under our Plan of Dissolution, if we have not sold a property prior to our indebtedness approaching maturity, we, along with our joint venture partners, may extend and refinance the construction loans on our development properties. 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 years ended December 31, 2016, 2015 and 2014, we borrowed approximately $70.0 million, $122.5 million and $145.7 million, respectively, in connection with construction draws relating to our development properties, of which approximately $53.6 million was borrowed during the seven months ended July 31, 2016. During the years ended December 31, 2015 and 2014, we paid loan costs totaling approximately $0.5 million and $2.5 million, respectively, in connection with our indebtedness. There were no loan costs paid during 2016.
We, through joint ventures formed to make investments, generally borrowed on a non-recourse basis. The use of non-recourse financing allowed us to limit our exposure on any investment to the amount invested. Non-recourse indebtedness

35




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.
In April 2015, the Hampton Roads Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $25.3 million mortgage note secured by the Hampton Roads Property. The Hampton Roads Property Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 1.0% by obtaining a maximum interest rate cap until March 2017.
In February 2015 and April 2014, we, through two different consolidated joint ventures which developed two separate properties, modified two original development and construction loans with the existing lenders. We were able to increase the level of indebtedness in February 2015 and April 2014 on the respective property by approximately $3.5 million and $5.5 million, respectively, based on an appraised value that exceeded the original cost of each property. We used the refinancing proceeds received in April 2014 to acquire our joint venture partner’s 5% interest in the Whitehall Joint Venture, at which point, we wholly-owned this property. We repaid one loan in 2015 and repaid the other loan in 2016 in connection with the sale of each of these two properties.
In September 2014, the Spring Town Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $18.5 million mortgage note secured by the Spring Town Property. The Spring Town Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 1% by obtaining a maximum interest rate cap through December 2015. After December 2015 through July 2016 the interest rate cap mitigated the risk of future LIBOR above 1.9%. This interest rate cap terminated in July 2016.
In March 2014, as part of acquiring the Oxford Square Property, we obtained $4.9 million in temporary financing through our Oxford Square Joint Venture in the form of a temporary loan and our joint venture partner advanced approximately $1.2 million for the development costs. In June 2014, we used unused proceeds from our Offerings to repay the $4.9 million loan and entered into a new construction loan that matures in June 2018.
In April 2014, the Whitehall Joint Venture, which developed the Whitehall Property completed in April 2013, refinanced its original development and construction loan which had an outstanding principal balance of $22.3 million and entered into a new $28.2 million variable rate, seven-year loan. We were able to increase the level of indebtedness on the Whitehall Property based on an appraised value that exceeded our original cost. 
For additional information on our borrowings, see Note 10, “Indebtedness” in our consolidated financial statements in Item 8. “Financial Statements and Supplementary Data” of this Annual Report.
Capital Contributions from Noncontrolling Interests
During the years ended December 31, 2015 and 2014, our co-venture partners made capital contributions aggregating to approximately $1.9 million and $14.2 million, respectively. Our co-venture partners did not make any capital contributions during the year ended December 31, 2016. As of December 31, 2016, our co-venture partners did not have any commitments to fund additional capital contributions in accordance with the terms of our joint venture agreements relating to the multifamily development properties.
Uses of Liquidity and Capital Resources
Acquisition and Development of Properties
We completed our acquisition phase when we acquired our last multifamily development property in 2015 and acquired five properties in 2014. In connection with our development projects, we funded approximately $67.8 million, $143.0 million and $203.7 million in acquisition and development costs during 2016, 2015 and 2014, respectively, of which approximately $53.4 million was funded during the seven months ended July 31, 2016.
Debt Service
During the year ended December 31, 2016, we paid $160.1 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 $159.8 million using a portion of the net sales proceeds from the sale of six properties. In 2015, we paid approximately $111.3 million of mortgage and construction loans payable, and $0.3 million in a related prepayment penalty, using a portion of the net sales proceeds from the sale of six properties. During the year ended December 31, 2014, we repaid approximately $36.7 million of outstanding loans, which included approximately $22.3 million related to refinancing Whitehall Joint Venture’s original construction loan, approximately $4.9 million related to Oxford Square Joint Venture’s temporary loan, and approximately $8.0 million related to Gwinnett Center as the result of the sale of the property.

36




In October and November 2015, we, through two separate consolidated joint ventures, exercised our options to extend the maturity dates of the construction loans collateralized by the two separate properties by one year to November 30, 2016 and December 20, 2016, respectively. We sold both properties in 2016 prior to their maturity dates.
In September 2016, we, through one of our consolidated joint ventures, extended the original construction loan relating to our Remington Fairfield Property by one year to September 2017. In addition, we, through one of our consolidated joint ventures, have begun discussions with the lender of the construction loan relating to our Aura at the Rim Property, which is scheduled to mature to April 2017, to exercise our extension option.
Scheduled maturities of $96.6 million during 2017 reflect the maturity of four loans during 2017 as described further in Note 10. “Indebtedness” in the accompanying consolidated financial statements. We have begun discussions with our joint venture partners relating to the 2017 maturities and if we are not able to sell the respective properties in 2017 and use net sales proceeds to repay the related indebtedness as part of executing under our Plan of Dissolution, we believe that we will be able to refinance or exercise our extension options for any debt that matures in 2017 and other debt as it comes due in the ordinary course of business.
Stock Distributions
On September 15, 2014, our board approved the termination of the stock distributions and distribution reinvestment plan, as described above in Item 1, in the “Our Distribution Policy” section.
Special Cash Distributions
Due to the sale of four properties as described above in “Net Sales Proceeds from Sales of Real Estate”, in February and December 2015, our board of directors declared Special Cash Distributions in the amount of $1.30 and $1.70, respectively, per share of common stock. The Special Cash Distributions totaling approximately $67.6 million were paid in cash and were funded from the proceeds of refinancings and the 2015 sales of four properties. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Special Cash Distributions”. No special cash distributions were declared during 2014.
Liquidating Distributions
Subsequent to obtaining stockholder approval to our Plan of Dissolution, in August 2016 and December 2016, our board of directors declared Liquidating Distributions in the amounts of $2.35 and $2.30, respectively, per share of common stock. The Liquidating Distributions totaling approximately $104.7 million were paid in cash and were funded from the proceeds of asset sales, including the sales of six properties in 2016. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Liquidating Distributions”.
Stock Issuance and Offering Costs
Since inception and through the close of our Offerings of shares of common stock on April 11, 2014, we received aggregate offering proceeds of approximately $208.3 million, of which $65.4 million were received during the year ended December 31, 2014. Under the terms of our offerings, certain affiliates were entitled to receive selling commissions and a marketing support fee of up to 7% and 3%, respectively, of gross offering proceeds on shares sold through the close of our Offerings on April 11, 2014. In addition, affiliates were entitled to reimbursement of actual expenses incurred in connection with our offerings, such as filing fees, legal, accounting, printing, and due diligence expense reimbursements, which were recorded as stock issuance and offering costs and deducted from stockholders’ equity. In accordance with our articles of incorporation, the total amount of selling commissions, marketing support fees, and other organizational and offering costs paid by us did not exceed 15% of the aggregate gross offering proceeds. Offering costs were generally funded by our Advisor and subsequently reimbursed by us subject to this limitation. During the year ended December 31, 2014, we paid approximately $9.6 million in stock issuance and offering costs. No such costs were incurred or paid subsequent to the close of our Offerings on April 11, 2014.
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

37




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 and the years ended December 31, 2015 and 2014, our consolidated joint ventures paid distributions of approximately $27.1 million, $62.6 million and $2.1 million, respectively, to our co-venture partners representing their pro rata share of positive operating cash flows, plus a disproportionate share of proceeds from capital events, which included approximately $25.8 million in net sales proceeds from the sales of the properties during the seven months ended July 31, 2016 and $58.4 million during the year ended December 31, 2015 in accordance with the terms of our joint venture agreements. Additionally, capital events during 2015 also included payment to our co-venture partners for proceeds received in connection with modifying our indebtedness related to two properties. During 2014, in accordance with the terms of the Oxford Square Property joint venture agreement, once the Oxford Square Joint Venture obtained a construction loan in June 2014, our ownership interest in the joint venture increased to 95% with an additional capital contribution by us and a return of capital to our joint venture partner.
Purchase of Noncontrolling Interests
During the year ended December 31, 2014, we used $5.5 million of the excess proceeds received from the refinancing of the construction loan by the Whitehall Joint Venture to acquire our joint venture partner’s 5% interest in the Whitehall Joint Venture and as a result we owned 100% of the interests in the Whitehall Joint Venture. We sold the Whitehall Property during 2016.
In addition, in accordance with the terms of the Oxford Square Property joint venture agreement, once the Oxford Square Joint Venture obtained a construction loan in June 2014, our ownership interest in the joint venture increased to 95% with an additional capital contribution by us and a $1.5 million return of capital to our joint venture partner.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

Results of Operations
As a result of our stockholders' approval of our Plan of Dissolution and our adoption of Liquidation Basis of 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. See Item 2. "Properties" for additional the leased percentage for each property as of December 31, 2016.
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 December 31, 2016
Net assets in liquidation decreased by approximately $100.3 million during the period August 1, 2016 through December 31, 2016. The decline in net assets was primarily due to Liquidating Distributions to stockholders totaling approximately $104.7 million, or $4.65 per common share, in August and December 2016. The decline in net assets in liquidation was partially offset by a net increase in estimated net sales proceeds from the sales of real estate excluding amounts allocable to noncontrolling interests.
Comparison of the fiscal year ended December 31, 2015 to the fiscal year ended December 31, 2014
Analysis of Revenues and Expenses from Continuing Operations:
Revenues. Rental income from operating leases from continuing operations and other property revenues are derived from base rent, garage and storage income, application fees, lease cancellation fees, and miscellaneous administrative fees. Revenues were approximately $32.9 million and $15.3 million for the years ended December 31, 2015 and 2014, respectively (of which $8.6 million and $4.8 million, respectively, related to the properties sold from September – December 2015). Rental income from continuing operations and other property revenues increased primarily due to the increased stabilization of several properties (either fully operational or partially operational).
Property Operating Expenses. Property operating expenses from continuing operations for the years ended December 31, 2015 and 2014 were $16.5 million and $8.5 million, respectively (of which $3.8 million and $2.7 million,

38




respectively, related to the properties sold from September – December 2015). Property operating expenses increased primarily due to the additional properties becoming either fully operational or partially operational. Property operating expenses also increased in 2015 due to pre-leasing and marketing activities at our properties under development with partial operations.
General and Administrative Expenses. General and administrative expenses from continuing operations for the years ended December 31, 2015 and 2014 were approximately $3.2 million and $2.9 million, respectively. General and administrative expenses were comprised primarily of reimbursable personnel expenses of affiliates of our Advisor, directors’ and officers’ insurance, accounting and legal fees, NAV fees and board of directors’ fees. The increase in general and administrative expenses for the year ended December 31, 2015 was primarily the result of the additional legal, accounting and other professional services necessary to account and report on our growing portfolio of assets.
Asset Management Fees. We incurred approximately $3.3 million and $2.1 million in asset management fees from continuing operations payable to our Advisor during the years ended December 31, 2015 and 2014, respectively, (of which approximately $1.0 million and $1.0 million, respectively, were capitalized as part of the cost of our properties that were under development). We incur asset management fees at an annual rate of 1% of our real estate assets under management as defined in the advisory agreement (which generally equals our acquisition and development capitalized costs and excludes pro rata portions attributable to our joint venture partners); therefore, asset management fees increased for the year ended December 31, 2015 as compared to the prior year period as a result of several multifamily projects becoming operational. Asset management fees incurred during development were capitalized as part of the cost of development.
Property Management Fees. We incurred approximately $1.3 million and $0.8 million in property management fees from continuing operations during the years ended December 31, 2015 and 2014, respectively. Property management fees from third party property managers generally range from 2.25% to 4% of property revenues, subject to minimum monthly fees during initial lease-up periods. Property management fees increased during 2015 primarily as a result of increased property revenues.
Acquisition Fees and Expenses. We incurred approximately $1.1 million and $3.5 million in acquisition fees and expenses, including closing costs, during the years ended December 31, 2015 and 2014, respectively, of which approximately $1.1 million and $3.4 million, respectively, were capitalized as part of the costs of our properties under development. The decrease in acquisition fees and expenses in 2015 was due to the fact that we had one acquisition during the year ended December 31, 2015, as compared to five acquisitions during the year ended December 31, 2014. We incurred acquisition fees and expenses, consisting primarily of investment services fees and other acquisition expenses, through April 2015 with the purchase of our last property and capitalized most of these fees and expenses as part of the cost of the development.
Depreciation. Depreciation from continuing operations for the years ended December 31, 2015 and 2014 was approximately $10.4 million and $5.9 million, respectively. Depreciation expense increased primarily due to more properties being fully operational in 2015, as compared to the same period in 2014.
Interest Expense and Loan Cost Amortization, Net of Amounts Capitalized. During the years ended December 31, 2015 and 2014, we incurred approximately $8.9 million and $5.5 million, respectively, of interest expense and loan cost amortization from continuing operations relating to debt outstanding on our properties, $3.8 million and $4.0 million, respectively, of which was capitalized as development costs relating to our properties under development. Interest costs incurred during the year ended December 31, 2015, increased as a result of an increase in our average debt outstanding during the year ended December 31, 2015 to $261.9 million from approximately $186.0 million during 2014, resulting in an increase of approximately $3.4 million in interest cost and loan cost amortization. Interest expense also increased as a result of less interest expense being eligible for capitalization due to the completion of construction activity on several properties that became operational during the year ended December 31, 2015.
Loss on Extinguishment of Debt. Loss on extinguishment of debt from continuing operations was approximately $0.09 million and $0.06 million for the years ended December 31, 2015 and 2014, respectively, related to the early repayment of construction loans due to the sales of properties in 2015 and in 2014 due to refinancings. Loss on extinguishment of debt included the write-off of unamortized loan costs.
Income Tax Expense. Income tax expense was approximately $0.09 million and $0.04 million for the years ended December 31, 2015 and 2014, respectively.
Gain on Sale of Real Estate, Net of Tax. Gain from sale of real estate, net of tax from continuing operations was approximately $61.2 million for the year ended December 31, 2015 relating to the sale of the properties, of which $23.6 million was allocable to common stockholders. There was no gain on sale of real estate from continuing operations in 2014.
Gain on Sale of Easement. During the year ended December 31, 2015, we recorded a gain on the sale of a property easement of $0.6 million. There was no gain on sale of easement during 2014.

39




Analysis of Discontinued Operations
We had income from discontinued operations of approximately $26.6 million and $2.4 million for the years ended December 31, 2015 and 2014, respectively. During 2014 and 2013, we entered into contracts to sell the Long Point Property and Gwinnett Center, respectively. As a result, we accounted for the revenues and expenses associated with the Long Point Property and Gwinnett Center as discontinued operations for all periods presented in accordance with GAAP. In January 2015 and March 2014, we sold the Long Point Property and Gwinnett Center, respectively, to unrelated parties and recorded a gain of approximately $27.4 million (of which $13.9 million was allocable to common stockholders) and $1.2 million, respectively, for financial reporting purposes. Income from discontinued operations was partially offset by a loss on extinguishment of debt of approximately $0.8 million and $0.03 million related to the repayment of the indebtedness of the Long Point Property and Gwinnett Center, respectively, for unamortized loan costs and a prepayment penalty on the Long Point Property due to the sales of these properties.
Net (Income) Loss Attributable to Noncontrolling Interests
In accordance with the provisions of each joint venture agreement, we allocate (income) loss from operations to our co-venture partners based on their percentage ownership in each joint venture. To the extent we have a capital event, such as a sale of a property, the gain is allocated to first provide minimum gain allocations to each joint venture partner, and thereafter, our co-venture partner will receive a disproportionately higher gain allocation, as set forth in each joint venture agreement.
During the years ended December 31, 2015 and 2014, net income (loss) from continuing and discontinued operations attributable to our co-venture partners was approximately $51.4 million and $(0.9) million, respectively. Net income attributable to noncontrolling interests during the year ended December 31, 2015, included pro rata share of income from operations attributable to noncontrolling interests of approximately $0.3 million and a disproportionate share of gains from the sales of properties, in accordance with the gain allocation provisions for capital events, of approximately $51.1 million. All of the net loss attributable to noncontrolling interests for the year ended December 31, 2014, was a result of pro rata share of loss from operations.
As disclosed above, we plan to execute under our Plan of Dissolution, which will include the sale of our remaining properties, the satisfaction of obligations, the payment of liquidating distributions and the dissolution of the Company. We are not aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the operation and disposition of properties, other than those described above, risk factors, if any, identified in Part II, Item 1A of this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016.
2%/25% Limitation
We incur operating expenses which, in general, are expenses relating to our administration on an ongoing basis. Pursuant to the advisory agreement, the Advisor will reimburse us the amount by which the total operating expenses paid or incurred by us exceed, in any four consecutive fiscal quarters (the “Expense Year”) commencing with the Expense Year ended December 31, 2012, the greater of 2% of average invested assets or 25% of net income (as defined in the advisory agreement) (the “Limitation”), unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors.
During the years ended December 31, 2016, 2015 and 2014, total operating expenses did not exceed the Limitation.
Off Balance Sheet Arrangements
As of December 31, 2016, we had no off balance sheet arrangements.
Contractual Obligations
As of December 31, 2016, we were subject to contractual payment obligations as described in the table below.
 

40




 
 
Payments Due by Period
 
 
Less than
1 year
 
Years
1 - 3
 
Years
3 - 5
 
More
than 5
years
 
Total
Development contracts on development properties(1)
 
$
6,472,830

 
$

 
$

 
$

 
$
6,472,830

Construction notes payable (principal and interest)(2)
 
101,099,947

 
83,661,339

 

 

 
184,761,286

 
 
$
107,572,777

 
$
83,661,339

 
$

 
$

 
$
191,234,116

FOOTNOTES:
(1)
The amounts presented above represent accrued development costs incurred as of December 31, 2016 and development costs not yet incurred of the aggregate budgeted development costs in accordance with the development agreements, and the expected timing of such costs.
(2)
For purposes of this table, management has assumed the mortgage and construction notes payable are repaid as of the initial maturity dates and are not extended beyond such dates as allowed pursuant to the loan agreements. Additionally, management has calculated estimated interest payments based on interest rates of our mortgage note payables as of December 31, 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, organization and offering costs, selling commissions, marketing support fees, asset and property management fees and reimbursement of operating costs. See Note 12, “Related Party Arrangements” within Item 8, “Financial Statements and Supplementary Data” and Item 13, “Certain Relationships and Related Transactions, and Director Independence” for a discussion of the various related party transactions, agreements and fees.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies that management believes are critical to our operations. We consider these policies critical because they involve difficult management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Prior to the adoption of the Liquidation Basis of Accounting, our most sensitive estimates involved the determination of whether an entity should be consolidated, and the capitalization of costs associated with our development properties.
Subsequent to the adoption of the Liquidation Basis of Accounting, we are required to estimate all costs and income we expect to incur and earn through the end of liquidation including the estimated amount of cash we expect to collect on the disposal of our assets and the estimated costs to dispose of our assets.

Basis of Presentation (Post Plan of Dissolution)
As a result of the approval of the Plan of Dissolution by the stockholders in August 2016, our financial position and results of operations for the year ended December 31, 2016 is presented using two different presentations. The Company adopted the Liquidation Basis of Accounting 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.
As a result of adopting the Liquidation Basis of Accounting, on August 1, 2016 assets were adjusted to their estimated liquidation value, which represents the estimated gross amount of cash that we will collect on disposal of assets as we carry out our Plan of Dissolution. The liquidation value of our 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.

41




We accrue costs and income that we expect to incur and earn through the end of liquidation to the extent we have a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the 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 5, "Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation" in Item 8, “Financial Statements and Supplementary Data” for further discussion. Actual costs incurred but unpaid as of December 31, 2016 are included in accrued development costs, accounts payable and other accrued expenses, due to related parties and other liabilities on the Consolidated Statement of Net Assets.
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.
Non-controlling Interests – Liquidation Basis of Accounting (Post Plan of Dissolution)
 In liquidation, the presentation for joint ventures historically consolidated under going concern accounting will be determined based on our planned exit strategy. We intend to sell all of our properties, rather than selling our interests in our properties, and therefore the properties will be presented on a gross basis with a liability to the non-controlling interest holders. Amounts expected to be 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.
Basis of Presentation (Pre Plan of Dissolution)
All financial results and disclosures up through July 31, 2016, prior to adopting the Liquidation Basis, are presented based on a going concern basis (“Going Concern Basis”), which contemplates the realization of assets and liabilities in the normal course of business. As a result, the balance sheets as of December 31, 2015 and 2014, the statements of operations and the statements of cash flows for the seven months ended July 31, 2016 and the comparative years ended December 31, 2015 and 2014 used the Going Concern Basis presentation.
Principles of Consolidation (Pre Plan of Dissolution)
Under the going concern basis of accounting, our consolidated financial statements included our accounts, the accounts of our wholly owned subsidiaries or subsidiaries for which we had a controlling interest, the accounts of variable interest entities in which we were the primary beneficiary, and the accounts of other subsidiaries over which we had control. All intercompany accounts and transactions were eliminated in consolidation. The determination of whether we were the primary beneficiary was based on a combination of qualitative and quantitative factors which required management in some cases to estimate future cash flows or likely courses of action.
Real Estate
Prior to the adoption of the Liquidation Basis of Accounting, buildings and improvements were depreciated on the straight-line method over their estimated useful lives, which generally were 39 and 15 years, respectively. Expenditures for maintenance and repairs were charged to operations as incurred. Significant renovations and replacements, which improved or extended the life of the asset, were capitalized.
As of August 1, 2016, real estate assets were adjusted to their estimated liquidation value, to reflect the change to the Liquidation Basis of Accounting. The liquidation value represents the estimated gross amount of cash that we will collect on disposal of assets as we carry out our Plan of Dissolution. The liquidation value of our operating properties are presented on an undiscounted basis. Estimated costs to dispose of assets have been presented separately from the related assets.
As of December 31, 2016, we estimated the liquidation value of our real estate based on purchase and sale agreements when available or property appraisals from CBRE Valuation Advisory Services Group. For valuation methodologies used in preparing the property appraisals, refer to the "Valuation Methodologies" section of Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Real Estate Under Development
Prior to the adoption of the Liquidation Basis of Accounting, we recorded acquisition and development costs of properties under development at cost, including acquisition fees and expenses incurred. The cost of real estate under development included direct and indirect costs of development, including interest and miscellaneous costs incurred during the development

42




period until the project was substantially complete and available for occupancy. In addition, during active development, all operating expenses related to the project, including property expenses such as real estate taxes, were capitalized rather than expensed and incidental revenue were recorded as a reduction of capitalized project (i.e., construction) costs. Preleasing costs were expensed as incurred. Assets were placed into service once certificates of occupancy were issued.
Capitalized Interest
Prior to the adoption of the Liquidation Basis of Accounting, we capitalized interest and the amortization of loan costs as a cost of development using the weighted average interest rate of our total outstanding indebtedness and based on our weighted average expenditures for our development properties for the period. Capitalization of interest for a particular development project began when expenses related to the project had been made, activities necessary to get the project ready for its intended use were in progress and when interest costs had been incurred. Capitalization of interest ceased when the project was substantially complete and ready for occupancy.
Impairment of Real Estate Assets
Prior to the adoption of the Liquidation Basis of Accounting, real estate assets were reviewed on an ongoing basis to determine whether there were any indicators, including property operating performance and general market conditions, that the value of the real estate properties (including any related amortizable intangible assets or liabilities) had been impaired. To assess if a property value was potentially impaired, management compared the estimated current and projected undiscounted cash flows, including estimated net sales proceeds, of the property over its remaining useful life to the net carrying value of the property. Such cash flow projections considered factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition, and other factors. In the event that the carrying value exceeded the undiscounted operating cash flows, we recognized an impairment provision to adjust the carrying value of the asset to the estimated fair value of the property.
Income Taxes
We have 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, we generally are not subject to federal corporate income taxes on distributed taxable income and may be subject to excise tax on undistributed taxable income. We or our subsidiaries may be subject to certain state and local taxes on our income and/or property.
If we fail to qualify as a REIT for any reason in a taxable year and applicable relief provisions do not apply, then we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. It is not possible to state whether we would be entitled to this statutory relief.
Recent Accounting Pronouncements
See Item 8. “Financial Statements and Supplementary Data” for information about the impact of recent accounting pronouncements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes primarily as a result of long-term debt used to acquire and develop properties. 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. With regard to variable rate financing, we assessed 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. As of December 31, 2016, we had entered into a LIBOR based interest rate cap agreement to hedge against increases in the interest rate on one construction loan.
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):
 
2017
 
2018
 
2019
 
2020
 
2021
 
There-after
 
Total
 
Approximate Fair Value
Variable rate debt
$
96,616,221

 
$
82,519,149

 
$

 
$

 
$

 
$

 
$
179,135,370

 
$
178,300,000

Average interest rate(1)
3.14
%
 
3.09
%
 
%
 
%
 
%
 
%
 
3.12
%
 
 

43



FOOTNOTE:
(1)
As of December 31, 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 December 31, 2016, would increase annual interest expense by approximately $1.5 million on our variable rate debt. 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.


44




Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
 
 
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


45



Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and Stockholders of
CNL Growth Properties, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheet (going concern basis) of CNL Growth Properties, Inc. and its subsidiaries as of December 31, 2015, and the related consolidated statements of operations (going concern basis), equity (going concern basis) and cash flows (going concern basis) for each of the two years in the period ended December 31, 2015 and for the period from January 1, 2016 to July 31, 2016. In addition, we have audited the consolidated statement of net assets (liquidation basis) as of December 31, 2016, and the related consolidated statement of changes in net assets (liquidation basis) for the period from August 1, 2016 to December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 2 and 3 to the consolidated financial statements, the stockholders of CNL Growth Properties, Inc. approved a plan of liquidation on August 4, 2016, and the Company determined liquidation is imminent. As a result, the Company changed its basis of accounting on August 1, 2016 from the going concern basis to a liquidation basis.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CNL Growth Properties, Inc. and its subsidiaries as of December 31, 2015, the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 and for the period from January 1, 2016 to July 31, 2016, their net assets in liquidation as of December 31, 2016, and the changes in their net assets in liquidation for the period from August 1, 2016 to December 31, 2016, in conformity with accounting principles generally accepted in the United States of America applied on the bases described in the preceding paragraph. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

As discussed in Note 9 to the consolidated financial statements, the Company changed the criteria for reporting discontinued operations in 2015.


/s/ PricewaterhouseCoopers LLP
Orlando, Florida
March 17, 2017


46


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET ASSETS
(Liquidation Basis)


 
 
December 31, 2016

ASSETS
 
 
Real estate assets, net
 
$
331,970,000

Cash and cash equivalents
 
17,926,602

Restricted cash
 
405,255

Other assets
 
257,989

Total Assets
 
350,559,846

LIABILITIES
 
 
Mortgage and construction notes payable
 
179,135,370

Liability for non-controlling interests
 
35,080,687

Liability for estimated costs in excess of estimated receipts during liquidation
 
11,306,997

Accrued development costs
 
2,944,380

Accounts payable and other accrued expenses
 
4,379,230

Due to related parties
 
1,812,609

Other liabilities
 
850,990

Total Liabilities
 
235,510,263

Commitments and contingencies (Note 14)
 

Net assets in liquidation
 
$
115,049,583


See accompanying notes to consolidated financial statements.


47


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Going Concern Basis)


 
 
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 14)
 

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 income
 
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 consolidated financial statements.


48


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Liquidation Basis)


 
 
Period from August 1, 2016 through December 31, 2016
Net assets in liquidation, beginning of period (Note 4)
 
$
215,361,554

Changes in net assets in liquidation:
 
 
Change in liquidation value of investments in real estate
 
4,412,000

Remeasurement of assets and liabilities
 
6,766,593

Remeasurement of noncontrolling interests
 
(6,743,864
)
Net increase in liquidation value
 
4,434,729

Liquidating distributions to stockholders
 
(104,746,700
)
Changes in net assets in liquidation
 
(100,311,971
)
Net assets in liquidation, end of period
 
$
115,049,583


See accompanying notes to consolidated financial statements.


49


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Going Concern Basis) 


 
 
Seven Months Ended July 31,
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
 
Rental income from operating leases
 
$
19,199,105

 
$
30,473,600

 
$
14,080,893

Other property revenues
 
2,003,701

 
2,473,481

 
1,228,725

Total revenues
 
21,202,806

 
32,947,081

 
15,309,618

Expenses:
 
 
 
 
 
 
Property operating expenses
 
11,653,617

 
16,462,866

 
8,488,871

General and administrative
 
2,775,540

 
3,210,332

 
2,850,632

Asset management fees, net of amounts capitalized
 
1,604,305

 
2,348,250

 
1,070,864

Property management fees
 
965,979

 
1,262,453

 
763,681

Acquisition fees and expenses, net of amounts capitalized
 

 
16,462

 
76,046

Depreciation
 
5,355,949

 
10,433,749

 
5,946,416

Total operating expenses
 
22,355,390

 
33,734,112

 
19,196,510

Operating loss
 
(1,152,584
)
 
(787,031
)
 
(3,886,892
)
Other income (expense):
 
 
 
 
 
 
Fair value adjustments and other income (expense)
 
73,120

 
(16,476
)
 
55,165

Interest expense and loan cost amortization, net of amounts capitalized
 
(4,197,031
)
 
(5,127,058
)
 
(1,485,912
)
Loss on extinguishment of debt
 
(27,454
)
 
(87,047
)
 
(59,573
)
Total other expense
 
(4,151,365
)
 
(5,230,581
)
 
(1,490,320
)
Income tax expense
 
(151,217
)
 
(89,192
)
 
(42,696
)
Loss from continuing operations
 
(5,455,166
)
 
(6,106,804
)
 
(5,419,908
)
Income from discontinued operations, net of tax
 

 
26,556,668

 
2,378,499

Net (loss) income before gains on sale of real estate and easement
 
(5,455,166
)
 
20,449,864

 
(3,041,409
)
Gain on sale of real estate, net of tax
 
40,917,543

 
61,208,195

 

Gain on sale of easement
 

 
603,400

 

Net income (loss) including noncontrolling interests
 
35,462,377

 
82,261,459

 
(3,041,409
)
Net (income) loss attributable to noncontrolling interests:
 
 
 
 
 
 
Continuing operations
 
(21,931,862
)
 
(37,899,343
)
 
897,670

Discontinued operations
 

 
(13,459,486
)
 
(45,265
)
Net (income) loss attributable to non-controlling interests
 
(21,931,862
)
 
(51,358,829
)
 
852,405

Net income (loss) attributable to common stockholders
 
$
13,530,515

 
$
30,902,630

 
$
(2,189,004
)
Net income (loss) per share of common stock (basic and diluted):
 
 
 
 
 
 
Continuing operations
 
$
0.60

 
$
0.79

 
$
(0.21
)
Discontinued operations
 

 
0.58

 
0.11

Net income (loss) per share of common stock (basic and diluted)
 
$
0.60

 
$
1.37

 
$
(0.10
)
Weighted average number of shares of common stock outstanding (basic and diluted)
 
22,526,171

 
22,526,171

 
21,361,725

See accompanying notes to consolidated financial statements.

50


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Going Concern Basis)


 
 
Common Stock
 
Capital in
Excess of Par
Value
 
Accumulated
(Deficit) Income
 
Accumulated
Cash
Distributions
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Number of
Shares
 
Par Value
 
Balance at December 31, 2013
 
15,393,316

 
$
153,933

 
$
120,627,485

 
$
(9,818,401
)
 
$

 
$
110,963,017

 
$
23,415,094

 
$
134,378,111

Subscriptions received for common stock through public offering
 
5,985,914

 
59,859

 
65,336,467

 

 

 
65,396,326

 

 
65,396,326

Redemptions of common stock
 
(40,447
)
 
(404
)
 
(399,781
)
 

 

 
(400,185
)
 

 
(400,185
)
Stock issuance and offering costs
 

 

 
(9,490,715
)
 

 

 
(9,490,715
)
 

 
(9,490,715
)
Stock distributions
 
1,187,388

 
11,874

 
(11,874
)
 

 

 

 

 

Purchase of noncontrolling interest
 

 

 
(5,269,501
)
 

 

 
(5,269,501
)
 
(256,324
)
 
(5,525,825
)
Contributions from non-controlling interests
 

 

 

 

 

 

 
14,744,367

 
14,744,367

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(2,149,737
)
 
(2,149,737
)
Net loss
 

 

 

 
(2,189,004
)
 

 
(2,189,004
)
 
(852,405
)
 
(3,041,409
)
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 ($3.00 per share)
 

 

 

 

 
(67,578,518
)
 
(67,578,518
)
 

 
(67,578,518
)
Contributions from non-controlling interests
 

 

 

 

 

 

 
1,942,204

 
1,942,204

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(62,647,550
)
 
(62,647,550
)
Net income
 

 

 

 
30,902,630

 

 
30,902,630

 
51,358,829

 
82,261,459

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

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 consolidated financial statements.

51


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Going Concern Basis)


 
 
Seven Months Ended July 31,
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
Operating Activities:
 
 
 
 
 
 
Net income (loss), including amounts attributable to noncontrolling interests
 
$
35,462,377

 
$
82,261,459

 
$
(3,041,409
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
5,355,949

 
10,433,749

 
6,811,281

Amortization of loan costs
 
441,510

 
557,379

 
212,182

Loss on extinguishment of debt
 
27,454

 
905,451

 
92,361

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
)
 
(89,847,236
)
 
(1,219,693
)
Gain on sale of easement
 

 
(603,400
)
 

Unrealized loss from change in fair value of interest rate caps
 
23,342

 
75,712

 
243,045

Straight line rent adjustments
 
(413,223
)
 
(72,649
)
 
(374,359
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
Other assets
 
110,316

 
(588,355
)
 
120,300

Due to related parties
 
20,375

 
140,238

 
226,736

Accounts payable and other accrued expenses
 
297,385

 
2,277,216

 
1,167,872

Other liabilities
 
(11,998
)
 
(15,914
)
 
42,825

Net cash provided by operating activities
 
297,368

 
5,241,165

 
4,281,141

Investing Activities:
 
 
 
 
 
 
Development property costs, including land and capital expenditures
 
(53,371,715
)
 
(142,976,241
)
 
(203,727,989
)
Collection of advance to municipality utility district
 

 

 
1,313,975

Capital expenditures on real estate held for sale
 
(91,758
)
 

 
(181,951
)
Proceeds from sale of properties
 
109,996,325

 
222,961,667

 
14,986,333

Proceeds from sale of easement
 

 
675,000

 

Changes in restricted cash
 
(124,110
)
 
1,097,070

 
(311,233
)
Net cash provided by (used in) investing activities
 
56,408,742

 
81,757,496

 
(187,920,865
)
Financing Activities:
 
 
 
 
 
 
Subscriptions received for common stock through public offering
 

 

 
65,396,326

Stock issuance and offering costs
 

 

 
(9,587,242
)
Redemptions of common stock
 

 

 
(767,390
)
Cash distributions paid on common stock
 

 
(67,578,518
)
 

Proceeds from mortgage and construction notes payable
 
53,606,891

 
125,967,686

 
173,864,602

Payments of mortgage and construction notes payable
 
(51,205,315
)
 
(111,319,670
)
 
(36,663,212
)
Payment of loan costs
 

 
(480,876
)
 
(2,478,530
)
Purchase of interest rate caps
 

 
(72,200
)
 
(126,780
)
Purchase of non-controlling interest
 

 

 
(5,525,825
)
Advance from affiliate of noncontrolling interest
 
418,522

 
15,000

 
461,000

Repayment of advance from affiliate of non-controlling interest
 
(15,000
)
 
(1,500,000
)
 
(1,164,012
)
Contributions from noncontrolling interests
 

 
1,942,204

 
14,244,367

Distributions to noncontrolling interests
 
(27,107,808
)
 
(62,647,550
)
 
(2,149,737
)
Net cash (used in) provided by financing activities
 
(24,302,710
)
 
(115,673,924
)
 
195,503,567

Net Increase (Decrease) in Cash and Cash Equivalents
 
32,403,400

 
(28,675,263
)
 
11,863,843

Cash and Cash Equivalents at Beginning of Year
 
19,016,194

 
47,691,457

 
35,827,614

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

 
$
19,016,194

 
$
47,691,457

See accompanying notes to consolidated financial statements.

52


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Going Concern Basis)


 
 
Seven Months Ended July 31,
 
December 31,
 
 
2016
 
2015
 
2014
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
 
Cash paid for interest, net of amounts capitalized of approximately $1.2 million, $3.0 million and $3.5 million, respectively
 
$
3,638,419

 
$
4,580,978

 
$
1,298,571

Cash paid for income tax
 
$
1,333,084

 
$
412,900

 
$

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

 
$
18,265,802

 
$
23,768,886

Loan costs
 
$

 
$

 
$
1,193

Loan costs amortization capitalized on development properties
 
$
233,707

 
$
808,735

 
$
1,063,153

Noncontrolling interests non-cash contributions
 
$

 
$

 
$
500,000

Noncontrolling interests construction advance
 
$

 
$

 
$
703,012

Stock distributions declared (at par)
 
$

 
$

 
$
11,874

See accompanying notes to consolidated financial statements.


53


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 



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. From October 20, 2009 through April 11, 2014, the Company received aggregate offering proceeds of approximately $208.3 million from its initial and follow-on offering (the “Offerings”).
On August 4, 2016, the Company's stockholders approved a plan of liquidation and dissolution ("Plan of Dissolution") authorizing the Company to undertake an orderly liquidation. In an orderly liquidation, the Company will sell of all of its remaining assets, pay all of its known liabilities, provide for the payment of its unknown or contingent liabilities, distribute its remaining cash to its stockholders as liquidating distributions, wind-up its operations and dissolve the Company in accordance with Maryland law. As a result of the approval of the Plan of Dissolution by the stockholders in August 2016, the Company adopted the liquidation basis of accounting ("Liquidation Basis of Accounting") as described in Note 4. "Net Assets in Liquidation."
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 December 31, 2016, the Company owned interests in seven Class A multifamily properties, all of which were operational and as to which development was substantially complete. The Company had a total of 1,960 completed apartment units as of December 31, 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 approved by the stockholders on August 4, 2016, 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 approved 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, the Company's 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 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.



54


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


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 year ended December 31, 2016, are presented using two different presentations. The Company adopted the Liquidation Basis of Accounting 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) reflects 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 years ended December 31, 2015 and 2014 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 of Accounting (Post Plan of Dissolution) – Effective with the adoption of the Liquidation Basis of Accounting, on August 1, 2016 assets were adjusted to their estimated liquidation value, which represents the estimated gross 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 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 5, "Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation" for further discussion. Actual costs incurred but unpaid as of December 31, 2016 are included in accrued development costs, accounts payable and other accrued expenses, due to related parties and other liabilities on the Consolidated Statement of Net Assets.
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 Interests – Liquidation Basis of Accounting (Post Plan of Dissolution) – In liquidation, the presentation for joint ventures historically consolidated under going concern accounting is 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 are 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.
Consolidation and Variable Interest Entities (Pre Plan of Dissolution) The accompanying consolidated financial statements for period prior to the adoption of the Liquidation Basis of Accounting include the accounts of the Company and its subsidiaries over which it had control. All intercompany accounts were eliminated in consolidation. In accordance with the guidance for the consolidation of a variable interest entity (“VIE”), the Company analyzed its variable interests, including loans, leases, guarantees, and equity investments, to determine if the entity in which it had a variable interest was a VIE. The Company’s analysis included both quantitative and qualitative reviews. The Company based 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 used its quantitative and qualitative analyses to determine if it was the primary beneficiary of the VIE, and if such determination was made, it included the accounts of the VIE in its consolidated financial statements.
Real Estate Under Development – Prior to the adoption of the Liquidation Basis of Accounting, the Company recorded acquisition and development costs of properties under development at cost, including acquisition fees and expenses incurred. The cost of real estate under development included direct and indirect costs of development, including interest and miscellaneous costs incurred during the development period until the project was substantially complete and available for occupancy.

55


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


3.
Summary of Significant Accounting Policies (continued)
In addition, during active development, all operating expenses related to the project, including property expenses such as real estate taxes, were capitalized rather than expensed and incidental revenue was recorded as a reduction of capitalized project (i.e., construction) costs. Preleasing costs were expensed as incurred. Assets were placed into service once certificates of occupancy were issued.
Capitalized Interest – Prior to the adoption of the Liquidation Basis of Accounting, the Company capitalized interest and the amortization of loan costs as a cost of development using the weighted average interest rate of the Company’s total outstanding indebtedness and based on its weighted average expenditures for its development properties for the period. Capitalization of interest for a particular development project began when expenses related to the project had been made, activities necessary to get the project ready for its intended use were in progress and when interest costs had been incurred. Capitalization of interest ceased when the project was substantially complete and ready for occupancy. During the seven months ended July 31, 2016, and the years ended December 31, 2015 and 2014, the Company incurred interest expense and loan cost amortization of approximately $5.7 million, $8.9 million and $5.5 million, respectively, of which $1.5 million, $3.8 million and $4.0 million, respectively, was capitalized according to this policy.
Real Estate – Prior to the adoption of the Liquidation Basis of Accounting, buildings and improvements were depreciated on the straight-line method over their estimated useful lives, which generally were 39 years and 15 years, respectively. Furniture, fixtures and equipment were depreciated on the straight-line method over their estimated useful lives, which generally were three to five years.
Expenditures for maintenance and repairs were charged to operations as incurred. Significant renovations and replacements, which improved or extended the life of the asset, were capitalized.
Real Estate Held For Sale – Prior to the adoption of the Liquidation Basis of Accounting, the Company presented the assets of any properties which qualified as held for sale separately in the consolidated balance sheet. In addition, the results of operations for those properties and any properties which had been sold that met the definition of discontinued operations were presented as such in the Company’s consolidated statements of operations. Held for sale and discontinued operations classifications were provided in prior periods presented. Real estate assets held for sale were measured at the lower of the carrying amount or the fair value less costs to sell. Subsequent to classification of an asset as held for sale, no further depreciation or amortization relating to the asset were recorded. The Company classified assets held for sale as discontinued operations if the disposal represented a strategic shift that had a major effect on the Company’s operations and financial results. For those assets qualifying for classification as discontinued operations, the specific components of net income (loss) were presented as discontinued operations including operating income (loss) and interest expense directly attributable to the property held for sale, net. In addition, the net gain or loss (including any impairment loss) on the disposal of assets held for sale that qualified as discontinued operations were presented as discontinued operations when recognized.
Derivative Instruments – The Company currently holds one interest rate cap. Prior to the adoption of Liquidation Basis of Accounting, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 815, “Derivatives and Hedging” (“ASC 815”), the Company recorded all derivatives on the balance sheet at fair value. The Company did not use derivatives for speculative purposes but instead used derivatives to manage its exposure to increases in interest rates. Changes in the fair value of derivatives not designated in hedging relationships were recorded directly in fair value adjustments and other income (expense) in the accompanying consolidated statements of operations. For all interest rate caps held during the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014, management determined not to elect hedge accounting for financial reporting purposes.
Other Comprehensive Income (Loss) Going Concern Basis (Pre Plan of Dissolution) – Prior to the adoption of the Liquidation Basis of Accounting, 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 consolidated financial statements.
Impairment of Real Estate Assets – Prior to the adoption of the Liquidation Basis of Accounting, real estate assets were reviewed on an ongoing basis to determine whether there were any indicators, including property operating performance and general market conditions, that the value of the real estate properties had been impaired. To assess if a property value was potentially impaired, management compared the estimated current and projected undiscounted cash flows, including estimated net sales proceeds, of the property over its remaining useful life to the net carrying value of the property. Such cash flow projections considered factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition, and other factors. In the event that the carrying value exceeded the undiscounted operating

56


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


3.
Summary of Significant Accounting Policies (continued)
cash flows, the Company would recognize an impairment provision to adjust the carrying value of the asset to the estimated fair value of the property. The Company has never recorded an impairment of real estate.
Cash and Cash Equivalents – Cash and cash equivalents consist of cash on hand and highly liquid investments purchased with original maturities of three months or less.
As of December 31, 2016, the Company’s cash deposits exceeded federally insured amounts. However, the Company continues to monitor the third-party depository institutions that hold the Company’s cash, primarily with the goal of safety of principal. The Company attempts to limit cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on cash.
Restricted Cash – Restricted cash is generally comprised of resident security deposits for the Company’s operational multifamily properties located in certain states, and certain escrow deposits for real estate taxes and property insurance.
Rental Income from Operating Leases – Prior to the adoption of the Liquidation Basis of Accounting, rental income related to leases was recognized on an accrual basis when due from residents, on a monthly basis. Rental revenues for leases with uneven payments were recognized on a straight-line basis over the term of the lease.
Acquisition Fees and Expenses – Prior to the adoption of the Liquidation Basis of Accounting, acquisition fees and expenses, including investment services fees and expenses, and closing costs in connection with purchase of the property, associated with transactions deemed to be business combinations, were expensed as incurred. Acquisition fees and expenses associated with making loans and with transactions deemed to be an asset purchase were capitalized. The Company incurred approximately $0.1 million, $1.1 million and $3.5 million in acquisition fees and expenses during the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014, respectively, including approximately $0.1 million, $1.1 million and $3.4 million, respectively, which have been capitalized as a part of the costs of the properties under development.
Loan Costs – Prior to the adoption of the Liquidation Basis of Accounting, financing costs paid in connection with obtaining debt were deferred and amortized over the estimated life of the debt using the effective interest rate method. As of December 31, 2015, accumulated amortization of loan costs was approximately $2.5 million.
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. Under the Liquidation Basis of Accounting, the Company is required to estimate all costs and income that it expects to incur and earn through the end of the liquidation, including the estimated amount of cash it will collect on the disposal of its assets and estimated costs incurred to dispose of assets. 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 balance sheet. These reclassifications had no effect on previously reported net income (loss) or equity. See Note 9. “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 not subject to federal corporate income taxes on distributed taxable income 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 its income and/or property. As of December 31, 2016, the Company had state net operating carryforwards of approximately $9.9 million which will begin to expire in 2030. The Company analyzed its tax positions and determined that it has not taken any uncertain tax positions. The tax years 2013 through 2016 remain subject to examination by taxing authorities.
Net Income (Loss) per Share – Net income (loss) per share was calculated based upon the weighted average number of shares of common stock outstanding. For purposes of determining the weighted average number of shares of common stock outstanding, stock distributions are treated as if they were issued and outstanding as of the beginning of each period presented. The Company suspended its stock redemption plan effective September 10, 2014 and declared no stock distributions after October 1, 2014.

57


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


3.
Summary of Significant Accounting Policies (continued)
Segment Information – Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company determined that it operates in one business segment, real estate ownership. Accordingly, the Company did not report more than one segment.
Redemptions – Under the Company’s stock redemption plan, a stockholder’s shares were deemed to have been redeemed as of the date that the Company accepted the stockholder’s request for redemption. From and after such date, the stockholder by virtue of such redemption was no longer entitled to any rights of a stockholder in the Company. Shares redeemed were retired and not available for reissue. The Company suspended its stock redemption plan effective September 10, 2014.
Fair Value Measurements – GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability, which are typically based on the Company’s own assumptions, as there is little, if any, related market activity.
When market data inputs are unobservable, the Company utilizes inputs that it believes reflect the Company’s best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
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 joint ventures were VIEs or whether the Company was the primary beneficiary for each of its joint ventures.
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 retrospectively adjusted the presentation of loan costs for all periods presented prior to the adoption of Liquidation Basis of Accounting.


58


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


3.
Summary of Significant Accounting Policies (continued)
The following table provides additional details by financial statement line item of the adjusted presentation in the Company’s 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.
Net Assets in Liquidation
The Company adopted Liquidation Basis of Accounting effective August 1, 2016 upon approval by the Company's stockholders of the Company's Plan of Dissolution. The following is a reconciliation of Stockholders' Equity under the going concern basis of accounting to net assets in liquidation under the Liquidation Basis of Accounting as of August 1, 2016:
Stockholders' Equity as of July 31, 2016
 
$
135,864,565

Increase due to estimated liquidation 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 noncontrolling 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

As of December 31, 2016, net assets in liquidation were $115.0 million. Net assets in liquidation decreased by approximately $100.3 million during the period August 1, 2016 through December 31, 2016. The primary reason for the decline in net assets in liquidation was due to liquidating distributions to stockholders declared and paid in August 2016 and December 2016 totaling approximately $104.7 million, or $4.65 per common share.
The net assets in liquidation at December 31, 2016 would result in liquidating distributions of approximately $5.11 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 estimates, and they could change materially based on the timing of the property sales, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows.

5.
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:

59


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


5.
Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation (continued)
Rental income from operating leases
 
$
22,182,874

Property operating expenses
 
(9,208,132
)
Interest expense
 
(4,217,407
)
Asset management fees due to related parties
 
(1,920,211
)
Property management fees(1)
 
(755,849
)
General and administrative (2)
 
(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
)
FOOTNOTES:
(1)
Includes estimated amounts payable to related parties. Refer to Note 12, "Related Party Arrangements" for additional information.
(2)
Includes amounts estimated to be reimbursed to related parties for operating expenses paid on behalf of the Company.
The change in the liability for estimated costs in excess of estimated receipts during liquidation from August 1, 2016 through December 31, 2016 is as follows:
 
 
August 1, 2016
 
Cash Payments (Receipts)
 
Remeasurement of Assets and Liabilities
 
December 31, 2016
Assets:
 
 
 
 
 
 
 
 
Estimated net inflows from investments in real estate
 
$
7,285,671

 
$
(3,414,502
)
 
$
666,451

 
$
4,537,620

Estimated net outflows from development costs
 
(11,050,590
)
 
6,294,269

 
1,227,871

 
(3,528,450
)
 
 
(3,764,919
)
 
2,879,767

 
1,894,322

 
1,009,170

Liabilities:
 
 
 
 
 
 
 
 
Liquidation transaction costs
 
(15,595,331
)
 
2,311,804

 
5,169,433

 
(8,114,094
)
Corporate expenditures
 
(6,168,666
)
 
2,263,755

 
(297,162
)
 
(4,202,073
)
 
 
(21,763,997
)
 
4,575,559

 
4,872,271

 
(12,316,167
)
Total liability for estimated costs in excess of estimated receipts during liquidation
 
$
(25,528,916
)
 
$
7,455,326

 
$
6,766,593

 
$
(11,306,997
)


60


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


6.
Acquisitions
During the year ended December 31, 2016, the Company did not acquire any properties. During the year ended December 31, 2015, the Company acquired an ownership interest in one consolidated joint venture, which was developing the following property:
Property Name and Location
 
Date
Acquired
 
Operator/Developer
 
Ownership
Interest
(1)
 
Land Contract
Purchase Price
(in millions)
Hampton Roads
Suffolk, VA
(the “Hampton Roads Property”)
 
4/30/2015
 
The Bainbridge Companies, LLC
 
90%
 
$5.2

FOOTNOTE:
(1)
The property was acquired through a joint venture with a third party. In the joint venture arrangement, the Company is the managing member and the joint venture partner or its affiliates manage the development, construction and certain day-to-day operations of the property subject to the Company’s oversight. Generally, distributions of operating cash flow will be distributed pro rata based on each member’s ownership interest. In addition, generally, proceeds from a capital event, such as a sale of the property or refinancing of the debt, will be distributed pro rata until the members of the joint venture receive the return of their invested capital and a specified minimum return thereon, and thereafter, the respective co-venture partner will receive a disproportionately higher share of any remaining proceeds at varying levels based on the Company having received certain minimum threshold returns.

7.
Variable Interest Entities
Prior to the adoption of the Liquidation Basis of Accounting and as of December 31, 2015, the Company had entered into twelve separate joint venture arrangements in connection with the development and ownership of its multifamily properties. In connection therewith, the Company determined that each of the joint ventures in which it had invested was a VIE. As a result of rights held under each of the respective agreements, the Company determined that it was the primary beneficiary of these VIEs and held controlling financial interest in the ventures due to the Company’s authority to direct the activities that most significantly impacted the economic performance of the entities, as well as its obligation to absorb the losses and its right to receive benefits from the ventures that could potentially be significant to the entity.
As a result, as of December 31, 2015 and through July 31, 2016, the transactions and accounts for the remaining twelve joint ventures determined to be VIEs were included in the accompanying consolidated financial statements for periods under the going concern basis. The creditors of the VIEs did not have general recourse to the Company.

8.
Real Estate Assets
As a result of adopting the Liquidation Basis of Accounting in August 2016, as of December 31, 2016, real estate assets were recorded at their estimated liquidation value, which represents the estimated gross amount of cash that the Company will collect on disposal of assets as it carries out its Plan of Dissolution.
    
Prior to adopting Liquidation Basis of Accounting, and after reclassification of the four assets identified for held 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:
 
 
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
)
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 years ended December 31, 2015 and 2014, depreciation expense on the Company’s real estate assets was approximately $5.4 million, $10.4 million and $5.9 million, respectively.

61


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


9.
Real Estate Held for Sale, Dispositions and Discontinued Operations
Liquidation Basis of Accounting
Effective with the Company's adoption of the Plan of Dissolution and adoption of the Liquidation Basis of Accounting on August 1, 2016, as discussed above in Note 3, "Summary of Significant Accounting Policies," all of the Company's real estate assets are considered held for sale.
During the period August 1, 2016 through December 31, 2016, the Company sold its wholly-owned Whitehall Property and the joint ventures owning the Aura Grand, Crescent Gateway and City Walk properties each sold its respective property. In connection with these transactions, the Company received gross sales proceeds of approximately $217.5 million which equaled the combined liquidation value of these four properties as of August 1, 2016. No disposition fee was payable to the Advisor on the sale of these four properties.
Pre Liquidation Basis of Accounting
Effective January 1, 2015, the Company adopted ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)" which impacted the Company's determination of which property disposals qualify as discontinued operations, as well as required disclosures about discontinued operations.
During the seven months ended July 31, 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
)
Operating 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 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.
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 during 2016 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. However, the proposed dispositions of the four properties represented individually significant components. The Company recorded net income (loss) from continuing operations related to the four properties of 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) was attributable to common stockholders.
During the year ended December 31, 2015, the Company sold its Long Point property (for which revenues, expenses and other items were included in income from discontinued operations) and also sold its three additional properties (collectively, the "Crescent Properties"). In connection with these transactions, the Company received aggregate sales proceeds net of closing costs of approximately $223.0 million resulting in aggregate gains, net of tax of approximately $88.6 million, of which approximately $61.2 million (net of tax of $1.2 million) was recorded in income from continuing operations and $27.4 million was recorded in income from discontinued operations in the accompanying consolidated statements of operations. Furthermore, of the aggregate gains, net of tax, of approximately $88.6 million, approximately $37.5 million was allocable to common stockholders. There was no disposition fee payable to the Advisor related to the sales of these four properties.

62


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


9.
Real Estate Held for Sale, Dispositions and Discontinued Operations (continued)
The Company accounted for the revenues and expenses related to the Crescent Properties classified as held for sale as income from continuing operations because the disposition of these three properties 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. However, the dispositions of the Crescent Properties represented individually significant components. The Company recorded net income (loss) from continuing operations related to the Crescent Properties held for sale of approximately $61.7 million (including a gain on sale of real estate of approximately $61.2 million) for the year ended December 31, 2015, of which approximately $23.6 million was allocable to common stockholders.
Discontinued Operations (Prior to Liquidation Basis of Accounting)
As described above, during the year ended December 31, 2015, the Company sold its Long Point property. In addition, during the year ended December 31, 2014, the Company sold the Gwinnett Center, a three building office complex, and received net sales proceeds of approximately $15.0 million, resulting in a gain of approximately $1.2 million, which was included in income from discontinued operations for the year ended December 31, 2014 in the accompanying consolidated statements of operations. There was no disposition fee payable to the Advisor related to the sale of the Gwinnett Center. 
The financial statements reflect the presentation of rental income, interest expense and other categories relating to the Long Point Property and Gwinnett Center from loss from continuing operations to income from discontinued operations for all periods presented in the accompanying consolidated statements of operations. In January 2015 and March 2014, the Company sold the Long Point Property and Gwinnett Center, respectively, and received sales proceeds net of closing costs of approximately $54.4 million and $15.0 million, respectively, resulting in a gain of approximately $27.4 million and $1.2 million, respectively, for financial reporting purposes, which were included in income from discontinued operations for the years ended December 31, 2015 and 2014, respectively, in the accompanying consolidated statements of operations. Of the $27.4 million and $1.2 million in gains recognized on the sale of the Long Point Property and Gwinnett Center, respectively, approximately $13.9 million and $1.2 million, respectively, were allocable to common stockholders.
There were no discontinued operations for the seven months ended July 31, 2016. The following is a summary of income (loss) from discontinued operations for the years ended December 31:
 
 
2015
 
2014
Revenues
 
$
190,068

 
$
5,297,476

Expenses
 
(184,920
)
 
(2,787,177
)
Depreciation and amortization
 

 
(864,865
)
Operating income
 
5,148

 
1,645,434

Fair value adjustments and other income (expense)
 
1

 
(104,333
)
Interest expense, net of amounts capitalized
 
(44,274
)
 
(349,508
)
Loss on extinguishment of debt
 
(818,404
)
 
(32,787
)
Gain on sale of property
 
27,414,197

 
1,219,693

Total other income (expense)
 
26,551,520

 
733,065

Income from discontinued operations
 
$
26,556,668

 
$
2,378,499



63


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016



10.
Indebtedness
The following table provides details of the Company’s indebtedness as of December 31, 2016 and 2015:
Property and Related Loan
 
Outstanding 
Principal
Balance
(in millions)
 
Interest Rate
 
Payment Terms
 
Maturity
Date
 
Total Loan
Capacity
Amount
(in millions)
2016
 
2015(4)
 
Class A Multifamily:
 
 
 
 
 
 
Operating:
 
 
 
 
 
 
 
 
Remington Fairfield Mortgage Construction Loan
 
$
19.7

 
$
19.8

 
LIBOR plus 2.65%, adjusted monthly(1)
 
Monthly principal installments of $20,200 plus interest payments throughout the initial term. If extended, then P&I monthly installments calculated based on a 30-year amortization.
 
9/24/17
(plus an additional 12-month extension)
 
$
21.7

Premier at Spring Town Center Mortgage Construction Loan
 
31.1

 
30.4

 
LIBOR plus 2.25%, adjusted monthly(1)
 
Monthly interest only payments throughout the initial term. If extended, then P&I monthly installments calculated based on a 30-year amortization.
 
6/20/17
(plus an additional 18-month extension)
 
32.1

Oxford Square Property Construction Loan
 
35.2

 
30.0

 
LIBOR plus 2.50%, adjusted monthly(1)
 
Monthly interest only payments through the initial term, then principal and interest monthly installments calculated based on a 30-year amortization.
 
6/26/18
(plus an additional 12-month extension)
 
35.9

Aura at The Rim Property Construction Loan
 
27.7

 
21.6

 
LIBOR plus 2.25%, adjusted monthly(1)
 
Monthly interest only payments through the initial term. If extended, then principal installments of $29,200 plus interest until maturity.
 
4/17/17 
(plus an additional 24-month extension)
 
27.7

Haywood Reserve Construction Loan
 
23.0

 
3.0

 
LIBOR plus 2.15%, adjusted monthly(1)
 
Monthly interest only payments throughout the initial term. If extended, then P&I monthly installments calculated based on a 30-year amortization and an assumed interest rate of 6.0% per annum.
 
4/15/18 
(plus
an additional
18-month
extension)
 
25.0

Aura on Broadway Construction Loan
 
18.1

 
5.4

 
LIBOR plus 2.45%, adjusted monthly(1)
 
Monthly interest only payments through the initial term. If extended, then monthly principal installments of $19,241 plus interest until maturity.
 
12/12/17 
(plus
two additional
12-month
extensions)
 
20.7

Bainbridge 3200 Property Construction Loan
 
24.3

 
4.3

 
LIBOR plus 2%, minimum 3% interest rate adjusted monthly(1)(2)
 
Monthly interest only payments through April 2018; principal due on maturity, including extension periods.
 
4/28/18 
(plus
two additional
12-month
extensions)
 
25.3

Sold Properties:
 
 
 
 
 
 
 
 
 
 
 
 
Whitehall Property Mortgage Loan
 
(3) 
 
28.2

 
(3) 
 
(3) 
 
(3) 
 
(3) 
Aura Castle Hills Property Mortgage Construction Loan
 
(3) 
 
24.4

 
(3) 
 
(3) 
 
(3) 
 
(3) 
Aura Grand Property Mortgage Construction Loan
 
(3) 
 
21.5

 
(3) 
 
(3) 
 
(3) 
 
(3) 
REALM Patterson Place Deed of Trust Construction Loan
 
(3) 
 
26.6

 
(3) 
 
(3) 
 
(3) 
 
(3) 

64


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016

10.
Indebtedness (continued)

Property and Related Loan
 
Outstanding 
Principal
Balance
(in millions)
 
Interest Rate
 
Payment Terms
 
Maturity
Date
 
Total Loan
Capacity
Amount
(in millions)
2016
 
2015(4)
 
City Walk Mortgage Construction Loan
 
(3) 
 
30.4

 
(3) 
 
(3) 
 
(3) 
 
(3) 
Crescent Gateway Property Construction Loan
 
(3) 
 
23.6

 
(3) 
 
(3) 
 
(3) 
 
(3) 
Subtotal
 
$
179.1

 
$
269.2

 
 
 
 
 
 
 
$
188.4

Unamortized Loan Costs
 
(5) 
 
(2.2
)
 
 
 
 
 
 
Total
 
$
179.1

 
$
267.0

 
 
 
 
 
 
 
 
FOOTNOTES:
(1)
As of December 31, 2016, one month LIBOR was 0.77%.
(2)
The joint venture entered into a LIBOR based interest rate cap agreement to hedge against certain increases in the interest rate on this construction loan. See Note 11, “Derivatives.”
(3)
These properties sold during the year ended December 31, 2016. Upon the sale of each property, the Company repaid the corresponding debt.
(4)
As described in Note 3, "Summary of Significant Accounting Policies," on January 1, 2016 the Company adopted ASU 2015-03 which impacted the Company's presentation of loan costs under Going Concern Basis.
(5)
As described in Note 3, "Summary of Significant Accounting Policies," on August 1, 2016 the Company adopted the liquidation basis of accounting which requires the Company to record indebtedness at their contractual amounts.
The Company's real estate properties, which serve as collateral for each of their respective mortgage and construction loans, had a combined liquidation value of approximately $332.0 million as of December 31, 2016.
Maturities of indebtedness for the next five years and thereafter, in aggregate, assuming the terms of the loans are not extended, were as follows as of December 31, 2016:
                    
2017
$
96,616,221

2018
82,519,149

 
$
179,135,370

Mortgage and construction loans are carried at their contractual amounts due as of December 31, 2016 under Liquidation Basis of Accounting. As of December 31, 2015, the Company had outstanding mortgage loans payable of $269.2 million. As of December 31, 2016 and 2015, the estimated fair market value of the Company's debt was approximately $178.3 million and $269.0 million, respectively.

11.
Derivatives
For all interest rate caps, management determined not to elect hedge accounting for financial reporting purposes. Prior to the adoption of the Liquidation Basis of Accounting, changes in the fair value of interest rate caps were recorded in fair value adjustments and other income (expense) in the accompanying consolidated statements of operations.
In March 2014, the Whitehall Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $28.2 million mortgage note secured by the Whitehall Property in connection with the refinancing described in Note 10, “Indebtedness.” The Whitehall Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 3.94% by obtaining a maximum interest rate cap through April 2017. During the year ended December 31, 2016, the Company sold the Whitehall Property and in connection therewith, it repaid the Whitehall Property mortgage loan and terminated the related interest rate cap agreement.
In September 2014, the Spring Town Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $18.5 million mortgage note secured by the Spring Town Property. The Spring Town Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases by obtaining a maximum interest rate cap. Through December 2015 the interest rate cap mitigated risk of future LIBOR above 1.0% and after December

65


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


11.
Derivatives (continued)
2015 through July 2016 the interest rate cap mitigated risk of future LIBOR above 1.9%. This interest rate cap terminated in July 2016.
In April 2015, the Hampton Roads Joint Venture entered into a LIBOR-based interest rate cap agreement to hedge the interest rate on the $25.3 million mortgage note secured by the Hampton Roads Property. The Hampton Roads Property Joint Venture entered into this agreement to mitigate the risk of future LIBOR interest rate increases above 1.0% by obtaining a maximum interest rate cap until March 2017.
Prior to the adoption of the Liquidation Basis of Accounting the fair value of the Company’s interest rate caps was determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each interest rate cap. This analysis reflected the contractual terms of the interest rate caps, including the period to maturity, and used observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although the Company determined that the majority of the inputs used to value its derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate caps utilized Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its interest rate cap positions and determined that the credit valuation adjustments on the overall valuation adjustments were not significant to the overall valuation of its interest rate caps. As a result, the Company determined that its interest rate cap valuation in its entirety was classified in Level 2 of the fair value hierarchy. Determining fair value required management to make certain estimates and judgments.
During the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014, the Company recognized unrealized losses of $0.02 million, $0.08 million and $0.1 million, respectively, in fair value adjustments and other income (expense) of the accompanying consolidated statements of operations due to changes in the fair value of the interest rate caps.

12.
Related Party Arrangements
The Company is externally advised and has no direct employees. Certain directors and officers hold similar positions with CNL Securities Corp., the managing dealer of the offerings and a wholly owned subsidiary of CNL (the “Managing Dealer”), the Advisor and their affiliates. In connection with services provided to the Company, affiliates are entitled to the following fees:
Managing Dealer – The Managing Dealer received selling commissions and marketing support fees of up to 7% and 3%, respectively, of gross offering proceeds for shares sold through the close of the Company's Offerings in April 2014, excluding shares sold pursuant to the Company’s distribution reinvestment plan, all or a portion of which may was paid to participating broker dealers by the Managing Dealer.
 
Advisor – The Advisor and certain affiliates are entitled to receive fees and compensation in connection with the acquisition, management and sale of the Company’s assets, as well as the refinancing of debt obligations of the Company or its subsidiaries. In addition, the Advisor and its affiliates are entitled to reimbursement of actual costs incurred on behalf of the Company in connection with the Company’s organizational, offering, acquisition and operating activities. Pursuant to the advisory agreement, the Advisor receives investment services fees equal to 1.85% of the purchase price of properties (including its proportionate share of properties acquired through joint ventures) for services rendered in connection with the selection, evaluation, structure and purchase of assets. For development properties, the Company pays the investment services fee to the Advisor based upon the estimated budget for the development project. Upon completion of the project, the Company trues up the investment services fee based upon actual amounts spent. In addition, the Advisor is entitled to receive a monthly asset management fee of 0.08334% of the real estate asset value (as defined in the advisory agreement) of the Company’s properties, including its proportionate share of properties owned through joint ventures, as of the end of the preceding month.
The Advisor will also receive a financing coordination fee for services rendered with respect to refinancing of any debt obligations of the Company or its subsidiaries equal to 1.0% of the gross amount of the refinancing.
The Company will pay the Advisor a disposition fee in an amount equal to (i) in the case of the sale of real property, the lesser of (A) one-half of a competitive real estate commission, or (B) 1% of the sales price of such property, and (ii) in

66


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


12.
Related Party Arrangements (continued)
the case of the sale of any asset other than real property or securities, 1% of the sales price of such asset, if the Advisor, its affiliates or related parties provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more assets (including a sale of all of its assets or the sale of it or a portion thereof). The Company will not pay its Advisor a disposition fee in connection with the sale of investments that are securities; however, a disposition fee in the form of a usual and customary brokerage fee may be paid to an affiliate or related party of the Advisor if, such affiliate is properly licensed. No disposition fee was payable on any of the property sales completed in 2014, 2015 or 2016.
Under the advisory agreement and the Company’s articles of incorporation, the Advisor will be entitled to receive certain subordinated incentive fees upon (a) sales of assets and/or (b) a listing (which would also include the receipt by the Company’s stockholders of securities that are approved for trading on a national securities exchange in exchange for shares of the Company’s common stock as a result of a merger, share acquisition or similar transaction). However, if a listing occurs, the Advisor will not be entitled to receive an incentive fee on subsequent sales of assets. The incentive fees are calculated pursuant to formulas set forth in both the advisory agreement and the Company’s articles of incorporation. All incentive fees payable to the Advisor are subordinated to the return to investors of their invested capital plus a 6% cumulative, noncompounded annual return on their invested capital. Upon termination or non-renewal of the advisory agreement by the Advisor for good reason (as defined in the advisory agreement) or by the Company other than for cause (as defined in the advisory agreement), a listing or sale of assets after such termination or non-renewal will entitle the Advisor to receive a prorated portion of the applicable subordinated incentive fee. As a result of adopting Liquidation Basis of Accounting, as of December 31, 2016, the Company had accrued approximately $2.7 million in the liability of estimated costs in excess of estimated receipts during liquidation in the accompanying statement of net assets as an estimate of the subordinated incentive fee payable to the Advisor upon completion of the sale of the Company's remaining seven properties.
In addition, the Advisor or its affiliates may be entitled to receive fees that are usual and customary for comparable services in connection with the financing, development, construction or renovation of a property, subject to approval of the Company’s board of directors, including a majority of its independent directors.
Property Manager – Pursuant to a master property management agreement, the Property Manager may receive property management fees of 4.3% of gross revenues for the Company’s properties managed by the Property Manager and the Property Manager also received a property oversight fee of 0.2% of gross revenues (as defined by the master property management agreement) for oversight services over the entire portfolio of the Company’s properties. During each of the years ended December 31, 2016, 2015 and 2014, the Property Manager received property management fees of approximately $0.1 million.
CNL Capital Markets Corp. – CNL Capital Markets Corp., an affiliate of CNL, received fees for investor set up and annual maintenance for providing certain administrative services to the Company pursuant to a services agreement. These fees are presented in the table below in investor administrative service fees.
 
For the years ended December 31, 2016, 2015 and 2014, the Company incurred the following fees and reimbursable expenses due to related parties, including the managing dealer of the Company’s offerings, which is an affiliate of the Company’s Advisor, its affiliates and other related parties:

67


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


12.
Related Party Arrangements (continued)
 
 
Year End December 31,
 
 
2016
 
2015
 
2014
Selling commissions(1)
 
$

 
$

 
$
4,332,800

Marketing support fees(1)
 

 

 
1,869,583

 
 

 

 
6,202,383

Reimbursable expenses:
 
 
 
 
 
 
Offering costs(1)
 

 

 
3,279,232

Investor administrative service fees(2)
 
135,000

 
135,000

 
135,000

All other operating and acquisition expenses(3)(4)
 
1,209,291

 
1,116,899

 
1,161,441

 
 
1,344,291

 
1,251,899

 
4,575,673

Investment services fees(5)
 
74,434

 
609,370

 
2,623,446

Asset management fees(6)
 
3,211,129

 
3,343,893

 
2,390,738

Property management fees(7)
 
65,150

 
63,376

 
55,682

Financing coordination fee
 

 

 
282,150

 
 
$
4,695,004

 
$
5,268,538

 
$
16,130,072

FOOTNOTES:
(1)
Selling commissions, marketing support fees, and offering costs are included in stock issuance and offering costs in the consolidated statements of equity for each period presented.
(2)
Through the adoption of Liquidation Basis of Accounting, investor administrative service fees of approximately $78.8 thousand, $135.0 thousand and $125.9 thousand are included in general and administrative expenses in the accompanying consolidated statements of operations for the seven months ended July 31, 2016 and years ended December 31, 2015 and 2014, respectively. The remaining investor maintenance fees for the year ended December 31, 2014 are included in stock issuance and offering costs in the accompanying consolidated statement of equity.
(3)
Through the adoption of Liquidation Basis of Accounting, all other operating and acquisition expenses of $0.7 million, $1.1 million and $1.1 million are included in general and administrative expenses for the seven months ended July 31, 2016 and for the years ended December 31, 2015 and 2014, respectively. The remaining operating and acquisition expenses are recorded in acquisition fees and expenses, net of amounts capitalized, for all periods presented in the accompanying consolidated statements of operations.
(4)
Includes $0.05 million, $0.09 million and $0.07 million for reimbursable expenses to the Advisor for services provided to the Company for its executive officers during the years ended December 31, 2016, 2015 and 2014. The reimbursable expenses include components of salaries, benefits and other overhead charges.
(5)
For the seven months ended July 31, 2016 and for the years ended December 31, 2015 and 2014, all of the investment services fees were capitalized as part of the cost of development properties.
(6)
For the seven months ended July 31, 2016 and for the years ended December 31, 2015 and 2014, approximately $2.0 million, $3.3 million and $2.4 million, respectively, of asset management fees were incurred, of which approximately $0.4 million, $1.0 million and $1.0 million, respectively, were capitalized as part of the cost of development properties. Asset management fees, net of amounts capitalized, are included in asset management fees in the accompanying consolidated statements of operations. In addition, asset management fees related to Gwinnett Center and the Long Point Property, included in the amounts above, are included in income (loss) from discontinued operations for the years ended December 31, 2015 and 2014 presented in the accompanying consolidated statements of operations.
(7)
Property management fees included in the amounts above related to the Gwinnett Center and Long Point Property are included in income (loss) from discontinued operations for the years ended December 31, 2015 and 2014 presented in the accompanying consolidated statements of operations.

Amounts due to related parties for fees and reimbursable costs and expenses described above were as follows as of December 31:
 
 
2016
 
2015
Due to Property Manager:
 
 
 
 
Property management fees
 
$
15,049

 
$
16,326

Due to the Advisor and its affiliates:
 
 
 
 
Reimbursable operating expenses
 
1,797,560

 
1,634,462

 
 
$
1,812,609

 
$
1,650,788


68


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


12.
Related Party Arrangements (continued)
The Company incurs operating expenses which, in general, are expenses relating to its administration on an ongoing basis. Pursuant to the Company's advisory agreement, the Advisor will reimburse the Company the amount by which the total operating expenses paid or incurred by the Company exceed, in any four consecutive fiscal quarters (the “Expense Year”), the greater of 2% of average invested assets or 25% of net income (as defined in the advisory agreement) (the “Limitation”), unless a majority of the Company's independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. Operating expenses did not exceed the Limitation for the Expense Years 2016, 2015 and 2014.
Transactions with Other Related Parties – During the year ended December 31, 2013, an executive officer of CNL joined the board of directors of Crescent Communities, LLC, formerly Crescent Resources, LLC (“Crescent”), a joint venture partner of the Company with four of its multifamily development projects, all of which were sold as of December 31, 2016. From August 2014 to August 2016, this executive officer served the Company and the Company’s Advisor in various officer or director roles. In connection with the development of such projects, each consolidated joint venture agreed to pay Crescent or its affiliates development fees based on a percent of the development costs of the applicable projects. During the seven months ended July 31, 2016 and the year ended December 31, 2015, approximately $0.04 million and $0.7 million, respectively, in development fees were incurred and were included as part of the cost of the applicable development projects. There were no fees paid to Crescent or its affiliates for development fees after July 31, 2016.
Additionally, during the years ended December 31, 2016 and 2015, one and three joint ventures, respectively, with which Crescent was a joint venture partner completed the sale of the respective properties held by the joint ventures. In connection therewith, Crescent received a disproportionately higher share of net sales proceeds of approximately $9.1 million and $45.0 million during 2016 and 2015, respectively, which included a return of their invested capital in the joint ventures, in accordance with the respective joint venture agreements based on the Company having received certain minimum threshold returns. We sold the last of the Crescent joint venture properties in December 2016, and Crescent is no longer a joint venture partner of the Company.
In connection with the adoption of the liquidation basis of accounting, the Company accrues costs it expects to incur through the end of the liquidation as a liability for estimated costs in excess of estimated receipts during liquidation. As of December 31, 2016, the Company has accrued estimated future asset management fees of approximately $0.9 million, property management fees of approximately $0.02 million, reimbursement of operating expenses of $0.9 million, and a subordinated incentive fee of approximately $2.7 million.

13.
Stockholders’ Equity
Public Offering – Through the close of the Company’s Offerings on April 11, 2014, the Company had received aggregate offering proceeds of approximately $208.3 million.
Stock Issuance and Offering Costs – Through the close of the Company’s Offerings on April 11, 2014, the Company incurred costs in connection with the offering and issuance of shares, including selling commissions, marketing support fees, filing fees, legal, accounting, printing and due diligence expense reimbursements, which were recorded as stock issuance and offering costs and deducted from stockholders’ equity. In accordance with the Company’s articles of incorporation, the total amount of selling commissions, marketing support fees, and other organizational and offering costs paid by the Company did not exceed 15% of the aggregate gross offering proceeds. Offering costs were funded by the Advisor and subsequently reimbursed by the Company subject to this limitation. For the year ended December 31, 2014, the Company incurred approximately $9.5 million in stock issuance and other offering costs. The Company did not incur any stock issuance and other offering costs during the years ended December 31, 2016 and 2015.
 
Stock Distributions – On June 24, 2010, the Company’s board of directors authorized a daily stock distribution equal to $0.000219178 of a share of common stock on each outstanding share of common stock (which was equal to an annualized distribution rate of 0.08 of a share based on a 365-day calendar year), payable to all common stockholders of record as of the close of business on each day. Distributions pursuant to this policy began on July 1, 2010. Effective October 1, 2012, the Company’s board of directors authorized the declaration of a monthly stock distribution of $0.006666667 of a share of common stock on each outstanding share of common stock (which represented an annualized distribution rate of 0.08 of a share based on a calendar year), payable to all common stockholders of record as of the close of business on the first day of each month and distributed quarterly until the policy was terminated or amended by the board.

69


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


13.
Stockholders’ Equity (continued)
The Company’s board approved the termination of the stock distribution policy effective as of October 1, 2014 because the board believed that additional stock distributions no longer provided an economic benefit, and believed that stock distributions were not in the best interests of its existing stockholders. As a result, the Company did not declare any further stock distributions effective October 1, 2014. During the year ended December 31, 2014, the Company declared 1,187,388 shares of common stock as stock distributions. These distributions of new common shares were not taxable to the recipient stockholders when received.
Special Cash Distributions – In February 2015 and December 2015, the Company’s board of directors declared special cash distributions in the amount of $1.30 and $1.70, respectively, per share of common stock (the “Special Cash Distributions”). The Special Cash Distributions totaling approximately $67.6 million were paid in cash and were funded from the proceeds of refinancings and asset sales, including the 2015 sales of the Long Point Property and the Crescent Properties.
For the year ended December 31, 2015, approximately 6.1%, 47.4% and 46.5% of the cash distributions paid to stockholders were considered taxable as ordinary income, capital gain and return of capital, respectively, for federal income tax purposes. Of the 47.4% treated as capital gain, approximately 6.4% was taxed as 1250 unrecaptured gain. No amounts distributed to stockholders for the year ended December 31, 2015 were required to be or have been treated as return of capital for purposes of calculating the stockholders’ return on their invested capital as described in the Company’s advisory agreement.
No special cash distributions were declared during the seven months ended July 31, 2016.
Liquidating Distributions – Subsequent to the adoption of Liquidation Basis of Accounting, in August 2016 and December 2016, the Company's board of directors declared liquidating distributions in the amount $2.35 and $2.30, respectively, per share of common stock (the "Liquidating Distributions"). The Liquidating Distributions totaling approximately $104.7 million were paid in cash and were funded from the proceeds of assets sales in 2016.
The Liquidating Distributions paid to stockholders were considered liquidating distributions for federal income tax purposes. The liquidating distributions will be applied to reduce a stockholders' basis but not below zero. The amount of distributions in excess of a stockholders' basis will be considered a gain which should be recognized in the year the distribution is received.
Redemption Plan – The Company had adopted a share redemption plan (the “Redemption Plan”) that allowed a stockholder who held shares for at least one year to request that the Company redeem their shares subject to conditions and limitations within the Redemption Plan. During the year ended December 31, 2014, the Company utilized all funds available for redemption requests received under the Redemption Plan, and accepted redemption requests for 40,447 shares of common stock at an average redemption price of $9.90 per share for approximately $0.4 million. On September 15, 2014, the Company’s board approved the suspension of its Redemption Plan, and terminated the distribution reinvestment plan. Outstanding redemption requests of approximately 51,000 shares received in good order prior to September 10, 2014, were placed in the redemption queue. The Company did not accept or otherwise process any additional redemption requests after September 10, 2014. Redemptions were funded with offering proceeds. Shares redeemed were retired and not available for reissue.

14.
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.

15.
Concentration of Credit Risk
As of December 31, 2016, all of the Company’s properties were located in the southeastern and sunbelt regions of the United States, including three properties in Texas.
 

70


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


16.
Income Tax
Post Plan of Dissolution
Effective with the Company's adoption of the Plan of Dissolution and adoption of the Liquidation Basis of Accounting on August 1, 2016, as discussed above in Note 3, "Summary of Significant Accounting Policies," the Company accrued estimated future income taxes expected to be incurred through the end of liquidation. During the period August 1, 2016 through December 31, 2016, the Company incurred income taxes of approximately $0.2 million.
The Company had net operating loss carry-forwards for state income tax purposes of approximately $9.9 million as of December 31, 2016 to offset future taxable income. The net operating loss carry-forwards are set to expire beginning in 2030.
Pre Plan of Dissolution
The provision for income tax expense from continuing operations was approximately $0.15 million, $0.09 million and $0.04 million for the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014, respectively.
For the year ended December 31, 2015, the Company incurred an income tax expense of approximately $1.2 million attributable to the gain on sale of property, which is recorded within gain on sale of real estate, net of tax in the accompanying consolidated statements of operations.
The Company does not have any deferred tax assets or liabilities.
A reconciliation of the income tax (benefit) expense computed at the statutory federal tax rate on income from continuing operations before income taxes and income taxes allocable to non-controlling interests is as follows:
 
 
Seven Months Ended July 31,
 
Year End December 31,
 
 
2016
 
2015
 
2014
Tax (benefit)/expense computed at federal statutory rate
 
$
12,464,758

 
$
(2,106,269
)
 
$
(1,896,968
)
Impact of REIT election
 
(12,464,758
)
 
2,106,269

 
1,896,968

State income tax expense
 
151,217

 
89,192

 
42,696

Income tax expense
 
$
151,217

 
$
89,192

 
$
42,696


17.
Selected Quarterly Financial Data (Unaudited)
The following table presents selected unaudited quarterly financial data for the seven months ended July 31, 2016 and year ended December 31, 2015:
2016 Quarters (Going Concern Basis)
 
March 31
 
June 30
 
July 31 (1)
 
Seven Months
Revenues from continuing operations
 
$
8,688,075

 
$
9,621,726

 
$
2,893,005

 
$
21,202,806

Net loss before gain on sale of real estate
 
$
(1,738,574
)
 
$
(2,865,961
)
 
$
(850,631
)
 
$
(5,455,166
)
Gain on sale of real estate, net of tax
 

 
40,917,543

 

 
40,917,543

Net (loss) income including noncontrolling interests
 
(1,738,574
)
 
38,051,582

 
(850,631
)
 
35,462,377

Net loss (income) from continuing operations attributable to noncontrolling interests
 
134,055

 
(22,214,709
)
 
148,792

 
(21,931,862
)
Net (loss) income attributable to common stockholders
 
$
(1,604,519
)
 
$
15,836,873

 
$
(701,839
)
 
$
13,530,515

Net (loss) income per share of common stock (basic and diluted):
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.07
)
 
$
0.70

 
$
(0.03
)
 
$
0.60

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

 
22,526,171

 
22,526,171

 
22,526,171

FOOTNOTE:
(1)
Represents the one month ended July 31, 2016.


71


CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
 


17.
Selected Quarterly Financial Data (Unaudited) (continued)
2015 Quarters (Going Concern Basis)
 
March 31
 
June 30
 
September 30
 
December 31
 
Year
Revenues from continuing operations
 
$
6,388,375

 
$
7,853,753

 
$
9,975,539

 
$
8,729,414

 
$
32,947,081

Loss from continuing operations
 
$
(2,645,727
)
 
$
(1,128,613
)
 
$
(628,840
)
 
$
(1,703,624
)
 
$
(6,106,804
)
Income from discontinued operations
 
26,065,668

 

 
491,000

 

 
26,556,668

Net income (loss) before gains on sale of real estate and easement
 
23,419,941

 
(1,128,613
)
 
(137,840
)
 
(1,703,624
)
 
20,449,864

Gain on sale of real estate, net of tax
 

 

 
18,158,938

 
43,049,257

 
61,208,195

Gain on sale of easement
 

 
603,400

 

 

 
603,400

Net income (loss) including noncontrolling interests
 
23,419,941

 
(525,213
)
 
18,021,098

 
41,345,633

 
82,261,459

Net loss (income) from continuing operations attributable to noncontrolling interests
 
357,450

 
(99,043
)
 
(11,737,771
)
 
(26,419,979
)
 
(37,899,343
)
Net income from discontinued operations attributable to non-controlling interests
 
(13,459,486
)
 

 

 

 
(13,459,486
)
Net income (loss) attributable to common stockholders
 
$
10,317,905

 
$
(624,256
)
 
$
6,283,327

 
$
14,925,654

 
$
30,902,630

Net (loss) income per share of common stock (basic and diluted):
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.10
)
 
$
(0.03
)
 
$
0.26

 
$
0.66

 
$
0.79

Discontinued operations
 
$
0.56

 
$

 
$
0.02

 
$

 
$
0.58

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

 
22,526,171

 
22,526,171

 
22,526,171

 
22,526,171


18.
Subsequent Events

In February 2017, the Company completed the sale of the Oxford Square property for gross sales proceeds of approximately $65.7 million, which equaled the property's liquidation value as of December 31, 2016. No disposition fee was payable to the Advisor on the sale of the Oxford Square property.

72




Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
 
Item 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 under 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.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on management’s assessment, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control Integrated Framework (2013).
Pursuant to rules established by the Securities and Exchange Commission, this annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Control over Financial Reporting
In connection with the adoption of the Liquidation Basis of Accounting as of August 1, 2016, certain of our internal controls over financial reporting became no longer relevant, primarily relating to asset impairments, and we adopted additional internal controls over financial reporting, primarily with respect to the calculation of our net asset value for liquidation accounting purposes.
 
9B.
Other Information
None.


73




PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our directors and executive officers as of March 10, 2017 were as follows:
 
Name
 
Age
 
Position
Thomas K. Sittema
 
58
 
Chairman of the Board and Director
Stephen P. Elker
 
65
 
Independent Director
James P. Dietz
 
52
 
Independent Director
Stephen H. Mauldin
 
48
 
Chief Executive Officer and President
Tammy J. Tipton
 
56
 
Chief Financial Officer and Treasurer
Scott C. Hall
 
52
 
Senior Vice President of Operations
Holly J. Greer
 
45
 
General Counsel, Senior Vice President and Secretary
Ixchell C. Duarte
 
50
 
Senior Vice President and Chief Accounting Officer
John F. Starr
 
42
 
Chief Portfolio Management Officer
Thomas K. Sittema. Chairman of the Board and Director. Mr. Sittema has served as chairman of the board of directors since August 2016 and served as chief executive officer from September 2014 to August 2016, and president from September 2014 to March 2016. Mr. Sittema has also served as chief executive officer and president of our advisor since September 2014. Mr. Sittema has also served as chief executive officer of CNL Healthcare Properties, Inc. from September 2011 to April 2012 and has served as chief executive officer of its advisor since September 2011. He also has served as chairman of the board of CNL Healthcare Properties II, Inc., a public, non-traded REIT, since November 2015, and as a director since its inception on July 10, 2015 and as chief executive officer of its advisor since its inception on July 9, 2015.  Mr. Sittema has also served as vice chairman of the board of directors and a director of CNL Lifestyle Properties, Inc. since April 2012. He served as chief executive officer of CNL Lifestyle Properties, Inc. from September 2011 to April 2012 and has served as chief executive officer of its advisor since September 2011. He served as chief executive officer and president of Global Income Trust, Inc., another public, non-traded REIT, from September 2014 until its dissolution in December 2015, and served as chief executive officer and president of its advisor, CNL Global Income Advisors, LLC until December 2016. Mr. Sittema has served as chief executive officer of CNL Financial Group, Inc. (January 2011 to present) and as president (August 2013 to present), and previously served as vice president (February 2010 to January 2011). He has also served as chief executive officer and president of CNL Financial Group, LLC, (“CNL”), the Company’s sponsor (the “Sponsor”), since August 2013.  Mr. Sittema also serves as chairman of the board and a director of Corporate Capital Trust, Inc., a non-diversified, closed-end management investment company that has elected to be regulated as a business development company since October 2010. Mr. Sittema has also served as Corporate Capital Trust, Inc.’s chief executive officer since September 1, 2014. Mr. Sittema has served as a trustee and chief executive officer of Corporate Capital Trust II, a non-traded business development company, since August 2014.  Mr. Sittema holds various other offices with other CNL affiliates. Mr. Sittema has served in various roles with Bank of America Corporation and predecessors, including NationsBank, NCNB and affiliate successors (1982 to October 2009).  While at Bank of America Corporation Merrill Lynch, he served as managing director of real estate, gaming, and lodging investment banking. Mr. Sittema joined the real estate investment banking division of Banc of America Securities at its formation in 1994 and initially assisted in the establishment and build-out of the company’s securitization/permanent loan programs. He also assumed a corporate finance role with the responsibility for mergers and acquisitions, or M&A, advisory and equity and debt capital raising for his client base. Throughout his career, Mr. Sittema has led numerous M&A transactions, equity offerings and debt transactions including high grade and high-yield offerings, commercial paper and commercial mortgage-backed security conduit originations and loan syndications. Mr. Sittema is a member, since February 2013, of the board of directors of Crescent Holdings, LLC. Mr. Sittema served as chairman of the Investment Program Association in 2016. Mr. Sittema received his B.A. in business administration from Dordt College, and an M.B.A. with a concentration in finance from Indiana University.
Stephen P. Elker. Independent Director. Mr. Elker has served as an Independent Director and the Audit Committee financial expert since August 2009. Until July 2009, Mr. Elker spent over 36 years with KPMG LLP, the U.S. member firm of KPMG International, beginning in its Washington D.C. office, and then with offices in Rochester, New York and Orlando, Florida. In 1999, Mr. Elker was appointed as managing partner of the Orlando office and served as partner in charge of the Florida business tax practice from 2001 to July 2009. His responsibilities included providing tax consulting and compliance services for clients in industries including real estate, hospitality and consumer markets. Mr. Elker’s experience extends to advising multinational clients, both U.S. and foreign-based, on mergers, acquisitions, divestitures, international taxation, and cross-border real estate transactions.

74




In May 2012, Mr. Elker joined the board of directors of Fiesta Restaurant Group Inc. as an independent director and chairman on the audit committee. Mr. Elker earned his bachelor of science degree in business administration from Georgetown University. Mr. Elker is a certified public accountant.
James P. Dietz. Independent Director. Mr. Dietz has served as an Independent Director since September 1, 2014. He served as an independent director of Global Income Trust, Inc. from November 2009 until its dissolution in December 2015. Mr. Dietz provides CFO services to certain private companies on a contractual basis. During 2016, he was a partner in a national CFO services organization. From November 2014 to January 2016, Mr. Dietz served as a consulting chief financial officer for Integral Health Plan, Inc. Mr. Dietz served as executive vice president, chief financial officer and secretary of Health Insurance Innovations, Inc. (NASDAQ: HIIQ), a developer and administrator of web-based individual health insurance plans and ancillary products from November 2013 to August 2014. Mr. Dietz previously served Health Insurance Innovations as its senior vice president of finance and business development from April to November 2013, and as a consultant during March and April 2013. Mr. Dietz served as president and chief executive officer of NanoScale Corporation, a non-public manufacturer of specialty materials, from May 2012 until December 2012, in connection with that company’s turnaround efforts. Prior to joining NanoScale, Mr. Dietz served as chief financial officer from July 2011 to April 2012, and served as vice president of finance and accounting from May 2010 to July 2011 for Parabel, Inc. (formerly known as PetroAlgae Inc.) (OTCQB:PALG), a provider of technology and solutions that utilize biomass derived from micro-crops. From January 2008 through April 2010, Mr. Dietz served as chief financial officer of companies engaged in start-up or turn-around efforts in the real estate industry, including positions as chief financial officer of U.S. Capital Holdings, LLC, an international private equity investor and developer, from May 2009 to April 2010, vice president of finance and business development of PACT, LLC, a real estate development company, from May 2008 to May 2009, and chief financial officer of American Leisure Group, a real estate investor and timeshare developer, from January 2008 to April 2008. From 1995 until December 2007, Mr. Dietz served as chief financial officer of residential community developer, WCI Communities, Inc. (NYSE: WCI), and various predecessor firms. From 1993 to 1995, Mr. Dietz managed asset-backed financing originations for GTE Leasing Corporation (a subsidiary of GTE, a predecessor to Verizon Communications). He began his professional career with Arthur Andersen & Co where he worked for six years in positions of increasing seniority. Mr. Dietz earned a B.A. in accounting and economics from the University of South Florida in 1986. Mr. Dietz is a certified public accountant.
Stephen H. Mauldin, President and Chief Executive Officer. Mr. Mauldin has served as our president since March 2016 and as chief executive officer since August 2016. Mr. Mauldin has served as vice chairman of the board of directors and director of CNL Healthcare Properties II, Inc., a public, non-traded REIT, since November 2015 and as chief executive officer and president since July 2015. He has served as a manager, chief operating officer and president of its advisor since July 2015. He also has served as president of each of CNL Healthcare Properties, Inc., a public, non‑traded REIT, and its advisor since September 2011, chief executive officer of CNL Healthcare Properties, Inc. (since April 2012) and chief operating officer of each of CNL Healthcare Properties, Inc. (September 2011 to April 2012) and its advisor (September 2011 to present). Mr. Mauldin has also served as president since September 2011 of each of CNL Lifestyle Properties, Inc., a public-non-traded REIT, and its advisor, CNL Lifestyle Advisor Corporation, chief executive officer of CNL Lifestyle Properties, Inc. (since April 2012), and was the chief operating officer of each of CNL Lifestyle Properties, Inc. (September 2011 to April 2012) and its advisor (September 2011 to present).
Prior to joining us, Mr. Mauldin most recently served as a consultant to Crosland, LLC, a privately held real estate development and asset management company headquartered in Charlotte, North Carolina, from March 2011 through August 2011. He previously served as their chief executive officer, president and a member of their board of directors from July 2010 until March 2011. Mr. Mauldin originally joined Crosland, LLC in 2006 and served as its chief financial officer from July 2009 to July 2010 and as president of Crosland’s mixed-use and multi-used development division prior to his appointment as chief financial officer. Prior to joining Crosland, LLC, from 1998 to June 2006, Mr. Mauldin was a co-founder and served as a partner of Crutchfield Capital, LLC, a privately held investment and operating company with a focus on small and medium-sized companies in the southeastern United States. From 1996 to 1998, Mr. Mauldin held various positions in the capital markets group and the office of the chairman of Security Capital Group, Inc., which prior to its sale in 2002, owned controlling interests in 18 public and private real estate operating companies (eight of which were NYSE-listed) with a total market capitalization of over $26 billion. Mr. Mauldin graduated with a B.S. in finance from the University of Tampa and received an M.B.A. with majors in real estate, finance, managerial economics and accounting/information systems from the J.L. Kellogg Graduate School of Management at Northwestern University.
Tammy J. Tipton. Chief Financial Officer and Treasurer. Ms. Tipton has served as our chief financial officer and treasurer since September 2014. She served as chief financial officer and treasurer of Global Income Trust, Inc., another public, non-traded REIT, from September 2014 until its dissolution in December 2015. She has served as chief financial officer, senior vice president and treasurer of CHP II Advisors, LLC, since its inception on July 9, 2015, the advisor to CNL Healthcare Properties II, Inc., a public, non-traded REIT. Ms. Tipton has served as chief financial officer and treasurer of CNL Lifestyle Properties, Inc., a public, non-traded REIT, since May 2015, and has served as chief financial officer since March 2014 and as senior vice president since May 2015 of its advisor. She has served as senior vice president since October 2011 and group financial officer since January 2014 of CNL Financial Group Investment Management, LLC where she oversees the strategic finance, accounting, reporting,

75




budgeting, payroll and purchasing functions for CNL Financial Group, Inc. (“CNL”) and its affiliates.  Ms. Tipton also holds various other offices with other CNL affiliates. She previously served as senior vice president of CNL from 2002 to December 2011. Ms. Tipton has served in various other financial roles since joining CNL in 1987.  These roles include regulatory reporting for 20 public entities and the accounting, reporting and servicing for approximately 30 public and private real estate programs.  Ms. Tipton earned a B. S. in accounting from the University of Central Florida.  She is also a certified public accountant.
Scott C. Hall. Senior Vice President of Operations. Mr. Hall has served as the Company’s senior vice president of operations since December 2012. Mr. Hall served as senior vice president of operations for Global Income Trust, Inc. from December 2012 until its dissolution in December 2015. He also served as senior vice president of its advisor from March 2013 until its dissolution in December 2016. Prior to his appointment as senior vice president of operations, he served from May 2011 to December 2012 as a consultant to the Advisor and to the advisors of other CNL affiliates, including Global Income Trust, Inc., CNL Lifestyle Properties, Inc., CNL Healthcare Properties, Inc., each a public, non-traded REIT, and Corporate Capital Trust, Inc., a public, non-traded business development company. From September 2005 to February 2010, Mr. Hall was senior vice president and led the Florida office of The Pizzuti Companies, a nationally recognized real estate investor and developer based in Columbus, Ohio. He also held various positions with a number of CNL affiliates from May 2002 to September 2005. Previously, from 1995 to 2001, Mr. Hall was an associate at Lake Nona, a 7,000-acre mixed-use real estate development in Orlando, Florida, owned by Tavistock Group, an international private investment company. Mr. Hall earned a B.A. in English from Ohio Wesleyan University, and an M.B.A. with honors from Rollins College.
Holly J. Greer. General Counsel, Senior Vice President and Secretary. Ms. Greer has served as the Company’s general counsel, senior vice president and secretary since August 2011. Ms. Greer has also served as senior vice president and secretary of the Company’s Advisor since August 2011. Ms. Greer served as general counsel, senior vice president and secretary of Global Income Trust, Inc., a public, non-traded REIT from August 2011 until its dissolution in December 2015. She has also served as senior vice president and secretary of its advisor since August 2011. Ms. Greer served as associate general counsel and vice president of CNL Healthcare Properties, Inc., a public, non-traded REIT, from inception in June 2010 until March 2011, and has served as general counsel, senior vice president and secretary since March 2011. Ms. Greer also served as associate general counsel and vice president of its advisor (June 2010 until April 2011), served as senior vice president, legal affairs (April 2011 until November 2013) and has served as senior vice president since November 2013. Ms. Greer also served as general counsel and secretary of CNL Healthcare Properties II, Inc., a public, non-traded REIT from January 2016 to August 2016, and has served as senior vice president since January 2016. Ms. Greer has served as senior vice president and secretary of its advisor since July 2015. Ms. Greer joined CNL Lifestyle Properties, Inc., a public, non-traded REIT, in August 2006, where she initially served as acquisition counsel for its former advisor, CNL Lifestyle Company, LLC, until April 2007. From April 2007 until November 2009, Ms. Greer served as counsel to CNL Lifestyle Properties, Inc. and its former advisor, overseeing real estate and general corporate legal matters. Ms. Greer served as associate general counsel (January 2010 until March 2011) and vice president (December 2009 until March 2011) of CNL Lifestyle Properties, Inc. and served as associate general counsel and vice president of its former advisor from January 2010 until April 2011. Effective March 2011, Ms. Greer has served as general counsel, senior vice president and secretary of CNL Lifestyle Properties, Inc. From April 2011 to November 2013, she served as senior vice president, legal affairs of CNL Lifestyle Advisor Corporation, its current advisor, and effective November 2013 she serves as senior vice president. Prior to joining CNL Lifestyle Properties, Ms. Greer spent seven years in private legal practice, primarily at the law firm of Lowndes, Drosdick, Doster, Kantor & Reed, P.A., in Orlando, Florida. Ms. Greer is licensed to practice law in Florida and is a member of the Florida Bar Association and the Association of Corporate Counsel. She received a B.S. in communications and political science from Florida State University and her J.D. from the University of Florida.
Ixchell C. Duarte. Senior Vice President and Chief Accounting Officer. Ms. Duarte has served as a senior vice president and the Company’s chief accounting officer since June 2012, and has served as a senior vice president of the Company’s Advisor since November 2013. She also served as a senior vice president and chief accounting officer of Global Income Trust, Inc. from June 2012 until its dissolution in December 2015, and has served as senior vice president of its advisor since November 2013. Ms. Duarte has also served as a senior vice president and chief accounting officer of CNL Healthcare Properties, Inc., a public, non-traded REIT, since March 2012, and was previously a vice president from February 2012 to March 2012. She also has served as senior vice president and chief accounting officer of its advisor since November 2013. Ms. Duarte has served as senior vice president and chief accounting officer since March 2012 of CNL Lifestyle Properties, Inc., a public, non-traded REIT, and was previously a vice president from February 2012 to March 2012. She also has served as a senior vice president of its advisor since November 2013. Ms. Duarte has served as chief accounting officer and senior vice president of CNL Healthcare Properties II, Inc., a public, non-traded REIT, since January 2016 and as senior vice president and chief accounting officer of its advisor, CHP II Advisors, LLC, since July 2015. Ms. Duarte served as controller at GE Capital, Franchise Finance, from February 2007 through January 2012 as a result of GE Capital’s acquisition of Trustreet, a publicly traded REIT. Prior to that, Ms. Duarte served as senior vice president and chief accounting officer of Trustreet and served as senior vice president and controller of its predecessor CNL companies (2002 to February 2007). Ms. Duarte also served as senior vice president, chief financial officer, secretary and treasurer of CNL Restaurant Investments, Inc. (2000 to 2002) and as a director of accounting and then vice president and controller of CNL

76




Fund Advisors, Inc. and other CNL affiliates (1995 to 2000). Prior to that, Ms. Duarte served as an audit senior and then as audit manager in the Orlando, Florida office of Coopers & Lybrand where she serviced several CNL entities (1990 to 1995), and as audit staff in the New York office of KPMG (1988 to 1990). She received a B.S. in accounting from the Wharton School of the University of Pennsylvania. Ms. Duarte is a certified public accountant.
John F. Starr. Chief Portfolio Management Officer. Mr. Starr has served as the Company’s chief portfolio management officer since December 2012. Mr. Starr served as chief portfolio management officer of Global Income Trust, Inc. from December 2012 until its dissolution in December 2015. Since 2002, Mr. Starr has held various positions with multiple CNL affiliates. From October 2011 until his appointment as the Company’s chief portfolio management officer, Mr. Starr served as senior vice president of portfolio management at CNL Financial Group Investment Management, LLC responsible for developing and implementing strategies to maximize the financial performance of CNL’s real estate portfolios. He also served as a senior vice president of CNL Private Equity Corp. from December 2010 until his appointment as the chief portfolio management officer. Between June 2009 and December 2010, he served as CNL Private Equity Corp.’s senior vice president of asset management, responsible for the oversight and day-to-day management of all real estate assets from origination to disposition. At CNL Management Corp., Mr. Starr served as senior vice president of asset management, from June 2007 to December 2010. Between January 2004 and February 2005, Mr. Starr served as vice president of real estate portfolio management at Trustreet, and from February 2005 to February 2007, he served as Trustreet’s vice president of special servicing, and as president of a Trustreet affiliate, where he was responsible for the resolution and value optimization of distressed leases and loans. From February 2007 to May 2007, following the sale of Trustreet to GE Capital, he served as GE Capital, Franchise Finance’s vice president of special servicing, before rejoining CNL affiliates in June 2007. Between May 2002 and January 2004, Mr. Starr was assistant vice president of special servicing at CNL Restaurant Properties, Inc. Prior to joining CNL’s affiliates, Mr. Starr served in various positions in the credit products management group at Wachovia Bank, Orlando, Florida, from December 1997 to May 2002. Mr. Starr received a B.S. in business and an M.B.A. from the University of Florida in 1997 and 2007, respectively.
Board Independence
For the year ended December 31, 2016, each of James Dietz and Stephen P. Elker served as independent directors. Although our shares are not listed on the New York Stock Exchange, we apply the exchange’s standards of independence to our own outside directors and for the year ended December 31, 2016, each of Messrs. Elker and Dietz met the definition of “independent” under Section 303A.02 of the New York Stock Exchange listing standards.
Committees of the Board of Directors
The Company has a standing Audit Committee, the members of which are selected by the board of directors each year. During 2016, the Audit Committee was comprised of Stephen P. Elker and James P. Dietz, each of whom was determined to be “independent” under the listing standards of the New York Stock Exchange referenced above. The Audit Committee operates under a written charter adopted by the board. A copy of the Audit Committee charter is posted on the Company’s website at http://CNLGrowthProperties.com/corporate-governance.stml. The Audit Committee assists the board by providing oversight responsibilities relating to:
The integrity of financial reporting;
The independence, qualifications and performance of the Company’s independent auditors;
The systems of internal controls;
The performance of the Company’s internal audit function;
Compliance with management’s audit, accounting and financial reporting policies and procedures; and
Company risk management.
In addition, the Audit Committee engages and is responsible for the compensation and oversight of the Company’s independent auditors and internal auditors. In performing these functions, the Audit Committee meets periodically with the independent auditors, management and internal auditors (including private sessions) to review the results of their work. During the year ended December 31, 2016, the Audit Committee met four times with the Company’s independent auditors, internal auditors and management to discuss the annual and quarterly financial reports prior to filing them with the Commission. The Audit Committee has determined that Mr. Elker, the Chairman of the Audit Committee and an Independent Director, is an “audit committee financial expert” under the rules and regulations of the Commission for purposes of Section 407 of the Sarbanes-Oxley Act of 2002.
Currently, we do not have a nominating committee, and therefore, do not have a nominating committee charter. Our board is of the view that it is not necessary to have a nominating committee at this time because the board is composed of only three members,

77




including two “independent directors” (as defined under the New York Stock Exchange listing standards), and each director is responsible for identifying and recommending qualified board candidates. The board does not have a formal policy regarding diversity. The board considers many factors with regard to each candidate, including judgment, integrity, diversity, prior professional experience, background, the interplay of the candidate’s experience with the experience of other board members, the extent to which the candidate would be desirable as a member of the audit committee, and the candidate’s willingness to devote substantial time and effort to board responsibilities.
Currently, we do not have a compensation committee because we do not have any employees and do not separately compensate our executive officers for their services as officers. At such time, if any, as our shares of common stock are listed on a national securities exchange such as the New York Stock Exchange or the NASDAQ Stock Market, or have employees whom we directly provide compensation, we will form a compensation committee, the members of which will be selected by the full board each year.
Our board has formed a valuation committee comprised of our independent directors who are responsible for the oversight of the determination of the net asset value per share of the Company’s stock. The valuations are based on certain recommendations and methodologies recommended by the Investment Program Association Practice Guideline, a trade association for non-listed direct investment vehicles (the “IPA”), as set forth in IPA Practice Guideline 2013-01 “Valuations of Publicly Registered Non-Listed REITs” (“IPA Practice Guideline”). The board and the valuation committee approve independent third-party firms to provide real estate appraisals or valuation services.
With the completion of our Offering in April 2014, our Advisor began to explore possible liquidity options for us. Our board formed a special committee comprised of our independent directors. In 2016, the Company continued its liquidation event process and obtained stockholder approval of the Plan of Dissolution on August 4, 2016. Along with our leasing and management partners, we continue to actively manage our remaining communities and our Company to optimize performance and maximize value. Although the Company is not obligated to enter into any particular liquidity transaction, we anticipate it will take between 12 to 24 months from the stockholders’ approval of the plan of dissolution to complete liquidation and wind-up the Company. However, there is no specific date by which a final liquidity event must occur, and there is no assurance a transaction will occur in the near term, or that the process will result in complete stockholder liquidity.
Corporate Governance
The board has adopted corporate governance policies and procedures that the board believes are in the best interest of the Company and its stockholders, as well as, compliant with the Sarbanes-Oxley Act of 2002 and the Commission’s rules and regulations. In particular
The majority of the Board are Independent Directors and all of the members of the Audit Committee are Independent Directors.
The board has adopted a charter for the Audit Committee. One member of the Audit Committee is an “audit committee financial expert” under Commission rules.
The Audit Committee hires, determines compensation of, and decides the scope of services performed by the Company’s independent auditors.
The Company has adopted a Code of Business Conduct that applies to all directors and officers of the Company, as well as, all directors, officers and employees of the Company’s Advisor. The Code of Business Conduct sets forth the basic principles to guide their day-to-day activities.
The Company has adopted a Whistleblower Policy that applies to the Company and all employees of the Company’s Advisor, and establishes procedures for the anonymous submission of employee complaints or concerns regarding financial statement disclosures, accounting, internal accounting controls or auditing matters.
The Company’s Code of Business Conduct and Whistleblower Policy are available on the Company’s website at http://CNLGrowthProperties.com/corporate-governance.stml.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10% of our equity securities that are registered under the Exchange Act, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Commission (such persons hereinafter referred to as “Reporting Persons”). Reporting Persons are required by the Commission’s regulations to furnish us with copies of all Forms 3, 4 and 5 that they file.

78




We do not have any stockholders who own more than 10% of our outstanding common stock. We believe, based upon a review of our records and reports filed with the Commission with respect to 2016 that our Reporting Persons complied with all Section 16(a) filing requirements during 2016.

Item 11.     
EXECUTIVE COMPENSATION

Board of Directors Report on Compensation
The following report of the Board does not constitute “soliciting material” and should not be deemed “filed” with the Commission or incorporated by reference into any other filing the Company makes under the Securities Act or the Exchange Act except to the extent the Company specifically incorporates this report by reference therein.
The Board reviewed and discussed with management the Compensation Discussion and Analysis set forth below in this Proxy Statement (“CD&A”). Based on the board of director's review of the CD&A and the board of director's discussions of the CD&A with management, the board of director approved including the CD&A in this proxy statement, and the Company’s 2016 Annual Report on Form 10-K for filing with the Commission.
The Board of Directors:
Thomas K. Sittema
Stephen P. Elker
James P. Dietz
Compensation Discussion and Analysis
The Company has no employees and all of its executive officers are officers of the Advisor and/or one or more of the Advisor’s affiliates and are compensated by those entities, in part, for their service rendered to the Company. The Company does not separately compensate its executive officers for their service as officers. The Company did not pay any annual salary or bonus or long-term compensation to its executive officers for services rendered in all capacities to the Company during the year ended December 31, 2016. See “Certain Relationships and Related Transactions” for a description of the fees paid and expenses reimbursed to the Advisor and its affiliates.
If the Company determines to compensate named executive officers in the future, the Board will review all forms of compensation and approve all stock option grants, warrants, stock appreciation rights and other current or deferred compensation payable with respect to the current or future value of the Company’s shares.
Compensation of Independent Directors
During the year ended December 31, 2016, each Independent Director received a $30,000 annual fee for services, as well as, $2,000 per Board meeting attended whether they participated by telephone or in person. Each Independent Director serving on the Audit Committee, Valuation Committee or special committee received $2,000 per committee meeting attended whether they participated by telephone or in person. The Audit Committee Chair received an annual retainer of $10,000 in addition to Audit Committee meeting fees and fees for meeting with the independent accountants as a representative of the Audit Committee. No additional compensation is paid for attending annual stockholder meetings.
The following table sets forth the compensation earned or paid to the Company’s directors during the year ended December 31, 2016 for their service on the Board, the Audit Committee and the Valuation Committee (where applicable):
 
Name
 
Fees Earned or
Paid in Cash
James M. Seneff, Jr.(1)
 
None

Stephen P. Elker
 
$
68,000

James P. Dietz
 
$
58,000

Thomas K. Sittema
 
None

FOOTNOTE:
(1)
Mr. Seneff did not stand for reelection at the annual meeting on August 4, 2016 and thus, his term as director ended on that date.

79




Currently, we do not have a compensation committee because we do not have any employees and do not separately compensate our executive officers for their services as officers. For additional information, see Item 10. “Directors, Executive Officers and Corporate Governance – Committees of the Board of Directors.”
 
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of March 10, 2017, the number and percentage of outstanding shares beneficially owned by all persons known by the Company to own beneficially more than 5% of its common stock, by each director and nominee, by each executive officer and by all executive officers and directors as a group, based upon information furnished by such stockholders, directors and officers. Fractional shares are rounded to the nearest whole number. Except as noted below, the address of the named officers and directors is CNL Center at City Commons, 450 South Orange Avenue, Orlando, Florida 32801.
Name of Beneficial Owner
 
Number of Shares
Beneficially Owned
 
Percent
of Shares
James M. Seneff, Jr. (1)
 
12,495

 

Stephen P. Elker
 

 

James P. Dietz
 

 

Thomas K. Sittema
 
38,311

 
*

Stephen H. Mauldin
 

 

Tammy J. Tipton
 

 

Holly J. Greer
 
604

 

Ixchell C. Duarte
 

 

Scott C. Hall
 
555

 

John F. Starr
 
785

 

All directors and executive officers as a group (10 persons)
 
52,750

 


FOOTNOTES:
*
 Represents less than 1% of the outstanding shares of the Company’s common stock.
(1)
This number represents shares attributed to Mr. Seneff as a result of his control of the Advisor and CNL Financial Group, LLC. The Advisor is a subsidiary of an affiliate of CNL Financial Group, LLC. Mr. Seneff beneficially owns the Advisor through his ownership of CNL Financial Group, LLC.

Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company is externally advised and has no direct employees. Mr. Thomas K. Sittema (Chairman of the Board), Mr. James M. Seneff (former Chairman of the Board) and/or certain of the Company’s executive officers hold similar positions with the Managing Dealer of the Company’s public offerings of its common stock and a wholly owned subsidiary of CNL, the Advisor and their affiliates. In connection with services provided to the Company, affiliates are entitled to certain fees as described in Note 12. “Related Party Arrangements” in Item 8. “Financial Statements and Supplementary Data.”
During 2016, the Company’s total operating expenses incurred represented approximately 1.8% of Average Invested Assets, and 1001.5% of Net Loss, as each term is defined in the Charter.
For additional information on director independence, refer to Item 10, "Directors, Executive Officers and Corporate Governance – Board Independence."
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Auditor Fees
PricewaterhouseCoopers LLP serves as our principal accounting firm and audited our consolidated financial statements for the years ended December 31, 2016 and 2015. The following table sets forth the aggregate fees billed by PricewaterhouseCoopers LLP for 2016 and 2015 for audit and non-audit services (as well as, all “out-of-pocket” costs incurred in connection with these services) and are categorized as Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees. The nature of the services provided in each such category is described following the table.

80




 
 
2016
 
2015
Audit fees
 
$
687,500

 
$
532,900

Audit-related fees
 

 

Tax fees
 
270,774

 
149,180

All other fees
 

 

Total fees
 
$
958,274

 
$
682,080

Audit Fees - Consists of professional services rendered in connection with the annual audit of our consolidated financial statements included in our annual reports on Form 10-K and quarterly reviews of our interim financial statements included in our quarterly reports on Form 10-Q. Audit fees also include fees for services performed by PricewaterhouseCoopers that are closely related to the audit and in many cases could only be provided by our independent auditors. Such services include consents related to our registration statements, assistance with and review of other documents filed with the Commission and accounting advice on completed transactions.
Audit-Related Fees - Consists of services related to audits of properties acquired, due diligence services related to contemplated property acquisitions and accounting consultations.
Tax Fees - Consists of services related to corporate tax compliance, including preparation and/or review of corporate tax returns, review of the tax treatments for certain expenses, tax due diligence relating to acquisitions, VAT services, REIT compliance, safe harbor opinion, review of private letter ruling and earnings and profit review.
All Other Fees - There were no professional services rendered by PricewaterhouseCoopers LLP that would be classified as other fees during the years ended December 31, 2016 and 2015.
Pre-Approval of Audit and Non-Audit Services
Under our audit committee charter, the audit committee must pre-approve all audit and non-audit services provided by the independent auditors in order to assure that the provisions of such services do not impair the auditor’s independence. The policy, as described below and set forth in the audit committee charter sets forth conditions and procedures for such pre-approval of services to be performed by the independent auditor and utilizes both a framework of general pre-approval for certain specified services and specific pre-approval for all other services.
The annual audit services, as well as all audit-related services (assurance and related services that are reasonably related to the performance of the auditor’s review of the financial statements or that are traditionally performed by the independent auditor), requires the specific pre-approval of the audit committee. The audit committee may, however, grant general pre-approval for other audit services, which are those services that only the independent auditor reasonably can provide (such as comfort letters or consents). The audit committee has pre-approved all tax services and may grant general pre-approval for those permissible non-audit services that it has classified as “all other services” because it believes such services are routine and recurring services, and would not impair the independence of the auditor.
The fee amounts for all services to be provided by the independent auditor are established annually by the audit committee, and any proposed service fees exceeding approved levels will require specific pre-approval by the audit committee. Requests to provide services that require specific approval by the audit committee are submitted to the audit committee by the independent auditor, the chief financial officer and the chief executive officer, and must include a joint statement as to whether, in their view, the request is consistent with the Commission’s rules on auditor independence.

81




PART IV
 
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)     List of Documents Filed

(1)
Report of Independent Registered Certified Public Accounting Firm
Consolidated Statement of Net Assets (Liquidation Basis) as of December 31, 2016
Consolidated Balance Sheet (Going Concern Basis) as of December 31, 2015
Consolidated Statement of Changes in Net Assets (Liquidation Basis) from August 1, 2016 through December 31, 2016
Consolidated Statements of Operations (Going Concern Basis) for the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014
Consolidated Statements of Equity (Going Concern Basis) for the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014
Consolidated Statements of Cash Flows (Going Concern Basis) for the seven months ended July 31, 2016 and the years ended December 31, 2015 and 2014
Notes to Consolidated Financial Statements
 
(2)
Index to Financial Statement Schedules
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2016
 
(3)
Index to Exhibits – Reference is made to the Exhibit Index for a list of all exhibits filed as a part of this report.

Item 16.
FORM 10-K SUMMARY
 
None.

82




SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of March, 2017.
 
 
 
 
 
 
 
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)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 
 
 
 
Signature
  
Title
 
Date
 
 
 
/s/    Thomas K. Sittema        
  
Chairman of the Board and Director
 
March 17, 2017
Thomas K. Sittema
  
 
 
 
 
 
 
/s/    Stephen P. Elker        
  
Independent Director
 
March 17, 2017
Stephen P. Elker
  
 
 
 
 
 
 
/s/    James P. Dietz        
  
Independent Director
 
March 17, 2017
James P. Dietz
  
 
 
 
 
 
 
 
 
/s/    Stephen H. Mauldin
  
President and Chief Executive Officer (Principal Executive Officer)
 
March 17, 2017
Stephen H. Mauldin
  
 
 
 
 
 
/s/    Tammy J. Tipton        
  
Chief Financial Officer and Treasurer (Principal Financial Officer)
 
March 17, 2017
Tammy J. Tipton
  
 
 
 
 
 
/s/    Ixchell C. Duarte        
  
Chief Accounting Officer (Principal Accounting Officer)
 
March 17, 2017
Ixchell C. Duarte
  
 
 



83




Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by
Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
As of the date of this report, we have not sent any annual reports or proxy materials to our stockholders. We intend to deliver (i) our annual report to stockholders, prepared pursuant to Rule 14a-3 for the fiscal year ended December 31, 2016 (the “Annual Report”) and (ii) our Definitive Proxy Statement and related proxy materials for our 2017 Annual Meeting (collectively the “Proxy Materials”) to our stockholders subsequent to the filing of this report. We will furnish copies of the Annual Report and the Proxy Materials to the SEC when we deliver such materials to our stockholders.

84




EXHIBIT INDEX
Exhibits:
 
 
3.1
 
Third Articles of Amendment and Restatement. (Previously filed as Exhibit 3.1 to Current Report on Form 8-K/A filed July 23, 2013, and incorporated herein by reference.)
3.2
 
Third Amended and Restated Bylaws. (Previously filed as Exhibit 3.2 to Current Report on Form 8-K/A filed July 23, 2013, and incorporated herein by reference.)
3.2.1
 
First Amendment to the Third Amended and Restated Bylaws. (Previously filed as Exhibit 3.3 to Current Report on Form 8-K filed on December 11, 2013 and incorporated herein by reference.)
4.1
 
Amended and Restated Redemption Plan, adopted effective August 16, 2013, suspended effective October 1, 2014. (Previously filed as Appendix D to Pre-Effective Amendment Three to the Registration on Form S-11 (File No. 333- 184308) filed August 13, 2013, and incorporated herein by reference.)
4.2
 
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request to stockholders issued shares without certificates). (Previously filed as Exhibit 4.5 to the Pre-Effective Amendment Three to the Registration Statement on Form S-11 (File No. 333-156479) filed August 20, 2009, and incorporated herein by reference.)
10.1
 
Second Amended and Restated Limited Partnership Agreement of Global Growth, LP (Previously filed as Exhibit 10.1 to Post-Effective Amendment Four to the Registration Statement on Form S-11 (File No. 333-156479) filed August 19, 2011, and incorporated herein by reference.)
10.2
 
Fourth Amended and Restated Advisory Agreement (Previously filed as Exhibit 10.3 to Post-Effective Amendment 7 to Registration Statement on Form S-11 (File No. 333-156479) filed April 6, 2012, and incorporated herein by reference.)
10.3
 
Second Amended and Restated Master Property Management Agreement (Previously filed as Exhibit 10.4.2 to Post-Effective Amendment 7 to the Registration Statement on Form S-11 (File No. 333-156479) filed April 6, 2012, and incorporated herein by reference.)
10.4
 
Form of Indemnification Agreement between CNL Growth Properties, Inc. and each of James M. Seneff, Jr. and Stephen P. Elker dated December 10, 2012; James P. Dietz dated effective September 1, 2014; Holly J. Greer dated January 10, 2012 and effective as of August 9, 2011; Ixchell Duarte dated June 19, 2012; and for each of Kent Crittenden, Erin M. Gray, Scott C. Hall and John F. Starr dated December 11, 2012. (Previously filed as Exhibit 10.6 to the Annual Report on Form 10-K filed March 21, 2013, and incorporated herein by reference.)
10.5
 
Purchase and Sale Agreement by and between CPG Houston Holdings, L.P., as Seller and Allen Harrison Development, LLC, as Purchaser, dated March 4, 2013, and amendments thereto. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on September 30, 2013 and incorporated herein by reference.)
10.5.1
 
Assignment and Assumption of Purchase and Sale Agreement by and between Allen Harrison Development, LLC and GGT AHC Fairfield TX, LLC, dated September 24, 2013. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on September 30, 2013 and incorporated herein by reference.)
10.6
 
Limited Liability Company Agreement of GGT AHC Fairfield TX, LLC, dated September 24, 2013. (Previously filed as Exhibit 10.3 to Current Report on Form 8-K filed on September 30, 2013 and incorporated herein by reference.)
10.7
 
Construction Loan Agreement between Texas Capital Bank, National Association and GGT AHC Fairfield TX, LLC, dated September 24, 2013. (Previously filed as Exhibit 10.4 to Current Report on Form 8-K filed on September 30, 2013 and incorporated herein by reference.)
10.7.1
 
Promissory Note in the original principal amount of $21,742,500, by GGT AHC Fairfield TX, LLC in favor of Texas Capital Bank, National Association, dated September 24, 2013. (Previously filed as Exhibit 10.5 to Current Report on Form 8-K filed on September 30, 2013 and incorporated herein by reference.)
10.8
 
Real Estate Purchase Agreement by and between Grand-Kuykendahl, Ltd., as Seller and MCRT Investments LLC, as Purchaser, dated March 18, 2013, and amendments thereto. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on December 27, 2013 and incorporated herein by reference.)
10.8.1
 
Assignment and Assumption of Purchase and Sale Agreement by and between MCRT Investments LLC and GGT Spring Town TX, LLC, dated December 20, 2013. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on December 27, 2013 and incorporated herein by reference.)
10.9
 
Limited Liability Company Agreement of GGT Spring Town TX, LLC, dated December 20, 2013. (Previously filed as Exhibit 10.3 to Current Report on Form 8-K filed on December 27, 2013 and incorporated herein by reference.)
10.10
 
Construction Loan Agreement between Synovus Bank and GGT Spring Town TX, LLC, dated December 20, 2013. (Previously filed as Exhibit 10.4 to Current Report on Form 8-K filed on December 27, 2013 and incorporated herein by reference.)

85




10.10.1
 
Promissory Note in the original principal amount of $32,060,000, by GGT Spring Town TX, LLC in favor of Synovus Bank, dated December 20, 2013. (Previously filed as Exhibit 10.5 to Current Report on Form 8-K filed on December 27, 2013 and incorporated herein by reference.)
10.11
 
Purchase and Sale Agreement by and between GDG Overlook LLC, as Seller and Trinsic Acquisition Company, LLC, as Purchaser, dated February 11, 2013, and amendments thereto. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on February 24, 2014 and incorporated herein by reference.)
10.11.1
 
Assignment of Contract by Trinsic Acquisition Company, LLC and GGT TRG Rim TX, LLC, dated February 18, 2014. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on February 24, 2014 and incorporated herein by reference.)
10.12
 
Limited Liability Company Agreement of GGT TRG Rim TX, LLC, dated February 18, 2014. (Previously filed as Exhibit 10.3 to Current Report on Form 8-K filed on February 24, 2014 and incorporated herein by reference.)
10.13
 
Loan Agreement by and between GGT TRG RIM TX, LLC and Regions Bank, dated effective as of April 17, 2014. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on April 23, 2014 and incorporated herein by reference.)
10.13.1
 
Promissory Note in the original principal amount of $27,670,300, by GGT TRG RIM TX, LLC in favor of Regions Bank, dated April 17, 2014. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on April 23, 2014 and incorporated herein by reference.)
10.14
 
Contract for the Purchase of Real Property by and between Kellogg-CCP, LLC, as Seller and Woodfield Acquisitions, LLC, its permitted successors and assigns, as Purchaser, dated May 10, 2013, and amendments thereto. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on March 13, 2014 and incorporated herein by reference.)
10.14.1
 
Assignment of Contract by and between Woodfield Acquisitions, LLC and GGT Oxford Venture MD, LLC, dated March 7, 2014. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on March 13, 2014 and incorporated herein by reference.)
10.15
 
Limited Liability Company Agreement of GGT Oxford Venture MD, LLC, dated March 7, 2014. (Previously filed as Exhibit 10.3 to Current Report on Form 8-K filed on March 13, 2014 and incorporated herein by reference.)
10.16
 
Construction Loan Agreement by and among GGT Oxford Venture MD, LLC and Santander Bank, N.A., dated June 26, 2014. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on July 2, 2014 and incorporated herein by reference.)
10.16.1
 
Promissory Note in the original principal amount of $35,916,862, by GGT Oxford Venture MD, LLC in favor of Santander Bank, N.A., dated June 26, 2014. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on July 2, 2014 and incorporated herein by reference.)
10.17
 
Contract for the Purchase and Sale of Real Property by and between Greenville Mixed-Use Partners, LLC, as the seller, and Daniel Realty Company, LLC, as the buyer, dated April 10, 2014, and amendments thereto. (Previously filed as Exhibit 10.1 to Current Report on Form 8-K filed on October 29, 2014 and incorporated herein by reference.)
10.18
 
Limited Liability Company Agreement of GGT Daniel SC Venture, LLC, dated October 15, 2014. (Previously filed as Exhibit 10.2 to Current Report on Form 8-K filed on October 29, 2014 and incorporated herein by reference.)
10.19
 
Credit Agreement by and between GGT Daniel SC Venture, LLC and Synovus Bank, dated effective as of October 15, 2014. (Previously filed as Exhibit 10.3 to Current Report on Form 8-K filed on October 29, 2014 and incorporated herein by reference.)
10.19.1
 
Promissory Note in the original principal amount of $25,000,000, by GGT Daniel SC Venture, LLC in favor of Synovus Bank, dated October 15, 2014. (Previously filed as Exhibit 10.4 to Current Report on Form 8-K filed on October 29, 2014 and incorporated herein by reference.)
10.20
 
Purchase and Sale Agreement, dated as of June 30, 2016, between GGT Whitehall Venture NC, LLC and BEL Whitehall LLC. (Previously filed as Exhibit 10.3 to Quarterly Report on Form 10-Q filed on August 8, 2016 and incorporated herein by reference.)
10.21
 
Purchase and Sale Agreement, dated as of June 30, 2016, between GGT TRG Grand Lakes TX, LLC and Lloyd Jones Capital LLC. (Previously filed as Exhibit 10.4 to Quarterly Report on Form 10-Q filed on August 8, 2016 and incorporated herein by reference.)
10.22
 
First Amendment to Purchase and Sale Agreement, dated as of July 14, 2016, between GGT TRG Grand Lakes TX, LLC and Lloyd Jones Capital LLC. (Previously filed as Exhibit 10.5 to Quarterly Report on Form 10-Q filed on August 8, 2016 and incorporated herein by reference.)
10.23
 
Purchase and Sale Agreement, dated as of August 26, 2016, between GGT TRG Grand Lakes TX, LLC and Southstar Capital Group I, LLC. (Previously filed as Exhibit 10.1 to Quarterly Report on Form 10-Q filed on November 10, 2016 and incorporated herein by reference.)

86




10.24
 
Purchase and Sale Agreement, dated as of September 15, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Previously filed as Exhibit 10.2 to Quarterly Report on Form 10-Q filed on November 10, 2016 and incorporated herein by reference.)
10.25
 
First Amendment to Purchase and Sale Agreement, dated September 19, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Previously filed as Exhibit 10.3 to Quarterly Report on Form 10-Q filed on November 10, 2016 and incorporated herein by reference.)
10.26
 
Second Amendment to Purchase and Sale Agreement, dated September 30, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Previously filed as Exhibit 10.4 to Quarterly Report on Form 10-Q filed on November 10, 2016 and incorporated herein by reference.)
10.27
 
Third Amendment to Purchase and Sale Agreement, dated November 3, 2016, between GGT LMI City Walk GA, LLC and Bluerock Real Estate, LLC. (Previously filed as Exhibit 10.5 to Quarterly Report on Form 10-Q filed on November 10, 2016 and incorporated herein by reference.)
10.28
 
Purchase and Sale Agreement dated effective October 26, 2016, by and between GGT Crescent Gateway Holdings, LLC and NIC Gateway Orlando, LLC. (Filed herewith.)
21.1
 
Subsidiaries of the Registrant (Filed herewith.)
31.1
 
Certification of the Chief Executive Officer, 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 the Chief Financial Officer, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32
 
Certification of the Chief Executive Officer and Chief Financial Officer, 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. Annual Report on Form 10-K for the fiscal year ended December 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Net Assets, (ii) Consolidated Balance Sheet (iii) Consolidated Statement of Changes in Net Assets, (iv) Consolidated Statements of Operations, (v) Consolidated Statements of Equity, (vi) Consolidated Statements of Cash Flows, and (vii) Notes to Consolidated Financial Statements.



87




CNL GROWTH PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2016 (in thousands)
 
 
 
 
Initial Cost
 
Cost Capitalized Subsequent to Acquisitions
 
Gross Amounts at which Carried at Close of Period(1)
 
 
Property/Location
Encum-Brances
 
Land & Land Improve-ments
 
Building and Building Improve-ments
 
Land & Land Improve-ments
 
Building and Building Improve-ments
 
Land & Land Improve-ments
 
Building and Building Improve-ments
 
Accum-ulated Deprec-iation(2)
 
Net Liquid-ation Adjust-ment(3)
 
Total
 
Date of Constr-uction
 
Date Acquired
 
Life on
which
depreciation
in latest
income
statement is
computed
Operating:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Remington Fairfield Property(4)
Cypress, Texas
$
19,728

 
$
3,233

 
$

 
$
3,720

 
$
22,262

 
$
6,953

 
$
22,262

 
$
(1,462
)
 
$

 
$
27,753

 
2015
 
9/24/2013
 
(5)
Premier at Spring Town Center Property(4)
Spring, Texas
31,115

 
5,186

 

 
5,538

 
30,814

 
10,724

 
30,814

 
(1,537
)
 

 
40,001

 
2015
 
12/20/2013
 
(5)
Oxford Square Property(4)
Hanover, MD
35,186

 
9,920

 

 
253

 
34,902

 
10,173

 
34,902

 
(692
)
 

 
44,383

 
2015
 
3/7/2014
 
(5)
Aura at The Rim Property(4)
San Antonio, TX
27,670

 
5,750

 

 
1,068

 
31,693

 
6,818

 
31,693

 
(481
)
 

 
38,030

 
2016
 
2/18/2014
 
(5)
Haywood Reserve Property(4)
Greenville, SC
23,003

 
4,290

 

 
1,358

 
28,204

 
5,648

 
28,204

 
(92
)
 

 
33,760

 
2016
 
10/15/2014
 
(5)
Broadway Property(4)
Tempe, AZ
18,103

 
3,793

 

 
1,315

 
22,844

 
5,108

 
22,844

 
(79
)
 

 
27,873

 
2016
 
12/12/2014
 
(5)
Bainbridge 3200 Property(4)
Suffolk, VA
24,330

 
5,161

 

 
1,447

 
26,376

 
6,608

 
26,376

 
(115
)
 

 
32,869

 
2016
 
4/30/2015
 
(5)
Net Liquidation Adjustment(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
85,181

 
85,181

 
 
 
 
 
 
 
$
179,135

 
$
37,333

 
$

 
$
14,699

 
$
197,095

 
$
52,032

 
$
197,095

 
$
(4,458
)
 
$
85,181

 
$
329,850

 
 
 
 
 
 





88




The following table presents changes in real estate and accumulated depreciation for the years ended December 31, 2016, 2015 and 2014 (in thousands):
Real Estate
 
Accumulated Depreciation
Balance at December 31, 2013
$
221,586

(6)
 
Balance at December 31, 2013
$
(2,614
)
(6)
2014 Acquisitions
203,996

(6)
 
2014 Depreciation
(4,327
)
(6)
2014 Dispositions
(11,872
)
(6)
 
2014 Dispositions
489

(6)
Balance at December 31, 2014
413,710

(6)
 
Balance at December 31, 2014
(6,452
)
(6)
2015 Acquisitions
119,477

(6)
 
2015 Depreciation
(6,794
)
(6)
2015 Dispositions
(128,061
)
(6)
 
2015 Dispositions
4,311

(6)
Balance at December 31, 2015
405,126

(6)
 
Balance at December 31, 2015
(8,935
)
(6)
2016 Acquisitions
49,157

(6)
 
2016 Depreciation(2)
(3,592
)
(6)
2016 Dispositions
(205,156
)
(6)
 
2016 Dispositions
8,069

(6)
Liquidation Adjustment
80,723

(3)
 
Liquidation Adjustment
4,458

(3)
Balance at December 31, 2016
$
329,850

 
 
Balance at December 31, 2016
$

 

FOOTNOTES:
(1)
The aggregate cost for federal income tax purposes is approximately $248.5 million.
(2)
As a result of adopting the Liquidation Basis of Accounting, depreciation ceased effective August 1, 2016.
(3)
Under the Liquidation Basis of Accounting, real estate holdings are now carried at their estimated liquidation values. As a result, the liquidation adjustment is the adjustment that the Company has made to the carrying value of the properties in order to reflect the liquidation value, which includes furniture, fixtures and equipment and excludes accumulated depreciation. The values presented for each individual property exclude amounts related to furniture, fixtures and equipment.
(4)
These properties are owned through separate joint venture agreements. As these entities are consolidated, the amounts presented include 100% of the costs of the property.
(5)
Prior to adopting the Liquidation Basis of Accounting, land improvements were depreciated over 15 years. Building and building improvements were depreciated over 39 years.
(6)
Excludes amounts related to furniture, fixtures and equipment.






89