Sterling Real Estate Trust - FORM 10-K/A

Attached files

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EX-32.1 - EX-32.1 - Sterling Real Estate Trust	sret-20161231ex32135ed73.htm
EX-31.2 - EX-31.2 - Sterling Real Estate Trust	sret-20161231ex312c51562.htm
EX-31.1 - EX-31.1 - Sterling Real Estate Trust	sret-20161231ex3111df698.htm
EX-23.1 - EX-23.1 - Sterling Real Estate Trust	sret-20161231ex231a57f0d.htm
EX-21.1 - EX-21.1 - Sterling Real Estate Trust	sret-20161231ex211a3a519.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment #1)

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

For the fiscal year ended December 31, 2016

◻	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 000-54295

Sterling Real Estate Trust

d/b/a Sterling Multifamily Trust

(Exact name of registrant as specified in its charter)

North Dakota		90-0115411
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1711 Gold Drive South, Suite 100 Fargo, North Dakota		58103
(Address of principal executive offices)		(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Shares of Beneficial Interest

(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

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ◻ Yes ☑ No

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 ◻ No

Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). ☑ Yes ◻ 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. ☑

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 the definitions 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	◻	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

The aggregate market value of the common shares of beneficial interest held by non-affiliates as of June 30, 2016 was approximately $108,329,193, computed by reference to the price at which the common shares was last sold as of such date. The common shares of beneficial interest are not listed on any national exchange or over-the-counter market or quoted on any national securities market.

Indicate the number of shares outstanding of each of the issuer’s classes of common shares, as of the latest practicable date.

Class		Outstanding at March 9, 2017
Common Shares of Beneficial Interest, $0.01 par value per share		8,115,588

Documents Incorporated by Reference: Portions of Sterling’s Proxy Statement for its 2017 Annual Meeting of Shareholders, which Sterling intends to file with the Securities and Exchange Commission within 120 days after the end of Sterling’s fiscal year ended December 31, 2016, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K to the extent described herein. If Sterling does not file its Proxy Statement on or before 120 days after the end of its 2016 fiscal year, Sterling will file the required information in an amendment to this Annual Report on Form 10-K.

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EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the Annual Report on Form 10-K of Sterling Real Estate Trust (the “Company”) for the year ended December 31, 2016, originally filed on March 15, 2017 (the “Original Filing”). The Company is filing the Amendment solely to amend and restate in its entirety the Report of the Independent Registered Public Accounting Firm included in Item 8 of the Original Filing to correct the omission of the auditor’s electronic signature. Except as described above, no other changes have been made to Item 8 of Part II or are being made to the Annual Report. This Form 10-K/A does not reflect events occurring after the March 15, 2017 filing of the Annual Report nor does it modify or update the disclosure contained in the Annual Report in any way other than described in this Explanatory Note. The Amendment also includes, as did the Annual Report, the certifications of the registrant’s executive officers pursuant to Item 15 of the Annual Report. The Amendment presents Item 8 of Part II, as amended in its entirety.

Sterling Real Estate Trust

FORM 10-K/A (Amendment No. 1)

INDEX

	PAGE
PART II
Item 8. Financial Statements and Supplementary Data	1
PART IV
Item 15. Exhibits and Financial Statement Schedules	1
Report of Independent Registered Public Accounting Firm and Financial Statements	4
Signatures	47
Consent of Independent Registered Public Accounting Firm
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Accounting Officer
Section 906 Certification of Chief Executive Officer and Chief Accounting Officer

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature pages.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The financial statements listed below are included in this report

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2016 and 2015

Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended December 31, 2016, 2015 and 2014

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016, 2015 and 2014

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014

Notes to Consolidated Financial Statements

Real Estate and Accumulated Depreciation (Schedule III)

(a)(3) Exhibits

See the Exhibit Index filed as part of this Annual Report on Form 10-K.

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Sterling Trust Logo

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND 2015,

AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS,

EQUITY AND CASH FLOWS FOR THE YEARS ENDED

DECEMBER 31, 2016, 2015 AND 2014,

INCLUDING NOTES

and

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

	PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	4

CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets	5
Consolidated Statements of Operations and Other Comprehensive Income	6
Consolidated Statements of Shareholders’ Equity	7
Consolidated Statements of Cash Flows	8
Notes to Consolidated Financial Statements	10
Real Estate and Accumulated Depreciation (Schedule III)	39

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Directors

Sterling Real Estate Trust

Fargo, ND

We have audited the accompanying consolidated balance sheets of Sterling Real Estate Trust as of December 31, 2016 and 2015, and the related consolidated statements of operations and other comprehensive income, shareholders' equity and cash flows for each of the years in the three‑year period ended December 31, 2016. Our audits also included the financial statement schedule listed in the accompanying index to the consolidated financial statements. These consolidated financial statements and financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sterling Real Estate Trust as of December 31, 2016 and 2015 and the results of its operations and cash flows for each of the years in the three‑year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ Baker Tilly Virchow Krause, LLP

Chicago, Illinois

March 15, 2017

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

as of December 31, 2016 and 2015


	December 31,		December 31,
	2016		2015
	(in thousands)
ASSETS
Real estate investments	$	622,975	$	594,509
Cash and cash equivalents		12,034		6,461
Restricted deposits and funded reserves		7,213		6,115
Investment in unconsolidated affiliates		3,653		9,022
Due from related party		34		60
Receivables		4,258		3,428
Prepaid expenses		433		844
Notes receivable		600		651
Financing and lease costs, less accumulated amortization of $1,720 in 2016 and $1,356 in 2015		950		1,240
Assets held for sale		2,482		1,721
Lease intangible assets, less accumulated amortization of $10,770 in 2016 and $7,655 in 2015		15,852		18,184
Other assets		29		140

Total Assets	$	670,513	$	642,375

LIABILITIES
Mortgage notes payable, net	$	390,479	$	379,911
Special assessments payable		480		1,659
Dividends payable		5,925		5,319
Due to related party		957		440
Tenant security deposits payable		3,851		3,763
Subordinated debt		175		200
Lease intangible liabilities, less accumulated amortization of $1,122 in 2016 and $803 in 2015		2,075		2,253
Accounts payable - trade		438		819
Retainage payable		288		6
Liabilities related to assets held for sale		125		659
Fair value of interest rate swaps		145		219
Deferred insurance proceeds		102		69
Accrued expenses and other liabilities		6,818		6,631
Total Liabilities		411,858		401,948

COMMITMENTS and CONTINGENCIES - Note 18

SHAREHOLDERS' EQUITY
Noncontrolling interest
Operating partnership		170,138		154,810
Partially owned properties		3,935		4,537
Beneficial interest		84,727		81,299
Accumulated other comprehensive loss		(145)		(219)
Total Shareholders' Equity		258,655		240,427

	$	670,513	$	642,375

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 and 2014


	Year Ended
	December 31,
	2016		2015		2014
	(in thousands, except per share data)
Income from rental operations
Real estate rental income	$	101,885	$	93,330	$	68,706
Tenant reimbursements		6,178		3,852		2,230
		108,063		97,182		70,936
Expenses
Expenses from rental operations
Interest		18,366		17,141		12,958
Depreciation and amortization		22,145		19,574		13,575
Real estate taxes		9,524		7,852		5,320
Property management fees		10,852		9,617		6,511
Utilities		7,672		7,220		5,614
Repairs and maintenance		21,267		17,726		11,721
Insurance		1,375		2,292		1,647
Loss on lease terminations		299		—		58
Loss on impairment of property		—		412		—
		91,500		81,834		57,404
Administration of REIT
Administrative expenses		360		338		281
Advisory fees		2,644		2,401		1,855
Acquisition and disposition expenses		2,081		2,323		4,201
Trustee fees		59		51		56
Legal and accounting		456		534		431
		5,600		5,647		6,824
Total expenses		97,100		87,481		64,228
Income from operations		10,963		9,701		6,708
Other income (expense)
Equity in income of unconsolidated affiliates		1,019		957		1,086
Other income		78		59		376
Gain (Loss) on sale of real estate investments		(316)		470		69
Gain on change in control of real estate investments		550		—		—
Gain on sale of investment in equity method investee		597		—		—
Gain (Loss) on involuntary conversion		(34)		197		398
Gain on disposal of marketable securities		—		—		666
		1,894		1,683		2,595
Net income	$	12,857	$	11,384	$	9,303
Net income (loss) attributable to noncontrolling interest:
Operating Partnership		9,034		7,684		6,715
Partially owned properties		(602)		(586)		9
Net income attributable to Sterling Real Estate Trust	$	4,425	$	4,286	$	2,579

Net income per common share, basic and diluted	$	0.56	$	0.59	$	0.47

Comprehensive income:
Net income	$	12,857	$	11,384	$	9,303
Other comprehensive gain - change in fair value of interest rate swaps		74		53		37
Comprehensive income		12,931		11,437		9,340
Comprehensive income attributable to noncontrolling interest		8,482		7,134		6,750
Comprehensive income attributable to Sterling Real Estate Trust	$	4,449	$	4,303	$	2,590

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014


				Accumulated				Noncontrolling
				Distributions		Total		Interest				Accumulated
	Common	Paid-in		in Excess of		Beneficial		Operating		Partially Owned		Comprehensive
	Shares	Capital		Earnings		Interest		Partnership		Properties		Income (Loss)		Total
	(in thousands)
BALANCE AT DECEMBER 31, 2013	5,454	$	68,051	$	(12,075)	$	55,976	$	141,539	$	—	$	(309)	$	197,206
Shares issued under trustee compensation plan	2		23				23								23
Contribution of assets in exchange for the issuance of noncontrolling interest shares									17,461		—				17,461
Shares/units redeemed	(238)		(3,338)				(3,338)		(1,566)		—				(4,904)
Dividends declared					(4,948)		(4,948)		(12,954)		—				(17,902)
Dividends reinvested - stock dividend	231		3,238				3,238								3,238
Issuance of shares under optional purchase plan	128		1,892				1,892								1,892
UPREIT units converted to REIT common shares	47		700				700		(700)		—				—
Purchase of subsidary ownership from noncontrolling interest			(810)				(810)		101						(709)
Change in fair value of interest rate swaps													37		37
Distributions paid to consolidated real estate entity noncontrolling interests									(11)		—				(11)
Net income					2,579		2,579		6,724		—				9,303
BALANCE AT DECEMBER 31, 2014	5,624	$	69,756	$	(14,444)	$	55,312	$	150,594	$	—	$	(272)	$	205,634
Issuance of common shares	1,677		25,750				25,750								25,750
Shares issued under trustee compensation plan	4		56				56								56
Contribution of assets in exchange for the issuance of noncontrolling interest shares									11,228		—				11,228
Shares/units redeemed	(132)		(1,915)				(1,915)		(633)		—				(2,548)
Dividends declared					(6,885)		(6,885)		(13,976)		—				(20,861)
Dividends reinvested - stock dividend	284		4,160				4,160								4,160
Issuance of shares under optional purchase plan	116		1,783				1,783								1,783
UPREIT units converted to REIT common shares	6		87				87		(87)		—				—
Syndication costs					(1,335)		(1,335)		—		—				(1,335)
Change in fair value of interest rate swaps													53		53
Contributions from consolidated real estate entity noncontrolling interests											5,123		—		5,123
Net income					4,286		4,286		7,684		(586)				11,384
BALANCE AT DECEMBER 31, 2015	7,579	$	99,677	$	(18,378)	$	81,299	$	154,810	$	4,537	$	(219)	$	240,427
Shares issued pursuant to trustee compensation plan	4		60				60								60
Contribution of assets in exchange for the issuance of noncontrolling interest shares									23,468		—				23,468
Shares/units redeemed	(80)		(1,194)				(1,194)		(868)		—				(2,062)
Dividends declared					(7,527)		(7,527)		(15,552)		—				(23,079)
Dividends reinvested - stock dividend	315		4,760				4,760								4,760
Issuance of shares under optional purchase plan	136		2,150				2,150								2,150
UPREIT units converted to REIT common shares	47		754				754		(754)		—				—
Change in fair value of interest rate swaps													74		74
Net income					4,425		4,425		9,034		(602)				12,857
BALANCE AT DECEMBER 31, 2016	8,001	$	106,207	$	(21,480)	$	84,727	$	170,138	$	3,935	$	(145)	$	258,655

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 and 2014


	Year Ended
	December 31,
	2016		2015		2014
	(in thousands)
OPERATING ACTIVITIES
Net income	$	12,857	$	11,384	$	9,303
Adjustments to reconcile net income to net cash from operating activities
(Gain) loss on sale of real estate and non-real estate investments		320		(470)		(69)
(Gain) on change in control of real estate investment		(550)		—		—
(Gain) on sale of joint venture interest		(597)		—		—
Loss on extinguishment of debt		—		—		18
Net gain on investment in marketable securities		—		—		(666)
(Gain) loss on involuntary conversion		34		(197)		(398)
Loss on impairment of property		—		412		—
Loss on lease terminations		299		—		58
Equity in income of unconsolidated affiliates		(1,019)		(957)		(1,086)
Distributions of earnings of unconsolidated affiliates		1,014		900		1,086
Depreciation		18,507		16,466		12,116
Amortization		3,539		3,076		1,434
Amortization of debt issuance costs		694		666		463
Effects on operating cash flows due to changes in
Restricted deposits - tenant security deposits		(120)		(1,169)		(304)
Restricted deposits - real estate tax and insurance escrows		(159)		330		523
Due from related party		26		49		(45)
Receivables		(474)		(475)		199
Prepaid expenses		411		737		(372)
Marketable securities		—		—		666
Other assets		111		(64)		23
Due to related party		179		(2,037)		2,229
Tenant security deposits payable		103		159		244
Accounts payable - trade		(432)		(815)		439
Accrued expenses and other liabilities		(24)		320		2,066
NET CASH PROVIDED BY OPERATING ACTIVITIES		34,719		28,315		27,927
INVESTING ACTIVITIES
Purchase of real estate investment properties		(9,745)		(23,480)		(43,932)
Capital expenditures and tenant improvements		(10,848)		(5,759)		(10,536)
Proceeds from sale of real estate investments		1,409		1,424		625
Proceeds from involuntary conversion		973		529		906
Proceeds from sale of joint venture interest		2,600		—		—
Investment in unconsolidated affiliates		(67)		(37)		(674)
Distributions in excess of earnings received from unconsolidated affiliates		542		152		274
Restricted deposits - replacement reserve escrows		(841)		1,456		(1,367)
Notes receivable issued		—		(51)		(600)
Notes receivable payments received		9		—		—
NET CASH USED IN INVESTING ACTIVITIES		(15,968)		(25,766)		(55,304)
FINANCING ACTIVITIES
Payments for financing, debt issuance and lease costs		(446)		(1,938)		(1,668)
Payments on investment certificates and subordinated debt		(50)		(319)		(64)
Reinvested proceeds from investment certificates		—		—		17
Principal payments on special assessments payable		(1,984)		(117)		(35)
Proceeds from issuance of mortgage notes payable and subordinated debt		20,271		36,385		24,540
Principal payments on mortgage notes payable		(13,345)		(27,160)		(7,898)
Advances on lines of credit		6,669		16,305		29,630
Payments on lines of credit		(6,669)		(32,725)		(13,210)
Proceeds from contributions received from noncontrolling interest - partially owned properties		—		5,123		—
Proceeds from issuance of common shares		—		25,750		—
Proceeds from issuance of shares under optional purchase plan		2,150		1,783		1,892
Shares/units redeemed		(2,062)		(2,548)		(4,904)
Dividends/distributions paid		(17,712)		(15,935)		(14,129)
Payment of syndication costs		—		(1,335)		—
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(13,178)		3,269		14,171
NET CHANGE IN CASH AND CASH EQUIVALENTS		5,573		5,818		(13,206)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		6,461		643		13,849
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,034	$	6,461	$	643

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 and 2014 (Continued)


	Year Ended
	December 31,
	2016		2015		2014
	(in thousands)
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	18,319	$	16,249	$	12,395

SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	4,760	$	4,160	$	3,238
Dividends declared and not paid		1,920		1,762		1,264
UPREIT distributions declared and not paid		4,005		3,557		3,290
UPREIT units converted to REIT common shares		754		87		700
Stock issued pursuant to trustee compensation plan		60		56		23
Acquisition of assets in exchange for the issuance of noncontrolling interest units in UPREIT		23,468		11,228		16,771
Contributed assets in real estate venture		—		—		1,316
Purchase of subsidiary ownership from noncontrolling interest in exchange for the issuance of noncontrolling interest units in UPREIT		—		—		810
Increase in land improvements due to increase in special assessments payable		908		850		172
Unrealized gain on interest rate swaps		74		53		37
Acquisition of assets with new financing		2,662		45,830		67,813
Acquisition of assets through assumption of debt and liabilities		78		2,051		2,636
Capitalized interest and real estate taxes related to construction in progress		136		71		224
Construction in progress with new financing		—		3,424		—
Acquisition of assets with accounts payable		(34)		213		1,066

See Notes to Consolidated Financial Statements

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STERLING REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Note 1 - Organization

Sterling Real Estate Trust (“Sterling”, “the Trust” or “the Company”) is a registered, but unincorporated business trust organized in North Dakota in December 2002. Sterling has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.

Sterling previously established an operating partnership (“Sterling Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, Sterling has management responsibility for all activities of the operating partnership. As of December 31, 2016 and 2015, Sterling owned approximately 32.41% and 33.12%, respectively, of the operating partnership.

NOTE 2 – PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Sterling and all subsidiaries for which we maintain a controlling interest.

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Sterling, Sterling Properties, LLLP, and wholly-owned limited liability companies. All significant intercompany transactions and balances have been eliminated in consolidation.

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both: a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

Principal Business Activity

Sterling currently owns directly and indirectly, 155 properties. The Trust’s 105 residential properties are located in North Dakota, Minnesota, Missouri and Nebraska and are principally multifamily apartment buildings. The Trust owns 50 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. The Trust’s mix of properties is 69.4% residential and 30.6% commercial (based on cost) at December 31, 2016. Currently our focus is limited to multifamily apartment properties. We currently have no plans with respect to our non-

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

multifamily apartment properties. Sterling did complete two commercial transactions during the first quarter of 2016 which were initiated prior to January 1, 2016. We currently have no plans to dispose of our existing commercial properties.


Residential Property	Location	No. of Properties	Units
	North Dakota	86	5,484
	Minnesota	16	3,027
	Missouri	1	164
	Nebraska	2	316
		105	8,991

Commercial Property	Location	No. of Properties	Sq. Ft
	North Dakota	21	832,920
	Arkansas	2	29,370
	Colorado	1	13,390
	Iowa	1	32,532
	Louisiana	1	14,560
	Michigan	1	11,737
	Minnesota	15	683,090
	Mississippi	1	14,820
	Nebraska	1	16,480
	Texas	1	7,296
	Wisconsin	5	63,016
		50	1,719,211

Concentration of Credit Risk

Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.

Real Estate Investments

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition. Significant factors included in the independent appraisal include items such as current rent schedules, occupancy levels, and discount factors. Property valuations are completed primarily using the income capitalization approach, in which anticipated benefits are converted to an indication of current value.

The total value allocable to intangible assets acquired, which consists of in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease, our overall relationship with that respective tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net, in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

We estimate the in-place lease value for each lease acquired. This fair value estimate is calculated using factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, and the current economic climate.

Our analysis results in three discrete financial items: assets for above market leases, liabilities for below market leases, and assets for the in-place lease value. The calculation of each of these components is performed in tandem to provide a complete lease intangible asset and/or liability value.

Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

Furniture and fixtures are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:


Buildings and improvements		40 years
Furniture, fixtures and equipment		5-9 years

Depreciation expense for the years ended December 31, 2016, 2015 and 2014 totaled $18,507, $16,466, and $12,116 respectively.

The Company’s real estate investments are reviewed for potential impairment at the end of each reporting period whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Company separately determines whether impairment indicators exist for each property.

Examples of situations considered to be impairment indicators include, but are not limited to:

a substantial decline or continued low occupancy rate;

continued difficulty in leasing space;

significant financial troubled tenants;

a change in plan to sell a property prior to the end of its useful life or holding period;

a significant decrease in market price not in line with general market trends; and

any other quantitative or qualitative events or factors deemed significant by the Company’s management or board of trustees.

If the presence of one or more impairment indicators as described above is identified at the end of the reporting period or throughout the year with respect to a real estate investment, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows. A real estate investment is considered to be impaired when the estimated future undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair value of an impaired real estate investment, the Company makes complex or subjective assumptions which include, but are not limited to:

projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;

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(Dollar amounts in thousands, except share and per share data)

projected capital expenditures and lease origination costs;

projected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;

comparable selling prices; and

property specific discount rates for fair value estimates as necessary.

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of real estate investments. Based on evaluation, management recorded a loss on impairment of property of $412 during the year ended December 31, 2015. There were no impairment losses during the years ended December 31, 2016 or 2014.

Properties Held for Sale

We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component or group of components of an entity either has been disposed of or is classified as held for sale.

In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as properties held for sale in the period in which all of the following criteria are met:

management, having the authority to approve the action, commits to a plan to sell the asset;

the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

The results of operations of a component of an entity that either has been disposed of or is classified as held-for-sale under the requirements of ASC 360 is reported in discontinued operations in accordance with ASC 205, Presentation of Financial Statements (“ASC 205”) if such disposal or classification represents a strategic shift that has (or will have) a major effect on our operations and financial results.

There was one retail property classified as held for sale at December 31, 2016 and one medical property classified as held for sale at December 31, 2015. See Note 19.

Construction in Progress

The Company capitalizes direct and certain indirect project costs incurred during the development period such as construction, insurance, architectural, legal, interest and other financing costs, and real estate taxes. At such time as the development is considered substantially complete, the capitalization of certain indirect costs such as real estate taxes and interest and financing costs cease and all project-related costs included in construction in process are reclassified to land and building and other improvements.

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Cash and Cash Equivalents

We classify highly liquid investments with a maturity of three months or less when purchased as cash equivalents.

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the years ended December 31, 2016, 2015 and 2014.

We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operations and financial policies of the investee. We will also use the equity method for investments that do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. For a joint venture accounted for under the equity method, our share of net earnings and losses is reflected in income when earned and distributions are credited against our investment in the joint venture as received.

In determining whether an investment in a limited liability company or tenant in common is a variable interest entity, we consider: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including the necessity of subordinated debt; estimates of future cash flows; our and our partner’s ability to participate in the decision making related to acquisitions, dispositions, budgeting and financing on the entity; and obligation to absorb losses and preferential returns. As of December 31, 2016, we assessed that all three of our tenant in common arrangements do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810.

As of December 31, 2016 and 2015, the unconsolidated affiliates held total assets of $26,140 and $32,296 and mortgage notes payable of $20,017 and $20,421, respectively.

The operating partnership owns a 40.26% interest in a single asset limited liability company which owns a 144 unit residential, multifamily apartment complex in Bismarck, North Dakota. The property is encumbered by a first mortgage with a balance at December 31, 2016 and 2015 of $2,190 and $2,259, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership is a 50% owner of Grand Forks Marketplace Retail Center through 100% ownership in a limited liability company. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at December 31, 2016 and 2015 of $10,891 and $11,079, respectively. The Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at December 31, 2016 and 2015 of $6,936 and $7,083, respectively. The Company is jointly and severally liable for the full mortgage balance.

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

The operating partnership previously owned an 82.50% interest as a tenant in common in a 61 unit residential, multifamily apartment complex in Fargo, North Dakota. The property was unencumbered at December 31, 2015. As of December 1, 2016, there was a change in control over the real estate investment, with the operating partnership acquiring the other tenant in common’s 17.50% ownership interest in the property (See Note 20). We estimated the property had a fair value of approximately $4,087. The operating partnership paid total cash consideration of approximately $193 before transaction costs and issued $448 of limited partnership units for a total purchase price of approximately $641. The company accounted for this as a business combination and recognized a gain on change in control of real estate investment of $550 in the fourth quarter of 2016 as a result of remeasuring the carrying value to fair value.

The operating partnership previously was a 99% owner of Michigan Street Transit Center, LLC (“Transit Center”) through 100% ownership in a limited liability company. The operating partnership had contributed approximately $644 in cash and $1,316 in property to the Transit Center in May and June 2014, respectively. The new parking ramp constructed on the site was fully operational in October 2016. The property was unencumbered at December 31, 2015. As of December 7, 2016, the operating partnership sold its 99% ownership interest in the Michigan Street Transit Center partnership for $2,600 and recognized a gain of $597.

Receivables

Receivables consist primarily of amounts due for rent and real estate taxes. The receivables are non-interest bearing. The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected. As of December 31, 2016 and 2015, management determined no allowance was necessary for uncollectible receivables.

Financing and Lease Costs

Financing costs have been capitalized and are being amortized over the life of the financing (line of credit) using the effective interest method. Unamortized financing costs are written off when debt is retired before the maturity date and included in amortization expense at that time.

Lease costs incurred in connection with new leases have been capitalized and are being amortized over the life of the lease using the straight-line method. We record the amortization of leasing costs in depreciation and amortization on the consolidated statements of operations and comprehensive income. If an applicable lease terminates prior to the expiration of its initial lease term, we write off the carrying amount of the costs to amortization expense.

Debt Issuance Costs

We amortize external debt issuance costs using the effective interest rate method, over the estimated life of the related debt. We record debt issuance costs related to notes and mortgage notes, net of amortization, on our consolidated balance sheets as an offset to their related debt. We record debt issuance costs related to revolving lines of credit on our consolidated balance sheets as financing fees, regardless of whether a balance on the line of credit is outstanding. We record the amortization of all debt issuance costs as interest expense.

Intangible Assets

Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases and the value of leases with above or below market lease terms. Lease intangibles are amortized over the term of the related lease.

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash

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(Dollar amounts in thousands, except share and per share data)

flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined no impairment charges were necessary at December 31, 2016 and 2015.

Noncontrolling Interest

A noncontrolling interest in a subsidiary is in most cases an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and separate from the parent company’s equity. In addition, consolidated net income is required to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest, and the amount of consolidated net income attributable to the parent and the noncontrolling interest are required to be disclosed on the face of the consolidated statements of operations and comprehensive income.

Operating Partnership: Interests in Sterling Properties, LLLP held by limited partners are represented by operating partnership units. Sterling Properties, LLLP’s income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement.

Partially Owned Properties: The Company reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Company that are not wholly owned by the Company. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interest in partially owned properties in the consolidated statement of operations and comprehensive income.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to beneficial and noncontrolling interest.

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.

A summary of the tax characterization of the dividends paid to shareholders of the Company’s common stock for the years ended December 31, 2016 and 2015 follows:


	Tax Year Ended December 31,
	Dividend		%		Dividend		%
	2016		2016		2015		2015
Tax status
Ordinary income	$	0.8718	90.48	%	$	0.8671	93.24	%
Capital Gain		0.0267	2.77	%		0.0098	1.05	%
Return of capital		0.0615	6.75	%		0.0531	5.71	%
	$	0.9600	100.00	%	$	0.9300	100.00	%

We intend to continue to qualify as a REIT and, provided we maintain such status, will not be taxed on the portion of the income that is distributed to shareholders. In addition, we intend to distribute all of our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the financial statements.

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Sterling conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership – Sterling Properties, LLLP. The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The conversion of a partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of December 31, 2016 and 2015 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2013.

The operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.

Revenue Recognition

We derive over 95% of our revenues from tenant rents and other tenant-related activities. We lease multifamily units under operating leases with terms of one year or less. Rental income and other property revenues are recorded when due from tenants and are recognized monthly as earned pursuant to the terms of the underlying leases. Other property revenues consist primarily of laundry, application and other fees charged to tenants.

We lease commercial space primarily under long-term lease agreements. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and a straight-line rent adjustment. We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $499, $325 and $186 for the years ended December 31, 2016, 2015 and 2014, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of December 31, 2016 and 2015 was $3,362 and $2,863, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Sterling had no dilutive potential common shares as of December 31, 2016, 2015 and 2014 and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the years ended December 31, 2016, 2015 and 2014, Sterling’s denominators for the basic and diluted earnings per common share were approximately 7,844,000, 7,223,000, and 5,507,000, respectively.

Recent Accounting Pronouncements

In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts with customers, which was issued by the FASB as Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09, which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, supersedes most current GAAP applicable to revenue recognition and converges U.S. and international accounting standards in this area. The core principle of the new guidance is that revenue shall only be recognized when an entity has transferred control of goods or services to a customer and for an amount reflecting the consideration to which the entity expects to be entitled for such exchange. Additionally,

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

lease contracts are specifically excluded from ASU 2014-09. In July 2015, the FASB decided to defer the effective date for annual reporting periods beginning after December 15, 2017. Early adoption is permitted beginning on the original effective date of periods beginning after December 15, 2016. Upon adoption, ASU 2014-09 allows for full retrospective adoption applied to all periods presented or modified retrospective adoption with the cumulative effect of initially applying the standard recognized at the date of initial application. We have performed a review of the requirements of the new guidance and have identified which of our revenue streams will be within the scope of ASU 2014-09. We are working through an adoption plan which includes a review of transactions supporting each revenue stream to determine the impact of accounting treatment under ASU 2014-09, an evaluation of the method of adoption and assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting. We plan to adopt the new guidance beginning January 1, 2018.

In April 2015, the FASB issued ASU No. 2015-03 Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The objective of ASU 2015-03 is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. In August 2015, the FASB issued ASU No. 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies that absent authoritative guidance in ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the staff of the Securities and Exchange Commission would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This ASU is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2015. Upon adoption of the standard, on January 1, 2016, we reclassified unamortized debt issuance costs related to the Company’s mortgage notes payable from assets, net to reductions in mortgage notes payable within our consolidated balance sheets as of December 31, 2015 to conform with the new ASU and the presentation of such costs in our consolidated balance sheet as of December 31, 2016.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends existing accounting standards for lease accounting, including by requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after Dececember 15, 2018 with earlier application permitted. The Company is evaluating the impact of ASU No. 2016-02 on its financial position and results of operations.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity (“VIE”) and voting entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics, particularly the rights held by limited partners. The Company adopted this standard on January 1, 2016 and concluded that no change was required to its accounting for its joint ventures. However, the Operating Partnership now meets the criteria of a VIE, the Company is the primary beneficiary and accordingly, the Company continues to consolidate the Operating Partnership. The Company’s sole significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.

In January 2017, the FASB issued ASU No. 2017-01 to amend the guidance for determining whether a transaction involves the purchase or disposal of a business or an asset. The amendments clarify that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar assets, the set of assets and activities is not a business. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017,

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

including interim periods within those fiscal years and early adoption is permitted for transactions which have not been previously reported in financial statements that have been issued. The Company currently anticipates that it will adopt the guidance effective January 1, 2018 and that the guidance will result in acquisitions of operating properties being accounted for as asset acquisitions instead of business combinations. The adoption of this guidance will also change the accounting for the transaction costs for acquisitions of operating properties such that transaction costs will be able to be capitalized as part of the purchase price of the acquisition instead of being expensed as acquisition-related expenses. The ASU is required to be applied prospectively.

In November 2016, the FASB issued ASU No. 2016-18 to require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15 to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying Consolidated Financial Statements.

NOTE 3 – segment reporting

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multifamily properties. Our commercial properties include retail, office, industrial, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and certain general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.

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DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Segment Revenues and Net Operating Income

The revenues and net operating income for the reportable segments (residential and commercial) are summarized as follows for the years ended December 31, 2016, 2015 and 2014, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the consolidated financial statements for the years ended December 31, 2016 and 2015.


	Year ended December 31, 2016						Year ended December 31, 2015						Year ended December 31, 2014
	Residential		Commercial		Total		Residential		Commercial		Total		Residential		Commercial		Total
	(in thousands)						(in thousands)						(in thousands)
Income from rental operations	$	80,497	$	27,566	$	108,063	$	75,914	$	21,268	$	97,182	$	53,499	$	17,437	$	70,936
Expenses from rental operations		43,766		6,924		50,690		39,898		4,809		44,707		27,794		3,019		30,813
Net operating income	$	36,731	$	20,642	$	57,373	$	36,016	$	16,459	$	52,475	$	25,705	$	14,418	$	40,123
Interest						18,366						17,141						12,958
Depreciation and amortization						22,145						19,574						13,575
Administration of REIT						5,600						5,647						6,824
Loss on impairment of property						—						412						—
Loss on lease terminations						299						—						58
Other (income)/expense						(1,894)						(1,683)						(2,595)
Net income					$	12,857					$	11,384					$	9,303

Segment Assets and Accumulated Depreciation


As of December 31, 2016	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	514,341	$	200,959	$	715,300
Accumulated depreciation		(63,148)		(29,177)		(92,325)
	$	451,193	$	171,782		622,975
Cash and cash equivalents						12,034
Restricted deposits and funded reserves						7,213
Investment in unconsolidated affiliates						3,653
Receivables and other assets						5,354
Financing and lease costs, less accumulated amortization						950
Assets held for sale						2,482
Intangible assets, less accumulated amortization						15,852
Total Assets					$	670,513

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)


As of December 31, 2015	Residential		Commercial		Total
	(in thousands)
Real estate investments	$	472,129	$	197,355	$	669,484
Accumulated depreciation		(50,668)		(24,307)		(74,975)
	$	421,461	$	173,048		594,509
Cash and cash equivalents						6,461
Restricted deposits and funded reserves						6,115
Investment in unconsolidated affiliates						9,022
Receivables and other assets						5,123
Financing and lease costs, less accumulated amortization						1,240
Assets held for sale						1,721
Intangible assets, less accumulated amortization						18,184
Total Assets					$	642,375

note 4 – real estate investments


As of December 31, 2016	Residential		Commercial		Total
	(in thousands)
Land and land improvements	$	67,384	$	37,769	$	105,153
Building and improvements		419,120		161,724		580,844
Furniture, fixtures and equipment		24,852		1,466		26,318
Construction in progress		2,985		—		2,985
		514,341		200,959		715,300
Less accumulated depreciation		(63,148)		(29,177)		(92,325)
	$	451,193	$	171,782	$	622,975


As of December 31, 2015	Residential		Commercial		Total
	(in thousands)
Land and land improvements	$	63,605	$	35,631	$	99,236
Building and improvements		384,308		160,225		544,533
Furniture, fixtures and equipment		23,744		1,499		25,243
Construction in progress		472		—		472
		472,129		197,355		669,484
Less accumulated depreciation		(50,668)		(24,307)		(74,975)
	$	421,461	$	173,048	$	594,509

Construction in progress as of December 31, 2016 primarily consists of development and planning costs associated with phase II and III of a multifamily apartment community under construction in Bismarck, North Dakota. Phase II of the project consists of a clubhouse and six 6-plex, two-story townhomes and Phase III may consist of up to six, 4-story apartment buildings with underground parking. The clubhouse was substantially complete in July 2016, the first and second townhome buildings were substantially completed in September 2016 and November 2016, respectively. Site work has commenced on the remaining four townhome buildings of Phase II. Phase III of the development is still in the planning stages and construction has not yet commenced. Phase II of the project is estimated to cost $9,061 and is expected to be substantially completed in third quarter 2017. We have a construction contract of $1,232 for the clubhouse and $7,829 for the townhomes, of which $1,120 and $4,647 have been completed to date, including $56 and $232 of retainage which is included in payables at December 31, 2016, respectively. The Company is working with GOLDMARK Development Corporation, a related party, as the general contractor for Phase II.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

NOTE 5 - RESTRICTED DEPOSITS AND FUNDED RESERVES


	2016		2015
	(in thousands)
Tenant security deposits	$	3,836	$	3,738
Real estate tax and insurance escrows		1,836		1,677
Replacement reserves		1,541		700
	$	7,213	$	6,115

Tenant Security Deposits

We have set aside funds to repay tenant security deposits upon tenant move-out.

Real Estate Tax and Insurance Escrows

Pursuant to the terms of certain mortgages, we have established and maintain real estate tax escrows and insurance escrows to pay real estate taxes and insurance. We are required to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums.

Replacement Reserves

Pursuant to the terms of certain mortgages, we have established and maintain several replacement reserve accounts. We make monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals.

NOTE 6 – NOTES RECEIVABLE

Notes receivable primarily consisted of a $600 note to an unaffiliated party to provide working capital and for improvements on a residential property bearing interest at a rate of 6.5%. This note is personally guaranteed by the owner. Accrued interest is due monthly beginning until the note is paid in full. The principal plus accrued interest was originally due and payable on August 31, 2016. Upon maturing the note was extended for an additional twelve months to August 31, 2017 with the same terms.

NOTE 7 - Lease intangibles

The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:


	Lease		Accumulated		Lease
As of December 31, 2016	Intangibles		Amortization		Intangibles, net
Intangible Assets	(in thousands)
In-place leases	$	23,507	$	(9,860)	$	13,647
Above-market leases		3,115		(910)		2,205
	$	26,622	$	(10,770)	$	15,852
Intangible Liabilities
Below-market leases	$	(3,197)	$	1,122	$	(2,075)

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)


	Lease		Accumulated		Lease
As of December 31, 2015	Intangibles		Amortization		Intangibles, net
Intangible Assets	(in thousands)
In-place leases	$	22,722	$	(6,974)	$	15,748
Above-market leases		3,117		(681)		2,436
	$	25,839	$	(7,655)	$	18,184
Intangible Liabilities
Below-market leases	$	(3,056)	$	803	$	(2,253)

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:


	Intangible		Intangible
Years ending December 31,	Assets		Liabilities
	(in thousands)
2017	$	2,520	$	288
2018		2,262		282
2019		1,956		273
2020		1,527		221
2021		1,210		189
Thereafter		6,377		822
	$	15,852	$	2,075

The weighted average amortization period for the intangible assets (in-place leases, above-market leases) and intangible liabilities (below-market leases) acquired as of December 31, 2016 was 6.0 years.

NOTE 8 – LINES OF CREDIT

We have a $27,000 variable rate (1-month LIBOR plus 2.25%) line of credit agreement with Wells Fargo Bank, which expires in June 2018; and a $6,315 variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expires November 2019. The lines of credit are secured by properties in Duluth, Minnesota; Minneapolis/St. Paul, Minnesota; Austin, Texas; Mandan, North Dakota; Fargo, North Dakota; Edina, Minnesota; St. Cloud, Minnesota; Moorhead, Minnesota; and Grand Forks, North Dakota. We also have a $2,000 variable rate (prime rate less 0.5%) unsecured line of credit agreement with Bremer Bank, which expires October 2017; and a $3,000 variable rate (prime rate) unsecured line of credit agreement with Bell State Bank & Trust, which expired December 2016 and was extended to December 2017. At December 31, 2016, there was no balance outstanding on the lines of credit, leaving $37,015 available and unused under the agreements. Certain of the variable lines of credit have limits on availability based on collateral specific criteria.

Certain line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of December 31, 2016, one residential property was out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. A waiver was received from the lender. As of December 31, 2015, four residential properties were out of compliance with Bremer’s debt service coverage ratio requirement on an individual property basis. A waiver was received from the lender.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

NOTE 9 - MORTGAGE NOTES PAYABLE

The following table summarizes the Company’s mortgage notes payable.


	Principal Balance At
	December 31,		December 31,
	2016		2015
	(in thousands)
Fixed rate mortgage notes payable (a)	$	393,511	$	383,292
Less unamortized debt issuance costs		3,032		3,381
	$	390,479	$	379,911

(a)

Includes $3,056 and $3,158 of variable rate mortgage debt that was swapped to a fixed rate as of December 31, 2016 and 2015, respectively.

The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We adopted this guidance in the first quarter of 2016 and have reclassified the unamortized debt issuance costs into the debt liability as shown in the table above.

As of December 31, 2016, we had 116 fixed rate and no variable rate mortgage loans with effective interest rates ranging from 2.57% to 7.25% per annum and a weighted average effective interest rate of 4.43% per annum.

As of December 31, 2015, we had 108 fixed rate and no variable rate mortgage loans with effective interest rates ranging from 2.57% to 7.65% per annum, and a weighted average effective interest rate of 4.53% per annum.

The majority of the Company’s mortgages payable require monthly payments of principal and interest. Certain mortgages require reserves for real estate taxes and certain other costs. Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits with the lender.

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of December 31, 2016, five loans on residential properties were out of compliance due to various unit renovation and parking lot repair and maintenance costs. The loans were secured by properties located in Fargo and Bismarck, North Dakota with a total outstanding balance of $8,336 at December 31, 2016. Annual waivers have been received from the lenders. As of December 31, 2015, three loans on residential properties and two loans on commercial properties were out of compliance due to various unit renovation and parking lot repair and maintenance costs. The loans were secured by properties located in Fargo and Bismarck, North Dakota with a total outstanding balance of $9,650 at December 31, 2015. Waivers have been received from the lenders.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:


Years ending December 31,	Amount
	(in thousands)
2017	$	36,449
2018		17,018
2019		24,321
2020		26,969
2021		44,804
Thereafter		243,950
Total payments	$	393,511

NOTE 10 – HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we used derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with two existing borrowings. To meet these objectives, we have entered into interest rate swaps in the notional amount of $1,294 and $2,450 to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature in April 2020 and December 2017, respectively. The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception.

The carrying amount of the swaps have been adjusted to their fair values at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps. The interest rate swaps are accounted for as effective hedges in accordance with ASC 815-20 whereby they are recorded at fair value and changes in fair value are recorded to comprehensive income. As of December 31, 2016 and 2015, we have recorded a liability and accumulated other comprehensive loss of $145 and $219, respectively.

NOTE 11 - FAIR VALUE MEASUREMENT

The following table presents the carrying value and estimated fair value of the Company’s financial instruments:


	December 31, 2016				December 31, 2015
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable, net	$	390,479	$	402,438	$	379,911	$	394,782
Fair value of interest rate swaps	$	145	$	145	$	219	$	219

The carrying values shown in the table are included in the consolidated balance sheets under the indicated captions.

ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions.

These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable;

Level 3 – Instruments whose significant inputs are unobservable.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

The guidance requires the use of observable market data, when available, in making fair value measurements. 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.

Recurring Fair Value Measurements

The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.


	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2016
Fair value of interest rate swaps	$	—	$	145	$	—	$	145
December 31, 2015
Fair value of interest rate swaps	$	—	$	219	$	—	$	219

Fair value of interest rate swaps: The fair value of interest rate swaps is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates 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 has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2016 and 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 10.

Nonrecurring Fair Value Measurements

As discussed in Note 2, the Company recorded an impairment charge during the year ended December 31, 2015 to write the carrying value down to estimated fair value for certain real estate investments after determining their carrying value exceeded the projected undiscounted cash flows based upon the estimated holding period for such assets. Estimated fair value is determined by the Company utilizing the discounted cash flow models, third-party broker valuation estimates, appraisals, bona fide purchase offers or the expected sales price from an executed sales agreement. Capitalization and discount rates utilized within discounted cash flows models are based upon observable rates that the Company believes to be within a reasonable range of current market rates for the property.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Real estate investments measured at fair value on a nonrecurring basis at December 31, 2016 and 2015, respectively, aggregated by the level within the fair value hierarchy in which those measurements fall are as follows:


										Provision for
										Impairment of
										Investment
	Level 1		Level 2		Level 3		Total			Properties
	(in thousands)
December 31, 2016
Real estate investments	$	—	$	—	$	—	$	—	$	—
December 31, 2015
Real estate investments (a)	$	—	$	—	$	1,087	$	1,087	$	412

(a)

Includes an impairment charge recorded on certain real estate investments during the year ended December 31, 2015, based upon a discounted cash flow model.

Fair Value Disclosures

The following table presents the Company’s financial assets and liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.


	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2016
Mortgage notes payable, net	$	—	$	—	$	402,438	$	402,438
December 31, 2015
Mortgage notes payable, net	$	—	$	—	$	394,782	$	394,782

Mortgage notes payable: The Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders. Judgment is used in determining the appropriate rate for each of the Company’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 4.00% to 4.35% and from 3.97% to 4.05% December 31, 2016 and 2015, respectively. The fair value of the Company’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of December 31, 2016. The Company’s mortgage notes payable are further described in Note 9.

NOTE 12 – NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of December 31, 2016 and 2015, outstanding limited partnership units totaled 16,688,000 and 15,300,000, respectively. Total aggregate distributions per unit for the years ended December 31, 2016 and 2015 were $0.9600 and $0.9300, respectively. The operating partnership declared fourth quarter distributions of $4,005 and $3,557 respectively, to limited partners payable in January 2017 and 2016, respectively.

During the year ended December 31, 2016, Sterling exchanged 47,000 common shares for 47,000 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $754. During the year ended December 31, 2015, Sterling exchanged 6,000 common shares for 6,000 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $87. During the year

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

ended December 31, 2014, Sterling exchanged 47,000 common shares for 47,000 limited partnership units held by limited partners, pursuant to redemption requests. The aggregate value of these transactions was $700.

At the sole and absolute discretion of the limited partnership, and so long as a Redemption Plan exists, Limited Partners may request the operating partnership redeem their limited partnership units. The operating partnership may choose to offer the Limited Partner: (i) cash for the redemption or, at the request of the Limited Partner, (2) offer shares in lieu of cash for the redemption on a basis of one limited partnership unit for one Sterling common share (the “Exchange Request”). The Exchange Request shall be exercised pursuant to a Notice of Exchange. If the issuance of Sterling common shares pursuant to an Exchange Request will cause the shareholder to exceed the ownership limitations, among other reasons, payment will be made to the Limited Partner in cash. No Limited Partner may exercise an Exchange Request more than twice during any calendar year, and Exchange Requests may not be made for less than 1,000 limited partnership units. If a Limited Partner owns less than 1,000 limited partnership units, all of the limited partnership units held by the Limited Partner must be exchanged pursuant to the Exchange Request.

NOTE 13 – REDEMPTION PLANS

Our Board of Trustees has approved redemption plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans.

Our redemption plans currently provide that the maximum amount that can be redeemed under the plan is $30,000 worth of securities. Currently, the fixed redemption price is $15.00 per share or unit under the plans which price became effective March 24, 2016.

We may redeem securities under the plans provided the aggregate total has not been exceeded if we have sufficient funds to do so. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the redemption plans, either or both of them, if it determines to do so in its sole discretion.

During the years ended December 31, 2016, 2015 and 2014, the Company redeemed 80,000, 132,000 and 238,000 common shares valued at $1,194, $1,915 and $3,338, respectively. In addition, during the years ended December 31, 2016, 2015 and 2014, the Company redeemed 59,000, 44,000 and 112,000 units valued at $868 ,$633 and $1,566, respectively.

NOTE 14 – BENEFICIAL INTEREST

We are authorized to issue 100,000,000 common shares of beneficial interest with $0.01 par value and 50,000,000 preferred shares with $0.01 par value, which collectively represent the beneficial interest of Sterling. As of December 31, 2016 and 2015, there were 8,001,000 and 7,579,000 common shares outstanding. We had no preferred shares outstanding as of either date.

Dividends paid to holders of common shares were $0.9600 per share, $0.9300 per share and $0.9000 per share for the years ended December 31, 2016, 2015 and 2014, respectively.

NOTE 15 – DIVIDEND REINVESTMENT PLAN

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges. On July 20, 2012, we registered with the Securities Exchange Commission 2,000,000 common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Under this plan, eligible shareholders can elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional optional cash purchases of our common shares, not to exceed $5 per fiscal quarter without our prior approval. The purchase price per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional optional cash purchases, as determined by our Board of Trustees. The estimated value per common share was $16.00 and $15.50 at December 31, 2016 and 2015, respectively. See discussion of determination of estimated value in Note 20.

In December the Trust amended its Dividend Reinvestment Plan to provide that eligible shareholders electing to reinvest cash dividends under the plan, may also make additional optional purchases of Common Shares not to exceed $10 per fiscal quarter and, with the Trust’s prior approval, automatic optional cash purchases in excess of $10 per fiscal quarter effective January 1, 2017. In addition, participants may not, in any calendar year, purchase or receive via transfer more than $40 in Common Shares derived from the rights granted to Participants under this amendment.

Therefore, the purchase price per common share for dividend reinvestments was $15.20 and $14.725 and for additional optional cash purchases was $16.00 and $15.50 at December 31, 2016 and 2015, respectively. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten day notice to participants.

In the year ended December 31, 2016, 315,000 shares were issued pursuant to dividend reinvestments and 136,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2015, 284,000 shares were issued pursuant to dividend reinvestments and 116,000 shares were issued pursuant to additional optional cash purchases under the plan. In the year ended December 31, 2014, 231,000 shares were issued pursuant to dividend reinvestments and 128,000 shares were issued pursuant to additional optional cash purchases under the plan.

NOTE 16 – RELATED PARTY TRANSACTIONS

Property Management Fee

During the years ended December 31, 2016, 2015 and 2014, we paid property management fees to GOLDMARK Property Management in an amount equal to approximately 5% of rents of the properties managed. GOLDMARK Property Management is owned in part by Kenneth Regan and James Wieland. For the years ended December 31, 2016, 2015 and 2014, we paid management fees of $9,929, $9,304, and $6,439 respectively, to GOLDMARK Property Management. In addition, during the years ended December 31, 2016, 2015 and 2014, we paid repair and maintenance related payroll and payroll related expenses to GOLDMARK Property Management totaling $4,556, $3,961, and $2,613 respectively.

Board of Trustee Fees

We incurred Trustee fees of $59, $51 and $56 during the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, and 2015 we owed our Trustees $26 and $27 for unpaid board of trustee fees, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees specific amounts for meetings attended. Our Trustee Compensation Plan provides:



Board Chairman – Board Meeting			105 shares/meeting
Trustee – Board Meeting			75 shares/meeting
Committee Chair – Committee Meeting			30 shares/meeting
Trustee – Committee Meeting			30 shares/meeting

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Common shares earned in accordance with the plan are calculated on an annual basis. Shares earned pursuant to the Trustee Compensation Plan are issued on or about July 15 for Trustees’ prior year of service. Non-independent Trustees are not compensated for their service on the Board or Committees.

Advisory Agreement

We are an externally managed trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The following is a brief description of the current fees and compensation that may be received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 24, 2016, effective January 1, 2016.

Management Fee: 0.35% of our total assets (before depreciation and amortization), annually. Total assets are our gross assets (before depreciation and amortization) as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by a majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

Disposition Fee: For its services in the effort to sell any investment for us, the Advisor receives a disposition fee of 2.5% of the sales price of each property disposition, capped at $375 per disposition.

Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility.

Development Fee: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.


Total Cost	Fee		Range of Fee	Formula
0 – 10M	5.0	%	0 –.5M	0M – 5.0% x (TC – 0M)
10M - 20M	4.5	%	.5 M – .95M	.50M – 4.5% x (TC – 10M)
20M – 30M	4.0	%	.95 M – 1.35M	.95M – 4.0% x (TC – 20M)
30M – 40M	3.5	%	1.35 M – 1.70M	1.35M – 3.5% x (TC – 30M)
40M – 50M	3.0	%	1.70 M – 2.00M	1.70M – 3.0% x (TC – 40M)

TC = Total Project Cost

Management Fees

During the years ended December 31, 2016, 2015 and 2014, we incurred advisory management fees of $2,644, $2,401 and $1,855 with Sterling Management, LLC, our Advisor. As of December 31, 2016 and 2015, we owed our Advisor $226 and $214, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations. In addition, during the years ended December 31, 2016, 2015 and

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

2014, we reimbursed the Advisor for operating costs such as travel and meals, legal and office supplies totaling $37, $22, and $4, respectively.

Acquisition Fees

During the years ended December 31, 2016, 2015 and 2014, we incurred acquisition fees of $903, $1,128, and $2,628 respectively, with our Advisor. As of December 31, 2016, we owed our Advisor $226 for unpaid acquisition fees. There were no acquisition fees owed to our Advisor as of December 31, 2015.

Financing Fees

During the years ended December 31, 2016, 2015 and 2014, we incurred financing fees of $68, $270 and $269 with our Advisor for loan financing and refinancing activities. There were no financing fees owed to our Advisor as of December 31, 2016. As of December 31, 2015, we owed our Advisor $23 for unpaid financing fees.

Disposition Fees

During the years ended December 31, 2016, 2015 and 2014, we incurred disposition fees of $100, $36 and $16 with our Advisor. See Note 19. There were no disposition fees owed to our Advisor as of December 31, 2016 and 2015, respectively.

Development Fees

During the years ended December 31, 2016, 2015 and 2014, we incurred $170, $336 and $358 in development fees with our Advisor. As of December 31, 2016 and 2015, we owed our Advisor $81 and $69 for unpaid development fees as part of a 10% hold back, respectively.

Operating Partnership Units Issued in Connection with Acquisitions

During the year ended December 31, 2016, we issued directly or indirectly, 551,000 operating partnership (OP) units to entities affiliated with Messrs. Regan, Wieland, two of our trustees, and Messr. Swenson, one of our officers in connection with the acquisition of various properties. The aggregate value of these units was $8,650.

During the year ended December 31, 2015, we issued directly or indirectly, 242,000 operating partnership (OP) units to entities affiliated with Messrs. Regan, Wieland, two of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $3,754.

During the year ended December 31, 2014, we issued directly or indirectly, 644,000 operating partnership (OP) units to entities affiliated with Messrs. Regan, Wieland, Furness, three of our trustees, in connection with the acquisition of various properties. The aggregate value of these units was $9,118.

Commissions

During the years ended December 31, 2016, 2015 and 2014, we incurred real estate commissions of $953, $1,033, and $1,408 respectively, owed to GOLDMARK Commercial Real Estate Services, Inc., which is controlled by Messrs. Regan and Wieland. There were no outstanding commissions owed as of December 31, 2016 or 2015.

During the year ended December 31, 2016, we did not incur brokerage fees. During the year ended December 31, 2015, we incurred brokerage fees of $931 and $348 to a broker-dealer benefiting Dale Lian and James Echtenkamp, respectively, shareholders of Sterling and members of our Advisor. Brokerage fees were based on 7% of the purchase price of Sterling common shares sold. There were no outstanding brokerage fees owed as of December 31, 2016 or 2015.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Rental Income

During the years ended December 31, 2016, 2015 and 2014, we received rental income of $215, $215 and $179, respectively, under an operating lease agreement with GOLDMARK Property Management.

During the years ended December 31, 2016, 2015 and 2014, we received rental income of $53, $51 and $50, respectively, under an operating lease agreement with GOLDMARK Commercial Real Estate Services, Inc.

During the years ended December 31, 2016, 2015 and 2014, we received rental income of $45, $43 and $42, respectively, under operating lease agreements with our Advisor.

Construction Costs

As of December 31, 2016, since the project’s inception through its completion in 2015, we incurred total costs of $5,767 related to the construction of Phase II of the Bismarck, North Dakota development project which consists of a clubhouse and six 6-plex two-story townhomes to GOLDMARK Development, which is controlled by Messrs. Regan and Wieland. As of December 31, 2016, we owed GOLDMARK Development $288 for retainage and $398 for unpaid construction fees.

As of December 31, 2015, since the project’s inception, we incurred total costs of $14,147 related to the construction of a 156 unit apartment community (Phase I) in Bismarck, North Dakota to GOLDMARK Development. There was no retainage owed to GOLDMARK Development as of December 31, 2015. In addition, there were no unpaid construction fees owed to GOLDMARK Development as of December 31, 2015.

As of December 31, 2015, we incurred total costs of $117 related to the construction of Phase II of the Bismarck, North Dakota development project to GOLDMARK Development. As of December 31, 2015, we owed GOLDMARK Development $107 for construction fees and $6 for retainage.

NOTE 17 - RENTALS UNDER OPERATING LEASES / RENTAL INCOME

Residential apartment units are rented to individual tenants with lease terms of one year or less. Gross revenues from residential rentals totaled $80,497, $75,914 and $53,499 for the years ended December 31, 2016, 2015 and 2014, respectively.

Commercial properties are leased to tenants under terms expiring at various dates through 2034. Lease terms often include renewal options. For the years ended December 31, 2016, 2015 and 2014, gross revenues from commercial property rentals, including CAM income (common area maintenance) of $6,178, $3,852 and $2,230, respectively, totaled $27,566, $21,268 and $17,437, respectively.

Commercial space is rented under long-term agreements. Minimum future rentals on non-cancelable operating leases as of December 31, 2016 are as follows:


Years ending December 31,	Amount
	(in thousands)
2017	$	20,004
2018		18,999
2019		18,238
2020		17,272
2021		13,533
Thereafter		64,483
	$	152,529

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

NOTE 18 - COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we own or may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property.

There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.

Risk of Uninsured Property Losses

We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.

Litigation

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Company.

NOTE 19 – DISPOSITIONS

During December 2015, the Company received a notice from a tenant to exercise a purchase option for a medical property located in Eau Claire, Wisconsin. This property qualified for held for sale accounting treatment upon meeting all applicable GAAP criteria on or prior to December 31, 2015, at which time depreciation and amortization ceased. As such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of December 31, 2015. During the year ended December 31, 2016, the operating partnership sold the Eau Claire, Wisconsin medical property for approximately $1,400 and recognized a loss of $316.

During September 2016, the Company entered into a purchase agreement to sell a retail property located in Fargo, North Dakota. This property qualified for held for sale accounting treatment upon meeting all applicable GAAP criteria on or prior to December 31, 2016, at which time depreciation and amortization ceased. As such, the assets and liabilities associated with this property were separately classified as held for sale in the consolidated balance sheet as of December 31, 2016. The company expects to close on this sale in the first quarter of 2017.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

The following table presents the assets and liabilities associated with the real estate investments held for sale:


	December 31,		December 31,
	2016		2015
	(in thousands)
ASSETS
Real estate investments	$	2,365	$	1,716
Restricted deposits and funded reserves		22		—
Receivables		25		5
Notes receivable		42		—
Financing and lease costs, less accumulated amortization of $87 in 2016		28		—

Total Assets	$	2,482	$	1,721

LIABILITIES
Mortgage notes payable	$	—	$	655
Special assessments payable		103		—
Tenant security deposits payable		22		—
Accrued expenses and other liabilities		—		4

Total Liabilities	$	125	$	659

NOTE 20 – BUSINESS COMBINATIONS AND ACQUISITIONS

The Company closed on the following acquisitions during the year ended December 31, 2016:

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/29/16

Titan Machinery

North Platte, NE

Implement dealership

16,480 sq. ft.

1,769

2/1/16

Bristol Park Apartments

Grand Forks, ND

Apartment complex

80 units

5,050

2/1/16

Redpath

White Bear Lake, MN

Office building

25,817 sq. ft.

4,000

3/1/16

Eagle Sky I Apartments

Bismarck, ND

Apartment complex

20 units

1,525

3/1/16

Eagle Sky II Apartments

Bismarck, ND

Apartment complex

20 units

1,525

5/4/16

Garden Grove Apartments

Bismarck, ND

Apartment complex

95 units

7,072

5/4/16

Washington Apartments

Grand Forks, ND

Apartment complex

17 units

667

8/1/16

Roughrider

Grand Forks, ND

Apartment complex

12 units

582

8/29/16

West 80 Development Land

Rochester, MN

Land

18.8 acres

900

9/13/16

Amberwood Apartments

Grand Forks, ND

Apartment complex

95 units

3,942

12/19/16

Bridgeport Apartments

Fargo, ND

Apartment complex

120 units

8,280

35,312

Total consideration given for acquisitions through December 31, 2016 was completed through issuing approximately 1,466,000 limited partnership units of the operating partnership valued at $15.50 and $16.00 per unit for an aggregate consideration of approximately $23,020, new loans of $2,662, assumed liabilities of $78 and cash of $9,552. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

In addition, as of December 1, 2016, the operating partnership acquired the remaining 17.5% ownership interest in a 61 unit property which was previously held as tenant in common (See Note 2). We estimated the property’s fair value of approximately $4,087. The Trust paid total cash consideration of approximately $193 before transaction costs and issued $448 of limited partnership units for a total purchase price of approximately $641. The company accounted for this as a

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

business combination and recognized a gain on change in control of real estate investment of $550 as a result of remeasuring the carrying value to fair value.

The Company closed on the following acquisitions during the year ended December 31, 2015:

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/13/15

Valley Homes Duplexes

Grand Forks, ND

Duplex complex

24 units

2,148

1/28/15

Titan Machinery

Bismarck, ND

Implement dealership

22,293 sq. ft.

3,416

2/3/15

Quail Creek

Springfield, MO

Apartment complex

164 units

10,900

5/13/15

Parkview Arms

Bismarck, ND

Apartment complex

62 units

4,464

6/16/15

Development land

Mankato, MN

Land

1.13 acres

263

7/20/15

Development land

Fargo, ND

Land

1.95 acres

500

8/4/15

Huntington

Fargo, ND

Apartment complex

10 units

420

8/4/15

Summerfield

Fargo, ND

Apartment complex

18 units

774

8/13/15

Bell Plaza (FKA Northland Plaza)

Bloomington, MN

Office building

296,967 sq. ft.

52,500

36,750

9/1/15

Columbine Apartments

Grand Forks, ND

Apartment complex

12 units

629

10/1/15

Summit Point

Fargo, ND

Apartment complex

87 units

6,572

82,586

66,836

Total consideration given for acquisitions through December 31, 2015 was completed through issuing approximately 729,000 limited partnership units of the operating partnership valued at $15.00 per unit and $15.50 per unit for an aggregate consideration of approximately $11,228, new loans of $45,830, assumed loans of $719, assumed liabilities $1,329, and cash of $23,480. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

Included in the Company’s consolidated statements of operations and other comprehensive income are the results of operations from Bell Plaza (FKA Northland Plaza), which was acquired and accounted for as a business combination, consisting of $3,163 in revenues and $2,356 in net loss attributable to Sterling Real Estate Trust from the date of acquisition (August 13, 2015) through December 31, 2015.

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

The Company closed on the following acquisitions during the year ended December 31, 2014:

Date

Property Name

Location

Property Type

Units/ Square Footage/ Acres

Acquisition Price

Prorata Acquisition Price

1/2/14

Barrett Arms Apartments

Crookston, MN

Apartment complex

24 units

1,104

1/2/14

Chandler 1802

Grand Forks, ND

Apartment complex

24 units

1,320

1/2/14

Echo Manor Apartments

Hutchinson, MN

Apartment complex

30 units

1,080

1/2/14

Westcourt Apartments

Fargo, ND

Apartment complex

64 units

3,520

5/1/14

Eagle Run Apartments (1)

West Fargo, ND

Apartment complex

144 units

1,566

6/9/14

Griffin Court Apartments

Moorhead, MN

Apartment complex

128 units

4,848

6/30/14

Parkwest Gardens Apartments

West Fargo, ND

Apartment complex

142 units

6,840

8/7/14

Dakota Manor Apartments

Fargo, ND

Apartment complex

54 units

2,646

10/1/14

Twin Oaks

Hutchinson, MN

Apartment complex

80 units

4,320

10/23/14

Development land

Bismarck, ND

Land

16 acres

2,246

12/19/14

Brighton Village Apartments

New Brighton, MN

Apartment complex

240 units

16,800

12/19/14

Georgetown on the River

Fridley, MN

Apartment complex

462 units

30,400

12/19/14

Maplewood Apartments

Maplewood, MN

Apartment complex

240 units

15,600

12/19/14

Robinwood Apartments

Coon Rapids, MN

Apartment complex

120 units

7,500

12/19/14

Rosedale Estates North

Roseville, MN

Apartment complex

180 units

12,850

12/19/14

Rosedale Estates South

Roseville, MN

Apartment complex

180 units

12,850

12/19/14

Valley View

Golden Valley, MN

Apartment complex

72 units

7,500

132,990

(1)

Assumed loan presented as consideration given, however, previously consolidated the single asset LLP due to controlling financial interest.

Total consideration given for acquisitions through December 31, 2014 was completed through issuing approximately 1,233,000 limited partnership units of the operating partnership valued at $14.00 per unit and $15.00 per unit for an aggregate consideration of approximately $17,461, assumed loans of $2,636, assumed liabilities and deferred maintenance of $1,362, new loans of $67,477 and cash of $44,054. The value of units issued in exchange for property is determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

The following table summarizes the acquisition date fair values, before prorations, the Company recorded in conjunction with the acquisitions discussed above:


		Year Ended
		December 31,
		2016		2015		2014

Land, building, tenant improvements and FF&E	$	34,102	$	71,493	$	132,990
Acquired lease intangible assets		1,386		12,735		-
Acquired lease intangible liabilities		(176)		(1,642)		-
Mortgages notes payable assumed		-		(719)		(2,637)
Other liabilities		(78)		(1,329)		(1,361)
Net assets acquired		35,234		80,538		128,992
Equity/limited partnership unit consideration		(23,020)		(11,228)		(17,461)
New loans		(2,662)		(45,830)		(67,477)

Net cash consideration (a)	$	9,552	$	23,480	$	44,054

(a)

The 2016 total does not include the $193 cash outflow related to the change in control of real estate investment, in which the operating partnership acquired the remaining 17.50% ownership interest in a 61 unit property in December 2016 (described above).

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

Estimated Value of Units/Shares

The Board of Trustees determined an estimate of fair value for the trust shares in 2016, 2015 and 2014. In addition, the Board of Trustees, acting as general partner for the operating partnership, determined an estimate of fair value for the limited partnership units in 2016, 2015 and 2014. In determining this value, the Board relied upon experience with, and knowledge about, our real estate portfolio and debt obligations. The Board also relied on valuation methodologies that are commonly used in the real estate industry. The methodology used by our board to determine this value was based on the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain.

Based on the results of the methodologies, the Board determined the fair value of the shares and limited partnership units to be $14.00 per share/unit for the first three months of 2014 through March 27, 2014. The Board determined the fair value of the shares and limited partnership units to be $15.00 per share/unit effective March 28, 2014. The Board determined the fair value of the shares and limited partnership units to be $15.50 per share/unit effective February 1, 2015.

The Board determined the fair value of the shares and limited partnership units to be $16.00 per share/unit effective March 23, 2016.

As with any valuation methodology, the methodologies utilized by the Board in reaching an estimate of the value of the shares and limited partnership units are based upon a number of estimates, assumptions, judgments or opinions that may, or may not, prove to be correct. The use of different estimates, assumptions, judgments, or opinions would likely have resulted in significantly different estimates of the value of the shares and limited partnership units. In addition, the Board’s estimate of share and limited partnership unit value is not based on the book values of our real estate, as determined by GAAP, as our book value for most real estate is based on the amortized cost of the property, subject to certain adjustments.

Furthermore, in reaching an estimate of the value of the shares and limited partnership units, the Board did not include a liquidity discount in order to reflect the fact that the shares and limited partnership units are not currently traded on a national securities exchange; a discount for debt that may include a prepayment obligation or a provision precluding assumption of the debt by a third party; or the costs that are likely to be incurred in connection with an appropriate exit strategy, whether that strategy might be a listing of the limited partnership units or Sterling common shares on a national securities exchange or a merger or sale of our portfolio.

Condensed Pro Forma Financial Information

The following unaudited condensed pro forma financial information is presented as if the Bell Plaza (FKA Northland Plaza) acquisition was completed as of January 1, 2014. These pro forma results are for comparative purposes only and are not necessarily indicative of what the actual results of operations of the Company would have been had the acquisition occurred at the beginning of the period presented, nor are they necessarily indicative of future operating results.

The unaudited condensed pro forma financial information is as follows:


	Year Ended
	December 31,
	2016		2015		2014
		(in thousands, except per share data)
Total revenues	$	108,063	$	101,807	$	78,735
Net income	$	12,857	$	11,457	$	5,772
Net income attributable to Sterling Real Estate Trust	$	4,425	$	5,998	$	2,657
Earnings per common share, basic and diluted
Net income per common share attributable to Sterling Real Estate Trust	$	0.56	$	0.83	$	0.48
Weighted average number of common shares outstanding - basic		7,844		7,223		5,507

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NOTES TO CONSOLITATED FINANCIAL STATEMENTS

DECEMBER 31, 2016, 2015 AND 2014

(Dollar amounts in thousands, except share and per share data)

NOTE 21 – QUARTERLY FINANCIAL INFORMATION (unaudited)

The following table sets forth selected quarterly financial data for the Company:


	Quarter (1)
2016		First		Second		Third		Fourth
	(in thousands, except per share data)
Income from rental operations	$	26,688	$	27,046	$	26,888	$	27,441
Net Income	$	3,374	$	2,706	$	2,523	$	4,254
Net Income attributable to Sterling Real Estate Trust	$	1,273	$	839	$	885	$	1,428
Net Income per common share, basic and diluted	$	0.17	$	0.11	$	0.11	$	0.17
Weighted average common shares outstanding		7,690,000		7,789,000		7,891,000		8,003,000


	Quarter (1)
2015		First		Second		Third		Fourth
	(in thousands, except per share data)
Income from rental operations	$	22,825	$	23,552	$	24,688	$	26,117
Net Income	$	3,178	$	4,596	$	2,087	$	1,526
Net Income attributable to Sterling Real Estate Trust	$	952	$	1,511	$	1,078	$	748
Net Income per common share, basic and diluted	$	0.15	$	0.20	$	0.14	$	0.10
Weighted average common shares outstanding		6,308,000		7,436,000		7,543,000		7,588,000

(1)

With regard to per share calculations, the sum of the quarterly results may not equal full year results due to rounding.

NOTE 22 - SUBSEQUENT EVENTS

On January 15, 2017, we paid a dividend or distribution of $0.2400 per share on our common shares of beneficial interest, to common shareholders and limited unit holders of record on December 31, 2016.

In January 2017, the operating partnership purchased a 36 unit apartment complex in Fargo, North Dakota for approximately $1,710. The purchase price was financed with the issuance of limited partnership units and cash.

In January 2017, the operating partnership purchased an 82 unit apartment complex in Grand Forks, North Dakota for approximately $5,494. The purchase price was financed with the issuance of limited partnership units and cash.

In January 2017, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $777. The purchase price was financed with the issuance of limited partnership units and cash.

In January 2017, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $828. The purchase price was financed with the issuance of limited partnership units and cash.

Pending acquisitions and dispositions are subject to numerous conditions and contingencies and there are no assurances that the transactions will be completed.

We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.

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SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Industrial				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Guardian Building Products	Fargo, ND	$	2,043	$	820	$	2,554	$	9	$	(94)	$	829	$	2,460	$	3,289	$	273	08/29/2012		40
Titan Machinery	Bismarck, ND		2,444		950		1,395		7		—		957		1,395		2,352		70	01/28/2015		40
Titan Machinery	Dickinson, ND		896		354		1,096		400		—		754		1,096		1,850		132	07/30/2012		40
Titan Machinery	Fargo, ND		1,060		781		1,947		510		—		1,291		1,947		3,238		207	10/30/2012		40
Titan Machinery	Marshall, MN		2,071		300		3,648		81		—		381		3,648		4,029		479	11/01/2011		40
Titan Machinery	Minot, ND		1,537		618		1,654		—		—		618		1,654		2,272		183	08/01/2012		40
Titan Machinery	North Platte, NE		—		325		1,269		—		—		325		1,269		1,594		33	01/29/2016		40
Titan Machinery	Redwood Falls, MN		1,565		333		3,568		—		—		333		3,568		3,901		349	01/31/2013		40
Titan Machinery	Sioux City, IA		1,474		315		2,472		—		—		315		2,472		2,787		201	10/25/2013		40
Total		$	13,090	$	4,796	$	19,603	$	1,007	$	(94)	$	5,803	$	19,509	$	25,312	$	1,927


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Land				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Taco Bell	Denver, CO	$	459	$	669	$	—	$	—	$	—	$	669		—		669	$	—	06/14/2011
West 80	Rochester, MN		—		1,364		—		—		—		1,364		—		1,364		—	08/29/2016
Total		$	459	$	2,033	$	—	$	—	$	—	$	2,033	$	—	$	2,033	$	—

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Medical				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Bio-Life Plasma Center	Bismarck, ND	$	1,232	$	306	$	2,255	$	11	$	123	$	317		2,378		2,695	$	568	01/03/2008	9	-	40
Bio-Life Plasma Center	Grand Forks, ND		1,232		457		2,230		1		158		458		2,388		2,846		590	01/03/2008	10	-	40
Bio-Life Plasma Center	Janesville, WI		1,232		250		1,857		—		123		250		1,980		2,230		476	01/03/2008	9	-	40
Bio-Life Plasma Center	Mankato, MN		1,232		390		2,111		263		1,154		653		3,265		3,918		704	01/03/2008	11	-	40
Bio-Life Plasma Center	Marquette, MI		—		213		2,793		—		123		213		2,916		3,129		685	01/03/2008	9	-	40
Bio-Life Plasma Center	Onalaska, WI		1,232		208		1,853		—		323		208		2,176		2,384		502	01/03/2008	11	-	40
Bio-Life Plasma Center	Oshkosh, WI		1,232		293		1,705		—		146		293		1,851		2,144		465	01/03/2008	10	-	40
Bio-Life Plasma Center	Sheboygan, WI		1,232		645		1,611		—		248		645		1,859		2,504		437	01/03/2008	10	-	40
Bio-Life Plasma Center	Stevens Point, WI		1,232		119		2,184		—		123		119		2,307		2,426		549	01/03/2008	9	-	40
Total		$	9,856	$	2,881	$	18,599	$	275	$	2,521	$	3,156	$	21,120	$	24,276	$	4,976

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Residential				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed

Amberwood	Grand Forks, ND	$	—	$	426	$	3,304	$	—	$	21	$	426		3,325		3,751	$	28	09/13/2016	20	-	40
Arbor I/400	Bismarck, ND		428		73		516		4		—		77		516		593		46	06/04/2013		40
Arbor II/404	Bismarck, ND		438		73		538		6		14		79		552		631		43	11/01/2013		40
Arbor III/406	Bismarck, ND		435		71		536		7		14		78		550		628		43	11/01/2013		40
Ashbury	Fargo, ND		—		314		3,774		—		—		314		3,774		4,088		8	12/19/2016		40
Auburn II	Fargo, ND		587		105		883		12		64		117		947		1,064		228	03/23/2007	20	-	40
Autumn Ridge	Grand Forks, ND		5,887		1,072		8,875		44		19		1,116		8,894		10,010		2,352	08/16/2004	9	-	40
Barrett Arms	Crookston, MN		914		37		1,001		—		11		37		1,012		1,049		76	01/02/2014		40
Bayview	Fargo, ND		3,226		284		4,077		6		65		290		4,142		4,432		931	12/31/2007	20	-	40
Berkshire	Fargo, ND		261		31		406		4		6		35		412		447		91	03/31/2008	20	-	40
Betty Ann	Fargo, ND		548		74		738		1		60		75		798		873		142	08/31/2009		40
Bridgeport	Fargo, ND		—		613		7,676		—		—		613		7,676		8,289		16	12/19/2016		40
Brighton Village	New Brighton, MN		10,709		2,520		13,985		—		371		2,520		14,356		16,876		737	12/19/2014	5	-	40
Bristol Park	Grand Forks, ND		3,348		985		3,976		—		192		985		4,168		5,153		93	02/01/2016		40
Brookfield	Fargo, ND		885		228		1,958		3		157		231		2,115		2,346		426	08/01/2008	20	-	40
Cambridge (FKA 44th Street)	Fargo, ND		1,715		333		1,845		3		41		336		1,886		2,222		181	02/06/2013		40
Candlelight	Fargo, ND		2,092		613		1,221		(337)		392		276		1,613		1,889		164	11/30/2012		40
Carling Manor	Grand Forks, ND		493		69		656		—		3		69		659		728		144	03/31/2008		40
Carlton Place	Fargo, ND		7,171		703		7,207		14		197		717		7,404		8,121		1,515	09/01/2008	20	-	40
Chandler 1802	Grand Forks, ND		694		133		1,114		—		12		133		1,126		1,259		84	01/02/2014		40
Chandler 1866	Grand Forks, ND		347		31		270		—		28		31		298		329		84	01/03/2005	20	-	40
Cherry Creek (FKA Village)	Grand Forks, ND		993		173		1,435		1		60		174		1,495		1,669		301	11/01/2008		40
Columbia West	Grand Forks, ND		3,186		294		3,406		1		148		295		3,554		3,849		734	09/01/2008	20	-	40
Country Club	Fargo, ND		295		252		1,252		—		97		252		1,349		1,601		186	05/02/2011	20	-	40
Countryside	Fargo, ND		181		135		677		—		14		135		691		826		94	05/02/2011		40
Courtyard	St. Louis Park, MN		4,000		2,270		5,681		—		583		2,270		6,264		8,534		484	09/03/2013	5	-	40
Dakota Manor	Fargo, ND		1,823		249		2,236		—		31		249		2,267		2,516		136	08/07/2014		40
Danbury	Fargo, ND		2,789		381		6,020		9		107		390		6,127		6,517		1,373	12/31/2007	20	-	40
Dellwood Estates	Anoka, MN		7,576		844		9,966		—		324		844		10,290		11,134		908	05/31/2013		40
Eagle Run	West Fargo, ND		4,306		576		5,787		75		61		651		5,848		6,499		930	08/12/2010		40
Eagle Sky I	Bismarck, ND		963		115		1,322		—		(30)		115		1,292		1,407		27	03/01/2016		40
Eagle Sky II	Bismarck, ND		963		135		1,303		—		(24)		135		1,279		1,414		27	03/01/2016		40
Echo Manor	Hutchinson, MN		987		141		875		—		32		141		907		1,048		68	01/02/2014	20	-	40
Emerald Court	Fargo, ND		534		66		830		1		66		67		896		963		194	03/31/2008	20	-	40
Fairview	Bismarck, ND		3,032		267		3,978		35		27		302		4,005		4,307		799	12/31/2008	20	-	40
Flickertail	Fargo, ND		5,607		426		5,652		8		106		434		5,758		6,192		1,142	12/31/2008		40
Forest Avenue	Fargo, ND		433		61		637		—		6		61		643		704		63	02/06/2013		40
Galleria III	Fargo, ND		577		118		681		1		—		119		681		800		105	11/09/2010		40

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Residential				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Garden Grove	Bismarck, ND		4,646		606		6,073		—		54		606		6,127		6,733		102	05/04/2016	5	-	40
Georgetown on the River	Fridley, MN		19,008		4,620		25,263		—		490		4,620		25,753		30,373		1,333	12/19/2014	5	-	40
Glen Pond	Eagan, MN		15,330		3,761		20,833		—		200		3,761		21,033		24,794		2,633	12/02/2011	20	-	40
Granger Court I	Fargo, ND		2,389		279		2,619		—		14		279		2,633		2,912		235	06/04/2013		40
Griffin Court	Moorhead, MN		3,461		652		3,914		20		267		672		4,181		4,853		267	06/09/2014	5	-	40
Hannifin	Bismarck, ND		492		81		607		5		28		86		635		721		49	11/01/2013		40
Hunter's Run I	Fargo, ND		282		50		419		2		(2)		52		417		469		100	03/23/2007		40
Hunter's Run II	Fargo, ND		569		44		441		2		—		46		441		487		94	07/01/2008		40
Huntington	Fargo, ND		—		86		309		—		15		86		324		410		11	08/04/2015		40
Islander	Fargo, ND		893		98		884		—		53		98		937		1,035		123	07/01/2011		40
Kennedy	Fargo, ND		473		84		588		1		47		85		635		720		56	02/06/2013	20	-	40
Library Lane	Grand Forks, ND		1,799		301		2,401		12		121		313		2,522		2,835		575	10/01/2007	20	-	40
Madison	Grand Forks, ND		264		95		497		—		52		95		549		644		17	09/01/2015		40
Maple Ridge	Omaha, NE		4,151		766		5,608		—		831		766		6,439		7,205		1,262	08/01/2008	20	-	40
Maplewood	Maplewood, MN		9,844		3,120		12,122		—		244		3,120		12,366		15,486		640	12/19/2014	5	-	40
Maplewood Bend I, II, III. IV, V, VI, VII, VIII & Royale	Fargo, ND		5,192		783		5,839		—		192		783		6,031		6,814		956	01/01/2009	20	-	40
Martha Alice	Fargo, ND		548		74		738		1		83		75		821		896		149	08/31/2009	20	-	40
Mayfair	Grand Forks, ND		735		80		1,043		—		20		80		1,063		1,143		225	07/01/2008	20	-	40
Monticello	Fargo, ND		720		60		752		7		32		67		784		851		61	11/08/2013	20	-	40
Montreal Courts	Little Canada, MN		19,072		5,809		19,687		15		458		5,824		20,145		25,969		1,644	10/02/2013	5	-	40
Oak Court	Fargo, ND		1,762		270		2,354		13		213		283		2,567		2,850		539	04/30/2008	28	-	40
Pacific Park I	Fargo, ND		703		95		777		—		42		95		819		914		79	02/06/2013		40
Pacific Park II	Fargo, ND		602		111		865		—		37		111		902		1,013		88	02/06/2013		40
Pacific South	Fargo, ND		371		58		459		—		—		58		459		517		45	02/06/2013		40
Parkview Arms	Bismarck, ND		143		373		3,845		—		78		373		3,923		4,296		164	05/13/2015	5	-	40
Parkwest Gardens	West Fargo, ND		4,011		713		5,825		—		427		713		6,252		6,965		392	06/30/2014	20	-	40
Parkwood	Fargo, ND		1,079		126		1,143		7		16		133		1,159		1,292		232	08/01/2008		40
Pebble Creek	Bismarck, ND		4,380		260		3,704		—		(300)		260		3,404		3,664		756	03/19/2008	20	-	40
Prairiewood Courts	Fargo, ND		1,289		308		1,815		28		43		336		1,858		2,194		466	09/01/2006	20	-	40
Prairiewood Meadows	Fargo, ND		2,242		736		2,514		8		10		744		2,524		3,268		273	09/30/2012		40
Quail Creek	Springfield, MO		7,164		1,529		8,717		—		67		1,529		8,784		10,313		421	02/03/2015	5	-	40
Richfield/Harrison	Grand Forks, ND		6,028		756		6,346		3		285		759		6,631		7,390		1,560	07/01/2007	5	-	40
Robinwood	Coon Rapids, MN		4,751		1,138		6,133		242		277		1,380		6,410		7,790		318	12/19/2014		40
Rosedale Estates	Roseville, MN		16,103		4,680		20,591		—		321		4,680		20,912		25,592		1,082	12/19/2014	5	-	40
Rosegate	Fargo, ND		2,244		251		2,978		5		84		256		3,062		3,318		676	04/30/2008	20	-	40
Roughrider	Grand Forks, ND		—		100		448		—		7		100		455		555		5	08/01/2016	5	-	40
Saddlebrook	West Fargo, ND		1,014		148		1,262		13		89		161		1,351		1,512		256	12/31/2008		40
Schrock	Fargo, ND		527		71		626		3		6		74		632		706		56	06/04/2013		40

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Residential				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Sheridan Pointe	Fargo, ND		2,090		292		2,424		21		16		313		2,440		2,753		198	10/01/2013		40
Sierra Ridge	Bismarck, ND		5,597		754		8,795		151		2		905		8,797		9,702		1,633	09/01/2006		40
Somerset	Fargo, ND		3,131		300		3,431		7		—		307		3,431		3,738		729	07/01/2008		40
Southgate	Fargo, ND		2,811		803		5,299		—		(96)		803		5,203		6,006		1,231	07/01/2007	20	-	40
Southview III	Grand Forks, ND		217		99		522		—		68		99		590		689		78	08/01/2011		40
Southview Villages	Fargo, ND		1,967		268		2,519		15		122		283		2,641		2,924		604	10/01/2007	20	-	40
Spring	Fargo, ND		574		76		822		5		15		81		837		918		82	02/06/2013	20	-	40
Stanford Court	Grand Forks, ND		—		291		3,866		—		83		291		3,949		4,240		384	02/06/2013	20	-	40
Stonefield-Clubhouse	Bismarck, ND		—		34		1,147		—		—		34		1,147		1,181		14	07/31/2016		40
Stonefield-Phase I	Bismarck, ND		9,001		2,804		13,353		207		(216)		3,011		13,137		16,148		670	08/01/2014	20	-	40
Stonefield-Phase II	Bismarck, ND		—		1,167		1,181		278		1,275		1,445		2,456		3,901		15	10/23/2014		40
Stonefield-Phase III	Bismarck, ND		—		1,079		—		216		—		1,295		—		1,295		—	10/23/2014		n/a
Stonybrook	Omaha, NE		7,487		1,439		8,003		—		1,344		1,439		9,347		10,786		1,656	01/20/2009	20	-	40
Summerfield	Fargo, ND		123		129		599		1		39		130		638		768		22	08/04/2015		40
Summit Point	Fargo, ND		3,917		681		5,510		21		63		702		5,573		6,275		174	10/01/2015	20	-	40
Sunset Ridge	Bismarck, ND		8,641		1,759		11,012		36		14		1,795		11,026		12,821		2,095	06/06/2008	9	-	40
Sunview	Grand Forks, ND		1,126		144		1,614		1		42		145		1,656		1,801		331	12/31/2008	20	-	40
Sunwood	Fargo, ND		2,875		358		3,520		7		21		365		3,541		3,906		837	07/01/2007	20	-	40
Terrace on the Green	Moorhead, MN		2,063		697		2,588		—		—		697		2,588		3,285		280	09/30/2012		40
Twin Oaks	Hutchinson, MN		940		816		3,245		—		93		816		3,338		4,154		185	10/01/2014		40
Twin Parks	Fargo, ND		2,226		119		2,072		17		56		136		2,128		2,264		435	10/01/2008	20	-	40
Valley Homes Duplexes	Grand Forks, ND		1,066		356		1,668		—		69		356		1,737		2,093		84	01/22/2015		40
Valley View	Golden Valley, MN		4,709		1,190		6,217		—		59		1,190		6,276		7,466		324	12/19/2014	5	-	40
Village Park	Fargo, ND		799		219		1,932		23		34		242		1,966		2,208		424	04/30/2008		40
Village West	Fargo, ND		2,585		357		2,274		24		31		381		2,305		2,686		496	04/30/2008		40
Washington	Grand Forks, ND		459		74		592		—		14		74		606		680		10	05/04/2016		40
Westcourt	Fargo, ND		2,426		287		3,028		—		41		287		3,069		3,356		240	01/02/2014	5	-	40
Westside	Hawley, MN		563		59		360		—		37		59		397		456		64	02/01/2010		40
Westwind	Fargo, ND		297		49		455		1		83		50		538		588		117	04/30/2008	20	-	40
Westwood	Fargo, ND		4,442		597		6,455		13		183		610		6,638		7,248		1,415	06/05/2008	20	-	40
Willow Park	Fargo, ND		4,075		288		5,298		7		323		295		5,621		5,916		1,080	12/31/2008		40
Total		$	298,911	$	66,048	$	407,134	$	1,336	$	11,991	$	67,384	$	419,125	$	486,509	$	48,850

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Office				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
32nd Avenue	Fargo, ND	$	2,099	$	635	$	3,300	$	9	$	82	$	644		3,382		4,026	$	1,064	03/16/2004	3	-	40
Aetna	Bismarck, ND		6,535		1,291		7,372		30		946		1,321		8,318		9,639		1,926	12/06/2006	20	-	40
Bell Plaza (FKA Northland Plaza)	Bloomington, MN		34,855		6,912		36,520		—		656		6,912		37,176		44,088		3,135	08/13/2015	1	-	40
First International Bank & Trust	Moorhead, MN		—		210		712		3		88		213		800		1,013		135	05/13/2011	10	-	40
Four Points	Fargo, ND		—		70		1,238		—		11		70		1,249		1,319		286	10/18/2007		40
Gate City	Grand Forks, ND		938		382		917		1		131		383		1,048		1,431		201	03/31/2008		40
Goldmark Office Park	Fargo, ND		2,796		1,160		14,796		62		1,181		1,222		15,977		17,199		3,779	07/01/2007	1	-	40
Great American Building	Fargo, ND		957		511		1,290		1		362		512		1,652		2,164		434	02/01/2005	28	-	40
Midtown Plaza	Minot, ND		1,283		30		1,213		—		—		30		1,213		1,243		354	01/01/2004		40
Parkway office building (FKA Echelon)	Fargo, ND		1,015		278		1,491		2		29		280		1,520		1,800		363	05/15/2007	20	-	40
Redpath	White Bear Lake, MN		2,755		1,195		1,787		—		—		1,195		1,787		2,982		41	02/01/2016		40
Regis	Edina, MN		—		2,991		7,633		—		—		2,991		7,633		10,624		1,533	01/01/2009		40
SSA	St Cloud, MN		—		100		2,793		—		18		100		2,811		2,911		685	03/20/2007	20	-	40
Wells Fargo Center	Duluth, MN		—		600		7,270		(115)		1,159		485		8,429		8,914		1,789	07/11/2007	4	-	40
Total		$	53,233	$	16,365	$	88,332	$	(7)	$	4,663	$	16,358	$	92,995	$	109,353	$	15,725

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
Retail				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Applebee's	Apple Valley, MN	$	—	$	560	$	1,235	$	—	$	—	$	560		1,235		1,795	$	185	01/27/2011		40
Applebee's	Bloomington, MN		—		1,000		474		11		—		1,011		474		1,485		81	03/22/2010		40
Applebee's	Coon Rapids, MN		—		750		875		—		—		750		875		1,625		149	03/09/2010		40
Applebee's	Savage, MN		—		690		424		—		—		690		424		1,114		72	01/01/2010		40
Becker Furniture	Waite Park, MN		—		150		2,065		—		(637)		150		1,428		1,578		542	07/12/2006		40
Buffalo Wild Wings	Austin, TX		—		575		1,664		—		—		575		1,664		2,239		270	07/30/2010		40
Dairy Queen	Dickinson, ND		593		329		658		—		—		329		658		987		82	01/19/2012		40
Dairy Queen	Moorhead, MN		—		243		787		1		—		244		787		1,031		112	05/13/2011		20
Family Dollar	Mandan, ND		—		167		649		—		—		167		649		816		99	12/14/2010		40
O'Reilly	Mandan, ND		—		115		449		—		—		115		449		564		68	12/14/2010		40
Walgreen's	Alexandria, LA		1,666		1,090		2,973		—		—		1,090		2,973		4,063		522	12/18/2009	28	-	40
Walgreen's	Batesville, AR		5,968		473		6,405		—		—		473		6,405		6,878		1,201	07/09/2009		40
Walgreen's	Denver, CO		3,524		2,349		2,358		—		—		2,349		2,358		4,707		329	06/14/2011		40
Walgreen's	Fayetteville, AR		4,563		636		4,732		—		—		636		4,732		5,368		887	07/09/2009		40
Walgreen's	Laurel, MS		1,648		1,280		2,984		—		—		1,280		2,984		4,264		485	07/30/2010		40
Total		$	17,962	$	10,407	$	28,732	$	12	$	(637)	$	10,419	$	28,095	$	38,514	$	5,084
Grand Totals		$	393,511	$	102,530	$	562,400	$	2,623	$	18,444	$	105,153	$	580,844	$	685,997	$	76,562


Investments in Unconsolidated Affiliates:																					Life on
																					which
								Costs													depreciation
								capitalized												Date of	on latest
				Initial cost				subsequent				Gross Amount at which								Construction	income
				to company				to acquisition (a)				carried at close of period								or	statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings		Land		Buildings		Total		Depreciation		Acquisition	computed
Banner	Fargo, ND	$	6,936	$	750	$	8,016	$	22	$	311	$	772		8,327		9,099	$	1,985	03/15/2007		40
GF Marketplace	Grand Forks, ND		10,891		4,259		15,801		208		108		4,467		15,909		20,376		5,042	07/01/2003	8	-	40
Highland Meadows	Bismarck, ND		2,190		624		2,591		335		40		959		2,631		3,590		1,476	07/31/2011	15	-	40

Notes:

(a)

The costs capitalized subsequent to acquisition is net of dispositions.

(b)

The changes in total real estate investments for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):

Table of Contents

STERLING REAL ESTATE TRUST AND SUBSIDIARIES

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2016

(Dollar amounts in thousands)


	2016		2015		2014
Balance at January 1,	$	669,484	$	591,136	$	450,250
Purchase of real estate investments		48,305		82,111		143,141
Sale and disposal of real estate investment		(1,766)		(1,325)		(2,255)
Property held for sale		(3,234)		(2,058)		—
Provision for asset impairment		—		(412)		—
Construction in progress not yet placed in service		2,511		—
Reallocation to intangible assets		—		32		—
Balance at December 31,	$	715,300	$	669,484	$	591,136

(c)

The changes in accumulated depreciation for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):


	2016		2015		2014
Balance at January 1,	$	74,975	$	58,873	$	47,058
Depreciation expense		18,507		16,466		12,116
Property held for sale		(867)		(342)		—
Sale and disposal of real estate investment		(290)		(22)		(301)
Balance at December 31,	$	92,325	$	74,975	$	58,873

(d)

The aggregate cost of our real estate for federal income tax purposes is $624,433.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 22, 2017

	STERLING REAL ESTATE TRUST

	By:	/s/ KENNETH P. REGAN
		Kenneth P. Regan
		Chief Executive Officer (Principal Executive Officer)

Table of Contents

Exhibit Index

Filed

Incorporated by reference

Exhibit

here

Period

Filing

number

Exhibit Description

with

Form

ending

Exhibit

date

3.1

Articles of Organization of Sterling Real Estate Trust filed December 3, 2002

10-12G

3.1

03/10/11

3.2

Amendment to Articles of Organization of Sterling Real Estate Trust dated August 1, 2014

8-K

5.02

06/24/14

3.3

Amended and Restated Bylaws dated June 23, 2011

10-12G

3.2

03/10/11

3.4

Amended and Restated Bylaws dated June 23, 2016

8-K

3.1

06/29/16

4.1

Declaration of Trust Sterling Real Estate Trust dated July 21, 2004

10-12G

4.1

03/10/11

4.2

Addendum to Declaration of Trust dated July 25, 2007

10-12G

4.2

03/10/11

4.3

Sterling Third Amended and Restated Declaration of Trust dated March 27, 2014

8-K

4.1

04/02/14

4.4

Sterling Third Amended and Restated Declaration of Trust dated June 23, 2016

8-K

4.1

06/29/16

4.5

First Amended and Restated Declaration of Trust dated February 9, 2011

10-12G

4.3

03/10/11

4.6

Amendment No. 1 to First Amended and Restated Declaration of Trust dated August 1, 2014

8-K

5.01

06/24/14

4.7

Amended and Restated Share Repurchase Plan dated March 24, 2016

8-K

99.1

03/25/16

4.8

Amended and Restated Unit Repurchase Plan dated March 24, 2016

8-K

99.3

03/25/16

10.1

First Amendment and Complete Restatement of Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated April 25, 2003

10-12G

10.2

03/10/11

10.2

Second Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated December 19, 2008

10-12G

10.3

03/10/11

10.3

Third Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated August 5, 2009

10-12G

10.4

03/10/11

10.4

Fourth Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated February 9, 2011

10-12G

10.5

03/10/11

10.5

Fifth Amendment to the Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated June 23, 2011

10-K

12/31/2011

10.6

03/30/12

10.6

Fourth Amended and Restated Advisory Agreement dated January 1, 2016

8-K

10.1

03/25/16

10.7

Second Amended and Restated Agreement of Limited Liability Limited Partnership of Sterling Properties, LLLP dated January 1, 2013

8-K

10.1

12/27/12

10.8

Third Amended and Restated Agreement of Limited Liability Limited Partnership of Sterling Properties LLLP dated August 1, 2104

8-K

5.04

06/24/14

10.9

Dividend Reinvestment Plan dated July 20, 2012

S-3D

07/20/12

10.10

First Amendment to Dividend Reinvestment Plan dated September 26, 2013

8-K

99.1

10/02/13

10.11

Amendment to Certificate of Limited LiabilityPartnership of SterlingProperties, LLLP dated August 1, 2014

8-K

5.03

06/24/14

10.12

Form of Purchase and Sale Agreement dated as of November 17, 2014

8-K

10.1

12/23/14

10.13

Form of Amendment to Purchase and Sale Agreement dated as of December 18, 2014

8-K

10.2

12/23/14

10.14

Form of Secured Promissory Note (15-Year Note) dated as of December 19, 2014

8-K

10.3

12/23/14

10.15

Form of Secured Promissory Note (10-Year Note) dated as of December 19, 2014

8-K

10.4

12/23/14

10.16

Form of Mortgage, Security Agreement and Fixture Filing dated as of December 19, 2014

8-K

10.5

12/23/14

10.17

Form of Promissory Note dated as of December 19, 2014

8-K

10.6

12/23/14

10.18

Form of Mortgage dated as of December 19, 2014

8-K

10.7

12/23/14

10.19

Form of Commercial Security Agreement dated as of December 19, 2014

8-K

10.8

12/23/14

10.2

Amended and Restated Sterling Real Estate Trust Independent Trustee Common Shares Plan approved June 18, 2015

8-K

10.1

06/23/15

10.21

Form of Purchase and Sale Agreement dated as of July 1, 2015

8-K

10.1

08/18/15

10.22

Form of Promissory Note dated as of August 13, 2015

8-K

10.2

08/18/15

10.23

Form of Mortgage, Security Agreement and Fixture Filing dated as of August 13, 2015

8-K

10.3

08/18/15

10.24

Second Amendment to Dividend Reinvestment Plan dated December 14, 2016

8-K

99.1

12/20/16

21.1

Subsidiaries of Registrant

23.1

Consent of Independent Registered Public Accounting Firm - Baker Tilly Virchow Krause, LLP

31.1

Section 302 Certification of Chief Executive Officer

31.2

Section 302 Certification of Chief Accounting Officer

32.1

Section 906 Certification of Chief Executive Officer and Chief Accounting Officer

99.1

Financial Statements of Properties Acquired

8-K/A

99.1

01/30/15

Report of Independent Registered Public Accounting Firm
Combined Statement of Revenues and Certain Expenses for the nine months ended September 30, 2014 (unaudited) and the year ended December 31, 2013
Notes to the Combined Statement of Revenues and Certain Expenses for the nine months ended September 30, 2014 (unaudited) and the year ended December 31, 2013

Table of Contents

99.2

Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2014
Unaudited Pro Forma Consolidated Statement of Operations and Other Comprehensive Income for the nine months ended September 30, 2014
Unaudited Pro Forma Consolidated Statement of Operations and Other Comprehensive Income for the year ended December 31, 2013
Notes to Unaudited Pro Form Consolidated Financial Statements

8-K/A

99.2

01/30/15

101

10-K

101

03/15/17

The following materials from Sterling Real Estate Trust’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2016 and 2015; (ii) Consolidated Statements of Operations and Comprehensive Income for years ended December 31, 2016, 2015 and 2014; (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2016, 2015 and 2014; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014, and; (v) Notes to Consolidated Financial Statements.

Attached files

Sterling Real Estate Trust Reports

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