Exhibit 99.4

 

Financial Statements and Independent Auditor’s Report

 

BR Southside Member, LLC

 

December 31, 2017, 2016 and 2015

 

  

TABLE OF CONTENTS

 

Independent Auditor’s Report	2
Financial Statements:
Balance Sheets	3
Statements of Operations	4
Statements of Members’ Equity	5
Statements of Cash Flows	6
Notes to Financial Statements	7-12

 

  

Independent Auditor’s Report

 

The Members

BR Southside Member, LLC

New York, New York

 

We have audited the accompanying financial statements of BR Southside Member, LLC, which comprise the balance sheet as of December 31, 2017 and 2016 and the related statements of operations, members’ equity and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BR Southside Member, LLC at December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ BDO USA, LLP
Troy, Michigan
March 13, 2018

 

  

BR Southside Member, LLC

BALANCE SHEETS

 

		December 31,
		2017				2016
Assets
Investment in unconsolidated real estate joint venture		$	14,940,280			$	15,384,133
Cash and cash equivalents			1,136,076				105,994
Total Assets		$	16,076,356			$	15,490,127
Liabilities and Members’ Equity
Accounts payable, accrued expenses and other liabilities		$	2,701			$	2,700
Total Liabilities			2,701				2,700
Members’ equity			16,073,655				15,487,427
Total Liabilities and Members’ Equity		$	16,076,356			$	15,490,127

 

The accompanying notes are an integral part of these statements.

 

  

BR Southside Member, LLC

STATEMENTS OF OPERATIONS

 

		Year Ended December 31, 2017				Year Ended December 31, 2016				(Unaudited) Year Ended December 31, 2015
Expenses
General and administrative		$	3,051			$	4,224			$	5,237
Total expenses			3,051				4,224				5,237
Net loss from operations			(3,051	)			(4,224	)			(5,237	)
Equity in loss from unconsolidated joint venture			(443,853	)			(9,956	)			(63,613	)
Net loss		$	(446,904	)		$	(14,180	)		$	(68,850	)

 

The accompanying notes are an integral part of these statements.

 

  

BR Southside Member, LLC

STATEMENTS OF MEMBERS' EQUITY

 

		BRG Southside, LLC Class A Member				Bluerock Special Opportunity + Income Fund II, LLC Class B Member				Bluerock Special Opportunity + Income Fund III, LLC Class B Member				Total
Members' Equity, December 31, 2014 (Unaudited)		$	-			$	-			$	-			$	-
Member contributions (Unaudited)			17,322,028				1,314,349				1,314,349				19,950,726
Preferred return (Unaudited)			1,774,846				(887,423	)			(887,423	)			-
Share of net loss (Unaudited)			-				(34,425	)			(34,425	)			(68,850	)
Member distributions (Unaudited)			(1,774,846	)			-				-				(1,774,846	)
Members' Equity, December 31, 2015 (Unaudited)		$	17,322,028			$	392,501			$	392,501			$	18,107,030
Preferred return			2,605,423				(1,302,712	)			(1,302,711	)			-
Share of net loss			-				(7,090	)			(7,090	)			(14,180	)
Member distributions			(2,605,423	)			-				-				(2,605,423	)
Members' Equity, December 31, 2016		$	17,322,028			$	(917,301	)		$	(917,300	)		$	15,487,427
Member contributions			3,261,606				300,000				300,000				3,861,606
Preferred return			2,828,474				(1,414,237	)			(1,414,237	)			-
Share of net loss			-				(223,452	)			(223,452	)			(446,904	)
Member distributions			(2,828,474	)			-				-				(2,828,474	)
Members' Equity, December 31, 2017		$	20,583,634			$	(2,254,990	)		$	(2,254,989	)		$	16,073,655

 

The accompanying notes are an integral part of these statements.

 

  

BR Southside Member, LLC

STATEMENTS OF CASH FLOWS

 

		Year Ended December 31, 2017				Year Ended December 31, 2016				(Unaudited) Year Ended December 31, 2015
OPERATING ACTIVITIES
Net loss		$	(446,904	)		$	(14,180	)		$	(68,850	)
Adjustments to reconcile net loss to net cash used in   operating activities:
Equity in loss from unconsolidated joint venture			443,853				9,956				63,613
Changes in assets and liabilities:
Accounts payable, accrued expenses and other liabilities			1				-				2,700
Net cash used in operating activities			(3,050	)			(4,224	)			(2,537	)
INVESTING ACTIVITIES
Investments in unconsolidated joint ventures			-				-				(15,457,702	)
Net cash used in investing activities			-				-				(15,457,702	)
FINANCING ACTIVITIES
Member contributions			3,861,606				-				19,950,726
Member distributions			(2,828,474	)			(2,605,423	)			(1,774,846	)
Net cash provided by (used in) financing activities			1,033,132				(2,605,423	)			18,175,880
Net increase (decrease) in cash and cash equivalents			1,030,082				(2,609,647	)			2,715,641
Cash and cash equivalents at beginning of year			105,994				2,715,641				-
Cash and cash equivalents at end of year		$	1,136,076			$	105,994			$	2,715,641

 

The accompanying notes are an integral part of these statements.

 

  

BR Southside Member, LLC

NOTES TO FINANCIAL STATEMENTS

 

1.

Organizations and Summary of Significant Accounting Policies

 

BR Southside Member, LLC (the “Company”) was formed as a Delaware Limited Liability Company on December 22, 2014 (date of inception), between BRG Southside, LLC, as Class A Member (“BRG”), and Bluerock Special Opportunity + Income Fund II, LLC (“SOIF II”), and Bluerock Special Opportunity + Income Fund III, LLC (“SOIF III”) as the Class B Members.

 

BRG Southside, LLC is a wholly-owned subsidiary of Bluerock Residential Holdings, L.P., the operating partnership of Bluerock Residential Growth REIT, Inc.

 

The Company holds a 90% membership interest in BR Bellaire Blvd., LLC, which owns the leasehold interest in certain real property located in Houston, Texas upon which it is developing an approximately 270-unit Class A apartment community, known as Alexan Southside Place.

 

The duration of BR Southside Member, LLC shall be perpetual and shall continue until cancellation of the certificate of formation.

 

All figures related to the 2015 financial statements are unaudited.

 

Principles of Consolidation

 

The financial statements include the accounts of the Company. As discussed in Note 2, the Company accounts for its investment in BR Bellaire Blvd, LLC under the equity method of accounting.

 

Real Estate Joint Venture Interests

 

The Company first analyzes its investments in joint ventures to determine if the joint venture is a variable interest entity (“VIE”) in accordance with Accounting Standard Codification (“ASC”) Topic 810 and if so, whether the Company is the primary beneficiary requiring consolidation.  A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest.  VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity.  Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change in value with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses at each level of the joint venture whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE.  If it was determined an entity in which the Company holds a joint venture interest qualified as a VIE and the Company was the primary beneficiary, the entity would be consolidated. 

 

If, after consideration of the VIE accounting literature, the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of ASC 810.  These provisions provide for consolidation of majority-owned entities through a majority voting interest held by the Company providing control, or through determination of control by virtue of the Company being the general partner in a limited partnership or the controlling member of a limited liability company.

 

 

In assessing whether the Company is in control of and requiring consolidation of the limited liability company and partnership venture structures the Company evaluates the respective rights and privileges afforded each member or partner (collectively referred to as “member”).  The Company’s member would not be deemed to control the entity if any of the other members have either (i) substantive kickout rights providing the ability to dissolve (liquidate) the entity or otherwise remove the managing member or general partner without cause or (ii) has substantive participating rights in the entity.  Substantive participating rights (whether granted by contract or law) provide for the ability to effectively participate in significant decisions of the entity that would be expected to be made in the ordinary course of business.    

  

If it has been determined that the Company does not have control, but does have the ability to exercise significant influence over the entity, the Company accounts for these unconsolidated investments under the equity method of accounting. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for the Company’s share of net income (loss), including eliminations for the Company’s share of inter-company transactions, and increased (decreased) for contributions (distributions). The Company’s proportionate share of the results of operations of these investments is reflected in the Company’s earnings or losses.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and reported amounts that are not readily available from other sources. Actual results could differ from these estimates.

 

Risks and Uncertainties

 

The Company is subject to risks common to companies in the multifamily development industry, including, but not limited to, cyclical operations, availability of land and its cost, availability of financing, supply and demand for apartments, and overall local and regional economic conditions. The Company believes it has properly identified the risks and has implemented strategies to reduce the financial impact of changes in the business cycle.

 

Real Estate Assets

 

Development, Improvements, Depreciation and Amortization

 

Costs incurred to develop and improve properties are capitalized.  The Company capitalizes direct and indirect costs that are clearly related to the development, construction, or improvement of properties, including internal costs such as interest, taxes, and qualifying payroll related expenditures. Cost capitalization begins once the development or construction activity commences and ceases when the asset is ready for its intended use. Repair and maintenance and tenant turnover costs are charged to expense as incurred.  Repair and maintenance and tenant turnover costs include all costs that do not extend the useful life of the real estate asset.  Depreciation and amortization expense is computed on the straight-line method over the asset’s estimated useful life. The Company considers the period of future benefit of an asset to determine its appropriate useful life and anticipates the estimated useful lives of assets by class to be generally as follows:

 

Buildings	30 – 40 years
Building improvements	5 – 15 years
Land improvements	5 – 15 years
Furniture, fixtures and equipment	3 – 7 years

 

The Company reviews its investment in real estate for impairment whenever events or changes in circumstances indicate that the remaining estimated useful life may warrant revision or that the carrying value of the property may not be recoverable. These changes in circumstances include, but are not limited to, changes in occupancy, rental rates, net operating income, geographic location, real estate values, and management’s intentions related to the operating property.

 

 

Determining whether an investment in real estate is impaired and the amount of any such impairment requires considerable management judgment. In the event that management changes its intended holding period for an investment in real estate, impairment may result even without any other event or change in circumstances related to that investment. Under certain circumstances, management may use probability-weighted scenarios related to an investment in real estate, and the use of such analysis may also result in impairment. Impairment provisions resulting from any event or change in circumstances, including changes in management’s intentions and management’s analysis, could be material to the financial statements.

 

The Company recognizes an impairment of an investment in real estate when the estimated undiscounted cash flow is less than the net carrying value of the property. If it is determined that an investment in real estate is impaired, then the Company’s carrying value is reduced to the estimated fair value as determined by cash flow models and discount rates or comparable sales in accordance with its fair value measurement policy.

 

No impairment loss was recognized for the years ended December 31, 2017, 2016 and 2015.

 

Income Taxes

 

Income taxes on earnings or the tax benefits of losses are payable or realizable by the members, and accordingly, no provision for income taxes is reflected in the accompanying financial statements. As of December 31, 2017, 2016 and 2015, the Company had no amounts related to recognized income tax benefits and no amounts related to accrued interest and penalties.

 

Cash

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

 

Recent Accounting Pronouncements

 

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows; Restricted Cash" (“ASU 2016-18”). This update requires 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 should 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. The Company will adjust the consolidated statement of cash flows as required in conjunction with the adoption of ASU 2016-08 in 2018. ASU 2016-18 is effective for the Company for annual and interim periods beginning after December 15, 2017.

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The ASU provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. For public business entities, the amendments in ASU 2016-15 are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier application is permitted. The Company will adjust the consolidated statement of cash flows as required in conjunction with the adoption of ASU 2016-15 in 2018.

 

In March 2016, the FASB issued ASU No. 2016-07, “Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”), which eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings when the investment qualifies for the use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The new standard is effective for annual reporting periods beginning after December 15, 2016 and early adoption is permitted. ASU 2016-07 did not have a material impact on the Company’s financial statements when adopted.

 

 

In June 2016, the FASB updated Accounting Standards Codification ("ASC") Topic 326 "Financial Instruments - Credit Losses" with 2016-13 “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-03”). ASU 2016-13 enhances the methodology of measuring expected credit losses to include the use of forward-looking information to better inform credit loss estimates. ASU 2016-13 is effective for annual periods (including interim periods within those periods) beginning after December 15, 2019. The Company is currently evaluating the guidance and has not determined the impact this standard may have on the Company’s financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company expects that, because of the ASU 2016-02’s emphasis on lessee accounting, ASU 2016-02 will not have a material impact on the Company’s accounting for leases. Consistent with present standards, the Company will continue to account for lease revenue on a straight-line basis. Also consistent with the Company’s current practice, under ASU 2016-02 only initial direct costs that are incremental to the lessor will be capitalized.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under the new standard, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue is generally recognized net of allowances.  In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers-Deferral of the Effective Date which defers the effective date of the new revenue recognition standard until the first quarter of 2018.  Therefore, ASU 2014-09 will become effective for the Company in the first quarter of the fiscal year ending December 31, 2018.  Early adoption is permitted, but not earlier than the first quarter of the fiscal year ending December 31, 2017.  The ASU allows for either full retrospective or modified retrospective adoption. The Company has selected the modified retrospective approach. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers” (Topic 606): Identifying Performance Obligations and Licensing, which adds guidance on identifying performance obligations within a contract. The majority of the Company's revenue is derived from rental income, which is scoped out from this standard and will be accounted for under ASU 2016-02, Leases, discussed above. The Company's other revenue streams, which are being evaluated under this ASU, include but are not limited to other property revenues and interest income from related parties determined not to be within the scope of ASU 2016-02, and gains and losses from real estate dispositions. The Company will continue to assess the impact of the new standard and will adopt it as of January 1, 2018. The adoption of ASU 2014-09 is not expected to have a material impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) (Topic 606)” (“ASU 2016-08”), which updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance (1) require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer; (2) illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer; (3) clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a specified good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances; and (4) revise existing examples and add two new ones to more clearly depict how the guidance should be applied. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of Topic 606, Revenue from Contracts with Customers (see ASU 2014-09 above). The majority of the Company's revenue is derived from rental income, which is scoped out from this standard and will be accounted for under ASU 2016-02, Leases, discussed above.  The Company will continue to assess the impact of the new standard and will adopt it as of January 1, 2018. The adoption of ASU 2016-08 is not expected to have a material impact on the Company’s financial statements.

 

 

In February 2017, the FASB issued ASU 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. ASU 2017-05 also defines the term in substance nonfinancial asset. It is effective for annual periods beginning after December 15, 2017. The adoption of this standard is not anticipated to have a material impact on our consolidated financial statements.

 

2.

Investment in unconsolidated real estate joint venture

 

The Company has concluded that BR Bellaire Blvd., LLC is not a variable interest entity. Based on the voting rights of the unrelated joint venture partner, the Company has concluded that the unrelated joint venture partner controls BR Bellaire Blvd., LLC. The Company determined that it exercises significant influence over BR Bellaire Blvd., LLC and, accordingly, accounts for its interest in BR Bellaire Blvd., LLC under the equity method of accounting.

 

Summary balance sheets information for the unconsolidated joint venture is as follows:

 

		December 31,				December 31,
		2017				2016
Balance Sheets:
Real estate, net of depreciation		$	44,626,671			$	15,958,063
Other assets			266,781				4,306,934
Total assets		$	44,893,452			$	20,264,997
Construction loan payable		$	24,546,239			$	1,000
Other liabilities			3,746,871				3,170,486
Total liabilities		$	28,293,110			$	3,171,486
Members’ equity			16,600,342				17,093,511
Total liabilities and members’ equity		$	44,893,452			$	20,264,997

 

Summary statements of operations for the unconsolidated joint venture are as follows:

 

		Year Ended				Year Ended				Year Ended
		December 31, 2017				December 31, 2016				December 31, 2015
Operating Statements:
Revenues		$	163,253			$	-			$	-
Operating expenses			(398,379	)			(11,063	)			(70,681	)
Interest expense			(119,285	)			-				-
Depreciation and amortization			(138,759	)			-				-
Net loss		$	(493,170	)		$	(11,063	)		$	(70,681	)

 

 

In conjunction with the Alexan Southside development, on April 7, 2015, the Alexan Southside Place leasehold interest holder, entered into a $31.8 million construction loan of which $24.5 million and $1,000 is outstanding at December 31, 2017 and 2016, respectively, which is secured by the leasehold interest in the Alexan Southside Place property. The loan matures on April 7, 2019, and contains a one-year extension option, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty-year amortization. The loan can be prepaid without penalty.

 

BR Bellaire Blvd., LLC is subject to a land lease agreement for its underlying land. The land lease has a term of 85 years from the rent commencement date of May 1, 2015. Land lease payments of $600,000, $600,000 and $400,000 were paid in 2017, 2016 and 2015, respectively. As of December 31, 2017, future annual lease commitments under this agreement are $600,000 per year through 2099, and $200,000 in 2100.

 

3.

Members’ Equity

 

In 2015, BRG initially contributed $17,322,028 as the Class A Member, and SOIF II initially contributed $1,314,349 and SOIF III contributed $1,314,349 as the Class B Members. The Class A Member is entitled to a Class A current return of 15% of its contributions. The net income and loss, after allocation of the preferred return to the Class A Member, are generally allocated to the Class B Members. The Class B Members are the managing members of the Company.

 

In 2017, BRG additionally contributed $3,261,606 as Class A Priority contribution, entitled to a 20% priority return. SOIF II and SOIF III additionally contributed $300,000 each as the Class B Members during the year ended December 31, 2017.

 

The Class A Member has the right to convert its Class A Member interest into a 69% Class B Member interest during the six-month period following the achievement of seventy percent occupancy, assuming that all original capital commitments were contributed. At December 31, 2017, the property was 14.4% occupied.

 

The Class A Member’s interest is subject to mandatory redemption by the Company on the earlier of six months following the maturity date of the construction loan, including the exercise of any extensions, or any earlier acceleration or due date thereof. If the Company does not redeem the Class A Member’s interest, the Class A return increases to 20% until redeemed.

 

4.

Subsequent Events

 

The Company has evaluated subsequent events through March 13, 2018 which is the date that the financial statements were issued. No events have taken place that require disclosure.