Resource Apartment REIT III, Inc. - FORM 10-K - March 29, 2018

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EX-32.2 - EXHIBIT 32.2 - Resource Apartment REIT III, Inc.rareitiii-20171231x10kex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource Apartment REIT III, Inc.rareitiii-20171231x10kex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Apartment REIT III, Inc.rareitiii-20171231x10kex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Apartment REIT III, Inc.rareitiii-20171231x10kex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
o
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 333-207740
reitiiilogocoolgreya04.jpg
RESOURCE APARTMENT REIT III, Inc.   
(Exact name of registrant as specified in its charter)
Maryland
 
47-4608249
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
1845 Walnut Street, 18th Floor, Philadelphia, PA, 19103
(Address of principal executive offices) (Zip code)
 
 
 
 (215) 231-7050
(Registrant's telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
None
 
None
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No R
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No R
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 R No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R 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. R
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer                  o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company þ
 
 
Emerging growth company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
There is no established market for the registrant's shares of common stock. The registrant is currently conducting its ongoing initial public offering of its shares of Class A, Class T, Class R and Class I common stock pursuant to a Registration Statement on Form S-11. There were 1,440,282 shares of common stock held by non-affiliates at June 30, 2017, the last business day of the registrant's most recently completed second fiscal quarter. As of March 23, 2018, there were 624,078 outstanding shares of Class A common stock, 1,086,639 outstanding shares of Class T common stock, 3,249,706 outstanding shares of Class R common stock and 61,380 outstanding shares of Class I common stock of Resource Apartment REIT III, Inc.
Registrant incorporates by reference portions of the Resource Apartment REIT III, Inc. Definitive Proxy Statement for the 2018 Annual Meeting of Stockholders (Items 10, 11, 12, 13, and 14 of Part III).


RESOURCE APARTMENT REIT III, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K

 
 
PAGE
 
Forward Looking Statements
 
PART I
 
 
  Item 1.
  Item 1A.
  Item 1B.
Unresolved Staff Comments
  Item 2.
Properties
  Item 3.
Legal Proceedings
  Item 4.
Mine Safety Disclosures
 
 
 
PART II
 
 
  Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  Item 6.
Selected Financial Data
  Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
  Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
  Item 8.
Financial Statements and Supplementary Data
  Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  Item 9A.
Controls and Procedures
  Item 9B.
Other Information
 
 
 
PART III
 
 
  Item 10.
Directors, Executive Officers and Corporate Governance
  Item 11.
Executive Compensation
  Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
  Item 13.
Certain Relationships and Related Transactions, and Director Independence
  Item 14.
Principal Accounting Fees and Services
 
 
 
PART IV.
 
 
  Item 15.
Exhibits and Financial Statement Schedule
 
 
 



Forward-Looking Statements

Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expects," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology. Actual results may differ materially from those contemplated by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
We are dependent on Resource REIT Advisor, LLC (formerly known as Resource Apartment Advisor III, LLC) (our "Advisor") to select investments and conduct our operations. Our Advisor has a limited operating history and limited experience operating a public company. This limited experience makes our future performance difficult to predict.
•
Our executive officers and some of our directors are also officers, directors, managers or key professionals of our Advisor, Resource Securities LLC (formerly known as Resource Securities, Inc.) (our "Dealer Manager") and other entities affiliated with Resource Real Estate, LLC (formerly known as Resource Real Estate, Inc.) (our "Sponsor"). As a result, these individuals face conflicts of interest, including significant conflicts created by our Advisor’s compensation arrangements with us and other programs sponsored by our Sponsor and conflicts in allocating time among us and these other programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
•
We pay substantial fees to and expenses of our Advisor, its affiliates and participating broker-dealers, which payments increase the risk that our stockholders will not earn a profit on their investment.
•
Our Advisor and its affiliates receive fees in connection with transactions involving the acquisition and management of our investments. These fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us.
•
There is no limit on the amount we can borrow to acquire a single real estate investment, but pursuant to our charter, we may not leverage our assets with debt financing such that our borrowings would be in excess of 300% of our net assets unless a majority of our independent directors find substantial justification for borrowing a greater amount.
•
We may lack property diversification if we do not raise substantial funds in our initial public offering.
•
Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our Advisor. To the extent these distributions exceed our net income or net capital gain, a greater proportion of your distributions will generally represent a return of capital as opposed to current income or gain, as applicable.
•
We may experience adverse business developments or conditions similar to those affecting certain programs sponsored by our Sponsor, which could limit our ability to make distributions and could decrease the value of an investment in us.
•
Our failure to qualify as a real estate investment trust for federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders.
All forward-looking statements should be read in light of the risks described above and identified in the "Risk Factors" section of our Registration Statement on Form S-11 (File No. 333-207740) filed with the Securities and Exchange Commission, as the same may be amended and supplemented from time to time.




PART I
ITEM 1.
BUSINESS
General
Resource Apartment REIT III, Inc. is a Maryland corporation, formed on July 15, 2015, that intends to take advantage of its sponsor's multifamily investing and lending platforms to invest in apartment communities in order to provide stockholders with growing cash flow and increasing asset values. As used herein, the terms "we," "our" and "us" refer to Resource Apartment REIT III, Inc. and, as required by context, Resource Apartment OP III, LP, which we refer to as our "Operating Partnership" and to their subsidiaries. We intend to acquire underperforming apartment communities which we will renovate and stabilize in order to increase rents. To a lesser extent, we may also seek to originate and acquire commercial real estate debt secured by apartment communities. We cannot predict, however, the ultimate allocation of net proceeds from our initial public offering between property acquisitions and debt investments at this time because this allocation will depend, in part, on market conditions and opportunities and on the amount of financing that we are able to obtain with respect to the types of assets in which we seek to invest. At December 31, 2017, we owned two multifamily properties, as described further in "Item 2. Properties". We intend to continue to purchase a diversified portfolio of underperforming U.S. commercial real estate and real estate-related debt, including properties that may benefit from renovations that may increase their long-term values.
We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that our Advisor presents us with attractive investment opportunities that allow us to meet the real estate investment trust ("REIT") requirements under the Internal Revenue Code of 1986, as amended, our portfolio composition may vary from what we initially expect.
We are externally managed by our Advisor. Our Advisor manages our day-to-day operations and our portfolio of real estate assets, including making certain decisions with respect to the acquisition of certain insignificant investments, subject to the limitations in our charter and the direction and oversight of our board of directors (our "Board"). Our Advisor also provides asset-management, marketing, investor-relations and other administrative services on our behalf.
We intend to qualify as a REIT commencing with the taxable year that ended December 31, 2017. If we qualify as a REIT for federal income tax purposes, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year after electing REIT status, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and cash available for distribution. However, we believe that we will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes so as to retain our REIT qualification.
Our Advisor is an indirect wholly owned subsidiary of Resource America, Inc. ("RAI"). RAI is a wholly-owed subsidiary of C-III Capital Partners, LLC ("C-III"), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III controls our Advisor, our Dealer Manager and Resource Apartment Manager III, LLC (our "Manager"). C-III also controls all of the shares of our common stock held by RAI and the Advisor. To provide its services, the Advisor draws upon RAI, C-III, their management teams and their collective investment experience.
We intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended.
Our Offering
We are offering to the public up to $1.1 billion of shares of our common stock, consisting of up to $1.0 billion of shares in our primary offering and up to $100.0 million of shares pursuant to our distribution reinvestment plan ("DRIP"). Through July 2, 2017, we offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock at prices of $9.52 per share and $9.13 per share, respectively.
The offering price for shares offered pursuant to the DRIP is $9.60 per share for Class A, $9.09 per share for Class T, $9.14 per share for Class R and $8.90 per share for Class I. We will determine our net asset value ("NAV") per share on a date no later than June 30, 2018 (the "NAV Pricing Date"). Commencing on the NAV Pricing Date, if the primary offering is ongoing, we


will offer Class R and Class I shares in our primary offering at a price equal to the NAV per share for Class R and Class I shares, respectively, plus applicable selling commissions and dealer manager fees, and pursuant to the DRIP at a price equal to 96% of the new primary offering price. If our primary offering is not ongoing on the NAV Pricing Date, or on the date of any subsequent NAV pricing, we will offer Class A, Class T, Class R and Class I shares pursuant to the DRIP at a price equal to 96% of the most recently determined NAV per share. We will update our NAV at least annually following the NAV Pricing Date and further adjust the per share price in our primary offering and DRIP accordingly. As of December 31, 2017, we have raised aggregate primary offering proceeds of approximately $35.6 million from the sale of 601,207 Class A shares, 1,049,996 Class T shares, 2,049,713 Class R shares and 35,985 Class I shares of common stock.
On August 10, 2015, our Advisor contributed $200,000 to us in exchange for 20,000 shares of common stock. On June 29, 2016, RAI purchased 222,222 shares of Class A common stock for $2.0 million in our offering. On August 5, 2016, our Advisor exchanged 5,000 shares of common stock for 50,000 shares of our convertible stock. Under limited circumstances, these shares may be converted into shares of our Class A common stock satisfying our obligation to pay the Advisor an incentive fee and diluting the stockholders’ interest in us.
Our Business Strategy
Our business strategy has a particular focus on multifamily assets, although we may also purchase interests in other types of commercial property assets consistent with our investment objectives. We intend to acquire underperforming multifamily rental properties which we will renovate and stabilize in order to increase rents and to a lesser extent, we may also seek to acquire and originate commercial real estate debt secured by apartments. We believe multiple opportunities exist within the multifamily industry today and will continue to present themselves over the next few years to real estate investors who possess the following characteristics: (i) extensive experience in multifamily investing, (ii) strong management platforms specializing in operational and financial performance optimization, (iii) financial sophistication allowing them to benefit from complex opportunities and (iv) the overall scale and breadth of a national real estate platform in both the equity and debt markets. We seek to utilize our sponsor's dedicated multifamily investing and lending relationships to take advantage of the full range of opportunities across the entire multifamily spectrum of investments. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities.
Competition
We believe that the current market for properties that meet our investment objectives is extremely competitive and many of our competitors have greater resources than we do. We compete with numerous other entities engaged in real estate investment activities, including individuals, corporations, banks and insurance company investment accounts, other REITs, real estate limited partnerships, the U.S. government and other entities, to acquire, manage and sell real estate properties and real estate related assets. Many of our expected competitors enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Our management does not expect compliance with existing or future laws to have a material adverse effect on our financial condition or results of operations. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we may hold an interest, or on properties that we may acquire directly or indirectly in the future.
Employees and Economic Dependency
We have no paid employees. The employees of our Advisor or its affiliates provide management, acquisition, advisory and certain administrative services for us. We are dependent on our Advisor and its affiliates for certain services that are essential to us, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments; management of the daily operations of our portfolio; and other general and administrative responsibilities. In the event that these affiliated companies are unable to provide the respective services, we will be required to obtain such services from other sources.




Access to Our Information
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the United States Securities and Exchange Commission ("SEC"). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports on our website, www.resourcereit3.com, or by responding to requests addressed to our investor relations group.
ITEM 1A.    RISK FACTORS
Risk factors have been omitted as permitted under rules applicable to smaller reporting companies.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.    PROPERTIES
At December 31, 2017, we owned two multifamily properties. The following is a summary of our real estate properties:
Multifamily Community Name
 
City and State
 
Date of Acquisition
 
Contractual Purchase Price (1)
 
Year of Construction
 
Number
of Units
 
Average Unit Size (Sq. Ft.)
 
Physical Occupancy Rate (2)
 
Effective Monthly Revenue per Unit(3)
 
Mortgage Debt Secured by Property
Payne Place
 
Alexandria, VA
 
8/19/2016
 
$
2,500,000

 
1950
 
11

 
605

 
100.0
%
 
$
1,606

 
$
1,625,000

Bay Club
 
Jacksonville, FL
 
7/31/2017
 
28,300,000

 
1990
 
220

 
1,016

 
92.3
%
 
1,214

 
21,520,000

 
 
 
 
 
 
 
 
 
 
231

 
 
 
 
 
 
 
 
 
(1)
Contractual purchase price excludes closing costs, acquisition expenses, and other immaterial settlement date adjustments and pro-rations.
(2)
Physical occupancy rate is defined as the units occupied at December 31, 2017 divided by the total number of residential units.
(3)
Effective monthly rental revenue per unit has been calculated based on the leases in effect at December 31, 2017, adjusted for any tenant concessions, such as free rent. Effective monthly rental revenue per unit only includes base rents for occupied units, including affordable housing payments and subsidies. It does not include other charges for storage, parking, pets, cleaning, clubhouse or other miscellaneous amounts.
ITEM 3.    LEGAL PROCEEDINGS
From time to time, we may become party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.



PART II
ITEM 5 .
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stockholder Information
At March 23, 2018, 624,078 Class A shares were outstanding, of which 15,378 were held by the Advisor and 227,822 were held by RAI, 1,086,639 Class T shares were outstanding, 3,249,706 Class R shares were outstanding, and 61,380 Class I shares were outstanding. At March 23, 2018, there were 104 holders of Class A shares, 298 holders of Class T shares, 849 holders of Class R shares, and 9 holders of Class I shares. There is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder. Through July 2, 2017, we offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock at prices of $9.52 per share and $9.13 per share, respectively. The initial offering price for shares offered pursuant to the DRIP is $9.60 per share for Class A, $9.09 per share for Class T, $9.14 per share for Class R and $8.90 per share for Class I. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for our shares will develop.
To assist Financial Industry Regulatory Authority, Inc. ("FINRA") members and their associated persons that participated in our initial public offering in meeting their customer account statement reporting obligations pursuant to applicable FINRA and National Association of Securities Dealers Conduct Rules, we disclose in each annual report distributed to stockholders a per-share estimated value of our common stock, the method by which it was developed, and the date of the data used to develop the estimated value. For this purpose, the estimated value of the Class A, Class T, Class R, and Class I shares is $8.90 per share as of December 31, 2017. The basis for this valuation is the net investment amount of our shares, which is based on the "amount available for investment" percentage shown in the estimated use of proceeds table in the prospectus for our initial public offering. No later than the NAV pricing date, we will provide our NAV per Class A share, per Class T share, per Class R share and per Class I share.
Unregistered Sales of Equity Securities
All securities sold by us during the year ended December 31, 2017 were sold in an offering registered under the Securities Act of 1933.
Use of Proceeds
On April 28, 2016, our Registration Statement on Form S-11 (File No. 333-207740), covering our initial public offering of up to $1.1 billion in shares of common stock, was declared effective under the Securities Act of 1933. We retained our Dealer Manager as the dealer manager for our offering.
We are offering to the public up to $1.1 billion of shares of our common stock, consisting of up to $1.0 billion of shares in our primary offering and up to $100.0 million of shares pursuant to our DRIP. Through July 2, 2017, we offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock at prices of $9.52 per share and $9.13 per share, respectively. The offering price for shares offered pursuant to the DRIP is $9.60 per share for Class A, $9.09 per share for Class T, $9.14 per share for Class R and $8.90 per share for Class I. At December 31, 2017, our Advisor has incurred costs on our behalf of approximately $6.2 million.
At December 31, 2017, a total of 601,207 Class A shares, including shares purchased by both our Advisor and RAI, 1,049,996 Class T shares, 2,049,713 Class R shares and 35,985 Class I shares of common stock have been issued in connection with our public offering resulting in gross offering proceeds of approximately $35.6 million. From the commencement of our public offering through December 31, 2017, we incurred selling commissions, dealer manager fees, other underwriting compensation and other organization and offering costs in the amounts set forth below. We generally paid selling commissions and dealer manager fees to our Dealer Manager for the sale of shares in our primary offering and our Dealer Manager reallowed all selling commissions and a portion of the dealer manager fees to participating broker-dealers. In addition, we reimburse our Advisor and Dealer Manager for certain organizational and offering costs.



Type of Expense
 
Amount
Selling commissions
 
$
875,557

Dealer manager fees
 
1,021,189

Distribution and shareholder service fee (1)
 
1,075,749

Other organization and offering costs (2)
 
816,116

Total expenses
 
$
3,788,611

 
(1)
Outstanding Class T and R shares issued in our primary offering are subject to a 1% annual distribution and shareholder servicing fee from the date on which each share is issued. Such fees are not paid from offering proceeds and do not reduce the amount of net offering proceeds to us. At December 31, 2017, $989,515 of these fees are unpaid and included in due to related parties on our consolidated balance sheets.
(2)
At December 31, 2017, this amount is included in due to related parties on the consolidated balance sheets.
From the commencement of our initial public offering through December 31, 2017, the net offering proceeds to us, after deducting the total expenses incurred as described above, excluding the distribution and shareholder servicing fee as they do not reduce the net offering proceeds to us, were approximately $32.9 million. At December 31, 2017, we have used the net proceeds from our ongoing initial public offering and debt financing to acquire approximately $30.8 million in real estate investments. Of the amount used for the purchase of these investments, approximately $665,000 was paid to our Advisor as acquisition fees and approximately $46,000 was paid to other affiliates for acquisition expense reimbursements.
Share Redemption Program
Our common stock is currently not listed on a national securities exchange and we will not seek to list our common stock unless and until such time as our Board determines that the listing of our common stock would be in the best interests of our stockholders. In order to provide stockholders with the benefit of some interim liquidity, our Board has adopted a share repurchase program that enables our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. The terms of our share repurchase program are more flexible in cases involving the death or disability of a stockholder. We may reject any request for repurchase of shares. Repurchases of shares of our common stock, when requested, generally will be made quarterly. We will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of our common stock outstanding on December 31 of the previous calendar year. In addition, we are only authorized to repurchase shares using proceeds from our DRIP plus 1.0% of the operating cash flow from the previous fiscal year (to the extent positive) and any additional operating funds, if any, as our Board in its sole discretion may reserve for this purpose. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.
Unless the shares of our common stock are being repurchased in connection with a stockholder’s death or qualifying disability, the purchase price for shares repurchased under our share repurchase program will be as set forth below until the NAV Pricing Date. Prior to the NAV Pricing Date, and unless the shares are being repurchased in connection with a stockholder’s death or qualifying disability, we will repurchase shares at a price equal to, or at a discount from, the purchase price paid for the shares being repurchased as follows:
Share Purchase Anniversary
 
Redemption Price as a Percentage of Purchase Price
Less than 1 year
 
No redemption allowed
1 year
 
92.5%
2 years
 
95.0%
Notwithstanding the foregoing, until the NAV Pricing Date, shares received as a stock dividend will be redeemed at a purchase price of $0.00. In addition, the purchase price per share will be adjusted for any stock combinations, splits, recapitalizations and the like with respect to the shares of common stock and reduced by the aggregate amount of net sale or refinance proceeds per share, if any, distributed to the stockholder prior to the repurchase date. Shares repurchased in connection with a stockholder’s death or qualifying disability will be repurchased at a price per share equal to 100% of the amount the stockholder paid for each share, or, once we have established an estimated NAV per share, 100% of such amount, as determined by our Board, subject to any special distributions previously made to our stockholders. Shares repurchased in connection with a stockholder’s other exigent circumstances, such as bankruptcy, within one year from the purchase date, will be repurchased at a price per share equal to the price per share we would pay had the stockholder held the shares for one year from the purchase date, and at all other times in accordance with the terms described above. A stockholder must have beneficially held the shares for at least one year prior to


offering them for sale to us through our share repurchase program, unless the shares are being repurchased in connection with a stockholder’s death, qualifying disability, or certain other exigent circumstances. Our Board reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period requirement in the event of the death or qualifying disability of a stockholder, other involuntary exigent circumstances such as bankruptcy, or a mandatory distribution requirement under a stockholder’s IRA.
During the period covered by this report, we did not repurchase any of our securities.
Distribution Information
Cash Distributions
During the years ended December 31, 2017 and 2016, we declared and paid aggregate distributions, which were paid from debt financing and offering proceeds, as follows:
 
 
Year Ended December 31, 2017
 
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
Distributions declared
 
$
253,708

 
$
332,545

 
$
396,088

 
$
11,330

 
$
993,671

 
 
 
 
 
 
 
 
 
 
 
Distributions reinvested in shares of common stock paid
 
70,500

 
141,933

 
75,823

 
1,187

 
289,443

Cash distributions paid
 
122,557

 
79,359

 
68,184

 
5,425

 
275,525

Total distributions paid
 
$
193,057

 
$
221,292

 
$
144,007

 
$
6,612

 
$
564,968

 
 
Year Ended December 31, 2016
 
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
Distributions declared
 
$
35,177

 
$
5,901

 
$
—

 
$
—

 
$
41,078

 
 
 
 
 
 
 
 
 
 
 
Distributions reinvested in shares of common stock paid
 
3,293

 
1,087

 
—

 
—

 
4,380

Cash distributions paid
 
11,272

 
252

 
—

 
—

 
11,524

Total distributions paid
 
$
14,565

 
$
1,339

 
$
—

 
$
—

 
$
15,904

On December 14, 2017, our Board declared cash distributions on the outstanding shares of all classes of our common stock based on daily record dates for the periods from December 29, 2017 through March 29, 2018, which distributions were paid or will be paid on January 31, 2018, February 28, 2018 and April 2, 2018, respectively. Distributions for these periods were or will be calculated based on stockholders of record each day during these periods at a rate of (i) $0.001434521 per share per day less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock.












Distributions declared, distributions paid and cash flows used in operating activities were as follows for the year ended December 31, 2017:
 
 
Distributions Paid
 
 
 
Distributions Declared
 
Sources of Distributions Paid
2017
 
Cash
 
Distributions Reinvested (DRIP)
 
Total
 
Cash Used in Operating Activities
 
Total
 
Per Share(1)
 
Operating Activities
 
Offering Proceeds
 
Debt Financing
 
 
 
 
 
 
Amount Paid / Percent of Total
 
Amount Paid / Percent of Total
 
Amount Paid / Percent of Total
First quarter
 
$
16,429

 
$
11,092

 
$
27,521

 
$
(4,598
)
 
$
11,083

 
$
0.015

 
- / -
 
$
27,521

/100%
 
- / -
Second quarter
 
22,227

 
21,214

 
43,441

 
(64,700
)
 
53,567

 
0.051

 
- / -
 
$
43,441

/100%
 
- / -
Third quarter
 
79,724

 
83,468

 
163,192

 
(325,606
)
 
235,891

 
0.132

 
- / -
 
- / -
 
$
163,192

/100%
Fourth quarter
 
157,145

 
173,669

 
330,814

 
(356,657
)
 
693,130

 
0.215

 
- / -
 
- / -
 
$
330,814

/100%
Total
 
$
275,525

 
$
289,443

 
$
564,968

 
$
(751,561
)
 
$
993,671

 
 
 
 
 
 
 
 
 
 

(1)
Distributions for Class T and Class R shareholders were reduced for the distribution and shareholder servicing fee.
Cash distributions paid since inception were as follows:
Fiscal Period Paid
 
Per Share (1)
 
Distributions
Reinvested in
Shares of
Common Stock
 
Net
Cash
Distributions
 
Total
Aggregate
Distributions
12 months ended December 31, 2016
 
$0.000547945 per day
 
$
4,380

 
$
11,524

 
$
15,904

Seven months ended July 31, 2017
 
$0.000547945 per day
 
41,012

 
47,682

 
88,694

Five months ended December 31, 2017
 
$0.001434521 per day
 
248,431

 
227,843

 
476,274

 
 
 
 
$
293,823

 
$
287,049

 
$
580,872


(1)
Distributions for Class T and Class R shareholders were reduced for the distribution and shareholder servicing fee.
We will elect to be taxed as a REIT and to operate as a REIT beginning with our taxable year ended December 31, 2017. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our common stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our Board may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our Board deems relevant.
Our Board considers many factors before authorizing a cash distribution, including current and projected cash flow from operations, capital expenditure needs, general financial conditions and REIT qualification requirements. To the extent permitted by Maryland law, we may borrow funds, issue new securities or sell assets to make and cover our declared distributions, all or a portion of which could be deemed a return of capital. We may also fund such distributions from advances from our Advisor or sponsor or from our Advisor's deferral of its asset management fee, although we have no present intention to do so. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations.
Our net loss attributable to common stockholders for the year ended December 31, 2017 was $3,131,845 and net cash used in operating activities was $751,561. Our cumulative cash distributions and net loss attributable to common stockholders from inception through December 31, 2017 were $580,872 and $3,908,092, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with proceeds from both our public offering and debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.


We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders. We will make distributions with respect to our shares of common stock in the sole discretion of our Board.
Stock Dividends
On October 7, 2016, our Board authorized a stock dividend in the amount of 0.005 shares of common stock to all common stockholders of record as of the close of business on December 31, 2016. On February 22, 2017, our Board authorized a stock dividend, in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on March 31, 2017. On April 25, 2017, our Board authorized a stock dividend in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on July 1, 2017. The stock dividends were issued in the same class of shares as the shares for which such stockholder received the stock dividend. We issued the stock dividends on January 13, 2017, April 13, 2017, and July 14, 2017, respectively.
ITEM 6.
SELECTED FINANCIAL DATA
Selected financial data has been omitted as permitted under rules applicable to smaller reporting companies.

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to our financial statements and should be read in conjunction with the accompanying financial statements of Resource Apartment REIT III, Inc. and the notes thereto appearing elsewhere in this report. Statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not historical facts may be forward-looking statements. See also " Forward-Looking Statements" preceding Part I.
Results of Operations
We were formed on July 15, 2015. We commenced active real estate operations on August 19, 2016 with the acquisition of our first multifamily property. At December 31, 2017, we owned two multifamily properties. As such, we had limited operating results during the years ended December 31, 2017 and 2016.
Our management is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting our targeted portfolio or the U.S. apartment community industry, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.
    


The following table sets forth the results of our operations:
 
Years Ended December 31,
 
2017
 
2016
Revenues:
 
 
 
Rental income
$
1,443,863

 
$
72,119

Total revenues
1,443,863

 
72,119

 
 
 
 
Expenses:
 
 
 
Rental operating - expenses
400,432

 
14,898

Rental operating - payroll
165,558

 
—

Rental operating - real estate taxes
182,166

 
8,021

     Subtotal - rental operating
748,156

 
22,919

Acquisition costs
906,644

 
128,119

Property management fees
9,505

 
3,123

Management fees - related parties
215,433

 
9,844

General and administrative
1,258,682

 
641,538

Loss on disposal of fixed assets
186,078

 
—

Depreciation and amortization expense
908,624

 
35,502

Total expenses
4,233,122

 
841,045

Loss before other income (expense)
(2,789,259
)
 
(768,926
)
 
 
 
 
Other income (expense):
 
 
 
Other income
1,500

 
—

Interest income
16,639

 
762

Interest expense
(360,725
)
 
(8,083
)
Net loss
$
(3,131,845
)
 
$
(776,247
)
During the years ended December 31, 2017 and 2016, we incurred the following general and administrative expenses:
 
Years Ended December 31,
 
2017
 
2016
Allocated payroll and benefits
$
525,562

 
$
118,429

Directors' fees
126,500

 
60,870

Allocated rent
99,068

 
43,922

Professional fees
186,537

 
177,076

Travel and entertainment
48,050

 
5,426

Insurance
35,228

 
138,492

IT related expenses
179,841

 
80,332

Other
57,896

 
16,991

 
$
1,258,682

 
$
641,538






As a result of the timing of the commencement of our public offering and our active real estate operations, comparative operating results are not relevant to a discussion of operations for the two periods represented.  We expect revenues and expenses to increase in future periods as we acquire additional investments. At December 31, 2017, we owned two multifamily properties. The following is a summary of our real estate properties and their respective occupancy and monthly revenue per unit rates:
Multifamily Community Name
 
Physical Occupancy Rate
 
Effective Monthly Revenue per Unit
Payne Place
 
100.0
%
 
$
1,606

Bay Club
 
92.3
%
 
1,214


Liquidity and Capital Resources
We are offering to the public up to $1.1 billion of shares of our common stock, consisting of up to $1.0 billion of shares in our primary offering and up to $100.0 million of shares pursuant to our DRIP. Through July 2, 2017, we offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock at prices of $9.52 per share and $9.13 per share, respectively. The offering price for shares offered pursuant to the DRIP is $9.60 per share for Class A, $9.09 per share for Class T, $9.14 per share for Class R and $8.90 per share for Class I.
We anticipate deriving the capital required to purchase real estate investments and conduct our operations from the proceeds of our initial public offering and any future offerings we may conduct, from secured or unsecured financings from banks or other lenders and from proceeds from the sale of assets. In addition, our Advisor has and will advance funds to us for certain organization and offering costs. At December 31, 2017, we have purchased two properties using both offering proceeds and debt financing.
If we are unable to raise substantial funds in the offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we are able to raise substantial funds in our offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions. At December 31, 2017, we have raised approximately $35.6 million in our public offering.
We intend to make reserve allocations as necessary to aid our objective of preserving capital for our investors by supporting the maintenance and viability of properties we acquire in the future. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds when we need them or upon acceptable terms.
On December 15, 2016, we, through a wholly owned subsidiary, entered into a 30-year secured mortgage loan with JPMorgan Chase Bank, N.A., an unaffiliated lender, for borrowings of approximately $1.6 million secured by Payne Place (the "Payne Place Mortgage Loan"). The Payne Place Mortgage Loan matures on January 1, 2047. The Payne Place Mortgage Loan bears interest at an initial fixed rate of 3.11% until January 1, 2020. Beginning January 1, 2020, the loan will bear interest at a rate of LIBOR plus 2.25%. Monthly payments include repayments of principal and interest. Any remaining principal balance and all accrued and unpaid interest and fees will be due at maturity. We may prepay the Payne Place Mortgage Loan in full at any time or in part from time to time: (1) during the first year of the loan upon payment of a prepayment premium equal to 3% of the amount prepaid; (2) during the second year of the loan upon payment of a prepayment premium equal to 2% of the amount prepaid; (3) during the third year of the loan upon payment of a prepayment premium equal to 1% of the amount prepaid; and (3) after the third year of the loan with no prepayment premium. The Payne Place Mortgage Loan is guaranteed by us and RAI.
On July 31, 2017, we, through a wholly owned subsidiary, entered into a seven year, $21.5 million secured mortgage loan with CBRE Capital Markets, Inc., an unaffiliated lender, secured by Bay Club (the "Bay Club Mortgage Loan"). The Bay Club Mortgage Loan matures on August 1, 2024. The Bay Club Mortgage Loan bears interest at a rate of LIBOR plus 1.87%, with a maximum interest rate of 5.75%. Monthly payments are interest only for the first 24 months. Beginning on August 1, 2019, we will pay both principal and interest based on 30 year amortization. Any remaining principal balance and all accrued and unpaid interest and fees will be due at maturity. We may prepay the Bay Club Mortgage Loan in full at any time: (1) after July 31, 2019


and until April 30, 2024 upon payment of a prepayment premium equal to 1% of the principal amount prepaid; and (2) after April 30, 2024 with no prepayment premium. The non-recourse carveouts under the loan documents for the Bay Club Mortgage Loan are guaranteed by us.
Although there is no limit on the amount we can borrow to acquire a single real estate investment, we may not leverage our assets with debt financing such that our borrowings are in excess of 300% of our net assets unless a majority of our independent directors find substantial justification for borrowing a greater amount. Examples of such a substantial justification include, without limitation, obtaining funds for the following: (i) to repay existing obligations, (ii) to pay sufficient distributions to maintain REIT status, or (iii) to buy an asset where an exceptional acquisition opportunity presents itself and the terms of the debt agreement and the nature of the asset are such that the debt does not increase the risk that we would become unable to meet our financial obligations as they became due. On a total portfolio basis, however, based on current lending market conditions, we expect to leverage our assets in an amount equal to 55% to 60% of the cost of our assets.
We may finance the acquisition costs of individual real estate investments, as well as the acquisition costs of all or a group of real estate investments acquired by us, by causing our subsidiaries to borrow directly from third-party financial institutions or other commercial lenders. Under these circumstances, our Advisor anticipates that certain properties acquired will serve as collateral for the debt we incur to acquire those particular properties and that we will seek to obtain nonrecourse financing for the acquisition of the properties. However, there is no guarantee that our Advisor will be successful in obtaining financing arrangements on a property-by-property basis and that the loans would be nonrecourse to us. Additionally, we may obtain corporate-level financing through a line of credit from third-party financial institutions or other commercial lenders. Our assets will serve as collateral for this type of debt incurred to acquire real estate investments. We may also obtain seller financing with respect to specific assets that we acquire.
Organization and Offering Costs
We expect to incur organization and offering costs in pursuit of our fundraising. Our organization and offering costs (other than selling commissions, dealer manager fees, and distribution and shareholder servicing fees) are initially paid by the Advisor on our behalf. Organization costs include all expenses that we incur in connection with our formation, including but not limited to legal fees and other costs to incorporate.
Pursuant to the Advisory Agreement, we are obligated to reimburse the Advisor for organization and offering costs paid by the Advisor on our behalf, up to an amount equal to 4% of gross offering proceeds as of the termination of this offering if we raise less than $500.0 million in the primary offering, and 2.5% of gross offering proceeds as of the termination of this offering if we raise $500.0 million or more in the primary offering. However, if we raise the maximum offering amount in the primary offering, we expect organization and offering expenses (other than selling commissions, the dealer manager fee and the distribution and shareholder servicing fee) to be approximately $10.0 million or 1% of gross offering proceeds. These organization and offering expenses include all actual expenses (other than selling commissions, the dealer manager fee and the distribution and shareholder servicing fee), including reimbursements to our advisor for the portion of named executive officer salaries allocable to activities related to this offering, to be incurred on our behalf and paid by us in connection with the offering.
A portion of deferred offering costs will be charged to equity upon the sale of each share of common stock sold under the public offering. Through December 31, 2017, we have charged approximately $816,000 to equity for the payment of offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal, printing and similar costs. At December 31, 2017, the Advisor has incurred approximately $6.2 million of these costs on our behalf, of which approximately $5.4 million has been deferred at December 31, 2017.
Organization costs, which include all expenses incurred by us in connection with our formation, including but not limited to legal fees and other costs to incorporate, are expensed as incurred. There can be no assurance that the our plans to raise capital will be successful.
Outstanding Class T shares issued in our primary offering are subject to a 1% annual distribution and shareholder servicing fee for five years from the date on which such share is issued. We will cease paying the distribution and shareholder servicing fee on each Class T share prior to the fifth anniversary of its issuance on the earliest of the following, should any of these events occur: (i) the date at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from the our primary offering (i.e., excluding proceeds from sales pursuant to our DRIP); (ii) the date on which we list our common stock on a national securities exchange; and (iii) the date of a merger or other extraordinary transaction in which we are a party and in which our common stock is exchanged for cash or other securities. We cannot predict if or when any of these events will occur.


Outstanding Class R shares issued in our primary offering are also subject to a 1% annual distribution and shareholder servicing fee.  We will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from our primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of our assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between the Dealer Manager and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and the Dealer Manager s advises our transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through our distribution reinvestment plan).
We record the distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares are issued. The liability will be relieved over time, as the fees are paid to the Dealer Manager, or as the fees are adjusted (if the fees are no longer payable pursuant to the conditions described above). For issued Class T shares, we have accrued an estimate of total distribution and shareholder servicing fees for the full five year period of $490,492 at December 31, 2017, of which we paid $64,951 cumulatively through December 31, 2017. For issued Class R shares, we have accrued an estimate of total distribution and shareholder servicing fees of $585,257 at December 31, 2017, of which we paid $21,283 cumulatively through December 31, 2017.
Acquisition and Asset Management Costs
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor. During our acquisition stage, we expect to make payments to our Advisor in connection with the acquisition of real estate investments. In addition, we expect to continue to make payments to our Advisor for the management of our assets and costs incurred by our Advisor in providing services to us.
Operating Expenses
At the end of each fiscal quarter, our Advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the Conflicts Committee of our Board has determined that such excess expenses were justified based on unusual and non-recurring factors.
Operating expenses for the four fiscal quarters ended December 31, 2017 exceeded the charter imposed limitation; however, the Conflicts Committee of our Board determined that the relationship of our operating expenses to our average invested assets was justified for these periods given the costs of operating a public company and the early stage of our operations.
"Average invested assets" means the average monthly book value of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. "Total operating expenses" means all expenses paid or incurred by us, as determined under accounting principles generally accepted in the United States ("GAAP"), that are in any way related to our operation, including advisory fees, but excluding (i) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of our stock; (ii) interest payments; (iii) taxes; (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves; (v) incentive fees paid in accordance with the NASAA Statement of Policy Regarding Real Estate Investment Trusts (the "NASAA REIT Guidelines"); (vi) acquisition fees and expenses (including expenses relating to potential investments that we do not close); (vii) real estate commissions on the sale of property; and (viii) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, loans or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).




Funds from Operations and Modified Funds from Operations
Funds from operations, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.
Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Investment Program Association, or IPA. MFFO excludes from FFO the following items:
(1)
acquisition fees and expenses;
(2)
straight-line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our acquisition stage is complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:
•
Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009,


acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition expenses include those paid to our Advisor or third parties.
•
Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
•
Adjustments for amortization of above or below market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
•
Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.
•
Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our offering and acquisition stages are completed. We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry. MFFO is useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments. However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering and acquisition stages are completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.
Neither FFO nor MFFO should be considered as an alternative to net income attributable to common stockholders, nor is an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. In particular, as we intend to continue to acquire properties as part of our ongoing operations, acquisition costs and other adjustments that are increases to MFFO are, and may continue to be, a significant use of cash. Accordingly, FFO and MFFO should be reviewed in connection with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.




The following table presents our calculation of FFO and MFFO and provides additional information related to our operations:
 
Years ended December 31,
 
2017
 
2016
Net loss attributable to common stockholders - GAAP
$
(3,131,845
)
 
$
(776,247
)
Depreciation expense
478,920

(1) 
13,431

FFO attributable to common stockholders
(2,652,925
)
 
(762,816
)
Amortization of intangible lease assets
429,704

(1) 
22,071

Acquisition costs
906,644

(1) 
128,119

MFFO attributable to common stockholders
$
(1,316,577
)
 
$
(612,626
)
 
(1)
We owned two properties during the year ended December 31, 2017 as compared to one property during the year ended December 31, 2016.


Critical Accounting Policies
We consider these policies critical because they involve significant management judgments and assumptions, they require estimates about matters that are inherently uncertain, and they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of our assets and liabilities and our disclosure of contingent assets and liabilities on the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Real Estate Investments
We will record acquired real estate at fair value on its acquisition date. We will consider the period of future benefit of an asset to determine its appropriate useful life. We anticipate the estimated useful lives of our assets by class as follows:
Buildings
27.5 years
Building improvements
5.0 to 27.5 years
Furniture, fixtures, and equipment
3.0 to 5.0 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Weighted average remaining term of related leases
Allocation of Purchase Price of Acquired Assets
We record the acquisition of real properties as business combinations. Upon the acquisition of real properties, it is our policy to allocate the purchase price of properties to acquired tangible assets, consisting of land, building, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, other value of in-place leases and value of tenant relationships, based in each case on their fair values.
We will record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases, which we expect will range from one month to one year.
We measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of


value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
We also consider information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
We amortize the value of in-place leases to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense in that period.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the fair value of these assets and liabilities, which could impact the amount of our reported net income. We have up to 12 months from the date of acquisition to finalize the valuation for each property.
Revenue Recognition
We recognize minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years.
We make estimates of the collectability of our tenant receivables related to base rents, including straight-line rentals, expense reimbursements and other revenue or income. We specifically analyze accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, we make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. These estimates have a direct impact on our net income because a higher bad debt reserve results in less net income.
Adoption of New Accounting Standards
 Accounting Standards Issued But Not Yet Effective
In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  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. ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. We will adopt ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. The majority of our revenue is derived from residential rental income and other lease income, which are scoped out from this standard and included in the current lease accounting framework, and will be accounted for under ASU No. 2016-02, "Leases", as discussed below. Revenue streams that are in the scope of the new standards include (but are not limited to) administrative and late fees and revenue sharing arrangements of cable income from contracts with cable providers at our properties.  Due to the nature and timing of our identified revenue streams as of December 31, 2017, we do not anticipate the adoption of the new standards will have a material impact on our financial position or results of operations.


In February 2016, FASB issued ASU No. 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions and requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In September 2017, FASB issued ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provides additional implementation guidance on the previously issued ASU No. 2016-02 Leases (Topic 842).  ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are continuing to evaluate this guidance, however, we expect that our operating leases, where we are the lessor, will be accounted for on our balance sheet similar to our current accounting with the underlying leased asset recognized as real estate. We expect that executory costs and certain other non-lease components will need to be accounted for separately from the lease component of the lease with the lease component continuing to be recognized on a straight-line basis over the lease term and the executory costs and certain other non-lease components being accounted for under the new revenue recognition guidance in ASU 2014-09. For leases in which we are the lessee, primarily consisting of office equipment leases, we expect to recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense on a straight-line basis over the term of the lease.
In June 2016, FASB issued ASU No. 2016-03 "Financial Instruments - Credit Losses", which requires measurement and recognition of expected credit losses for financial assets held. The standard update is effective for us beginning January 1, 2019. We are continuing to evaluate this guidance; however, we do not expect the adoption of ASU No. 2016-03 to have a significant impact on our consolidated financial statements.
In August 2016, FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which addresses eight specific cash flow issues with the objective of reducing existing diversity in practice.  The guidance is effective for us as of January 1, 2018. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on our consolidated statement of cash flows.
In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which provides guidance on the classification of restricted cash in the statement of cash flows. ASU 2016-18 is effective for our fiscal year beginning January 1, 2018 and we do not expect the adoption of ASU 2016-18 to have a material effect on our consolidated financial statements and disclosures.
In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 850): Clarifying the Definition of Business," which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. ASU No. 2017-01 is effective for us beginning January 1, 2018 but early adoption is allowed. We believe all future acquisitions will be accounted for as asset acquisitions, not business acquisitions.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which alters the current goodwill impairment testing procedures. ASU No. 2017-04 will be effective for us beginning December 15, 2019. Early application is permitted. We are evaluating this guidance and assessing the impact of this guidance on our consolidated financial statements.
In August 2017, FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for us on January 1, 2019, with early adoption permitted in any interim period. We are continuing to evaluate this guidance and assessing the impact of this guidance on our consolidated financial statements.
Off Balance Sheet Arrangements
As of December 31, 2017, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
Subsequent Events
We have evaluated subsequent events and determined that no events have occurred, which would require an adjustment to or additional disclosure in the consolidated financial statements, except for the following:


On March 22, 2018, we purchased Tramore Village Apartments, a 324 unit multifamily apartment complex in Austell, Georgia for $44.4 million. The seller was an unaffiliated third party. In conjunction with the purchase, we entered into a $32.6 million mortgage on the property.
On March 28, 2018, our Board authorized a cash distribution on the outstanding shares of all classes of our common stock based on daily record dates for the period from March 30, 2018 through June 28, 2018, which we expect to pay on April 30, 2018, May 31, 2018, and June 29, 2018. The distribution will be calculated based on the stockholders of record each day during the period at a rate of (i) $0.001434521 per share per day, less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock divided by the number of shares of common stock of such class outstanding as of the close of business on the record date.
On March 28, 2018, the Company's board of directors made the determination to extend the primary portion of this offering to April 27, 2019.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk have been omitted as permitted under rules applicable to smaller reporting companies.
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements at page F-1 of this Annual Report on Form 10-K.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent registered public accountants during the year ended December 31, 2017.
ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth in the 2013 version of the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management believes that our internal control over financial reporting is effective as of December 31, 2017.


Changes in Internal Control over Financial Reporting
      There has been no change in our internal control over financial reporting that occurred during the three months ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.


PART III
ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our directors, executive officers and employees, including but not limited to, our chief executive officer and chief financial officer. Our Code of Conduct and Ethics may be found at www.resourcereit3.com, on the Materials & Filings page.

The other information required by this Item is incorporated by reference from our 2018 Proxy Statement.
ITEM 11.     EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our 2018 Proxy Statement.
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from our 2018 Proxy Statement.
ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from our 2018 Proxy Statement.
ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from our 2018 Proxy Statement.



PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
(a)
Financial Statements
1.
See the Index to Consolidated Financial Statements at page F-1 of this report.
(b)
Exhibits
Exhibit No.
 
Description
3.1
 
3.2
 
3.3
 
3.4
 
3.5
 
4.1
 
4.2
 
4.3
 
4.4
 
10.1
 
10.2
 
10.3
 
10.4
 
10.5
 
10.6
 


10.7
 
10.8
 
10.9
 
31.1
 
31.2
 
32.1
 
32.2
 
99.1
 
99.2
 
101.1
 
Interactive Data Files


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized representative.

 
RESOURCE APARTMENT REIT III, INC.
 
 
March 29, 2018
By:           /s/ Alan F. Feldman
 
Alan F. Feldman
 
Chief Executive Officer
 
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Name
 
Title
 
Date
 
 
 
 
 
/s/ Alan F. Feldman
 
Chief Executive Officer (Principal Executive Officer)
 
March 29, 2018
Alan F. Feldman
 
 
 
 
 
 
 
/s/ Steven R. Saltzman
 
Chief Financial Officer, Senior Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer)
 
March 29, 2018
Steven R. Saltzman
 
 
 
 
 
 
 
/s/ Paul A. Hughson
 
Director
 
March 29, 2018
Paul A. Hughson
 
 
 
 
 
 
 
/s/ Harvey Magarick
 
Director
 
March 29, 2018
Harvey Magarick
 
 
 
 
 
 
 
/s/ Lee F. Shlifer
 
Director
 
March 29, 2018
Lee F. Shlifer
 
 
 
 
 
 
 
/s/ David Spoont
 
Director
 
March 29, 2018
David Spoont
 
 







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Resource Apartment REIT III, Inc.

Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Resource Apartment REIT III, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2015.

/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 29, 2018



RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
 
2017
 
2016
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental properties, net
 
$
29,443,089

 
$
2,445,835

Identified intangible assets, net
 
321,468

 
27,870

 
 
29,764,557

 
2,473,705

 
 
 
 
 
Cash
 
23,752,810

 
3,351,536

Restricted cash
 
192,064

 
7,733

Tenant receivables, net
 
2,138

 
788

Due from related parties
 
4,571

 
2,352

Subscriptions receivable
 
413,084

 
210,000

Prepaid expenses and other assets
 
188,332

 
100,485

Deferred offering costs
 
5,409,942

 
2,848,199

Total assets
 
$
59,727,498

 
$
8,994,798

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 
 
 

Mortgage notes payable, net
 
$
22,778,370

 
$
1,590,834

Accounts payable and accrued expenses
 
257,060

 
214,284

Due to related parties
 
9,021,884

 
3,616,713

Tenant prepayments
 
21,078

 
—

Security deposits
 
62,724

 
3,300

Distributions payable
 
453,877

 
25,174

Total liabilities
 
32,594,993

 
5,450,305

 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Preferred stock, par value $0.01: 10,000,000 shares authorized, none issued and outstanding
 
—

 
—

Convertible stock, par value $0.01: 50,000 shares authorized, 50,000 and 50,000 issued and outstanding, respectively
 
500

 
500

Class A common stock, par value $0.01: 25,000,000 and 250,000,000 shares authorized, respectively, 621,754 and 384,195 issued and outstanding, respectively
 
6,218

 
3,842

Class T common stock, par value $0.01: 25,000,000 and 750,000,000 shares authorized, respectively, 1,081,226 and 114,037 issued and outstanding, respectively
 
10,812

 
1,140

Class R common stock, par value $0.01: 750,000,000 and 0 shares authorized, respectively, 2,058,008 and 0 issued and outstanding, respectively
 
20,580

 
—

Class I common stock, par value $0.01: 75,000,000 and 0 shares authorized, respectively, 36,118 and 0 issued and outstanding, respectively
 
361

 
—

Additional paid-in capital
 
32,323,424

 
4,380,126

Accumulated other comprehensive loss
 
(11,192
)
 
—

Accumulated deficit
 
(5,218,198
)
 
(841,115
)
Total stockholders’ equity
 
27,132,505

 
3,544,493

Total liabilities and stockholders’ equity
 
$
59,727,498

 
$
8,994,798




 The accompanying notes are an integral part of these consolidated financial statements.


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 
 
Years Ended December 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Rental income
 
$
1,443,863

 
$
72,119

Total revenues
 
1,443,863

 
72,119

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating - expenses
 
400,432

 
14,898

Rental operating - payroll
 
165,558

 
—

Rental operating - real estate taxes
 
182,166

 
8,021

     Subtotal - rental operating
 
748,156

 
22,919

Acquisition costs
 
906,644

 
128,119

Property management fees
 
9,505

 
3,123

Management fees - related parties
 
215,433

 
9,844

General and administrative
 
1,258,682

 
641,538

Loss on disposal of assets
 
186,078

 
—

Depreciation and amortization expense
 
908,624

 
35,502

Total expenses
 
4,233,122

 
841,045

Loss before other income (expense)
 
(2,789,259
)
 
(768,926
)
 
 
 
 
 
Other income (expense):
 
 
 
 
Other income
 
1,500

 
—

Interest income
 
16,639

 
762

Interest expense
 
(360,725
)
 
(8,083
)
Net loss
 
$
(3,131,845
)
 
$
(776,247
)
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
Designated derivatives, fair value adjustments
 
(11,192
)
 
—

     Total other comprehensive loss
 
(11,192
)
 
—

Comprehensive loss
 
$
(3,143,037
)
 
$
(776,247
)














The accompanying notes are an integral part of these consolidated financial statements.


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS- (continued)

 
 
Years Ended December 31,
 
 
2017
 
2016
Class A common stock:
 
 
 
 
Net loss attributable to Class A common stockholders
 
$
(1,003,994
)
 
$
(709,398
)
Net loss per Class A share, basic and diluted
 
$
(1.79
)
 
$
(4.50
)
Weighted average Class A common shares outstanding, basic and diluted
 
560,110

 
157,726

 
 
 
 
 
Class T common stock:
 
 
 
 
Net loss attributable to Class T common stockholders
 
$
(1,423,508
)
 
$
(66,849
)
Net loss per Class T share, basic and diluted
 
$
(1.82
)
 
$
(4.34
)
Weighted average Class T common shares outstanding, basic and diluted
 
782,047

 
15,411

 
 
 
 
 
Class R common stock:
 
 
 
 
Net loss attributable to Class R common stockholders
 
$
(677,323
)
 
$
—

Net loss per Class R share, basic and diluted
 
$
(1.42
)
 
$
—

Weighted average Class R common shares outstanding, basic and diluted
 
478,037

 
—

 
 
 
 
 
Class I common stock:
 
 
 
 
Net loss attributable to Class I common stockholders
 
$
(27,020
)
 
$
—

Net loss per Class I share, basic and diluted
 
$
(1.58
)
 
$
—

Weighted average Class I common shares outstanding, basic and diluted
 
17,079

 
—

























The accompanying notes are an integral part of these consolidated financial statements.


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

 
 
Common Stock
 
Convertible Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
A Shares
 
T Shares
 
R Shares
 
I Shares
 
A Shares
 
T Shares
 
R Shares
 
I Shares
 
 
 
 
 
 
Balance at January 1, 2016
 
20,000

 
—

 
—

 
—

 
$
200

 
$
—

 
$
—

 
$
—

 
—

 
$
—

 
$
199,800

 
$
—

 
$
—

 
$
200,000

Issuance of common stock
 
366,948

 
113,415

 
 
 
 
 
3,669

 
1,134

 
 
 
 
 
—

 
—

 
4,504,823

 
 
 
—

 
4,509,626

Exchange of common stock for convertible stock
 
(5,000
)
 
—

 
—

 
—

 
(50
)
 
—

 
—

 
—

 
50,000

 
500

 
(450
)
 
—

 
—

 
—

Offering costs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(352,188
)
 
—

 
—

 
(352,188
)
Cash distributions declared
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(41,078
)
 
(41,078
)
Stock dividends
 
1,904

 
502

 
—

 
—

 
19

 
5

 
—

 
—

 
—

 
—

 
23,766

 
—

 
(23,790
)
 
—

Common stock issued through distribution reinvestment plan
 
343

 
120

 
—

 
—

 
4

 
1

 
—

 
—

 
—

 
—

 
4,375

 
—

 
—

 
4,380

Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(776,247
)
 
(776,247
)
Balance at December 31, 2016
 
384,195

 
114,037

 
—

 
—

 
$
3,842

 
$
1,140

 
$
—

 
$
—

 
50,000

 
$
500

 
$
4,380,126

 
$
—

 
$
(841,115
)
 
$
3,544,493

Issuance of common stock
 
219,259

 
936,581

 
2,049,713

 
35,985

 
2,192

 
9,366

 
20,497

 
360

 
 
 
 
 
30,839,285

 
—

 
—

 
30,871,700

Offering costs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,436,423
)
 
—

 
—

 
(3,436,423
)
Cash distributions declared
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(993,671
)
 
(993,671
)
Stock dividends
 
10,956

 
14,993

 
—

 
—

 
110

 
150

 
—

 
—

 
—

 
—

 
251,307

 
—

 
(251,567
)
 
—

Common stock issued through distribution reinvestment plan
 
7,344

 
15,615

 
8,295

 
133

 
74

 
156

 
83

 
1

 
—

 
—

 
289,129

 
—

 
—

 
289,443

Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(11,192
)
 
—

 
(11,192
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,131,845
)
 
(3,131,845
)
Balance at December 31, 2017
 
621,754

 
1,081,226

 
2,058,008

 
36,118

 
$
6,218

 
$
10,812

 
$
20,580

 
$
361

 
50,000

 
$
500

 
$
32,323,424

 
$
(11,192
)
 
$
(5,218,198
)
 
$
27,132,505





The accompanying notes are an integral part of these consolidated financial statements.


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Years Ended December 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(3,131,845
)
 
$
(776,247
)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Loss on disposal of assets
 
186,078

 
—

Depreciation and amortization
 
908,624

 
35,502

Amortization of deferred financing costs
 
22,314

 
2,775

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
214,775

 
(7,733
)
Tenant receivable, net
 
(1,350
)
 
(788
)
Due from related parties
 
4,953

 
(2,352
)
Prepaid expenses and other assets
 
(13,016
)
 
(100,115
)
Due to related parties
 
1,127,499

 
702,213

Accounts payable and accrued expenses
 
(93,819
)
 
99,306

Tenant prepayments
 
18,346

 
—

Security deposits
 
5,880

 
—

Net cash used in operating activities
 
(751,561
)
 
(47,439
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Property acquisitions
 
(6,967,828
)
 
(2,493,673
)
Capital expenditures
 
(66,234
)
 
(9,207
)
Restricted cash
 
(68,237
)
 
—

Net cash used in investing activities
 
(7,102,299
)
 
(2,502,880
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Net proceeds from issuance of common stock
 
28,885,437

 
4,122,545

Proceeds from borrowings
 
—

 
2,180,000

Payments on borrowings
 
(30,493
)
 
(555,000
)
Payment of deferred financing costs
 
(324,285
)
 
(34,166
)
Distributions paid on common stock
 
(275,525
)
 
(11,524
)
Net cash provided by financing activities
 
28,255,134

 
5,701,855

 
 
 
 
 
Net increase in cash
 
20,401,274

 
3,151,536

Cash at beginning of year
 
3,351,536

 
200,000

Cash at end of year
 
$
23,752,810

 
$
3,351,536






The accompanying notes are an integral part of these consolidated financial statements.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017



NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource Apartment REIT III, Inc. (the "Company") was organized in Maryland on July 15, 2015. The Company is offering up to $1.1 billion of shares of its common stock, consisting of up to $1.0 billion of shares in its primary offering and up to $100.0 million of shares pursuant to its distribution reinvestment plan (the "DRIP"). Through July 2, 2017, the Company offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock in its primary offering and commenced offering shares of Class R and Class I at $9.52 per share and $9.13 per share, respectively.
The initial offering price for shares offered pursuant to the DRIP is $9.60 per share for Class A, $9.09 per share for Class T, $9.14 per share for Class R, and $8.90 per share for Class I. The Company will determine its net asset value ("NAV") per share on a date no later than June 30, 2018 (the "NAV pricing date"). Commencing on the NAV pricing date, if the primary offering is ongoing, the Company will offer Class R and Class I shares in the primary offering at a price equal to the NAV per share for Class R and Class I shares, respectively, plus applicable selling commissions and dealer manager fees, and pursuant to the DRIP at a price equal to 96% of the new primary offering price. If the Company’s primary offering is not ongoing on the NAV pricing date, or on the date of any subsequent NAV pricing, it will offer Class A, Class T, Class R, and Class I shares pursuant to the DRIP at a price equal to 96% of the most recently determined NAV per share. The Company will update its NAV at least annually following the NAV pricing date and further adjust the per share price in the primary offering and DRIP accordingly. As of December 31, 2017, the Company has raised aggregated gross primary offering proceeds of $35.6 million from the sale of 601,207 Class A shares, 1,049,996 Class T shares, 2,049,713 Class R shares, and 35,985 Class I shares of common stock.
Resource REIT Advisor, LLC (formerly known as Resource Apartment Advisor III, LLC) (the "Advisor"), an indirect wholly-owned subsidiary of Resource America, Inc. ("RAI"), contributed $200,000 to the Company in exchange for 20,000 shares of Class A common stock on August 10, 2015. On June 29, 2016, RAI purchased 222,222 shares of Class A common stock for $2.0 million in the offering. On August 5, 2016, the Advisor exchanged 5,000 shares of common stock for 50,000 shares of convertible stock. Under limited circumstances, these shares may be converted into shares of the Company's Class A common stock satisfying its obligation to pay the Advisor an incentive fee and diluting its other stockholders’ interest in the Company.
RAI is a wholly-owned subsidiary of C-III Capital Partners, LLC ("C-III"), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III controls the Advisor, Resource Securities LLC (formerly known as Resource Securities, Inc.) ("Resource Securities"), the Company's dealer manager, and Resource Apartment Manager III, LLC (the "Manager"), the Company's property manager. C-III also controls all of the shares of the Company's common stock held by RAI and the Advisor.
The Company’s objective is to take advantage of Resource Real Estate, LLC’s (formerly known as Resource Real Estate, Inc.) (its "Sponsor") multifamily investing and lending platforms to invest in apartment communities in order to provide the investor with growing cash flow and increasing asset values. The Company intends to acquire underperforming apartments which it will renovate and stabilize in order to increase rents. To a lesser extent, the Company may also seek to originate and acquire commercial real estate debt secured by apartments having the same characteristics. At December 31, 2017, the Company owned two apartment properties located in Alexandria, Virginia and Jacksonville, Florida.
The Company intends to elect and qualify to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 2017. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, once qualified as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes all of its REIT taxable income to its stockholders. The Company also intends to operate its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with the accounting principles generally accepted in the United States of America ("GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiaries
 
Number of Units
 
Property Location
Resource Apartment REIT III Holdings, LLC
 
N/A
 
N/A
Resource Apartment REIT III OP, LP
 
N/A
 
N/A
RRE Payne Place Holdings, LLC
 
11
 
Alexandria, VA
RRE Bay Club Holdings, LLC
 
220
 
Jacksonville, FL
 
 
231
 
 
All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Company does not evaluate performance on a relationship-specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.
Concentration of Concentration Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist of periodic temporary deposits of cash. At December 31, 2017, the Company had approximately $23.9 million of deposits at various banks, of which approximately $23.1 million were over the insurance limit of the Federal Deposit Insurance Corporation. The Company has not experienced any loss on such deposits.
At December 31, 2017, the Company’s real estate investment in Florida represented 92% of the Company’s real estate assets. As a result, the geographic concentration of the Company's portfolio makes it particularly susceptible to adverse economic developments in the Florida real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, adverse weather events, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect the Company's operating results and its ability to make distributions to stockholders.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.





RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Real Estate Investments
The Company records acquired real estate at fair value on their respective acquisition dates. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates the asset using the straight line method. The Company anticipates the estimated useful lives of its assets by class as follows:
Buildings
27.5 years
Building improvements
5.0 to 27.5 years
Furniture, fixtures, and equipment
3.0 to 5.0 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Weighted average remaining term of related leases
Improvements and replacements in excess of $1,000 are capitalized when they have a useful life greater than or equal to one year. The Manager earns a construction management fee of 5% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. There were no impairment losses recorded on long lived assets during the years ended December 31, 2017 and 2016.
Loans Held for Investment
The Company records acquired real estate loans at cost and reviews them for potential impairment at each balance sheet date. A loan receivable is considered impaired when it becomes probable, based on current information, that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or the fair value of the collateral. If a loan is deemed to be impaired, the Company will record a reserve for loan losses through a charge to income for any shortfall. Failure to recognize impairment would result in the overstatement of the carrying values of the Company’s real estate loans receivable and an overstatement of the Company’s net income.
The Company may acquire real estate loans at a discount due to credit quality. Revenues from these loans are recorded under the effective interest method. Under this method an effective interest rate ("EIR") is applied to the cost basis of the real estate loan receivable. The EIR that is calculated when the real estate loan is acquired remains constant and is the basis for subsequent impairment testing and income recognition. If the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate loan receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the real estate loan receivable has been fully recovered.
Interest income from loans receivable will be recognized based on the contractual terms of the debt instrument. Fees related to any buydown of the interest rate will be deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income. Closing costs related to the purchase of a loan receivable will be amortized over the term of the loan and accreted as an adjustment against interest income. There were no loans held for investment on the Company's consolidated balance sheets as of both December 31, 2017 and 2016.



RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Allocation of Purchase Price of Acquired Assets
The Company records the acquisition of real properties as business combinations. Upon the acquisition of real properties, the Company allocates the purchase price of properties to tangible assets, consisting of land, building, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, other value of in-place leases and value of tenant relationships, based in each case on their fair values.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases, which the Company expects will range from one month to one year.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense in that period.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the fair value of these assets and liabilities, which could impact the amount of the Company’s reported net income. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years. The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are approximately $1.6 million and $27,106 for the years ending December 31, 2018 and 2019, respectively, and none thereafter.
Revenue is primarily derived from the rental of residential housing units; however, included within rental income is other income such as pet fees, parking fees, and late fees, as well as property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs. The Company records the ancillary charges in the period in which they are earned or received and records the reimbursements in the period in which the related expenses are incurred. Total other income included within rental income was $119,668 and $211 for the years ended December 31, 2017 and 2016, respectively.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Tenant Receivables
The Company makes estimates of the collectability of its tenant receivables related to base rents, including straight-line rentals, expense reimbursements and other revenue or income. The Company specifically analyzes accounts receivable and historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company will make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. These estimates have a direct impact on the Company’s net income because a higher bad debt reserve results in less net income. At December 31, 2017 and 2016, the Company recorded $370 and $0 of allowances for uncollectible receivables, respectively.
Income Taxes
The Company intends to elect and qualify to be taxed as a REIT, commencing with the filing of the tax return for its taxable year ending December 31, 2017. Accordingly, once qualified as a REIT, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as a taxable REIT subsidiary ("TRS"). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes.
While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. At December 31, 2017 and 2016, the Company did not treat any of its subsidiaries as a TRS.
Legislation commonly known as the Tax Cuts and Jobs Act ("TCJA") was signed into law on December 22, 2017. The TCJA makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations (including REITs), generally effective for taxable years beginning after December 31, 2017. The Company is continuing to evaluate this legislation but it does not expect it to have a significant impact.
Earnings Per Share
Basic earnings per share are computed by dividing net income (loss) attributable to common stockholders for each period by the weighted-average common shares outstanding during the period for each share class. Diluted net income (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. For the purposes of calculating earnings per share, all common shares and per share information in the financial statements have been retroactively adjusted for the effect of any stock dividends and stock splits.
In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 260-10-45, "Earnings Per Share", the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on their relative percentage of each class of shares to the total number of outstanding shares. The Company did not have any participating securities outstanding other than Class A common stock, Class T common stock, Class R common stock, and Class I common stock during the periods presented (see Note 10).

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Organization and Offering Costs
Organization and offering costs (other than selling commissions, dealer manager fees, and distribution and shareholder servicing fees) of the Company are initially being paid by the Advisor on behalf of the Company.
Pursuant to the Advisory Agreement between the Company and the Advisor, the Company is obligated to reimburse the Advisor for organization and other offering costs paid by the Advisor on behalf of the Company, up to an amount equal to 4.0% of gross offering proceeds as of the termination of the initial public offering if the Company raises less than $500.0 million in the primary portion of the initial public offering and 2.5% of gross offering proceeds as of the termination of the initial public offering if the Company raises $500.0 million or more in the primary portion of the initial public offering.
A portion of deferred offering costs will be charged to equity upon the sale of each share of common stock sold under the public offering. Through December 31, 2017, the Company has charged approximately $816,000 to equity for the payment of offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal, printing and similar costs. At December 31, 2017, the Advisor has advanced approximately $6.2 million of these costs on behalf of the Company, of which $5.4 million has been deferred at December 31, 2017.
Organization costs, which include all expenses incurred by the Company in connection with its formation, including but not limited to legal fees and other costs to incorporate, are expensed as incurred. There can be no assurance that the Company's plans to raise capital will be successful. Prior to the Company breaking escrow, the Advisor incurred approximately $104,266 of formation and other operating expenses on the Company's behalf, which will not be reimbursed to the Advisor.
Outstanding Class T shares issued in the Company's primary offering are subject to a 1% annual distribution and shareholder servicing fee for five years from the date on which such share is issued. The Company will cease paying the distribution and shareholder servicing fee on each Class T share prior to the fifth anniversary of its issuance on the earliest of the following, should any of these events occur: (i) the date at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from the Company's primary offering (i.e., excluding proceeds from sales pursuant to the DRIP); (ii) the date on which the Company lists its common stock on a national securities exchange; and (iii) the date of a merger or other extraordinary transaction in which the Company is a party and in which the common stock is exchanged for cash or other securities. The Company cannot predict if or when any of these events will occur.
Outstanding Class R shares issued in the Company's primary offering are also subject to a 1% annual distribution and shareholder servicing fee.  The Company will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from its primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of its assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between the Resource Securities and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and Resource Securities advises the Company's transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through its distribution reinvestment plan).
The Company records distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares are issued. The liability will be relieved over time, as the fees are paid to the Dealer Manager, or as the fees are adjusted (if the fees are no longer payable pursuant to the conditions described above.) For issued Class T shares, the Company has accrued an estimate of total distribution and shareholder servicing fees for the full five year period of $490,492 at December 31, 2017 based on a total of 5% of the gross proceeds from all Class T shares sold, of which the Company paid $64,951 cumulatively through December 31, 2017. For issued Class R shares, the Company has accrued an estimate of total distribution and shareholder servicing fees of $585,257 at December 31, 2017 based on a total of 5% of the gross proceeds from all Class R shares sold, of which the Company paid $21,283 cumulatively through December 31, 2017. The total accrual of $989,515 is included in due to related parties on the Company's consolidated balance sheets at December 31, 2017.


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The impact of the reclassifications made to prior year amounts are not material and did not affect net loss.
Adoption of New Accounting Standards
 Accounting Standards Issued But Not Yet Effective
In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  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. ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company will adopt ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. The majority of the Company’s revenue is derived from residential rental income and other lease income, which are scoped out from this standard and included in the current lease accounting framework, and will be accounted for under ASU No. 2016-02, "Leases", as discussed below. Revenue streams that are in the scope of the new standards include (but are not limited to) administrative and late fees and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties.  Due to the nature and timing of its identified revenue streams as of December 31, 2017, the Company does not anticipate the adoption of the new standards will have a material impact on its financial position or results of operations.
In February 2016, FASB issued ASU No. 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions and requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In September 2017, FASB issued ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provides additional implementation guidance on the previously issued ASU No. 2016-02 Leases (Topic 842).  ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is continuing to evaluate this guidance, however, the Company expects that its operating leases where it is the lessor will be accounted for on its balance sheet similar to its current accounting with the underlying leased asset recognized as real estate. The Company expects that executory costs and certain other non-lease components will need to be accounted for separately from the lease component of the lease with the lease component continuing to be recognized on a straight-line basis over the lease term and the executory costs and certain other non-lease components being accounted for under the new revenue recognition guidance in ASU 2014-09. For leases in which the Company is the lessee, primarily consisting of office equipment leases, the Company expects to recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense on a straight-line basis over the term of the lease.
In June 2016, FASB issued ASU No. 2016-03 "Financial Instruments - Credit Losses", which requires measurement and recognition of expected credit losses for financial assets held. The standard update is effective for the Company beginning January 1, 2019. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2016-03 to have a significant impact on its consolidated financial statements due to the fact the Company did not have investments subject to this guidance at December 31, 2017.
In August 2016, FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which addresses eight specific cash flow issues with the objective of reducing existing diversity in practice.  The guidance is effective for the Company as of January 1, 2018. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on the Company's consolidated statement of cash flows.

In November 2016, FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which
provides guidance on the classification of restricted cash in the statement of cash flows. ASU No. 2016-18 is effective for the
Company's fiscal year beginning January 1, 2018 and the Company does not expect the adoption of ASU No. 2016-18 to have a material effect on its consolidated financial statements and disclosures.
In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 850): Clarifying the Definition of Business," which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. ASU No. 2017-01 is effective for the

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Company beginning January 1, 2018 but early adoption is allowed. The Company believes all future acquisitions will be accounted for as asset acquisitions, not business acquisitions.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which alters the current goodwill impairment testing procedures. ASU No. 2017-04 will be effective for the Company beginning December 15, 2019. Early application is permitted. The Company is evaluating this guidance and assessing the impact of this guidance on its consolidated financial statements.
In August 2017, FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for the Company on January 1, 2019, with early adoption permitted in any interim period. The Company is continuing to evaluate this guidance and assessing the impact of this guidance on its consolidated financial statements.

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents the Company's supplemental cash flow information:
 
 
Years Ended December 31,
 
 
2017
 
2016
Non-cash operating, financing and investing activities:
 
 
 
 
Offering costs payable to related parties
 
$
3,319,624

 
$
2,848,317

Offering costs payable to third parties
 
48,897

 
111,581

Cash distributions on common stock declared but not yet paid
 
453,877

 
25,174

Stock issued from distribution reinvestment plan
 
289,443

 
4,380

Stock dividend issued
 
251,567

 
23,790

Subscriptions receivable
 
413,084

 
210,000

Exchange of common stock for convertible stock
 
—

 
500

Escrow deposits funded directly by mortgage notes payable
 
347,318

 
—

 
 
 
 
 
Non-cash activity related to acquisitions:
 
 
 
 
Mortgage notes payable used to acquire real property
 
21,172,682

 
—

 
 
 
 
 
Cash paid during the year for:
 
 
 
 
Interest
 
$
274,203

 
$
5,307


NOTE 4 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvement. The following table presents a summary of the components of the Company's restricted cash:
 
December 31,
 
2017
 
2016
Real estate taxes
$
32,115

 
$
7,733

Insurance
8,227

 
—

Capital improvements
151,722

 
—

Total
$
192,064

 
$
7,733


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


In addition, the Company designated unrestricted cash for capital expenditures of approximately $1.9 million and $84,702 at December 31, 2017 and 2016, respectively.

NOTE 5 - ACQUISITIONS
On August 19, 2016, the Company, through its wholly-owned subsidiary, purchased a multifamily community located in Alexandria, Virgina ("Payne Place"). Payne Place, constructed in 1950, contains 11 units and amenities, including but not limited to storage lockers and a patio with a barbeque area. Payne Place encompasses 6,650 rentable square feet. At December 31, 2017, Payne Place was 100% leased.
On July 31, 2017, the Company, through its wholly-owned subsidiary, purchased a multifamily community located in Jacksonville, Florida ("Bay Club"). Bay Club, constructed in 1990, contains 220 units and amenities, including private garages for each unit, a clubhouse, pool, fitness center and business center. Bay Club encompasses 223,568 rentable square feet. At December 31, 2017, Bay Club was 92.27% leased.
The Company estimated the fair values of certain of the acquired assets and liabilities based on preliminary valuations at the date of purchase. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property. The valuation for Payne Place was finalized at December 31, 2016 and the valuation for Bay Club was finalized at December 31, 2017.
The following table summarizes the Company's acquisitions and the respective fair values assigned:
 
 
 
 
 
 
 
 
Fair Value Assigned
Multifamily Community Name
 
City and State
 
Date of Acquisition
 
Contractual Purchase Price (1)
 
Land
 
Building and Improvements
 
Furniture, Fixtures and Equipment
 
Intangible Assets
 
Other Liabilities
Payne Place
 
Alexandria, Virginia
 
8/19/2016
 
$
2,500,000

 
$
1,419,898

 
$
1,016,451

 
$
13,710

 
$
49,941

 
$
(6,327
)
Bay Club
 
Jacksonville, Florida
 
7/31/2017
 
28,300,000

 
3,321,081

 
23,879,553

 
376,064

 
723,302

 
(232,980
)
 
(1)
Contractual purchase price excludes closing costs, acquisition expenses, and other immaterial settlement date adjustments and pro-rations.

The following table presents the total revenues, net loss, and acquisition costs of Bay Club, the Company's wholly-owned acquisition during the year ended December 31, 2017:
 
 
Year Ended December 31, 2017
Total revenues
 
$
1,231,893

Net loss
 
(1,158,609
)
Acquisition costs
 
294,313

Acquisition fee
 
612,331

The following table presents the total revenues, net loss, and acquisition costs of Payne Place, the Company's wholly-owned acquisition during the year ended December 31, 2016:
 
 
Year Ended December 31, 2016
Total revenues
 
$
72,119

Net loss
 
(58,495
)
Acquisition costs
 
75,255

Acquisition fee
 
52,864


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


NOTE 6 - RENTAL PROPERTIES, NET
The following table presents the Company's investment in rental properties:
 
December 31,
 
2017
 
2016
Land
4,740,979

 
$
1,419,898

Building and improvements
24,923,994

 
1,018,051

Furniture, fixtures and equipment
256,992

 
21,317

Construction in progress
13,395

 
—

 
29,935,360

 
2,459,266

Less: accumulated depreciation
(492,271
)
 
(13,431
)
Total rental property, net
$
29,443,089

 
$
2,445,835

Depreciation expense for the year ended December 31, 2017 and 2016 was $478,920 and $13,431, respectively.
Loss on disposal of assets: During the year ended December 31, 2017, the Company recorded losses of $186,078 on the disposal of assets, due to the replacement of appliances at its rental properties in conjunction with unit upgrades.

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of acquired in-place rental leases. The net carrying value of the leases at December 31, 2017 and 2016 was $321,468 and $27,870, respectively, net of accumulated amortization of $451,775 and $22,071, respectively. The weighted average remaining life of the leases is four months at December 31, 2017.
Amortization for the years ended December 31, 2017 and 2016 was $429,704 and $22,071, respectively. At December 31, 2017, expected amortization for the in-place rental leases for the next 12 months is $321,468 and none thereafter.

NOTE 8 - MORTGAGE NOTES PAYABLE
The following table presents a summary of the Company's mortgage notes payable, net:
 
 
December 31, 2017
 
December 31, 2016
Collateral
 
Outstanding Borrowings
 
Deferred Financing Costs, net
 
Carrying Value
 
Outstanding borrowings
 
Deferred Financing Costs, net
 
Carrying Value
Payne Place
 
$
1,594,507

 
$
(32,126
)
 
$
1,562,381

 
$
1,625,000

 
$
(34,166
)
 
$
1,590,834

Bay Club
 
21,520,000

 
(304,011
)
 
21,215,989

 
—

 
—

 
—

Total
 
$
23,114,507

 
$
(336,137
)
 
$
22,778,370

 
$
1,625,000

 
$
(34,166
)
 
$
1,590,834








RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


The following table presents additional information about the Company's mortgage notes payable, net:
Collateral
 
Maturity Date
 
Annual Interest Rate
 
 
 
Average Monthly Debt Service
 
Average Monthly Escrow
Payne Place
 
1/1/2047
 
3.11%
 
(1)(4) 
 
$
6,948

 
$
1,933

Bay Club
 
8/1/2024
 
3.43%
 
(2)(3) 
 
61,929

 
40,667

 
(1)
Fixed rate until January 1, 2020, when the fixed rate of the note changes to variable rate based on six-month LIBOR plus 2.25%, with an all-in interest rate floor of 2.50% and ceiling of 9.50%.
(2)
Variable rate based on one-month LIBOR of 1.56% (at December 31, 2017) plus 1.87%, with a maximum interest rate of 5.75%.
(3)
Monthly interest-only payment currently required.
(4)
RAI co-guarantees this loan with the Company. See Note 9 for more details.
Both mortgage notes are collateralized by a first mortgage lien on the assets of the respective property named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty for a period of the term.
The following table presents the Company's annual principal payments on outstanding borrowings for each of the next five years ending December 31, and thereafter:
2018
 
$
34,271

2019
 
171,282

2020
 
453,885

2021
 
471,891

2022
 
488,442

Thereafter
 
21,494,736

 
 
$
23,114,507

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the year ended December 31, 2017 and 2016, amortization of deferred financing costs of $22,314 and $2,775, respectively, was included in interest expense. The amortization during the year ended December 31, 2016 related to the fully repaid bridge loan to the Advisor. Accumulated amortization at December 31, 2017 and 2016 was $22,314 and $2,775, respectively.
The following table presents the Company's estimated amortization of the existing deferred financing costs for the next five years ending December 31, and thereafter:
2018
 
$
49,960

2019
 
49,851

2020
 
49,149

2021
 
47,967

2022
 
46,882

Thereafter
 
92,328

 
 
$
336,137


NOTE 9 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship with the Advisor
The Company is externally managed and advised by the Advisor. Pursuant to the terms of the Advisory Agreement, the Advisor provides the Company with its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of the Sponsor or one of its affiliates. The Company does not expect

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


to have any employees. The Advisor is not obligated to dedicate any specific portion of its time or its employees' time to the Company’s business. The Advisor and any employees of the Sponsor or its affiliates acting on behalf of the Advisor, are at all times subject to the supervision and oversight of the Company’s board of directors and have only such functions and authority as the Company delegates to it. Effective April 28, 2017, the Company renewed the Advisory Agreement with the Advisor through April 27, 2018. The terms of the agreement are identical to those of the Advisory Agreement in effect through April 27, 2017.
During the course of the offering, the Advisor will provide offering-related services to the Company and will advance funds to the Company for both operating costs and organization and offering costs. These amounts will be reimbursed to the Advisor from the proceeds from the offering, subject to the aforementioned limits on organization and offering expense reimbursements, although there can be no assurance that the Company’s plans to raise capital will be successful. As of December 31, 2017, the Advisor has advanced organization and offering costs on a cumulative basis on behalf of the Company of approximately $6.2 million.
The Advisory Agreement has a one-year term and may be renewed for an unlimited number of successive one-year terms upon the approval of the Conflicts Committee of the Company's board of directors. Under the Advisory Agreement, the Advisor will receive fees and will be reimbursed for its expenses as set forth below:
Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital reserves allocated, or the amount funded by the Company to acquire or originate loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Advisor earns a monthly asset management fee equal to 0.083% (one-twelfth of 1.0%) of the cost of each asset at the end of each month, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.
Disposition fees. The Advisor will earn a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.
Debt financing fees. The Advisor will earn a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also will pay directly or reimburse the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs of up to 4.0% of gross offering proceeds if the Company raises less than $500.0 million in the primary offering and 2.5% of gross offering proceeds if the Company raises $500.0 million or more in the primary offering. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees. Prior to the Company breaking escrow, the Advisor incurred approximately $104,266 of formation and other operating expenses the Company's behalf, which will not be reimbursed to the Advisor.
On August 18, 2016, the Advisor provided a $555,000 bridge loan (the "Bridge Loan") to the Company. The Company used the proceeds of the Bridge Loan to partially finance the acquisition of Payne Place. The Bridge Loan incurred interest at an annual rate of LIBOR plus 3.00%. On November 1, 2016, the Company repaid the outstanding balance of the Bridge Loan and accrued interest. Interest expense associated with Bridge Loan for the year ended December 31, 2016 was $2,921.
Relationship with the Manager
The Manager manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments that it manages and an oversight fee on any real property investments that are managed by third parties. Property management fees are deducted directly from the property's operating account by the property

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


manager. Any property management fees paid to unaffiliated third party property managers in excess of 4.5% of actual gross receipts will be reimbursed to the Company by the Advisor. At December 31, 2017 and 2016, the Advisor owes the Company $4,192 and $1,041, respectively, for property management fees in excess of the 4.5% cap paid to the unaffiliated third party property manager.
Construction management fees. The Manager earns a construction management fee equal to 5.0% of actual aggregate costs to construct improvements to a property.
Debt servicing fees. The Manager will earn a debt servicing fee equal to 2.75% of gross receipts from real estate-related debt investments.
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company. The Company is obligated to reimburse the Manager or other affiliates for such shared operating expenses.
Relationship with Resource Securities
Resource Securities, an affiliate of the Advisor, serves as the Company’s dealer manager and is responsible for marketing the Company’s shares during the public offering.
Dealer manager fee and selling commissions. Pursuant to the terms of the amended and restated dealer manager agreement with Resource Securities, the Company generally pays Resource Securities a selling commission of up to 3.0% of gross offering proceeds from the sale of Class R shares and a dealer manager fee of up to 3.5% of gross offering proceeds from the sale of Class R shares (but the aggregate of such fees shall not exceed 5.5% of gross offering proceeds). The Company generally pays Resource Securities a dealer manager fee of up to 1.5% of gross offering proceeds from the sale of the Class I shares. Prior to July 3, 2017, the Company generally paid the Dealer Manager a selling commission of up to 7.0% of gross primary offering proceeds from the sale of Class A shares and up to 2.0% of gross primary offering proceeds from the sale of Class T shares and a dealer manager fee of up to 3.0% of gross primary offering proceeds from the sale of either Class A or Class T shares. The Dealer Manager reallows all selling commissions earned and a portion of the dealer manager fee as a marketing fee to participating broker-dealers. No selling commissions or dealer manager fees are earned by the Dealer Manager in connection with sales under the distribution reinvestment plan. Additionally, the Company may reimburse the Dealer Manager for bona fide due diligence expenses. No selling commissions or dealer manager fees were paid in connection with the sales of Class A shares to the Advisor or RAI.
Distribution and shareholder servicing fee. Resource Securities is paid an annual fee of 1.0% of the purchase price (or, once reported, the NAV) per share of Class T common stock sold in the primary offering for five years from the date on which each share is issued up to a total of 5.0%. Resource Securities is also paid an annual fee of 1.0% of the purchase price (or, once reported, the NAV) per share of Class R common stock sold in the primary offering.  The Company will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from the primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the Company with or into another entity, or the sale or other disposition of all or substantially all of our assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between Resource Securities and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and Resource Securities advises the Company’s transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through the distribution reinvestment plan).
Relationship with RAI and C-III
Property loss pool. The Company's properties participate in a property loss self-insurance pool with other properties directly and indirectly managed by RAI and C-III, which is backed by a catastrophic insurance policy.  Substantially all of the receivables from related parties represent insurance deposits held in escrow by RAI and C-III related to the self-insurance pool which, if unused, will be returned to the Company. The pool covers losses up to $2.5 million in aggregate, after a $25,000 deductible per incident. Claims beyond the insurance pool limits will be covered by the catastrophic insurance policy, which covers claims up to $250.0 million, after a $25,000 deductible per incident. Therefore, unforeseen or catastrophic losses in excess of the Company's

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


insured limits could have a material adverse effect on the Company's financial condition and operating results. During the year ended December 31, 2017, the Company paid $7,591 into the insurance pools.
General liability loss pool. The Company's properties also participated in a general liability pool with other properties directly and indirectly managed by RAI and C-III until April 22, 2017. The pool covered claims up to $50,000 per incident through April 22, 2017. Effective April 23, 2017, the loss pool was eliminated and the Company now participates (with other properties directly and indirectly managed by RAI and C-III) in a general liability policy. The insured limit for the general liability policy is $76.0 million in total claims, after a $25,000 deductible per incident.
Internal audit fees. RAI performs internal audit services for the Company.
Other transactions. RAI co-guarantees the mortgage on Payne Place with the Company until such time as the Company achieves the following: (a) owns a minimum of five apartment complexes; (b) has a minimum net worth of $50.0 million; (c) has liquidity of no less than $5.0 million; and (d) has an aggregate portfolio leverage of no more than 65% (see Note 8 for further details).
The Company paid The Planning & Zoning Resource Company, a subsidiary of C-III, $1,079 for a zoning report in connection with its acquisition of Bay Club during the year ended December 31, 2017.
The Company participates in a liability insurance program for directors and officers coverage with other C-III managed entities and subsidiaries for coverage up to $100.0 million.  The Company paid $70,000 in insurance premiums during the year ended December 31, 2017. 





















RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


The following table presents the Company's amounts receivable from and amounts payable to such related parties:
 
December 31,
 
2017
 
2016
Due from related parties:
 
 
 
Advisor
$
4,192

 
$
1,041

RAI and affiliate - insurance funds held in escrow
379

 
1,311

 
$
4,571

 
$
2,352

 
 
 
 
Due to related parties:
 
 
 
Advisor:
 
 
 
Acquisition-related reimbursements
6,533

 
14,050

Asset management fees
—

 
2

Organization and offering costs
6,167,941

 
2,848,317

Operating expense reimbursements (including prepaid expenses)
1,810,658

 
682,661

 
7,985,132

 
3,545,030

Manager:
 
 
 
Property management fees
10,800

 
—

Operating expense reimbursements
3,592

 
—

 
14,392

 
—

RAI:
 
 
 
 Internal audit fee
3,500

 
8,250

Operating expense reimbursements
6,625

 
—

 
10,125

 
8,250

Resource Securities:
 
 
 
Selling commissions and dealer-manager fees
22,720

 
10,363

Distribution and shareholder servicing fee
989,515

 
53,015

 
1,012,235

 
63,378

 
 
 
 
Other:
—

 
55

 
 
 
 
 
$
9,021,884

 
$
3,616,713












RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


The following table presents the Company's fees earned by and expenses incurred from such related parties:
 
Years Ended December 31,
 
2017
 
2016
Fees earned / expenses incurred:
 
 
 
Advisor:
 
 
 
Acquisition fees and acquisition related reimbursements (1)
$
641,193

 
$
67,064

Asset management fees (2)
159,803

 
9,844

Debt financing fees (3)
107,600

 
10,900

Interest expense (4)
—

 
2,921

Organization and offering costs (5)
3,319,624

 
2,848,317

Operating expense reimbursement (6)
660,219

 
196,292

 
 
 
 
Manager:
 
 
 
Property management fees (2)
$
55,630

 
$
—

Construction management fees (7)
1,517

 
—

Operating expense reimbursements (8)
24,858

 
—

 
 
 
 
RAI:
 
 
 
Internal audit fee (6)
$
13,250

 
$
8,250

 
 
 
 
Resource Securities:
 
 
 
Selling commissions and dealer-manager fees (9)
$
1,709,990

 
$
186,757

Distribution and shareholder servicing fee (9)
1,022,047

 
53,702

 
 
 
 
Other:
 
 
 
The Planning & Zoning Resource Company (1)
$
1,079

 
$
1,495

 
(1)
Included in Acquisition costs on the consolidated statements of operations and comprehensive loss.
(2)
Included in Management fees - related parties on the consolidated statements of operations and comprehensive loss.
(3)
Included in Mortgage notes payable on the consolidated balance sheets.
(4)
Included in Interest expense on the consolidated statements of operations and comprehensive loss.
(5)
Organizational expenses were expensed when incurred and offering costs are included in Deferred offering costs and Stockholders' equity on the consolidated balance sheets.
(6)
Included in General and administrative on the consolidated statements of operations and comprehensive loss and excludes third party costs that are advanced by the Advisor.
(7)
Included in Rental properties, net on the consolidated balance sheets.
(8)
Included in Rental operating expenses on the consolidated statements of operations and comprehensive loss.
(9)
Included in Stockholders' equity on the consolidated balance sheets.







RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


NOTE 10 - EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted earnings/(loss) per share for the periods presented as follows:
 
Years Ended December 31,
 
2017
 
2016
Net loss
$
(3,131,845
)
 
$
(776,247
)
Less: Class A common stock cash distributions declared
253,708

 
35,177

Less: Class T common stock cash distributions declared
332,545

 
5,901

Less: Class R common stock cash distributions declared
396,088

 
—

Less: Class I common stock cash distributions declared
11,330

 
—

Undistributed net loss attributable to common stockholders
$
(4,125,516
)
 
$
(817,325
)
 
 
 
 
Class A common stock:
 
 
 
Undistributed net loss attributable to Class A common stockholders
$
(1,257,702
)
 
$
(744,575
)
Class A common stock cash distributions declared
253,708

 
35,177

Net loss attributable to Class A common stockholders
$
(1,003,994
)
 
$
(709,398
)
Net loss per Class A common share, basic and diluted
$
(1.79
)
 
$
(4.50
)
Weighted-average number of Class A common shares outstanding, basic and diluted (1)
560,110

 
157,726

 
 
 
 
Class T common stock:
 
 
 
Undistributed net loss attributable to Class T common stockholders
$
(1,756,053
)
 
$
(72,750
)
Class T common stock cash distributions declared
332,545

 
5,901

Net loss attributable to Class T common stockholders
$
(1,423,508
)
 
$
(66,849
)
Net loss per Class T common share, basic and diluted
$
(1.82
)
 
$
(4.34
)
Weighted-average number of Class T common shares outstanding, basic and diluted
782,047

 
15,411


 
 
 
Class R common stock:
 
 
 
Undistributed net loss attributable to Class R common stockholders
$
(1,073,411
)
 
$
—

Class R common stock cash distributions declared
396,088

 
—

Net loss attributable to Class R common stockholders
$
(677,323
)
 
$
—

Net loss per Class R common share, basic and diluted
$
(1.42
)
 
$
—

Weighted-average number of Class R common shares outstanding, basic and diluted
478,037

 
—

 
 
 
 
Class I common stock:
 
 
 
Undistributed net loss attributable to Class I common stockholders
$
(38,350
)
 
$
—

Class I common stock cash distributions declared
11,330

 
—

Net loss attributable to Class I common stockholders
$
(27,020
)
 
$
—

Net loss per Class I common share, basic and diluted
$
(1.58
)
 
$
—

Weighted-average number of Class I common shares outstanding, basic and diluted
17,079

 
—

 
(1)
Weighted-average number of shares excludes the convertible stock as they are not participating securities.




RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


NOTE 11 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10 million shares of its $0.01 par value preferred stock. As of December 31, 2017, no shares of preferred stock were issued or outstanding.
Convertible Stock
The Company’s charter authorizes the Company to issue 50,000 shares of its $0.01 par value convertible stock. On August 5, 2016, the Company's board of directors approved the issuance of 50,000 convertible shares in exchange for 5,000 shares of Class A common stock. As of December 31, 2017, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor. The convertible stock will convert into shares of the Company’s Class A common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 6% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange or the Company consummates a merger pursuant to which consideration received by the stockholders is securities of another issuer that are listed on a national securities exchange.
Each of these two events is a "Triggering Event."  Upon a Triggering Event, the Company's convertible stock will, unless its Advisory Agreement has been terminated or not renewed on account of a material breach by its Advisor, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:
(A)
15% of the amount, if any, by which
(1)
the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds
(2)
the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by
(B) the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the as of the date of the event triggering the conversion.
Common Stock
The Company’s charter authorizes the issuance of 1 billion shares of common stock with a par value of $0.01 per share, of which, the Company initially allocated 250 million shares of its $0.01 par value common stock as Class A common stock and 750 million shares of its $0.01 par value common stock as Class T common stock.
On June 28, 2017, the Company amended its charter to authorize 750 million shares of its $0.01 par value common stock as Class R common stock, 75 million shares of its $0.01 par value common stock as Class I common stock, 25 million shares of its $0.01 par value common stock as Class A common stock and 25 million shares of its $0.01 par value common stock as Class T common stock. 125 million shares of the Company's $0.01 par value common stock remain undesignated. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock and commenced the offering of Class R and Class I common stock in its primary offering.







RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


At December 31, 2017, shares of the company's $0.01 par value Class A, Class T, Class R, and Class I common stock have been issued as follows:    
 
 
Class A
 
Class T
 
Class R
 
Class I
 
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
Shared issued through primary offering (1)
 
586,207

 
$
5,601,476

 
1,049,996

 
$
9,943,465

 
2,049,713

 
$
19,508,566

 
35,985

 
$
327,820

Shares issued through stock dividends
 
12,860

 
—

 
15,495

 
—

 
—

 
—

 
—

 
—

Shares issued through distribution reinvestment plan
 
7,687

 
73,793

 
15,735

 
143,020

 
8,295

 
75,823

 
133

 
1,187

Shares issued in conjunction with the Advisor's initial investment, net of 5,000 share conversion
 
15,000

 
200,000

 
—

 
—

 
—

 
—

 
—

 
—

Total at December 31, 2017
 
621,754

 
$
5,875,269

 
1,081,226

 
$
10,086,485

 
2,058,008

 
$
19,584,389

 
36,118

 
$
329,007

 
(1)
Includes 222,222 of Class A shares issued to RAI.
Distributions
Cash Distributions
During the year ended December 31, 2017, the Company's board of directors declared a cash distribution on the outstanding shares of all classes of its common stock based on daily record dates for the period from March 31, 2017 through March 29, 2018, which were paid or will be paid on April 28, 2017, May 31, 2017, June 30, 2017, July 31, 2017, August 31, 2017, September 29, 2017, October 31, 2017, November 30, 2017, December 29, 2017, January 31, 2018, February 28, 2018, and April 2, 2018.
The distributions declared for the periods from March 31, 2017 through July 30, 2017 were calculated based on stockholders of record each day during these periods at a rate of (i) 0.000547945 per share per day less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock.
The distributions declared for the periods from July 31, 2017 through March 29, 2018 were calculated based on stockholders of record each day during these periods at a rate of (i) $0.001434521 per share per day less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock.
Distributions are generally paid to stockholders on the last business day of the month for which the distribution has accrued. Distributions reinvested pursuant to the distribution reinvestment plan are reinvested in shares of the same class as the shares on which distributions are made.
The following table presents information regarding the Company's distributions declared and paid to stockholders during the year ended December 31, 2017:
 
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
Distributions declared
 
$
253,708

 
$
332,545

 
$
396,088

 
$
11,330

 
$
993,671

 
 
 
 
 
 
 
 
 
 
 
Distributions reinvested in shares of common stock paid
 
70,500

 
141,933

 
75,823

 
1,187

 
289,443

Cash distributions paid
 
122,557

 
79,359

 
68,184

 
5,425

 
275,525

Total distributions paid
 
$
193,057

 
$
221,292

 
$
144,007

 
$
6,612

 
$
564,968

At December 31, 2017, the Company had accrued $453,877 for the cash distributions paid on January 31, 2018, February 28, 2018, and April 2, 2018, which is reported in distributions payable in the consolidated balance sheet.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


Stock Dividends
On February 22, 2017, the Company's board of directors authorized a stock dividend, in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on March 31, 2017. On April 25, 2017, the Company's board of directors authorized a stock dividend, in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on July 1, 2017. The stock dividends were issued in the same class of shares as the shares for which such stockholder received the stock dividend. The Company issued the stock dividends on April 13, 2017 and July 14, 2017, respectively.

NOTE 12 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its financial investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature. The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.
During the year ended December 31, 2017, derivatives (interest rate caps) of $14,600 were acquired in conjunction with the acquisition of Bay Club. Derivatives are reported at fair value in the consolidated balance sheets and are valued by a third party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2).
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2017
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate caps
 
$
—

 
$
3,408

 
$
—

 
$
3,408

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate caps
 
$
—

 
$
—

 
$
—

 
$
—


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


The carrying and fair values of the Company’s mortgage notes payable- outstanding borrowings, which were not carried at fair value on the consolidated balance sheets at December 31, 2017 and 2016, were as follows:
 
December 31, 2017
 
December 31, 2016
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Mortgage notes payable- outstanding borrowings
$
23,114,507

 
$
22,236,396

 
$
1,625,000

 
$
1,625,000

The carrying amount of the mortgage notes payable presented above is the outstanding borrowings excluding premium or discount and deferred finance costs, net. At December 31, 2017, the fair value of mortgage notes payable was estimated using a discounted cash flow model and rates available to the Company for debt with similar terms and remaining maturity. At December 31, 2016, the carrying value of the mortgage note payable was estimated to be the fair value due to the recent issuance of the mortgage obtained (Level 3).

NOTE 13 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into one interest rate cap that was designated as a cash flow hedge. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2017, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with the Bay Club Mortgage Loan. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the year ended December 31, 2017, the Company recorded no hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. At December 31, 2017, the Company estimates that an additional $143 will be reclassified as an increase to interest expense over the next 12 months.




RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2017


At December 31, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
 
Number of Instruments
 
Notional Amount
 
Maturity Date
Interest rate cap
 
1

 
$
21,520,000

 
August 1, 2020
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The following table presents the fair value of the Company’s derivative financial instrument, an interest rate cap, as well as its classification on the consolidated balance sheets at December 31, 2017 and 2016:
Asset Derivatives
 
Liability Derivatives
December 31, 2017
 
December 31, 2016
 
December 31, 2017
 
December 31, 2016
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Prepaid expenses and other assets
 
$3,408
 
N/A
 
$
—

 
N/A
 
$
—

 
N/A
 
$
—


NOTE 14 - OPERATING EXPENSE LIMITATION
Under its charter, the Company must limit its total operating expenses to the greater of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the Conflicts Committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.
Operating expenses for the four fiscal quarters ended December 31, 2017 exceeded the charter imposed limitation; however, the Conflicts Committee of the Company's board of directors determined that the relationship of the Company's operating expenses to its average invested assets was justified for these periods given the costs of operating a public company and the early stage of the Company's operations.

NOTE 15 - SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this report and determined that there have been any events that have occurred that would require adjustments to or disclosures in the consolidated financial statements, except for the following:
On March 22, 2018, the Company purchased Tramore Village Apartments, a 324 unit multifamily apartment complex in Austell, Georgia for $44.4 million. The seller was an unaffiliated third party. In conjunction with the purchase, the Company entered into a $32.6 million mortgage on the property.
On March 28, 2018, the Company's board of directors authorized a cash distribution on the outstanding shares of all classes of common stock based on daily record dates for the period from March 30, 2018 through June 28, 2018, which the Company expects to pay on April 30, 2018, May 31, 2018, and June 29, 2018. The distribution will be calculated based on the stockholders of record each day during the period at a rate of (i) $0.001434521 per share per day, less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock divided by the number of shares of common stock of such class outstanding as of the close of business on the record date.
On March 28, 2018, the Company's board of directors made the determination to extend the primary portion of this offering to April 27, 2019.



RESOURCE APARTMENT REIT III, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2017



Description
 
Encumbrances
 
Initial cost to Company
 
Cost capitalized subsequent to acquisition
 
Gross Amount at which carried at close of period
 
Accumulated Depreciation
 
Date of Construction
 
Date Acquired
 
Life on which depreciation in latest income is computed
 
 
 
 
Building and Land Improvements
 
Improvements Carrying Costs
 
Building and Land Improvements, Total
 
 
 
 
 
 
 
 
Real estate owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alexandria, Virginia
 
$
1,594,507

 
$
2,450,059

 
$
25,376

 
$
2,475,435

 
$
(56,144
)
 
1950
 
8/19/2016
 
3 - 27.5 years
Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jacksonville, Florida
 
21,520,000

 
27,576,698

 
(116,773
)
(1) 
27,459,925

 
$
(436,127
)
 
1990
 
7/31/2017
 
3 - 27.5 years
 
 
$
23,114,507

 
$
30,026,757

 
$
(91,397
)
 
$
29,935,360

 
$
(492,271
)
 
 
 
 
 
 



 
 
December 31,
 
 
2017
 
2016
Investments in real estate:
 
 
 
 
Balance, beginning of period
 
$
2,459,266

 
$
—

Acquisitions
 
27,576,698

 
2,450,059

Improvements, etc.
 
85,554

 
9,207

Disposals during the period
 
(186,158
)
 
—

Balance, end of period
 
$
29,935,360

 
$
2,459,266

 
 
 
 
 
Accumulated Depreciation:
 
 
 
 
Balance, beginning of period
 
$
(13,431
)
 
$
—

Depreciation
 
(478,920
)
 
(13,431
)
Disposals during the period
 
80

 
—

Balance, end of period
 
$
(492,271
)
 
$
(13,431
)

 
(1)
Due to recorded losses on the disposal of appliances that exceeded additions.

Resource Apartment REIT III, Inc. Reports