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EX-32.1 - CINAV 12/31/2017 10-K EXHIBIT 32.1 - CIM INCOME NAV, INC.cinav1231201710kex321.htm
EX-31.2 - CINAV 12/31/2017 10-K EXHIBIT 31.2 - CIM INCOME NAV, INC.cinav1231201710kex312.htm
EX-31.1 - CINAV 12/31/2017 10-K EXHIBIT 31.1 - CIM INCOME NAV, INC.cinav1231201710kex311.htm
EX-21.1 - CINAV 12/31/2017 10-K EXHIBIT 21.1 - CIM INCOME NAV, INC.cinav1231201710kex211.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-K
 
 
 
(Mark One)
 
 
x
 
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 000-55187
 COLE REAL ESTATE
INCOME STRATEGY (DAILY NAV), INC.
(Exact name of registrant as specified in its charter)
 Maryland
 
27-3147801
 (State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification Number)
 2325 East Camelback Road, 10th Floor
Phoenix, Arizona 85016
(Address of principal executive offices; zip code)
 
(602) 778-8700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Wrap Class Common Stock, $.01 par value
Advisor Class Common Stock, $.01 par value
Institutional Class Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
¨

 
Non-accelerated filer
(Do not check if a smaller reporting company)
x
 
 
 
 
 
 
 
Smaller reporting company
¨

 
Emerging growth company
¨

 
 
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 pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
There is no established market for the registrant’s shares of common stock. There were approximately 22.0 million shares of common stock held by non-affiliates as of June 30, 2017, for an aggregate market value of $397.7 million, based upon an average net asset value per share of $18.13 as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter.
As of March 26, 2018, there were approximately 16.6 million shares of Wrap Class common stock, approximately 9.5 million shares of Advisor Class common stock and approximately 953,000 shares of Institutional Class common stock, par value $0.01 each, of Cole Real Estate Income Strategy (Daily NAV), Inc. outstanding.
Documents Incorporated by Reference:
The Registrant incorporates by reference portions of the Cole Real Estate Income Strategy (Daily NAV), Inc. definitive proxy statement to be filed with the SEC with respect to the Registrant’s 2018 Annual Meeting of Stockholders (into Items 10, 11, 12, 13 and 14 of Part III).
 
 



TABLE OF CONTENTS

 
 
 
 
PART I
 
ITEM 1.
 
ITEM 1A.
 
ITEM 1B.
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
 
 
 
 
PART II
 
ITEM 5.
 
ITEM 6.
 
ITEM 7.
 
ITEM 7A.
 
ITEM 8.
 
ITEM 9.
 
ITEM 9A.
 
ITEM 9B.
 
 
 
 
 
PART III
 
ITEM 10.
 
ITEM 11.
 
ITEM 12.
 
ITEM 13.
 
ITEM 14.
 
 
 
 
 
PART IV
 
ITEM 15.
 
ITEM 16.
 
 
 
 
 
 
 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K of Cole Real Estate Income Strategy (Daily NAV), Inc., includes “forward-looking statements” (within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that reflect our expectations and projections about our future results, performance, prospects and opportunities. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. We caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date this Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission (the “SEC”). Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
Our properties, intangible assets and other assets may be subject to impairment charges.
We could be subject to unexpected costs or unexpected liabilities that may arise from potential dispositions of properties.
We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties and we may be unable to acquire, dispose of, or lease properties on advantageous terms.
We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
We have substantial indebtedness, which may affect our ability to pay distributions, and expose us to interest rate fluctuation risk and the risk of default under our debt obligations.
We may be affected by the incurrence of additional secured or unsecured debt.
We may not be able to maintain profitability.
We may not generate cash flows sufficient to pay our distributions to stockholders or meet our debt service obligations.
We may be affected by risks resulting from losses in excess of insured limits.
We may fail to remain qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.
Our sponsor may be unable to fully reestablish the financial network which previously supported real estate investment trusts sponsored by our sponsor, and/or regain the prior level of transaction and capital raising volume achieved by such real estate investment trusts.
We are subject to risks that may affect capital raising volume as a result of increased regulatory changes.
Our advisor has the right to terminate the advisory agreement upon 60 days’ written notice without cause or penalty.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A. Risk Factors within this Annual Report on Form 10-K.




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Definitions
We use certain defined terms throughout this Annual Report on Form 10-K that have the following meanings:
The phrase “annualized rental income” refers to the straight-line rental revenue under our leases on operating properties owned as of the respective reporting date, which includes the effect of rent escalations and any tenant concessions, such as free rent, and excludes any bad debt allowances and any contingent rent, such as percentage rent. Management uses annualized rental income as a basis for tenant, industry and geographic concentrations and other metrics within the portfolio. Annualized rental income is not indicative of future performance.
Under a “net lease,” the tenant occupying the leased property (usually as a single tenant) does so in much the same manner as if the tenant were the owner of the property. The tenant generally agrees that it will either have no ability or only limited ability to terminate the lease or abate rent prior to the expiration of the term of the lease as a result of real estate driven events such as casualty, condemnation or failure by the landlord to fulfill its obligations under the lease. There are various forms of net leases, most typically classified as triple-net or double-net. Triple-net leases typically require the tenant to pay all expenses associated with the property (e.g., real estate taxes, insurance, maintenance and repairs, including roof, structure and parking lot). Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property (e.g., real estate taxes, insurance and maintenance).

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PART I
ITEM 1.    BUSINESS
Formation
Cole Real Estate Income Strategy (Daily NAV), Inc. (the “Company,” “we,” “our” or “us”) is a Maryland corporation that was formed on July 27, 2010, our date of inception, which has elected to be taxed, and qualified as a REIT for U.S. federal income tax purposes. We were organized to primarily acquire and operate a diversified portfolio of necessity retail, office and industrial properties that are anchored by creditworthy tenants under long-term net leases, and are strategically located throughout the United States. As of December 31, 2017, we owned 139 commercial properties, including two properties through a consolidated joint venture agreement (the “Consolidated Joint Venture”), comprising 4.4 million rentable square feet of commercial space located in 36 states, which includes the rentable square feet of buildings on land subject to ground leases. As of December 31, 2017, these properties were 99.4% leased, including month-to-month agreements, if any. Substantially all of our business is conducted through our operating partnership, Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP, a Delaware limited partnership (“Cole OP”). We are the sole general partner of and own, directly or indirectly, 100% of the partnership interest in Cole OP.
On November 13, 2017, VEREIT Operating Partnership, L.P. (“VEREIT OP”), a former affiliated entity of our sponsor CCO Group (as defined below), entered into a Purchase and Sale Agreement with CCA Acquisition, LLC (“CCA”), a newly-formed affiliate of CIM Group, LLC (“CIM”), pursuant to which CCA agreed to acquire all of the issued and outstanding shares of common stock of Cole Capital Advisors, Inc., the direct or indirect owner of Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC (“Cole Income NAV Strategy Advisors”), Cole Capital Corporation and CREI Advisors, LLC (“CREI Advisors”), our external advisor, dealer manager and property manager, respectively (the “Transaction”). CIM is a vertically-integrated owner and operator of real assets with multidisciplinary expertise and in-house research, acquisition, credit analysis, development, finance, leasing, and asset management capabilities. CIM is headquartered in Los Angeles, California and has offices in Oakland, California; Bethesda, Maryland; Dallas, Texas; New York, New York; Chicago, Illinois; and Phoenix, Arizona.
On February 1, 2018, the Transaction was completed. Immediately following the completion of the Transaction, Cole Capital Advisors, Inc. and our dealer manager were each converted into Delaware limited liability companies, Cole Capital Advisors, Inc.’s name was changed to CCO Group, LLC, and our dealer manager’s name was changed to CCO Capital, LLC (“CCO Capital”). As a result of the Transaction, CIM owns and/or controls CCO Group, LLC and its subsidiaries (collectively, “CCO Group”), and CCO Group, LLC owns and controls Cole Income NAV Strategy Advisors, CCO Capital and CREI Advisors, our external advisor, dealer manager for the Offerings (as defined below) and property manager, respectively.
In addition, as part of the Transaction, VEREIT OP and CCO Group, LLC entered into a services agreement (the “Services Agreement”) pursuant to which VEREIT OP will continue to provide certain services to CCO Group and to us, Cole Credit Property Trust IV, Inc. (“CCPT IV”), Cole Credit Property Trust V, Inc. (“CCPT V”), Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), and Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”) (CCPT IV, CCPT V, CCIT II, CCIT III, and us collectively, the “Cole REITs®”), including operational real estate support. VEREIT OP will continue to provide such services through March 31, 2019 (or, if later, the date of the last government filing other than a tax filing made by any of the Cole REITs with respect to its 2018 fiscal year) (the “Initial Services Term”) and will provide consulting and research services through December 31, 2023 as requested by CCO Group, LLC.
Despite the indirect change of ownership and control of our advisor, dealer manager, property manager and sponsor, we expect that, during the Initial Services Term of the Services Agreement, the advisory, dealer manager and property management services we receive will continue without any material changes in personnel (except as supplemented by the management oversight of CIM personnel) or material change in service procedures. During the Initial Services Term of the Services Agreement, CCO Group, LLC intends to evaluate and effectuate an appropriate transition of VEREIT OP’s services under the Services Agreement to other CIM affiliates or third parties with the goal of ensuring continuity and minimizing disruption.
CCO Group has sponsored and operated various real estate investment programs. Cole Income NAV Strategy Advisors acts as our advisor pursuant to an advisory agreement with us, and is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf. Our charter provides that our independent directors are responsible for reviewing the performance of our advisor and determining whether the compensation paid to our advisor and its affiliates is reasonable. The advisory agreement with Cole Income NAV Strategy Advisors is for a one-year term and is reconsidered on an annual basis by our board of directors. We have no paid employees and rely upon our advisor and its affiliates to provide substantially all of our day-to-day management.

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On December 6, 2011, pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended (Registration No. 333-169535) (the “Initial Registration Statement”), we commenced our initial public offering on a “best efforts” basis for a maximum of $4.0 billion in shares of our common stock. On August 26, 2013, pursuant to a registration statement filed on Form S-11 (Registration No. 333-186656) (the “Multi-Class Registration Statement”) under the Securities Act, we designated the existing shares of our common stock that were sold prior to such date to be Wrap Class shares (“W Shares”) of common stock and registered two new classes of our common stock, Advisor Class shares (“A Shares”) and Institutional Class shares (“I Shares”). Pursuant to a registration statement filed on Form S-11 (Registration No. 333-213271), on February 10, 2017 (the “Continuing Offering Registration Statement”), we are offering up to $4.0 billion in shares of common stock of the three classes (the “Offering”), consisting of $3.5 billion in shares in our primary offering (the “Primary Offering”) and $500 million in shares pursuant to a distribution reinvestment plan (the “DRIP”). We are offering to sell any combination of W Shares, A Shares and I Shares with a dollar value up to the maximum offering amount.
The initial offering price per share for shares of our W Shares was $15.00, an amount that was arbitrarily determined by our board of directors. On December 6, 2011, Cole Holdings Corporation (“CHC”), then an affiliate of Cole Income NAV Strategy Advisors, deposited $10.0 million for the purchase of shares of common stock at a purchase price of $15.00 per share. As a result, we satisfied the conditions of our escrow agreement and on December 7, 2011, we broke escrow and accepted the stockholder’s subscription for shares of our common stock in the offering under the Initial Registration Statement. Subsequently, the per share purchase price of each class of our common stock varies from day-to-day, and on any given business day is equal to our net asset value (“NAV”) for such class divided by the number of shares of our common stock outstanding for that class as of the end of business on such day (“NAV per share” plus, for A Shares sold in the Primary Offering, applicable selling commissions).
We are structured as a perpetual-life, non-exchange traded REIT. This means that, subject to regulatory approval of our filing for additional offerings, we will be selling shares of our common stock on a continuous basis and for an indefinite period of time. We will endeavor to take all reasonable actions to avoid interruptions in the continuous offering of our shares of common stock. There can be no assurance, however, that we will not need to suspend our continuous offering. The Offering must be registered in every state in which we offer or sell shares. Generally, such registrations are for a period of one year. Thus, we may have to stop selling shares in any state in which our registration is not renewed or otherwise extended annually. We reserve the right to terminate the Offering at any time and to extend our offering term to the extent permissible under applicable law.
Investment Objectives and Policies
Our investment strategy is to invest primarily in a diversified portfolio of (1) necessity commercial properties in the retail, office and industrial sectors that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States, (2) notes receivable secured by commercial real estate, including the origination of loans, and (3) U.S. government securities, agency securities and corporate debt and other investments for which there is reasonable liquidity. The actual percentage of our portfolio that is comprised of retail, office and industrial property categories may fluctuate due to market conditions and acquisition opportunities or as a result of any changes to our investment policies. We expect to maintain a level of liquid assets (cash, cash equivalents, other short-term investments, U.S. government securities, agency securities, corporate debt, liquid real estate-related, equity or debt securities and other investments for which there is reasonable liquidity) as a source of funds to meet redemption requests. Our primary investment objectives are:
to acquire quality commercial real estate properties, net leased under long-term leases to creditworthy tenants, which provide current operating cash flow;
to maintain a level of liquid assets as a source of funds to meet redemption requests;
to provide reasonably stable, current income for stockholders through the payment of cash distributions; and
to provide the opportunity to participate in capital appreciation in the value of our investments.
Our board of directors, including our independent directors, has adopted investment policies. Our directors formally review at duly called meetings our investment policies on an annual basis and our portfolio on a quarterly basis or, in each case, more often as they deem appropriate. Except to the extent that investment policies and limitations are included in our charter, our board of directors may revise our investment policies without the approval of our stockholders. Investment policies that are provided in our charter may only be amended by a vote of stockholders holding a majority of our outstanding shares, unless the amendments do not adversely affect the rights, preferences and privileges of our stockholders. Our investment policies delegate to our advisor broad authority to execute real estate property acquisitions and dispositions. Our board of directors will at all times have ultimate oversight over our investments and may change from time to time the scope of authority delegated to our advisor with respect to acquisition and disposition transactions.

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Acquisition and Investment Policies
Commercial Real Estate Properties
We intend to acquire income-producing necessity retail properties that are primarily single-tenant properties, which are leased to national and regional creditworthy tenants under long-term net leases, and are strategically located throughout the United States. We consider necessity retail properties to be properties leased to retail tenants that attract consumers for everyday needs, such as pharmacies, home improvement stores, national superstores, restaurants and regional retailers. We also currently own eight anchored shopping centers, which are multi-tenant properties that are anchored by one or more large national, regional or local retailers. Over time, we expect our property sector allocations to broadly reflect the composition of the NCREIF Property Index with the exception of multi-family and lodging, which will be excluded from our portfolio. The actual percentage of our portfolio that is comprised of retail, office and industrial property categories may fluctuate due to market conditions and acquisition opportunities.
By focusing our retail investment strategy on necessity retailers subject to long-term net leases, our objective is to provide our stockholders with a relatively stable stream of current income, while avoiding a significant decline in the value of our real estate portfolio.
Necessity office and industrial properties are essential to the business operations of a corporate tenant, typically due to one or more of the following factors:
difficulty of replacement or prohibitive cost to relocate;
sole or major location for its distribution or office operations;
proximity to its distribution, manufacturing, research facilities or customer base;
lower labor, transportation and/or operating costs;
more stable labor force;
optimal access to transportation networks that enable efficient distribution; and/or
significant amount of tenant-funded capital improvements, such as customized computer systems and information technology infrastructure, racking and sorting systems, and cooling or refrigeration systems. 
For example, distribution facilities, warehouses, manufacturing plants and corporate or regional headquarters are often considered to be necessity office and industrial properties. We believe that necessity office and industrial properties provide a relatively greater level of stability than other property types because they typically involve long-term leases and experience relatively low tenant turnover. We also believe that, as a result of recent and ongoing business developments, such as the role of the internet in the distribution of products, globalization of importing and exporting products and consolidation of businesses requiring office buildings to accommodate a single tenant, there is, and we expect there will continue to be, increasing demand by commercial tenants for necessity office and industrial properties.
Our goal is to acquire a portfolio of commercial properties that are diversified by way of property type, location and industry, in order to minimize the potential adverse impact of economic slow-downs or downturns in local markets or a specific industry. There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net proceeds of the Offering that may be used to acquire a single property. The number and mix of properties comprising our portfolio will depend upon real estate market conditions and other circumstances existing at the time we acquire properties, and the amount of proceeds we raise in the Offering. We are not restricted to acquiring commercial properties and we will not forgo acquiring a high quality asset because it does not precisely fit our expected portfolio composition.
We have and intend to continue to incur debt to acquire properties where our advisor determines that incurring such debt is in our best interests, and in the best interests of our stockholders. In addition, from time to time, we acquire some properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We use the proceeds from these loans to acquire additional properties and maintain liquidity. See “— Borrowing Policies” below for a more detailed description of our borrowing intentions and limitations.
Retail Real Estate Properties. We expect the portion of our portfolio allocated to retail real estate properties will continue to focus on regional or national name brand retail businesses with creditworthy and established track records. It is our present intention to hold substantially all of the retail properties that we acquire for a period in excess of five years. We also pursue properties leased to tenants representing a variety of retail industries to avoid concentration in any one industry. These industries include all types of retail establishments, such as big box retailers, convenience stores, drug stores and restaurant properties. We expect that some of these acquisitions will provide long-term value by virtue of their size, location, quality and condition, and lease characteristics. We currently expect that substantially all of our retail acquisitions will be in the United States.

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By acquiring a large number of retail properties, we believe that lower than expected results of operations from one or a few investments will not necessarily preclude our ability to realize our investment objective of cash flow from our overall portfolio. In addition, we believe that retail properties under long-term triple-net and double-net leases offer a distinct investment advantage since these properties generally require less management and operating capital, have less recurring tenant turnover and, with respect to single tenant properties, often offer superior locations that are less dependent on the financial stability of adjoining tenants. In addition, since we intend to acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic slowdowns or downturns in local markets.
Many retail companies today are entering into sale-leaseback arrangements as a strategy for applying capital to their core operating business that would otherwise be applied to their real estate holdings. We believe that our investment strategy will enable us to take advantage of the increased emphasis on retailers’ core business operations in today’s competitive corporate environment as many retailers attempt to divest from real estate assets.
Office and Industrial Real Estate Properties. We expect that our office properties will include recently constructed, high quality, low, mid- or high-rise office buildings that are necessary to a principal tenant, subject to a long-term net lease, and used for purposes such as a corporate, regional or product-specific headquarters. We also expect that our industrial property portfolio will include recently constructed, high quality industrial properties that are necessary to a single principal tenant, subject to a long-term net lease, and used for purposes such as warehousing, distribution, light manufacturing, research and development, or industrial flex facilities. It is our present intention to hold substantially all of the office and industrial properties that we acquire for a period of more than seven years.
We expect that some of our office and industrial properties will be multi-tenant properties, anchored by one or more principal tenants, who are creditworthy and subject to long-term net leases. We expect that, from time to time, we may enter into corporate development projects, designed to construct an income producing office or industrial property to serve one or more creditworthy tenants.
Real Estate Underwriting Process
In evaluating potential property acquisitions consistent with our investment objectives, our advisor applies its well-established underwriting process to determine the creditworthiness of potential tenants. We consider a tenant to be creditworthy if we believe that the tenant has sufficient assets, cash flow generation and stability of operations to meet its obligations under the lease. Similarly, our advisor will apply its credit underwriting criteria to possible new tenants when we are leasing properties in our portfolio. Our advisor’s underwriting process includes analyzing the financial data and other available information about the tenant, such as income statements, balance sheets, net worth, cash flow, business plans, data provided by industry credit rating services, and/or other information our advisor may deem relevant. Generally, these tenants must have a proven track record in order to meet the credit tests applied by our advisor. In addition, we may obtain guarantees of leases by the corporate parent of the tenant, in which case our advisor will analyze the creditworthiness of the guarantor. In many instances, especially in sale-leaseback situations where we are acquiring a property from a company and simultaneously leasing it back to the company under a long-term lease, we will meet with the tenant’s senior management to discuss the company’s business plan and strategy.
When using debt rating agencies, a tenant typically will be considered creditworthy when the tenant has an “investment grade” debt rating by Moody’s Investors Service (“Moody’s”) of Baa3 or better, credit rating by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) of BBB- or better, or its payments are guaranteed by a company with such rating. Changes in tenant credit ratings, coupled with future acquisition and disposition activity, may increase or decrease our concentration of creditworthy tenants in the future.
Moody’s ratings are forward-looking opinions of future relative creditworthiness, which considers, but are not limited to, franchise value, financial statement analysis and management quality. The rating given to a debt obligation describes the level of risk associated with receiving full and timely payment of principal and interest on that specific debt obligation and how that risk compares with that of all other debt obligations. The rating, therefore, provides one measure of the ability of a company to generate cash in the future.
A Moody’s debt rating of Baa3, which is the lowest investment grade rating given by Moody’s, is assigned to companies which, in Moody’s opinion, are subject to moderate credit risk and as such may possess certain speculative characteristics. A Moody’s debt rating of AAA, which is the highest investment grade rating given by Moody’s, is assigned to companies which, in Moody’s opinion, are of the highest quality and subject to the lowest level of credit risk.
Standard & Poor’s assigns a credit rating to companies and to each issuance or class of debt issued by a rated company. A Standard & Poor’s credit rating of BBB-, which is the lowest investment grade rating given by Standard & Poor’s, is assigned to companies that, in Standard & Poor’s opinion, exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial

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commitments. A Standard & Poor’s credit rating of AAA+, which is the highest investment grade rating given by Standard & Poor’s, is assigned to companies that, in Standard & Poor’s opinion, have extremely strong capacities to meet their financial commitments.
While we will utilize ratings by Moody’s and Standard & Poor’s as one factor in determining whether a tenant is creditworthy, our advisor also considers other factors in determining whether a tenant is creditworthy, for the purpose of meeting our investment objectives. Our advisor’s underwriting process considers information provided by third-party analytical services, such as Moody’s CreditEdge, along with our advisor’s own analysis of the financial condition of the tenant and/or the guarantor, the operating history of the property with the tenant, the tenant’s market share and track record within the tenant’s industry segment, the general health and outlook of the tenant’s industry segment, the strength of the tenant’s management team and the terms and length of the lease at the time of the acquisition.
Description of Leases
We expect, in most instances, to continue to acquire tenant properties with existing double-net or triple-net leases. “Net” leases mean leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, maintenance, insurance and building repairs related to the property, in addition to the lease payments. Triple-net leases typically require the tenant to pay all costs associated with a property in addition to the base rent and percentage rent, if any, including capital expenditures for the roof and the building structure. Double-net leases typically hold the landlord responsible for the capital expenditures for the roof and structure, while the tenant is responsible for all lease payments and remaining operating expenses associated with the property. Double-net and triple-net leases help ensure the predictability and stability of our expenses, which we believe will result in greater predictability and stability of our cash distributions to stockholders. Not all of our leases will be net leases. Since each lease is an individually negotiated contract between two or more parties, each lease will have different obligations of both the landlord and the tenant. Many large national tenants have standard lease forms that generally do not vary from property to property. We will have limited ability to revise the terms of leases to those tenants. We have acquired and may continue to acquire properties subject to “gross” leases. “Gross” leases means leases that typically require the tenant to pay a flat rental amount, and we would pay for all property charges regularly incurred as a result of our owning the property. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we generally expect to enter into “net” leases.
We expect to enter into long-term leases that have terms of ten years or more; however, certain leases may have a shorter term. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is in an attractive location, if the property is difficult to replace, or if the property has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term. We expect that many of our leases will contain periodic rent increases. Generally, the leases will require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. Tenants will be required to provide proof of insurance by furnishing evidence of insurance to our advisor on an annual basis. The evidence of insurance will be tracked and reviewed for compliance by our advisor’s personnel responsible for property and risk management.
As a precautionary measure, we may obtain, to the extent available, secondary liability insurance, as well as loss of rents insurance that covers one year of annual rent in the event of a rental loss. In addition, some leases require that we procure insurance for both commercial general liability and property damage; however, generally the premiums are fully reimbursable from the tenant. In such instances, the policy will list us as the named insured and the tenant as the additional insured.
In general, if a lease is assigned or subleased, the original tenant remains fully liable under the lease unless we release that original tenant from its obligations.
We may enter into sale-leaseback transactions, pursuant to which we purchase properties and lease them back to the sellers of such properties. While we intend to use our best efforts to structure any such sale-leaseback transaction (as well as other leases) so that the lease will be characterized as a “true lease” and so that we are treated as the owner of the property for federal income tax purposes, the Internal Revenue Service (“IRS”) could challenge this characterization. In the event that any sale-leaseback transaction (or other leases) is re-characterized as a financing transaction for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed and in certain circumstances we could lose our REIT status. See Part I, Item 1A — Risk Factors — Risks Related to Federal Income Taxes and Our Status as a REIT of this Annual Report on Form 10-K.

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Other Possible Commercial Real Estate Assets
Although we expect to acquire primarily necessity retail, office and industrial properties, we also may acquire other income-producing properties, where the properties share some of the same characteristics as our core properties, including one or more principal, creditworthy tenants, long-term leases, and/or strategic locations. We may also acquire ground leases.
Acquisition Decisions
Our advisor has substantial discretion with respect to the selection of our specific acquisitions, subject to our investment and borrowing policies, which are approved by our independent directors. In pursuing our investment objectives and making investment decisions on our behalf, our advisor evaluates the proposed terms of the acquisition against all aspects of the transaction, including the condition and financial performance of the asset, the terms of existing leases, the creditworthiness of the tenant or tenants, and property location and characteristics. Because the factors considered, including the specific weight we place on each factor, vary for each potential acquisition, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
Our advisor procures and reviews an independent valuation estimate on each and every proposed acquisition. In addition, our advisor, to the extent such information is available, considers the following:
tenant rolls and tenant creditworthiness;
a property condition report;
unit level store performance;
property location, visibility and access;
age of the property, physical condition and curb appeal;
local market conditions including vacancy rates and market rents;
area demographics, including trade area population and average household income;
neighborhood growth patterns and economic conditions;
presence of nearby properties that may positively or negatively impact store sales at the subject property; and
lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options.
Our advisor also reviews the terms of each existing lease by considering various factors, including:
rent escalations;
remaining lease term;
renewal option terms;
tenant purchase options;
termination options;
scope of the landlord’s maintenance, repair and replacement requirements;
projected net cash flow yield; and
projected internal rates of return.
Conditions to Closing Our Acquisitions
Generally, we condition our obligation to close the purchase of any property on the delivery and verification of certain documents from the seller or developer, including, where appropriate:
plans and specifications;
surveys;
evidence of marketable title, subject to such liens and encumbrances as are acceptable to our advisor;
financial statements covering recent operations of properties with operating histories;
title and liability insurance policies; and
estoppel certificates.

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In addition, we will take such steps as we deem necessary with respect to potential environmental matters. See the section below entitled “— Environmental Matters.”
We have and may continue to enter into purchase and sale arrangements with a seller or developer of a suitable property under development or construction. In such cases, we are obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications, and costs approved by us in advance. In such cases, prior to our acquiring the property, we generally would receive a certificate of an architect, engineer or other appropriate party, stating that the property complies with all plans and specifications. If renovation or remodeling is required prior to the purchase of a property, we expect to pay a negotiated maximum amount to the seller upon completion.
In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option to purchase such property. The amount paid for an option, if any, normally is forfeited if the property is not purchased and credited against the purchase price if the property is purchased.
In purchasing, leasing and developing properties, we will be subject to risks generally incident to the ownership of real estate. See Part I, Item 1A — Risk Factors — Risks Related to Acquisitions of Real Estate in this Annual Report on Form 10-K.
Ownership Structure
Our real estate acquisitions generally take the form of holding fee title or a long-term leasehold estate. We have acquired and expect to continue to acquire such interests either directly through our operating partnership or indirectly through limited liability companies, limited partnerships or other entities owned and/or controlled by our operating partnership. We have acquired, and may continue to acquire, properties by acquiring the entity that holds the desired properties. We also may acquire properties through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with third parties, including the developers of the properties or affiliates of our advisor. See the “— Joint Ventures” section below.
Joint Ventures
We have entered, and may continue to enter into joint ventures, partnerships, co-tenancies and other co-ownership arrangements with third parties, including affiliates of our advisor for the acquisition, development or improvement of properties or the acquisition of other real estate-related assets. We may also enter into such arrangements with real estate developers, owners and other unaffiliated third parties for the purpose of developing, owning and operating real properties. In determining whether to participate in a particular joint venture, our advisor will evaluate the underlying real property or other real estate-related asset using the same criteria described above in “— Investment Acquisitions.” Our advisor also will evaluate the joint venture or co-ownership partner and the proposed terms of the joint venture or a co-ownership arrangement.
Our general policy is to invest in joint ventures only when we will have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. In the event that the co-venturer elects to sell all or a portion of the interests held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the joint venture. It is also possible that joint venture partners may resist granting us a right of first refusal or may insist on a different methodology for unwinding the joint venture if one of the parties wishes to liquidate its interest.
In the event we enter into a joint venture or other co-ownership arrangements with CIM or its affiliates, or another real estate program sponsored or operated by CCO Group, our advisor’s officers, key persons and affiliates may have conflicts of interest in determining which real estate program operated by CCO Group should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our advisor’s officers and key persons may face a conflict in structuring the terms of the relationship between our interests and the interests of any affiliated co-venturer and in managing the joint venture. Since some or all of our advisor’s officers and key persons may also advise the affiliated co-venturer, agreements and transactions between us and CIM or any other real estate programs sponsored or operated by CCO Group will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our contribution to the joint venture.
We may enter into joint ventures with CIM, other real estate programs sponsored or operated by CCO Group, or with CCO Group, our advisor, one or more of our directors, or any of their respective affiliates, but only if a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by unaffiliated joint venturers, and the cost of our investment must be supported by a current third-party appraisal of the asset.

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Development and Construction of Properties
We may acquire properties on which improvements are to be constructed or completed or which require substantial renovation or refurbishment. We expect that joint ventures would be the exclusive vehicle through which we would invest in build-to-suit property projects. Any such joint ventures will make up no more than 20% of our total assets and our general policy is to structure them as follows:
we may enter into a joint venture with third parties who have an executed lease with the developer who has an executed lease in place with the future tenant whereby we will provide a portion of the equity or debt financing;
we would accrue a preferred return during construction on any equity investment;
the properties will be developed by third parties; and
consistent with our general policy regarding joint ventures, we would have an option or contract to purchase, or a right of first refusal to purchase, the property or the co-investor’s interest. 
It is possible that joint venture partners may resist granting us a right of first refusal or may insist on a different methodology for unwinding the joint venture if one of the parties wishes to liquidate its interest.
In the event that we elect to engage in development or construction projects, in order to help ensure performance by the builders of properties that are under construction, completion of such properties will be guaranteed at the contracted price by a completion guaranty, completion bond or performance bond. Our advisor may rely upon the substantial net worth of the contractor or developer or a personal guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the person entering into the construction or development contract as an alternative to a completion bond or performance bond. Development of real estate properties is subject to risks relating to a builder’s ability to control construction costs or to build in conformity with plans, specifications and timetables. Refer to Part I, Item 1A. Risk Factors — Risks Related to Acquisitions of Real Estate in this Annual Report on Form 10-K.
We may make periodic progress payments or other cash advances to developers and builders of our properties prior to completion of construction only upon receipt of an architect’s certification as to the percentage of the project then completed and as to the dollar amount of the construction then completed. We intend to use such additional controls on disbursements to builders and developers as we deem necessary or prudent. We may directly employ one or more project managers, to plan, supervise and implement the development of any unimproved properties that we may acquire. Such persons would be compensated directly by us.
In addition, we may acquire unimproved properties, provided that we will not invest more than 10% of our total assets in unimproved properties or invest in mortgage loans secured by such properties. We will consider a property to be an unimproved property if it was not acquired for the purpose of producing rental or other operating cash flows, has no development or construction in process at the time of acquisition and no development or construction is planned to commence within one year of the acquisition.
Investing in and Originating Loans
The criteria that our advisor will use in making or investing in loans on our behalf is substantially the same as those involved in acquiring our properties. We do not intend to make loans to other persons, to underwrite securities of other issuers or to engage in the purchase and sale of any types of assets other than those relating to real estate. However, unlike our property acquisitions, which we expect to hold in excess of five years for retail properties and seven years for office and industrial properties, we expect that the average duration of loans will typically be one to five years. We are not limited as to the amount of gross offering proceeds that we may apply to mortgage loan investments.
We do not expect to make or invest in loans that are not directly or indirectly secured by real estate. We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including our loan, would exceed an amount equal to 85% of the appraised value of the property, as determined by an independent third-party appraiser, unless we find substantial justification due to other underwriting criteria. We may find such justification in connection with the purchase of loans in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and in which the cost of the loan investment does not exceed the fair market value of the underlying property. We will not invest in or make loans unless an appraisal has been obtained concerning the underlying property, except for those loans insured or guaranteed by a government or government agency.
We may invest in first, second and third mortgage loans, mezzanine loans, bridge loans, wraparound mortgage loans, construction mortgage loans on real property, loans on leasehold interest mortgages, and commercial mortgage-backed securities (“CMBS”) held as long-term investments. However, we will not make or invest in any loans that are subordinate to

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any mortgage or equity interest of our advisor or any of its or our affiliates. We also may invest in participations in mortgage loans. A mezzanine loan is a loan made in respect of certain real property but is secured by a lien on the ownership interests of the entity that, directly or indirectly, owns the real property. A bridge loan is short-term financing, for an individual or business, until permanent or the next stage of financing can be obtained. Second mortgage and wraparound loans are secured by second or wraparound deeds of trust on real property that is already subject to prior mortgage indebtedness. A wraparound loan is one or more junior mortgage loans having a principal amount equal to the outstanding balance under the existing mortgage loan, plus the amount actually to be advanced under the wraparound mortgage loan. Under a wraparound loan, we would generally make principal and interest payments on behalf of the borrower to the holders of the prior mortgage loans. Third mortgage loans are secured by third deeds of trust on real property that is already subject to prior first and second mortgage indebtedness. Construction loans are loans made for either original development or renovation of property. Construction loans in which we would generally consider an investment would be secured by first deeds of trust on real property for terms of six months to two years. Loans on leasehold interests are secured by an assignment of the borrower’s leasehold interest in the particular real property. These loans are generally for terms of six months to 15 years. The leasehold interest loans are either amortized over a period that is shorter than the lease term or have a maturity date prior to the date the lease terminates. These loans would generally permit us to cure any default under the lease. Participations in mortgage loans are investments in partial interests of mortgages of the type described above that are made and administered by third-party mortgage lenders.
In evaluating prospective loan investments, our advisor will consider factors such as the following:
the ratio of the investment amount to the underlying property’s value;
the property’s potential for capital appreciation;
expected levels of rental and occupancy rates;
the condition and use of the property;
current and projected cash flow of the property;
potential for rent increases;
the degree of liquidity of the investment;
the property’s income-producing capacity;
the quality, experience and creditworthiness of the borrower;
general economic conditions in the area where the property is located;
in the case of mezzanine loans, the ability to acquire the underlying real property; and
other factors that our advisor believes are relevant.
In addition, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage or condition of the title. We will also consider the REIT requirements under the Internal Revenue Code of 1986, as amended (the “Code”), which may limit our ability to make certain loan investments. Because the factors considered, including the specific weight we place on each factor, will vary for each prospective loan investment, we do not, and are not able to, assign a specific weight or level of importance to any particular factor.
We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or may purchase existing loans that were originated by other lenders. Our advisor will evaluate all potential loan investments to determine if the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. Most loans that we will consider for investment would provide for monthly payments of interest and some may also provide for principal amortization, although many loans of the nature that we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.
We do not have any policies directing the portion of our assets that may be invested in construction loans, mezzanine loans, bridge loans, loans secured by leasehold interests and second, third and wraparound mortgage loans. However, we recognize that these types of loans are subject to greater risk than first deeds of trust or first priority mortgages on income-producing, fee-simple properties, and we expect to minimize the amount of these types of loans in our portfolio, to the extent that we make or invest in loans at all. Our advisor will evaluate the fact that these types of loans are riskier in determining the rate of interest on the loans. We do not have any policy that limits the amount that we may invest in any single loan or the amount we may invest in loans to any one borrower. We are not limited as to the amount of gross offering proceeds that we may use to invest in or originate loans.
Our loan investments may be subject to regulation by federal, state and local authorities and subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosures to customers,

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governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders, and these requirements may affect our ability to effectuate our proposed investments in loans. Commencement of operations in these or other jurisdictions may be dependent upon a finding of our financial responsibility, character and fitness. We may determine not to make loans in any jurisdiction in which the regulatory authority determines that we have not complied in all material respects with applicable requirements.
Liquid Investment Portfolio
Investment in Liquid Securities. To the extent permitted by the tax rules applicable to REITs, we intend for our liquid investment portfolio to primarily consist of U.S. government securities, agency securities and high quality corporate debt. We use the term “agency” to refer to a U.S. government agency such as the Government National Mortgage Association, or Ginnie Mae, or a federally-chartered corporation such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac.
We may also invest in liquid real estate-related securities, including equity and debt securities of companies whose shares are listed for trading on a national securities exchange and are engaged in real estate activities. Listed companies engaged in real estate activities may include, for example, REITs. Our investments in securities of companies engaged in activities related to real estate will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer.
We may also make investments in CMBS to the extent permitted by the tax rules applicable to REITs. CMBS are securities that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined portfolios of one or more commercial mortgage loans. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust’s income. Losses and other shortfalls from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest to which they are entitled. CMBS are subject to all of the risks of the underlying mortgage loans. We may invest in investment grade and non-investment grade CMBS classes.
Additionally, we may acquire exchange traded funds, or ETFs, and mutual funds focused on REITs and real estate companies. To a lesser extent we may also invest in traded securities that are unrelated to real estate and make other investments or enter into transactions designed to limit our exposure to market volatility, illiquidity, interest rate or other risks related to our real-estate related, equity or debt, securities subject to complying with the REIT requirements under the Code.
Cash, Cash Equivalents and Other Short-Term Investments. Our cash, cash equivalents and other short-term investments may include investments in money market instruments, cash and other cash equivalents (such as high-quality short-term debt instruments, including commercial paper, certificates of deposit, bankers’ acceptances, repurchase agreements and interest-bearing time deposits), to the extent consistent with our qualification as a REIT.
Other Investments
Although it is our expectation that our portfolio will consist primarily of commercial real estate, as well as notes receivable, liquid assets and cash and cash equivalents, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forgo acquiring a high quality asset because it does not precisely fit our presently expected portfolio composition. Thus, to the extent that our advisor presents us with high quality acquisition opportunities that allow us to meet the REIT requirements under the Code, and that result in an overall real estate portfolio that is consistent with our investment objectives, our portfolio composition may vary from time to time.
Borrowing Policies
Our advisor believes that utilizing borrowing is consistent with our objective of maximizing the return to stockholders and providing us with added liquidity. By operating on a leveraged basis, we have more funds available for acquiring properties. This allows us to make more investments than would otherwise be possible, resulting in a more diversified portfolio.
At the same time, our advisor believes in utilizing leverage in a moderate fashion. Under our charter, we may not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans on such property would exceed an amount equal to 85% of the appraised value of such property unless substantial justification exists for exceeding such limit because of the presence of other underwriting criteria. Additionally, our charter limits our aggregate borrowings to 75% of the greater of cost (or 300% of net assets) (before deducting depreciation or other non-cash reserves) or market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. Consistent with our advisor’s approach toward the moderate use of leverage, our board of directors has adopted a policy to further limit our

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borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or market value of our gross assets, unless such borrowing is approved by a majority of the independent directors and disclosed to our stockholders in the next quarterly report along with a justification for such excess borrowing. During the capital raising stage, our board of directors, including a majority of our independent directors has approved exceeding this limit because we are in the process of raising our equity capital to acquire our portfolio. After we have acquired a substantial portfolio, our advisor expects to target a leverage of 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets. Fair market value is based on the estimated market value of our real estate assets as of December 31, 2017 used to determine our estimated per share NAV. As of December 31, 2017, our ratio of debt to the cost (before deducting depreciation or other non-cash reserves) of our gross assets was 39.4% (39.0% including adjustment to debt for cash and cash equivalents), and our ratio of debt to the fair market value of our gross assets was 37.7%.
Our advisor uses its best efforts to obtain financing on the most favorable terms available to us. Under certain circumstances, lenders may have recourse to assets not securing the repayment of the indebtedness. Our advisor may elect to refinance properties during the term of a loan, but we expect this would occur only in limited circumstances, such as when a decline in interest rates makes it beneficial to prepay an existing mortgage, when an existing mortgage matures or if an attractive asset becomes available and the proceeds from the refinancing can be used to purchase such asset. The benefits of the refinancing may include increased cash flow resulting from reduced debt service requirements, an increase in dividend distributions from proceeds of the refinancing, if any, and an increase in property ownership if some refinancing proceeds are reinvested in real estate.
Our ability to increase our diversification through borrowing may be adversely impacted if banks and other lending institutions reduce the amount of funds available for loans secured by real estate. When interest rates on mortgage loans are high or financing is otherwise unavailable on a timely basis, we may purchase properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. To the extent that we do not obtain mortgage loans on our properties, our ability to acquire additional properties will be restricted and we may not be able to adequately diversify our portfolio. Refer to Part I, Item 1A. Risk Factors — Risk Associated with Debt Financing in this Annual Report on Form 10-K.
We may not borrow money from any of our directors, advisor or any of their affiliates unless such loan is approved by a majority of the directors not otherwise interested in the transaction (including a majority of the independent directors) as fair, competitive and commercially reasonable and no less favorable to us than a comparable loan between unaffiliated parties.
In an effort to have adequate cash available to support our redemption plan, our advisor may determine to reserve borrowing capacity under our line of credit. Our advisor could then elect to borrow against this line of credit in its discretion in order to fund redemption requests.
Disposition Policies
We intend to hold each property we acquire for an extended period, generally in excess of five years for retail properties and seven years for office and industrial properties. Holding periods for other real estate-related investments may vary. Regardless of intended holding periods, circumstances might arise that could cause us to determine to sell an asset before the end of the expected holding period if we believe the sale of the asset would be in the best interests of our stockholders. The determination of whether a particular asset should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing and projected economic conditions, current tenant rolls and tenant creditworthiness, whether, depending on the asset’s tax attributes, we could apply the proceeds from the sale of the asset to acquire other assets, whether disposition of the asset would increase cash flow, and whether the sale of the asset would be a prohibited transaction under the Internal Revenue Code or otherwise impact our status as a REIT for federal income tax purposes. The selling price of a property that is net leased will be determined in large part by the amount of rent payable under the lease and the remaining lease term(s). If a tenant has a repurchase option at a formula price, we may be limited in realizing any appreciation. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale. During the years ended December 31, 2017 and 2016, the Company had no dispositions. During the year ended December 31, 2015, we disposed of four retail properties and one anchored shopping center, for an aggregate gross sales price of $21.9 million and a gain of $5.6 million.
Acquisition of Properties from Affiliates of Cole Income NAV Strategy Advisors
We may acquire properties or interests in properties from, or in co-ownership arrangements with, entities affiliated with Cole Income NAV Strategy Advisors, including properties acquired from affiliates of Cole Income NAV Strategy Advisors engaged in construction and development of commercial real properties. We will not acquire any property from an affiliate of Cole Income NAV Strategy Advisors unless a majority of our directors (including a majority of our independent directors) not otherwise interested in the transaction determine that the transaction is fair and reasonable to us. The purchase price that we will

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pay for any property we acquire from affiliates of Cole Income NAV Strategy Advisors, including property developed by an affiliate of Cole Income NAV Strategy Advisors as well as property held by such an affiliate that has already been developed, will not exceed the current appraised value of the property. In addition, the price of the property we acquire from an affiliate of Cole Income NAV Strategy Advisors may not exceed the cost of the property to the affiliate, unless a majority of our directors (including a majority of our independent directors) determine that substantial justification for the excess exists and the excess is reasonable. During the year ended December 31, 2017, we did not purchase any properties from affiliates of our advisor.
Conflicts of Interest
We are subject to various conflicts of interest arising out of our relationship with our advisor and its affiliates, including conflicts related to the arrangements pursuant to which we compensate our advisor and its affiliates. Certain conflict resolution procedures are set forth in our charter and disclosed in our prospectus with respect to the Offering.
The officers and affiliates of our advisor will try to balance our interests with the interests of CIM and its affiliates and other programs sponsored or operated by CCO Group to whom they owe duties. However, to the extent that these persons take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our stockholders and the value of their investments. In addition, our directors and our officers may engage for their own account in business activities of the types conducted or to be conducted by our subsidiaries and us.
Our independent directors have an obligation to act on our behalf and on behalf of our stockholders in all situations in which a conflict of interest may arise.
As a result of the Services Agreement between VEREIT OP and CCO Group, we are subject to conflicts of interest arising out of our contractual relationship with VEREIT, Inc. (“VEREIT”), the publicly-traded (NYSE: VER) parent company of VEREIT OP, which also has investment objectives and targeted assets similar to ours. Conflicts of interest will also exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where CIM or its affiliates own properties.
Interests in Other Real Estate Programs and Other Concurrent Offerings
Richard S. Ressler, our chief executive officer, president and one of our directors, who is also is a founder and principal of CIM and certain of its affiliates and a director of CCPT IV and CCIT III, and Nathan D. DeBacker, our chief financial officer and treasurer, act as executive officers to one or more other programs sponsored by CCO Group. One of our directors, W. Brian Kretzmer, also serves as a director of CCPT IV and CCIT III. Similarly, Glenn J. Rufrano, one of our directors, serves as a director of CCPT V, CCIT II and CCIT III, as well as chief executive officer and a director of VEREIT, the parent company of VEREIT OP, who provides certain services to us and our advisor through the Services Agreement. In addition affiliates of Cole Income NAV Strategy Advisors act as an advisor to, and certain of our executive officers and one of our directors act as executive officers and/or directors of CCPT IV, CCPT V, CCIT II and/or CCIT III, all of which are/or intend to be public, non-listed REITs offered, distributed and/or managed by affiliates of Cole Income NAV Strategy Advisors. In addition, all of these programs primarily focus on the acquisition and management of commercial properties subject to long-term net leases to creditworthy tenants and have acquired or may acquire assets similar to ours. VEREIT, CCPT IV, and CCPT V focus primarily on the retail sector, while CCIT II and CCIT III focus primarily on the corporate office and industrial sectors. Nevertheless, the investment strategy used by each REIT would permit them to purchase certain properties that may also be suitable for our portfolio.
CCPT IV’s initial public offering of up to $2.975 billion in shares of common stock was declared effective by the SEC on January 26, 2012. CCIT II’s initial public offering of up to $2.975 billion in shares of common stock was declared effective by the SEC on September 17, 2013. CCPT IV and CCIT II are no longer offering shares for investment to the public as of the date of this Annual Report on Form 10-K. CCPT V’s initial public offering of up to $2.975 billion in shares of common stock was declared effective by the SEC on March 17, 2014 and terminated on August 1, 2017. CCPT V’s follow-on offering of up to $1.5 billion in shares of common stock was declared effective by the SEC on August 1, 2017. CCIT III’s initial public offering of up to $3.5 billion in shares of common stock of two classes was declared effective by the SEC on September 22, 2016.
Other real estate programs sponsored or operated by CCO Group, including other real estate offerings in registration, could compete with us in the sale or operation of our assets. We will seek to achieve any operating efficiencies or similar savings that may result from affiliated management of competitive assets. However, to the extent such programs own or acquire property that is adjacent, or in close proximity, to a property we own, our property may compete with another program’s property for tenants or purchasers.
During the Initial Services Term of the Services Agreement, VEREIT OP will provide property acquisition services to us and CCO Group, and property acquisitions will be allocated among VEREIT and the real estate programs sponsored by CCO

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Group pursuant to an asset allocation policy and in accordance with the terms of the Services Agreement. During this period, in the event that an acquisition opportunity has been identified that may be suitable for more than one of us, VEREIT or one or more other programs sponsored by CCO Group, and for which more than one of such entities has sufficient funds, then an allocation committee, which is comprised of employees of VEREIT and employees of CIM, CCO Group or their respective affiliates (the “Allocation Committee”), will examine the following factors, among others, in determining the entity for which the acquisition opportunity is most appropriate:
the investment objective of each entity;
the anticipated operating cash flows of each entity and the cash requirements of each entity;
the effect of the acquisition both on diversification of each entity’s investments by type of property, geographic area and tenant concentration;
the amount of funds available to each program and the length of time such funds have been available to deploy;
the policy of each entity relating to leverage of properties;
the income tax effects of the purchase to each entity; and
the size of the investment.
If, in the judgment of the Allocation Committee, the acquisition opportunity may be equally appropriate for more than one program, then the entity that has had the longest period of time elapse since it was allocated an acquisition opportunity of a similar size and type (e.g., office, industrial or retail properties) will be allocated such acquisition opportunity.
If a subsequent development, such as a delay in the closing of the acquisition or a delay in the construction of a property, causes any such acquisition opportunity, in the opinion of the Allocation Committee, to be more appropriate for an entity other than the entity to which the acquisition opportunity was allocated, the Allocation Committee may determine that VEREIT or another program sponsored by CCO Group will be allocated the acquisition opportunity. Our board of directors has a duty to ensure that the method used for the allocation of the acquisition of properties by VEREIT or by other programs sponsored by CCO Group seeking to acquire similar types of properties is applied fairly to us.
For programs sponsored by CCO Group that commenced operations on or after March 5, 2013, VEREIT retains a right of first refusal for all opportunities to acquire real estate and real estate-related assets or portfolios with a purchase price greater than $100 million. This right of first refusal applies to CCIT II, CCIT III and CCPT V, but does not apply to CCPT IV or us. During the Initial Services Term of the Services Agreement, all transactions with a purchase price at or below $100 million will be allocated among us, VEREIT and the other programs sponsored by CCO Group pursuant to the terms of the allocation policy described above.
In addition, after the Initial Services Term of the Services Agreement, CIM or its affiliates will have similar responsibilities for allocating acquisition opportunities among CIM and its affiliates, us and the other real estate programs sponsored by CCO Group, and in such circumstances will accordingly face similar conflicts of interest to those described above with respect to VEREIT OP during the Initial Services Term of the Services Agreement.
Although our board of directors has adopted a policy limiting the types of transactions that we may enter into with Cole Income NAV Strategy Advisors and its affiliates, including other real estate programs operated by CCO Group, we may still enter into certain such transactions, which are subject to inherent conflicts of interest. Similarly, joint ventures involving affiliates of Cole Income NAV Strategy Advisors also give rise to conflicts of interest. In addition, our board of directors may encounter conflicts of interest in enforcing our rights against our advisor or its affiliates in the event of a default by or disagreement with any of them or in invoking powers, rights or options pursuant to any agreement between us and our advisor, any of its affiliates, or another real estate program sponsored by CCO Group.
Other Activities of Cole Income NAV Strategy Advisors and Its Affiliates
We rely on our advisor, Cole Income NAV Strategy Advisors, and, during the Initial Services Term of the Services Agreement, VEREIT OP, for the day-to-day operation of our business. As a result of the interests of certain members of these entities’ management in CIM or its affiliates, VEREIT and/or other real estate programs sponsored by CCO Group, and the fact that such persons also are engaged, and will continue to engage, in other business activities, CIM, VEREIT OP, our advisor and their respective officers, key persons and affiliates may have conflicts of interest in allocating their time and resources among us, CIM, VEREIT OP, their respective affiliates and other real estate programs sponsored by CCO Group, as applicable. However, our advisor believes that it, CIM and their respective affiliates, along with VEREIT OP, have sufficient personnel to discharge fully their responsibilities to all of the other programs sponsored or operated by CIM, CCO Group or their respective affiliates, or VEREIT, and the other ventures in which they are involved.
Richard S. Ressler, our chief executive officer, president and one of our directors, is also a founder and principal of CIM

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and an officer/director of certain of its affiliates, and a director of CCPT IV and CCIT III. One of our directors, Glenn Rufrano, is also the chief executive officer and a director of VEREIT and a director of several other real estate programs sponsored by CCO Group. In addition, our chief financial officer and treasurer, Nathan D. DeBacker, is also an officer of other real estate programs sponsored by CCO Group. As a result, Messrs. Ressler, Rufrano and DeBacker may owe duties to these other entities and their stockholders or equity owners, as applicable, which may from time to time conflict with the duties that they owe to us and our stockholders.
From time to time our advisor may direct certain of its affiliates to acquire properties that would be suitable assets for us or may create special purpose entities to acquire properties for the specific purpose of selling the properties to us at a later time. Subsequently, we may acquire such properties from such affiliates, but any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of independent directors, not otherwise interested in such transactions as being fair and reasonable to us. In addition our purchase price in any such transaction will be limited to the cost of the property to the affiliate, including acquisition-related expenses, unless a majority of the independent directors determines that there is substantial justification for any amount that exceeds such cost and that the difference is reasonable. Further, our charter provides that in no event will the purchase price of any asset acquired from an affiliate exceed its current appraised value as determined by an independent appraiser.
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property or for the purpose of providing short term financing as necessary to satisfy valid redemption requests under the Company’s share redemption plan, in either case when offering proceeds alone are insufficient to do so and third party financing has not been arranged. Any and all such transactions must be approved by a majority of our directors (including a majority of our independent directors) not otherwise interested in such transaction as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties. Our advisor or its affiliates may pay costs on our behalf, pending our reimbursement, or we may defer payment of fees to our advisor or its affiliates, but neither of these transactions would be considered a loan.
Our charter does not prohibit us from entering into transactions other than those described above with our directors, our advisor, our operator or any of their affiliates, subject to compliance with the requirements set forth under “— Certain Conflict Resolution Procedures,” including approval by a majority of our directors (including a majority of the independent directors), not otherwise interested in such transactions as being fair and reasonable to us and no less favorable to us than comparable terms and conditions available from unaffiliated third parties. Although we do not currently anticipate entering into any such transactions, we may sell assets to or acquire assets from affiliates of our advisor, make loans to or borrow from affiliates of our advisor and lease assets to or from affiliates of our advisor. In addition, we would not be precluded from internalizing our advisor if our board of directors were to determine an internalization transaction to be in the best interests of our stockholders.
Competition in Acquiring, Leasing and Reselling of Properties
There is a risk that a potential acquisition would be suitable for VEREIT and one or more programs operated by CCO Group, in which case the officers of our advisor will have a conflict of interest allocating the acquisition opportunity to us, VEREIT or another program. There is a risk that our advisor will choose a property that provides lower returns to us than a property purchased by VEREIT or another program operated by CCO Group. However, in such event, our advisor, with oversight by our board of directors, will determine which program will be first presented with the opportunity. Additionally, our advisor may cause a prospective tenant to enter into a lease for property owned by VEREIT or another program operated by CCO Group.
Conflicts of interest will also exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where properties owned by CIM or its affiliates, VEREIT (during the Initial Services Term of the Services Agreement) or other programs operated by CCO Group are located. In such a case, a conflict could arise in the acquisition or leasing of properties in the event that we and CIM or its affiliates, VEREIT (during the Initial Services Term of the Services Agreement) or another program operated by CCO Group were to compete for the same properties or tenants, or a conflict could arise in connection with the resale of properties in the event that we and CIM or its affiliates, VEREIT (during the Initial Services Term of the Services Agreement) or another program operated by CCO Group were to attempt to sell similar properties at the same time, including, in particular, in the event CIM or its affiliates, VEREIT (during the Initial Services Term of the Services Agreement) or another program operated by CCO Group liquidates at approximately the same time as us. Conflicts of interest may also exist at such time as we or our affiliates managing property on our behalf seek to employ developers, contractors or building managers, as well as under other circumstances.
VEREIT and/or our property manager will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making such prospective developers, contractors or building managers aware of all such properties with respect to which their services may be sought, regardless of whether such properties are owned by us or another program operated by CCO Group. In addition, VEREIT and/or our property manager will seek to reduce conflicts that may arise with

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respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties, regardless of whether such properties are owned by us or another program operated by CCO Group. However, these conflicts cannot be fully avoided in that there may be differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.
Dealer Manager
Since CCO Capital, our dealer manager, is an affiliate of our advisor, we will not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the Offering. Accordingly, stockholders will have to rely on their own financial intermediary to make an independent review of the terms of the Offering. If a stockholder’s financial intermediary conducts an independent review of the Offering, and/or engages an independent due diligence reviewer to do so on its behalf, we expect that we will pay or reimburse the expenses associated with such review, which may create conflicts of interest. If a stockholder’s financial intermediary does not conduct such a review, the stockholder will not have the benefit of an independent review of the terms of the Offering. In addition, the sale of our shares of common stock in the Offering will result in distribution fees and dealer manager fees to CCO Capital, our dealer manager and an affiliate of our advisor.
Property Manager
Our properties are, and we anticipate that substantially all properties we acquire in the future will be, managed and leased by our property manager, CREI Advisors, an affiliate of our advisor, pursuant to property management and leasing agreements with our subsidiaries that hold title to our properties. We expect CREI Advisors to also serve as property manager for properties owned by other real estate programs sponsored by CCO Group, some of which may be in competition with our properties.
Receipt of Fees and Other Compensation by Cole Income NAV Strategy Advisors and Its Affiliates
Our advisor will receive substantial fees from us. These compensation arrangements could influence our advisor’s advice to us, as well as the judgment of the personnel of our advisor who serve as our officers or directors. Among other matters, the compensation arrangements could affect the judgment of our advisor’s personnel with respect to:
the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and the dealer manager agreement, and the amounts we pay under such agreements;
the advisory fee and performance fee that we pay to our advisor, which are based upon our NAV, given that our advisor will be involved in estimating certain accrued fees and expenses that are part of our NAV;
our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance that would entitle our advisor to incentive compensation; and
the decision to buy or sell an asset based on whether it will increase or decrease our NAV as opposed to whether it is the most suitable acquisition for our portfolio.
We will pay advisory fees to our advisor regardless of the quality of the services it provides during the term of the advisory agreement. Our advisor, however, has a fiduciary duty to us. The advisory agreement may be terminated by us or our advisor on 60 days’ notice.
Employees
We have no direct employees. The employees of Cole Income NAV Strategy Advisors and its affiliates provide services to us related to acquisitions and dispositions, property management, asset management, financing, accounting, stockholder relations and administration. The employees of CCO Capital, our dealer manager, provide wholesale brokerage services.
We are dependent on our advisor and its affiliates for services that are essential to us, including the sale of shares of our common stock, asset acquisition decisions, property management and other general administrative responsibilities. In the event that these companies are unable to provide these services to us, we would be required to obtain such services from other sources.
We reimburse Cole Income NAV Strategy Advisors and its affiliates for expenses incurred in connection with its provision of administrative, acquisition, property management, asset management, financing, accounting and stockholder relations services, including personnel costs, subject to certain limitations. During the years ended December 31, 2017 and 2016, $5.0 million and $3.8 million, respectively, were incurred for reimbursement of services provided by Cole Income NAV Strategy Advisors and its affiliates in connection with the acquisition, management, operating and financing of our assets. Cole Income NAV Strategy Advisors agreed to permanently waive its right to receive certain operating expense reimbursements, for a total amount of $1.3 million, for the year ended December 31, 2015.

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Reportable Segment
We operate on a consolidated basis in our commercial properties segment. See Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
Competition
As we purchase properties, we are in competition with other potential buyers for the same properties and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our acquisition criteria. In addition, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we may also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Property Concentrations
As of December 31, 2017, no single tenant accounted for greater than 10% of our 2017 annualized rental income. Tenants in the discount store and home furnishings industries accounted for 12% and 10%, respectively, of our 2017 annualized rental income. Additionally, we have certain geographic concentrations in our property holdings. In particular, as of December 31, 2017, 16 of our properties were located in Ohio, accounting for 12% of our 2017 annualized rental income.
Environmental Matters
All real property and the operations conducted on real property are subject to federal, state and local laws, ordinances and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the presence and release of hazardous substances and the remediation of any associated contamination. Federal, state and local laws in this area are constantly evolving, and we intend to take commercially reasonable steps to protect ourselves from the impact of these laws. We carry environmental liability insurance on our properties that will provide limited coverage for remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which we may be liable.
We generally will not purchase any property unless and until we also obtain what is generally referred to as a “Phase I” environmental site assessment and are generally satisfied with the environmental status of the property. However, we may purchase a property without obtaining such assessment if our advisor determines the assessment is not necessary because there exists a recent Phase I environmental site assessment that we deem satisfactory. A Phase I environmental site assessment generally consists of a visual survey of the building and the property in an attempt to identify areas of potential environmental concerns, visually observing neighboring properties to assess surface conditions or activities that may have an adverse environmental impact on the property, interviewing the key site manager and/or property owner, contacting local governmental agency personnel and performing an environmental regulatory database search in an attempt to determine any known environmental concerns in, and in the immediate vicinity of, the property. A Phase I environmental site assessment does not generally include any sampling or testing of soil, ground water or building materials from the property and may not reveal all environmental hazards on a property.
In the event the Phase I environmental site assessment uncovers potential environmental problems with a property, our advisor will determine whether we will pursue the acquisition opportunity and whether we will have a “Phase II” environmental site assessment performed. The factors we may consider in determining whether to conduct a Phase II environmental site assessment include, but are not limited to, (1) the types of operations conducted on the property and surrounding properties, (2) the time, duration and materials used during such operations, (3) the waste handling practices of any tenants or property owners, (4) the potential for hazardous substances to be released into the environment, (5) any history of environmental law violations on the subject property and surrounding property, (6) any documented environmental releases, (7) any observations from the consultant that conducted the Phase I environmental site assessment, and (8) whether any party (e.g., surrounding property owners, prior owners or tenants) may be responsible for addressing the environmental conditions. We will determine whether to conduct a Phase II environmental site assessment on a case by case basis.
We have acquired and we expect that some of the properties that we continue to acquire may contain, at the time of our acquisition, or may have contained prior to our acquisition, storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties may be adjacent to or near other properties that have contained or currently contain

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storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties may be on or adjacent to or near other properties upon which others, including former owners or tenants of our properties, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are significant and quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we will estimate the costs of environmental investigation, clean-up and monitoring in determining the purchase price. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
We are not aware of any environmental matters which we believe are reasonably likely to have a material effect on our results of operations, financial condition or liquidity.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. We have also filed registration statements, amendments to our registration statements, and/or supplements to our prospectus in connection with the Offering with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website at http://www.sec.gov. Access to these filings is free of charge.
Supplement To Material U.S. Federal Income Tax Consequences
This summary is for general information purposes only and is not tax advice. This discussion does not address all aspects of taxation that may be relevant to particular holders of our securities in light of their personal investment or tax circumstances.
Recent Legislation
The recently enacted “Tax Cuts and Jobs Act”, generally applicable for tax years beginning after December 31, 2017, made significant changes to the Code, including a number of provisions of the Code that affect the taxation of businesses and their owners, including REITs and their stockholders.
Among other changes, the Tax Cuts and Jobs Act made the following changes:  
For tax years beginning after December 31, 2017 and before January 1, 2026, (i) the U.S. federal income tax rates on ordinary income of individuals, trusts and estates have been generally reduced and (ii) non-corporate taxpayers are generally permitted to deduct 20% of certain pass-through business income, including dividends received from REITs that are not designated as capital gain dividends or qualified dividend income, subject to certain limitations.
The maximum U.S. federal income tax rate for corporations has been reduced from 35% to 21%, and corporate alternative minimum tax has been eliminated for corporations, which would generally reduce the amount of U.S. federal income tax payable by our taxable REIT subsidiaries (“TRSs”) and by us to the extent we were subject to corporate U.S. federal income tax (for example, if we distributed less than 100% of our taxable income or recognized built-in gains in assets acquired from C corporations). In addition, the maximum withholding rate on distributions by us to non-U.S. stockholders that are treated as attributable to gain from the sale or exchange of a U.S. real property interest is reduced from 35% to 21%.
Certain new limitations on the deductibility of interest expense now apply, which limitations may affect the deductibility of interest paid or accrued by us or our TRSs.
Certain new limitations on net operating losses now apply, which limitations may affect net operating losses generated by us or our TRSs.
A U.S. tax-exempt stockholder that is subject to tax on its unrelated business taxable income (“UBTI”) will be required to separately compute its taxable income and loss for each unrelated trade or business activity for purposes of determining its UBTI.
New accounting rules generally require us to recognize income items for federal income tax purposes no later than when we take the item into account for financial statement purposes, which may accelerate our recognition of certain income items.


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ITEM 1A.
RISK FACTORS
Stockholders should carefully consider the following factors, together with all the other information included in this Annual Report on Form 10-K, in evaluating the Company and our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and stockholders may lose all or part of their investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business
We are considered to be a “blind pool,” as we currently have not identified all of the specific properties and real estate-related assets that we intend to purchase. For this and other reasons, an investment in our shares is speculative.
Since we have not identified all of the specific properties that we may purchase with future offering proceeds, this is a “blind pool.” Our stockholders will not be able to evaluate the economic merit of our additional acquisitions until after these acquisitions have been made. As a result, an investment in our shares is speculative.
Our stockholders should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that are, like us, in their early stages of development. To be successful in this market, we and our advisor must, among other things:
identify and acquire assets that further our investment objectives;
increase awareness of the Cole Real Estate Income Strategy (Daily NAV), Inc. name within the investment products market;
expand and maintain our network of licensed broker-dealers and others who sell shares on our behalf and other agents;
rely on our advisor and its affiliates to attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
respond to competition for our targeted real estate and other investments, as well as for potential stockholders;
rely on our advisor and its affiliates to continue to build and expand our operations structure to support our business; and
rely on our advisor, who relies on its sub-advisor, and its affiliates and our board of directors to be continuously aware of, and interpret, marketing trends and conditions.
We may not succeed in achieving these goals, and our failure to do so could cause our stockholders to lose a significant portion of their investment.
The purchase and redemption of our shares is based on our NAV per share for each class, and the daily determination of our NAV per share is based upon subjective judgments, assumptions and opinions about future events that may or may not turn out to be correct. As a result, our daily NAV per share may not reflect the precise amount that might be paid to stockholders for their shares in a market transaction.
The purchase and redemption price for shares of our common stock is based on our NAV per share for each class each business day, which requires an estimate of the value of our assets and liabilities – consisting principally of illiquid commercial real estate and illiquid commercial real estate mortgages. Although quarterly valuations of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate are performed by our independent valuation expert, our advisor also monitors our commercial real estate assets for events that may be expected to have a material impact on the most recent estimated values provided by our independent valuation expert. The valuation methodologies used to estimate the value of our commercial real estate assets, related liabilities and notes receivable secured by real estate involve subjective judgments, assumptions and opinions about future events, which may or may not turn out to be correct. Any resulting potential disparity in our NAV per share may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.

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It may be difficult to reflect, fully and accurately, material events that may impact our daily NAV between quarterly valuations.
Since our independent fund accountant’s determination of our daily NAV per share for each class is based in part on quarterly estimates of the values of each of our commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by the independent valuation expert in individual appraisal reports in accordance with valuation guidelines approved by our board of directors, our published NAV per share on any given day may not fully reflect any or all changes in value that may have occurred since the most recent quarterly valuation. Our advisor reviews appraisal reports and monitors our commercial real estate and notes receivable assets and liabilities, but it may be difficult to reflect fully and accurately rapidly changing market conditions or material events that may impact the value of our commercial real estate assets, notes receivable secured by real estate or related real estate liabilities between periodic valuations, or to quickly obtain complete information regarding any such events. For example, an unexpected termination or renewal of a material lease, a material change in vacancies or an unanticipated structural or environmental event at a property may cause the value of a commercial real estate asset to change materially, yet obtaining sufficient relevant information after the occurrence has come to light and/or analyzing fully the financial impact of such an event may be difficult to do and may require some time. As a result, the NAV per share may not reflect a material event until such time as sufficient information is made available and can be analyzed, and the financial impact is fully evaluated, such that our NAV may be appropriately adjusted in accordance with our valuation guidelines. Any resulting disparity may be to the detriment of a purchaser of our shares or a stockholder selling shares pursuant to our share redemption program.
NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards.
The method for calculating our NAV, including the components that are used in calculating our NAV, is not prescribed by rules of the SEC or any state securities regulatory agency. Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV is not audited by our independent registered public accounting firm. We calculate and publish NAV solely for purposes of establishing the daily price at which we will sell and redeem classes of shares of our common stock and our stockholders should not view our NAV as a measure of our historical or future financial condition or performance. The components and methodology that are used by our independent fund accountant in calculating our NAV may differ from those used by other companies now or in the future.
In addition, our NAV calculations, to the extent that they incorporate valuations of our assets and liabilities, are not prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These valuations, which are based on market values that assume a willing buyer and seller, may differ from liquidation values that could be realized in the event that we were forced to sell assets.
An investment in shares of our common stock has limited liquidity and we are not required, through our charter or otherwise, to provide for a liquidity event. There is no public market for our shares of common stock and our limited redemption program may not have sufficient liquidity at all times to redeem stockholders shares. As a result, our stockholders’ should purchases their shares as a long-term investment.
There is no current public market for shares of our common stock, we do not expect that a public market will ever develop and our charter does not require a liquidity event at a fixed time in the future. Therefore, redemption of shares by us will likely be the only way for our stockholders to dispose of their shares. While we designed our redemption plan to allow stockholders to request redemptions, on any business day, of all or any portion of their shares, our ability to fulfill redemption requests is subject to a number of limitations. Most significantly, the vast majority of our assets consist, and will consist in the future, of commercial real estate properties, which cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. Further, the redemption program is subject to quarterly redemption limits and to protect our operations, our status as a REIT, and our non-redeeming stockholders, our board of directors may modify or suspend our redemption program or limit stockholder redemptions. Additionally, subject to limited exceptions, shares of our common stock redeemed within 365 days of the date of purchase may be subject to a short-term trading fee of 2% of the aggregate NAV per share of such shares redeemed. As a result, our stockholders’ ability to have their shares redeemed by us may be limited, and our shares should be considered a potentially long-term investment with limited liquidity.

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Our board of directors may modify or suspend our redemption plan, which may limit our stockholders’ ability to redeem their shares.
Our board of directors, including a majority of independent directors, may modify or suspend our redemption plan in its discretion if it believes that such action is in the interests of our stockholders. For instance, our board of directors may modify or suspend our redemption plan to prevent an undue burden on our liquidity or to preserve our status as a REIT. As a result, our stockholders may not always be able to redeem their shares and an investment in our shares should be considered a potentially long-term investment with limited liquidity.
Economic events that may cause our stockholders to seek to redeem their shares may materially adversely affect our cash flow and our ability to achieve our investment objectives.
Economic events affecting the U.S. economy, such as the general negative performance of the real estate sector or the negative performance of the U.S. economy as a whole, could cause our stockholders to seek to redeem their shares. Even if we are able to satisfy all resulting redemption requests, our cash flow could be materially adversely affected. In addition, if we elect to sell valuable assets to satisfy redemption requests, our ability to achieve our investment objectives, including, without limitation, diversification of our real estate property portfolio by property type and location, moderate financial leverage, conservative operating risk and an attractive level of current income, could be materially adversely affected.
The amount and source of distributions we may make to our stockholders is uncertain and we may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future.
We have not established a minimum distribution payment level, and our ability to make distributions to our stockholders may be adversely affected by a number of factors, including the risk factors described herein. Our board of directors will make determinations regarding distributions based upon, among other factors, our financial performance, our debt service obligations, our debt covenants, and capital expenditure requirements. Among the factors that could impair our ability to make distributions to our stockholders are:
the limited size of our real estate portfolio;
our inability to acquire, on a timely basis and in attractive commercial properties, the proceeds from sales of our shares;
our inability to realize attractive risk-adjusted returns on our investments;
unanticipated expenses or reduced revenues that reduce our cash flow or non-cash earnings;
defaults in our portfolio or decreases in the value of our properties; and
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
As a result, we may not be able to make distributions to our stockholders at any time in the future, and the level of any distributions we do make to our stockholders may not increase or even be maintained over time.
We may suffer adverse tax consequences if the amount of distributions do not comply with certain tax requirements, and we expect that a substantial portion of our distributions will be taxed as ordinary income to our stockholders.
To continue to qualify for taxation as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding certain non-cash items and net capital gains. To the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code.
In addition, dividends that we pay to our stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital distribution is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock, until the distribution exceeds the stockholder’s basis. Distributions in excess of our earnings and a stockholder’s tax basis in our shares will be treated as gain from the sale of shares.

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We have paid, and may continue to pay, some of our distributions from sources other than cash flows from operations, including borrowings, proceeds from asset sales or the sale of securities, which may reduce the amount of capital we ultimately deploy in our real estate operations and may negatively impact the value of our common stock.
To the extent that cash flow from operations is insufficient to pay distributions or to fund redemptions, we may pay all or some of our distributions and fund all or some of our redemptions from borrowings by the REIT, proceeds from asset sales of the sale of our securities. We have no limits on the amounts we may use to pay distributions from sources other than cash flow from operations. The payment of distributions and redemptions from sources other than cash flow from operations may reduce the amount of proceeds available for acquisitions, negatively impact the value of our common stock and reduce the overall return. We expect that, from time to time, we may declare distributions and/or fund redemptions that exceed our cash flows from operations and in anticipation of future cash flows.
During the years ended December 31, 2017 and 2016, we paid distributions of $20.7 million and $12.5 million, respectively, including $10.3 million and $6.0 million, respectively, through the issuance of shares pursuant to the DRIP. Net cash provided by operating activities for the years ended December 31, 2017 and 2016 was $19.3 million and $8.3 million, respectively, and reflected a reduction for real estate acquisition-related expenses incurred of $2.2 million and $3.3 million, respectively, in accordance with GAAP. Prior to the adoption of Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, in April 2017, we treated our real estate acquisition-related fees and expenses as funded by proceeds from the Offering, including proceeds from the DRIP. Therefore, for consistency, proceeds from the issuance of common stock used as a source of distributions for the years ended December 31, 2017 and 2016 includes the amount by which real estate acquisition-related fees and expenses have reduced net cash flows from operating activities of $849,000 and $3.3 million, respectively. The distributions paid during the year ended December 31, 2017, including shares issued pursuant to the DRIP, were funded by cash flows from operating activities of $19.3 million, or 93%, and proceeds from the Offering of $1.4 million or 7%. Our distributions for the year ended December 31, 2016 were funded by cash flows from operations, including cash flows in excess of distributions from the prior year, of $10.0 million , or 80%, and proceeds from the Offering of $2.5 million, or 20%.
If we raise substantially less than the maximum offering amount, we may not be able to construct a diverse portfolio of real estate and real estate-related assets, and the value of an investment in our stock may fluctuate more widely with the performance of specific investments.
We are dependent upon the proceeds to be received from the Offering to conduct our proposed investment activities. The Offering is being made on a “best efforts” basis, whereby our dealer manager and the broker/dealers that participate in the Offering are only required to use their best efforts to sell shares of our common stock and have no firm commitment or obligation to purchase any of the shares of our common stock. As a result, we do not know the amount of proceeds that will be raised in the Offering or that we will achieve sales of the maximum offering amount. If we raise substantially less than the maximum offering amount, we may not be able to acquire a diverse portfolio in terms of the number of assets owned, the geographic regions in which our properties are located and the types of assets that we acquire. An investment in shares of our common stock would be subject to greater risk to the extent that we lack a diversified portfolio. In addition, our fixed operating expenses, as a percentage of gross income, would be higher, and our financial condition and ability to pay distributions could be adversely affected if we are unable to raise substantial funds in the Offering.
We have experienced losses in the past, and we may experience additional losses in the future.
We have experienced net losses in the past (calculated in accordance with GAAP) and we may not be profitable or realize growth in the value of our assets. Many of our losses can be attributed to start-up costs, general and administrative expenses, depreciation and amortization, as well as acquisition expenses incurred in connection with purchasing properties or making other investments. Our ability to sustain profitability is uncertain, and depends on the demand for, and value of, our portfolio of properties. For a further discussion of our operational history and the factors affecting our losses, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K and our accompanying consolidated financial statements and notes thereto.

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An inability to restore or enter into selling agreements with key broker-dealers would impact our ability to raise capital in the near term.
On October 29, 2014, VEREIT, the former indirect parent of our sponsor, announced that certain of its financial statements could no longer be relied upon. As a result, various broker-dealers and clearing firms participating in offerings operated by our sponsor prior to the Transaction suspended sales activity, resulting in a significant decrease in capital raising activity.
While certain of the broker-dealers and the clearing firms reengaged with our sponsor prior to the Transaction, there can be no assurance that the remaining broker-dealers will engage with CCO Group following the Transaction. If these circumstances continue for a prolonged period of time, our capital raising activity may continue to be negatively affected, and, therefore, our overall financial success could be adversely affected.
Following the expiration of the Initial Services Term of the Services Agreement, CCO Group, LLC may be unable to make, on a timely or cost-effective basis, the changes necessary to replace the services provided by VEREIT OP pursuant to the Services Agreement and otherwise operate our programs.
Pursuant to the Services Agreement, VEREIT OP will continue to provide certain services to CCO Group and to the Cole REITs, including operational real estate support, during the Initial Services Term of the Services Agreement. During that period, CCO Group, LLC intends to evaluate and effectuate an appropriate transition of these services to other CIM affiliates or third parties with the goal of ensuring continuity and minimizing disruption. We cannot assure our stockholders that CCO Group, LLC will be able to successfully identify or transition to itself or third parties, on a timely and cost-effective basis, the services provided by VEREIT OP pursuant to the Services Agreement and continue to effectively provide us services, and we cannot assure our stockholders that there will be no disruption in quality or quantity of services provided. Furthermore, any transition of such services to CCO Group, LLC or third parties could lead to increased expenses associated with such services. These increased expenses could materially and adversely affect our business, financial position or results of operations.
CIM, the new parent company of CCO Group, has limited experience in the business of operating or managing entities that engage in double- and triple-net lease activities, which is an important aspect of CCO Group’s operations.
CIM, the new parent company of CCO Group, has limited experience in the business of operating or managing entities that principally engage in double- or triple-net lease activities. While CIM’s management has considerable general real estate operational and management experience, and some members of CIM’s management have knowledge and abilities relating to double- or triple-net lease activities, sponsoring entities that principally engage in double- and triple-net lease activities is a new business for CIM with risks that differ from those to which CIM has been subject historically. There can be no assurance that CIM’s management will have the skills needed to operate CCO Group profitably, especially following the expiration of the Initial Services Term of the Services Agreement.
We may suffer from delays in locating suitable acquisitions, which could adversely affect our ability to pay distributions and to achieve our investment objectives.
If we are able to raise capital quickly during the Offering, we may have difficulty in identifying and purchasing suitable commercial real estate properties in a timely and efficient fashion. This may impact the value of our stockholders’ investment in our common stock and our ability to pay distributions to our stockholders.
Our board of directors may change certain of our investment policies without stockholder approval, which could alter the nature of an investment in our common stock.
Except for changes to the investment objectives and investment restrictions contained in our charter, which require stockholder consent to amend, our board of directors, a majority of whom are independent, may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the types of investments described in this Annual Report on Form 10-K. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

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Our participation in a co-ownership arrangement could subject us to risks that otherwise may not be present in other real estate assets, which could result in litigation or other potential liabilities that could increase our costs and negatively affect our results of operations.
We may enter in co-ownership arrangements with respect to a portion of the properties we acquire. Co-ownership arrangements involve risks generally not otherwise present with an acquisition of real estate and could result in litigation or other potential liabilities, such as the following:
the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
the risk that a co-owner may be in a position to take action contrary to our instructions or requests or our policies or objectives or status as a REIT;
the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under any mortgage loan financing documents applicable to the property, which may constitute an event of default under all of the applicable mortgage loan financing documents, result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner, or allow the bankruptcy court to reject the agreements entered into by the co-owners owning interests in the property;
the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and otherwise adversely affect the operation and maintenance of the property, could cause a default under any mortgage loan financing documents applicable to the property and result in late charges, penalties and interest, and could lead to the exercise of foreclosure and other remedies by the lender;
the risk that a co-owner could breach agreements related to the property, which may cause a default under, and possibly result in personal liability in connection with, any mortgage loan financing documents applicable to the property, violate applicable securities laws, result in a foreclosure or otherwise adversely affect the property and the co-ownership arrangement;
the risk that we could have limited control and rights, with management decisions made entirely by a third-party; and
the possibility that we will not have the right to sell the property at a time that otherwise could result in the property being sold for its maximum value.
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, because we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright, we may not be able to sell our co-ownership interest in a property at the time we would like to sell.
Uninsured losses or losses in excess of our insurance coverage could materially adversely affect our financial condition and cash flows, and there can be no assurance as to future costs and the scope of coverage that may be available under insurance policies.
We carry comprehensive liability, fire, extended coverage, and rental loss insurance covering all of the properties in our portfolio under one or more blanket insurance policies with policy specifications, limits and deductibles customarily carried for similar properties. In addition, we carry professional liability and directors’ and officers’ insurance, and cyber liability insurance. While select policy specifications and insured limits that we believe are appropriate and adequate given the relative risk of loss, insurance coverages provided by tenants, the cost of the coverage and industry practice, there can be no assurance that we will not experience a loss that is uninsured or that exceeds policy limits. In addition, we may reduce or discontinue terrorism, earthquake, flood or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. Our title insurance policies may not insure for the current aggregate market value of our portfolio, and we do not intend to increase our title insurance coverage as the market value of our portfolio increases.

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Further, we do not carry insurance for certain losses, including, but not limited to, losses caused by riots or war. Certain types of losses may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots or acts of war. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparably damaged. In addition, we carry several different lines of insurance, placed with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. As a result of any of the situations described above, our financial condition and cash flows may be materially and adversely affected.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and stockholder relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. We have implemented processes, procedures and internal controls to help mitigate cyber incidents, but these measures do not guarantee that a cyber incident will not occur or that attempted security breaches or disruptions would not be successful or damaging. A cyber incident could materially adversely impact our business, financial condition, results of operations, or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
The U.S. Department of Labor has issued a final regulation revising the definition of “fiduciary” and the scope of “investment advice” under Employee Retirement Income Security Act (ERISA), which may have a negative impact on our ability to raise capital.
On April 8, 2016, the U.S. Department of Labor issued a final regulation relating to the definition of a fiduciary under ERISA and Section 4975 of the Internal Revenue Code. The final regulation broadens the definition of fiduciary by expanding the range of activities that would be considered to be fiduciary investment advice under ERISA and is accompanied by new and revised prohibited transaction exemptions relating to investments by employee benefit plans subject to Title I of ERISA or retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (including IRAs). The final regulation and the related exemptions were expected to become applicable for investment transactions on and after April 10, 2017, but generally would not apply to purchases of our shares before the final regulation becomes applicable. However, on February 3, 2017, the President asked for additional review of this regulation; the results of such review are unknown. In response, on March 2, 2017, the U.S. Department of Labor published a notice seeking public comments on, among other things, a proposal to adopt a 60-day delay of the April 10 applicability date of the final regulation. On April 7, 2017, the U.S. Department of Labor published a final rule extending for 60 days the applicability date of the final regulation to June 9, 2017. However, certain requirements and exemptions under the regulation are implemented through a phased-in approach, and on November 27, 2017, the U.S. Department of Labor further delayed the implementation of certain requirements and exemptions. On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the fiduciary rule in its entirety, including the expanded definition of “investment advice fiduciary” and the associated exemptions. Accordingly, the final regulation does not apply in the Fifth Circuit, which includes Texas, Louisiana and Mississippi. It is unclear what impact this ruling will have on the final regulation the U.S. Department of Labor could, among other things, seek review by the U.S. Supreme Court or further revise or withdraw the final regulation. 
The final regulation and the accompanying exemptions are complex and may be subject to further revision or withdrawal. Plan fiduciaries and the beneficial owners of IRAs are urged to consult with their own advisors regarding the impact of the final regulations on purchasing and holding shares of our common stock. The final regulation could have negative implications on our ability to raise capital from potential stockholders, including those investing through IRAs.

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Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our advisor and its affiliates, including the material conflicts discussed below. The “Conflicts of Interest” section of Part I, Item 1. of this Annual Report on Form 10-K provides a more detailed discussion of the conflicts of interest between us and our advisor and its affiliates, and our policies to reduce or eliminate certain potential conflicts.
Our advisor and its affiliates, including our dealer manager, face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
Our advisor and its affiliates, including our dealer manager, are entitled to substantial fees from us under the terms of the advisory agreement and the dealer manager agreement. These fees could influence the judgment of our advisor and its affiliates in performing services for us. Among other matters, these compensation arrangements could affect their judgment with respect to:
the continuation, renewal or enforcement of our agreements with our advisor and its affiliates, including the advisory agreement and the dealer manager agreement;
the advisor’s role in estimating accruals of expenses for our independent fund accountant’s calculation of our daily NAV, as the fees of our advisor and its affiliates are based on our NAV, however, any intentionally inaccurate estimation of our daily net operating revenues, expenses and fees by our advisor could constitute a breach of its fiduciary duty to us and our stockholders, and may subject our advisor to significant liability; and
the amount of fees paid to our advisor and its affiliates. While the fees must be approved on an annual basis by our independent directors, the approval process may be constrained, to some extent, because the independent directors are likely to consider, among other factors, our stockholders’ expectation that affiliates of VEREIT and other programs sponsored by CCO Group will serve in management roles at our advisor and our dealer manager.
Our advisor is responsible for estimating amounts of certain liabilities that will affect the calculation of our NAV.
Our advisor is responsible for estimating the amounts of certain liabilities that are used by our independent fund accountant to determine our daily NAV per share. These estimated amounts will include estimates of accrued fees and expenses attributable to the Offering, accrued operating fees and expenses and accrued distributions. To the extent that these liabilities are based on estimates, this could lead to conflicts of interest with our advisor because the advisor’s fee is based on a percentage of our NAV, although any intentionally inaccurate estimation of our daily net operating revenues, expenses and fees by the advisor could constitute a breach of its fiduciary duty to us and our stockholders, and may subject the advisor to significant liability.
Our advisor has engaged its sub-advisor to select and manage our liquid investments. Our advisor relies on the performance of its sub-advisor in implementing the liquid investments portion of our investment strategy.
Our advisor has engaged its sub-advisor to select liquid investments pursuant to a sub-advisory agreement between our advisor and its sub-advisor. The sub-advisor has, and will continue to have substantial discretion, within our investment guidelines, to make decisions related to the acquisition, management and disposition of our liquid assets. If the sub-advisor does not succeed in implementing the liquid investments portion of our investment strategy, our performance will suffer. In addition, even though our advisor has the ability to terminate the sub-advisor at any time, it may be difficult and costly to terminate and replace the sub-advisor.
We do not have a direct contractual relationship with the sub-advisor. Therefore, it may be difficult for us to take enforcement action against the sub-advisor if its actions, performance or non-performance do not comply with the agreement.
Our advisor has engaged its sub-advisor to select liquid investments pursuant to a sub-advisory agreement between our advisor and its sub-advisor. We are not a party to the agreement with the sub-advisor. Therefore, we are dependent upon our advisor to manage and monitor the sub-advisor effectively. The sub-advisor may take actions that are not in our best interest, which could cause our performance to suffer, and as we are not a party to the agreement with the sub-advisor, we are limited in our ability to enforce that agreement.

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Payment of fees to our advisor and our dealer manager will reduce the cash available for investment and distribution and will increase the risk that a stockholder will not be able to recover the amount of their investment in our shares.
Our advisor and our dealer manager perform services for us in connection with the distribution of our shares, the selection and acquisition of our investments, and the management of our assets. We pay our advisor and our dealer manager fees for these services, which will reduce the amount of cash available for investments or distributions to our stockholders. The fees we pay to our advisor and its affiliates decrease the value of our portfolio and increase the risk that stockholders may receive a lower price when they request redemption of their shares than the purchase price they initially paid for their shares.
Our advisor faces conflicts of interest relating to the incentive fee structure under our advisory agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Pursuant to the terms of our advisory agreement, our advisor is entitled to fees that are structured in a manner intended to provide incentives to our advisor to perform in our best interests and in the best interests of our stockholders. For example, the advisory fee is based on our NAV, and not on the costs or book value of our investments, and our advisor is entitled to an incentive fee based on the annual performance of our stock. Nevertheless, our advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance that would entitle our advisor to incentive compensation.
Other real estate programs sponsored or operated by CCO Group, as well as VEREIT, CIM and certain of its affiliates, use investment strategies that are similar to ours; therefore, our executive officers and the officers and key personnel of our advisor and its affiliates may face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor.
CCPT IV, CCPT V, CCIT II, CCIT III, CIM and its affiliates and VEREIT have characteristics, including targeted investment types, and investment objectives and criteria substantially similar to ours. As a result, we may be seeking to acquire properties and real estate-related assets at the same time as CIM or its affiliates, VEREIT or one or more of the other real estate programs sponsored or operated by CCO Group and managed by officers and key personnel of our advisor and/or its affiliates, and these other programs may use investment strategies and have investment objectives and criteria substantially similar to ours. Certain of our executive officers and the executive officers of our advisor also are executive officers of CIM or its affiliates and other programs sponsored or operated by CCO Group, the general partners of other private investment programs sponsored or operated by CCO Group and/or the advisors or fiduciaries of other real estate programs sponsored or operated by CCO Group. During the Initial Services Term of the Services Agreement, all transactions with a purchase price at or below $100 million will be allocated among VEREIT, us and the other real estate programs sponsored by CCO Group by an allocation committee, which is comprised of employees of VEREIT and employees of CIM, CCO Group and their respective affiliates, in a manner consistent with the policy described in Part I, Item 1. Business — Conflicts of Interest in this Annual Report on Form 10-K. Additionally, for programs sponsored or operated by CCO Group that commenced operations on or after March 5, 2013, VEREIT retains a right of first refusal for all opportunities to acquire real estate and real estate-related assets or portfolios with a purchase price greater than $100 million. This right of first refusal applies to CCIT II, CCIT III and CCPT V, but does not apply to CCPT IV or us. Accordingly, there is a risk that the allocation of acquisition opportunities may result in our acquiring a property that provides lower returns to us than a property purchased by VEREIT or another real estate program sponsored by CCO Group.
In addition, we have acquired, and may continue to acquire, properties in geographic areas where CIM or its affiliates, VEREIT or other real estate programs sponsored by CCO Group own properties. If one of these other real estate programs attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. Similar conflicts of interest may arise if our advisor recommends that we make or purchase mortgage loans or participations in mortgage loans, since CIM or its affiliates or other real estate programs sponsored by CCO Group may be competing with us for these investments.
Our officers, certain of our directors and our advisor, including its key personnel and officers, face conflicts of interest related to the positions they hold with affiliated and unaffiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to stockholders.
Mr. Ressler, our chief executive officer, president and one of our directors, is also a founder and principal of CIM and an officer/director of certain of its affiliates, as well as a director of CCPT IV and CCIT III. Furthermore, Glenn J. Rufrano, one of our directors, is the chief executive officer and a director of VEREIT and a director of several other real estate programs sponsored by CCO Group, and W. Brian Kretzmer, one of our directors, also serves as a director of CCPT IV and CCIT III. In addition, our chief financial officer and treasurer, Nathan D. DeBacker, is also an officer of other real estate programs sponsored by CCO Group. Also, our advisor and its key personnel are or may be key personnel of other current or future real

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estate programs that have investment objectives, targeted assets, and legal and financial obligations substantially similar to ours, and/or key personnel of the advisor to such programs, and they may have other business interests as well. As a result, Messrs. Ressler, Rufrano, Kretzmer and DeBacker may owe fiduciary duties to these other entities and their stockholders or equity owners, as applicable, which may from time to time conflict with the duties that they owe to us and our stockholders.
Conflicts with our business and interests are most likely to arise from involvement in activities related to (1) allocation of new acquisition opportunities, management time and operational expertise among us and the other entities, (2) our purchase of properties from, or sale of properties to, affiliated entities, (3) the timing and terms of the acquisition or sale of an asset, (4) development of our properties by affiliates, (5) investments with affiliates of our advisor, (6) compensation to our advisor and its affiliates, and (7) our relationship with, and compensation to, our dealer manager. Even if these persons do not violate their duties to us and our stockholders, they will have competing demands on their time and resources and may have conflicts of interest in allocating their time and resources among us and these other entities and persons. Should such persons devote insufficient time or resources to our business, returns on our investments may suffer.
We depend on our advisor, and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement.
We depend on our advisor, and we may not be able to find a suitable replacement if our advisor terminates the advisory agreement. Our ability to make distributions and achieve our investment objectives is dependent upon the performance of our advisor in the acquisition of real estate properties and other real estate-related assets, the management of our portfolio, the selection of tenants for our properties and the determination of any financing arrangements. If our advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, our advisor may be unable to allocate sufficient time and resources to our operations. If our advisor is unable to allocate sufficient resources to oversee and perform our operations for any reason, we may be unable to achieve our investment objectives or pay distributions to our stockholders.
Our future success depends to a significant degree upon certain key personnel of our advisor. If our advisor loses or is unable to attract and retain key personnel, our ability to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholders and the value of their investment.
Our success depends to a significant degree upon the contributions of certain executive officers and other key personnel of CCO Group and advisor. We cannot guarantee that all of these key personnel, or any particular person, will remain affiliated with us, CCO Group and/or our advisor. If any of our key personnel were to cease their affiliation with our advisor, our operating results could suffer. We believe that our future success depends, in large part, upon our advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure our stockholders that CCO Group or our advisor will be successful in attracting and retaining such skilled personnel. If our advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investment may decline.
The termination or replacement of our advisor could trigger an event under our mortgage loans for some of our properties and the credit agreement governing for any line of credit we obtain.
Lenders may request provisions in the loan documentation that would make the termination or replacement of our advisor, without first obtaining the prior consent of the lender, an event of default. If an event of default occurs with respect to any of our financings, our ability to achieve our investment objectives could be adversely affected.
Our board of directors generally will not approve, in advance, the investment decisions made by our advisor.
Our board of directors has approved investment guidelines that delegate to our advisor the authority to (1) execute (i) real estate property acquisitions and dispositions and (ii) investments in other real estate-related assets, and to (2) contract with a sub-advisor to purchase and sell liquid assets, liquid real estate-related securities, cash and cash equivalents, in each case so long as such investments are consistent with our investment guidelines. As a result, our advisor has substantial latitude within these broad parameters in determining the types of assets that are proper investments for us. Our directors generally do not review, in advance, the investment decisions made by our advisor or sub-advisor. Instead, our directors review our investment guidelines on an annual basis and our portfolio on a quarterly basis or, in each case, as often as they deem appropriate. In conducting these periodic reviews, our directors rely primarily on information provided to them by our advisor. Furthermore, transactions entered into on our behalf by our advisor may be costly, difficult or impossible to unwind when they are subsequently reviewed by our board of directors.

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Our charter permits us to acquire assets and borrow funds from affiliates of our advisor and sell or lease our assets to affiliates of our advisor, and any such transaction could result in conflicts of interest.
Our charter permits us to acquire assets and borrow funds from affiliates of our advisor on a limited basis as set forth below, and any such transaction could result in a conflict of interest.
Our advisor may create special purpose entities to acquire properties for the specific purpose of selling the properties to us, and we may acquire such properties, provided that any and all acquisitions from affiliates of our advisor must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction, as being fair and reasonable to us and either the purchase price to us is no greater than the cost of the property to the affiliate of our advisor, including acquisition-related expenses, or a majority of our independent directors determines that there is substantial justification for any amount above such cost and that the difference is reasonable. Further, we will not acquire a property from an affiliate of our advisor if the cost to us would exceed the property’s current appraised value as determined by an independent appraiser.
From time to time, we may borrow funds from affiliates of our advisor, including our sponsor, as bridge financing to enable us to acquire a property or for the purpose of providing short term financing as necessary to satisfy valid redemption requests under the Company’s share redemption plan, in either case when offering proceeds alone are insufficient to do so and third party financing has not been arranged or is insufficient. Any and all such transactions must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction as fair, competitive and commercially reasonable, and no less favorable to us than comparable loans between unaffiliated parties under the same circumstances. Finally, our advisor or its affiliates may pay costs on our behalf, pending our reimbursement, or we may defer payment of fees to our advisor or its affiliates, but neither of these transactions would be considered a loan under our charter.
Our advisor faces conflicts of interest relating to joint ventures or other co-ownership arrangements that we may enter into with CIM or its affiliates, VEREIT or another real estate programs sponsored or operated by CCO Group, which could result in a disproportionate benefit to CIM or its affiliates, VEREIT or another real estate program sponsored or operated by CCO Group.
We may enter into joint ventures or co-ownership arrangements (including co-investment transactions) with CIM or its affiliates, VEREIT or another real estate program sponsored or operated by CCO Group for the acquisition, development or improvement of properties as well as the acquisition of real estate-related assets. Since one or more of the officers of our advisor are officers of CIM or its affiliates, including CCO Group and/or the advisors to other real estate programs sponsored or operated by CCO Group, our advisor may face conflicts of interest in determining which real estate program should enter into any particular joint venture or co-ownership arrangement. These persons also may have a conflict in structuring the terms of the relationship between us and any affiliated co-venturer or co-owner, as well as conflicts of interests in managing the joint venture, which may result in the co-venturer or co-owner receiving benefits greater than the benefits that we receive.
In the event we enter into joint venture or other co-ownership arrangements with CIM or its affiliates, VEREIT or another real estate program sponsored or operated by CCO Group, our advisor and its affiliates may have a conflict of interest when determining when and whether to buy or sell a particular property, or to make or dispose of another real estate-related asset. In addition, if we become listed for trading on a national securities exchange, we may develop more divergent goals and objectives from any affiliated co-venturer or co-owner that is not listed for trading. In the event we enter into a joint venture or other co-ownership arrangement with another real estate program sponsored or operated by CIM, CCO Group or their respective affiliates, or VEREIT, that has a term shorter than ours, the joint venture may be required to sell its properties earlier than we may desire to sell the properties. Even if the terms of any joint venture or other co-ownership agreement between us and VEREIT or a real estate program sponsored or operated by CIM or its affiliates, VEREIT or another real estate program operated by CCO Group grants us the right of first refusal to buy such properties, we may not have sufficient funds or borrowing capacity to exercise our right of first refusal under these circumstances. We have adopted certain procedures for dealing with potential conflicts of interest as further described in Part I, Item 1. Business — Conflicts of Interest in this Annual Report on Form 10-K.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results.
An effective system of internal control over financial reporting is necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies in our internal controls that we believe require remediation. If we discover such weaknesses, we will make efforts to improve our internal controls in a timely manner. Any system of internal

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controls, however well designed and operated, is based in part on certain assumptions and can only provide reasonable, not absolute, assurance that the objectives of the system are met. Any failure to maintain effective internal controls, or implement any necessary improvements in a timely manner, could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock, or cause us to not meet our reporting obligations. Ineffective internal controls could also cause holders of our securities to lose confidence in our reported financial information, which would likely have a negative effect on business.
Risks Related to Our Corporate Structure
Our stockholdersinterest in us will be diluted as we issue additional shares.
Our stockholders will not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue up to 500,000,000 shares of capital stock. Of the total number of shares of capital stock authorized (a) 490,000,000 shares are designated as common stock, 164,000,000 of which are classified as W Shares, 163,000,000 of which are classified as A Shares, and 163,000,000 of which are classified as I Shares, and (b) 10,000,000 shares are designated as preferred stock. Our board of directors may amend the charter from time to time to increase or decrease the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. After our stockholders purchase shares of our common stock, our board of directors may elect, without stockholder approval, to: (1) sell additional shares of these classes of shares, or future classes of shares in our current or future public offerings; (2) issue equity interests in private offerings; (3) issue shares upon the exercise of the options we may grant to our independent directors or future employees; (4) issue shares to our advisor, its successors or assigns, in payment of an outstanding fee obligation; or (5) issue shares to sellers of properties we acquire in connection with an exchange of limited partnership interests of our operating partnership. To the extent we issue additional shares after a stockholder’s purchase, such stockholder will not experience dilution in the value of their shares given that each class of our common stock is valued daily based on our NAV. However, to the extent we issue additional shares after a stockholder’s purchase, such stockholder’s percentage ownership interest will be diluted.  
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted prospectively or retroactively by our board of directors, no person may beneficially or constructively own more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding capital stock or more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding common stock pursuant to our charter. A person that did not acquire beneficially or constructively more than the applicable ownership limitations may become subject to such restrictions if redemptions by other stockholders cause such person’s holdings to exceed the applicable limits. Our ownership limitations may have the effect of delaying, deferring or preventing a change in control of the Company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of the holders of our common stock or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
Subject to its fiduciary duties to stockholders, our board of directors may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption of any such stock without stockholder approval. Thus, our board of directors in the exercise of its business judgment could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our common stock.
The power of the board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our organizational documents permit our board of directors to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if the board of directors determines that it is no longer in our best interest to continue to qualify as a REIT. In such a case, we would become subject to U.S. federal, state and local income tax on our net taxable

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income and we would no longer be required to distribute most of our net taxable income to our stockholders, which could have adverse consequences on the total return to holders of our common stock.
Our rights and the rights of our stockholders to recover claims against our directors and officers are limited, which could reduce our stockholders and our recovery against them if they cause us to incur losses.
MGCL provides that a director will not have any liability in such capacity if he or she performs his or her duties in accordance with the applicable standard of conduct. In addition, subject to any limitations required by the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (which we refer to as the “NASAA REIT Guidelines”), Maryland law and our charter provide that no director or officer shall be liable to us or our stockholders for monetary damages unless the director or officer (1) actually received an improper benefit or profit in money, property or services or (2) was actively and deliberately dishonest as established by a final judgment. Moreover, our charter requires us to indemnify our directors and officers, subject to any limitations required by the NASAA REIT Guidelines and Maryland law. As a result, we and our stockholders may have more limited rights against our directors or officers than might otherwise exist under common law, which could reduce our stockholders’ and our recovery from these persons if they act in a manner that causes us to incur losses.
Certain provisions of Maryland law could inhibit transactions or changes of control under circumstances that could otherwise provide stockholders with the opportunity to realize a premium.
Certain provisions of the Maryland General Corporation Law applicable to us prohibit business combinations with:
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock, which we refer to as an “interested stockholder;”
an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was an interested stockholder; or
an affiliate of an interested stockholder.  
These prohibitions last for five years after the most recent date on which the interested stockholder became an interested stockholder. Thereafter, any business combination with the interested stockholder or an affiliate of the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding shares of our voting stock, and two-thirds of the votes entitled to be cast by holders of our outstanding shares other than shares of voting stock held by the interested stockholder. These requirements could have the effect of inhibiting a change in control even if a change in control were in our stockholders’ best interests. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that someone becomes an interested stockholder.
Our UPREIT structure may result in potential conflicts of interest with limited partners in our operating partnership whose interests may not be aligned with those of our stockholders.
Our directors and officers have duties to our corporation and our stockholders under Maryland law in connection with their management of the corporation. At the same time, we, as general partner, have fiduciary duties under Delaware law to our operating partnership and to the limited partners in connection with the management of our operating partnership. If we admit outside limited partners to our operating partnership, our duties as general partner of our operating partnership and its partners may come into conflict with the duties of our directors and officers to the corporation and our stockholders. Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership’s partnership agreement. The partnership agreement of our operating partnership provides that, for so long as we own a controlling interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners will be resolved in favor of our stockholders.
Additionally, the partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees, will not be liable or accountable to our operating partnership for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. In addition, our operating partnership is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law from and against any and all claims arising from operations of our operating partnership, unless it is established that: (1) the act or omission was committed in bad faith, was fraudulent or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful.

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The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict our fiduciary duties.
If we seek to internalize our management functions, we may be unable to obtain key personnel, which could adversely affect our operations and the value of an investment in our common stock.
If our board of directors determines that it is in our best interest to internalize our management functions, certain key employees of the advisor may not become our employees, but may instead remain employees of our advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring additional costs, including potentially significant litigation costs; or experiencing operational issues that could divert our management’s attention from management of our investments and negatively impact the value of an investment in our common stock.
An investment return may be reduced if we are deemed to be an investment company under the Investment Company Act of 1940 as amended (the “Investment Company Act”).
We do not intend, or expect to be required, to register as an investment company under the Investment Company Act. Rule 3a-1 under the Investment Company Act generally provides that an issuer will not be deemed to be an “investment company” provided that (1) it does not hold itself out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting or trading securities and (2) no more than 45% of the value of its assets (exclusive of government securities and cash items) and no more than 45% of its net income after taxes (for the past four fiscal quarters combined) is derived from securities other than government securities, securities issued by employees’ securities companies, securities issued by certain majority owned subsidiaries of such company and securities issued by certain companies that are controlled primarily by such company. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things:
limitations on capital structure;
restrictions on specified investments;
requirements that we add directors who are independent of us, our advisor and its affiliates;
restrictions or prohibitions on retaining earnings;
restrictions on leverage or senior securities;
restrictions on unsecured borrowings;
requirements that our income be derived from certain types of assets;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.  
If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Registration with the SEC as an investment company would be costly, would subject our company to a host of complex regulations, and would divert the attention of management from the conduct of our business. In addition, the purchase of real estate that does not fit our investment guidelines and the purchase or sale of investment securities or other assets to preserve our status as a company not required to register as an investment company could materially adversely affect our NAV, the amount of funds available for investment, and our ability to pay distributions to our stockholders.
General Risks Associated with Real Estate Assets
To the extent we acquire industrial properties, the demand for and profitability of our industrial properties may be adversely affected by fluctuations in manufacturing activity in the United States.
We may acquire industrial properties that share some of the same core characteristics as our other commercial properties. To the extent we acquire industrial properties, such properties may be adversely affected if manufacturing activity decreases in the United States. Trade agreements with foreign countries have given employers the option to utilize less expensive non-U.S. manufacturing workers. The outsourcing of manufacturing functions could lower the demand for our industrial properties. Moreover, an increase in the cost of raw materials or decrease in the demand for housing could cause a slowdown in

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manufacturing activity, such as furniture, textiles, machinery and chemical products, and our profitability may be adversely affected.
If a major tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which could have a material adverse effect on our financial condition and ability to pay distributions to our stockholders.
The bankruptcy or insolvency of our tenants may adversely affect the income produced by our properties. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy and has the option to assume or reject any unexpired lease. If the tenant rejects the lease, any resulting claim we have for breach of the lease (excluding collateral securing the claim) will be treated as a general unsecured claim. Our claim against the bankrupt tenant for unpaid and future rent will be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and it is unlikely that a bankrupt tenant that rejects its lease would pay in full amounts it owes us under the lease. Even if a lease is assumed and brought current, we still run the risk that a tenant could condition lease assumption on a restructuring of certain terms, including rent, that would have an adverse impact on us. Any shortfall resulting from the bankruptcy of one or more of our tenants could adversely affect our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
In addition, the financial failure of, or other default by, one or more of the tenants to whom we have exposure could have an adverse effect on the results of our operations. While we evaluate the creditworthiness of our tenants by reviewing available financial and other pertinent information, there can be no assurance that any tenant will be able to make timely rental payments or avoid defaulting under its lease. If any of our tenants’ businesses experience significant adverse changes, they may fail to make rental payments when due, close a number of stores, exercise early termination rights (to the extent such rights are available to the tenant) or declare bankruptcy. A default by a significant tenant or multiple tenants could cause a material reduction in our revenues and operating cash flows. In addition, if a tenant defaults, we may incur substantial costs in protecting our asset.
If a sale-leaseback transaction is re-characterized in a tenants bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback might be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our financial condition, cash flow and the amount available for distributions to our stockholders.
If the sale-leaseback were re-characterized as a financing, we would not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property.
We have assumed, and may in the future assume, liabilities in connection with our property acquisitions, including unknown liabilities.
In connection with the acquisitions of properties, we may assume existing liabilities, some of which may have been unknown or unquantifiable at the time of the transaction. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims of tenants or other persons dealing with the sellers prior to our acquisition of the properties, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. If the magnitude of such unknown liabilities is high, either singly or in the aggregate, it could adversely affect our business, financial condition, liquidity and results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
We are primarily dependent on single-tenant leases for our revenue and, accordingly, if we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
Our portfolio is primarily comprised of freestanding, single-tenant commercial properties that are net leased to a single tenant. Therefore, the financial failure of, or other default in payment by, a single tenant under its lease may cause a significant reduction

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in our operating cash flows from that property and could cause a significant reduction in our revenues. In addition, to the extent that we enter into a master lease with a particular tenant, the termination of such master lease could affect each property subject to the master lease, resulting in the loss of revenue from all such properties.
We cannot assure our stockholders that our leases will be renewed or that we will be able to lease or re-lease the properties on favorable terms, or at all, or that lease terminations will not cause us to sell the properties at a loss. Any of our properties that incur a vacancy could be difficult to re-lease or sell. We have and may continue to experience vacancies either by the continued default of a tenant under its lease or the expiration of one of our leases. Upon the expiration of leases at our properties, we may be required to make rent or other concessions to tenants, or accommodate requests for renovations, build-to-suit remodeling and other improvements, in order to retain and attract tenants. Certain of our properties may be specifically suited to the particular needs of a tenant (e.g., a retail bank branch or distribution warehouse) and major renovations and expenditures may be required in order for us to re-lease the space for other uses. If the vacancies continue for a long period of time, we may suffer reduced revenues, resulting in less cash available for distribution to our stockholders. If we are unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire on favorable terms or at all, our financial condition could be adversely affected.
We are subject to geographic and industry concentrations that make us more susceptible to adverse events with respect to certain geographic areas or industries.
As of December 31, 2017, we derived approximately:
12% of our 2017 gross annualized rental revenues from tenants in Ohio; and
12% and 10% of our 2017 gross annualized rental revenues from tenants in the discount store and home furnishings industries.
Any adverse change in the financial condition of a tenant to whom we may have a significant credit concentration now or in the future, or any downturn of the economy in any state or industry in which we may have a significant credit concentration now or in the future, could result in a material reduction of our cash flows or material losses to us.
Our net leases may require us to pay property-related expenses that are not the obligations of our tenants.
Under the terms of the majority of our net leases, in addition to satisfying their rent obligations, our tenants will be responsible for the payment or reimbursement of property expenses such as real estate taxes, insurance and ordinary maintenance and repairs. However, under the provisions of certain existing leases and leases that we may enter into in the future with our tenants, we may be required to pay some or all of the expenses of the property, such as the costs of environmental liabilities, roof and structural repairs, real estate taxes, insurance, certain non-structural repairs and maintenance. If our properties incur significant expenses that must be paid by us under the terms of our leases, our business, financial condition and results of operations may be adversely affected and the amount of cash available to meet expenses and to pay distributions to stockholders may be reduced.
Our portfolio of properties includes retail properties. Our performance, therefore, is linked to the market for retail space generally and a downturn in the retail market could have an adverse effect on the value of an investment in our common stock.
The market for retail space has been and could be adversely affected by weaknesses in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, excess amounts of retail space in a number of markets and competition for tenants with other shopping centers in our markets. Customer traffic to these shopping areas may be adversely affected by the closing of stores in the same shopping center, or by a reduction in traffic to these stores resulting from a regional economic downturn, a general downturn in the local area where our store is located, or a decline in the desirability of the shopping environment of a particular shopping center. A reduction in customer traffic could have a material adverse effect on our business, financial condition and results of operations.
Increased competition from alternative retail channels could adversely impact our retail tenants profitability and ability to make timely lease payments to us.
Traditional retailers face increasing competition from alternative retail channels, including internet-based retailers and other forms of e-commerce, factory outlet centers, wholesale clubs, mail order catalogs and television shopping networks. The increasing competition from such alternative retail channels could adversely impact our retail tenants’ profitability and ability to

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make timely lease payments to us. If our retail tenants are unable to make timely lease payments to us, our operating cash flows could be adversely affected.
Adverse economic, regulatory and geographical conditions that have an impact on the real estate market in general may prevent us from being profitable or from realizing growth in the value of our real estate properties.
We are subject to risks generally attributable to the ownership of real property, including:
changes in global, national, regional or local economic, demographic or capital market conditions;
current and future adverse national real estate trends, including increasing vacancy rates, which may negatively impact resale value, declining rental rates and general deterioration of market conditions;
changes in supply of or demand for similar properties in a given market or metropolitan area that will result in changes in market rental rates or occupancy levels;
increased competition for real property assets targeted by our investment strategy;
bankruptcies, financial difficulties or lease defaults by our tenants;
changes in interest rates and availability of financing; and
changes in government rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws.
All of these factors are beyond our control. Any negative changes in these factors could affect our ability to meet our obligations and make distributions to stockholders.
We face risks associated with property acquisitions, which may adversely impact our ability to pay distributions and the value of an investment in our common stock.
We intend to acquire properties and portfolios of properties, including large portfolios that will increase our size and result in changes to our capital structure. Our acquisition activities and their success are subject to the following risks:
we may be unable to complete an acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs;
we may be unable to obtain financing for acquisitions on favorable terms or at all;
acquired properties may fail to perform as expected;
the actual costs of repositioning or redeveloping acquired properties may be greater than our estimates;
acquired properties may be located in new markets in which we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and
we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations.
These acquisition risks may reduce our ability to pay distributions and may negatively impact the value of an investment in our common stock.
Many of our assets are public places such as shopping centers. Because these assets are public places, crimes, violence and other incidents beyond our control may occur, which could result in a reduction of business traffic at our properties and could expose us to civil liability.
Because many of our assets are open to the public, they are exposed to a number of incidents that may take place within their premises and that are beyond our control or our ability to prevent, which may harm our consumers and visitors. Some of our assets may be located in large urban areas, which can be subject to elevated levels of crime and urban violence. If violence escalates, we may lose tenants or be forced to close our assets for some time. If any of these incidents were to occur, the relevant asset could face material damage to its image and the property could experience a reduction of business traffic due to lack of confidence in the premises’ security. In addition, we may be exposed to civil liability and be required to indemnify the victims, which could adversely affect us. Should any of our assets be involved in incidents of this kind, our business, financial condition and results of operations could be adversely affected.

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The market environment may adversely affect our operating results, financial condition and ability to pay distributions to our stockholders.
Any deterioration of domestic or international financial markets could impact the availability of credit or contribute to rising costs of obtaining credit and therefore, could have the potential to adversely affect the value of our assets, the availability or the terms of financing, our ability to make principal and interest payments on, or refinance, and indebtedness and/or, for our leased properties, the ability of our tenants to enter into new leasing transactions or satisfy their obligations, including the payment of rent, under existing leases. The market environment also could affect our operating results and financial condition as follows:
Debt Markets — The debt market is sensitive to the macro environment, such as Federal Reserve policy, market sentiment, or regulatory factors affecting the banking and commercial mortgage backed securities (“CMBS”) industries. Should overall borrowing costs increase, due to either increases in index rates or increases in lender spreads, our operations may generate lower returns.
Real Estate Markets — While incremental demand growth has helped to reduce vacancy rates and support modest rental growth in recent years, and while improving fundamentals have resulted in gains in property values, in many markets property values, occupancy and rental rates continue to be below those previously experienced before the most recent economic downturn. If recent improvements in the economy reverse course, the properties we acquire could substantially decrease in value after we purchase them. Consequently, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge or record a loss on sale in our earnings.
We may be unable to secure funds for future leasing commissions, tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for leasing commissions, tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs and other expenses, we could be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain funds from available sources, if any, including operating cash flows, borrowings sales from offerings of our securities, or property sales. The use of cash from these sources may reduce the amount of capital we have available to acquire real estate, negatively impact the value of an investment in our common stock and reduce overall return. If additional capital is not available, this may adversely impact the value of the properties and our ability to attract new tenants.
We may be unable to successfully expand our operations into new markets.
Each of the risks described in the previous risk factors that are applicable to our ability to acquire and successfully integrate and operate properties in the markets in which our properties are located are also applicable to our ability to acquire and successfully integrate and operate properties in new markets. In addition to these risks, we may not possess the same level of familiarity with the dynamics and market conditions of certain new markets that we may enter, which could adversely affect our ability to expand into those markets. We may be unable to build a significant market share or achieve a desired return on our assets in new markets. If we are unsuccessful in expanding into new markets, it could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock.
We face significant competition for tenants for our properties, which may impact our ability to attract and retain tenants at reasonable rent levels.
We face significant competition from owners, operators and developers of retail real estate properties. Substantially all of our properties face competition from similar properties in the same market. This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lease available space at lower prices than the space in our properties. Due to such competition, the terms and conditions of any lease that we enter into with our tenants may vary substantially from those we describe in this prospectus.

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We may face potential difficulties or delays renewing leases or re-leasing space, which could adversely impact our cash flows and our ability to pay distributions.
We derive a significant portion of our rental income from rent received from our tenants. We seek to lease the rentable square feet at our real estate properties to creditworthy tenants. However, if a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Also, when our tenants decide not to renew their leases or terminate early, we may not be able to re-let the space. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our net income or loss and ability to pay distributions to stockholders could be materially adversely affected. In addition, the presence of hazardous or toxic substances on our real estate properties may adversely affect our ability to lease such property.
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations.
We are exposed to inflation risk, as income from long-term leases will be the primary source of our cash flows from operations. Leases of long-term duration or which include renewal options that specify a maximum rate increase may result in below-market lease rates over time if we do not accurately estimate inflation or market lease rates. Provisions of our leases designed to mitigate the risk of inflation and unexpected increases in market lease rates, such as periodic rental increases, may not adequately protect us from the impact of inflation or unexpected increases in market lease rates. If we are subject to below-market lease rates on a significant number of our properties pursuant to long-term leases, our cash flow from operations and financial position may be adversely affected.
We may have difficulty selling our real estate properties, which may limit our flexibility and ability to pay distributions.
Because real estate assets are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. In addition, federal tax laws that impose a 100% excise tax on gains from sales of dealer property by a REIT (generally, property held for sale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our stockholders. These restrictions could adversely affect our ability to achieve our investment objectives.
Our properties where the underlying tenant has a below investment grade credit rating, as determined by major credit rating agencies, or has an unrated tenant may have a greater risk of default.
As of December 31, 2017, approximately 60.2% of our tenants were not rated or did not have an investment grade credit rating from a major ratings agency or were not affiliates of companies having an investment grade credit rating. Our properties with such tenants may have a greater risk of default and bankruptcy than properties leased exclusively to investment grade tenants. When we acquire properties where the tenant does not have a publicly available credit rating, we will use certain credit assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes reviewing the tenant’s financial information (i.e., financial ratios, net worth, revenue, cash flows, leverage and liquidity, if applicable). If our ratings estimates are inaccurate, the default or bankruptcy risk for the subject tenant may be greater than anticipated. If our lender or a credit rating agency disagrees with our ratings estimates, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property or may require us to maintain specified debt levels for a period of years on some properties.
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance. If a property is subject to a lock-out provision we may be materially restricted from or delayed in selling or otherwise disposing of or refinancing such property. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

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In the event we obtain options to acquire real estate properties, we may lose the amount paid for such options whether or not the underlying property is purchased.
We may obtain options to acquire certain real estate properties. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is purchased. Any unreturned option payments will reduce the amount of cash available for further investments or distributions to our stockholders.
Our properties may be subject to impairment charges.
We routinely evaluate our real estate assets for impairment indicators. The judgment regarding the existence of impairment indicators is based on factors such as market conditions, tenant performance and lease structure. For example, the early termination of, or default under, a lease by a tenant may lead to an impairment charge. Since our investment focus is on properties net leased to a single tenant, the financial failure of, or other default by, a single tenant under its lease may result in a significant impairment loss. If we determine that an impairment has occurred, we would be required to make a downward adjustment to the net carrying value of the property, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. Negative developments in the real estate market may cause management to reevaluate the business and macro-economic assumptions used in its impairment analysis. Changes in management’s assumptions based on actual results may have a material impact on the Company’s financial statements.
We may obtain only limited warranties when we purchase a property and typically have only limited recourse in the event our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property.
Joint ventures could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We have and we may continue to co-invest in the future with third parties through partnerships or other entities, which we collectively refer to as joint ventures, acquiring non-controlling interests in or sharing responsibility for managing the affairs of the joint venture. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
In addition, our joint ventures may be considered variable interest entities, which may not be consolidated for purposes of financial reporting and may be reflected under the equity method of accounting on our balance sheets contained in our annual and quarterly reports. Consequently, this non-consolidation could be material for the purpose of analyzing our financial position.
Terrorism and war could harm our operating results.
The strength and profitability of our business depends on demand for and the value of our properties. Future terrorist attacks in the United States, such as the attacks that occurred in New York and the District of Columbia on September 11, 2001 and in Boston on April 15, 2013, and other acts of terrorism or war may have a negative impact on our operations. Terrorist attacks in the United States and elsewhere may result in declining economic activity, which could harm the demand for and the value of our properties. In addition, the public perception that certain locations are at greater risk for attack, such as major airports, ports, and rail facilities, may decrease the demand for and the value of our properties near these sites. A decrease in

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demand could make it difficult for us to renew or re-lease our properties at these sites at lease rates equal to or above historical rates. Such terrorist attacks could have an adverse impact on our business even if they are not directed at our properties.
In addition, the terrorist attacks of September 11, 2001 have substantially affected the availability and price of insurance coverage for certain types of damages or occurrences, and our insurance policies for terrorism include large deductibles and co-payments. Although we maintain terrorism insurance coverage on our portfolio, the amount of our terrorism insurance coverage may not be sufficient to cover losses inflicted by terrorism and therefore could expose us to significant losses and have a negative impact on our operations.
Costs of complying with environmental laws and regulations may adversely affect our income and the cash available for any distributions.
Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns.
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield an attractive risk-adjusted return. In such an instance, we will estimate the costs of environmental investigation, clean-up and monitoring, and factor them into the amount we will pay for such properties. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
In some instances, our advisor may rely on third party property managers to operate our properties and leasing agents to lease vacancies in our properties.
Under our advisory agreement, our advisor is obligated to manage our properties and find tenants to lease our vacant properties. We expect that, in some instances, our advisor will rely on third party property managers and leasing agents. The third party property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not supervise any of the property managers or leasing agents or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in part on the ability of our third party property managers to manage the day-to-day operations and the ability of our leasing agents to lease vacancies in our properties. Any adversity experienced by our property managers or leasing agents could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives, including, without limitation, diversification of our real estate properties portfolio by property type and location, moderate financial leverage, conservative levels of operating risk and an attractive level of current income.

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Changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants, which could reduce overall demand for our leasing services.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on its balance sheet. If the lease does not meet the criteria for a capital lease, the lease is to be considered an operating lease by the tenant, and the obligation does not appear on the tenant’s balance sheet; rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can appear to enhance a tenant’s balance sheet in comparison to direct ownership. The Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board conducted a joint project to re-evaluate lease accounting. In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”), which will require that a tenant recognize assets and liabilities on the balance sheet for all leases with a lease term of more than 12 months, with the result being the recognition of a right of use asset and a lease liability and the disclosure of key information about the entity’s leasing arrangements. These and other potential changes to the accounting guidance could affect both our accounting for leases as well as that of our current and potential tenants. These changes may affect how our real estate leasing business is conducted. For example, with the ASU 2016-02 revision, companies may be less willing to enter into leases in general or desire to enter into leases with shorter terms because the apparent benefits to their balance sheets under current practice could be reduced or eliminated. This impact in turn could make it more difficult for us to enter into leases on terms we find favorable. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the full impact ASU 2016-02 will have on its consolidated financial statements; however, the Company will adopt ASU 2016-02 as of January 1, 2019.
Changes in accounting standards may adversely impact our financial condition and/or results of operations.
We are subject to the rules and regulations of the FASB related to GAAP. Various changes to GAAP are constantly being considered, some of which could materially impact our reported financial condition and/or results of operations. Also, to the extent that public companies in the United States would be required in the future to prepare financial statements in accordance with International Financial Reporting Standards instead of the current GAAP, this change in accounting standards could materially affect our financial condition or results of operations.
Compliance with the Americans with Disabilities Act of 1990, as amended, and fire, safety and other regulations may require us to make unanticipated expenditures that could significantly reduce the cash available for distributions on our common stock.
Our properties are subject to regulation under federal laws, such as the Americans with Disabilities Act of 1990, as amended (the “ADA”), pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons. Although we believe that our properties substantially comply with present requirements of the ADA, we have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties or future properties are not in compliance with the ADA, we might be required to take remedial action, which would require us to incur additional costs to bring the property into compliance. Noncompliance with the ADA could also result in imposition of fines or an award of damages to private litigants.
Additional federal, state and local laws also may require modifications to our properties or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation.
In addition, our properties are subject to various federal, state and local regulatory requirements, such as state and local earthquake, fire and life safety requirements. If we were to fail to comply with these various requirements, we might incur governmental fines or private damage awards. If we incur substantial costs to comply with the ADA or any other regulatory requirements, our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock could be materially adversely affected. Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain approval from local officials or community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties.

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Risks Associated with Debt Financing
We have incurred mortgage indebtedness and other borrowings, which may increase our business risks, could hinder our ability to make distributions, and decrease the value of our stockholders’ investment.
We have financed, and intend to continue to finance, a portion of the purchase price of properties by borrowing funds. Under our charter, we have a limitation on borrowing which precludes us from borrowing in excess of 300% of the value of our net assets. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities. Generally speaking, the preceding calculation is expected to approximate 75% of the cost of our properties before non-cash reserves and depreciation. Our board of directors, including our independent directors has adopted a policy limiting our borrowing to 60%, absent special approval by a majority of our independent directors. As of the date of this Annual Report on Form 10-K, we have sought and received approval of our independent directors to exceed this limit because we are in the process of raising our equity capital to acquire our portfolio.
In addition, we may incur mortgage debt and pledge some or all of our properties as security for that debt to obtain funds to acquire additional properties or for working capital. We may also obtain lines of credit to provide a flexible borrowing source which generally will allow us to borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. Furthermore, we may borrow under lines of credit if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes or avoid taxes on undistributed income.  
High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, then the amount available for distributions to our stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of an investment in our common stock. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we will recognize taxable income on foreclosure, but we would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to qualify and maintain our qualification as a REIT. We may give full or partial guarantees to lenders of recourse mortgage debt to the entities that own our properties. If we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgage contains cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected, which could result in us losing our REIT status and would result in a decrease in the value of our stockholders’ investment.
If we draw on a line of credit to fund redemptions or for any other reason, our leverage will increase.
We have obtained a line of credit which could provide for a ready source of liquidity to fund redemptions of shares of our common stock, in the event that redemption requests exceed our operating cash flows, liquid assets and net proceeds from our continuous offering. There can be no assurances that we will be able to obtain future lines of credit on reasonable terms given the recent volatility in the capital markets. In addition, we may not be able to obtain additional lines of credit of an appropriate size for our business until such time as we have a substantial portfolio, or at all. If we borrow under a line of credit to fund redemptions of shares of our common stock, our leverage will increase until we receive additional net proceeds from our continuous offering, additional operating cash flows or sell some of our assets to repay outstanding indebtedness.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
We have incurred, and in the future may incur additional, indebtedness, that bears interest at a variable rate. To the extent that we incur variable rate debt and do not hedge our exposure thereunder, increases in interest rates would increase the amounts payable under such indebtedness, which could reduce our operating cash flows and our ability to pay distributions to our stockholders. In addition, if our existing indebtedness matures or otherwise becomes payable during a period of rising interest rates, we could be required to liquidate one or more of our properties at times that prevent realization of the maximum return on such assets.

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We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash. To a certain extent, our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory and other factors, many of which are beyond our control.
We cannot assure our stockholders that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs.
Additionally, if we incur additional indebtedness in connection with any future deployment of capital or development projects or for any other purpose, our debt service obligations could increase. We may need to refinance all or a portion of our indebtedness before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
our financial condition and market conditions at the time;
restrictions in the agreements governing our indebtedness;
general economic and capital market conditions;
the availability of credit from banks or other lenders; and
our results of operations
As a result, we may not be able to refinance our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity, or delaying any strategic acquisitions and alliances or capital expenditures, any of which could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or maintain our level of distributions on our common stock.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage. In addition, loan documents may limit our ability to replace the property manager or terminate certain operating or lease agreements related to the property. These or other limitations imposed by a lender may adversely affect our flexibility and our ability to pay distributions on our common stock.
If we enter into financing arrangements involving balloon payment obligations, it may adversely affect our ability to make distributions.
Some of our financing arrangements may require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the particular property. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the particular property at a price sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to our stockholders and the projected time of disposition of our assets.
Failure to hedge effectively against interest rate changes may materially adversely affect our ability to achieve our investment objectives.
Subject to limitations required to maintain qualification as a REIT, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest rate cap or collar agreements and interest rate swap agreements. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and that these arrangements may not be effective in reducing our exposure to interest rate changes. These interest rate hedging arrangements may create additional assets and/or liabilities from time to time that may be held or liquidated separately from the underlying property or loan for which they were originally established. Hedging may reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes may have a material adverse effect on our ability to achieve our investment objectives.

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Risks Associated with Real Estate-Related Assets
The real estate-related equity securities in which we may acquire are subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities.
We may acquire equity securities of both publicly traded and private real estate companies, which involves a higher degree of risk than debt securities due to a variety of factors, including that such investments are subordinate to creditors and are not secured by the issuer’s property. Our investments in real estate-related equity securities will involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related equity securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate, including risks relating to rising interest rates.
The value of the real estate-related securities in which we may invest may be volatile.
The value of real estate-related securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Different parts of the market and different types of equity securities can react differently to these developments and they can affect a single issuer, multiple issuers within an industry or economic sector or geographic region or the market as a whole. The real estate industry is sensitive to economic downturns. The value of securities of companies engaged in real estate activities can be affected by changes in real estate values and rental income, property taxes, interest rates and tax and regulatory requirements.
CMBS in which we may invest are subject to several types of risks that may adversely impact our performance.
CMBS are bonds that evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the mortgage-backed securities we invest in are subject to all the risks of the underlying mortgage loans, including the risks of prepayment or default.
In a rising interest rate environment, the value of CMBS may be adversely affected when repayments on underlying mortgage loans do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated assets but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying CMBS to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities. The value of CMBS also may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets as a whole. In addition, CMBS are subject to the credit risk associated with the performance of the underlying mortgage properties.
CMBS are also subject to several risks created through the securitization process. Certain subordinate CMBS are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate CMBS will not be fully paid. Subordinate securities of CMBS are also subject to greater risk than those CMBS that are more highly rated.
The mortgage instruments in which we may invest may be impacted by unfavorable real estate market conditions, which could result in losses to us.
If we make investments in mortgage loans or mortgage-backed securities, we will be at risk of loss on those investments, including losses as a result of defaults on mortgage loans. These losses may be caused by many conditions beyond our control, including general prevailing local, national and global economic conditions, economic conditions affecting real estate values, tenant defaults and lease expirations, interest rate levels and the other economic and liability risks associated with real estate described above under the heading “— Risks Related to Investments in Real Estate,” as well as, among other things:
competition from comparable types of properties;
success of tenant businesses;
property management decisions;
changes in use of property;
shift of business processes and functions offshore;
property location and condition;

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changes in specific industry segments;
declines in regional or local real estate values, or rental or occupancy rates; and
increases in interest rates, real estate tax rates and other operating expenses.
If we acquire a property by foreclosure following defaults under our mortgage loan investments, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our ability to achieve our investment objectives. We do not know whether the values of the property securing any of our real estate securities investments will remain at the levels existing on the dates we initially make the related investment. If the values of the underlying properties drop, our risk will increase and the values of our interests may decrease.
Delays in liquidating defaulted mortgage loan investments could reduce our investment returns.
If there are defaults under our mortgage loan investments, we may not be able to foreclose on or obtain a suitable remedy with respect to such investments. Specifically, we may not be able to repossess and sell the underlying properties quickly, which could reduce the value of our investment. For example, an action to foreclose on a property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of lawsuits if the defendant raises defenses or counterclaims. Additionally, in the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan.
The mezzanine loans in which we may invest will involve greater risks of loss than senior loans secured by income-producing real properties, which may result in losses to us.
We may invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
Interest rate and related risks may cause the value of our real estate-related assets to be reduced.
Interest rate risk is the risk that fixed income securities such as preferred and debt securities, and to a lesser extent dividend paying common stocks, will decline in value because of changes in market interest rates. Generally, when market interest rates rise, the market value of such securities will decline, and vice versa. Our investment in such securities means that the net asset value of our shares may tend to decline if market interest rates rise.
During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below-market interest rate, increase the security’s duration and reduce the value of the security. This is known as extension risk. During periods of declining interest rates, an issuer may be able to exercise an option to prepay principal earlier than scheduled, which is generally known as “call risk” or “prepayment risk.” If this occurs, we may be forced to reinvest in lower yielding securities. This is known as “reinvestment risk.” Preferred and debt securities frequently have call features that allow the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. These risks may reduce the value of our real estate-related securities investments.

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U.S. Federal Income and Other Tax Risks
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
We believe that our prior, current and proposed organization, ownership and method of operation has enabled and will enable us to meet the requirements for qualification and taxation as a REIT. However, we cannot assure stockholders in our common stock that we have qualified or will qualify as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.
If we fail to remain qualified as a REIT in any taxable year, or are determined to have lost our REIT status in a prior year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; and
unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to remain qualified as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to remain qualified as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock and the return on an investment in our common stock.
Even if we maintain our status as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we maintain our status as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. For example, to the extent we satisfy the 90% distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. Further, any taxable REIT subsidiary (“TRS”) we establish will be subject to regular corporate U.S. federal, state and local taxes. Any of these taxes would decrease cash available for distribution to stockholders.
REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.
In order to maintain our qualification as a REIT and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions for numerous reasons, including as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT.
If we fail to invest a sufficient amount of the net proceeds from selling our stock in real estate assets within one year from the receipt of the proceeds, we could fail to continue to qualify as a REIT.
Temporary investment of the net proceeds from sales of our stock in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from sales of our stock in qualifying real estate assets within such one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Code, we could fail to continue to qualify as a REIT.

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If our operating partnership is treated as a corporation for U.S. federal income tax purposes, we will cease to qualify as a REIT.
As of the date of this Annual Report on Form 10-K, our operating partnership is a disregarded entity for U.S. federal income tax purposes. Our operating partnership will become a partnership for U.S. federal income tax purposes if and when it issues interests to a person other than the Company or an entity disregarded from the Company for tax purposes. As a partnership, our operating partnership would not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us, would be required to take into account its allocable share of the operating partnership’s income. No assurance can be provided, however, that the IRS would not challenge our operating partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, our operating partnership would become subject to U.S. federal, state and local income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.
Dividends payable by REITs generally do not qualify for reduced tax rates available for some dividends.
Income from "qualified dividends" payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our securities. However, under the Tax Cuts and Jobs Act, non-corporate U.S. stockholders of REITs are entitled to a deduction equal to 20% of any “qualified REIT dividends.” A qualified REIT dividend is defined as any dividend from a REIT that is not a capital gain dividend or a dividend attributable to dividend income from U.S. corporations or certain non-U.S. corporations. A non-corporate U.S. stockholder’s ability to claim a deduction equal to 20% of qualified REIT dividends received may be limited by the stockholder’s particular circumstances.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or to liquidate otherwise attractive investments.
To maintain our qualification as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In addition, if we fail to comply with certain asset ownership tests at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification. As a result, we may be required to liquidate otherwise attractive assets. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Our ability to dispose of some of our properties may be constrained by their tax attributes.
Federal tax laws may limit our ability to sell properties and this may affect our ability to sell properties without adversely affecting returns to our stockholders. These restrictions may reduce our ability to respond to changes in the performance of our investments and could adversely affect our financial condition and results of operations.
Our ability to dispose of some of our properties is constrained by their tax attributes. Properties which we own for a significant period of time or which we acquire through tax deferred contribution transactions in exchange for partnership interests in our operating partnership often have low tax bases. If we dispose of low-basis properties outright in taxable transactions, we may recognize a significant amount of taxable gain that we must distribute to our stockholders in order to avoid tax, and potentially in order to meet the minimum distribution requirements of the Code for REITs, which in turn would impact our cash flow. In some cases, without incurring additional costs we may be restricted from disposing of properties contributed in exchange for interests in our operating partnership under tax protection agreements with contributors. To dispose of low basis or tax-protected properties efficiently we may use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the property for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes (including tax protection covenants).

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The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to continue to qualify as a REIT.
We may acquire mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the safe harbor, such loans may not be real estate assets and could adversely affect our REIT status.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of one or both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because a domestic TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS will generally not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
The IRS may take the position that gains from sales of property are subject to a 100% prohibited transaction tax.
We may have to sell assets from time to time to fund redemption requests, to satisfy our REIT distribution requirements, to satisfy other REIT requirements, or for other purposes. It is possible that the IRS may take the position that one or more sales of our properties may be a prohibited transaction, which is a sale of property held by us primarily for sale in the ordinary course of our trade or business. If we are deemed to have engaged in a prohibited transaction, our gain from such sale would be subject to a 100% tax. The Code sets forth a safe harbor under which a REIT may, under certain circumstances, sell property without risking the imposition of the 100% tax, but there is no assurance that we will be able to qualify for the safe harbor. We do not intend to hold property for sale in the ordinary course of business, but there is no assurance that the IRS will not challenge our position, especially if we make frequent sales or sales of property in which we have short holding periods.
Our stockholders may have current tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in the DRIP, for U.S. federal income tax purposes they will be deemed to have received, and will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the reinvested distributions.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability or reduce our operating flexibility, including the recently passed Tax Cuts and Jobs Act.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect our taxation and our ability to continue to qualify as a REIT, or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their own tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that acquires real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders .

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In addition, on December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and businesses, generally effective for taxable years beginning after December 31, 2017. The Tax Cuts and Jobs Act makes major changes to the Code, including a number of provisions of the Code that affect the taxation of REITs and their stockholders. Among the changes made by the Tax Cuts and Jobs Act are permanently reducing the generally applicable corporate tax rate, generally reducing the tax rate applicable to individuals and other noncorporate taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026, eliminating or modifying certain previously allowed deductions (including substantially limiting interest deductibility and, for individuals, the deduction for non-business state and local taxes), and, for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for preferential rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and certain trade or business income of non-corporate taxpayers. The Tax Cuts and Jobs Act also imposes new limitations on the deduction of net operating losses and requires us to recognize income for tax purposes no later than when we take it into account on our financial statements, which may result in us having to make additional taxable distributions to our stockholders in order to comply with REIT distribution requirements or avoid taxes on retained income and gains. The Tax Cuts and Jobs Act also makes numerous large and small changes to the tax rules that do not affect the REIT qualification rules directly but may otherwise affect us or our stockholders.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Internal Revenue Code may have unanticipated effects on us or our stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be revisited in subsequent tax legislation. At this point, it is not clear if or when Congress will address these issues or when the Internal Revenue Service will issue administrative guidance on the changes made in the Tax Cuts and Jobs Act.
We urge our stockholders to consult with their own tax advisor with respect to the status of the Tax Cuts and Jobs Act and other legislative, regulatory or administrative developments and proposals and their potential effect on holding our common stock.
We may be subject to adverse tax consequences if certain sale-leaseback transactions are not characterized by the IRS as “true leases.”
We may purchase investments in real estate properties and lease them back to the sellers of such properties. In the event the IRS does not characterize such leases as “true leases,” we could be subject to certain adverse tax consequences, including an inability to deduct depreciation expense and cost recovery relating to such property, and under certain circumstances, we could fail to maintain our qualification as a REIT as a result.
Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.
Even if we continue to qualify as a REIT for U.S. federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase and if any such increase is not reimbursable under the terms of our lease, then our cash flows will be impacted, which in turn could have a material adverse effect on our business, financial condition, results of operations, cash flow or our ability to satisfy our debt service obligations or maintain our level our distributions on our common stock.
Non-U.S. stockholders may be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax upon the disposition of our shares.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a “U.S. real property interest” (“USRPI”) under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”). Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe that we are a domestically-controlled qualified investment entity. Because our shares may be purchased or redeemed on any business day, no assurance can be given that we are, have been during the applicable testing period, or will be, a domestically-controlled qualified investment entity.

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Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 10% or less of our common stock at any time during the five-year period ending on the date of the sale.
The share transfer and ownership restrictions applicable to REITs contained in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to continue to qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted prospectively or retroactively by the board of directors, for so long as we continue to qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Internal Revenue Code) more than 9.8% in value or number of shares, whichever is more restrictive, of our outstanding capital stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of our outstanding shares of common stock. The board of directors, in its sole discretion and upon receipt of certain representations and undertakings, may exempt a person (prospectively or retrospectively) from the ownership limits. However, the board of directors may not, among other limitations, grant an exemption from these ownership restrictions to any proposed transferee whose ownership, direct or indirect, in excess of the 9.8% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if the board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
If we elect to treat one or more of our subsidiaries as a TRS, it will be subject to corporate-level taxes, and our dealings with our TRSs may be subject to a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A TRS will be subject to applicable U.S. federal, state, local and foreign income tax on its taxable income, including corporate income tax on the TRS’s income, and is, as a result, less tax efficient than with respect to income we earn directly. The after-tax net income of our TRSs would be available for distribution to us. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. In addition, the rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our TRSs exceeds an arm’s-length rental amount, such amount would be potentially subject to a 100% excise tax. While we intend that all transactions between us and our TRSs would be conducted on an arm’s-length basis, and therefore, any amounts paid by our TRSs to us would not be subject to the excise tax, no assurance can be given that the IRS would not disagree with such conclusion and levy an excise tax on such transactions.
For qualified accounts, if an investment in our common stock constitutes a prohibited transaction under ERISA or the Internal Revenue Code, it is possible that our stockholders may be subject to the imposition of significant excise taxes and penalties with respect to the amount invested. In order to avoid triggering additional taxes and/or penalties, if our stockholders intend to invest in our shares through pension or profit-sharing trusts or IRAs, they should consider additional factors.
If our stockholders are investing the assets of any of the entities identified in the prior sentence in our common stock, our stockholders should satisfy themselves that, among other things:

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their investment is consistent with their fiduciary obligations under applicable law, including common law, ERISA and the Code;
their investment is made in accordance with the documents and instruments governing the trust, plan or IRA, including a plan’s investment policy;
their investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404 (a)(1)(C) of ERISA, if applicable, and other applicable provisions of ERISA and the Code;
their investment will not impair the liquidity needs to satisfy minimum and other distribution requirements of the trust, plan or IRA and the withholding requirements that may be applicable;
their investment will not produce “unrelated business taxable income” for the plan or IRA;
they will be able to value the assets of the plan annually in accordance with ERISA requirements and applicable provisions of the applicable trust, plan or IRA document; and
their investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.  
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA, the Code, or other applicable statutory or common law may result in the imposition of civil penalties, and can subject the fiduciary to liability for any resulting losses as well as equitable remedies. In addition, if an investment in our shares constitutes a prohibited transaction under the Code, the “disqualified person” that engaged in the transaction may be subject to the imposition of excise taxes with respect to the amount invested.
If our stockholders invest in our shares through an IRA or other retirement plan, they may be limited in their ability to withdraw required minimum dividends.
If our stockholders establish a plan or account through which they invest in our common stock, federal law may require them to withdraw required minimum dividends from such plan in the future. Our stock will be highly illiquid, and our share redemption program only offers limited liquidity. If our stockholders are able to find a purchaser for their shares, such sale may be at a price less than the price at which they initially purchased their shares of our common stock. If our stockholders fail to withdraw required minimum distributions from their plan or account, they may be subject to certain taxes and tax penalties.
Specific rules apply to foreign, governmental and church plans.
As a general rule, certain employee benefit plans, including foreign pension plans, governmental plans established or maintained in the United States (as defined in Section 3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA’s requirements and are not “benefit plan investors” within the meaning of the plan asset regulations of the U.S. Department of Labor. Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Internal Revenue Code and, under certain circumstances in the case of church plans, Section 4975 of the Internal Revenue Code. Also, some foreign plans and governmental plans may be subject to foreign, state, or local laws which are, to a material extent, similar to the provisions of ERISA or Section 4975 of the Internal Revenue Code. Each fiduciary of a plan subject to any such similar law should make its own determination as to the need for and the availability of any exemption relief.

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ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Portfolio Information of this Annual Report on Form 10-K for a discussion of the properties we hold for rental operations and Part IV Item 15. Exhibits, Financial Statement Schedules — Schedule III — Real Estate and Accumulated Depreciation of this Annual Report on Form 10-K for a detailed listing of such properties.
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary course of business we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or to which our properties are the subject.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 26, 2018, we had approximately 27.0 million shares of common stock outstanding (16.6 million W Shares, 9.5 million A Shares and 953,000 I Shares), held by a total of 9,286 stockholders of record. The numbers of stockholders is based on the records of DST Systems, Inc., which serves as our registrar and transfer agent.
Although we have adopted a redemption program which provides limited liquidity, there is no established trading market for our common stock, we do not expect that a public market will ever develop and our charter does not require a liquidity event at any time in the future. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Pursuant to the Offering, we are selling shares of our common stock to the public at a price that will vary from day-to-day and, on any given day, will be equal, for each class of common stock, to our NAV per share for such class. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
We have engaged an independent valuation expert which has expertise in appraising commercial real estate assets, including notes receivable secured by real estate, and related liabilities, to provide, on a rolling quarterly basis, valuations of each of our commercial real estate assets, related liabilities to be set forth in individual appraisal reports, and to adjust those valuations for events known to the independent valuation expert that it believes are likely to have a material impact on previously provided estimates of the value of the affected commercial real estate assets, notes receivable secured by real estate or related real estate liabilities. In addition, our assets will include liquid assets, which will be priced daily by third party pricing sources, and cash and cash equivalents.
At the end of each business day, our independent fund accountant will calculate our NAV per share for each class using a process that reflects (1) the estimated values of each of our commercial real estate assets, related liabilities and notes receivable provided by our independent valuation expert as described above, (2) daily updates on the price of liquid assets for which third party market quotes are available, (3) accruals of our daily distributions, and (4) estimates of daily accruals, on a net basis, of our operating revenues, expenses including class specific expenses, debt service costs and fees, including class specific fees. NAV for each class will be adjusted for contributions, redemptions and accruals of the class’s daily distributions and estimates of class-specific fee and expense accruals. Selling commissions will have no effect on the NAV of any class. NAV is intended to reflect our estimated value on the date that NAV is determined, and NAV of any class at any given time will not reflect any obligation to pay future trail fees that may become payable after the date the NAV is determined. As a result, the estimated liability for the future dealer manager and distribution fees, which is accrued at the time each share is sold, will have no effect on the NAV of any class. Our independent fund accountant determines our NAV per share by dividing the NAV for each class on such day by the number of shares of such class outstanding as of the end of such day, prior to giving effect to any share purchases or redemptions to be effected on such day. Our board of directors is responsible for ensuring that the independent valuation expert discharges its responsibilities in accordance with our valuation guidelines, and will periodically receive and review such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility. Our NAV is not audited by our independent registered public accounting firm.
Our goal is to provide an estimate of the market value of our shares. However, the majority of our assets will consist of commercial real estate assets and, as with any commercial real estate valuation protocol, the conclusions reached by our independent valuation expert will be based on a number of judgments, assumptions and opinions about future events that may or may not prove to be correct. The use of different judgments, assumptions or opinions would likely result in different estimates of the value of our commercial real estate assets. In addition, on any given day, our published NAV per share for each class may not fully reflect certain material events, to the extent that the financial impact of such events on our portfolio is not immediately quantifiable or known. As a result, the daily calculation of our NAV per share for each class may not reflect the precise amount that might be paid for a stockholder’s shares in a market transaction, and any potential disparity in our NAV per share for each class may be in favor of either stockholders who redeem their shares, or stockholders who buy new shares, or existing stockholders.
Share Redemption Program
We have adopted a redemption plan to provide limited liquidity whereby, on a daily basis, stockholders may request that we redeem all or any portion of their shares. Due to the illiquid nature of investments in commercial real estate, however, we may not always have sufficient liquid resources to fund redemption requests. Under our redemption plan, on each business day, stockholders may request that we redeem all or any portion of their shares, subject to a minimum amount of $500.00. The

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redemption price per share on any business day will be our NAV per share for that day for the class of shares being redeemed, calculated by the independent fund accountant after the close of business on the redemption request day, without giving effect to any share purchases or redemptions to be effected on such day. Subject to limited exceptions, stockholders who redeem their shares of our common stock within the first 365 days from the date of purchase will be subject to a short-term trading fee of 2% of the aggregate NAV per share of the shares of common stock received.
In each calendar quarter, net redemptions will be limited under our redemption plan to 5% of our total NAV as of the end of the immediately preceding quarter. If less than the full 5% limit available for a quarter is used, the unused percentage will be carried over to the next quarter (the “Carryover Percent”), but the maximum carryover percentage will never exceed 15% in the aggregate, and net redemptions in any quarter may never exceed 10% of the prior quarter’s NAV. On each business day, we will calculate the maximum amount available for redemptions as 5% plus the Carryover Percent times the prior quarter-end’s NAV, plus share sales for the quarter, minus share redemptions for the quarter (the “Quarterly Limit”). Redemption requests will be satisfied on a first-come-first-served basis up to the Quarterly Limit. A redemption request must be received by 4:00 p.m. Eastern Time on the last business day that the New York Stock Exchange is open for trading prior to the end of a calendar quarter in order for the current Quarterly Limit to apply.
For the quarter following a quarter in which the Quarterly Limit was reached (a “Limit Quarter”), a 5% per quarter redemption limitation will apply on a stockholder by stockholder basis, such that each of our stockholders will be allowed to request a redemption, at any time during that quarter, for a total of up to 5% of the shares they held as of the last day of the Limit Quarter, plus shares, if any, that the stockholder purchases during the in-progress quarter (the “Flow-regulator”). This prospective methodology for allocating available funds daily during a quarter for which a Flow-regulator is in effect (a “Flow-regulated Quarter”) is designed to treat all stockholders equally during the quarter as a whole, regardless of the particular day during the quarter when they choose to submit their redemption requests, based on the number of shares held by each stockholder as of the prior quarter-end.
If, during a Flow-regulated Quarter, total redemptions for all stockholders in the aggregate are more than 2.5% of our total NAV as of the end of the immediately preceding quarter, then the Flow-regulator will continue to apply for the next succeeding quarter. If total redemptions for all stockholders in the aggregate during a Flow-regulated Quarter are equal to or less than 2.5% of our total NAV as of the end of the immediately preceding quarter, then the first-come, first-served Quarterly Limit discussed above will come back into effect for the next succeeding quarter, with the Quarterly Limit consisting of 5% plus any remaining amount of the Carryover Percent from the last quarter before the Flow-regulated Quarter (subject to the 10% quarterly limit).
Our board of directors may modify or suspend our redemption plan in its sole discretion if it believes that such action is in the best interests of our stockholders.
We may, in our advisor’s discretion, after taking the interests of our Company as a whole and the interests of our remaining stockholders into consideration, use proceeds from any available sources at our disposal to satisfy redemption requests, including, but not limited to, available cash, proceeds from sales of additional shares, excess cash flow from operations, sales of our liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate-related assets.
During the year ended December 31, 2017, we received valid redemption requests for, and redeemed, approximately 1.8 million W Shares, 318,000 A Shares and 242,000 I Shares of our common stock for $32.2 million, $5.7 million, and $4.4 million, respectively. Subsequent to December 31, 2017, we redeemed approximately 361,000 W Shares, approximately 91,000 A Shares and approximately 117,000 I Shares for $6.6 million, $1.6 million and $2.2 million, respectively. During the year ended December 31, 2016, we received valid redemption requests for, and redeemed, approximately 782,000 W Shares and 104,000 A Shares of our common stock for $14.3 million and $1.9 million, respectively. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program set forth above. We funded such redemptions with available cash, proceeds from our credit facility, proceeds from our liquid investments and proceeds from the sale of additional shares.

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During the three-month period ended December 31, 2017, we redeemed shares as follows:
Period
 
Share Class
 
Total Number
of Shares
Redeemed
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
October 1, 2017 - October 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
W Shares
 
257,604

 
$
18.15

 
257,604

 
(1)
 
 
A Shares
 
28,415

 
$
17.91

 
28,415

 
(1)
 
 
I Shares
 

 
$

 

 
(1)
November 1, 2017 - November 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
W Shares
 
217,845

 
$
18.27

 
217,845

 
(1)
 
 
A Shares
 
46,781

 
$
18.05

 
46,781

 
(1)
 
 
I Shares
 

 
$

 

 
(1)
December 1, 2017 - December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
W Shares
 
89,912

 
$
18.30

 
89,912

 
(1)
 
 
A Shares
 
56,261

 
$
17.85

 
56,261

 
(1)
 
 
I Shares
 
189,570

 
$
18.46

 
189,570

 
(1)
Total
 
 
 
886,388

 
 
 
886,388

 
 
 ____________________________________
(1)
A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table.
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Share Redemptions in this Annual Report on Form 10-K, and Note 14 — Stockholders’ Equity to our consolidated financial statements included in this Annual Report on Form 10-K for additional share redemption information.
Distributions
We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2012. As a REIT, we have made, and intend to continue to make, distributions each taxable year equal to at least 90% of our taxable income (excluding capital gains and computed without regard to the dividends paid deduction). One of our primary goals is to pay regular (monthly) distributions to our stockholders.
See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Distributions in this Annual Report on Form 10-K for additional distributions information.
For federal income tax purposes, distributions to common stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. In addition, the amount of distributions in excess of a U.S. stockholder’s tax basis in such shares will be taxable as gain realized from the sale of those shares. See Note 15 — Income Taxes to our consolidated financial statements in this Annual Report on Form 10-K for the character of the distributions paid during the years ended December 31, 2017, 2016 and 2015.

57


The following table shows the distributions declared on a per share basis during the years ended December 31, 2017, 2016, and 2015 (in thousands, except per share data):
Year Ending December 31,
 
Share Class
 
Total Distributions
 Declared
 
Distributions Declared
per Common Share
2017
 
W Shares
 
$
14,095

 
$
0.98

 
 
A Shares
 
$
6,396

 
$
0.98

 
 
I Shares
 
$
928

 
$
0.98

2016
 
W Shares
 
$
9,802

 
$
0.98

 
 
A Shares
 
$
2,647

 
$
0.98

 
 
I Shares
 
$
709

 
$
0.98

2015
 
W Shares
 
$
6,362

 
$
0.98

 
 
A Shares
 
$
962

 
$
0.98

 
 
I Shares
 
$
413

 
$
0.98

Use of Public Offering Proceeds
On December 6, 2011, the Initial Registration Statement for our public offering of up to $4.0 billion in shares of common stock was declared effective under the Securities Act. On August 26, 2013, the Multi-Class Registration Statement was declared effective under the Securities Act; we designated the existing shares of our common stock that were sold prior to such date to be W Shares and registered two new classes of our common stock, A Shares and I Shares. On February 10, 2017, the Continuing Offering Registration Statement was declared effective under the Securities Act; we are offering up to $4.0 billion in shares of common stock of the three classes, covering up to $3.5 billion in shares in the Primary Offering and up to $500.0 million in shares pursuant to the DRIP. We are offering to sell any combination of W Shares, A Shares and I Shares with a dollar value up to the maximum offering amount. Additionally, as of December 31, 2017, we were authorized to issue 10.0 million shares of preferred stock, but had none issued or outstanding.
As of December 31, 2017, we had issued approximately 30.7 million shares in the Offering for gross proceeds of $550.6 million, out of which we recorded $12.0 million in selling commissions, the current portion of distribution fees and dealer manager fees and $4.1 million in organization and offering costs. With the net offering proceeds of $534.5 million and the borrowings from our credit facility, we have acquired $721.6 million in real estate assets and incurred $9.0 million of acquisition-related expenses. As of December 31, 2017, we received redemption requests for, and redeemed approximately 4.3 million W Shares, 489,000 A Shares, and 242,000 I Shares of our common stock for $76.8 million, $8.8 million, and $4.5 million, respectively.
As of March 26, 2018, we have sold the following common shares and raised the following proceeds in connection with the Offering (in thousands, except share data):
 
 
W Shares
 
A Shares
 
I Shares
 
Total
Primary Offering
 
 
 
 
 
 
 
 
Shares
 
20,270,241

 
9,678,427

 
1,236,307

 
31,184,975

Proceeds
 
$
357,609

 
$
180,146

 
$
22,274

 
$
560,029

Distribution Reinvestment Plan
 
 
 
 
 
 
 
 
Shares
 
986,212

 
362,422

 
76,089

 
1,424,723

Proceeds
 
$
17,747

 
$
6,524

 
$
1,380

 
$
25,651

Unregistered Sales of Equity Securities
None.

58


ITEM 6.    SELECTED FINANCIAL DATA
The following data should be read in conjunction with our consolidated financial statements and the notes thereto and Part II. Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K. Certain amounts presented below have been reclassified to conform to the current period presentation. See Note 2
— Summary of Significant Policies to our consolidated financial statements in this Annual Report on Form 10-K for a discussion of the various reclassifications. The selected financial data (in thousands, except share and per share amounts) presented below was derived from our consolidated financial statements.
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total real estate assets, net
 
$
671,426

 
$
436,774

 
$
257,583

 
$
225,505

 
$
102,796

Cash and cash equivalents
 
$
2,923

 
$
4,671

 
$
14,840

 
$
4,489

 
$
5,370

Total assets
 
$
699,463

 
$
453,572

 
$
281,502

 
$
233,162

 
$
109,883

Notes payable and credit facility, net
 
$
274,830

 
$
159,143

 
$
117,730

 
$
119,530

 
$
43,900

Total liabilities
 
$
316,993

 
$
185,486

 
$
133,558

 
$
130,578

 
$
49,875

Redeemable common stock
 
$
47,024

 
$
32,076

 
$
17,967

 
$
12,545

 
$
6,982

Stockholders’ equity
 
$
334,674

 
$
235,224

 
$
129,977

 
$
90,039

 
$
53,026

Operating Data:
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
48,146

 
$
27,311

 
$
19,109

 
$
13,305

 
$
5,089

Total operating expenses
 
$
37,508

 
$
23,233

 
$
13,444

 
$
10,503

 
$
4,679

Operating income
 
$
10,638

 
$
4,078

 
$
5,665

 
$
2,802

 
$
410

Net income (loss) attributable to the Company
 
$
312

 
$
(1,292
)
 
$
7,327

 
$
251

 
$
(534
)
Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operating activities
 
$
19,311

 
$
8,293

 
$
8,234

 
$
6,574

 
$
1,650

Cash flows used in investing activities
 
$
(253,937
)
 
$
(187,140
)
 
$
(36,009
)
 
$
(126,605
)
 
$
(70,976
)
Cash flows provided by financing activities
 
$
232,279

 
$
169,160

 
$
38,219

 
$
119,070

 
$
73,681

Per Common Share Data:
 
 
 
 
 
 
 
 
 
 
Class W Common Stock:
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
 
$
242

 
$
(952
)
 
$
6,025

 
$
223

 
$
(531
)
Basic and diluted weighted average number of common shares outstanding
 
14,374,833

 
9,986,524

 
6,506,020

 
5,412,144

 
2,490,886

Basic and diluted net income (loss) per common share
 
$
0.02

 
$
(0.10
)
 
$
0.93

 
$
0.04

 
$
(0.21
)
Distributions declared per common share
 
$
0.98

 
$
0.98

 
$
0.98

 
$
0.98

 
$
0.94

Class A Common Stock:
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
 
$
45

 
$
(276
)
 
$
911

 
$
19

 
$
(1
)
Basic and diluted weighted average number of common shares outstanding
 
6,590,846

 
2,713,815

 
986,216

 
413,621

 
3,607

Basic and diluted net income (loss) per common share
 
$
0.01

 
$
(0.10
)
 
$
0.92

 
$
0.05

 
$
(0.18
)
Distributions declared per common share
 
$
0.98

 
$
0.98

 
$
0.98

 
$
0.98

 
$
0.94

Class I Common Stock:
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to the Company
 
$
25

 
$
(64
)
 
$
391

 
$
8

 
$
(3
)
Basic and diluted weighted average number of common shares outstanding
 
936,555

 
718,206

 
420,662

 
194,160

 
15,187

Basic and diluted net income (loss) per common share
 
$
0.03

 
$
(0.09
)
 
$
0.93

 
$
0.04

 
$
(0.18
)
Distributions declared per common share
 
$
0.98

 
$
0.98

 
$
0.98

 
$
0.98

 
$
0.94


59


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part II, Item 6. Selected Financial Data section in this Annual Report on Form 10-K and our accompanying consolidated financial statements and the notes thereto. See also the “Cautionary Note Regarding Forward-Looking Statements” section preceding Part I.
Overview
We were formed on July 27, 2010, to acquire and operate a diversified portfolio of (1) necessity retail, office and industrial properties that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States, (2) notes receivable and other investments secured by commercial real estate, including the origination of loans, and (3) U.S. government securities, agency securities, corporate debt and other investments for which there is reasonable liquidity. We commenced our principal operations on December 7, 2011, when we issued the initial $10.0 million in shares of our common stock in the Offering and acquired our first real estate property. We have no paid employees and are externally advised and managed by Cole Income NAV Strategy Advisors. On February 1, 2018, the Transaction, discussed in Part I, Item 1 Business — Formation, was completed. Immediately following the completion of the Transaction, CIM indirectly owns and/or controls Cole Income NAV Strategy Advisors; our dealer manager, CCO Capital; our property manager, CREI Advisors; and our sponsor.
In addition, as part of the Transaction, pursuant to the Services Agreement, VEREIT OP will continue to provide certain services to CCO Group and to us, including operational real estate support. VEREIT OP will continue to provide such services through March 31, 2019 (or, if later, the date of the last government filing other than a tax filing made by any of the Cole REITs with respect to its 2018 fiscal year) and will provide consulting and research services through December 31, 2023 as requested by CCO Group, LLC.
Despite the indirect change of ownership and control of our advisor, dealer manager, property manager and sponsor, we expect that, during the Initial Services Term of the Services Agreement, the advisory, dealer manager and property management services we receive will continue without any material changes in personnel (except as supplemented by the management oversight of CIM personnel) or material change in service procedures. During the Initial Services Term of the Services Agreement, CCO Group, LLC intends to evaluate and effectuate an appropriate transition of VEREIT OP’s services under the Services Agreement to other CIM affiliates or third parties with the goal of ensuring continuity and minimizing disruption.
As we acquire additional commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on any current variable rate debt, refinancings or new indebtedness used to acquire the properties. We may manage our risk of changes in real estate prices on future property acquisitions, when applicable, by entering into purchase agreements and loan commitments simultaneously, or through loan assumptions, so that our operating yield is determinable at the time we enter into a purchase agreement, by contracting with developers for future delivery of properties, or by entering into sale-leaseback transactions. We manage our interest rate risk by monitoring the interest rate environment in connection with our future property acquisitions, when applicable, or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing terms for future acquisitions or refinancing, our results of operations may be adversely affected.
As of December 31, 2017, we owned 139 properties located in 36 states, comprising 4.4 million rentable square feet of commercial space, which includes the rentable square feet of buildings on land subject to ground leases. Our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property indebtedness and acquisition and operating expenses. Rental and other property income accounted for 91%, 90%, 91% of our total revenue for the years ended December 31, 2017, 2016, and 2015, respectively. As 99.4% of our rentable square feet was under lease as of December 31, 2017, with a weighted average remaining lease term of 10.8 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Cole Income NAV Strategy Advisors regularly monitors the creditworthiness of our tenants by reviewing each tenant’s financial results, credit rating agency reports, when available, on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease.

60


Our Business Environment and Current Outlook
Current conditions in the global capital markets remain volatile as the world’s economic growth has been affected by geopolitical and economic events. In the United States, the overall economic environment continued to improve in 2017. During 2017, the U.S. real gross domestic product increased 2.3%, the unemployment rate decreased 0.6 percentage points to 4.1%, and Core CPI, a measure of inflation which removes food and energy prices and is seasonally adjusted, increased 1.8%, as compared to the same period a year earlier.
Economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly. These include: overall economic activity and employment growth, interest rate levels, the cost and availability of credit and the impact of tax and regulatory policies.
Critical Accounting Policies and Significant Accounting Estimates
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that we have made these estimates and assumptions in an appropriate manner and in a way that accurately reflects our financial condition. We continually test and evaluate these estimates and assumptions using our historical knowledge of the business, as well as other factors, to ensure that they are reasonable for reporting purposes. However, actual results may differ from these estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We believe the following critical accounting policies govern the significant judgments and estimates used in the preparation of our financial statements, which should be read in conjunction with the more complete discussion of our accounting policies and procedures included in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
Recoverability of Real Estate Assets
We acquire real estate assets and subsequently monitor those assets quarterly for impairment, including the review of real estate properties subject to direct financing leases, if applicable. Additionally, we record depreciation and amortization related to our assets. The risks and uncertainties involved in applying the principles related to real estate assets include, but are not limited to, the following:
The estimated useful lives of our depreciable assets affects the amount of depreciation and amortization recognized on our assets;
The review of impairment indicators and subsequent determination of the undiscounted future cash flows could require us to reduce the value of assets and recognize an impairment loss;
The fair value of held for sale assets is estimated by management. This estimated value could result in a reduction of the carrying value of the asset; and
Changes in assumptions based on actual results may have a material impact on our financial results.
Consolidation of Equity Investment

 We must continually evaluate non-controlling interests for consolidation based on standards set forth in GAAP. For legal entities being evaluated, we must first determine whether the interests that we hold and fees we receive qualify as variable interests in the entity, as discussed in Note 2 – Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K. The difference between consolidating the variable interest entity (“VIE”) and accounting for it using the equity method could be material to our consolidated financial statements. The risks and uncertainties involved in applying the principles related to equity investments include, but are not limited to, the following:

Consideration for VIEs involves determining their ability to finance their operations without additional subordinated financial support, whether the equity holders lack the characteristic of controlling financial interest, or whether the entity is established with non-substantive voting rights.


61


We perform significance calculations based on investments, total assets and income, on an individual basis or on an aggregated basis, by any combination of unconsolidated subsidiaries and equity-method investees.

Allocation of Purchase Price of Real Estate Assets
In connection with our acquisition of properties, we allocate the purchase price to the tangible and intangible assets and liabilities acquired based on their respective estimated fair values. Tangible assets consist of land, buildings, and tenant improvements. Intangible assets consist of above- and below-market lease values and the value of in-place leases. Our purchase price allocations are developed utilizing third-party appraisal reports, industry standards and management experience. The risks and uncertainties involved in applying the principles related to purchase price allocations include, but are not limited to, the following:
The value allocated to land, as opposed to buildings and tenant improvements, affects the amount of depreciation expense we record. If more value is attributed to land, depreciation expense is lower than if more value is attributed to buildings and tenant improvements;
Intangible lease assets and liabilities can be significantly affected by estimates including market rent, lease term including renewal options at rental rates below estimated market rental rates, carrying costs of the property during a hypothetical expected lease-up period, and current market conditions and costs, including tenant improvement allowances and rent concessions; and
We determine whether any financing assumed is above- or below-market based upon comparison to similar financing terms for similar types of debt financing with similar maturities.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are described in Note 2 — Summary of Significant Accounting Policies to our consolidated financial statements in this Annual Report on Form 10-K.
Operating Highlights and Key Performance Indicators
2017 Activity
Acquired 31 properties for an aggregate purchase price of $253.4 million.
Issued approximately 10.3 million shares of common stock in the Offering for gross offering proceeds of $189.6 million before organization and offering costs, selling commissions, the current portion of dealer manager fees and distribution and stockholder servicing fees of $7.1 million.
Entered into the Second Amended and Restated Credit Agreement that increased the allowable borrowings and extended the maturity dates associated with the original amended and restated unsecured credit facility.
Total debt increased by $117.0 million, from $161.2 million to $278.2 million.

62


Portfolio Information
Real Estate Portfolio
As of December 31, 2017, we owned 139 commercial properties located in 36 states, comprising 4.4 million rentable square feet, which includes the rentable square feet of buildings on land subject to ground leases. As of December 31, 2017, these properties were 99.4% leased (including any month-to-month agreements) with a weighted average remaining lease term of 10.8 years. During the year ended December 31, 2015, we disposed of five properties, for an aggregate gross sales price of $21.9 million.
The following table shows the property statistics of our real estate assets as of December 31, 2017, 2016 and 2015:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Number of properties
139

 
108

 
77

Rentable square feet (in thousands) (1)
4,366

 
3,139

 
1,919

Percentage of rentable square feet leased
99.4
%
 
99.3
%
 
99.1
%
Percentage of investment-grade tenants (2)
39.8
%
 
41.5
%
 
46.9
%
 ____________________________________
(1)
Includes square feet of buildings on land that are subject to ground leases.
(2)
Investment-grade tenants are those with a credit rating of BBB- or higher by Standard & Poor’s or a credit rating of Baa3 or higher by Moody’s. The ratings may reflect those assigned by Standard & Poor’s or Moody’s to the lease guarantor or the parent company, as applicable. The weighted average credit rating is weighted based on annualized rental income, and is for only those tenants rated by Standard & Poor’s.
The following table summarizes our real estate acquisition activity during the years ended December 31, 2017, 2016 and 2015:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Properties acquired
31

 
31

 
7

Purchase price of acquired properties (in thousands)
$
253,448

 
$
186,289

 
$
52,274

Rentable square feet of acquired properties (in thousands) (1)
1,227

 
1,213

 
315

 ____________________________________
(1)
Includes square feet of buildings on land that are subject to ground leases.

63



The following table shows the tenant diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2017:
 
 
 
 
Leased
 
2017
 
2017
 
Percentage of
 
 
Total
 
Square
 
Annualized
 
Annualized
 
2017
 
 
Number
 
 Feet (2)
 
Rental Income
 
Rental Income
 
Annualized
Tenant
 
of Leases (1)
 
(in thousands)
 
(in thousands)
 
per Square Foot (2)
 
Rental Income
Walgreens
 
5

 
145

 
$
2,061

 
$
14.21

 
4
%
Art Van Furniture
 
1

 
135

 
1,962

 
14.53

 
4
%
CarMax
 
1

 
92

 
1,924

 
20.91

 
4
%
Dollar General
 
20

 
188

 
1,837

 
9.77

 
4
%
Lowe’s
 
2

 
298

 
1,833

 
6.15

 
3
%
Wal-Mart
 
1

 
161

 
1,711

 
10.63

 
3
%
L.A. Fitness
 
2

 
83

 
1,709

 
20.59

 
3
%
At Home
 
1

 
293

 
1,687

 
5.76

 
3
%
7-Eleven
 
9

 
22

 
1,572

 
71.45

 
3
%
Consumer Cellular
 
1

 
85

 
1,516

 
17.84

 
3
%
Other
 
142

 
2,837

 
34,763

 
12.25

 
66
%
 
 
185

 
4,339

 
$
52,575

 
$
12.12

 
100
%
 ____________________________________
(1)
Includes leases which are master lease agreements.
(2)
Including square feet of buildings on land that is subject to ground leases.
The following table shows the tenant industry diversification of our real estate portfolio, based on annualized rental income as of December 31, 2017:
 
 
 
 
Leased
 
2017
 
2017
 
Percentage of
 
 
Total
 
Square
 
Annualized
 
Annualized
 
2017
 
 
Number
 
 Feet (2)
 
Rental Income
 
Rental Income
 
Annualized
Industry
 
of Leases (1)
 
(in thousands)
 
(in thousands)
 
per Square Foot (2)
 
Rental Income
Discount store
 
38

 
591

 
$
6,029

 
$
10.20

 
12
%
Home furnishings
 
12

 
497

 
5,198

 
10.46

 
10
%
Grocery
 
7

 
253

 
4,607

 
18.21

 
9
%
Manufacturing
 
6

 
560

 
4,298

 
7.68

 
8
%
Home and garden
 
10

 
490

 
3,970

 
8.10

 
8
%
Motor vehicles
 
14

 
216

 
3,837

 
17.76

 
7
%
Pharmacy
 
10

 
193

 
2,841

 
14.72

 
5
%
Information and communication
 
7

 
158

 
2,766

 
17.51

 
5
%
Gas and convenience
 
12

 
31

 
2,087

 
67.32

 
4
%
Entertainment and recreation
 
2

 
83

 
1,709

 
20.59

 
3
%
Other
 
67

 
1,267

 
15,233

 
12.02

 
29
%
 
 
185

 
4,339

 
$
52,575

 
$
12.12

 
100
%
 ____________________________________
(1)
Includes leases which are master lease agreements.
(2)
Including square feet of buildings on land that is subject to ground leases.

64


The following table shows the geographic diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2017:
 
 
 
 
Rentable
 
2017
 
2017
 
Percentage of
 
 
Total
 
Square
 
Annualized
 
Annualized
 
2017
 
 
Number of
 
Feet (1)
 
Rental Income
 
Rental Income
 
Annualized
Location
 
Properties
 
(in thousands)
 
(in thousands)
 
per Square Foot (1)
 
Rental Income
Ohio
 
16

 
527

 
$
6,368

 
$
12.08

 
12
%
Illinois
 
6

 
425

 
4,706

 
11.07

 
9
%
North Carolina
 
8

 
288

 
4,281

 
14.86

 
8
%
Pennsylvania
 
5

 
237

 
3,371

 
14.22

 
7
%
Rhode Island
 
2

 
129

 
2,891

 
22.41

 
6
%
Texas
 
8

 
270

 
2,841

 
10.52

 
5
%
Maryland
 
2

 
295

 
2,809

 
9.52

 
5
%
Georgia
 
7

 
188

 
2,619

 
13.93

 
5
%
Minnesota
 
11

 
247

 
2,288

 
9.26

 
4
%
Arizona
 
4

 
107

 
2,258

 
21.10

 
4
%
Other
 
70

 
1,653

 
18,143

 
10.98

 
35
%
 
 
139

 
4,366

 
$
52,575

 
$
12.04

 
100
%
 ____________________________________
(1)
Including square feet of buildings on land that is subject to ground leases.
The following table shows the property type diversification of our real estate portfolio, based on annualized rental income, as of December 31, 2017:
 
 
 
 
 
 
2017
 
2017
 
Percentage of
 
 
Total
 
Rentable
 
Annualized
 
Annualized
 
2017
 
 
Number of
 
Square Feet (1)
 
Rental Income
 
Rental Income
 
Annualized
Property Type
 
Properties
 
(in thousands)
 
(in thousands)
 
per Square Foot (1)
 
Rental Income
Retail
 
114

 
2,333

 
$
31,318

 
$
13.42

 
60
%
Anchored shopping centers
 
8

 
725

 
9,903

 
13.66

 
19
%
Industrial and distribution
 
13

 
996

 
6,457

 
6.48

 
12
%
Office
 
4

 
312

 
$
4,897

 
15.70

 
9
%
Total:
 
139

 
4,366

 
$
52,575

 
$
12.04

 
100
%
____________________________________
(1)
Includes square feet of buildings on land parcels subject to ground leases.
Leases
Although there are variations in the specific terms of the leases of our properties, the following is a summary of the general structure of our current leases. Generally, the leases of the properties acquired provide for initial terms of ten or more years, and provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions as the initial lease term. Certain leases also provide that in the event we wish to sell the property subject to that lease, we first must offer the lessee the right to purchase the property on the same terms and conditions as any offer which we intend to accept for the sale of the property. The properties are generally leased under net leases pursuant to which the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance, while certain of the leases require us to maintain the roof, structure and parking areas of the building. Additionally, certain leases provide for increases in rent as a result of fixed increases, increases in the consumer price index, and/or increases in the tenant’s sales volume.
Our leases, as of December 31, 2017, provided for annual base rental payments (payable in monthly installments) ranging from $15,000 to $1.9 million, and had an average annual base rental payment of $274,000, with a weighted average remaining lease term of 10.8 years.

65


The following table shows lease expirations of our real estate portfolio as of December 31, 2017, during each of the next ten years and thereafter, assuming no exercise of renewal options:
 
 
Total
 
Leased
 
2017
 
2017
 
Percentage of
 
 
Number
 
Square Feet
 
Annualized
 
Annualized
 
2017
Year of
 
of Leases
 
Expiring (2)
 
Rental Income
 
Rental Income
 
Annualized
Lease Expiration
 
Expiring (1)
 
(in thousands)
 
Expiring (in thousands)
 
per Square Foot (2)
 
Rental Income
2018
 
6

 
14

 
$
205

 
$
14.64

 
*

2019
 
2

 
12

 
209

 
17.42

 
*

2020
 
6

 
59

 
608

 
10.31

 
1
%
2021
 
8

 
39

 
670

 
17.18

 
1
%
2022
 
9

 
71

 
1,008

 
14.20

 
2
%
2023
 
20

 
222

 
2,538

 
11.43

 
5
%
2024
 
21

 
320

 
4,715

 
14.73

 
9
%
2025
 
12

 
320

 
4,647

 
14.52

 
9
%
2026
 
22

 
746

 
6,698

 
8.98

 
13
%
2027
 
20

 
432

 
5,789

 
13.40

 
11
%
Thereafter
 
59

 
2,104

 
25,488

 
12.11

 
49
%
 
 
185

 
4,339

 
$
52,575

 
$
12.12

 
100
%
 ____________________________________
* Represents less than 1% of the total annual base rent.
(1)
Includes leases which are master lease agreements.
(2)
Including square feet of buildings on land that is subject to ground leases.
The following table shows the economic metrics of our real estate assets as of and for the years ended December 31, 2017, 2016 and 2015:
 
 
2017
 
2016
 
2015
Economic Metrics
 
 
 
 
 
 
Weighted-average lease term (in years) (1)
 
10.8
 
10.6
 
10.9
Lease rollover (1)(2):
 
 
 
 
 
 
Annual average
 
1.0%
 
1.1%
 
0.9%
Maximum for a single year
 
1.9%
 
1.9%
 
1.7%
____________________________________
(1)
Based on annualized rental income of our real estate portfolio as of the respective reporting date.
(2)
Through the end of the next five years as of the respective reporting date.

66


Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets. The following table provides summary information about our results of operations for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
 
 
Year Ended December 31,
 
2017 vs 2016 Increase/(Decrease)
 
2016 vs 2015 Increase/(Decrease)
 
 
2017
 
2016
 
2015
 
 
Total revenues
 
$
48,146

 
$
27,311

 
$
19,109

 
$
20,835

 
$
8,202

General and administrative
 
$
6,563

 
$
4,544

 
$
1,794

 
$
2,019

 
$
2,750

Property operating
 
$
1,740

 
$
1,090

 
$
644

 
$
650

 
$
446

Real estate tax
 
$
3,358

 
$
2,055

 
$
1,204

 
$
1,303

 
$
851

Advisory fees and expenses
 
$
4,910

 
$
2,760

 
$
2,536

 
$
2,150

 
$
224

Acquisition-related
 
$
2,174

 
$
3,251

 
$
809

 
$
(1,077
)
 
$
2,442

Depreciation and amortization
 
$
18,536

 
$
9,533

 
$
6,457

 
$
9,003

 
$
3,076

Impairments
 
$
227

 
$

 
$

 
$
227


$

Operating income
 
$
10,638

 
$
4,078

 
$
5,665

 
$
6,560

 
$
(1,587
)
Interest expense and other, net
 
$
10,291

 
$
5,380

 
$
3,980

 
$
4,911

 
$
1,400

Gain on disposition of real estate, net
 
$

 
$

 
$
5,642

 
$

 
$
(5,642
)
Net income (loss) attributable to the Company
 
$
312

 
$
(1,292
)
 
$
7,327

 
$
1,604

 
$
(8,619
)
Revenue
Our revenues consist primarily of rental and other property income from net leased commercial properties. We also incur certain operating expenses that are subject to reimbursement by our tenants, which results in tenant reimbursement income. Additionally, our portfolio includes liquid assets in the form of marketable securities. These assets can result in revenue in the form of interest income.
2017 vs 2016 – The increase in revenue of $20.8 million during the year ended December 31, 2017, compared to the same period in 2016, was primarily due to the acquisition of 31 rental income-producing properties subsequent to December 31, 2016 as well as recognizing a full year of revenue on the 31 properties acquired in 2016. Rental and other property income from net leased commercial properties accounted for 91% and 90% of our total revenues during the years ended December 31, 2017 and 2016, respectively. We also incurred certain operating expenses subject to reimbursement by our tenants, which resulted in $4.4 million of tenant reimbursement income during the year ended December 31, 2017, compared to $2.6 million of tenant reimbursement income during the year ended December 31, 2016.
2016 vs 2015 – The increase in revenue of $8.2 million during the year ended December 31, 2016, compared to the same period in 2015, was primarily due to the acquisition of 31 rental income-producing properties subsequent to December 31, 2015 as well as recognizing a full year of revenue on the seven properties acquired in 2015. Rental and other property income from net leased commercial properties accounted for 90% and 91% of our total revenues during the years ended December 31, 2016 and 2015, respectively. We also incurred certain operating expenses subject to reimbursement by our tenants, which resulted in $2.6 million of tenant reimbursement income during the year ended December 31, 2016, compared to $1.7 million of tenant reimbursement income during the year ended December 31, 2015. Interest income on marketable securities increased $41,000 to $117,000 for the year ended December 31, 2016, due to an increase in the average outstanding investment in marketable securities of $2.5 million.
General and Administrative
The primary general and administrative expense items are advisory reimbursements, professional fees, accounting and legal fees, escrow and trustee fees, unused fees on the line of credit and state franchise and income taxes.
2017 vs 2016 – The increase in general and administrative expenses of $2.0 million for the year ended December 31, 2017, compared to the same period in 2016, was primarily due to an increase in operating expense reimbursements to our advisor during the year ended December 31, 2017, primarily as a result of the acquisition of 31 additional rental income-producing properties subsequent to December 31, 2016.
2016 vs 2015 – The increase in general and administrative expenses of $2.8 million for the year ended December 31, 2016, compared to the same period in 2015, was primarily due to an increase in advisor reimbursements, as Cole Income NAV

67


Strategy Advisors no longer funded Excess G&A (as defined in the Notes to the Consolidated Financial Statements for the year ended December 31, 2016.
Property Operating
Property operating expenses such as property repairs, maintenance and property related insurance include both reimbursable and non-reimbursable property expenses. We are reimbursed by the tenant for reimbursable property operating expenses in accordance with the respective lease agreements.
2017 vs 2016 – The increase in property operating expense of $650,000 during the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to the acquisition of 31 rental income-producing properties subsequent to December 31, 2016, as well as recognizing a full year of property operating expenses on 31 properties acquired in 2016.
2016 vs 2015 – The increase in property operating expenses of $446,000 during the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the acquisition of 31 rental income-producing properties subsequent to December 31, 2016, as well as recognizing a full year of property operating expenses on seven properties acquired in 2015.
Real Estate Tax
2017 vs 2016 – The increase in real estate tax expenses of $1.3 million during the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to the acquisition of 31 rental income-producing properties during the year ended December 31, 2017, as well as recognizing a full year of real estate tax expense on 31 properties acquired in 2016.
2016 vs 2015 – The increase in real estate tax expenses of $851,000 during the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the acquisition of 31 rental income-producing properties during the year ended December 31, 2016, as well as recognizing a full year of real estate tax expense on seven properties acquired in 2015.
Advisory Fees and Expenses
The advisory fees and expenses that we pay to our advisor are based upon our NAV.
2017 vs 2016 – Advisory fees and expenses increased $2.2 million during the year ended December 31, 2017, as compared to the same period in 2016, due to an increase in the NAV for each class of common stock. The total NAV for all share classes increased $149.5 million during the year ended December 31, 2017, which represented an increase of $1.4 million and $141,000 in advisory fees and advisor reimbursements over the prior year and a $647,000 increase in performance fees, as we did not hit the performance fee metrics in 2016.
2016 vs 2015 – Advisory fees and expenses increased $224,000 during the year ended December 31, 2016, as compared to the same period in 2015, due to an increase in the NAV for each class of common stock. The total NAV for all share classes increased $141.1 million during the year ended December 31, 2016, which represented a $918,000 increase in advisory fees over the prior year and a $554,000 increase in advisor reimbursements, which were waived prior to 2016, offset by a $1.2 million decrease due to the fact that we did not hit the performance fee metrics during 2016.
Acquisition-Related Expenses
In April 2017, we early adopted ASU 2017–01, which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. As of April 2017, our acquisitions qualify as asset acquisitions, and as such, certain acquisition costs related to these asset acquisitions are capitalized. Prior to the adoption of ASU 2017-01 in April 2017, costs related to property acquisitions were expensed as incurred.
2017 vs 2016 – The decrease in acquisition-related expenses of $1.1 million during the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to the acquisition of 12 rental income-producing properties prior to the adoption of ASU 2017-01, for an aggregate purchase price of $52.5 million during the year ended December 31, 2017, compared to the purchase of 31 commercial properties for an aggregate purchase price of $186.3 million during the year ended December 31, 2016. During the year ended December 31, 2016, acquisition-related costs related to property acquisitions were expensed as incurred.
2016 vs 2015 The increase in acquisition-related expenses of $2.4 million during the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the acquisition of 31 rental income-producing properties for an

68


aggregate purchase price of $186.3 million during the year ended December 31, 2016, compared to the purchase of seven commercial properties for a purchase price of $52.3 million during the year ended December 31, 2015.
Depreciation and Amortization
2017 vs 2016 – The increase in depreciation and amortization expenses of $9.0 million during the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to the acquisition of 31 additional rental income-producing properties subsequent to December 31, 2016, as well as recognizing a full year of depreciation and amortization expenses on 31 properties acquired in 2016.
2016 vs 2015 – The increase in depreciation and amortization expenses of $3.1 million during the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to the acquisition of 31 additional rental income-producing properties subsequent to December 31, 2015, as well as recognizing a full year of depreciation and amortization expenses on seven properties acquired in 2015.
Impairment
2017 vs 2016 — Impairments increased $227,000 during the year ended December 31, 2017, as compared to the same period in 2016, due to management identifying the carrying value to be greater than the selling price of one multi-tenant property held for sale during the year.
Interest Expense and Other, Net
2017 vs 2016 – The increase in interest expense and other, net, of $4.9 million for the year ended December 31, 2017, as compared to the same period in 2016, was primarily due to an increase of $111.7 million in our average outstanding debt balance for the year ended December 31, 2017, compared to the year ended December 31, 2016.
2016 vs 2015 – The increase in interest expense and other, net, of $1.4 million for the year ended December 31, 2016, as compared to the same period in 2015, was primarily due to an increase of $20.4 million in our average outstanding debt balance for the year ended December 31, 2016, compared to the year ended December 31, 2015.
Gain on Disposition of Real Estate, Net
2016 vs 2015Gain on disposition real estate, net was $5.6 million for the year ended December 31, 2015. The gain recorded was due to the disposition of five properties during the year ended December 31, 2015. No dispositions occurred during the years ended December 31, 2017 or 2016.

69


Same Store Properties
We review our stabilized operating results, measured by contract rental revenue, from properties that we owned for the entirety of both the current and prior year reporting periods, referred to as “same store” properties. Contract rental revenue is a supplemental non-GAAP financial measure of real estate companies’ operating performance. Contract rental revenue is considered by management to be a helpful supplemental performance measure, as it provides a consistent method for the comparison of the Company’s properties. In determining the same store property pool, we include all properties that were owned for the entirety of both the current and prior reporting periods, except for properties during the current or prior year that were under development or redevelopment.
“Non-same store,” as reflected in the table below, includes properties acquired on or after January 1, 2016. As shown in the table below, contract rental revenue on the 77 same store properties for the year ended December 31, 2017 decreased $1,000 compared to the year ended December 31, 2016. The same store properties were 98.6% and 98.9% occupied as of December 31, 2017 and 2016, respectively. The following table shows the contract rental revenue from properties owned for both of the entire years ended December 31, 2017 and 2016, along with a reconciliation to rental income, calculated in accordance with GAAP (dollar amounts in thousands):
 
 
 
Number of Properties
 
Year Ended December 31,
 
Increase/(Decrease)
Contract Rental Revenue
 
 
2017
 
2016
 
$ Change
 
% Change
Rental income — as reported
 
 
 
$
43,670

 
$
24,574

 
$
19,096

 
77.7
 %
Less: Amortization (1)
 
 
 
419

 
(5)
 
424

 
(8,480.0
)%
Less: Straight line rental income
 
 
 
1,860

 
1,067
 
793

 
74.3
 %
Total Contract Rental Revenue
 
 
 
41,391

 
23,512

 
17,879

 
76.0
 %
 
 
 
 
 
 
 
 
 
 
 
Less: “Non-same store” properties
 
62
 
21,650

 
3,770

 
17,880

 
474.3
 %
“Same store” properties
 
77
 
$
19,741

 
$
19,742

 
$
(1
)
 
 %
 ____________________________________
(1) Includes amortization of above- and below-market lease intangibles and deferred lease incentives.
“Non-same store,” as reflected in the table below, includes properties acquired on or after January 1, 2015. As shown in the table below, contract rental revenue on the 70 same store properties for the year ended December 31, 2016 increased 0.2% compared to the year ended December 31, 2015. The same store properties were 99.3% and 99.6% occupied as of December 31, 2016 and 2015, respectively. The following table shows the contract rental revenue from properties owned for both of the entire years ended December 31, 2016 and 2015, along with a reconciliation to rental income, calculated in accordance with GAAP (dollar amounts in thousands):
 
 
 
Number of Properties
 
Year Ended December 31,
 
Increase/(Decrease)
Contract Rental Revenue
 
 
2016
 
2015
 
$ Change
 
% Change
Rental income — as reported
 
 
 
$
24,574

 
$
17,345

 
$
7,229

 
41.7
 %
Less: Amortization (1)
 
 
 
(5
)
 
(172
)
 
167

 
(97.1
)%
Less: Straight line rental income
 
 
 
1,067

 
717

 
350

 
48.8
 %
Total Contract Rental Revenue
 
 
 
23,512

 
16,800

 
6,712

 
40.0
 %
 
 
 
 
 
 
 
 
 
 
 
Less: “Non-same store” properties
 
38
 
7,572

 
375

 
7,197

 
1,919.2
 %
Less: Disposed properties (2)
 
 
 

 
519

 
(519
)
 
(100.0
)%
“Same store” properties
 
70
 
$
15,940

 
$
15,906

 
$
34

 
0.2
 %
 ____________________________________
(1) Includes amortization of above- and below-market lease intangibles and deferred lease incentives.
(2) The Company disposed of five properties during the year ended December 31, 2015.

70


Distributions
Our board of directors authorized a daily distribution, based on 365 days in the calendar year, of $0.002678083 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2017 and ending on June 30, 2018. The daily distribution amount for each class of outstanding common stock is adjusted based on the relative NAV of the various classes each day so that, from day to day, distributions constitute a uniform percentage of the NAV per share of all classes. As a result, from day to day, the per share daily distribution for each outstanding class of common stock may be higher or lower than the daily distribution amount authorized by our board of directors based on the relative NAV of each class of common stock on that day. As of December 31, 2017, we had distributions payable of $2.1 million.
During the years ended December 31, 2017 and 2016, we paid distributions of $20.7 million and $12.5 million, respectively, including $10.3 million and $6.0 million, respectively, through the issuance of shares pursuant to the DRIP. Net cash provided by operating activities for the years ended December 31, 2017 and 2016 was $19.3 million and $8.3 million, respectively, and reflected a reduction for real estate acquisition-related expenses incurred of $2.2 million and $3.3 million, respectively, in accordance with GAAP. Prior to the adoption of ASU 2017-01 in April 2017, we treated our real estate acquisition-related fees and expenses as funded by proceeds from the Offering, including proceeds from the DRIP. Therefore, for consistency, proceeds from the issuance of common stock used as a source of distributions for the years ended December 31, 2017 and 2016 includes the amount by which real estate acquisition-related fees and expenses have reduced net cash flows from operating activities of $849,000 and $3.3 million, for each year then ended, and $7.7 million and $6.8 million, respectively, cumulative since inception. The distributions paid during the year ended December 31, 2017, including shares issued pursuant to the DRIP, were funded by cash flows from operating activities of $19.3 million, or 93%, and proceeds from the Offering, including proceeds from the prior years, of $1.4 million, or 7%. Our distributions for the year ended December 31, 2016 were funded by cash flows from operations, including cash flows in excess of distributions from the prior year, of $10.0 million, or 80%, and proceeds from the Offering of $2.5 million, or 20%.
We may pay distributions from sources other than cash flow from operations, including from the proceeds of the Offering, from borrowings or from the sale of properties or other investments, among others, and we have no limit on the amounts we may pay from such sources. As of December 31, 2017, cumulative since inception, we have declared $51.1 million of distributions and we have paid $49.0 million, of which $26.4 million was paid in cash and $22.6 million was reinvested in shares of our common stock pursuant to the distribution reinvestment plan. As of December 31, 2017, cumulative since inception, our distributions were funded by net cash provided by operating activities of $44.8 million and proceeds from our offering of $4.2 million.
Share Redemptions
We have adopted a share redemption plan to provide limited liquidity whereby, on a daily basis, stockholders may request that we redeem all or any portion of their shares. Our share redemption plan provides that, on each business day, stockholders may request that we redeem all or any portion of their shares, subject to a minimum redemption amount and certain short-term trading fees. The redemption price per share for each class on any business day will be our NAV per share for such class for that day, calculated by the independent fund accountant in accordance with our valuation policies.
Our share redemption plan includes certain redemption limits, including a quarterly limit and, in some cases, a stockholder by stockholder limit. During the year ended December 31, 2017, we received redemption requests for, and redeemed approximately 1.8 million W Shares, 318,000 A Shares, and 242,000 I Shares for $32.2 million, $5.7 million, and $4.4 million, respectively. See Note 14 —Stockholders’ Equity Summary of Significant Accounting Policies to our consolidated financial statements included in this Annual Report on Form 10-K for additional terms of the share redemption program, including the share redemption plan limits.
We intend to fund share redemptions with available cash, proceeds from our liquid investments and proceeds from the sale of additional shares. We may, after taking the interests of our Company as a whole and the interests of our remaining stockholders into consideration, use proceeds from any available sources at our disposal to satisfy redemption requests, including, but not limited to, proceeds from sales of additional shares, excess cash flow from operations, sales of our liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate related assets. In an effort to have adequate cash available to support our share redemption plan, Cole Income NAV Strategy Advisors may determine to reserve borrowing capacity under our line of credit. Cole Income NAV Strategy Advisors could then elect to borrow against our line of credit in part to redeem shares presented for redemption during periods when we do not have sufficient proceeds from the sale of shares in the Offering to fund all redemption requests. See the discussion of our share redemption program in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Share Redemption Program in this Annual Report on Form 10-K.

71


Liquidity and Capital Resources
General
We expect to continue to raise capital through the Offering and to utilize such funds and future proceeds from secured or unsecured financing to complete future property acquisitions and for general corporate uses. The source of our operating cash flows is primarily the rental income received from current and future leased properties. As of December 31, 2017, we had raised $550.6 million of gross proceeds from the Offering before organization and offering costs, selling commissions, and the current portion of dealer manager fees and distribution fees of $16.1 million. Refer to Item 1A - Risk Factors for risks related to our ability to raise capital in the near term.
Our credit facility with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), provides for borrowings up to $425.0 million, which is comprised of $212.5 million in revolving loans (the “Revolving Loans”) and $212.5 million in term loans (the “Term Loans”), collectively, the credit facility (the “Credit Facility”). As of December 31, 2017, we had $296.5 million in unused capacity, subject to borrowing availability. As of December 31, 2017, we had cash and cash equivalents of $2.9 million and investments in marketable securities of $5.5 million.
Our investment guidelines provide that we will target the following aggregate allocation to relatively liquid investments, such as U.S. government securities, agency securities, corporate debt, publicly traded debt and equity real estate-related securities, cash, cash equivalents and other short-term investments and, in Cole Income NAV Strategy Advisors’ discretion, lines of credit (collectively, the “Liquid Assets”): (1) 10% of our NAV up to $1.0 billion and (2) 5% of our NAV in excess of $1.0 billion. To the extent that Cole Income NAV Strategy Advisors determines that we should maintain borrowing capacity under lines of credit, the amount available under the lines of credit will be included in calculating the Liquid Assets under these guidelines. These are guidelines, and our stockholders should not expect that we will, at all times, hold liquid assets at or above the target levels or that all liquid assets will be available to satisfy redemption requests as we receive them. We anticipate that both our overall allocation to liquid assets as a percentage of our NAV and our allocation to different types of liquid assets will vary. In making these determinations our advisor will consider our receipt of proceeds from sales of additional shares, our cash flow from operations, available borrowing capacity under lines of credit, if any, or from additional mortgages on our real estate, our receipt of proceeds from sales of assets, and the anticipated use of cash to fund redemptions, as well as the availability and pricing of different investments. The amount of the Liquid Assets is determined by our advisor, in its sole discretion, but is subject to review by our independent directors on a quarterly basis.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for acquisitions, operating expenses, distributions and redemptions to stockholders and interest on our outstanding debt. We expect to meet our short-term liquidity requirements through available cash, cash provided by property operations, proceeds from the Offering and borrowings from the line of credit or other sources.
We believe that the resources stated above will be sufficient to satisfy our operating requirements for the foreseeable future, and we do not anticipate a need to raise funds from sources other than those described above within the next 12 months.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds are for property and other asset acquisitions and the payment of tenant improvements, operating expenses, including debt service payments on any outstanding indebtedness, and distributions and redemptions to our stockholders. We expect to meet our long-term liquidity requirements through proceeds from the Offering, secured or unsecured financings from banks and other lenders, any available capacity on the line of credit by the addition of properties to the borrowing base, proceeds from the sale of marketable securities and net cash flows provided by operations.
We expect that substantially all net cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we have used, and may continue to use, other sources to fund distributions, as necessary, including proceeds from the Offering, borrowings on the line of credit and/or future borrowings on our unencumbered assets. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash flows from the Offering or debt financings will be used to fund acquisitions, certain capital expenditures, repayments of outstanding debt or distributions to our stockholders.

72


Contractual Obligations
As of December 31, 2017, we had $278.2 million of debt outstanding, with a weighted average interest rate of 3.58%. See Note 8 — Notes Payable and Credit Facility to our consolidated financial statements in this Annual Report on Form 10-K for a description of certain terms of the debt.
Our contractual obligations as of December 31, 2017 were as follows (in thousands):
  
 
Payments due by period (1)
  
 
Total
 
Less Than 1
Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Principal payments - credit facility(2)
 
$
128,500

 
$

 
$

 
$
128,500

 
$

Interest payments - credit facility(3)
 
19,057

 
4,180

 
8,370

 
6,507

 

Principal payments - fixed debt rate
 
149,734

 

 
9,240

 
123,544

 
16,950

Interest payments - fixed debt rate(4)
 
26,407

 
5,850

 
11,685

 
7,409

 
1,463

Total
 
$
323,698

 
$
10,030

 
$
29,295

 
$
265,960

 
$
18,413

 ____________________________________
(1)
The table does not include amounts due to our advisor or its affiliates pursuant to our advisory agreement because such amounts are not fixed and determinable.
(2)
The table does not include the impact of any extension. We may elect to extend the maturity of the Revolving Loans to no later than September 6, 2022, subject to satisfying certain conditions contained in the second amended credit agreement, or refinance the debt or enter into the new financing arrangement.
(3)
As of December 31, 2017, the Term Loans outstanding totaled $112.5 million, which are subject to interest rate swap agreements. The weighted average all-in interest rate for the Swapped Terms Loans was 3.25%. The remaining $16.0 million outstanding under the Credit Facility has a weighted average interest rate of 3.27% as of December 31, 2017.
(4)
As of December 31, 2017, we had $78.2 million of variable rate mortgage notes effectively fixed through the use of interest rate swap agreements. We used the effective interest rates fixed under our interest rate swap agreements to calculate the debt payment obligations in future periods.
Our charter prohibits us from incurring debt that would cause our borrowings to exceed 75% of our gross assets, valued at the aggregate cost (before depreciation and other non-cash reserves), unless approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report. In addition to this limitation in our charter, our board of directors has adopted a policy to further limit our borrowings to 60% of the greater of cost (before depreciation or other non-cash reserves) or fair market value of our gross assets; provided however, that a majority of our board of directors (including a majority of the independent directors) has determined that, as a general policy, borrowing in excess of 60% of the greater of cost (before deducting depreciation and other non-cash reserves) or fair market value of our gross assets is justified and in the best interest of us and our stockholders during our capital raising stage. Fair market value is based on the estimated market value of our real estate assets as of December 31, 2017 used to determine our estimated per share NAV. The independent directors believe such borrowing levels are justified as higher debt levels during the offering stage may enable us to acquire properties earlier than we might otherwise be able to acquire them if we were to adhere to the 60% debt limitation, which could yield returns that are accretive to the portfolio. In addition, as we are in the offering stage, more equity could be raised in the future to reduce the debt levels. As of December 31, 2017, our ratio of debt to the cost (before deducting depreciation or other non-cash reserves) of our gross assets was 39.4%, and our ratio of debt to the fair market value of our gross assets was 37.7%.
Our management reviews net debt as part of its management of our overall liquidity, financial flexibility, capital structure and leverage, and we therefore believe that the presentation of net debt provides useful information to stockholders. Net debt is a non-GAAP measure used to show our outstanding principal debt balance, excluding certain GAAP adjustments, such as financing and issuance costs and related accumulated amortization, less all cash and cash equivalents. As of December 31, 2017, our net debt leverage ratio, which is the ratio of net debt to total gross real estate assets net of gross intangible lease liabilities, was 39.0%.

73


The following table provides a reconciliation of the notes payable and Credit Facility, net balance, as reported on our consolidated balance sheet, to net debt as of December 31, 2017 (in thousands):
 
 
Balance as of December 31, 2017
Notes payable and credit facility, net
 
$
274,830

Deferred costs, net (1)
 
3,404

Total debt
 
278,234

Less: Cash and cash equivalents
 
(2,923
)
Net debt
 
$
275,311

 
 
 
Gross real estate assets, net (2)
 
$
706,378

Net debt leverage ratio
 
39.0
%
____________________________
(1)
Deferred costs relate to mortgage notes payable and the term portion of the Credit Facility.
(2)
Net of gross intangible lease liabilities.
As of December 31, 2017, we had entered into a purchase agreement with an unaffiliated third-party seller to acquire a 100% interest in one retail property, subject to meeting certain criteria, for an aggregate purchase price of $13.8 million, exclusive of closing costs. As of December 31, 2017, we had $500,000 of property escrow deposits held by an escrow agent in connection with this future property acquisition. This deposit is included in the consolidated balance sheets in derivative assets, property escrow deposits and other assets in this Annual Report on Form 10-K. As of December 31, 2017, this escrow deposit has not been forfeited.
Cash Flow Analysis
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
Operating Activities. Net cash provided by operating activities was $19.3 million for the year ended December 31, 2017, compared to $8.3 million for the year ended December 31, 2016. The increase was primarily due to the acquisition of 31 additional rental income-producing properties subsequent to December 31, 2016, resulting in net income before non-cash adjustments for depreciation, amortization of intangibles, and amortization of deferred financing costs increasing by $11.3 million, and a net decrease in working capital accounts of $224,000.
Investing Activities. Net cash used in investing activities increased $66.8 million to $253.9 million for the year ended December 31, 2017, compared to net cash used in investing activities of $187.1 million for the year ended December 31, 2016. The increase was primarily due to the acquisition of 31 commercial properties for an aggregate purchase price of $253.4 million during the year ended December 31, 2017, compared to the acquisition of 31 commercial properties for an aggregate purchase price of $186.3 million during the year ended December 31, 2016.
Financing Activities. Net cash provided by financing activities increased $63.1 million to $232.3 million for the year ended December 31, 2017, compared to net cash provided by financing activities of $169.2 million for the year ended December 31, 2016. The increase was primarily due to an increase in net proceeds from borrowing facilities and notes payable of $75.4 million, and an increase in net proceeds from the issuance of common stock of $21.1 million, offset by an increase in redemptions of common stock of $26.2 million, an increase in distributions to stockholders of $3.9 million, an increase in deferred financing costs paid of $2.3 million, and a decrease in noncontrolling interests of $845,000.
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015
Operating Activities. Net cash provided by operating activities increased $59,000 to $8.3 million for the year ended December 31, 2016, compared to $8.2 million for the year ended December 31, 2015. The increase was primarily due to an increase in gain on disposition of property of $5.6 million, offset by an increase in the net loss before non-cash adjustments for depreciation, amortization of intangibles, amortization of deferred financing costs, and amortization of discounts on marketable securities of $5.5 million.
Investing Activities. Net cash used in investing activities increased $151.1 million to $187.1 million for the year ended December 31, 2016, compared to $36.0 million for the year ended December 31, 2015. The increase was primarily due to the acquisition of 31 commercial properties during the year ended December 31, 2016. We acquired seven commercial properties, and disposed of five during the year ended December 31, 2015.

74


Financing Activities. Net cash provided by financing activities increased $131.0 million to $169.2 million for the year ended December 31, 2016, compared to $38.2 million for the year ended December 31, 2015. The increase was primarily due to an increase in net proceeds from borrowing facilities and notes payable of $42.5 million and an increase in net proceeds from the issuance of common stock of $93.1 million, offset by an increase in redemptions of common stock of $3.2 million.
Election as a REIT
We have elected to be taxed, and currently qualify, as a REIT under the Internal Revenue Code, as amended. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding certain non-cash items and net capital gains).
If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying consolidated financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which, if applicable, have been provided for in our accompanying consolidated financial statements.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in certain of our tenant leases that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include rent steps and clauses enabling us to receive payment of additional rent calculated as a percentage of the tenant’s gross sales above pre-determined thresholds. In addition, most of our leases require the tenant to pay all or a majority of the property’s operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs. However, due to the long-term nature of leases for real property, such leases may not reset frequently enough to adequately offset the effects of inflation.
Related-Party Transactions and Agreements
We have entered into agreements with Cole Income NAV Strategy Advisors and its affiliates, whereby we agree to pay certain fees, or reimburse certain expenses of, Cole Income NAV Strategy Advisors or its affiliates, primarily advisory and performance fees and expenses, organization and offering costs, sales commissions, dealer manager fees and expenses, distribution fees, and reimbursement of certain acquisition and operating costs. In addition , pursuant to the Services Agreement, VEREIT OP will continue to provide certain services to CCO Group and to us, including operational real estate support. See Note 12 — Related-Party Transactions and Agreements to our consolidated financial statements in this Annual Report on Form 10-K for a further explanation of the various related-party transactions, agreements and fees.
Conflicts of Interest
Richard S. Ressler, our chief executive officer, president and one of our directors, who is a founder and principal of CIM, as well as a director of CCPT IV and CCIT III, and Nathan D. DeBacker, our chief financial officer and treasurer, act as executive officers and/or a director of one or more other programs sponsored by CCO Group. One of our directors, W. Brian Kretzmer, also serves as a director of CCPT IV and CCIT III. Similarly, Glenn J. Rufrano, one of our directors, serves as a director of CCPT V, CCIT II, and CCIT III, as well as chief executive officer and a director of VEREIT, the parent company of VEREIT OP, who provides certain services to us and our advisor through the Services Agreement. In addition, affiliates of Cole Income NAV Strategy Advisors act as an advisor to, and certain of our executive officers and one of our directors act as executive officers and/or directors of CCPT IV, CCPT V, CCIT II, CCIT III and/or other real estate offerings in registrations, all of which are or intend to be public, non-listed REITs offered, distributed and/or managed by affiliates of Cole Income NAV Strategy Advisors. As such, there are conflicts of interest where Cole Income NAV Strategy Advisors or its affiliates, while serving in the capacity as sponsor, general partner, officer, director, key personnel and/or advisor for CIM or another real estate program sponsored or operated by CCO Group, including other real estate offerings in registration, may be in conflict with us in connection with providing services to other real estate related programs related to property acquisitions, property dispositions, and property management among others. The compensation arrangements between affiliates of Cole Income NAV

75


Strategy Advisors and CIM and these other real estate programs sponsored or operated by CCO Group could influence the advice to us. See Part I, Item 1. Business — Conflicts of Interest in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2017 and 2016, 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.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our market risk arises primarily from interest rate risk relating to variable-rate borrowings. To meet our short and long-term liquidity requirements, we borrow funds at a combination of fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to manage our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue these derivative contracts for trading or speculative purposes. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Interest Rate Risk
As of December 31, 2017, we had variable rate debt of $16.0 million, excluding any debt subject to interest rate swap agreements, and therefore, we are exposed to interest rate changes in the London Interbank Offered Rate (“LIBOR”). As of December 31, 2017, an increase or decrease of 50 basis points in interest rates would result in an increase or decrease in interest expense of $80,000 per year.
As of December 31, 2017, we had eight interest rate swap agreements outstanding, which mature on various dates from September 2019 to August 2022, respectively, with an aggregate notional amount of $190.7 million and an aggregate fair value of the net derivative asset of $1.7 million. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of December 31, 2017, an increase of 50 basis points in interest rates would result in a derivative asset of $4.8 million, representing a $3.1 million net change to the fair value of the net derivative asset. A decrease of 50 basis points would result in a derivative liability of $1.4 million, representing a $3.1 million decrease to the fair value of the net derivative asset.
As the information presented above includes only those exposures that existed as of December 31, 2017, it does not consider exposures or positions arising after that date. The information presented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs and assume no other changes in our capital structure.
Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We are subject to tenant, geographic and industry concentrations. Any downturn of the economic conditions in one or more of these tenants, states or industries could result in a material reduction of our cash flows or material losses to us.
The factors considered in determining the credit risk of our tenants include, but are not limited to: payment history; credit status and change in status (credit ratings for public companies are used as a primary metric); change in tenant space needs (i.e., expansion/downsize); tenant financial performance; economic conditions in a specific geographic region; and industry specific credit considerations. We believe that the credit risk of our portfolio is reduced by the high quality of our existing tenant base, reviews of prospective tenants’ risk profiles prior to lease execution and consistent monitoring of our portfolio to identify potential problem tenants and mitigation options.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this report are set forth beginning on page F-1 of this Annual Report on Form 10-K.

76


ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with our independent registered public accountants during the year ended December 31, 2017.
ITEM 9A.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that no controls and procedures, no matter how well designed and operated, can provide absolute assurance of achieving the desired control objectives.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2017 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of December 31, 2017, were effective at a reasonable assurance level.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2017.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d -15(f) of the Exchange Act) 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.

77


PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.



78


PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements
The list of the consolidated financial statements contained herein is set forth on page F-1 hereof.
Financial Statement Schedules
Schedule III – Real Estate Assets and Accumulated Depreciation is set forth beginning on page S-1 hereof.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
Exhibits
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
 
Description
 
 
1.1
 
1.2
 
3.1
 
3.2
 
3.3
 
3.4
 
4.1
 
4.2
 
4.3
 
4.4
 
10.1
 
10.2
 
10.3
 

79


Exhibit No.
 
Description
10.4
 
10.5
 
21.1*
 
31.1*
 
31.2*
 
32.1**
 
101.INS*
 
XBRL Instance Document.
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 ____________________________________
*
Filed herewith.
**
In accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
ITEM 16.
FORM 10-K SUMMARY
None.

80


SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 30th day of March 2018.
Cole Real Estate Income Strategy (Daily NAV), Inc. 
 
 
By:
 
/s/ NATHAN D. DEBACKER
Name:
 
Nathan D. DeBacker
Title:
 
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
 
 
 
 
 
 
 
Signature
 
Title
 
Date
 
 
 
 
 
 
/s/ RICHARD S. RESSLER
 
Chief Executive Officer, President and Director
 
March 30, 2018
Richard S. Ressler
 
(Principal Executive Officer)
 
 
 
 /s/ NATHAN D. DEBACKER
 
Chief Financial Officer and Treasurer
 
March 30, 2018
Nathan D. DeBacker
 
 (Principal Financial Officer)
 
 
 
 /s/ JEFFREY R. SMITH
 
Vice President of Accounting
 
March 30, 2018
Jeffrey R. Smith
 
 (Principal Accounting Officer)
 
 
 
 
 
 
 
 /s/ GEORGE N. FUGELSANG
 
Chairman of the Board
 
March 30, 2018
George N. Fugelsang
 
 
 
 
 
 
 
 
 
 /s/ RICHARD J. LEHMANN
 
Independent Director
 
March 30, 2018
Richard J. Lehmann
 
 
 
 
 
 
 
 
 
 /s/ ROGER D. SNELL
 
Independent Director
 
March 30, 2018
Roger D. Snell
 
 
 
 
 
 
 
 
 
 /s/ W. BRIAN KRETZMER
 
Independent Director
 
March 30, 2018
W. Brian Kretzmer
 
 
 
 
 
 
 
 
 
 /s/ GLENN J. RUFRANO
 
Director
 
March 30, 2018
Glenn J. Rufrano
 
 
 
 
 
 
 
 
 

81


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Cole Real Estate Income Strategy (Daily NAV), Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cole Real Estate Income Strategy (Daily NAV), Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (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 three 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 regarding 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.

/s/ Deloitte & Touche LLP
Phoenix, Arizona
March 30, 2018

We have served as the Company’s auditor since 2010.


F-2


COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
December 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Real estate assets:
 
 
 
Land
$
129,344

 
$
86,858

Buildings and improvements
488,741

 
319,589

Intangible lease assets
93,891

 
52,965

Total real estate assets, at cost
711,976

 
459,412

Less: accumulated depreciation and amortization
(40,550
)
 
(22,638
)
Total real estate assets, net
671,426

 
436,774

Investment in marketable securities
5,496

 
5,563

Total real estate assets and marketable securities, net
676,922

 
442,337

Cash and cash equivalents
2,923

 
4,671

Restricted cash
1

 
600

Rents and tenant receivables, net
7,377

 
4,206

Derivative assets, property escrow deposits and other assets
2,731

 
684

Deferred costs, net
1,359

 
1,074

Due from affiliates
100

 

Assets held for sale
8,050

 

Total assets
$
699,463

 
$
453,572

LIABILITIES AND EQUITY
 
 
 
Notes payable and credit facility, net
$
274,830

 
$
159,143

Accrued expenses and accounts payable
3,374

 
2,798

Escrowed stockholder proceeds

 
75

Due to affiliates
21,980

 
14,786

Intangible lease liabilities, net
12,753

 
5,798

Distributions payable
2,126

 
1,444

Deferred rental income, derivative liabilities and other liabilities
1,930

 
1,442

Total liabilities
316,993

 
185,486

Commitments and contingencies


 


Redeemable common stock
47,024

 
32,076

STOCKHOLDERS’ EQUITY:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding

 

W Shares common stock, $0.01 par value; 164,000,000 shares authorized, 15,837,102 and 12,461,616 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively
158

 
125

A Shares common stock, $0.01 par value; 163,000,000 shares authorized, 8,793,223 and 4,449,352 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively
88

 
45

I Shares common stock, $0.01 par value; 163,000,000 shares authorized, 1,065,232 and 788,270 shares issued and outstanding as of December 31, 2017 and December 31, 2016, respectively
11

 
8

Capital in excess of par value
378,266

 
259,817

Accumulated distributions in excess of earnings
(45,506
)
 
(24,399
)
Accumulated other comprehensive income (loss)
1,657

 
(372
)
Total stockholders’ equity
334,674

 
235,224

Non-controlling interests
772

 
786

          Total equity
$
335,446

 
$
236,010

Total liabilities, redeemable common stock, and equity
$
699,463

 
$
453,572

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

F-3


COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
Rental income
$
43,670

 
$
24,574

 
$
17,345

Tenant reimbursement income
4,355

 
2,620

 
1,688

Interest income on marketable securities
121

 
117

 
76

Total revenues
48,146

 
27,311

 
19,109

Operating expenses:
 
 
 
 
 
General and administrative
6,563

 
4,544

 
1,794

Property operating
1,740

 
1,090

 
644

Real estate tax
3,358

 
2,055

 
1,204

Advisory fees and expenses
4,910

 
2,760

 
2,536

Acquisition-related
2,174

 
3,251

 
809

Depreciation and amortization
18,536

 
9,533

 
6,457

Impairment
227

 

 

Total operating expenses
37,508

 
23,233

 
13,444

Operating income
10,638

 
4,078

 
5,665

Other income (expense):
 
 
 
 
 
Interest expense and other, net
(10,291
)
 
(5,380
)
 
(3,980
)
Income (loss) before real estate dispositions:
347

 
(1,302
)
 
1,685

Gain on disposition of real estate, net

 

 
5,642

Net income (loss)
347

 
(1,302
)
 
7,327

Net income (loss) allocated to noncontrolling interest
35

 
(10
)
 

Net income (loss) attributable to the Company
$
312

 
$
(1,292
)
 
$
7,327

 
 
 
 
 
 
Class W Common Stock:
 
 
 
 
 
Net income (loss) attributable to the Company
$
242

 
$
(952
)
 
$
6,025

Basic and diluted weighted average number of common shares outstanding
14,374,833

 
9,986,524

 
6,506,020

Basic and diluted net income (loss) per common share
$
0.02

 
$
(0.10
)
 
$
0.93

Distributions declared per common share
$
0.98

 
$
0.98

 
$
0.98

 
 
 
 
 
 
Class A Common Stock:
 
 
 
 
 
Net income (loss) attributable to the Company
$
45

 
$
(276
)
 
$
911

Basic and diluted weighted average number of common shares outstanding
6,590,846

 
2,713,815

 
986,216

Basic and diluted net income (loss) per common share
$
0.01

 
$
(0.10
)
 
$
0.92

Distributions declared per common share
$
0.98

 
$
0.98

 
$
0.98

 
 
 
 
 
 
Class I Common Stock:
 
 
 
 
 
Net income (loss) attributable to the Company
25

 
(64
)
 
391

Basic and diluted weighted average number of common shares outstanding
$
936,555

 
$
718,206

 
$
420,662

Basic and diluted net income (loss) per common share
$
0.03

 
$
(0.09
)
 
$
0.93

Distributions declared per common share
0.98

 
0.98

 
0.98

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

F-4


COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Net income (loss)
$
347

 
$
(1,302
)
 
$
7,327

Other comprehensive income (loss):
 
 
 
 
 
Unrealized holding gain (loss) on marketable securities
27

 
44

 
(93
)
Less: reclassification adjustment for (gain) loss included in income as other expense
(5
)
 

 
17

Unrealized gain (loss) on interest rate swaps
1,344

 
(580
)
 
(586
)
Amount of loss reclassified from other comprehensive income into income as interest expense
663

 
539

 
284

Total other comprehensive income (loss)
2,029

 
3

 
(378
)
 
 
 
 
 
 
Comprehensive income (loss)
2,376

 
(1,299
)
 
6,949

     Comprehensive income (loss) allocated to noncontrolling interest
35

 
(10
)
 

Comprehensive income (loss) attributable to the Company
$
2,341

 
$
(1,289
)
 
$
6,949

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

F-5


COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except share amounts)
 
W Shares
Common Stock
 
A Shares
Common Stock
 
I Shares
Common Stock
 
Capital in
Excess of
Par Value
 
Accumulated
Distributions
in Excess of
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Non-
Controlling
Interests
 
Total
Equity
 
Number 
of Shares
 
Par 
Value
 
Number 
of Shares
 
Par 
Value
 
Number 
of Shares
 
Par 
Value
 
 
 
 
 
 
Balance, January 1, 2015
6,012,043

 
$
60

 
897,376

 
$
9

 
256,525

 
$
3

 
$
99,503

 
$
(9,539
)
 
$
3

 
$
90,039

 
$

 
$
90,039

Issuance of common stock
2,689,946

 
27

 
541,431

 
6

 
175,819

 
2

 
62,136

 

 

 
62,171

 

 
62,171

Conversion of shares
(226,091
)
 
(2
)
 

 

 
225,280

 
2

 

 

 

 

 

 

Distributions declared

 

 

 

 

 

 

 
(7,737
)
 

 
(7,737
)
 

 
(7,737
)
Commissions, dealer manager
and distribution fees

 

 

 

 

 

 
(2,602
)
 

 

 
(2,602
)
 

 
(2,602
)
Other offering costs

 

 

 

 

 

 
(464
)
 

 

 
(464
)
 

 
(464
)
Redemptions of common stock
(650,835
)
 
(7
)
 
(67,044
)
 
(1
)
 

 

 
(12,949
)
 

 

 
(12,957
)
 

 
(12,957
)
Changes in redeemable
common stock

 

 

 

 

 

 
(5,422
)
 

 

 
(5,422
)
 

 
(5,422
)
Comprehensive income

 

 

 

 

 

 

 
7,327

 
(378
)
 
6,949

 

 
6,949

Balance, December 31, 2015
7,825,063

 
$
78

 
1,371,763

 
$
14

 
657,624

 
$
7

 
$
140,202

 
$
(9,949
)
 
$
(375
)
 
$
129,977

 
$

 
$
129,977

Issuance of common stock
5,418,786

 
55

 
3,181,316

 
32

 
130,646

 
1

 
160,947

 

 

 
161,035

 

 
161,035

Distributions declared

 

 

 

 

 

 

 
(13,158
)
 

 
(13,158
)
 

 
(13,158
)
Commissions, dealer manager
and distribution fees

 

 

 

 

 

 
(9,904
)
 

 

 
(9,904
)
 

 
(9,904
)
Other offering costs

 

 

 

 

 

 
(1,192
)
 

 

 
(1,192
)
 

 
(1,192
)
Redemptions of common stock
(782,233
)
 
(8
)
 
(103,727
)
 
(1
)
 

 

 
(16,127
)
 

 

 
(16,136
)
 

 
(16,136
)
Changes in redeemable
common stock

 

 

 

 

 

 
(14,109
)
 

 

 
(14,109
)
 

 
(14,109
)
Contributions from
non-controlling interests

 

 

 

 

 

 

 

 

 

 
796

 
796

Comprehensive loss

 

 

 

 

 

 

 
(1,292
)
 
3

 
(1,289
)
 
(10
)
 
(1,299
)
Balance, December 31, 2016
12,461,616

 
$
125

 
4,449,352

 
$
45

 
788,270

 
$
8

 
$
259,817

 
$
(24,399
)
 
$
(372
)
 
$
235,224

 
$
786

 
$
236,010

Issuance of common stock
5,206,244

 
51

 
4,661,884

 
46

 
464,022

 
5

 
189,494

 

 

 
189,596

 

 
189,596

Conversion of shares
(55,096
)
 

 

 

 
54,673

 

 

 

 

 

 

 

Distributions declared

 

 

 

 

 

 

 
(21,419
)
 

 
(21,419
)
 

 
(21,419
)
Commissions, dealer manager
and distribution fees

 

 

 

 

 

 
(12,424
)
 

 

 
(12,424
)
 

 
(12,424
)
Other offering costs

 

 

 

 

 

 
(1,400
)
 

 

 
(1,400
)
 

 
(1,400
)
Redemptions of common stock
(1,775,662
)
 
(18
)
 
(318,013
)
 
(3
)
 
(241,733
)
 
(2
)
 
(42,273
)
 

 

 
(42,296
)
 

 
(42,296
)
Changes in redeemable
common stock

 

 

 

 

 

 
(14,948
)
 

 

 
(14,948
)
 

 
(14,948
)
Distributions to
non-controlling interests

 

 

 

 

 

 

 

 

 

 
(49
)
 
(49
)
Comprehensive income

 

 

 

 

 

 

 
312

 
2,029

 
2,341

 
35

 
2,376

Balance, December 31, 2017
15,837,102

 
$
158

 
8,793,223

 
$
88

 
1,065,232

 
$
11

 
$
378,266

 
$
(45,506
)
 
$
1,657

 
$
334,674

 
$
772

 
$
335,446

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

F-6


COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
347

 
$
(1,302
)
 
$
7,327

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization, net
18,117

 
9,538

 
6,630

Straight-line rental income
(1,860
)
 
(1,067
)
 
(717
)
Amortization of deferred financing costs
1,813

 
716

 
465

Amortization on marketable securities
13

 
16

 
12

Gain on disposition of real estate assets, net

 

 
(5,642
)
 (Gain) loss on sale of marketable securities
(5
)
 

 
17

Ineffectiveness of interest rate swaps
(37
)
 

 

Write-off of deferred financing costs
97

 

 

Bad debt expense

 
17

 
2

Impairment of real estate assets, net
227

 

 

Changes in assets and liabilities:
 
 
 
 
 
Rents and tenant receivables
(1,311
)
 
(501
)
 
(1,077
)
Prepaid expenses and other assets
(267
)
 
4

 
114

Accounts payable and accrued expenses
413

 
664

 
884

Deferred rental income and other liabilities
842

 
253

 
233

Due from affiliates
(100
)
 

 

Due to affiliates
1,022

 
(45
)
 
(14
)
Net cash provided by operating activities
19,311

 
8,293

 
8,234

Cash flows from investing activities:
 
 
 
 
 
Investment in real estate assets and capital expenditures
(253,928
)
 
(186,432
)
 
(52,555
)
Investment in marketable securities
(1,513
)
 
(1,638
)
 
(6,954
)
Proceeds from sale and maturities of marketable securities
1,594

 
1,340

 
2,102

Proceeds from disposition of real estate assets

 

 
21,398

Payment of property escrow deposits
(5,140
)
 
(4,817
)
 

Refund of property escrow deposits
5,050

 
4,407

 

Net cash used in investing activities
(253,937
)
 
(187,140
)
 
(36,009
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from issuance of common stock
179,307

 
155,051

 
58,835

Offering costs on issuance of common stock
(7,652
)
 
(4,500
)
 
(1,414
)
Redemptions of common stock
(42,296
)
 
(16,136
)
 
(12,957
)
Distributions to stockholders
(10,448
)
 
(6,518
)
 
(4,208
)
Proceeds from credit facility and notes payable
308,065

 
69,675

 
82,190

Repayments of credit facility
(191,000
)
 
(28,000
)
 
(83,000
)
Proceeds from line of credit with affiliate

 

 
10,000

Repayments of line of credit with affiliate

 

 
(10,000
)
Payment of loan deposits
(85
)
 

 

Refund of loan deposits
85

 

 

Deferred financing costs paid
(3,573
)
 
(1,233
)
 
(1,252
)
Contributions from noncontrolling interest

 
796

 

Distributions to noncontrolling interest
(49
)
 

 

Change in escrowed stockholder proceeds liability
(75
)
 
25

 
25

Net cash provided by financing activities
232,279

 
169,160

 
38,219

Net (decrease) increase in cash and cash equivalents and restricted cash
(2,347
)
 
(9,687
)
 
10,444

Cash and cash equivalents and restricted cash, beginning of period
5,271

 
14,958

 
4,514

Cash and cash equivalents and restricted cash, end of period
$
2,924

 
$
5,271

 
$
14,958

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

F-7


COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BUSINESS
Cole Real Estate Income Strategy (Daily NAV), Inc. (the “Company”) is a Maryland corporation, incorporated on July 27, 2010, that qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2012. Substantially all of the Company’s business is conducted through Cole Real Estate Income Strategy (Daily NAV) Operating Partnership, LP (“Cole OP”), a Delaware limited partnership. The Company is the sole general partner of, and owns, directly or indirectly, 100% of the partnership interests in, Cole OP.
On November 13, 2017, VEREIT Operating Partnership, L.P. (“VEREIT OP”), a former affiliated entity of our sponsor, CCO Group (as defined below), entered into a Purchase and Sale Agreement with CCA Acquisition, LLC (“CCA”), a newly-formed affiliate of CIM Group, LLC (“CIM”), pursuant to which CCA agreed to acquire all of the issued and outstanding shares of common stock of Cole Capital Advisors, Inc., the direct or indirect owner of Cole Real Estate Income Strategy (Daily NAV) Advisors, LLC (“Cole Income NAV Strategy Advisors”), Cole Capital Corporation and CREI Advisors, LLC (“CREI Advisors”), our external advisor, dealer manager and property manager, respectively (the “Transaction”).
On February 1, 2018, the Transaction was completed. Immediately following the completion of the Transaction, Cole Capital Advisors, Inc. and our dealer manager were each converted into Delaware limited liability companies, Cole Capital Advisors, Inc.’s name was changed to CCO Group, LLC, and our dealer manager’s name was changed to CCO Capital, LLC (“CCO Capital”). As a result of the Transaction, CIM owns and/or controls CCO Group, LLC and its subsidiaries (collectively, “CCO Group”), and CCO Group, LLC owns and controls Cole Income NAV Strategy Advisors, CCO Capital and CREI Advisors, our external advisor, dealer manager for the Offerings (as defined below) and property manager, respectively.
In addition, as part of the Transaction, VEREIT OP and CCO Group, LLC entered into a services agreement (the “Services Agreement”) pursuant to which VEREIT OP will continue to provide certain services to CCO Group and to us, Cole Credit Property Trust IV, Inc. (“CCPT IV”), Cole Credit Property Trust V, Inc. (“CCPT V”), Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”), and Cole Office & Industrial REIT (CCIT III), Inc. (“CCIT III”) (CCPT IV, CCPT V, CCIT II, CCIT III, and us collectively, the “Cole REITs”), including operational real estate support. VEREIT OP will continue to provide such services through March 31, 2019 (or, if later, the date of the last government filing other than a tax filing made by any of the Cole REITs with respect to its 2018 fiscal year) (the “Initial Services Term”) and will provide consulting and research services through December 31, 2023 as requested by CCO Group, LLC.
Despite the indirect change of ownership and control of our advisor, dealer manager, property manager and sponsor, we expect that, during the Initial Services Term of the Services Agreement, the advisory, dealer manager and property management services the Company receives will continue without any material changes in personnel (except as supplemented by the management oversight of CIM personnel) or material change in service procedures. During the Initial Services Term of the Services Agreement, CCO Group, LLC intends to evaluate and effectuate an appropriate transition of VEREIT OP’s services under the Services Agreement to other CIM affiliates or third parties with the goal of ensuring continuity and minimizing disruption.
On December 6, 2011, pursuant to a registration statement filed on Form S-11 (Registration No. 333-169535) (the “Initial Registration Statement”) under the Securities Act of 1933, as amended (the “Securities Act”), the Company commenced its initial public offering on a “best efforts” basis of $4.0 billion in shares of common stock. On August 26, 2013, pursuant to a registration statement filed on Form S-11 (Registration No. 333-186656) (the “Multi-Class Registration Statement”) under the Securities Act, the Company designated the existing shares of the Company’s common stock that were sold prior to such date to be Wrap Class shares (“W Shares”) of common stock and registered two new classes of the Company’s common stock, Advisor Class shares (“A Shares”) and Institutional Class shares (“I Shares”). Pursuant to a registration statement filed on Form S-11 (Registration No. 333-213271) on February 10, 2017 (the “Continuing Offering Registration Statement”), the Company is offering up to $4.0 billion in shares of common stock of the three classes (the “Offering”), consisting of $3.5 billion in shares in the Company’s primary offering (the “Primary Offering”) and $500.0 million in shares pursuant to a distribution reinvestment plan (the “DRIP”). The Company is offering to sell any combination of W Shares, A Shares and I Shares with a dollar value up to the maximum offering amount. As of December 31, 2017, the Company had issued approximately 30.7 million shares of common stock in the Offering for gross offering proceeds of $550.6 million before offering costs and selling commissions of $10.0 million, and the current portion of dealer manager fees and distribution fees of $6.1 million.
The per share purchase price for each class of common stock varies from day-to-day and, on each business day, is equal to, for each class of common stock, the Company’s net asset value (“NAV”) for such class, divided by the number of shares of that class outstanding as of the close of business on such a day, plus, for A Shares sold in the Primary Offering, applicable selling commissions. The Company’s NAV per share is calculated daily as of the close of business by an independent fund accountant

F-8

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


using a process that reflects (1) estimated values of each of the Company’s commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by the Company’s independent valuation expert in individual appraisal reports, (2) daily updates in the price of liquid assets for which third party market quotes are available, (3) accruals of daily distributions, and (4) estimates of daily accruals, on a net basis, of operating revenues, expenses, debt service costs and fees. As of December 31, 2017, the NAV per share for W Shares, A Shares, and I Shares was $18.37, $18.15, and $18.55, respectively. The Company’s NAV is not audited or reviewed by its independent registered public accounting firm.
The Company intends to use substantially all of the net proceeds from the Offering to acquire and operate a diversified portfolio primarily consisting of (1) necessity retail, office and industrial properties that are leased to creditworthy tenants under long-term net leases, and are strategically located throughout the United States, (2) notes receivable and other investments secured by commercial real estate, including the origination of loans, and (3) U.S. government securities, agency securities, corporate debt and other investments for which there is reasonable liquidity. As of December 31, 2017, the Company owned 139 commercial properties, which includes properties owned through a consolidated joint venture arrangement (the “Consolidated Joint Venture”), located in 36 states, containing 4.4 million rentable square feet of commercial space, including the square feet of buildings which are on land subject to ground leases. As of December 31, 2017, the rentable square feet at these properties was 99.4% leased, including month-to-month agreements, if any.
The Company is structured as a perpetual-life, non-exchange traded REIT. This means that, subject to regulatory approval of its filing for additional offerings, the Company will be selling shares of common stock on a continuous basis and for an indefinite period of time to the extent permissible under applicable law. The Company will endeavor to take all reasonable actions to avoid interruptions in the continuous offering of shares of common stock. The Company reserves the right to terminate the Offering at any time.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the Consolidated Joint Venture in which the Company has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity (“VIE”). VIEs are entities where stockholders lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE’s operations.
For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a VIE.
A VIE must be consolidated by its primary beneficiary, which is generally defined as the party who has a controlling financial interest in the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity

F-9

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


method could be material to the Company’s consolidated financial statements. The Company continually evaluates the need to consolidate any VIEs based on standards set forth in GAAP as described above.
As of December 31, 2017, the Company determined that it had a controlling interest in the Consolidated Joint Venture and therefore met the GAAP requirements for consolidation.
Reclassifications
In connection with the adoption of Accounting Standards Update (“ASU”) ASU 2016-18, discussed in “Recent Accounting Pronouncements,” certain reclassifications have been made to prior period balances to conform to current presentation in the consolidated statement of cash flows. Under ASU 2016-18, transfers to or from restricted cash which have previously been shown in the Company’s investing activities section of the consolidated statements of cash flows are now required to be shown as part of the total change in cash, cash equivalents and restricted cash in the consolidated statements of cash flows. This change resulted in a decrease in cash flows from investing activities of $482,000 and $93,000, respectively, during the year ended December 31, 2016 and 2015.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. The Company considers the period of future benefit of each respective asset to determine the appropriate useful life. The estimated useful lives of the Company’s real estate assets by class are generally as follows:
Buildings
 
40 years
Site improvements
 
15 years
Tenant improvements
 
Lesser of useful life or lease term
Intangible lease assets
 
Lease term
Recoverability of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying amount of the assets will be recovered through the undiscounted future cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying amount, the Company will adjust the real estate assets to their respective fair values and recognize an impairment loss. Generally, fair value will be determined using a discounted cash flow analysis and recent comparable sales transactions. During the year ended December 31, 2017, the Company recorded impairment charges of $227,000, related to one multi-tenant property held for sale, due to the carrying value being greater than the selling price. The assumptions and uncertainties utilized in the evaluation of the impairment of real estate assets are discussed in detail in Note 3 — Fair Value Measurements. See also Note 4 — Real Estate Assets for further discussion regarding real estate acquisition and disposition activity. No impairment indicators were identified and no impairment losses were recorded during the years ended December 31, 2016 or 2015.

F-10

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Assets Held for Sale
When a real estate asset is identified by the Company as held for sale, the Company will cease depreciation and amortization of the assets related to the property and estimate the fair value, net of selling costs. If, in management’s opinion, the fair value, net of selling costs, of the asset is less than the carrying amount of the asset, an adjustment to the carrying amount would be recorded to reflect the estimated fair value of the property, net of selling costs. During the year ended December 31, 2017, the Company identified one property as held for sale, which was sold subsequent to December 31, 2017, as discussed in Note 18 — Subsequent Events. There were no assets identified as held for sale as of December 31, 2016.
Allocation of Purchase Price of Real Estate Assets
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases, based in each case on their respective fair values. The Company utilizes independent appraisals to assist in the determination of the fair values of the tangible assets of an acquired property (which includes land and buildings). The information in the appraisal, along with any additional information available to the Company’s management, is used in estimating the amount of the purchase price that is allocated to land. Other information in the appraisal, such as building value and market rents, may be used by the Company’s management in estimating the allocation of purchase price to the building and to intangible lease assets and liabilities. The appraisal firm has no involvement in management’s allocation decisions other than providing this market information.
The fair values of above- and below-market lease intangibles are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) an estimate of fair market lease rates for the corresponding in-place leases, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease including, for below-market leases, any bargain renewal periods. The above- and below-market lease intangibles are capitalized as intangible lease assets or liabilities, respectively. Above-market leases are amortized as a reduction to rental income over the remaining terms of the respective leases. Below-market leases are amortized as an increase to rental income over the remaining terms of the respective leases, including any bargain renewal periods. In considering whether or not the Company expects a tenant to execute a bargain renewal option, the Company evaluates economic factors and certain qualitative factors at the time of acquisition, such as the financial strength of the tenant, the remaining lease term, the tenant mix of the leased property, the Company’s relationship with the tenant and the availability of competing tenant space. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above- or below-market lease intangibles relating to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include estimates of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rental and other property income which are avoided by acquiring a property with an in-place lease. Direct costs associated with obtaining a new tenant include leasing commissions, legal and other related expenses and are estimated in part by utilizing information obtained from independent appraisals and management’s consideration of current market costs to execute a similar lease. The intangible values of opportunity costs, which are calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease, are capitalized as intangible lease assets and are amortized to expense over the remaining term of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
The Company may acquire certain properties subject to contingent consideration arrangements that may obligate the Company to pay additional consideration to the seller based on the outcome of future events. Additionally, the Company may acquire certain properties for which it funds certain contingent consideration amounts into an escrow account pending the outcome of certain future events. The outcome may result in the release of all or a portion of the escrow funds to the Company or the seller or a combination thereof. Prior to the adoption of ASU 2017-01 (as defined below) in April 2017, contingent consideration arrangements, including amounts funded through an escrow account, were recorded upon acquisition of the respective property at their estimated fair value, and any changes to the estimated fair value subsequent to acquisition were reflected in the accompanying consolidated statements of operations in acquisition-related fees and expenses. Upon adoption of ASU 2017-01 in April 2017, contingent consideration arrangements for asset acquisitions are recognized when the contingency is resolved. The determination of the amount of contingent consideration arrangements is based on the probability of several possible outcomes as identified by management.
The Company will estimate the fair value of assumed mortgage notes payable based upon indications of current market pricing for similar types of debt financing with similar maturities. Assumed mortgage notes payable will initially be recorded at

F-11

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


their estimated fair value as of the assumption date, and any difference between such estimated fair value and the mortgage note’s outstanding principal balance will be amortized or accreted to interest expense over the term of the respective mortgage note payable.
The determination of the fair values of the real estate assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, capitalization and discount rates, interest rates and other variables. The use of alternative estimates may result in a different allocation of the Company’s purchase price, which could materially impact the Company’s results of operations.
In April 2017, the Company elected to early adopt ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Beginning in April 2017, all real estate acquisitions qualified as asset acquisitions, and as such, acquisition-related fees and certain acquisition-related expenses related to these asset acquisitions were capitalized and allocated to tangible and intangible assets and liabilities as described above. Prior to the adoption of ASU 2017-01 in April 2017, all of the Company’s real estate acquisitions were accounted for as business combinations, and as such, acquisition-related expenses related to these business combination acquisitions were expensed as incurred. Prior to April 2017, acquisition-related expenses in the Company’s consolidated statements of operations primarily consisted of legal, deed transfer and other costs related to real estate purchase transactions, including costs incurred for deals that were not consummated. The Company expects its future acquisitions to qualify as asset acquisitions, and as such, the Company will allocate the purchase price to acquired tangible assets, consisting of land, buildings and improvements, and to identified intangible assets and liabilities, consisting of the value of above- and below-market leases and the value of in-place leases, based in each case on a relative fair value basis.
Investment in Marketable Securities
Investment in marketable securities consists primarily of the Companys investment in corporate and government debt securities. The Company determines the appropriate classification for debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of December 31, 2017, the Company classified its investments as available-for-sale as the Company is not actively trading the securities; however, the Company may sell them prior to their maturity. These investments are carried at their estimated fair value with unrealized gains and losses reported in other comprehensive income (loss).
The Company monitors its available-for-sale securities for impairments. A loss is recognized when the Company determines that a decline in the estimated fair value of a security below its amortized cost is other-than-temporary. The Company considers many factors in determining whether the impairment of a security is deemed to be other-than-temporary, including, but not limited to, the length of time the security has had a decline in estimated fair value below its amortized cost, the amount of the unrealized loss, the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, external credit ratings and recent changes in such ratings. The analysis of determining whether the impairment of a security is deemed to be other-than-temporary requires significant judgments and assumptions. The use of alternative judgments and assumptions could result in a different conclusion.
The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method and is recorded in the accompanying consolidated statements of operations in interest and other expense, net. Upon the sale of a security, the realized net gain or loss is computed on the specific identification method.
Noncontrolling Interest in Consolidated Joint Venture
On December 16, 2016, the Company completed the formation of the Consolidated Joint Venture. The Company determined it had a controlling interest in the Consolidated Joint Venture and, therefore, met the GAAP requirements for consolidation. The Company recorded net income of $35,000 and paid distributions of $49,000 related to the noncontrolling interest during the year ended December 31, 2017. The Company recorded the noncontrolling interest of $772,000 and $786,000 as of December 31, 2017 and 2016, respectively, on the consolidated balance sheet.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash in bank accounts, as well as investments in highly-liquid money market funds. The Company deposits cash with several high quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash and cash equivalents may exceed

F-12

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


federally insured levels. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held.
The Company had $1,000 and $600,000 in restricted cash as of December 31, 2017 and 2016, respectively. Included in restricted cash as of December 31, 2016 was $500,000 held by a lender in an escrow account for a certain property in accordance with the associate loan agreement. Additionally, as part of certain debt agreements, rent from certain of the Company’s tenants is deposited directly into a lockbox account, from which funds in excess of the required minimum balance are disbursed on a weekly basis to the Company. As of December 31, 2017 and 2016, the Company had $1,000 and $25,000, respectively, held in a lockbox account. In addition, restricted cash included $75,000 of escrowed stockholder proceeds for which shares of common stock had not been issued as of December 31, 2016.
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the accompanying consolidated balance sheets to the combined amounts shown on the accompanying consolidated statements of cash flows (in thousands):
 
As of December 31,
 
2017
 
2016
 
2015
Cash and cash equivalents
$
2,923

 
$
4,671

 
$
14,840

Restricted cash
1

 
600

 
118

Total cash and cash equivalents and restricted cash shown in the statement of cash flows
$
2,924

 
$
5,271

 
$
14,958

Deferred Financing Costs
Deferred financing costs represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. The presentation of all deferred financing costs, other than those associated with the revolving loan portion of the credit facility, are classified such that the debt issuance costs related to a recognized debt liability are presented on the consolidated balance sheets as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Debt issuance costs related to securing a revolving line of credit are presented as an asset and amortized ratably over the term of the line of credit arrangement. As such, the Company’s current and corresponding prior period total deferred financing costs, net in the accompanying consolidated balance sheets relate only to the revolving loan portion of the credit facility and the historical presentation, amortization and treatment of unamortized costs are still applicable. As of December 31, 2017 and 2016, the Company had $1.4 million and $1.1 million, respectively, of deferred financing costs, net of accumulated amortization, related to the revolving credit facility. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined the financing will not close.
Derivative Instruments and Hedging Activities
The Company accounts for its derivative instruments at fair value. Accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the designation of the derivative instrument. The change in fair value of the effective portion of any derivative instrument that is designated as a hedge is recorded as other comprehensive income (loss). The changes in fair value for derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria are recorded as a gain or loss to operations.
Due to Affiliates
Cole Income NAV Strategy Advisors and certain of its affiliates received, and will continue to receive, fees, reimbursements and compensation in connection with services provided relating to the Offering and the acquisition, management and performance of the Company’s assets. As of December 31, 2017 and 2016, $22.0 million and $14.8 million, respectively, was due to Cole Income NAV Strategy Advisors and its affiliates for such services, as discussed in Note 12 — Related-Party Transactions and Arrangements to these consolidated financial statements.
Redeemable Common Stock
The Company has adopted a share redemption program that permits its stockholders to redeem their shares, subject to certain limitations discussed in Note 14 Stockholders’ Equity to these consolidated financial statements. The Company records amounts that are redeemable under the share redemption program as redeemable common stock outside of permanent equity on its consolidated balance sheets. Redeemable common stock is recorded at the greater of the carrying amount or

F-13

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


redemption value each reporting period. Changes in the value from period to period are recorded as an adjustment to capital in excess of par value.
As of December 31, 2017 and 2016, the quarterly redemption capacity was equal to 10% of the Company’s NAV and this amount was recorded as redeemable common stock on the consolidated balance sheets for a total of $47.0 million and $32.1 million, respectively. As of December 31, 2017 and 2016, certain shares were not permitted to be redeemed subject to certain limitations as discussed in Note 14 Stockholders’ Equity to these consolidated financial statements.
Dealer Manager and Distribution Fees
The Company pays CCO Capital dealer manager and distribution fees, which are calculated on a daily basis in the amount of 1/365th of the amount indicated in the table below for each class of common stock:
 
Dealer Manager Fee
 
Distribution Fee
W Shares
0.55
%
 

A Shares
0.55
%
 
0.50
%
I Shares
0.25
%
 

The dealer manager and distribution fees are paid monthly in arrears. An estimated liability for future dealer manager and distribution fees payable to CCO Capital is recognized at the time each share is sold and included in due to affiliates in the consolidated balance sheets with a corresponding decrease to capital in excess of par value. The Company recognized a liability for future dealer manager and distribution fees payable to CCO Capital of $19.2 million and $12.5 million, as of December 31, 2017 and 2016, respectively.
Revenue Recognition
Certain properties have leases where minimum rental payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis when earned and collectability is reasonably assured. When the Company acquires a property, the terms of existing leases are considered to commence as of the acquisition date for the purpose of this calculation. The Company defers the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Expected reimbursements from tenants for recoverable real estate taxes and operating expenses are included in tenant reimbursement income in the period when such costs are incurred.
The Company continually reviews receivables related to rent, including any straight-line rent, and current and future operating expense reimbursements from tenants and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is uncertain, the Company will record an increase in the allowance for uncollectible accounts. As of December 31, 2017, the Company had no allowances. As of December 31, 2016, the Company had an allowance for uncollectible accounts of $2,000.
Income Taxes
The Company elected to be taxed, and currently qualifies, as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Company generally is not subject to federal corporate income tax to the extent it distributes its taxable income to its stockholders, and so long as it, among other things, distributes at least 90% of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the Company maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. See Note 15 Income Taxes for further discussion regarding the Tax Cuts and Jobs Act.
Earnings (Loss) and Distributions Per Share
The Company has three classes of common stock with nonforfeitable dividend rights that are determined based on a different NAV for each class. Accordingly, the Company utilizes the two-class method to determine its earnings per share, which results in different earnings per share for each of the classes. Under the two-class method, earnings per share of each class of common stock are computed by dividing the sum of the distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of shares for each class of common stock for the

F-14

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


respective period. Diluted income per share, when applicable, considers the effect of any potentially dilutive share equivalents, of which the Company had none for each of the years ended December 31, 2017, 2016 or 2015. Distributions per share is calculated based on the authorized daily distribution rate.
Offering and Related Costs
Cole Income NAV Strategy Advisors funds all of the organization and offering costs associated with the sale of the Company’s common stock (excluding selling commissions, the distribution fee and the dealer manager fee) and is reimbursed for such costs up to 0.75% of gross proceeds from the Offering, excluding selling commissions charged on A Shares sold in the Primary Offering. As of December 31, 2017, Cole Income NAV Strategy Advisors, or its affiliates, had paid organization and offering costs in excess of the 0.75% in connection with the Offering. These excess costs were not included in the financial statements of the Company because such costs were not a liability of the Company as they exceeded 0.75% of gross proceeds from the Offering. As the Company raises additional proceeds from the Offering, these excess costs may become payable to Cole Income NAV Strategy Advisors.
Reportable Segments
The Company’s commercial real estate assets primarily consist of single-tenant, necessity commercial properties, which are leased to creditworthy tenants under long-term net leases and provide current operating cash flow. The commercial properties are geographically diversified throughout the United States and have similar economic characteristics. The Company’s management evaluates operating performance on an overall portfolio level; therefore the Company’s properties are one reportable segment.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by various standard setting bodies that may have an impact on the Company’s accounting and reporting. Except as otherwise stated below, the Company is currently evaluating the effect that certain of these new accounting requirements may have on the Company’s accounting and related reporting and disclosures in the Company’s consolidated financial statements:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition, Accounting Standards Codification (“ASC”) (Topic 605) and will require an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public business entities, the guidance should be applied to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. In accordance with the Company’s plan for the adoption of ASU 2014-09, the Company’s implementation team has identified all of the Company’s revenue streams and real estate sales and concluded that upon adoption, there will not be a material impact on the Company’s consolidated financial statements and disclosures. The Company plans to adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. In addition, the Company evaluated controls around the implementation of ASU 2014-09 and has concluded there will be no significant impact on the Company’s control structure.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than 12 months, with the result being the recognition of a right of use asset and a lease liability and the disclosure of key information about the entity’s leasing arrangements. The lessor accounting model under ASU 2016-02 is similar to current guidance; however it limits the capitalization of initial direct leasing costs, such as internally generated costs. ASU 2016-02 retains a distinction between finance leases (i.e., capital leases under current GAAP) and operating leases. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective approach is required for existing leases that have not expired upon adoption and provides for certain practical expedients. The Company is still evaluating the full impact of ASU 2016-02 on its consolidated financial statements; however, the Company plans to adopt ASU 2016-02 as of January 1, 2019 and anticipates that it will elect a practical expedient offered in ASU 2016-02 that allows an entity to not reassess the following upon adoption (elected as a group): (i) whether an expired or existing contract contains a lease arrangement; (ii) lease classification related to expired or existing lease arrangements; or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs. As a result of the adoption, all leases for which the Company is the lessee, including ground leases (if any), will be recorded on the Company’s consolidated financial statements as either financing leases or operating leases with a related right of use asset and lease liability. In addition, certain executory and non-lease components, such as common area maintenance, may need to be

F-15

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


accounted for separately from the lease component of the lease. Lease components will continue to be recognized on a straight-line basis over the lease term and certain non-lease components will be accounted for under the new revenue recognition guidance in ASU 2014-09 as mentioned above. In January 2018, the FASB proposed amending Topic 842 to allow lessors the option to combine lease and non-lease components when certain criteria are met.
ASU No. 2016-01, Financial Instruments (Subtopic 825-10) (“ASU 2016-01”) — The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income (loss), the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the consolidated balance sheets or the accompanying notes to the consolidated financial statements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will adopt ASU 2016-01 during the first quarter of fiscal year 2018 and does not expect it will have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting requiring more timely recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology under current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating the impact this amendment will have on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to address diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted, and requires retrospective adoption unless it is impracticable to apply, in which case it is to be applied prospectively as of the earliest date practicable. The Company adopted ASU 2016-15 during the fourth quarter of fiscal year 2017 and has determined that this standard is relevant to its presentation of debt prepayment and debt extinguishment costs and contingent consideration payments made after a business combination. Following the retrospective adoption of this standard, the Company determined these items did not have a material impact on the consolidated statements of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. In accordance with ASU 2016-18, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of ASU 2016-18 are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2016-18 during the fourth quarter of 2017 and applied the standard retrospectively for all periods presented. Accordingly, for the years ended December 31, 2017, 2016 and 2015, the Company included restricted cash within cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows and removed the change in restricted cash from cash flows from investing activities. This change resulted in an increase in cash flows from investing activities of $482,000 and $93,000 during the years ended December 31, 2016 and 2015, respectively.

F-16

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


In February 2017, the FASB issued ASU No. 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05), which clarifies the following: (1) nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty; (2) an entity should allocate consideration to each distinct asset by applying the guidance in Topic 606 on allocating the transaction price to performance obligations; and (3) entities are required to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (a) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Subtopic 810 and (b) transfers control of the asset in accordance with Topic 606. The adoption of this standard may result in higher gains on the sale of partial real estate interests, including contributions of nonfinancial assets to a joint venture or other noncontrolling investee, due to recognizing the full gain when the derecognition criteria are met and recording the retained noncontrolling interest at its fair value. ASU 2017-05 is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early adoption is permitted. The standard is applied prospectively to sales of nonfinancial assets on or after the adoption date. The Company plans to adopt ASU 2017-05 effective January 1, 2018 using the modified retrospective approach and does not expect it will have a material impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The targeted amendments in this ASU help simplify certain aspects of hedge accounting and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. This ASU applies to the Company’s interest rate swaps designated as cash flow hedges. Upon adoption of this ASU, all changes in the fair value of highly effective cash flow hedges will be recorded in accumulated other comprehensive income rather than recognized directly in earnings. Under current GAAP, the ineffective portion of the change in fair value of cash flow hedges is recognized directly in earnings. This eliminates the requirement to separately measure and disclose ineffectiveness for qualifying cash flow hedges. ASU 2017-12 is effective for public entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The ASU is required to be adopted using a modified retrospective approach with early adoption permitted. The Company plans to adopt ASU 2017-12 during the first quarter of fiscal year 2018 and does not expect that it will have a material impact on its consolidated financial statements.
NOTE 3 — FAIR VALUE MEASUREMENTS
GAAP defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:
Notes payable and line of credit — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs. As of December 31, 2017, the estimated fair value of the Company’s debt was $274.0 million, compared to the carrying value of $278.2 million. The estimated fair value and the carrying value of the Company’s debt were each $161.2 million as of December 31, 2016.

F-17

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Marketable securities — The Company’s marketable securities are carried at fair value and are valued using Level 1 inputs. The estimated fair value of the Company’s marketable securities are based on quoted market prices that are readily and regularly available in an active market.
Derivative instruments — The Company’s derivative instruments are comprised of interest rate swaps. All derivative instruments are carried at fair value and are valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of December 31, 2017 and 2016, the Company has assessed the overall significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company’s derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable to approximate their fair values because of the short period of time between their origination and their expected realization as well as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.
Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. As of December 31, 2017 and 2016, there have been no transfers of financial assets or liabilities between fair value hierarchy levels.
In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2017 and 2016 (in thousands):
 
 
Balance as of
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant
Unobservable Inputs
 
 
December 31, 2017
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial asset:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
1,718

 
$

 
$
1,718

 
$

Marketable securities
 
5,496

 
5,496

 

 

Total financial assets
 
$
7,214

 
$
5,496

 
$
1,718

 
$

Financial liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(17
)
 
$

 
$
(17
)
 
$

 
 
Balance as of
 
Quoted Prices in Active Markets for Identical Assets
 
Significant Other Observable Inputs
 
Significant
Unobservable Inputs
 
 
December 31, 2016

 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial asset:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
28

 
$

 
$
28

 
$

Marketable securities
 
5,563

 
5,563

 

 

Total financial assets
 
$
5,591

 
$
5,563

 
$
28

 
$

Financial liabilities:
 
 
 
 
 
 
 
 
     Interest rate swaps
 
$
(371
)
 
$

 
$
(371
)
 
$



F-18

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)
Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment related to real estate assets and intangible assets is discussed in Note 2 — Summary of Significant Accounting Policies.
As discussed in Note 4 — Real Estate Assets, during the year ended December 31, 2017, real estate assets related to one multi-tenant property held for sale and totaling approximately 62,000 square feet was deemed to be impaired, due to the carrying value being greater than the selling price. The carrying value was reduced to an estimated fair value of $8.1 million, resulting in impairment charges of $227,000. The Company determined that the selling price used to determine the fair value was a Level 2 input. The following table presents the impairment charges by asset class recorded during the year ended December 31, 2017 (in thousands):
 
 
Year Ended
 
 
December 31, 2017
Asset class impaired:
 
 
Land
 
$
3

Buildings and improvements
 
210

Intangible lease assets
 
14

Total impairment loss
 
$
227

NOTE 4 — REAL ESTATE ASSETS
2017 Property Acquisitions
During the year ended December 31, 2017, the Company acquired a 100% interest in 31 commercial properties, of which 19 were accounted for as asset acquisitions and 12 were acquired prior to the Company’s adoption of ASU 2017-01 in April 2017 and thus were accounted for as business combinations for an aggregate purchase price of $253.4 million (the “2017 Acquisitions”). The Company funded the 2017 Acquisitions with net proceeds from the Offering and available borrowings. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.
The following table summarizes the consideration transferred for the properties purchased during the year ended December 31, 2017 (in thousands):
 
 
 
2017 Acquisitions
Real estate assets:
 
 
 
Purchase price of asset acquisitions
 
 
$
200,991

Purchase price of business combinations
 
 
52,457

Total purchase price of real estate assets acquired (1)
 
 
$
253,448

______________________
(1)
The weighted average amortization period for the 2017 Acquisitions is 12.6 years for acquired in-place leases and other intangibles, 15.7 years for acquired above-market leases and 13.8 years for acquired intangible lease liabilities.

F-19

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


During the year ended December 31, 2017, the Company acquired a 100% interest in 19 commercial properties for an aggregate purchase price of $201.0 million (the “2017 Asset Acquisitions”), which includes $1.5 million of external acquisition-related expenses that were capitalized in accordance with ASU 2017-01. Prior to the adoption of ASU 2017-01, costs related to property acquisitions were expensed as incurred. The following table summarizes the purchase price allocation for the 2017 Asset Acquisitions purchased during the year ended December 31, 2017 (in thousands):
 
 
2017 Asset Acquisitions
Land
 
$
30,220

Building and improvements
 
152,840

Acquired in-place leases and other intangibles
 
23,164

Acquired above-market leases
 
1,522

Intangible lease liabilities
 
(6,755
)
Total purchase price
 
$
200,991

During the year ended December 31, 2017, the Company acquired a 100% interest in 12 commercial properties for an aggregate purchase price of $52.5 million which were accounted for as business combinations (the “2017 Business Combination Acquisitions”). The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.
The following table summarizes the purchase price allocation for the 2017 Business Combination Acquisitions purchased during the year ended December 31, 2017 (in thousands):
 
 
2017 Business Combinations
Land
 
$
14,232

Building and improvements
 
22,292

Acquired in-place leases and other intangibles
 
15,911

Acquired above-market leases
 
1,423

Intangible lease liabilities
 
(1,401
)
Total purchase price
 
$
52,457

The Company recorded revenue of $3.3 million and net income of $650,000 for the year ended December 31, 2017 related to the 2017 Business Combination Acquisitions. In addition, the Company recorded $426,000 of acquisition-related expenses for the year ended December 31, 2017, which is included in acquisition-related expenses on the consolidated statements of operations.
The following table summarizes selected financial information of the Company, as if all of the 2017 Business Combination Acquisitions were completed on January 1, 2016 for each period presented below. The table below presents the Company’s estimated revenue and net income (loss), on a pro forma basis, for the years ended December 31, 2017 and 2016 (in thousands):
 
 
Year Ended
 
 
December 31, 2017
 
December 31, 2016
Pro forma basis (unaudited):
 
 
 
 
Revenue
 
$
48,362

 
$
30,872

Net income (loss)
 
$
702

 
$
(1,805
)
The unaudited pro forma information for the year ended December 31, 2017 was adjusted to exclude $426,000 of acquisition-related expenses recorded during such periods related to the 2017 Business Combination Acquisitions. Accordingly, these expenses were instead recognized in the pro forma information for the year ended December 31, 2016. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2016, nor does it purport to represent the results of future operations.

F-20

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


2017 Impairment of a Property
The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate that the carrying value of certain of its real estate assets may not be recoverable. See Note 2 — Summary of Significant Accounting Policies for a discussion on the Company’s accounting policies regarding impairment of real estate assets.
During the year ended December 31, 2017, one property with a carrying value of $8.3 million was deemed to be impaired and its carrying value was reduced to an estimated fair value of $8.1 million, resulting in impairment charges of $227,000, which were recorded in the consolidated statements of operations. See Note 3 — Fair Value Measurements for a further discussion on these impairment charges.
Consolidated Joint Venture
As of December 31, 2017, the Company had an interest in a Consolidated Joint Venture that owns and manages two properties, with total assets of $7.8 million, which included $1.4 million of land, $5.8 million of building and improvements, and $641,000 of intangible assets, net of accumulated depreciation and amortization of $238,000, and total liabilities of $222,000. The Consolidated Joint Venture does not have any debt outstanding as of December 31, 2017. The Company has the ability to control operating and financial policies of the Consolidated Joint Venture. There are restrictions on the use of these assets as the Company would generally be required to obtain the approval of the partner (the “Consolidated Joint Venture Partner”) in accordance with the joint venture agreement for any major transactions. The Company and the Consolidated Joint Venture Partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.
2016 Property Acquisitions
During the year ended December 31, 2016, the Company acquired 31 commercial properties, including properties held in the Consolidated Joint Venture, for an aggregate purchase price of $186.3 million (the “2016 Acquisitions”). The 2016 Acquisitions were accounted for as business combinations. The Company funded the 2016 Acquisitions with net proceeds from the Offering and available borrowings. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.
The following table summarizes the purchase price allocation for the acquisitions purchased during the year ended December 31, 2016 (in thousands):
 
 
2016 Acquisitions
Land
 
$
37,073

Building and improvements
 
131,828

Acquired in-place leases and other intangibles (1)
 
17,293

Acquired above-market leases(2)
 
2,828

Intangible lease liabilities(3)
 
(2,733
)
Total purchase price
 
$
186,289

______________________
(1)
The weighted average amortization period for acquired in-place leases and other intangibles was 15.9 years for the 2016 Acquisitions.
(2)
The weighted average amortization period for acquired above-market leases was 16.6 years for the 2016 Acquisitions.
(3)
The weighted average amortization period for acquired intangible lease liabilities was 15.5 years for the 2016 Acquisitions.
The Company recorded revenue of $4.1 million and net income of $1.0 million for the year ended December 31, 2016 related to the 2016 Acquisitions. In addition, the Company recorded $1.4 million of acquisition-related expenses for the year ended December 31, 2016, which is included in acquisition-related expenses on the consolidated statements of operations.

F-21

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table summarizes selected financial information of the Company, as if all of the 2016 Acquisitions were completed on January 1, 2015 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the years ended December 31, 2016 and 2015 (in thousands):
 
 
Year Ended
 
 
December 31, 2016
 
December 31, 2015
Pro forma basis (unaudited):
 
 
 
 
Revenue
 
$
37,204

 
$
33,132

Net income
 
$
963

 
$
9,254

The unaudited pro forma information for the year ended December 31, 2016 was adjusted to exclude acquisition-related expenses recorded during such periods related to the 2016 Acquisitions. Accordingly, these expenses were instead recognized in the pro forma information for the year ended December 31, 2015. The pro forma information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2015, nor does it purport to represent the results of future operations.
2015 Property Acquisitions
During the year ended December 31, 2015, the Company acquired a 100% interest in seven commercial properties for an aggregate purchase price of $52.3 million (the “2015 Acquisitions”). The 2015 Acquisitions were accounted for as business combinations. The Company funded the 2015 Acquisitions with net proceeds from the Offering and available borrowings. The Company allocated the purchase price of these properties to the fair value of the assets acquired and liabilities assumed.
The following table summarizes the purchase price allocation for the acquisitions purchased during the year ended December 31, 2015 (in thousands):
 
 
2015 Acquisitions
Land
 
$
11,505

Building and improvements
 
37,381

Acquired in-place leases and other intangibles (1)
 
5,054

Acquired above-market leases(2)
 
28

Intangible lease liabilities(3)
 
(1,694
)
Total purchase price
 
$
52,274

______________________
(1)
The weighted average amortization period for acquired in-place leases and other intangibles was 10.0 years for the 2015 Acquisitions.
(2)
The weighted average amortization period for acquired above-market leases was 8.5 years for the 2015 Acquisitions.
(3)
The weighted average amortization period for acquired intangible lease liabilities was 9.8 years for the 2015 Acquisitions.
The Company recorded revenue of $425,000 and net loss of $267,000 for the year ended December 31, 2015 related to the 2015 Acquisitions. In addition, the Company recorded $809,000 of acquisition-related expenses for the year ended December 31, 2015, which is included in acquisition-related expenses on the consolidated statements of operations.
The following information summarizes selected financial information of the Company, as if all of the 2015 Acquisitions were completed on January 1, 2014 for each period presented below. The table below presents the Company’s estimated revenue and net income, on a pro forma basis, for the years ended December 31, 2015 and 2014 (in thousands):
 
 
Year Ended
 
 
December 31, 2015
 
December 31, 2014
Pro forma basis (unaudited):
 
 
 
 
Revenue
 
$
23,322

 
$
17,943

Net income
 
$
9,296

 
$
1,523

The unaudited pro forma information for the year ended December 31, 2015 was adjusted to exclude acquisition-related expenses recorded during such periods related to the 2015 Acquisitions. These expenses were instead recognized in the pro forma information for the year ended December 31, 2014. The pro forma information is presented for informational purposes

F-22

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


only and may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2014, nor does it purport to represent the results of future operations.
2015 Property Dispositions
During the year ended December 31, 2015, the Company disposed of four retail properties and one anchored shopping center property, for an aggregate gross sales price of $21.9 million and a gain of $5.6 million. No disposition fees were paid to affiliates in connection with the sale of the properties and the Company has no continuing involvement with these properties. The gain on sale of real estate is included in gain on disposition of real estate, net in the consolidated statements of operations for all periods presented. The Company did not dispose of any properties during the years ended December 31, 2017 or 2016.
NOTE 5 — INTANGIBLE LEASE ASSETS
Intangible lease assets of the Company consisted of the following as of December 31, 2017 and 2016 (in thousands, except weighted average life amounts):
 
As of December 31,
 
2017
 
2016
In-place leases and other intangibles, net of accumulated amortization of $12,955 and $6,942, respectively
 
 
 
(with a weighted average life remaining of 10.7 years and 12.0 years, respectively).
$
71,543

 
$
39,353

Acquired above-market leases, net of accumulated amortization of $1,522 and $927, respectively
 
 
 
(with a weighted average life remaining of 12.3 years and 12.3 years, respectively).
7,871

 
5,743

 
$
79,414

 
$
45,096

Amortization of the above-market leases is recorded as a reduction to rental revenue, and amortization expense related to the in-place leases and other intangibles is included in depreciation and amortization in the accompanying consolidated statement of operations. The following table summarizes the amortization expense related to the intangible lease assets for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
In-place lease and other intangible amortization
 
$
6,491

 
$
2,969

 
$
2,120

Above-market lease amortization
 
$
745

 
$
417

 
$
347

As of December 31, 2017, the estimated amortization expense relating to the intangible lease assets for each of the five succeeding fiscal years is as follows (in thousands):
 
 
Amortization
Year ending December 31,
 
In-Place Leases and Other Intangibles
 
Above-Market Leases
2018
 
$
7,463

 
$
759

2019
 
$
7,403

 
$
746

2020
 
$
7,200

 
$
740

2021
 
$
7,019

 
$
740

2022
 
$
6,963

 
$
738


F-23

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


NOTE 6 — MARKETABLE SECURITIES
The Company owned marketable securities with an estimated fair value of $5.5 million and $5.6 million as of December 31, 2017 and 2016, respectively. The following is a summary of the Company’s available-for-sale securities as of December 31, 2017 (in thousands):
 
 
Available-for-sale securities
 
 
Amortized Cost Basis
 
Unrealized (Loss) Gain
 
Fair Value
U.S. Treasury Bonds
 
$
1,991

 
$
(24
)
 
$
1,967

U.S. Agency Bonds
 
620

 
(5
)
 
615

Corporate Bonds
 
2,892

 
22

 
2,914

Total available-for-sale securities
 
$
5,503

 
$
(7
)
 
$
5,496

The following table provides the activity for the marketable securities during the year ended December 31, 2017 (in thousands):
 
 
Amortized Cost Basis
 
Unrealized (Loss) Gain
 
Fair Value
Marketable securities as of January 1, 2017
 
$
5,592

 
$
(29
)
 
$
5,563

Face value of marketable securities acquired
 
1,494

 

 
1,494

Premiums and discounts on purchase of marketable securities, net of acquisition costs
 
19

 

 
19

Amortization on marketable securities
 
(13
)
 

 
(13
)
Sales and maturities of securities
 
(1,589
)
 
(5
)
 
(1,594
)
Unrealized gain on marketable securities
 

 
27

 
27

Marketable securities as of December 31, 2017
 
$
5,503

 
$
(7
)
 
$
5,496

During the year ended December 31, 2017, the Company sold 67 marketable securities for aggregate proceeds of $1.6 million. Unrealized gains (losses) on marketable securities are recorded in other comprehensive income (loss), with a portion of the amount subsequently reclassified into other expense, net on the accompanying consolidated statements of operations as securities are sold and gains (losses) are recognized. In addition, the Company recorded an unrealized gain of $27,000 on its investments, which is included in accumulated other comprehensive income (loss) on the accompanying consolidated statement of changes in equity for the year ended December 31, 2017 and the consolidated balance sheet as of December 31, 2017.
The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale securities as of December 31, 2017 and the length of time the available-for-sale securities have been in the unrealized loss position (in thousands):
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
U.S. Treasury Bonds
 
$
1,059

 
$
(6
)
 
$
774

 
$
(17
)
 
$
1,833

 
$
(23
)
U.S. Agency Bonds
 
615

 
(5
)
 

 

 
615

 
(5
)
Corporate Bonds
 
1,059

 
(6
)
 
41

 
(1
)
 
1,100

 
(7
)
Total temporarily impaired securities
 
$
2,733

 
$
(17
)
 
$
815

 
$
(18
)
 
$
3,548

 
$
(35
)
The scheduled maturities of the Company’s marketable securities as of December 31, 2017 are as follows (in thousands):
 
 
Available-for-sale securities
 
 
Amortized Cost
 
 Estimated Fair Value
Due within one year
 
$
957

 
$
954

Due after one year through five years
 
2,064

 
2,059

Due after five years through ten years
 
2,348

 
2,350

Due after ten years
 
134

 
133

Total
 
$
5,503

 
$
5,496


F-24

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Actual maturities of marketable securities can differ from contractual maturities because borrowers on certain debt securities may have the right to prepay their respective debt obligations at any time. In addition, factors such as prepayments and interest rates may affect the yields on such securities.
In estimating other-than-temporary impairment losses, management considers a variety of factors, including (1) whether the Company has the intent to sell the impaired security, (2) whether the Company expects to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value, and (3) whether the Company expects to recover the entire amortized cost basis of the security. The Company believes that none of the unrealized losses on investment securities are other-than-temporary as management expects the Company will fully recover the entire amortized cost basis of all securities. As of December 31, 2017, the Company had no other-than-temporary impairment losses.
NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, the Company uses certain types of derivative instruments for the purpose of managing or hedging its interest rate risk. During the year ended December 31, 2017, the Company entered into five interest rate swap agreements. As of December 31, 2017 the Company had eight interest rate swap agreements. The following table summarizes the terms of the Company’s executed interest rate swap agreements designated as hedging instruments as of December 31, 2017 and 2016 (dollar amounts in thousands):
 
 
 
Outstanding Notional
Amount as of
December 31, 2017
 
 
 
 
 
 
 
Fair Value of Assets and (Liabilities)
 
Balance Sheet Location
 
 
Interest Rates(1)
 
Effective Dates
 
Maturity Dates
 
December 31, 2017
 
December 31, 2016
Interest Rate Swaps
Derivative assets, property escrow deposits and other assets
 
$
174,305

 
3.13% to 4.14%
 
6/30/2015 to 9/29/2017
 
9/12/2019 to 8/1/2022
 
$
1,718

 
$
28

Interest Rate Swaps
Deferred rental income, derivative liabilities and other liabilities
 
$
16,400

 
4.17%
 
12/16/2016
 
1/1/2022
 
$
(17
)
 
$
(371
)
 ____________________________________
(1)
The interest rates consist of the underlying index swapped to a fixed rate and the applicable interest rate spread as of December 31, 2017.
Additional disclosures related to the fair value of the Company’s derivative instruments are included in Note 3 Fair Value Measurements to these consolidated financial statements. The notional amount under the interest rate swap agreements is an indication of the extent of the Company’s involvement in each instrument, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges in order to hedge the variability of the anticipated cash flows on its variable rate debt. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income (loss), with a portion of the amount subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. For the years ended December 31, 2017, and 2016, the amounts reclassified were $663,000 and $539,000, respectively. During the next 12 months, the Company estimates that an additional $5,000 will be reclassified from other comprehensive income (loss) as a decrease to interest expense.
Any ineffective portion of the change in fair value of the derivative instruments is recorded in interest expense. During the year ended December 31, 2017, $37,000 of the change in the fair value of the interest rate swaps was considered ineffective. There were no portions of the change in the fair value of the interest rate swaps that were considered ineffective during the year ended December 31, 2016.
The Company has agreements with each of its derivative counterparties that contain provisions whereby, if the Company defaults on certain of its unsecured indebtedness, the Company could also be declared in default on its derivative obligations resulting in an acceleration of payment. If the Company had breached any of these provisions, it could have been required to settle its obligations, under the agreements at an aggregate termination value, inclusive of interest payments, of $29,000, which includes accrued interest, at December 31, 2017. In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the credit quality of the Company and the respective counterparty. There were no termination events or events of default related to the interest rate swaps as of December 31, 2017.

F-25

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


NOTE 8 — NOTES PAYABLE AND CREDIT FACILITY
As of December 31, 2017, the Company had $274.8 million of debt outstanding, including net deferred financing costs, with weighted average years to maturity of 4.5 and a weighted average interest rate of 3.58%. The weighted average years to maturity is computed using the scheduled repayment date as specified in each loan agreement where applicable. The weighted average interest rate is computed using the interest rate in effect until the scheduled repayment date. Should a loan not be repaid by its scheduled repayment date, the applicable interest rate will increase as specified in the respective loan agreement until the extended maturity date. The following table summarizes the debt balances as of December 31, 2017 and 2016, and the debt activity for the year ended December 31, 2017 (in thousands):
 
 
 
 
During the Year Ended December 31, 2017
 
 
 
 
Balance as of January 1, 2017
 
Debt Issuances, Net (1)
 
Repayments
 
Amortization
 
Balance as of
December 31, 2017
Credit facility
 
$
64,000

 
$
255,500

 
$
(191,000
)
 
$

 
$
128,500

Fixed rate debt
 
97,169

 
52,565

 

 

 
149,734

Total debt
 
161,169

 
308,065

 
(191,000
)
 

 
278,234

Deferred costs (2)
 
(2,026
)
 
(1,951
)
 
97

(3) 
476

 
(3,404
)
Total debt, net
 
$
159,143

 
$
306,114

 
$
(190,903
)
 
$
476

 
$
274,830

 ____________________________________
(1)
Includes deferred financing costs incurred during the period.
(2)
Deferred costs relate to mortgage notes payable and the term portion of the credit facility, as discussed in Note 2 — Summary of Significant Accounting Policies.
(3)
Represents deferred financing costs of the term portion of the credit facility written off during the period resulting from the Second Amended and Restated Credit Agreement, as defined below.
As of December 31, 2017, the Company had fixed rate debt outstanding of $149.7 million, including $78.2 million of variable rate debt that is fixed through interest rate swap agreements, which has the effect of fixing the variable interest rate per annum through the maturity date of the variable rate debt. The fixed rate debt has interest rates ranging from 3.37% to 4.17% per annum and as of December 31, 2017, the fixed rate debt had a weighted average interest rate of 3.87%. The fixed rate debt outstanding matures on various dates from December 2020 to February 2025. The aggregate balance of gross real estate assets, net of gross intangible lease liabilities, securing the fixed rate debt outstanding was $266.1 million as of December 31, 2017. Each of the mortgage notes payable comprising the fixed rate debt is secured by the respective properties on which the debt was placed.
During the year ended December 31, 2017, the Company entered into a second amended and restated credit agreement (the “Second Amended Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent (“JPMorgan Chase”), that provides for borrowings up to $425.0 million, which is comprised of up to $212.5 million in unsecured revolving loans (the “Revolving Loans”) and up to $212.5 million in unsecured term loans (the “Term Loans”) (collectively, with the Revolving Loans the “Credit Facility”). The Term Loans mature on September 6, 2022 and the Revolving Loans mature on September 6, 2021; however, the Company may elect to extend the maturity date for the Revolving Loans for up to two six-month periods, but no later than September 6, 2022    , subject to satisfying certain conditions contained in the Second Amended Credit Agreement.
Depending upon the type of loan specified and overall leverage ratio, the Credit Facility bears interest at (i) the one-month, two-month, three-month or six-month London Interbank Offered Rate (“LIBOR”) multiplied by the statutory reserve rate (the “Eurodollar Rate”) plus an interest rate spread ranging from 1.70% to 2.20% for Revolving Loans and 1.60% to 2.10% for Term Loans; or (ii) a base rate ranging from 0.70% to 1.20% for Revolving Loans and 0.60% to 1.10% for Term Loans, plus the greater of: (a) JPMorgan Chase’s Prime Rate (as defined in the Second Amended Credit Agreement); (b) the Federal Funds Effective Rate (as defined in the Second Amended Credit Agreement) plus 0.50%; or (c) the one-month LIBOR multiplied by the statutory reserve rate plus 1.0%. As of December 31, 2017, the Revolving Loans outstanding totaled $16.0 million at an interest rate of 3.27% and the Term Loans outstanding totaled $112.5 million, all of which is subject to interest rate swap agreements (the “Swapped Term Loans”). The interest rate swap agreements have the effect of fixing the Eurodollar Rate per annum of the Swapped Term Loans. As of December 31, 2017, the weighted average all-in rate for the Swapped Term Loan was 3.25%. As of December 31, 2017, the Company had $128.5 million outstanding under the Credit Facility at a weighted average interest rate of 3.25% and $296.5 million in unused capacity, subject to borrowing availability.

F-26

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The Second Amended Credit Agreement contains provisions with respect to covenants, events of default and remedies customary for facilities of this nature. In particular, the Second Amended Credit Agreement requires the Company to maintain a minimum consolidated net worth greater than or equal to the sum of (i) $367.1 million plus (ii) 75% of the equity issued (iii) minus the aggregate amount of any redemptions or similar transaction from the date of the Second Amended Credit Agreement, a leverage ratio less than or equal to 60%, a fixed charge coverage ratio equal to or greater than 1.50, an unsecured debt to unencumbered asset value ratio equal to or less than 60%, an unsecured debt service coverage ratio greater than 1.75, a secured debt ratio equal to or less than 40%, and the amount of secured debt that is recourse debt at no greater than 15% of total asset value. As of December 31, 2017, the Company believes it was in compliance with the financial covenants of the Second Amended Credit Agreement, as well as the financial covenants under the Company’s various fixed and variable rate debt agreements.
Maturities
The following table summarizes the scheduled aggregate principal repayments for the Company’s outstanding debt as of December 31, 2017 for each of the five succeeding fiscal years and the period thereafter (in thousands):
Year ending December 31,
 
Principal Repayments
2018
 
$

2019
 

2020
 
9,240

2021
 
47,717

2022
 
204,327

Thereafter
 
16,950

Total
 
$
278,234

NOTE 9 — INTANGIBLE LEASE LIABILITIES
Intangible lease liabilities of the Company consisted of the following (in thousands, except weighted average life):
 
As of December 31,
 
2017
 
2016
Acquired below-market liabilities, net of accumulated amortization of $2,075 and $929, respectively (with a weighted average life remaining of 11.2 years and 11.9 years, respectively)
 
 
 
$
12,753

 
$
5,798

Amortization of below-market leases is recorded as an increase to rental revenue in the accompanying consolidated statements of operations. The following table summarizes the amortization of below-market leases related to the intangible lease liabilities for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Amortization of below-market leases
 
$
1,200

 
$
448

 
$
209

As of December 31, 2017, the estimated amortization of the intangible lease liabilities for each of the five succeeding fiscal years is as follows (in thousands):
 
 
Amortization of
Year ending December 31,
 
Below-Market Leases
2018
 
$
1,403

2019
 
$
1,392

2020
 
$
1,365

2021
 
$
1,124

2022
 
$
1,083


F-27

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


NOTE 10 — SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended December 31, 2017, 2016 and 2015 are as follows (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
 
 
 
 
 
Change in accrued dealer manager fee, distribution fee, and other offering costs
$
9,460

 
$
7,782

 
$
2,303

Distributions to stockholders declared and unpaid
$
2,126

 
$
1,444

 
$
788

Common stock issued through distribution reinvestment plan
$
10,289

 
$
5,984

 
$
3,336

Change in fair value of marketable securities
$
22

 
$
44

 
$
(73
)
Change in fair value of interest rate swaps
$
2,007

 
$
(41
)
 
$
(302
)
Accrued capital expenditures
$
163

 
$
12

 
$
50

Supplemental Cash Flow Disclosures:
 
 
 
 
 
Interest paid
$
7,864

 
$
4,346

 
$
3,404

NOTE 11 — COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company may become subject to litigation and claims. The Company is not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which the Company’s properties are the subject.
Purchase Commitments
As of December 31, 2017, the Company had entered into a purchase agreement with an unaffiliated third-party seller to acquire a 100% interest in one retail property, subject to meeting certain criteria, for an aggregate purchase price of $13.8 million, exclusive of closing costs. As of December 31, 2017, the Company had $500,000 of property escrow deposits held by an escrow agent in connection with this future property acquisition. This deposit is included in the consolidated balance sheets in derivative assets, property escrow deposits and other assets. As of December 31, 2017, this escrow deposit has not been forfeited.
Environmental Matters

In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. In addition, the Company may own or acquire certain properties that are subject to environmental remediation. Generally, the seller of the property, the tenant of the property and/or another third party is responsible for environmental remediation costs related to a property. Additionally, in connection with the purchase of certain properties, the respective sellers and/or tenants may agree to indemnify the Company against future remediation costs. The Company also carries environmental liability insurance on its properties that provides limited coverage for any remediation liability and/or pollution liability for third-party bodily injury and/or property damage claims for which the Company may be liable. The Company is not aware of any environmental matters which it believes are reasonably likely to have a material effect on its results of operations, financial condition or liquidity.

F-28

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


NOTE 12 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS
The Company has incurred, and will continue to incur, commissions, fees and expenses payable to Cole Income NAV Strategy Advisors and certain of its affiliates in connection with the Offering, and the acquisition, management and performance of the Company’s assets.
Selling commissions, dealer manager and distribution fees
In connection with the Offering, CCO Capital, the Company’s dealer manager, will receive selling commissions, an asset-based dealer manager fee and/or an asset-based distribution fee, as summarized in the table below for each class of common stock:
 
 
Selling Commission (1)
 
Dealer Manager Fee (2)
 
Distribution Fee (2)
W Shares
 

 
0.55
%
 

A Shares
 
up to 3.75%

 
0.55
%
 
0.50
%
I Shares
 

 
0.25
%
 

____________________________________
(1)
The selling commission is based on the offering price for A Shares. The selling commission expressed as a percentage of NAV per A Share, rather than the offering price, is up to 3.90%, subject to rounding and the effect of volume discounts the Company is offering on certain purchases of $150,001 or more of A Shares. Selling commissions are deducted directly from the offering price for A Shares and paid to CCO Capital. The Company has been advised that CCO Capital intends to reallow 100% of the selling commissions on A Shares to participating broker-dealers.
(2)
The dealer manager and distribution fees will be calculated on a daily basis in an amount equal to 1/365th of the percentage of NAV per W Share, A Share or I Share, as applicable, for such day on a continuous basis. CCO Capital, in its sole discretion, may reallow a portion of the dealer manager fee and distribution fee to participating broker-dealers.
Other organization and offering expenses
All other organization and offering expenses associated with the sale of the Company’s common stock (excluding selling commissions, the distribution fee and the dealer manager fee) are paid for by Cole Income NAV Strategy Advisors or its affiliates and can be reimbursed by the Company up to 0.75% of the aggregate gross offering proceeds, excluding selling commissions charged on A Shares sold in the Primary Offering. As of December 31, 2017, Cole Income NAV Strategy Advisors or its affiliates had paid organization and offering expenses in excess of the 0.75% in connection with the Offering. These excess amounts were not included in the financial statements of the Company because such amounts were not a liability of the Company as they exceeded 0.75% of gross proceeds from the Offering. As the Company raises additional proceeds from the Offering, these excess amounts may become payable to Cole Income NAV Strategy Advisors.
Advisory fees and expenses
The Company pays Cole Income NAV Strategy Advisors an asset-based advisory fee that is payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 0.90% of the Company’s NAV for each class of common stock, for each day.
Operating expenses
The Company reimburses Cole Income NAV Strategy Advisors for the operating expenses it paid or incurred in connection with the services provided to the Company, subject to the limitation that the Company will not reimburse for any amount by which its operating expenses (including the advisory fee) at the end of the four preceding fiscal quarters exceeds the greater of (1) 2% of average invested assets, or (2) 25% of net income other than any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Cole Income NAV Strategy Advisors waived its right to receive operating expense reimbursements for the year ended December 31, 2015; accordingly, the Company did not reimburse Cole Income NAV Strategy Advisors for any such expenses during the year ended December 31, 2015.

F-29

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Expense Cap
Cole Income NAV Strategy Advisors had an expense cap in place from October 1, 2013 through December 31, 2015, whereby Cole Income NAV Strategy Advisors funded all general and administrative expenses of the Company that were in excess of an amount calculated by multiplying the average NAV for the respective three month period by an annualized rate of 1.25% (the “Excess G&A”). During the year ended December 31, 2015, the Company incurred $773,000 of Excess G&A which was reimbursed by Cole Income NAV Strategy Advisors, of which $248,000 was included as a reduction to amounts due to affiliates on the consolidated balance sheet. Beginning January 1, 2016, Cole Income NAV Strategy Advisors ceased to fund Excess G&A.
Acquisition expenses
In addition, the Company reimburses Cole Income NAV Strategy Advisors for all out-of-pocket expenses incurred in connection with the acquisition of the Company’s investments. While most of the acquisition expenses are expected to be paid to third parties, a portion of the out-of-pocket acquisition expenses may be reimbursed to Cole Income NAV Strategy Advisors or its affiliates. Acquisition expenses, together with any acquisition fees paid to third parties for a particular real estate-related asset, will in no event exceed 6% of the gross purchase price of such asset.
Performance Fee
As compensation for services provided pursuant to the advisory agreement, the Company will also pay Cole Income NAV Strategy Advisors a performance-based fee calculated based on the Company’s annual total return to stockholders for each class of common stock (defined below), payable annually in arrears. The performance fee will be calculated such that for any calendar year in which the total return per share for a particular class exceeds 6% (the “6% Return”), Cole Income NAV Strategy Advisors will receive 25% of the excess total return on such class above the 6% Return allocable to that class, but in no event will the Company pay Cole Income NAV Strategy Advisors more than 10% of the aggregate total return, for that class, for such year. However, in the event the NAV per share of the Company’s W Shares, A Shares and I Shares decreases below the base NAV for the respective share class ($15.00, $16.72 and $16.82 for the W Shares, A Shares and I Shares, respectively) (the “Base NAV”), the performance-based fee for a respective class will not be calculated on any increase in NAV up to the Base NAV for the respective share class. In addition, the performance fee will not be paid with respect to any calendar year in which the NAV per share as of the last business day of the calendar year (the “Ending NAV”) for the respective share class is less than the Base NAV of that class. The Base NAV of any share class is subject to downward adjustment in the event that the Company’s board of directors, including a majority of the independent directors, determines that such an adjustment is necessary to provide an appropriate incentive to Cole Income NAV Strategy Advisors to perform in a manner that seeks to maximize stockholder value and is in the best interests of the Company’s stockholders. In the event of any stock dividend, stock split, recapitalization or similar change in the Company’s capital structure, the Base NAV for the respective share class shall be ratably adjusted to reflect the effect of any such event.
The total return to stockholders is defined, for each class of the Company’s common stock, as the change in NAV per share plus distributions per share for such class. The NAV per share for a class calculated on the last trading day of a calendar year shall be the amount against which changes in NAV per share for such class are measured during the subsequent calendar year. Therefore, for each class of the Company’s common stock, payment of the performance-based component of the advisory fee (1) is contingent upon the Company’s actual annual total return exceeding the 6% Return and the Ending NAV per share for the respective share class being greater than the Base NAV of that class, (2) will vary in amount based on the Company’s actual performance, (3) cannot cause the Company’s total return as a percentage of stockholders’ invested capital for the year to be reduced below 6%, and (4) is payable to Cole Income NAV Strategy Advisors if the Company’s total return exceeds the 6% Return in a particular calendar year, even if the total return to stockholders (or any particular stockholder) on a cumulative basis over any longer or shorter period has been less than 6% per annum. Cole Income NAV Strategy Advisors will not be obligated to return any portion of advisory fees paid based on the Company’s subsequent performance. The Company did not reach the 6% Return during the year ended December 31, 2016.

F-30

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The Company incurred commissions, fees and expense reimbursements as shown in the table below for services provided by Cole Income NAV Strategy Advisors and its affiliates related to the services described above during the years indicated (in thousands):
 
Year Ended December 31,
 
2017
 
2016
 
2015
Offering:
 
 
 
 
 
Selling commissions
$
2,964

 
$
2,121

 
$
301

Distribution fee (1)
$
592

 
$
246

 
$
89

Dealer manager fees (1)
$
2,128

 
$
1,310

 
$
764

Organization and offering expense reimbursement
$
1,400

 
$
1,192

 
$
464

Acquisition expense reimbursement
$
1,594

 
$
1,622

 
$
369

Advisory fee
$
4,263

 
$
2,760

 
$
1,290

Operating expense reimbursement
$
2,740

 
$
1,656

 
$

Performance fee
$
647

 
$

 
$
1,246

______________________
(1)
Amounts are calculated for the respective period in accordance with the dealer manager agreement and exclude the estimated liability for the future dealer manager and distribution fees payable to CCO Capital, which are included in due to affiliates in the consolidated balance sheets, with a corresponding decrease to capital in excess of par value, as described in Note 2 – Summary of Significant Accounting Policies.
As of December 31, 2017 and December 31, 2016, $2.5 million and $2.3 million of the amounts shown above had been incurred, but not yet paid, for services provided by Cole Income NAV Strategy Advisors or its affiliates in connection with the acquisitions and operations stage and was a liability of the Company. Cole Income NAV Strategy Advisors waived its right to receive operating expense reimbursements for the twelve months ended December 31, 2015, accordingly, the Company did not reimburse Cole Income NAV Strategy Advisors for any such expenses during the twelve months ended during that period. During the year ended December 31, 2015, Cole Income NAV Strategy Advisors permanently waived its right to receive expense reimbursements totaling $1.3 million.
Services Agreement
Pursuant to the Services Agreement, VEREIT OP will continue to provide certain services to CCO Group and to the Company, including operational real estate support. VEREIT OP will continue to provide such services through March 31, 2019 (or, if later, the date of the last government filing other than a tax filing made by any of the Cole REITs with respect to its 2018 fiscal year) and will provide consulting and research services through December 31, 2023 as requested by CCO Group, LLC.
Despite the indirect change of ownership and control of our advisor, dealer manager, property manager and sponsor, the Company expects that, during the Initial Services Term of the Services Agreement, the advisory, dealer manager and property management services the Company receives will continue without any material changes in personnel (except as supplemented by the management oversight of CIM personnel) or material change in service procedures. During the Initial Services Term of the Services Agreement, CCO Group, LLC intends to evaluate and effectuate an appropriate transition of VEREIT OP’s services under the Services Agreement to other CIM affiliates or third parties with the goal of ensuring continuity and minimizing disruption.
Due to/from Affiliates
As of December 31, 2017 and December 31, 2016, $22.0 million and $14.8 million, respectively, was due to Cole Income NAV Strategy Advisors or its affiliates primarily related to the estimated liability for current and future dealer manager and distribution fees, advisory fees, the reimbursement of organization and offering expenses, performance fee, and acquisition expenses, which were included in amounts due to affiliates on the consolidated balance sheets.
As of December 31, 2017, $100,000 was due from Cole Income NAV Strategy Advisors or its affiliates related to amounts received by affiliates of the advisor which were due to the Company. No such amounts were due from Cole Income NAV Strategy Advisors or its affiliates as of December 31, 2016.

F-31

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


NOTE 13 — ECONOMIC DEPENDENCY
Under various agreements, the Company has engaged and may in the future engage Cole Income NAV Strategy Advisors or its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issuance, as well as other administrative responsibilities for the Company including accounting services and stockholder relations. As a result of these relationships, the Company is dependent upon Cole Income NAV Strategy Advisors or its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.
NOTE 14 — STOCKHOLDERS’ EQUITY
As of December 31, 2017, the Company was authorized to issue up to 500,000,000 shares of capital stock. Of the total number of shares of capital stock authorized (a) 490,000,000 shares are designated as common stock, 164,000,000 of which are classified as W Shares, 163,000,000 of which are classified as A Shares, and 163,000,000 of which are classified as I Shares, and (b) 10,000,000 shares are designated as preferred stock. All shares of such stock have a par value of $0.01 per share. The Company’s board of directors may amend the charter from time to time to increase or decrease the aggregate number of authorized shares of capital stock or the number of authorized shares of capital stock of any class or series without stockholder approval. During the year ended December 31, 2017, the Company issued a total of 10.3 million shares, including 569,000 shares issued under the DRIP, for gross proceeds of $189.6 million. As of December 31, 2017, the Company had issued 30.7 million shares of common stock for cumulative gross proceeds of $550.6 million.
NAV per Share Calculation
The Company’s per share purchase and redemption price for each class varies from day-to-day. The Company has engaged an independent valuation expert which has expertise in appraising commercial real estate assets and related liabilities, to provide, on a rolling quarterly basis, valuations of each of the Company’s commercial real estate assets and related liabilities to be set forth in individual appraisal reports, and to adjust those valuations for events known to the independent valuation expert that it believes are likely to have a material impact on previously provided estimates of the value of the affected commercial real estate assets or related real estate liabilities. In addition, the calculation of NAV for each class includes liquid assets, which are priced daily using third party pricing services, and cash and cash equivalents.
The Company has retained an independent fund accountant to calculate the daily NAV for each class, which uses a process that reflects (1) estimated values of each of the Company’s commercial real estate assets, related liabilities and notes receivable secured by real estate provided periodically by the Company’s independent valuation expert, in individual appraisal reports, (2) daily updates in the price of liquid assets for which third party market quotes are available, (3) accruals of the daily distributions for each class, and (4) estimates of daily accruals, on a net basis, of the Company’s operating revenues, expenses, including class-specific expenses, debt service costs and fees, including class-specific fees. Selling commissions will have no effect on the NAV of any class. NAV is intended to reflect the Company’s estimated value on the date that the NAV is determined, and the NAV of any class at any given time will not reflect any obligation to pay future trail fees that may become payable after the date the NAV is determined. As a result, the estimated liability for the future dealer manager and distribution fees, which is accrued at the time each share is sold, will have no effect on the NAV of any class.
The result of this calculation is the NAV for each class of shares as of the end of any business day. The NAV per share is determined by allocating the NAV to each share class based on its respective ownership percentage. The NAV for each class is then adjusted for contributions, redemptions and accruals of the class’s daily distributions and estimates of class-specific fee and expense accruals. Distributions reflect the daily distribution rate set by the Company’s board of directors, which may vary for each class. The NAV per share for each class is determined by dividing such class’s NAV on such day by the number of shares outstanding for that class as of the end of such business day, prior to giving effect to any share purchases or redemptions to be effected on such day. At regularly scheduled board of directors meetings, the Company’s board of directors reviews the process by which the Company’s advisor estimated the daily accruals and the independent fund accountant calculated the NAV per share, and the operation and results of the process to determine NAV per share generally. The Company’s NAV is not calculated in accordance with GAAP and is not audited by the independent registered public accounting firm.

F-32

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Distribution Reinvestment Plan
Pursuant to the DRIP, the Company allows stockholders to elect to have their distributions reinvested in additional shares of the Company’s common stock. The purchase price for shares under the DRIP is equal to the NAV per share on the date that the distribution is payable, after giving effect to the distribution. During the years ended December 31, 2017, 2016 and 2015, 569,000, 328,000 and 185,000 shares were purchased under the DRIP for $10.3 million, $6.0 million and $3.3 million, respectively.
Share Redemption Program
The Company has adopted a share redemption plan whereby, on any business day, stockholders may request that the Company redeem all or any portion of their shares, subject to certain limitations described below. Pursuant to the share redemption program, the Company will initially redeem shares at a redemption price per share on any business day equal to the Company’s NAV per share for the class of shares being redeemed, without giving effect to any share purchases or redemptions to be effected on such day, less any applicable short-term trading fees. Subject to limited exceptions, stockholders who redeem their shares within the first 365 days from the date of purchase will be subject to a short-term trading fee of 2% of the aggregate NAV per share of the shares of common stock received.
In each calendar quarter, net redemptions will be limited to 5% of the Company’s total NAV as of the end of the immediately preceding quarter. If less than the full 5% limit available for a quarter is used, the unused percentage will be carried over to the next quarter (the “Carryover Percent”), but the maximum carryover percentage will never exceed 15% in the aggregate, and net redemptions in any quarter may never exceed 10% of the prior quarter’s NAV. On each business day, the Company will calculate the maximum amount available for redemptions as 5% plus the Carryover Percent times the prior quarter-end’s NAV, plus share sales for the quarter, minus share redemptions for the quarter (the “Quarterly Limit”). Redemption requests will be satisfied on a first-come-first-served basis up to the Quarterly Limit. A redemption request must be received by 4:00 p.m. Eastern Time on the last business day that the New York Stock Exchange is open for trading prior to the end of a calendar quarter in order for the current Quarterly Limit to apply.
For the quarter following a quarter in which the Company reached its Quarterly Limit (a “Limit Quarter”), a 5% per quarter redemption limitation will apply on a stockholder by stockholder basis, such that each of the Company’s stockholders will be allowed to request a redemption, at any time during that quarter, for a total of up to 5% of the shares they held as of the last day of the Limit Quarter, plus shares, if any, that the stockholder purchases during the in-progress quarter (the “Flow-regulator”). This prospective methodology for allocating available funds daily during a quarter for which a Flow-regulator is in effect (a “Flow-regulated Quarter”) is designed to treat all stockholders equally during the quarter as a whole, regardless of the particular day during the quarter when they choose to submit their redemption requests, based on the number of shares held by each stockholder as of the prior quarter-end.
If, during a Flow-regulated Quarter, total redemptions for all stockholders in the aggregate are more than two and one-half percent of the Company’s total NAV as of the end of the immediately preceding quarter, then the Flow-regulator will continue to apply for the next succeeding quarter. If total redemptions for all stockholders in the aggregate during a Flow-regulated Quarter are equal to or less than two and one-half percent of the Company’s total NAV as of the end of the immediately preceding quarter, then the first-come, first-served Quarterly Limit discussed above will come back into effect for the next succeeding quarter, with the Quarterly Limit consisting of five percent plus any remaining amount of the Carryover Percent from the last quarter before the Flow-regulated Quarter (subject to the 10% quarterly limit).
The Company adopted several restrictions with respect to the redemption of certain shares owned by CHC Investments, LLC, an affiliate of a former officer and director of the Company. This stockholder was not permitted to redeem its shares until the Company had raised $100.0 million in the Offering. Thereafter, redemption requests made for these shares would only be accepted (1) on the last business day of a calendar quarter, (2) after all redemption requests from all other stockholders for such quarter have been accepted and (3) to the extent that such redemptions do not cause net redemptions to exceed 5% of the Company’s total NAV as of the end of the immediately preceding quarter. Redemption requests for these shares would otherwise be subject to the same limitations as other stockholder redemption requests as described above. During the year ended December 31, 2016, redemption requests were made that conformed to these requirements, resulting in redemptions by CHC Investments, LLC of 178,264 shares during the year. As of December 31, 2017, CHC Investments, LLC had no shares outstanding.
In addition, as of December 31, 2017, VEREIT Properties Operating Partnership, L.P. (formerly known as ARC Properties Operating Partnership, L.P.) (“VEREIT OP”), as the successor to CHC, owned 13,333 W Shares. On February 1, 2018, VEREIT OP transferred these 13,333 W Shares to Cole Income NAV Strategy Advisors and pursuant to the Company’s charter, Cole Income NAV Strategy Advisors is prohibited from selling these shares, which represents the initial investment in the

F-33

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Company, for so long as the CCO Group remains the Company’s sponsor; provided, however, that Cole Income NAV Strategy Advisors could transfer ownership of all or a portion of such shares to other affiliates of the Company’s sponsor.
The Company may fund redemptions with proceeds from any available source, including, but not limited to, available cash, proceeds from sales of additional shares, excess cash flow from operations, sales of liquid investments, incurrence of indebtedness and, if necessary, proceeds from the disposition of real estate properties or real estate-related assets. The Company may reserve borrowing capacity under its Credit Facility and elect to borrow against the Credit Facility in part to redeem shares presented for redemption during periods when the Company does not have sufficient proceeds from the sale of shares to fund all redemption requests. Additionally, the Company’s board of directors may modify or suspend its redemption plan at any time in its sole discretion if it believes that such action is in the best interests of the stockholders.
As of December 31, 2017, the quarterly redemption capacity was equal to 10% of the Company’s NAV and this amount was recorded as redeemable common stock on the consolidated balance sheet for a total of $47.0 million.
During the year ended December 31, 2017, the Company received redemption requests for, and redeemed approximately 1.8 million W Shares of common stock for $32.2 million, 318,000 A Shares of common stock for $5.7 million, and 242,000 I Shares of common stock for $4.4 million.
Distributions Payable and Distribution Policy
The Company’s board of directors authorized a daily distribution, based on 365 days in the calendar year of $0.002678083 per share for stockholders of record as of the close of business on each day of the period commencing on January 1, 2017 and ending on June 30, 2018. The daily distribution amount for each class of outstanding common stock is adjusted based on the relative NAV of the various classes each day so that, from day to day, distributions constitute a uniform percentage of the NAV per share of all classes. As a result, from day to day, the per share daily distribution for each outstanding class of common stock may be higher or lower than the daily distribution amount authorized by the Company’s board of directors. As of December 31, 2017, the Company had distributions payable of $2.1 million.
NOTE 15 — INCOME TAXES
For federal income tax purposes, distributions to stockholders are characterized as ordinary dividends, capital gain distributions, or nondividend distributions. Nondividend distributions will reduce U.S stockholders’ basis (but not below zero) in their shares. The following table shows the character of the distributions paid on a percentage basis for the years ended December 31, 20172016, and 2015:
Character of Distributions:
 
 
2017
 
2016
 
2015 (1)
Ordinary dividends
 
 
37.3
%
 
33.0
%
 
44.9
%
Nondividend distributions
 
 
62.7
%
 
67.0
%
 
%
Capital gain distributions
 
 
%
 
%
 
55.1
%
Total
 
 
100
%
 
100
%
 
100
%
 ____________________________________
(1) Includes dividend paid on January 4, 2016.
During the years ended December 31, 2017, 2016 and 2015, the Company distributed as dividends to its stockholders 100% of its taxable income for federal income tax purposes. Accordingly, no provision for federal income taxes related to such taxable income was recorded in the Company’s consolidated financial statements. During the years ended December 31, 2017, 2016 and 2015, the Company incurred state and local income and franchise taxes of $201,000, $88,000 and $120,000, respectively, which were recorded in general and administrative expenses on the consolidated statements of operations.
The Company had no unrecognized tax benefits as of or during the years ended December 31, 2017, 2016 and 2015. Any interest and penalties related to unrecognized tax benefits would be recognized within the provision for income taxes in the accompanying consolidated statements of operations. The Company files income tax returns in the U.S. federal jurisdiction, as well as various state jurisdictions, and is subject to routine examinations by the respective tax authorities.
In December 2017, the Tax Cuts and Jobs Act was signed into law which, in addition to reducing corporate and individual tax rates, eliminates or restricts various deductions. The Tax Cuts and Jobs Act makes numerous large and small changes to the tax rules that do not affect the Company’s REIT qualification rules directly.

F-34

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


NOTE 16 — OPERATING LEASES
The Company’s real estate assets are leased to tenants under operating leases for which the terms and expirations vary. As of December 31, 2017, the leases had a weighted-average remaining term of 10.8 years. Certain leases include provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other negotiated terms and conditions. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. As of December 31, 2017, the future minimum rental income from the Company’s real estate assets under non-cancelable operating leases, assuming no exercise of renewal options for the succeeding five fiscal years and thereafter, was as follows (in thousands):
Year ending December 31,
 
Future Minimum Rental Income
2018
 
$
50,109

2019
 
50,435

2020
 
50,420

2021
 
50,433

2022
 
50,409

Thereafter
 
317,052

Total
 
$
568,858

NOTE 17 — QUARTERLY RESULTS (UNAUDITED)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2017 and 2016 (in thousands, except per share amounts). In the opinion of management, the information for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary to present a fair presentation of the results for each period.
 
 
December 31, 2017
 
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenues
 
$
10,026

 
$
11,126

 
$
13,244

 
$
13,750

Operating income
 
$
1,950

 
$
2,744

 
$
3,365

 
$
2,579

Net (loss) income
 
$
(77
)
 
$
524

 
$
76

 
$
(176
)
Net (loss) income attributable to the Company
 
$
(86
)
 
$
515

 
$
68

 
$
(185
)
Basic and diluted net (loss) income per share - Class W common stock (1)
 
$

 
$
0.03

 
$

 
$
(0.01
)
Distributions declared per common share - Class W common stock
 
$
0.24

 
$
0.24

 
$
0.25

 
$
0.25

Basic and diluted net (loss) income per share - Class A common stock (1)
 
$
(0.01
)
 
$
0.02

 
$

 
$
(0.01
)
Distributions declared per common share - Class A common stock
 
$
0.24

 
$
0.24

 
$
0.25

 
$
0.25

Basic and diluted net (loss) income per share - Class I common stock (1)
 
$

 
$
0.03

 
$
0.01

 
$

Distributions declared per common share - Class I common stock
 
$
0.24

 
$
0.24

 
$
0.25

 
$
0.25

 ____________________________________
(1)
The sum of the quarterly net loss income per share amounts does not agree to the full year net loss per share amounts. The Company calculates net loss income per share and distributions declared per share based on the weighted-average number of outstanding shares of common stock during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full year result that does not agree to the sum of the individual quarters.

F-35

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
 
December 31, 2016
 
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenues
 
$
5,954

 
$
6,341

 
$
6,889

 
$
8,127

Operating income
 
$
1,210

 
$
972

 
$
956

 
$
940

Net loss
 
$
(17
)
 
$
(280
)
 
$
(370
)
 
$
(625
)
Basic and diluted net (loss) per share - Class W common stock (1)
 
$

 
$
(0.02
)
 
$
(0.03
)
 
$
(0.04
)
Distributions declared per common share - Class W common stock
 
$
0.24

 
$
0.24

 
$
0.25

 
$
0.25

Basic and diluted net loss per share - Class A common stock (1)
 
$

 
$
(0.03
)
 
$
(0.03
)
 
$
(0.04
)
Distributions declared per common share - Class A common stock
 
$
0.24

 
$
0.24

 
$
0.25

 
$
0.25

Basic and diluted net loss per share - Class I common stock (1)
 
$

 
$
(0.02
)
 
$
(0.03
)
 
$
(0.04
)
Distributions declared per common share - Class I common stock
 
$
0.24

 
$
0.24

 
$
0.25

 
$
0.25

 ____________________________________
(1)
The sum of the quarterly net (loss) income per share amounts does not agree to the full year net income per share amounts. The Company calculates net (loss) income per share and distributions declared per share based on the weighted-average number of outstanding shares of common stock during the reporting period. The average number of shares fluctuates throughout the year and can therefore produce a full year result that does not agree to the sum of the individual quarters.
NOTE 18 — SUBSEQUENT EVENTS
The following events occurred subsequent to December 31, 2017:
Acquisition of Real Estate Assets
Subsequent to December 31, 2017, the Company acquired six real estate properties, which were accounted for as asset acquisitions, for an aggregate purchase price of $109.0 million. The acquisitions were funded with net proceeds from the Offering and available borrowings. The Company has not completed its initial purchase price allocations with respect to these properties and therefore cannot provide similar disclosures to those included in Note 4 in these consolidated financial statements for these properties.
Property Disposition
As of December 31, 2017, one property was classified as held for sale, as discussed in Note 2 — Summary of Significant Accounting Policies. Subsequent to December 31, 2017, the Company disposed of this property for a gross sales price of $8.1 million, resulting in proceeds of $7.8 million after closing costs and a loss of $209,000. No disposition fees were paid to affiliates in connection with the sale of the property and the Company has no continuing involvement with this property.
Sale of Cole Capital
As described in Note 1 — Organization and Business, on February 1, 2018, the Transaction was completed. Immediately following the completion of the Transaction, Cole Capital Advisors, Inc. and the Company’s dealer manager were each converted into Delaware limited liability companies, Cole Capital Advisors, Inc.’s name was changed to CCO Group, LLC, and the Company’s dealer manager’s name was changed to CCO Capital, LLC (CCO Capital”). As a result of the Transaction, CIM owns and/or controls CCO Group, LLC and its subsidiaries, and CCO Group, LLC owns and controls Cole Income NAV Strategy Advisors, CCO Capital and CREI Advisors, the Company’s external advisor, dealer manager for the Offerings and property manager, respectively.
In addition, as part of the Transaction, VEREIT OP and CCO Group, LLC entered into the Services Agreement pursuant to which VEREIT OP will continue to provide certain services to CCO Group and to the Cole REITs, including operational real estate support. VEREIT OP will continue to provide such services through March 31, 2019 (or, if later, the date of the last government filing other than a tax filing made by any of the Cole REITs with respect to its 2018 fiscal year) and will provide consulting and research services through December 31, 2023 as requested by CCO Group, LLC.


F-36

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(in thousands)

 
 
 
 
 
 
 
 
 
 
Gross Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
at Which
 
 
 
 
 
 
 
 
 
Initial Costs to Company
 
Total
 
Carried At
 
Accumulated
 
 
 
 
 
 
 
 
 
Buildings &
 
Adjustment
 
December 31, 2017
 
Depreciation
 
Date
 
Date
Description (a)
 
Encumbrances
 
Land
 
Improvements
 
to Basis
 
 (b) (c) (d)
 
(e) (f)
 
Acquired
 
Constructed
Real Estate Held for Investment the Company Has Invested in Under Operating Leases:
7-Eleven
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gloucester, VA
 
(g)
 
$
355

 
$
674

 
$

 
$
1,029

 
$
25

 
2/9/2017
 
2011
Hampton (Mercury), VA
 
(g)
 
652

 
394

 

 
1,046

 
17

 
2/9/2017
 
1979
Hampton (Ocean), VA
 
(g)
 
1,045

 
446

 

 
1,491

 
17

 
2/9/2017
 
1962
Hampton (Village), VA
 
(g)
 
1,316

 
464

 

 
1,780

 
17

 
2/9/2017
 
2001
Newport News, VA
 
(g)
 
566

 
510

 

 
1,076

 
18

 
2/9/2017
 
2000
Poquoson, VA
 
(g)
 
288

 
565

 

 
853

 
24

 
2/9/2017
 
2012
Surry, VA
 
(g)
 
495

 
522

 

 
1,017

 
19

 
2/9/2017
 
1981
Williamsburg (Bypass), VA
 
(g)
 
958

 
379

 

 
1,337

 
15

 
2/9/2017
 
1997
Williamsburg (John Tyler), VA
 
(g)
 
421

 
281

 

 
702

 
13

 
2/9/2017
 
1977
Advance Auto
 

 


 


 


 


 


 

 

Macomb Township, MI
 
(g)
 
718

 
1,146

 

 
1,864

 
187

 
12/20/2011
 
2009
Ravenswood, WV
 
(g)
 
150

 
645

 
58

 
853

 
44

 
6/17/2015
 
1996
Sedalia, MO
 
(g)
 
374

 
1,187

 

 
1,561

 
139

 
9/23/2013
 
2013
Algonac Plaza
 

 


 


 


 


 


 

 

Algonac, MI
 
(g)
 
1,097

 
7,718

 

 
8,815

 
990

 
8/30/2013
 
2002
Amcor Rigid Plastics
 

 


 


 


 


 


 

 

Ames, IA
 
$8,300
 
775

 
12,179

 

 
12,954

 
1,002

 
9/19/2014
 
1996
Apex Technologies
 

 


 


 


 


 


 

 

Mason, OH
 
(g)
 
997

 
11,657

 

 
12,654

 
15

 
12/19/2017
 
1999
Art Van Furniture
 

 


 


 


 


 


 

 

Monroeville, PA
 
(g)
 
1,023

 
9,607

 

 
10,630

 
34

 
11/22/2017
 
2004
York, PA
 
(g)
 
1,720

 
6,628

 

 
8,348

 
24

 
11/22/2017
 
1978
Aspen Dental
 

 


 


 


 


 


 

 

Somerset, KY
 
(g)
 
285

 
1,037

 

 
1,322

 
94

 
8/18/2014
 
2014
At Home
 

 


 


 


 


 


 

 

Colorado Springs, CO
 
(g)
 
989

 
9,347

 

 
10,336

 
318

 
9/9/2016
 
1969
O'Fallon, IL
 
(g)
 
2,521

 
7,336

 

 
9,857

 
274

 
9/9/2016
 
1998
AT&T
 

 


 


 


 


 


 

 

Oklahoma City, OK
 
(g)
 
622

 
1,493

 

 
2,115

 
177

 
5/1/2014
 
2013
AutoZone
 


 


 


 


 


 


 

 

Jesup, GA
 
(g)
 
209

 
781

 

 
990

 
25

 
10/25/2016
 
2005
Vandalia, OH
 
532
 
778

 

 

 
778

 

 
10/10/2014
 
2014
Biolife Plasma Services:
 

 


 


 


 


 


 

 

Fort Wayne, IN
 

 
692

 
2,662

 

 
3,354

 
84

 
12/16/2016
 
2007
Moorhead, MN
 

 
728

 
3,109

 

 
3,837

 
94

 
12/16/2016
 
2008
Bob Evans
 

 


 


 


 


 


 

 

Defiance, OH
 
(g)
 
391

 
1,674

 

 
2,065

 
42

 
4/28/2017
 
2011
Dover, OH
 
(g)
 
362

 
1,495

 

 
1,857

 
36

 
4/28/2017
 
2008
Dundee, MI
 
(g)
 
403

 
1,438

 

 
1,841

 
33

 
4/28/2017
 
2000
Hamilton, OH
 
(g)
 
393

 
1,305

 

 
1,698

 
32

 
4/28/2017
 
1997
Hummelstown, PA
 
(g)
 
1,184

 
1,165

 

 
2,349

 
25

 
4/28/2017
 
1994
Mayfield Heights, OH
 
(g)
 
721

 
919

 

 
1,640

 
23

 
4/28/2017
 
2003
Richmond, VA
 
(g)
 
785

 
688

 

 
1,473

 
15

 
4/28/2017
 
1990
Burger King
 

 


 


 


 


 


 

 

Midwest City, OK
 
765
 
576

 
413

 

 
989

 
34

 
9/30/2014
 
2015
Caliber Collision
 

 


 


 


 


 


 

 

Houston, TX
 
(g)
 
466

 
4,929

 

 
5,395

 
190

 
8/11/2016
 
2016

S-1

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)

 
 
 
 
 
 
 
 
 
 
Gross Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
at Which
 
 
 
 
 
 
 
 
 
Initial Costs to Company
 
Total
 
Carried At
 
Accumulated
 
 
 
 
 
 
 
 
 
Buildings &
 
Adjustment
 
December 31, 2017
 
Depreciation
 
Date
 
Date
Description (a)
 
Encumbrances
 
Land
 
Improvements
 
to Basis
 
 (b) (c) (d)
 
(e) (f)
 
Acquired
 
Constructed
Caliber Collision (continued)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
San Antonio, TX
 
(g)
 
$
196

 
$
2,918

 
$

 
$
3,114

 
$
80

 
1/19/2017
 
1963
Venice, FL
 
(g)
 
857

 
2,662

 

 
3,519

 
104

 
8/12/2016
 
2015
CarMax
 

 


 


 


 


 


 

 

Tinley Park, IL
 
$15,800
 
3,282

 
21,974

 

 
25,256

 
346

 
6/27/2017
 
1998
Carrier Rental Systems
 

 


 


 


 


 


 

 

Houston, TX
 
2,800
 
749

 
3,832

 

 
4,581

 
324

 
9/4/2014
 
2006
Chili's and PetSmart Center
 

 


 


 


 


 


 

 

Panama City, FL
 
(g)
 
1,371

 
4,411

 
129

 
5,911

 
269

 
12/10/2015
 
2005
Cottage Plaza
 

 


 


 


 


 


 

 

Pawtucket, RI
 
(g)
 
5,431

 
15,582

 
5

 
21,018

 
264

 
6/29/2017
 
2004
CVS
 

 


 


 


 


 


 

 

Austin, TX
 
(g)
 
1,417

 
1,579

 

 
2,996

 
249

 
12/8/2011
 
1997
Erie, PA
 
(g)
 
1,007

 
1,157

 

 
2,164

 
179

 
12/9/2011
 
1999
Mansfield, OH
 
(g)
 
270

 
1,691

 

 
1,961

 
262

 
12/9/2011
 
1998
Wisconsin Rapids, WA
 
1,790
 
517

 
2,148

 

 
2,665

 
225

 
12/13/2013
 
2013
DaVita Dialysis
 

 


 


 


 


 


 

 

Austell, GA
 
(g)
 
581

 
2,359

 

 
2,940

 
220

 
5/6/2014
 
2009
Dollar General
 

 


 


 


 


 


 

 

Ada, MN
 
(g)
 
144

 
867

 

 
1,011

 
40

 
4/8/2016
 
2015
Berwick, LA
 
(g)
 
141

 
1,448

 

 
1,589

 
201

 
11/30/2012
 
2012
Erie, IL
 
(g)
 
67

 
974

 

 
1,041

 
40

 
6/30/2016
 
2016
Gladwin, MI
 
780
 
121

 
1,119

 

 
1,240

 
119

 
1/24/2014
 
2013
Glasford, IL
 
(g)
 
167

 
904

 

 
1,071

 
38

 
6/24/2016
 
2016
Independence, MO
 
837
 
276

 
1,017

 

 
1,293

 
131

 
3/15/2013
 
2012
Lexington, MI
 
707
 
89

 
1,033

 

 
1,122

 
110

 
1/24/2014
 
2013
New Richland, MN
 
(g)
 
173

 
900

 

 
1,073

 
38

 
6/24/2016
 
2016
Ocala, FL
 
(g)
 
205

 
1,308

 

 
1,513

 
123

 
5/7/2014
 
2013
Pine River, MN
 
(g)
 
230

 
872

 

 
1,102

 
40

 
4/8/2016
 
2016
Redfield, SD
 
(g)
 
43

 
839

 

 
882

 
76

 
9/5/2014
 
2014
Sardis City, AL
 
(g)
 
334

 
1,058

 

 
1,392

 
145

 
6/26/2013
 
2012
Sioux Falls, SD
 
(g)
 
293

 
989

 

 
1,282

 
100

 
6/25/2014
 
2014
Stacy, MN
 
658
 
84

 
810

 

 
894

 
65

 
11/6/2014
 
2014
Starbuck, MN
 
(g)
 
76

 
946

 

 
1,022

 
43

 
4/15/2016
 
2016
St. Joseph, MO
 
(g)
 
197

 
972

 

 
1,169

 
124

 
4/2/2013
 
2013
Topeka, KS
 
794
 
176

 
882

 

 
1,058

 
77

 
10/22/2014
 
2014
Trimble, MO
 
(g)
 
212

 
802

 

 
1,014

 
33

 
6/30/2016
 
2016
Wheaton, MN
 
(g)
 
134

 
874

 

 
1,008

 
40

 
4/22/2016
 
2016
Winthrop, MN
 
(g)
 
130

 
876

 

 
1,006

 
40

 
4/8/2016
 
2016
Enid Crossing
 

 


 


 


 


 


 

 

Enid, OK
 
3,407
 
685

 
4,426

 

 
5,111

 
507

 
6/30/2014
 
2013
Family Dollar
 

 


 


 


 


 


 

 

Centreville, AL
 
(g)
 
50

 
1,122

 

 
1,172

 
108

 
4/29/2014
 
2013
Danville, VA
 
(g)
 
228

 
774

 

 
1,002

 
90

 
6/17/2014
 
2013
Darby, MT
 
881
 
244

 
889

 

 
1,133

 
83

 
9/30/2014
 
2014
Denton, NC
 
(g)
 
334

 
545

 

 
879

 
59

 
6/17/2014
 
2012
Deridder, LA
 
(g)
 
183

 
746

 

 
929

 
82

 
9/3/2014
 
2014
Hampton, AR
 
651
 
131

 
741

 

 
872

 
85

 
9/15/2014
 
2014
Londonderry, OH
 
(g)
 
65

 
1,078

 

 
1,143

 
112

 
9/3/2014
 
2014
Tatum, NM
 
700
 
130

 
805

 

 
935

 
88

 
3/31/2014
 
2014
West Portsmouth, OH
 
(g)
 
214

 
768

 

 
982

 
68

 
9/23/2014
 
2004

S-2

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)

 
 
 
 
 
 
 
 
 
 
Gross Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
at Which
 
 
 
 
 
 
 
 
 
Initial Costs to Company
 
Total
 
Carried At
 
Accumulated
 
 
 
 
 
 
 
 
 
Buildings &
 
Adjustment
 
December 31, 2017
 
Depreciation
 
Date
 
Date
Description (a)
 
Encumbrances
 
Land
 
Improvements
 
to Basis
 
 (b) (c) (d)
 
(e) (f)
 
Acquired
 
Constructed
FedEx
 

 


 


 


 


 


 

 

Elko, NV
 
(g)
 
$
186

 
$
2,024

 
$

 
$
2,210

 
$
245

 
5/28/2013
 
2012
Norfolk, NE
 
(g)
 
618

 
2,499

 

 
3,117

 
295

 
8/19/2013
 
2013
Spirit Lake, IA
 
(g)
 
115

 
2,501

 

 
2,616

 
268

 
12/12/2013
 
2013
FleetPride
 

 


 


 


 


 


 

 

Mobile, AL
 
(g)
 
695

 
2,445

 

 
3,140

 
187

 
10/22/2015
 
2015
Fresh Thyme
 

 


 


 


 


 


 

 

Indianapolis, IN
 
(g)
 
1,074

 
7,452

 

 
8,526

 
71

 
9/26/2017
 
2016
Worthington, OH
 
(g)
 
2,648

 
6,498

 

 
9,146

 
240

 
8/9/2016
 
2015
Great White
 

 


 


 


 


 


 

 

Oklahoma City, OK
 
(g)
 
323

 
4,031

 

 
4,354

 
402

 
5/29/2014
 
1973
Headwaters
 

 


 


 


 


 


 

 

Bryan, TX
 
(g)
 
273

 
961

 

 
1,234

 
86

 
7/23/2014
 
2014
Home Depot Center
 

 


 


 


 


 


 

 

Orland Park, IL
 
$11,275
 
5,694

 
13,100

 
605

 
19,399

 
915

 
12/31/2015
 
1993
Jo-Ann's
 

 


 


 


 


 


 

 

Roseville, MI
 
(g)
 
506

 
2,747

 

 
3,253

 
370

 
9/30/2013
 
2013
Kum & Go
 

 


 


 


 


 


 

 

Cedar Rapids, IA
 
1,501
 
630

 
1,679

 

 
2,309

 
208

 
5/3/2013
 
2011
LA Fitness
 

 


 


 


 


 


 

 

Pawtucket, RI
 
(g)
 
5,556

 
7,071

 

 
12,627

 
350

 
10/11/2016
 
2015
Rock Hill, SC
 
(g)
 
630

 
7,858

 

 
8,488

 
175

 
4/6/2017
 
2015
Lowe's
 

 


 


 


 


 


 

 

Fremont, OH
 
5,312
 
1,287

 
7,125

 
278

 
8,690

 
887

 
12/11/2013
 
1996
North Dartmouth, MA
 
(g)
 
7,334

 
11,976

 

 
19,310

 
407

 
1/4/2017
 
2004
Marshalls
 

 


 


 


 


 


 

 

Wilkesboro, NC
 
(g)
 
968

 
1,775

 

 
2,743

 
64

 
10/20/2016
 
1999
Marshalls & Petco
 

 


 


 


 


 


 

 

Blaine, MN
 
(g)
 
1,642

 
5,170

 

 
6,812

 
198

 
12/29/2016
 
2016
Mattress Firm
 

 


 


 


 


 


 

 

Fairview Park, OH
 
(g)
 
646

 
830

 

 
1,476

 
84

 
6/16/2014
 
2014
Gadsden, AL
 
(g)
 
393

 
1,413

 

 
1,806

 
170

 
6/10/2013
 
2012
Phoenix, AZ
 
(g)
 
550

 
956

 

 
1,506

 
99

 
2/26/2014
 
2014
Mattress Firm & AT&T
 

 


 


 


 


 


 

 

Woodbury, MN
 
(g)
 
812

 
2,238

 

 
3,050

 
248

 
1/24/2014
 
2013
Mattress Firm & Panera Bread

 


 


 


 


 


 

 

Elyria, OH
 
(g)
 
1,100

 
2,836

 

 
3,936

 
151

 
4/7/2016
 
2015
McAlister's Deli
 

 


 


 


 


 


 

 

Amarillo, TX
 
(g)
 
435

 
1,050

 

 
1,485

 
120

 
3/27/2014
 
2010
Shawnee, OK
 
(g)
 
601

 
1,054

 

 
1,655

 
115

 
3/27/2014
 
2007
Mister Carwash
 

 


 


 


 


 


 

 

Hudson, FL
 
(g)
 
1,014

 
843

 

 
1,857

 
26

 
10/19/2016
 
2007
Spring Hill, FL
 
(g)
 
961

 
1,156

 

 
2,117

 
36

 
10/19/2016
 
2008
National Tire & Battery
 

 


 


 


 


 


 

 

Conyers, GA
 
1,657
 
522

 
1,845

 

 
2,367

 
160

 
9/26/2014
 
1995
Natural Grocers
 

 


 


 


 


 


 

 

Prescott, AZ
 
2,367
 
795

 
2,802

 

 
3,597

 
381

 
5/6/2013
 
2012
North Lake Square
 

 


 


 


 


 


 

 

Gainesville, GA
 
13,365
 
1,318

 
22,598

 

 
23,916

 
302

 
7/26/2017
 
2015
Northern Tool
 

 

 

 

 

 

 

 

Hoover, AK
 
(g)
 
691

 
2,150

 

 
2,841

 
199

 
8/15/2014
 
2014
O'Reilly Auto Parts
 

 


 


 


 


 


 

 

Decatur, GA
 
(g)
 
491

 
985

 

 
1,476

 
33

 
9/12/2016
 
2007
Fayetteville, NC
 
(g)
 
132

 
1,246

 

 
1,378

 
119

 
3/18/2014
 
2012

S-3

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)

 
 
 
 
 
 
 
 
 
 
Gross Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
at Which
 
 
 
 
 
 
 
 
 
Initial Costs to Company
 
Total
 
Carried At
 
Accumulated
 
 
 
 
 
 
 
 
 
Buildings &
 
Adjustment
 
December 31, 2017
 
Depreciation
 
Date
 
Date
Description (a)
 
Encumbrances
 
Land
 
Improvements
 
to Basis
 
 (b) (c) (d)
 
(e) (f)
 
Acquired
 
Constructed
PetSmart
 

 


 


 


 


 


 

 

Lexington, NC
 
(g)
 
$
605

 
$
3,162

 
$

 
$
3,767

 
$
98

 
1/27/2017
 
2016
Little Rock, AR
 
(g)
 
1,283

 
2,820

 

 
4,103

 
352

 
7/19/2013
 
1996
McAllen, TX
 
$2,924
 
1,961

 
1,994

 

 
3,955

 
270

 
9/30/2014
 
1995
Raising Cane's
 

 


 


 


 


 


 

 

Avondale, AZ
 
(g)
 
1,435

 
1,857

 

 
3,292

 

 
5/23/2014
 
2013
Sam's Club
 

 


 


 


 


 


 

 

Timonium, MD
 
9,150
 
6,194

 
11,042

 

 
17,236

 
472

 
11/28/2016
 
2000
Sherwin-Williams
 

 


 


 


 


 


 

 

Douglasville, GA
 
(g)
 
417

 
578

 

 
995

 
68

 
8/2/2013
 
2009
Fort Myers, FL
 
(g)
 
515

 
703

 

 
1,218

 
17

 
4/26/2017
 
2016
Lawrenceville, GA
 
(g)
 
320

 
845

 

 
1,165

 
106

 
9/24/2013
 
2013
Pigeon Forge, TN
 
(g)
 
393

 
661

 

 
1,054

 
20

 
11/1/2016
 
2015
Shopko
 

 


 


 


 


 


 

 

Larned, KS
 
(g)
 
49

 
1,727

 

 
1,776

 
169

 
6/30/2014
 
2008
Nephi, UT
 
(g)
 
180

 
2,872

 

 
3,052

 
139

 
3/4/2016
 
2015
Shoppes at Battle Bridge
 

 


 


 


 


 


 

 

Raleigh, NC
 
6,300
 
1,450

 
8,436

 
(8,544
)
(h)
1,342

 

 
9/4/2014
 
2008
Sleepy's
 

 


 


 


 


 


 

 

Roanoke Rapids, NC
 
(g)
 
238

 
1,267

 

 
1,505

 
79

 
8/17/2015
 
2015
Sunoco
 

 


 


 


 


 


 

 

Merritt Island, FL
 
(g)
 
577

 
1,762

 

 
2,339

 
208

 
4/12/2013
 
2008
Tailwinds
 

 


 


 


 


 


 

 

Denton, TX
 
(g)
 
884

 
7,747

 

 
8,631

 
645

 
9/30/2014
 
2013
Tellico Greens
 

 


 


 


 


 


 

 

Loudon, TN
 
3,000
 
823

 
3,959

 

 
4,782

 
422

 
12/20/2013
 
2008
Tempe Commerce
 

 


 


 


 


 


 

 

Tempe, AZ
 

 
1,975

 
12,512

 

 
14,487

 
18

 
12/22/2017
 
1998
Teradata
 

 


 


 


 


 


 

 

Miami Township, OH
 
(g)
 
1,161

 
9,181

 

 
10,342

 
315

 
12/12/2016
 
2010
The Toro Company
 

 


 


 


 


 


 

 

Windom, MN
 
(g)
 
73

 
8,708

 

 
8,781

 
362

 
5/19/2016
 
2016
Time Warner
 

 


 


 


 


 


 

 

Streetsboro, OH
 
3,543
 
811

 
3,849

 

 
4,660

 
334

 
9/30/2014
 
2003
Tire Centers
 

 


 


 


 


 


 

 

Decatur, AL
 
1,311
 
208

 
1,329

 

 
1,537

 
121

 
10/3/2014
 
1998
Title Resource Group
 

 


 


 


 


 


 

 

Mt. Laurel, NJ
 
9,240
 
2,188

 
12,380

 

 
14,568

 
1,047

 
11/24/2015
 
2004
TJ Maxx
 

 


 


 


 


 


 

 

Danville, IL
 
(g)
 
271

 
2,528

 

 
2,799

 
341

 
9/23/2013
 
2013
Triangle Town Place
 

 


 


 


 


 


 

 

Raleigh, NC
 
16,400
 
4,694

 
23,044

 

 
27,738

 
644

 
12/15/2016
 
2004
Valeo Production Facility
 

 


 


 


 


 


 

 

East Liberty, OH
 
(g)
 
268

 
5,564

 

 
5,832

 
85

 
6/2/2017
 
2016
Walgreens
 

 


 


 


 


 


 

 

Albuquerque, NM
 
(g)
 
789

 
1,609

 
11

 
2,409

 
247

 
12/7/2011
 
1995
Coweta, OK
 
2,600
 
725

 
3,246

 

 
3,971

 
289

 
6/30/2014
 
2009
Reidsville, NC
 
3,603
 
610

 
3,801

 

 
4,411

 
592

 
12/8/2011
 
2008
St. Louis, MO
 
2,534
 
307

 
3,205

 

 
3,512

 
272

 
8/8/2014
 
2007
Walgreens Distribution Facility
 


 


 


 


 


 

 

Findlay Township, PA
 
(g)
 
2,203

 
11,146

 

 
13,349

 
578

 
2/29/2016
 
2015

S-4

COLE REAL ESTATE INCOME STRATEGY (DAILY NAV), INC.
SCHEDULE III – REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION – (Continued)
(in thousands)

 
 
 
 
 
 
 
 
 
 
Gross Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
at Which
 
 
 
 
 
 
 
 
 
Initial Costs to Company
 
Total
 
Carried At
 
Accumulated
 
 
 
 
 
 
 
 
 
Buildings &
 
Adjustment
 
December 31, 2017
 
Depreciation
 
Date
 
Date
Description (a)
 
Encumbrances
 
Land
 
Improvements
 
to Basis
 
 (b) (c) (d)
 
(e) (f)
 
Acquired
 
Constructed
Walmart
 

 


 


 


 


 


 

 

Randallstown, MD
 
$14,250
 
$
7,748

 
$
22,021

 
$

 
$
29,769

 
$
427

 
5/17/2017
 
2012
West Marine
 

 


 


 


 


 


 

 

Mystic, CT
 
(g)
 
1,168

 
3,132

 

 
4,300

 
202

 
9/11/2015
 
2014
 
 
$
149,734

 
$
129,452

 
$
496,091

 
$
(7,458
)
 
$
618,085

 
$
26,073

 
 
 
 
 ____________________________________
(a)
As of December 31, 2017, the Company owned 114 retail, eight anchored shopping centers, 13 industrial and distribution and four office properties.
(b)
Gross intangible lease assets of $93.9 million and the associated accumulated amortization of $14.5 million are not reflected in the table above.
(c)
The aggregate cost for federal income tax purposes was approximately $704.2 million.
(d)
The following is a reconciliation of total real estate carrying value for the years ended December 31:
 
 
 
2017
 
2016
 
2015
Balance, beginning of period
$
406,447

 
$
237,401

 
$
203,111

 
Additions
 
 
 
 
 
 
 
Acquisitions
219,584

 
168,901

 
48,885

 
 
Improvements
598

 
145

 
226

 
Total additions
$
220,182

 
$
169,046

 
$
49,111

 
Deductions
 
 
 
 
 
 
 
Dispositions

 

 
(14,821
)
 
 
Impairments
(227
)
 

 

 
 
Reclassified to assets held for sale
(8,317
)
 

 

 
Total deductions
$
(8,544
)
 
$

 
$
(14,821
)
Balance, end of period
$
618,085

 
$
406,447

 
$
237,401

(e)The following is a reconciliation of accumulated depreciation for the years ended December 31:
 
 
 
2017
 
2016
 
2015
Balance, beginning of period
$
14,768

 
$
8,168

 
$
4,459

 
Additions
 
 
 
 
 
 
 
Acquisitions - depreciation Expense
11,537

 
6,576

 
4,358

 
 
Improvements - depreciation Expense
544

 
24

 
14

 
Total additions
$
12,081

 
$
6,600

 
$
4,372

 
Deductions
 
 
 
 
 
 
Impairments
(10
)
 

 

 
 
Dispositions

 

 
(663
)
 
 
Reclassified to assets held for sale
(766
)
 

 

 
Total deductions
$
(776
)
 
$

 
$
(663
)
Balance, end of period
$
26,073

 
$
14,768

 
$
8,168

(f)
The Company’s assets are depreciated or amortized using the straight-line method over the useful lives of the assets by class. Generally, buildings are depreciated over 40 years, site improvements are depreciated over 15 years, and tenant improvements are amortized over the remaining life of the lease or the useful life, whichever is shorter.
(g)
Part of the Credit Facility’s Borrowing Base. As of December 31, 2017, the Company had $128.5 million outstanding under the Credit Facility.
(h)
Asset held for sale as of December 31, 2017.

S-5