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Section 1: 10-Q (10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2015

 

OR

 

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

 

For the transition period from _______ to ______

 

Commission File Number 000-54946

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   26-3136483
(State or other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)
     
712 Fifth Avenue, 9th Floor, New York, NY   10019
(Address or Principal Executive Offices)   (Zip Code)

 

(212) 843-1601

(Registrant’s Telephone Number, Including Area Code)

 

None 

(Former name, former address or former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨   Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

 

Number of shares outstanding of the registrant’s

classes of common stock, as of May 6, 2015:

Class A Common Stock: 12,499,818 shares

Class B-2 Common Stock: 353,630 shares

Class B-3 Common Stock: 353,629 shares

 

 
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

FORM 10-Q

March 31, 2015

 

PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 3
     
  Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 4
     
  Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2015 5
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
     
Item 4. Controls and Procedures 33
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 34
     
Item 1A. Risk Factors 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3. Defaults Upon Senior Securities 34
     
Item 4. Mine Safety Disclosures 34
     
Item 5. Other Information 34
     
Item 6. Exhibits 34
     
SIGNATURES 38

 

2
 

  

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

   (Unaudited)
March 31,
2015
   December 31,
2014
 
ASSETS          
Net Real Estate Investments          
Land  $45,233   $37,909 
Buildings and improvements   297,007    240,074 
Furniture, fixtures and equipment   8,011    6,481 
Total Gross Operating Real Estate Investments   350,251    284,464 
Accumulated depreciation   (13,277)   (10,992)
Total Net Operating Real Estate Investments   336,974    273,472 
Operating real estate held for sale, net   14,982    14,939 
Total Net Real Estate Investments   351,956    288,411 
Cash and cash equivalents   66,488    23,059 
Restricted cash   2,915    11,091 
Due from affiliates   531    570 
Accounts receivable, prepaid and other assets   1,405    753 
Investments in unconsolidated real estate joint ventures   22,298    18,331 
In-place lease value, net   1,549    745 
Deferred financing costs, net   2,554    2,199 
Non-real estate assets associated with operating real estate held for sale   879    927 
Total Assets  $450,575   $346,086 
           
LIABILITIES AND EQUITY          
Mortgages payable  $243,563   $201,343 
Mortgage payable associated with operating real estate held for sale   11,500    11,500 
Accounts payable   505    634 
Other accrued liabilities   4,489    3,345 
Due to affiliates   2,948    1,946 
Distributions payable   1,338    889 
Liabilities associated with operating real estate held for sale   398    418 
Total Liabilities   264,741    220,075 
Equity          
Stockholders’ Equity          
Preferred stock, $0.01 par value, 250,000,000 shares authorized; none issued and outstanding        
Common stock - Class A, $0.01 par value, 747,586,185 shares authorized; 12,499,818 and 7,531,188 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively   125    75 
Common stock - Class B-1, $0.01 par value, 804,605 shares authorized; none and 353,630 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively       4 
Common stock - Class B-2, $0.01 par value, 804,605 shares authorized; 353,630 shares issued and outstanding as of March 31, 2015 and December 31, 2014   4    4 
Common stock - Class B-3, $0.01 par value, 804,605 shares authorized; 353,629 shares issued and outstanding as of March 31, 2015 and December 31, 2014   4    4 
Additional paid-in-capital   167,725    113,511 
Distributions in excess of cumulative earnings   (21,823)   (21,213)
Total Stockholders’ Equity   146,035    92,385 
Noncontrolling Interests          
Operating partnership units   2,942    2,949 
    Partially owned properties   36,857    30,677 
Total Noncontrolling Interests   39,799    33,626 
Total Equity   185,834    126,011 
TOTAL LIABILITIES AND EQUITY  $450,575   $346,086 

 

See Notes to Consolidated Financial Statements 

 

3
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except share and per share amounts)

  

   Three Months Ended 
   March 31, 
   2015   2014 
Revenues          
Net rental income  $8,644   $3,130 
Other property revenues   392    96 
Total revenues   9,036    3,226 
Expenses          
Property operating   3,864    1,581 
General and administrative   928    530 
Management fees   1,450    116 
Acquisition costs   449    14 
Depreciation and amortization   2,765    1,108 
Total expenses   9,456    3,349 
Operating loss   (420)   (123)
Other income (expense)          
Other income   22     
Equity in income (loss) of unconsolidated real estate joint ventures   730    (6)
Gain on sale of unconsolidated real estate joint venture interest   11,307     
Interest expense, net   (2,292)   (1,123)
Total other income (expense)   9,767    (1,129)
           
Net income (loss) from continuing operations   9,347    (1,252)
           
Discontinued operations          
Loss on operations of rental property       (62)
Loss on early extinguishment of debt       (880)
Gain on sale of joint venture interest       1,006 
Income from discontinued operations       64 
           
Net income (loss)   9,347    (1,188)
Net income (loss) attributable to noncontrolling interests          
Operating partnership units   75     
Partially-owned properties   5,959    (141)
Net income (loss) attributable to noncontrolling interests   6,034    (141)
Net income (loss) attributable to common stockholders  $3,313   $(1,047)
           
Income (loss) per common share - Basic (1)          
Continuing operations  $0.26   $(1.05)
Discontinued operations  $0.00   $0.06 
   $0.26   $(0.99)
           
Income (loss) per common share – Diluted (1)          
Continuing operations  $0.26   $(1.05)
Discontinued operations  $0.00   $0.06 
   $0.26   $(0.99)
           
Weighted average basic common shares outstanding (1)   12,547,895    1,060,889 
Weighted average diluted common shares outstanding (1)   12,547,895    1,060,889 

 

(1) Share and per share amounts have been restated to reflect the effects of two reverse stock splits of the Company’s Class B common stock, which occurred during the first quarter of 2014. See Note 1, "Organization and Nature of Business" and Note 11, "Stockholders' Equity" for further discussion. 

 

See Notes to Consolidated Financial Statements

 

4
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

FOR THE THREE MONTHS ENDED MARCH 31, 2015

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands, except share and per share amounts)

 

   Class A Common
Stock
   Class B-1
Common Stock
   Class B-2
Common Stock
   Class B-3
Common Stock
                     
   Number of
Shares
   Par
Value
   Number
of
Shares
   Par
Value
   Number
of
Shares
   Par
Value
   Number
of
Shares
   Par
Value
   Additional
Paid-
in Capital
   Cumulative
Distributions
   Net loss to
Common
Stockholders
   Noncontrolling
Interests
   Total  Equity 
Balance, January 1, 2015   7,531,188   $75    353,630   $4    353,630   $4    353,629   $4   $113,511   $(9,930)  $(11,283)  $33,626   $126,011 
                                                                  
Issuance of Class A common stock, net   4,600,000    46    -    -    -    -    -    -    53,604    -    -    -    53,650 
Conversion of Class B-1 into Class A shares   353,630    4    (353,630)   (4)   -    -    -    -    -    -    -    -    - 
Vesting of restricted stock compensation   -    -    -    -    -    -    -    -    50    -    -    -    50 
Issuance of restricted stock   15,000    -    -    -    -    -    -    -    -    -    -    -    - 
Issuance of Long-Term Incentive Plan ("LTIP") units for compensation   -    -    -    -    -    -    -    -    146    -    -    -    146 
Vesting of LTIP unit compensation   -    -    -    -    -    -    -    -    414    -    -    -    414 
Capital contributions from noncontrolling interests   -    -    -    -    -    -    -    -    -    -    -    578    578 
Distributions declared   -    -    -    -    -    -    -    -    -    (3,923)   -    (82)   (4,005)
Distributions to noncontrolling interests   -    -    -    -    -    -    -    -    -    -    -    (357)   (357)
Net income   -    -    -    -    -    -    -    -    -    -    3,313    6,034    9,347 
                                                                  
Balance, March 31, 2015   12,499,818   $125    -   $-    353,630   $4    353,629   $4   $167,725   $(13,853)  $(7,970)  $39,799   $185,834 

 

See Notes to Consolidated Financial Statements

  

5
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands, except share and per share amounts)

 

   Three Months Ended 
   March 31, 
   2015   2014 
         
Cash flows from operating activities          
Net income (loss)  $9,347   $(1,188)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation and amortization   2,817    1,291 
Amortization of mortgages payable fair value adjustments   (65)   (120)
Equity in (income) loss of unconsolidated joint ventures   (730)   6 
Gain on sale of real estate assets of unconsolidated joint ventures   (11,307)   (1,006)
Distributions from unconsolidated real estate joint ventures   1,093    32 
Share-based compensation attributable to directors' stock compensation plan   50    14 
Share-based compensation to Former Advisor - LTIP Units   414    - 
Share-based compensation to Manager - LTIP Units   146    - 
Changes in operating assets and liabilities:          
Due to affiliates, net   1,120    405 
Accounts receivable, prepaids and other assets   (554)   (1,614)
Accounts payable and other accrued liabilities   996    1,000 
Net cash provided by (used in) operating activities   3,327    (1,180)
           
Cash flows from investing activities:          
Decrease in restricted cash   8,123    220 
Acquisitions of consolidated real estate investments   (66,640)   - 
Capital expenditures   (446)   (3,480)
Proceeds from sale of joint venture interests   -    4,986 
Proceeds from sale of unconsolidated real estate joint venture interests   15,590    - 
Investment in unconsolidated joint venture   (8,679)   - 
Net cash (used in) provided by investing activities   (52,052)   1,726 
           
Cash flows from financing activities:          
Distributions to common stockholders   (3,557)   (417)
Distributions to noncontrolling interests   (357)   (3,956)
Capital contributions from noncontrolling interests   578    - 
Borrowings on mortgages payable   42,641    3,975 
Repayments on mortgages payable   (355)   - 
Payments of deferred financing fees   (446)   - 
Net proceeds from issuance of common stock   53,650    - 
Net cash provided by financing activities   92,154    (398)
           
Net increase in cash and cash equivalents  $43,429   $148 
           
Cash and cash equivalents at beginning of period  $23,059   $2,984 
           
Cash and cash equivalents at end of period  $66,488   $3,132 
Supplemental Disclosure of Cash Flow Information          
           
Cash paid during the period for interest  $2,320   $187 
Distributions payable – declared and unpaid  $449   $- 
Accrued offering costs  $-   $1,392 

 

See Notes to Consolidated Financial Statements

 

6
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Organization and Nature of Business

  

Bluerock Residential Growth REIT, Inc. (the “Company”) was incorporated as a Maryland corporation on July 25, 2008. The Company’s objective is to maximize long-term stockholder value by acquiring well-located institutional-quality apartment properties in demographically attractive growth markets across the United States. The Company seeks to maximize returns through investments where it believes it can drive substantial growth in its funds from operations and net asset value through one or more of its Core-Plus, Value-Add, Opportunistic and Invest-to-Own investment strategies.

 

The Company has elected to be treated, and currently qualifies, as a real estate investment trust (“REIT”), for federal income tax purposes. As a REIT, the Company generally is not subject to corporate-level income taxes. To maintain its REIT status, the Company is required, among other requirements, to distribute annually at least 90% of its “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to the Company’s stockholders. If the Company fails to qualify as a REIT in any taxable year, it would be subject to federal income tax on its taxable income at regular corporate tax rates.

 

The Company raised capital in a continuous registered offering, carried out in a manner consistent with offerings of non-listed REITs, from its inception until September 9, 2013, when it terminated the continuous registered offering in connection with the Company’s Board of Directors (the “Board’s”) consideration of strategic alternatives to maximize value to its stockholders. The Company subsequently determined to register shares of newly authorized Class A common stock that were to be offered in a firmly underwritten public offering (the “IPO”), by filing a registration statement on Form S-11 (File No. 333-192610) with the SEC, on November 27, 2013. On March 28, 2014, the SEC declared the registration statement effective and the Company announced the pricing of the IPO of 3,448,276 shares of Class A common stock at a public offering price of $14.50 per share for total gross proceeds of $50.0 million. The net proceeds of the IPO, which closed on April 2, 2014, were approximately $44.0 million after deducting underwriting discounts and commissions and offering costs.

 

In connection with the IPO, shares of the Company’s Class A common stock were listed on the NYSE MKT for trading under the symbol “BRG.” Pursuant to the second articles of amendment and restatement to its charter filed on March 26, 2014, (the “Second Charter Amendment”), each share of its common stock outstanding immediately prior to the listing, including shares sold in its continuous registered offering, was changed into one-third of a share of each of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock. Following the filing of the Second Charter Amendment, the Company effected a 2.264881-to-1 reverse stock split of its outstanding shares of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock, and on March 31, 2014, the Company effected an additional 1.0045878-to-1 reverse stock split of its outstanding shares of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock.

 

As of March 31, 2014, we were externally managed by Bluerock Multifamily Advisor, LLC, an affiliate of Bluerock (the “Former Advisor”), pursuant to an advisory agreement (the “Advisory Agreement”). In connection with the completion of the IPO, we engaged BRG Manager, LLC, also an affiliate of Bluerock (the “Manager”), to provide external management services to us under a new management agreement (the “Management Agreement”), and terminated the Advisory Agreement with the Former Advisor.

 

Substantially concurrently with the completion of the IPO, the Company completed a series of related contribution transactions pursuant to which it acquired indirect equity interests in four apartment properties, and a 100% fee simple interest in a fifth apartment property for an aggregate asset value of $152.3 million (inclusive of Villas of Oak Crest, which is accounted for under the equity method, and Springhouse, in which the Company already owned an interest and which has been reported as consolidated for the periods presented.

 

The Company subsequently determined to register additional shares of its Class A common stock to be offered in a firmly underwritten public offering, (the “October 2014 Follow-On Offering”), by filing a registration statement on Form S-11 (File No. 333-198770) with the SEC on September 16, 2014. On October 2, 2014, the SEC declared the Registration Statement effective and the Company announced the pricing of the October 2014 Follow-On Offering at a public offering price of $11.90 per share. The Company closed the October 2014 Follow-On Offering of 3,035,444 shares of Class A common stock, inclusive of shares sold pursuant to the full exercise of the overallotment option by the underwriters, on October 8, 2014. Net proceeds of the October 2014 Follow-On Offering were approximately $32.9 million after deducting underwriting discounts and commissions and offering costs.

 

On January 20, 2015, the Company completed an underwritten shelf takedown offering (the “January 2015 Follow-On Offering”) of 4,600,000 shares of Class A common stock, par value $0.01 per share, inclusive of shares sold pursuant to the full exercise of the overallotment option by the underwriters. The shares were registered with the SEC, pursuant to a registration statement on Form S-3 (File No. 333-200359) filed with the SEC on November 19, 2014 and declared effective on December 19, 2014. The public offering price of $12.50 per share was announced on January 14, 2015. Net proceeds of the January 2015 Follow-On Offering were approximately $53.7 million after deducting underwriting discounts and commissions and offering costs.

 

7
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   

As of March 31, 2015, the Company's portfolio consisted of interests in thirteen properties (ten operating properties and three development properties), all but four acquired through joint ventures. The Company’s thirteen properties are comprised of an aggregate of 4,131 units, comprised of 3,226 operating units and 905 units under development. As of March 31, 2015, these properties, exclusive of our development properties, were approximately 94% occupied.

 

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

 

Principles of Consolidation and Basis of Presentation

 

The Company operates as an umbrella partnership REIT in which Bluerock Residential Holdings, L.P. (its “Operating Partnership”), or its wholly-owned subsidiaries, owns substantially all of the property interests acquired on the Company’s behalf. As of March 31, 2015, limited partners other than the Company owned approximately 4.48% of the Operating Partnership (2.05% is held by holders of limited partnership interest in the Operating Partnership (“OP Units”) and 2.43% is held by holders of the Operating Partnership’s long-term incentive plan units (“LTIP Units”)). Bluerock Real Estate, L.L.C., a Delaware limited liability company, is referred to as Bluerock, (“Bluerock”), and the Company’s external manager, BRG Manager, LLC, a Delaware limited liability company, is referred to as its Manager, (“Manager”), Both Bluerock and the Manager are related parties with respect to the Company, but are not within the Company’s control.

 

Because the Company is the sole general partner of its Operating Partnership and has unilateral control over its management and major operating decisions (even if additional limited partners are admitted to the Operating Partnership), the accounts of the Operating Partnership are consolidated in its consolidated financial statements. The Company consolidates entities in which it controls more than 50% of the voting equity and in which control does not rest with other investors. Investments in real estate joint ventures over which the Company has the ability to exercise significant influence, but for which it does not have financial or operating control, are accounted for using the equity method of accounting. These entities are reflected on the Company’s consolidated financial statements as “Investments in unconsolidated real estate joint ventures. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.  The Company will consider future majority owned and controlled joint ventures for consolidation in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

 

Certain amounts in prior year financial statement presentation have been reclassified to conform to the current period presentation. 

 

Interim Financial Information

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and the instructions to Form 10-Q and Article 10-1 of Regulation S-X.  Accordingly, the financial statements for interim reporting do not include all of the information and notes or disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included.  Operating results for interim periods should not be considered indicative of the operating results for a full year.

 

The balance sheet at December 31, 2014 has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements.  For further information refer to the financial statements and notes thereto included in our audited consolidated financial statements for the year ended December 31, 2014 contained in the Annual Report on Form 10-K as filed with the SEC on March 4, 2015. 

 

Summary of Significant Accounting Policies

 

There have been no significant changes to the Company’s accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014.

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (“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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

New Accounting Pronouncements

  

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and the accounting for debt issue costs. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. The amendments in ASU 2015-03 become effective for public business entities in the first annual period beginning after December 15, 2015, and interim periods within those fiscal years, with early application permitted. The Company is currently evaluating the impact of this accounting standard.

 

8
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 eliminates specific consolidation guidance for limited partnerships and revises other aspects of consolidation analysis, including how kick-out rights, fee arrangements and related parties are assessed. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the impact of ASU 2015-02 on the Company’s financial statements.

 

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01”), which eliminates the concept of extraordinary items and require items that are either unusual in nature or infrequently occurring to be reported as a separate component of income from continuing operations or disclosed in the notes to the financial statements. ASU 2015-01 is effective for periods beginning after December 15, 2015, with early adoption permitted. ASU 2015-01 is not expected to have a material impact on the Company's financial statements.

  

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern” (“ASU 2014-15”), which requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 is effective for periods beginning after December 15, 2016. ASU 2014-15 is not expected to have a material impact on the Company's financial statements.

  

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance when it becomes effective on January 1, 2017. Early adoption is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

   

Note 3 – Real Estate Assets Held for Sale, Discontinued Operations and Sale of Joint Venture Equity Interests

 

Real Estate Assets Held for Sale and Discontinued Operations

 

The Company had reported its Creekside property as held for sale in the Company’s Annual Report on Form 10-K for the twelve month period ended December 31, 2013. On March 28, 2014, the special purpose entity in which the Company held a 24.7% indirect equity interest sold the Creekside property, as discussed below. On August 28, 2014, the Company’s Investment Committee approved a plan to sell North Park Towers and the Company has classified amounts related to the property as held for sale as of December 31, 2014 and March 31, 2015.

 

Property Classified as Discontinued Operations

 

The following is a summary of the results of operations of the Creekside property classified as discontinued operations for the three months ended March 31, 2014 (amounts in thousands); there were no operations for the three months ended March 31, 2015 as the property was sold on March 28, 2014:

 

   For the Three Months Ended March 31, 
   2015   2014 
Total revenues  $-   $508 
Expenses          
Property operating   -    (229)
Depreciation and amortization   -    (184)
Management fees   -    (8)
Interest, net   -    (149)
Loss on operations of rental property  $-   $(62)
Gain on sale of joint venture interest   -    1,006 
Loss on early extinguishment of debt   -    (880)
Income from discontinued operations  $-   $64 

 

Sale of Joint Venture Equity Interests

 

On December 10, 2014, the Company through BEMT Augusta, LLC sold its 25.0% interest in the Estates at Perimeter/Augusta, Bluerock Special Opportunity + Income Fund II, LLC (“Fund II”) sold its 25.0% interest, and an unaffiliated third party, (“BRG Co-Owner”), sold its 50.0% interest, to Waypoint Residential Services, LLC, an unaffiliated third party, for an aggregate of $26.0 million, subject to a loan prepayment penalty and certain prorations and adjustments typical in such real estate transactions. After deduction for payment of the existing mortgage indebtedness and loan prepayment penalty, closing costs and fees, the sale of the Company’s interest in the Estates at Perimeter/Augusta generated net proceeds to the Company of approximately $1.7 million and a gain on sale of $0.6 million.

 

9
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On December 9, 2014 the Company, through BEMT Berry Hill, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Operating Partnership (“BEMT Berry Hill’), entered into a series of transactions and agreements to restructure the ownership of Berry Hill (the “Restructuring Transactions”).

 

Prior to the Restructuring Transactions, the Company held a 25.1% indirect equity interest in Berry Hill, Bluerock Special Opportunity + Income Fund III, LLC (“Fund III”) held a 28.4% indirect equity interest, Bluerock Growth Fund, LLC (“BGF”), a Delaware limited liability company and an affiliate of the Company’s Manager, held a 29.0% indirect equity interest, and Stonehenge 23Hundred JV Member, LLC (“Stonehenge JV Member”), an affiliate of Stonehenge Real Estate Group, LLC (“Stonehenge”), an unaffiliated third party, held the remaining 17.5% indirect equity interest plus a promote interest based on investment return hurdles for its service as developer of the property. These indirect equity interests were all held in BR Stonehenge 23Hundred JV, LLC, a Delaware limited liability company, which owns 100% of 23Hundred, LLC (“23Hundred”), a Delaware limited liability company, which in turn owned 100% of Berry Hill.

 

Following the Restructuring Transactions, as of December 31, 2014, Berry Hill was owned in tenancy-in-common interests, adjusted for the agreed Stonehenge promote interest as follows: (i) BEMT Berry Hill and Fund III, through 23Hundred, held a 42.2% undivided tenant-in-common interest (the Company, through BEMT Berry Hill own a 19.8% indirect equity interest and Fund III owns a 22.4% indirect equity interest); (ii) BGF’s subsidiary BGF 23Hundred, LLC, a Delaware limited liability company, holds a 22.9% undivided tenant-in-common interest; and (iii) Stonehenge JV Member’s subsidiary SH 23Hundred TIC, LLC, a Delaware limited liability company, holds a 34.8% undivided tenant-in-common interest.

 

As a result of the restructuring, the Company no longer controlled Berry Hill through its voting rights. The Company’s investment in Berry Hill has been deconsolidated and is now accounted for under the equity method of accounting as of December 31, 2014.

 

On January 14, 2015, the Company, along with the other two holders of tenant-in-common interests in Berry Hill, sold their respective interests to 2300 Berry Hill General Partnership, an unaffiliated third party. The aggregate purchase price was $61.2 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for payment of the existing mortgage indebtedness and payment of closing costs and fees, the sale of the Company’s interest in Berry Hill generated net proceeds of approximately $7.3 million to the Company and a consolidated gain on sale of $11.3 million, of which the Company’s pro rata share of gain is $5.3 million before disposition expenses of $0.1 million, which was included in the Company’s statement of operations for the three months ended March 31, 2015.

 

On December 3, 2014, the Company, through BR Waterford Crossing JV, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Operating Partnership (“BRG Grove”) and Bell HNW Waterford, LLC, a Delaware limited liability company and an unaffiliated third party (“BRG Co-Owner”), owned a 252-unit apartment community located in Hendersonville, Tennessee named the Grove at Waterford, as tenants-in-common.  BRG Grove owned a 60.0% tenant-in-common interest in the Grove at Waterford property. On December 18, 2014, BRG Grove sold its 60.0% tenant-in-common interest in the Grove at Waterford property, and BRG Co-Owner its 40.0% tenant-in-common interest, to Bell Hendersonville, an unaffiliated third party, for an aggregate of $37.7 million, subject to a loan prepayment penalty and certain prorations and adjustments typical in such real estate transactions. After deduction for payment of the existing mortgage indebtedness and loan prepayment penalty, closing costs and fees, the sale of the Company’s interest in the Grove at Waterford generated net proceeds to the Company of approximately $9.0 million and a gain on sale of $3.5 million.

 

On March 28, 2014, BR Creekside, LLC, a special-purpose entity in which the Company holds a 24.7% indirect equity interest, sold the Creekside property to SIR Creekside, LLC, an unaffiliated third party, for $18.9 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for payment of the existing mortgage indebtedness encumbering the Creekside property in the approximate amount of $13.5 million and payment of closing costs and fees, excluding disposition fees of approximately $0.1 million deferred by the Former Advisor, the sale of the Creekside property generated net proceeds to the Company of approximately $1.2 million and a gain on sale of $1.0 million.

 

Note 4 – Investments in Real Estate

 

As of March 31, 2015, the Company was invested in ten operating real estate properties and three development properties through joint venture partnerships. The following tables provide summary information regarding our operating and development investments, which are either consolidated or presented on the equity method of accounting.

 

Operating Properties   

 

   Number of   Date   Ownership   Average   % 
Multifamily Community Name/Location  Units   Built/Renovated (1)   Interest   Rent (2)     Occupied (3) 
MDA Apartment/ Chicago, IL (4)   190    2006    35.31%  $2,231    95%
Enders Place at Baldwin Park/ Orlando, FL   220    2003    89.50%   1,521    95%
Park & Kingston, Charlotte, NC   153    2014    46.95%   1,184    91%
ARIUM Grande Lakes/ Orlando, FL   306    2005    95.00%   1,130    96%
Lansbrook Village/ Palm Harbor, FL   595    2004    76.81%   1,122    93%
Village Green of Ann Arbor/ Ann Arbor, MI   520    2013    48.61%   1,120    93%
Fox Hill, Austin , TX   288    2010    85.27%   1,110    98%
North Park Towers/ Southfield, MI (5)   313    2000    100.0%   1,044    95%
Springhouse at Newport News/ Newport News, VA   432    1985    75.00%   830    92%
Villas at Oak Crest/ Chattanooga, TN   209    1999    67.18%   806    98%
Total/Average   3,226             $1,150    94%

 

10
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Represents date of last significant renovation or year built if there were no renovations.  

(2) Represents the average effective monthly rent per occupied unit for all occupied units for the three months ended March 31, 2015. Total concessions for the three months ended March 31, 2015 amounted to approximately $45,000.

(3) Percent occupied is calculated as (i) the number of units occupied as of March 31, 2015, divided by (ii) total number of units, expressed as a percentage.

(4) The MDA Apartments include 8,200 square feet of retail space. Average effective rent excluding the property’s retail space was $2,082.

(5) This property is classified as held for sale as of March 31, 2015 and accounted for on a consolidated basis based on our 100% ownership in the property. Amounts related to this investment are classified as held for sale assets/liabilities on the Company’s consolidated balance sheet.

 

Depreciation expense was $2.3 million and $1.2 million for the three months ended March 31, 2015 and 2014, respectively including amounts in discontinued operations.

 

Intangibles related to the Company’s consolidated investments in real estate consist of the value of in-place leases. In-place leases are amortized over the remaining term of the in-place leases, which is approximately six months. Amortization expense related to the in-place leases was $0.5 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

 

Development Properties

   

   Number of   Initial  Final Units to  Pro Forma 
Multifamily Community Name/Location  Units   Occupancy  be Delivered  Average Rent (1) 
UCF Orlando / Orlando, FL   296    2Q 2015   2Q 2016  $1,211 
Alexan CityCentre / Houston, TX   340    4Q 2016   4Q 2017   2,144 
Alexan Blaire House / Houston, TX   269    1Q 2017   1Q 2018  $2,019 
Total/Average   905         $1,803 

 

(1) Represents the average pro forma effective monthly rent per occupied unit for all expected occupied units upon stabilization.

 

Note 5 – Acquisition of Real Estate

 

The following describes the Company’s significant acquisition activity during 2015:

 

Acquisition of Interest in Park & Kingston

 

On March 16, 2015, the Company, through a wholly-owned subsidiary of its Operating Partnership, completed an investment in a multi-tiered joint venture along with Fund III, an affiliate of Bluerock, to acquire 153 newly-constructed units (the “Phase I Units”) in a Class AA apartment community in Charlotte, North Carolina known as the Park & Kingston Apartments (“Park & Kingston”). The Company’s indirect ownership interest in Park & Kingston is 46.95%.

 

The purchase price for the Phase I Units of $27.85 million was funded, in part, with a $15.25 million senior mortgage loan secured by the Park & Kingston property and improvements.

 

The Company also has the ability to acquire 15 units under development at Park & Kingston (the “Phase II Units”), for a purchase price of $2.87 million. The seller has commenced, and will manage and complete the development of the Phase II Units. Upon completion of the development of and upon the issuance of a certificate of occupancy for the Phase II Units, closing will occur, financed with supplemental financing of up to 70% of the appraised value of the Phase II Units per the senior mortgage loan discussed above.

 

Acquisition of Interest in Fox Hill

 

On March 26, 2015, the Company, through subsidiaries of its Operating Partnership, completed an investment in a multi-tiered joint venture along with Fund III, an affiliate of Bluerock, and three unaffiliated investors (collectively, the “Third Parties”), to acquire a 288-unit apartment community located in Austin, Texas (“Fox Hill”). The Company’s indirect ownership in Fox Hill is 85.27%.

  

The purchase price of $38.15 million was funded, in part, with a $26.71 million senior mortgage loan secured by the Fox Hill Property and improvements.

 

Preliminary Purchase Price Allocation

 

The acquisitions of Park & Kingston and Fox Hill have been accounted for as business combinations. The purchase prices were allocated to the acquired assets based on their estimated fair values at the dates of acquisition. The preliminary measurements of fair value reflected below are subject to change. The Company expects to finalize the purchase price allocation as soon as practical, but no later than one year from the acquisition date.

 

11
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the assets acquired at the acquisition date. The amounts listed below reflect provisional amounts that will be updated as information becomes available (amounts in thousands): 

  

   Preliminary Purchase Price Allocation 
Land  $7,240 
Building   47,641 
Building improvements   6,292 
Land improvements   2,386 
Furniture and fixtures   1,204 
In-place leases   1,237 
Total assets acquired  $66,000 

 

The pro-forma information presented below represents the change in consolidated revenue and earnings as if the Company's significant acquisitions of Village Green of Ann Arbor, North Park Towers, Lansbrook Village, ARIUM Grande Lakes, and Fox Hill, (collectively the "Recent Acquisitions"), had occurred on January 1, 2014 (amounts in thousands, except per share amounts).

 

   Three Months Ended March 31,   Three Months Ended March 31, 
   2015   2014 
   As Reported   Pro-Forma
Adjustments
   Pro-Forma   As Reported   Pro-Forma
Adjustments
   Pro-Forma 
                         
Revenues  $9,036   $936   $9,972   $3,226   $6,314   $9,540 
Net income (loss)  $9,347  $433  $9,780  $(1,188)  $(1,170)  $(2,358)
Net income (loss) attributable to BRG  $3,313  $412  $3,725  $(1,047)  $(1,076)  $(2,123)
                               
Earnings (loss) per share, basic and diluted  $0.26       $0.30  $(0.99)       $(2.00)

 

 

(1) Pro-forma earnings per share, both basic and diluted, are calculated based on the net income (loss) attributable to BRG.

 

Aggregate property level revenues and net loss for the Recent Acquisitions, since the properties’ respective acquisition dates, that are reflected in the Company’s 2015 consolidated statement of operations amounted to $5.7 million and $.2 million, respectively.

 

Note 6 – Investments in Unconsolidated Real Estate Joint Ventures

 

Following is a summary of the Company’s ownership interests in the investments we report under the equity method of accounting. The carrying amount of the Company’s investments in unconsolidated real estate joint ventures as of March 31, 2015 and December 31, 2014 is summarized in the table below (amounts in thousands):

 

Property  March 31,
 2015
   December 31,
 2014
 
Villas at Oak Crest  $3,163   $3,170 
Alexan CityCentre   6,505    6,505 
UCF Orlando   3,629    3,629 
23Hundred@Berry Hill   202    4,906 
Alexan Blaire House   8,679    - 
Other   120    121 
Total  $22,298   $18,331 

 

The Company’s investments in the Villas at Oak Crest, Alexan CityCentre UCF Orlando, and Alexan Blaire House represent preferred equity investments with the following stated returns:

 

   Current Pay      Total 
   Annualized   Accrued   Annualized 
Property  Preferred
Return
   Annualized
Preferred Return
   Preferred
Return
 
Villas at Oak Crest   10.5%   4.5%   15.0%
Alexan CityCentre   15.0%       15.0%
UCF Orlando   15.0%       15.0%
Alexan Blaire House   15.0%       15.0%

 

12
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The equity in income (loss) of the Company’s unconsolidated real estate joint ventures for the three months ended March 31, 2015 and 2014 is summarized below (amounts in thousands):

 

Property  March 31,
 2015
   March 31,
 2014
 
Villas at Oak Crest  $105   $ 
Alexan CityCentre   241     
UCF Orlando   134     
Alexan Blaire House   261     
Other   (11)   (6)
Equity in income (loss) of unconsolidated joint venture  $730   $(6)

  

Summary combined financial information for the Company’s investments in unconsolidated real estate joint ventures as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014, is as follows:

 

   March 31,
 2015
   December 31,
 2014
 
Balance Sheets:          
Real estate, net of depreciation  $62,585   $55,091 
Real estate, net of depreciation,  held for sale       31,334 
Other assets   8,790    1,193 
Other assets, held for sale   486    2,458 
Total assets  $71,861   $90,076 
           
Mortgage payable  $25,077   $19,820 
Mortgage payable, held for sale       23,569 
Other liabilities   3,315    2,812 
Other liabilities, held for sale   18    1,026 
Total liabilities  $28,410   $47,227 
Members’ equity   43,451    42,849 
Total liabilities and members’ equity  $71,861   $90,076 

   

   Three Months Ended March 31, 
   2015   2014 
Operating Statements:          
Total revenues  $683   $599 
Property operating expenses   (280)   (229)
Income before debt service, acquisition costs, and depreciation and amortization   403    370 
Interest expense   (181)   (186)
Acquisition costs        
Depreciation and amortization   (212)   (200)
Operating income (loss)   10    (16)
Gain on sale of real estate   29,197     
Net income (loss)   29,207    (16)
Net (income) loss attributable to JV partners   (28,838)   11 
Net income (loss) attributable to common stockholders   369    (5)
Amortization of deferred financing costs paid on behalf of joint venture   (7)   
           
Equity in income (loss) of unconsolidated joint venture  $362   $(5)

  

Acquisition of Alexan Blaire House Interests

 

On January 12, 2015, through BRG Southside, LLC, a wholly-owned subsidiary of its Operating Partnership, the Company made a convertible preferred equity investment in a multi-tiered joint venture along with Fund II and Fund III, LLC, which are affiliates of the Manager, and an affiliate of Trammell Crow Residential to develop an approximately 269-unit Class A apartment community located in Houston, Texas, to be known as Alexan Blaire House. Alexan Blaire House will be developed upon a tract of land ground leased from Prokop Industries BH, L.P., a Texas limited partnership, by BR Bellaire BLVD, LLC, as tenant under an 85-year ground lease. We have made a capital commitment of $17.4 million to acquire 100% of the preferred equity interests in BRG Southside, LLC of which $8.7 million has been funded as of March 31, 2015.

 

13
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

Note 7 – Mortgages Payable

 

The following table summarizes certain information as of March 31, 2015 and December 31, 2014, with respect to the Company’s indebtedness (amounts in thousands).

 

   Outstanding Principal   As of March 31, 2015
Property  March 31, 2015     December 31, 2014   Interest Rate   Fixed/ Floating  Maturity Date
Springhouse at Newport News  $22,428     $ 22,515    5.66%  Fixed  January 1, 2020
Enders Place at Baldwin Park(1)   25,398       25,475    4.30%  Fixed  November 1, 2022
MDA Apartments   37,600       37,600    5.35%  Fixed  January 1, 2023
Village Green of Ann Arbor   42,887       43,078    3.92%  Fixed  October 1, 2022
Lansbrook Village   43,043       42,357    4.42%  Blended (2)  March 31, 2018
ARIUM Grande Lakes   29,444       29,444    1.84%  Floating (3)  December 1, 2024
Fox Hills   26,705           3.57%  Fixed  April 1, 2022
Park & Kingston   15,250           3.21%  Fixed  April 1, 2020
Total   242,755       200,469            
Fair value adjustments   808       874            
Total continuing operations   243,563       201,343            
North Park Towers - held for sale   11,500       11,500    5.65%  Fixed  January 6, 2024
Total  $255,063     $ 212,843            

 

(1) The principal includes a $17.4 million loan at a 3.97% interest rate and an $8.0 million supplemental loan at a 5.01% interest rate.

(2) The principal balance includes the initial advance of $42.0 million at a fixed rate of 4.45% and an additional advance of $1.0 million that bears interest at a floating rate of one month LIBOR plus 3.00%, as of March 31, 2015, the additional advance had an interest rate of 3.31%.

(3) ARIUM Grande Lakes Senior Loan bears interest at a floating rate of 1.67% plus one month LIBOR.  At March 31, 2015, the interest rate was 1.84%.

 

Lansbrook Mortgage Payable

 

On March 21, 2014, the Company, through an indirect subsidiary (the “Lansbrook Borrower”), entered into a $48 million loan with General Electric Capital Corporation, which is secured by the Lansbrook property. The $48.0 million is comprised of a $42.0 million initial advance and an additional $6.0 million of additional borrowing for the acquisition and improvement of additional units. At March 31, 2015, the Lansbrook Borrower has borrowed $0.7 million of the $6.0 million of additional borrowable funds. The loan matures on March 31, 2018 and bears interest at a fixed rate 4.44% per annum, with interest-only payments due until May 1, 2016 and principal payments beginning thereafter based upon a 30-year amortization schedule. Yield maintenance payments will be required to the extent the loan is prepaid before the third month prior to the maturity date and thereafter the loan may be prepaid without penalty. At the time of repayment, whether prepaid or paid at maturity, a $240,000 exit fee is due to the lender. The loan is nonrecourse to the Lansbrook Borrower, with recourse carve-outs for certain deeds, acts or failures to act on the part of the Lansbrook Borrower or any of its officers, members, managers or employees.

 

Park & Kingston Mortgage Payable

 

On March 16, 2015, the Company, through an indirect subsidiary (the “Park & Kingston Borrower”), entered into a $15.25 million loan with the Federal National Mortgage Association (“Fannie Mae”), which is secured by Park & Kingston. The loan matures on April 1, 2020 and bears interest at a fixed rate of 3.21%, with interest-only payments due for the entire loan term. Yield maintenance payments will be required to the extent prepaid before the sixth month prior to the maturity date; during the period from the sixth month prior to the maturity date to the third month prior to the maturity date, a prepayment premium of 1% of the principal being prepaid will be required, and thereafter the loan may be prepaid without penalty. The loan is nonrecourse to the Park & Kingston Borrower with recourse carve-outs for certain deeds, acts or failures to act on the part of the Park & Kingston Borrower, or any of its officers, members, managers or employees.

 

Fox Hill Mortgage Payable

 

On March 26, 2015, the Company, through an indirect subsidiary (the “Fox Hill Borrower”), entered into a $26.7 million loan with Walker & Dunlop, LLC, which is secured by Fox Hill. The loan was subsequently assigned to Fannie Mae. The loan matures on April 1, 2022 and bears interest at a fixed rate of 3.57%, with interest-only payments due until May 1, 2019 and fixed monthly payments based on 30-year amortization thereafter. During the first 60 months of the term, the loan may be prepaid at any time with at least 30 business days prior notice and the payment of a prepayment premium equal to the greater of (i) 1% of the principal balance and (ii) a yield maintenance amount calculated as set forth in the loan agreement. After the first 60 months of the term through the fourth month prior to the end of the term, the loan may be prepaid at any time with at least 30 business days prior notice and the payment of a prepayment premium equal to 1% of the principal balance, and thereafter, the loan may be prepaid at any time at par. The loan is nonrecourse to the Company and the Fox Hill Borrower with recourse carve-outs for certain deeds, acts or failures to act on the part of the Company and the Fox Hill Borrower, or any of its officers, members, managers or employees.

 

14
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  As of March 31, 2015, contractual principal payments for the five subsequent years and thereafter are as follows (amounts in thousands):

 

Year  Total 
2015 (April 1-December 31)  $1,056 
2016   2,717 
2017   3,040 
2018   44,297 
2019   2,938 
Thereafter   200,207 
   $254,255 
Add: Unamortized fair value debt adjustment   808 
Total  $255,063 

 

The net book value of real estate assets providing collateral for these above borrowings were $352.0 million and $288.4 million at March 31, 2015 and December 31, 2014, respectively.

 

Note 8 – Line of Credit

 

As of January 1, 2014, the outstanding balance on the Company's working capital line of credit provided by Fund II and Fund III, both of which are affiliates of Bluerock, was $7.6 million.  On April 2, 2014, the line of credit was paid in full with proceeds from the IPO and extinguished.

  

Note 9 – Fair Value of Financial Instruments

 

As of March 31, 2015 and December 31, 2014, the Company believes the carrying value of cash and cash equivalents, accounts receivable, due to and from affiliates, accounts payable, accrued liabilities, and distributions payable approximate their fair value based on their highly-liquid nature and/or short-term maturities.  As of March 31, 2015, the carrying value and approximate fair value of mortgages payable, as presented on the consolidated balance sheet, were $254.3 million and $260.6 million, respectively, inclusive of the North Park Towers mortgage payable, which is classified as held for sale.  The fair value of mortgages payable is estimated based on the Company’s current interest rates (Level 3 inputs, as defined in ASC Topic 820, “Fair Value Measurement”) for similar types of borrowing arrangements.

 

Note 10 – Related Party Transactions

 

In connection with the Company’s investments in the Enders Place at Baldwin Park, Berry Hill and MDA Apartments, it entered into a line of credit agreement with Fund II and Fund III. As of January 1, 2014, the outstanding balance on the Company's working capital line of credit provided by Fund II and Fund III, both of which are affiliates of Bluerock, was $7.6 million.  On April 2, 2014, the line of credit was paid in full with proceeds of the IPO and extinguished.

 

In connection with the Company’s acquisition of an interest in the Villas at Oak Crest, the Company assumed a receivable of $0.3 million from Fund II related to accrued interest on Fund II’s investment in the Villas at Oak Crest prior to the contribution of their interest to the Company, and as of March 31, 2015 and December 31, 2014, the Company has a corresponding payable to Fund II for this amount.

   

As of March 31, 2014, we were externally managed by our Former Advisor pursuant to the Advisory Agreement. In connection with the completion of the IPO, we terminated our Advisory Agreement with our Former Advisor, and we entered into a new management agreement, or Management Agreement, with the Manager, on April 2, 2014. The terms and conditions of the Management Agreement, which became effective as of April 2, 2014, and the Advisory Agreement, which was effective for the reported periods prior to April 2, 2014, are described below.

 

Management Agreement

 

The Management Agreement requires the Manager to manage the Company’s business affairs in conformity with the investment guidelines and other policies that are approved and monitored by the Company’s board of directors. The Manager acts under the supervision and direction of the Board. Specifically, the Manager is responsible for (1) the selection, purchase and sale of the Company’s investment portfolio, (2) the Company’s financing activities, and (3) providing the Company with advisory and management services. The Manager provides the Company with a management team, including a chief executive officer, president, chief accounting officer and chief operating officer, along with appropriate support personnel. None of the officers or employees of the Manager are dedicated exclusively to the Company.

 

15
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

We pay the Manager a base management fee in an amount equal to the sum of: (A) 0.25% of the Company’s stockholders’ existing and contributed equity prior to the IPO and in connection with our contribution transactions, per annum, calculated quarterly based on the Company’s stockholders’ existing and contributed equity for the most recently completed calendar quarter and payable in quarterly installments in arrears, and (B) 1.5% of the equity per annum of the Company’s stockholders who purchase shares of the Company’s Class A common stock, calculated quarterly based on their equity for the most recently completed calendar quarter and payable in quarterly installments in arrears. The base management fee is payable independent of the performance of the Company’s investments. The base management fee expense for the Manager was $0.5 million for the three months ended March 31, 2015.

 

The Company also pays the Manager an incentive fee with respect to each calendar quarter in arrears. The incentive fee is equal to the difference between (1) the product of (x) 20% and (y) the difference between (i) the Company’s adjusted funds from operations (“AFFO”), for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price of equity securities issued in the IPO and in future offerings and transactions, multiplied by the weighted average number of all shares of the Company’s Class A common stock outstanding on a fully-diluted basis (including any restricted stock units, any restricted shares of Class A common stock, LTIP Units, and other shares of common stock underlying awards granted under the Incentive Plans and OP Units) in the previous 12-month period, exclusive of equity securities issued prior to the IPO or in the contribution transactions, and (B) 8%, and (2) the sum of any incentive fee paid to the Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive fee is payable with respect to any calendar quarter unless AFFO is greater than zero for the four most recently completed calendar quarters, or the number of completed calendar quarters since the closing date of the IPO, whichever is less. For purposes of calculating the incentive fee during the first 12 months after completion of the IPO, AFFO will be determined by annualizing the applicable period following completion of the IPO. One half of each quarterly installment of the incentive fee will be payable in LTIP Units, calculated pursuant to the formula above. The remainder of the incentive fee will be payable in cash or in LTIP Units, at the election of the Board, in each case calculated pursuant to the formula above. Incentive fees of $0.15 million were expensed during the three months ended December 31, 2014, which caused the issuance of 10,896 LTIP Units on February 18, 2015. Incentive fees to the Manager of $0.9 million were expensed during the three months ended March 31, 2015, which will result in the issuance of approximately 69,900 LTIP Units during the second quarter of 2015, assuming a LTIP Unit price of $13.33 per unit, once approved by the independent directors.

 

Management fee expense of $0.4 million and $1.0 million was recorded as part of general and administrative expenses for the three months ended March 31, 2015 and for the year ended December 31, 2014, respectively, related to the 179,562 LTIP Units granted in connection with the IPO. The expense recognized during 2014 was based on $12.43 per LTIP unit, which represents the closing share price for the Company’s Class A common stock on December 31, 2014. These LTIP units vest over a three year period beginning in April 2015.

 

The Company is also required to reimburse the Manager for certain expenses and pay all operating expenses, except those specifically required to be borne by the Manager under the Management Agreement. The Manager waived all reimbursements for the three months ended March 31, 2015.

 

 The initial term of the Management Agreement expires on April 2, 2017 (the third anniversary of the closing of the IPO), and will be automatically renewed for a one-year term on each anniversary date thereafter unless previously terminated in accordance with the terms of the Management Agreement. Following the initial term of the Management Agreement, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance that is materially detrimental to the Company, or (2) the Company’s determination that the fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of the fees agreed to by at least two-thirds of the Company’s independent directors. The Company must provide 180 days’ prior notice of any such termination. Unless terminated for cause, as further described in the Management Agreement, the Manager will be paid a termination fee equal to three times the sum of the base management fee and incentive fee earned, in each case, by the Manager during the 12-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. The Company may also terminate the Management Agreement at any time, including during the initial term, without the payment of any termination fee, for cause with 30 days’ prior written notice from the Board.

 

During the initial three-year term of the Management Agreement, the Company may not terminate the Management Agreement except as described above or in the following circumstance: At the earlier of (i) April 2, 2017 (three years following the completion of the IPO), and (ii) the date on which the value of the Company’s stockholders’ equity exceeds $250.0 million, the Board may, but is not obligated to, internalize the Company’s management. The Manager may terminate the Management Agreement if it becomes required to register as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay a termination fee. In addition, if the Company defaults in the performance of any material term of the Management Agreement and the default continues for a period of 30 days after written notice to the Company, the Manager may terminate the Management Agreement upon 60 days’ written notice. If the Management Agreement is terminated by the Manager upon a breach by the Company, the Company is required to pay the Manager the termination fee described above.

 

The Manager may retain, at its sole cost and expense, the services of such persons and firms as the Manager deems necessary in connection with our management and operations (including accountants, legal counsel and other professional service providers), provided that such expenses are in amounts no greater than those that would be payable to third-party professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. The Manager has in the past retained, and going forward may retain Konig & Associates, P.C., a professional corporation wholly-owned by Michael L. Konig, the Company’s Chief Operating Officer, Secretary and General Counsel, to provide transaction based legal services, if the Manager determines that such retention would be less expensive than retaining third party professionals. The Company incurred $0.2 million in fees and expenses during the year ended December 31, 2014 for the firm’s transaction-related work on the contribution transactions, the IPO and the October 2014 Follow-On Offering. There was approximately $25,000 of fees and expenses payable by the Company to Konig & Associates, P.C. in conjunction with the October 2014 Follow-On Offering, as of December 31, 2014 and March 31, 2015.

 

16
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Prior and Terminated Advisory Agreement

 

Prior to the entry by the Company into the Management Agreement upon the completion of the IPO and the concurrent termination of the Advisory Agreement, the Former Advisor performed essentially the same duties and responsibilities as the Company’s new Manager. The Advisory Agreement had a one-year term expiring October 14, 2014, and was renewable for an unlimited number of successive one-year periods upon the mutual consent of the Company and its Advisor.

 

The Former Advisor was entitled to receive a monthly asset management fee for the services it provided pursuant to the Advisory Agreement. For 2013 and subsequent, the monthly asset management fee was one-twelfth of 0.65% of the higher of the cost or the value of each asset, where (A) cost equals the amount actually paid, excluding acquisition fees and expenses, to purchase each asset it acquires, including any debt attributable to the asset (including any debt encumbering the asset after acquisition), provided that, with respect to any properties the Company develops, constructs or improves, cost will include the amount expended by the Company for the development, construction or improvement, and (B) the value of an asset is the value established by the most recent independent valuation report, if available, without reduction for depreciation, bad debts or other non-cash reserves.  The asset management fee was based only on the portion of the cost or value attributable to our investment in an asset if the Company did not own all of an asset.

  

Pursuant to the Advisory Agreement, the Former Advisor was entitled to receive an acquisition fee for its services in connection with the investigation, selection, sourcing, due diligence and acquisition of a property or investment.  For 2013 and subsequent, the acquisition fee was 2.50% of the purchase price. The purchase price of a property or investment was equal to the amount paid or allocated to the purchase, development, construction or improvement of a property, inclusive of expenses related thereto, and the amount of debt associated with such real property or investment. The purchase price allocable for joint venture investments was equal to the product of (1) the purchase price of the underlying property and (2) the Company’s ownership percentage in the joint venture. 

 

The Former Advisor was also entitled to receive a financing fee for any loan or line of credit, made available to the Company. The Former Advisor was entitled to re-allow some, or all, of this fee to reimburse third parties with whom it subcontracted to procure such financing for the Company. On October 21, 2013, the Company amended its Advisory Agreement to decrease the financing fee from 1.0% to 0.25% of any loan made to the Company. In addition, to the extent the Former Advisor provided a substantial amount of services in connection with the disposition of one or more of our properties or investments (except for securities traded on a national securities exchange), the Former Advisor would receive fees equal to the lesser of (A) 1.5% of the sales price of each property or other investment sold or (B) 50% of the selling commission that would have been paid to a third-party broker in connection with such a disposition. In no event were disposition fees paid to the Former Advisor or its affiliates and unaffiliated third parties to exceed, in the aggregate, 6% of the contract sales price. On October 21, 2013, the Company amended its Advisory Agreement to change the disposition fee to only 1.5% of the sales price of each property or other investment sold, such that the disposition fee was no longer determined based on selling commissions payable to third-party sales brokers.

 

In addition to the fees payable to the Former Advisor, the Company reimbursed the Former Advisor for all reasonable expenses incurred in connection with services provided to the Company, subject to the limitation that it would not reimburse any amount that would cause the Company’s total operating expenses at the end of the four preceding fiscal quarters to exceed the greater of 2% of our average invested assets or 25% of its net income determined (1) without reductions for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and (2) excluding any gain from the sale of our assets for the period.  Notwithstanding the above, the Company was permitted to reimburse amounts in excess of the limitation if a majority of its independent directors determined such excess amount was justified based on unusual and non-recurring factors. If such excess expenses were not approved by a majority of the Company’s independent directors, the Former Advisor was required to reimburse us at the end of the four fiscal quarters the amount by which the aggregate expenses during the period paid or incurred by us exceeded the limitations provided above.  The Company was not permitted to reimburse the Former Advisor for personnel costs in connection with services for which the Former Advisor received acquisition, asset management or disposition fees.  Due to the limitation discussed above and because operating expenses incurred directly by the Company exceeded the 2% threshold, the Board, including all of its independent directors, reviewed the total operating expenses for the four fiscal quarters ended December 31, 2013 and the Company’s total operating expenses for the four fiscal quarters ended March 31, 2014 and unanimously determined the excess amounts to be justified because of the costs of operating a public company in its early stage of operation and the Company’s initial difficulties with raising capital were considered to be non-recurring in nature.  As the Board has previously approved such expenses, all operating expenses for the year ended 2013 and the three months ended March 31, 2014 have been expensed as incurred.

 

The Company had issued 1,000 shares of convertible stock, par value $0.01 per share, to the Former Advisor, pursuant to the Advisory Agreement, that upon completion of the IPO were convertible to shares of common stock if and when: (A) the Company had made total distributions on the then outstanding shares of its common stock equal to the original issue price of those shares plus an 8% cumulative, non-compounded, annual return on the original issue price of those shares or (B) subject to specified conditions, the Company listed its common stock for trading on a national securities exchange. We listed shares of our Class A common stock on the NYSE MKT on March 28, 2014. At that time, the terms for converting the convertible stock would not be achieved and so we amended our charter on March 26, 2014 to remove the convertible stock as an authorized class of our capital stock.

 

In general, under the Advisory Agreement, the Company contracted property management services for certain properties directly to non-affiliated third parties, in which event it was to pay the Former Advisor an oversight fee equal to 1% of monthly gross revenues of such properties.

 

17
 

  

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All of the Company’s executive officers, and some of its directors, are also executive officers, managers and/or holders of a direct or indirect controlling interest in the Manager and other Bluerock-affiliated entities.  As a result, they owe fiduciary duties to each of these entities, their members, limited partners and investors, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to the Company and its stockholders.

 

 Some of the material conflicts that the Manager or its affiliates face are: 1) the determination of whether an investment opportunity should be recommended to us or another Bluerock-sponsored program or Bluerock-advised investor; 2) the allocation of the time of key executive officers, directors, and other real estate professionals among the Company, other Bluerock-sponsored programs and Bluerock-advised investors, and the activities in which they are involved; and 3) the fees received by the Manager and its affiliates.

  

Bluerock Property Management, LLC

 

The Company incurred $0.05 million in property management fees to Bluerock Property Management, LLC, an affiliate of Bluerock, on behalf of the North Park Towers property during the three months ended March 31, 2015.

 

Pursuant to the terms of the Advisory Agreement and the Management Agreement, summarized below are the related party amounts payable to our Former Advisor and the Manager, as of March 31, 2015 and December 31, 2014 (in thousands).

 

   March 31,
2015
   December 31,
2014
 
Amounts Payable to the Former Advisor under our Prior and Terminated Advisory Agreement          
Asset management and oversight fees  $404   $404 
Acquisition fees and disposition fees   740    740 
Financing fees   36    36 
Total payable to the Former Advisor   1,180    1,180 
           
Amounts Payable to the Manager under the New Management Agreement          
Base management fee   519    310 
Incentive fee   931    146 
Other   4    7 
Total payable to the Manager   1,454    463 
Total amounts payable to Former Advisor and Manager  $2,634   $1,643 

  

As of March 31, 2015 and December 31, 2014, we had $0.3 million in payables due to related parties other than our Manager and Former Advisor.

 

As of March 31, 2015 and December 31, 2014, we had $0.5 million and $0.6 million, respectively, in receivables due to us from related parties other than our Manager and Former Advisor.

  

Note 11 – Stockholders’ Equity

 

Net Income (Loss) Per Common Share

 

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders, less dividends on restricted stock expected to vest plus gains on redemptions on common stock, by the weighted average number of common shares outstanding for the period.  Diluted net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the sum of the weighted average number of common shares outstanding and any potential dilutive shares for the period.  Net income (loss) attributable to common stockholders is computed by adjusting net income (loss) for the non-forfeitable dividends paid on non-vested restricted stock.

 

The Company considers the requirements of the two-class method when preparing earnings per share. Earnings per share is not affected by the two-class method because the Company’s Class A, B-1, B-2 and B-3 common stock and LTIP Units participate in dividends on a one-for-one basis.

 

18
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table reconciles the components of basic and diluted net loss per common share (amounts in thousands, except share and per share amounts):

  

   For the Three Months Ended March 31, 
   2015   2014 
         
Net income (loss) from continuing operations attributable to common stockholders  $3,313   $(1,111)
Dividends on restricted stock expected to vest   (2)   (2)
Basic net income (loss) from continuing operations attributable to common stockholders  $3,311   $(1,113)
Basic net income from discontinued operations attributable to common stockholders  $   $64 
           
Weighted average common shares outstanding (2)   12,547,895    1,060,889 
           
Potential dilutive shares (1)   -    - 
Weighted average common shares outstanding and potential dilutive shares (2)   12,547,895    1,060,889 
           

Income (loss) per common share, basic 

          
Continuing operations  $0.26   $(1.05)
Discontinued operations  $0.00   $0.06 
   $0.26   $(0.99)

Income (loss) per common share, diluted

          
Continuing operations  $0.26   $(1.05)
Discontinued operations  $0.00   $0.06 
   $0.26   $(0.99)

 

The number of shares and per share amounts for the prior period have been retroactively restated to reflect the two reverse stock splits of the Class B common stock discussed below.

 

The effect of the conversion of OP Units is not reflected in the computation of basic and diluted earnings per share, as they are exchangeable for Class A Common Stock on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as noncontrolling interests in the accompanying consolidated financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings per share.

 

(1)Excludes 3,956 and 6,468 shares of Class B common stock, for the three months ended March 31, 2015 and 2014, related to non-vested restricted stock, as the effect would be anti-dilutive.  Also excludes 282,759 OP Units for the three months ended March 31, 2015 as the effect would be anti-dilutive.

 

(2)For 2015, amounts relate to shares of the Company’s Class A, B-1, B-2, B-3 common stock and LTIP Units outstanding. For 2014, amounts relate to Class B-1, B-2 and B-3 common shares outstanding.

 

Class B Common Stock

 

The Company raised capital in a continuous registered offering, carried out in a manner consistent with offerings of non-listed REITs, from its inception until September 9, 2013, when it terminated the continuous registered offering in connection with the Board’s consideration of strategic alternatives to maximize value to the Company’s stockholders. Through September 9, 2013, the Company had raised an aggregate of $22.6 million in gross proceeds through its continuous registered offering, including its distribution reinvestment plan.

 

On January 23, 2014, the Company's stockholders approved the second articles of amendment and restatement to our charter (the “Second Charter Amendment”), that provided, among other things, for the designation of a new share class of Class A common stock, and for the change of each existing outstanding share of our common stock into:

 

1/3 of a share of our Class B-1 common stock; plus

1/3 of a share of our Class B-2 common stock; plus

1/3 of a share of our Class B-3 common stock.

 

This transaction was effective upon filing the Second Charter Amendment with the State Department of Assessments and Taxation of the State of Maryland on March 26, 2014. Immediately following the filing of the Second Charter Amendment, we effectuated a 2.264881 to 1 reverse stock split of our outstanding shares of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock, and on March 31, 2014, we effected an additional 1.0045878 to 1 reverse stock split of our outstanding shares of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock.

 

We refer to Class B-1 common stock, Class B-2 common stock and Class B-3 common stock collectively as “Class B” common stock. We listed our Class A common stock on the NYSE MKT on March 28, 2014. Our Class B common stock is identical to our Class A common stock, except that (i) we do not intend to list our Class B common stock on a national securities exchange, and (ii) shares of our Class B common stock convert automatically into shares of Class A common stock at specified times, as follows:

 

  March 23, 2015, in the case of our Class B-1 common stock;

  September 19, 2015, in the case of our Class B-2 common stock; and

 

19
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  March 17, 2016, in the case of our Class B-3 common stock.

 

On March 23, 2015, 353,630 shares of Class B-1 common stock converted into Class A common stock in accordance with the above, and no Class B-1 common stock remains outstanding.

 

On January 20, 2015, the Company closed its January 2015 Follow-On Offering of 4,600,000 shares of its Class A common stock, par value $0.01 per share, inclusive of shares sold pursuant to the full exercise of the overallotment option by the underwriters. The shares were registered with the SEC, pursuant to a registration statement on Form S-3 (File No. 333-200359), filed with the SEC on November 19, 2014 and declared effective on December 19, 2014. The public offering price of $12.50 per share was announced on January 14, 2015. Net proceeds of the January 2015 Follow-On Offering were approximately $53.7 million after deducting underwriting discounts and commissions and estimated offering expenses

 

Operating Partnership and Long-Term Incentive Plan Units

 

On April 2, 2014, concurrently with the completion of the IPO, the Company entered into the Second Amended and Restated Agreement of Limited Partnership of its Operating Partnership, Bluerock Residential Holdings, L.P. Pursuant to the amendment, the Company is the sole general partner of the Operating Partnership and may not be removed as general partner by the limited partners with or without cause. The limited partners of the Operating Partnership are Bluerock REIT Holdings, LLC, BR-NPT Springing Entity, LLC (“NPT”), Bluerock Property Management, LLC (“BPM”), our Manager, and Bluerock Multifamily Advisor, LLC (the “Former Advisor”), all of which are affiliates of Bluerock.

 

Prior to the completion of the IPO, the Company owned, directly and indirectly, 100% of the limited partnership units in the Operating Partnership. Effective as of the completion of the IPO, limited partners other than the Company owned approximately 9.87% of the Operating Partnership (4.59% are held by OP Unit holders and 5.28% are held by LTIP Unit holders.) As of March 31, 2015, limited partners other than the Company owned approximately 4.48% of the Operating Partnership (2.05% is held by OP Unit holders and 2.43% is held by LTIP Unit holders.)

 

The Partnership Agreement, as amended, provides, among other things, that the Operating Partnership initially has two classes of limited partnership interests, which are units of limited partnership interest (“OP Units”), and the Operating Partnership’s long-term incentive plan units (“LTIP Units”). In calculating the percentage interests of the partners in the Operating Partnership, LTIP Units are treated as OP Units. In general, LTIP Units will receive the same per-unit distributions as the OP Units. Initially, each LTIP Unit will have a capital account balance of zero and, therefore, will not have full parity with OP Units with respect to any liquidating distributions. However, the Partnership Agreement Amendment provides that “book gain,” or economic appreciation, in the Company’s assets realized by the Operating Partnership as a result of the actual sale of all or substantially all of the Operating Partnership’s assets, or the revaluation of the Operating Partnership’s assets as provided by applicable U.S. Department of Treasury regulations, will be allocated first to the holders of LTIP Units until their capital account per unit is equal to the average capital account per-unit of the Company’s OP Unit holders in the Operating Partnership. We expect that the Operating Partnership will issue OP Units to limited partners, and the Company, in exchange for capital contributions of cash or property, and will issue LTIP Units pursuant to the Company’s 2014 Equity Incentive Plan for Individuals and 2014 Equity Incentive Plan for Entities (collectively the “Incentive Plans”), to persons who provide services to the Company, including the Company’s officers, directors and employees.

 

Pursuant to the Partnership Agreement, as amended, any holders of OP Units, other than the Company or its subsidiaries, will receive redemption rights which, subject to certain restrictions and limitations, will enable them to cause the Operating Partnership to redeem their OP Units in exchange for cash or, at the Company’s option, shares of the Company’s Class A common stock, on a one-for-one basis. The Company has agreed to file, not earlier than one year after the closing of the IPO, one or more registration statements registering the issuance or resale of shares of its Class A common stock issuable upon redemption of the OP Units issued upon conversion of LTIP Units, which include those issued to the Manager and the Former Advisor. Subject to certain exceptions, the Operating Partnership will pay all expenses in connection with the exercise of registration rights under the Partnership Agreement.

 

Stock-based Compensation for Independent Directors

 

Prior to the Company’s IPO on April 2, 2014, the Company’s independent directors received an automatic grant of 5,000 shares of restricted stock on the initial effective date of the continuous registered offering and received an automatic grant of 2,500 shares of restricted stock when such directors were re-elected at each annual meeting of the Company’s stockholders thereafter through the 2013 annual meeting held on August 5, 2013. The restricted stock vested 20% at the time of the grant and 20% on each anniversary thereafter over four years from the date of the grant. All shares of restricted stock granted to the independent directors receive distributions, whether vested or unvested. The value of the restricted stock granted was determined at the date of grant. Commencing with the Company’s IPO, the Company’s independent directors will no longer receive automatic grants upon appointment or reelection at each annual meeting of the Company’s stockholders.

 

On March 24, 2015, in accordance with the Company’s 2014 Equity Incentive Plan for Individuals (the “2014 Individuals Plan”), the Board authorized and each of the Company’s independent directors received two grants of 2,500 restricted shares of the Company’s Class A common stock. The first grant of 2,500 restricted shares related to services rendered in 2014 (each, a “2014 Restricted Stock Award”), while the second grant of 2,500 restricted shares relates to services rendered or to be rendered in 2015 (each, a “2015 Restricted Stock Award”). The vesting schedule for each 2014 Restricted Stock Award is as follows: (i) 834 shares as of March 24, 2015, (ii) 833 shares on March 24, 2016, and (iii) 833 shares on March 24, 2017. The vesting schedule for each 2015 Restricted Stock Award is as follows: (i) 834 shares as of March 24, 2016, (ii) 833 shares on March 24, 2017, and (iii) 833 shares on March 24, 2018. 

 

20
 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the status of the Company’s non-vested shares as of March 31, 2015 is as follows (amounts in thousands, except share amounts): 

 

Non-Vested shares  Shares (1)   Weighted average grant-date
fair value (1)
 
Balance at January 1, 2015   3,956   $90 
Granted   15,000    197 
Vested   (2,502)   (33)
Forfeited        
Balance at March 31, 2015   16,454   $254 

 

(1) The number of shares and per share amounts for the prior period have been retroactively restated to reflect the two reverse stock splits of the Class B common stock discussed above.

 

At March 31, 2015, there was $219,000 of total unrecognized compensation cost related to unvested restricted stocks granted under the independent director compensation plan. The original cost is expected to be recognized over a period of 2.9 years.

 

The Company currently uses authorized and unissued shares to satisfy share award grants.

 

Distributions

 

On October 10, 2014, the Board declared monthly dividends for the fourth quarter of 2014 equal to a quarterly rate of $0.29 per share on both the Company’s Class A common stock and Class B common stock, payable monthly to the stockholders of record as of October 25, 2014, November 25, 2014 and December 25, 2014, which was paid in cash on November 5, 2014, December 5, 2014 and January 5, 2015, respectively.

 

The declared dividends equal a monthly dividend on the Class A common stock and Class B common stock as follows: $0.096666 per share for the dividend paid to stockholders of record as of October 25, 2014, and $0.096667 per share for the dividend paid to stockholders of record as of November 25, 2014, and December 25, 2014. A portion of each dividend may constitute a return of capital for tax purposes.

 

On January 9, 2015, the Board declared monthly dividends for the first quarter of 2015 equal to a quarterly rate of $0.29 per share on both the Company’s Class A common stock and Class B common stock, payable monthly to the stockholders of record as of January 25, 2015, February 25, 2015 and March 25, 2015, which was paid in cash on February 5, 2015, March 5, 2015 and April 5, 2015, respectively. 

 

The declared dividends equal a monthly dividend on the Class A common stock and Class B common stock as follows: $0.096666 per share for the dividend paid to stockholders of record as of January 25, 2015, and $0.096667 per share for the dividend paid to stockholders of record as of February 25, 2015, and March 25, 2015. A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends or at this rate.

 

Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of the Company's Class A common stock.

 

 Distributions paid for the three months ended March 31, 2015 were as follows (amounts in thousands):

 

   Distributions 
2015  Declared   Paid 
First Quarter          
Class A Common Stock  $3,554   $3,073 
Class B-1 Common Stock   68    103 
Class B-2 Common Stock   103    103 
Class B-3 Common Stock   103    103 
OP Units   82    82 
LTIP Units   96    96 
Total  $4,006   $3,560 

 

Note 12 – Commitments and Contingencies

 

The Company is subject to various legal actions and claims arising in the ordinary course of business. Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position or results of operations or liquidity of the Company.

21
 

  

BLUEROCK RESIDENTIAL GROWTH REIT, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 13 – Economic Dependency

 

The Company is dependent on its Manager, an affiliate of Bluerock, to provide external management services for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of properties and other investments; management of the daily operations of its real estate portfolio; and other general and administrative responsibilities. In the event that the Manager or its affiliates are unable to provide the respective services, the Company will be required to obtain such services from other sources.

 

Note 14 – Subsequent Events

 

Alexan Blaire House Construction Financing

 

On April 7, 2015, the Company, through an indirect subsidiary, entered into a $31.8 million construction loan with Bank of America, NA which is secured by the leasehold interest in the Alexan Blaire House property. The loan matures on April 7, 2019, and contains a one-year extension option, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty year amortization. The loan can be prepaid without penalty.

 

Declaration of Dividends

 

On April 10, 2015, the Board declared monthly dividends for the second quarter of 2015 equal to a quarterly rate of $0.29 per share on the Company’s Class A common stock and $0.29 per share on the Company’s Class B common stock, payable monthly to the stockholders of record as of April 25, 2015, May 25, 2015 and June 25, 2015, which will be paid in cash on May 5, 2015, June 5, 2015 and July 5, 2015, respectively. Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of the Company's Class A common stock.

 

The declared dividends equal a monthly dividend on the Class A common stock and the Class B common stock as follows: $0.096666 per share for the dividend paid to stockholders of record as of April 25, 2015, $0.096667 per share for the dividend paid to stockholders of record as of May 25, 2015, and $0.096667 per share for the dividend paid to stockholders of record as of June 25, 2015. A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends or at this rate.

 

Distributions Paid

 

The following distributions were paid to the Company's holders of Class A, Class B-2 and B-3 common stock as well as holders of OP and LTIP Units subsequent to March 31, 2015 (amounts in thousands):

  

Shares  Declaration
Date
  Record Date  Date Paid  Distributions
per Share
   Total
Distribution
 
Class A Common Stock  Jan. 9, 2015  March 25, 2015  April 5, 2015  $0.096667   $1,208 
Class B-2 Common Stock  Jan. 9, 2015  March 25, 2015  April 5, 2015  $0.096667   $34 
Class B-3 Common Stock  Jan. 9, 2015  March 25, 2015  April 5, 2015  $0.096667   $34 
OP Units  Jan. 9, 2015  March 25, 2015  April 5, 2015  $0.096667   $27 
LTIP Units  Jan. 9, 2015  March 25, 2015  April 5, 2015  $0.096667   $33 
                    
Class A Common Stock  April 10, 2015  April 25, 2015  May 5, 2015  $0.096666   $1,208 
Class B-2 Common Stock  April 10, 2015  April 25, 2015  May 5, 2015  $0.096666   $34 
Class B-3 Common Stock  April 10, 2015  April 25, 2015  May 5, 2015  $0.096666   $34 
OP Units  April 10, 2015  April 25, 2015  May 5, 2015  $0.096666   $27 
LTIP Units  April 10, 2015  April 25, 2015  May 5, 2015  $0.096666   $33 
Total                $2,672 

 

Entrance into Purchase Agreement for Ashton Reserve

 

On May 12, 2015, the Company, through a subsidiary of its Operating Partnership, entered into an Assignment Agreement with Bluerock, pursuant to which the Company was assigned a purchase agreement to acquire a 322-unit apartment community located in Charlotte, North Carolina known as Ashton Reserve at Northlake (“Ashton Phase I”).  The purchase price of $44.8 million will be funded, in part, by the assumption of the existing loan secured by the property which has an expected principal amount as of the anticipated closing date of approximately $31.9 million.  The Company expects to invest approximately $13.7 million of equity in Ashton Phase I.   

 

The purchase agreement further provides that on the closing date for Ashton Phase I, the seller’s parent will assign a purchase agreement to acquire approximately 9.1 acres of land that are contiguous with Ashton Phase I, together with a 151-unit apartment community currently under construction thereon (“Ashton Phase II”) to the Company.  The purchase price for Ashton Phase II will be a maximum of $21.8 million.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Bluerock Residential Growth REIT, Inc., and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Bluerock Residential Growth REIT, Inc., a Maryland corporation, and, as required by context, Bluerock Residential Holdings, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their subsidiaries. We refer to Bluerock Real Estate, L.L.C., a Delaware limited liability company, as Bluerock, and we refer to our external manager, BRG Manager, LLC, a Delaware limited liability company, as our Manager. Both Bluerock and our Manager are affiliated with the company.

 

Forward-Looking Statements

 

Statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

  

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

  the factors included in this Quarterly Report on Form 10-Q, including those set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
     
  use of proceeds of the Company’s equity offerings;
     
  the competitive environment in which we operate;
     
  real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;
     
  risks associated with geographic concentration of our investments;
     
  decreased rental rates or increasing vacancy rates;
     
  our ability to lease units in newly acquired or newly constructed apartment properties;
     
  potential defaults on or non-renewal of leases by tenants;
     
  creditworthiness of tenants;

 

  our ability to obtain financing for and complete acquisitions under contract;
     
  development and acquisition risks, including failure of such acquisitions and developments to perform in accordance with projections;
     
  the timing of acquisitions and dispositions;
     
  the performance of the Bluerock strategic partners in our joint venture investments;
     
  potential natural disasters such as hurricanes, tornadoes and floods;
     
  national, international, regional and local economic conditions;
     
  our ability to pay future distributions;
     
  the general level of interest rates;

 

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  potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or tax laws, and potential increases in real property tax rates;
     
  financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;
     
  lack of or insufficient amounts of insurance;
     
  our ability to maintain our qualification as a REIT;
     
  litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and
     
  possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us or a subsidiary owned by us or acquired by us.

 

Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this report. All forward-looking statements are made as of the date of this report and the risk that actual results will differ materially from the expectations expressed in this report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this report, whether as a result of new information, future events, changed circumstances or any other reason. The forward-looking statements should be read in light of the risk factors set forth in Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 4, 2015, and subsequent filings by us with the SEC.

 

Overview

 

We were incorporated as a Maryland corporation on July 25, 2008. Our objective is to maximize long-term stockholder value by acquiring well-located institutional-quality apartment properties in demographically attractive growth markets across the United States. We seek to maximize returns through investments where we believe we can drive substantial growth in our funds from operations, adjusted funds from operations and net asset value through one or more of our Core-Plus, Value-Add, Opportunistic and Invest-to-Own investment strategies.

 

We are externally managed by our Manager, an affiliate of Bluerock. We conduct our operations through Bluerock Residential Holdings, L.P., our operating partnership (the “Operating Partnership”), of which we are the sole general partner. The consolidated financial statements include our accounts and those of the Operating Partnership and its subsidiaries.

 

As of March 31, 2015, our portfolio consisted of interests in thirteen properties (ten operating properties and three development properties), all but four acquired through joint ventures. The Company’s thirteen properties are comprised of an aggregate of 4,131 units, comprised of 3,226 operating units and 905 units under development. As of March 31, 2015, these properties, exclusive of our development properties, were approximately 94% occupied.

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and have qualified as a REIT commencing with our taxable year ended December 31, 2010. In order to continue to qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our taxable income (excluding net capital gains). If we qualify as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify as a REIT for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and results of operations. We intend to continue to organize and operate in such a manner as to remain qualified as a REIT.

 

Our IPO, Contribution Transactions and Follow-On Offerings

 

We raised capital in a continuous registered offering, carried out in a manner consistent with offerings of non-listed REITs, from its inception until September 9, 2013, when we terminated the continuous registered offering in connection with the Board’s consideration of strategic alternatives to maximize value to our stockholders. We subsequently determined to register shares of newly authorized Class A common stock that were to be offered in a firmly underwritten public offering (the “IPO”), by filing a registration statement on Form S-11 (File No. 333-192610) with the SEC, on November 27, 2013. On March 28, 2014, the SEC declared the registration statement effective and we announced the pricing of the IPO of 3,448,276 shares of Class A common stock at a public offering price of $14.50 per share for total gross proceeds of $50.0 million. The net proceeds of the IPO were approximately $44.0 million after deducting underwriting discounts and commissions and estimated offering costs.

 

In connection with the IPO, shares of our Class A common stock were listed on the NYSE MKT for trading under the symbol “BRG.” Pursuant to the second articles of amendment and restatement to our charter filed on March 26, 2014 (the “Second Charter Amendment”), each share of our common stock outstanding immediately prior to the listing, including shares sold in our Prior Public Offering and our Follow On Offering, was changed into one-third of a share of each of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock. Following the filing of the Second Charter Amendment, we effected a 2.264881-to-1 reverse stock split of our outstanding shares of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock, and on March 31, 2014, we effected an additional 1.0045878-to-1 reverse stock split of our outstanding shares of Class B-1 common stock, Class B-2 common stock and Class B-3 common stock.

 

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Substantially concurrently with the completion of the IPO, we completed a series of related contribution transactions pursuant to which we acquired indirect equity interests in four apartment properties, and a 100% fee simple interest in a fifth apartment property for an aggregate asset value of $152.3 million (inclusive of the Villas at Oak Crest, which is accounted for under the equity method, and Springhouse, in which we already owned an interest and which has been reported as consolidated for the periods presented). As holders of shares of our Class A common stock issued in our contribution transactions in connection with our IPO, Fund II and Fund III and their respective managers have certain registration rights covering the resale of their shares of Class A common stock. In addition, BR-NPT Springing Entity, LLC (“NPT”) and Bluerock Property Management, LLC, the property manager of North Park Towers (“BPM”), as holders of OP Units issued in our contribution transactions, and our Manager and our former advisor, as holders of LTIP Units, have certain registration rights covering the resale of shares of our Class A common stock issued or issuable, at our option, in exchange for OP Units, including OP Units into which LTIP Units may be converted. Fund II, Fund III and their respective managers have agreed not to require us to file a registration statement with respect to the resale of their shares of Class A common stock until January 4, 2016. In addition, NPT and BPM, and our Manager and our Former Advisor, have agreed not to require us to file a registration statement with respect to the resale of their shares of our Class A common stock issued or issuable, at our option, in exchange for OP Units, including OP Units into which LTIP Units may be converted, until January 4, 2016.

 

In October 2014, we completed an underwritten follow-on offering (the “October 2014 Follow-On Offering”), of 3,035,444 shares of Class A common stock, inclusive of shares sold pursuant to the full exercise of the overallotment option by the underwriters, on October 8, 2014. Net proceeds of the Follow-On Offering were approximately $32.9 million after deducting underwriting discounts and commissions and estimated offering costs. 

 

In January 2015, we completed an underwritten shelf takedown offering (the “January 2015 Follow-On Offering”) of 4,600,000 shares of Class A common stock, inclusive of shares sold pursuant to the full exercise of the overallotment option by the underwriters, on January 20, 2015. Net proceeds of the January 2015 Follow-On Offering were approximately $53.7 million after deducting underwriting discounts and commissions and offering costs.

 

Our total stockholders’ equity increased $53.6 million from $92.4 million as of December 31, 2014 to $146.0 million as of March 31, 2015.  The increase in our total stockholders’ equity is primarily attributable to the January 2015 Follow-On Offering, which increased our stockholders’ equity by approximately $53.7 million and our net income of $3.3 million, partially offset by dividends declared of $3.9 million, during the three months ended March 31, 2015.

 

Other Significant Developments

 

During the three months ended March 31, 2015, we made a convertible preferred investment, acquired two stabilized properties, and disposed of one joint venture equity interest as discussed below:

 

Acquisition of Alexan Blaire House Interests

 

On January 12, 2015, through a wholly-owned subsidiary of its Operating Partnership, BRG Southside, LLC,, the Company made a convertible preferred equity investment in a multi-tiered joint venture along with Bluerock Special Opportunity + Income Fund II, LLC (“Fund II”) and Bluerock Special Opportunity + Income Fund III, LLC (“Fund III”), which are affiliates of the Company’s Manager, and an affiliate of Trammell Crow Residential to develop an approximately 269-unit class A, apartment community located in Houston, Texas, to be known as Alexan Blaire House. Alexan Blaire House will be developed upon a tract of land ground leased from Prokop Industries BH, L.P., a Texas limited partnership, by BR Bellaire BLVD, LLC, as tenant under an 85-year ground lease. We have made a capital commitment of $17.4 million to acquire 100% of the preferred equity interests in BRG Southside, LLC of which $8.7 million has been funded as of March 31, 2015. Our preferred membership interest earns and shall be paid on a current basis a preferred return at the annual rate of 15% times our outstanding amount of our capital contribution. We have the right to convert our preferred membership interest into a majority common membership interest upon stabilization.

 

Acquisition of Interest in Park & Kingston

 

On March 16, 2015, the Company, through a wholly-owned subsidiary of its Operating Partnership, completed an investment in a multi-tiered joint venture along with Fund III, to acquire 153 newly-constructed units (the “Phase I Units”) in a Class AA apartment community in Charlotte, North Carolina known as the Park & Kingston Apartments (“Park & Kingston”). The Company’s indirect ownership interest in Park & Kingston is 46.95%.

 

The purchase price for the Phase I Units of $27.87 million was funded, in part, with a $15.25 million senior mortgage loan secured by the Park & Kingston property and improvements.

 

The Company also has the ability to acquire 15 units under development at Park & Kingston (the “Phase II Units”), for a purchase price of $2.87 million. The seller has commenced, and will manage and complete the development of the Phase II Units. Upon completion of the development of and upon the issuance of a certificate of occupancy for the Phase II Units, closing will occur, financed with supplemental financing of up to 70% of the appraised value of the Phase II Units per the senior mortgage loan discussed above.

 

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Acquisition of Interest in Fox Hill

 

On March 26, 2015, the Company, through subsidiaries of its Operating Partnership, completed an investment in a multi-tiered joint venture along with Fund III, an affiliate of Bluerock, and three unaffiliated investors (collectively, the “Third Parties”), to acquire a 288-unit apartment community located in Austin, Texas (“Fox Hill”). The Company’s indirect ownership in Fox Hill is 85.27%.

  

The purchase price of $38.15 million was funded, in part, with a $26.71 million senior mortgage loan is secured by the Fox Hill Property and improvements.

 

Sale of 23Hundred@Berry Hill Joint Venture Equity Interest (“Berry Hill”)

 

On January 14, 2015, the Company, along with the other two holders of tenant-in-common interests in 23Hundred@Berry Hill, sold their respective interests to 2300 Berry Hill General Partnership, an unaffiliated third party. The aggregate purchase price was $61.2 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for payment of the existing mortgage indebtedness and payment of closing costs and fees, the sale of the Company’s interest in 23Hundred@Berry Hill generated net proceeds of approximately $7.3 million to the Company and a consolidated gain of $11.3 million, of which the Company’s pro rata share of gain is $5.3 million before disposition expenses of $0.1 million.

 

Held for Sale - North Park Towers

 

We are actively marketing the sale of North Park Towers and intend to recycle capital invested from this project.

 

Results of Operations

 

The following is a summary of our stabilized operating real estate investments as of March 31, 2015:

 

Multifamily
Community
  Date
Acquired
  Number 
of Units
   Our
Ownership
Interest in
Property
Owner
   Occupancy
%
 
Springhouse at Newport News  12/3/2009   432    75.0%   92%
Enders Place at Baldwin Park(1)  10/2/2012   220    89.5%   95%
MDA Apartments  12/17/2012   190    35.3%   95%
Village Green of Ann Arbor  4/2/2014   520    48.6%   93%
Villas at Oak Crest  4/2/2014   209    67.2%   98%
North Park Towers  4/3/2014   313    100.0%   95%
Lansbrook Village(2)  5/23/2014   595    76.8%   93%
ARIUM Grande Lakes  11/4/2014   306    95.0%   96%
Park & Kingston  3/16/2015   153    47.0%   91%
Fox Hill  3/26/2015   288    85.3%   98%
Total      3,226         94%

 

(1) Includes an additional 22 units acquired during the second quarter of 2014.

(2) Includes an additional 22 units acquired since the original acquisition in May 2014 of which 7 units were acquired in the first quarter of 2015.

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

 

Revenue

 

Net rental income increased $5.5 million, or 177%, to $8.6 million for the three months ended March 31, 2015 as compared to $3.1 million for the same prior year period. This increase was primarily due to the acquisition of various interests in four properties during 2014, Village Green of Ann Arbor, North Park Towers, Lansbrook Village and ARIUM Grande Lakes, and two properties during the first quarter of 2015, Park & Kingston and Fox Hill, offset by the sale of Berry Hill.

 

Other property revenue increased $0.3 million, or 300%, to $0.4 million for the three months ended March 31, 2015 as compared to $0.1 million for the same prior year period. This increase was primarily due to the acquisition of interests in the properties noted above. 

 

Expenses

 

Property operating expenses increased $2.3 million, or 144%, to $3.9 million for the three months ended March 31, 2015 as compared to $1.6 million for the same prior year period. This increase was primarily due to the acquisition of interests in the properties noted above. Property operating expenses declined to 42.8% of revenue for the three months ended March 31, 2015, from 49.0% of revenue in the same prior year period.

 

 General and administrative expenses amounted to $0.9 million for the three months ended March 31, 2015 as compared to $0.5 million for the same prior year period. Excluding non-cash amortization of LTIP Units of $0.4 million and de minimis amounts for the three months ended March 31, 2015 and 2014, respectively, general and administrative expenses were $0.5 million, or 5.1% of revenues for the three months ended March 31, 2015 as compared to $0.5 million, or 16.0% of revenues, for the same prior year period.

 

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Management fees increased to $1.5 million for the three months ended March 31, 2015 as compared to $0.1 million for the same prior year period. This was primarily due to an increase in equity as a result of our IPO on April 2, 2014, the October 2014 Follow-On Offering and the January 2015 Follow-On Offering.

 

Acquisition costs increased to $0.4 million for the three months ended March 31, 2015 as compared to de minimis amounts for the same prior year period. This increase was primarily due to the acquisition of the Park & Kingston and Fox Hill properties and the acquisition of preferred equity interest in Alexan Blaire House during the three months ended March 31, 2015.

 

Depreciation and amortization expenses increased to $2.8 million for the three months ended March 31, 2015 as compared to $1.1 million for the same prior year period. This increase was primarily due to the acquisition of interests in the properties noted above.

 

Other Income and Expense

 

Other income and expenses amounted to income of $9.8 million for the three months ended March 31, 2015 as compared to other expense of $1.1 million same prior year period. This was primarily due to a gain on the sale of an unconsolidated joint venture interest of $11.3 million related to Berry Hill, an increase of $0.7 million in income from unconsolidated joint venture interests, partially offset by an increase in interest expense, net, of $1.2 million, as the result of the increase in mortgage payables resulting from the acquisition of interests in the properties mentioned above.

 

Income from Discontinued Operations

 

Income from discontinued operations was $0.06 million for the three months ended March 31, 2014. There was no income from discontinued operations in 2015. The 2014 amount related to the discontinued operations of our Creekside property, which was sold on March 28, 2014.

 

Property Operations

 

We define “same store” properties as those that we owned and operated for the entirety of both periods being compared, except for properties that are in the construction or lease-up phases, or properties that are undergoing development or significant redevelopment. We move properties previously excluded from our same store portfolio for these reasons into the same store designation once they have stabilized or the development or redevelopment is complete and such status has been reflected fully in all quarters during the applicable periods of comparison. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property stabilized upon attainment of 90% physical occupancy, subject to loss-to-lease, bad debt and rent concessions.  For comparison of our three months ended March 31, 2015 and 2014, the same store properties included properties owned at January 1, 2014, excluding the Berry Hill property, which was under construction. Our same store properties for the three months ended March 31, 2015 and 2014 were Springhouse at Newport News, Enders Place at Baldwin Park and MDA Apartments. Our non-same store properties for the same periods were The Estates at Perimeter/Augusta, The Reserve at Creekside Village, 23Hundred@Berry Hill, Village Green of Ann Arbor, North Park Towers, Lansbrook Village, ARIUM Grande Lakes, Park & Kingston and Fox Hill.

  

The Estates at Perimeter/Augusta and Berry Hill were accounted for under the equity method during the three months ended March 31, 2015. For the three months ended March 31, 2015, the components of non-same store property revenues, property expenses and net operating income represented by these properties were $159,000, $28,000 and $131,000, respectively. The Estates at Perimeter/Augusta was accounted for under the equity method and Creekside was accounted for as discontinued operations at March 31, 2014, but are reflected in our table of net operating income as if they were consolidated. For the three months ended March 31, 2014, the components of non-same store property revenues, property expenses and net operating income represented by these properties were $1,141,000, $489,000 and $652,000, respectively. The Estates at Perimeter/Augusta’s and Berry Hill financial information can be found at Note 6, "Equity Method Investments," and Creekside financial information can be found at Note 3, “Real Estate Assets Held for Sale, Discontinued Operations and Sale of Joint Venture Equity Interests” in our Notes to Consolidated Financial Statements. Creekside was sold on March 28, 2014, The Estates at Perimeter/Augusta was sold on December 10, 2014 and Berry Hill was sold on January 14, 2015.

 

The following table presents the same store and non-same store results from operations for the three months ended March 31, 2015 and 2014:

 

   Three Months Ended
March 31,
   Change 
   2015   2014   $   % 
Property Revenues                    
Same Store  $3,177   $2,957   $220    7.4%
Non-Same Store   6,007    1,410    4,597    326.0%
Total property revenues   9,184    4,367    4,817    110.3%
                     
Property Expenses                    
Same Store   1,207    1,304    (97)   -7.4%
Non-Same Store   2,671    752    1,919    255.2%
Total property expenses   3,878    2,056    1,822    88.6%
                     
Same Store NOI   1,970    1,653    317    19.2%
Non-Same Store NOI   3,336    658    2,678    407.0%
Total NOI(1)  $5,306   $2,311   $2,995    129.6%

 

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(1) See “Net Operating Income” below for a reconciliation of Same Store NOI, Non-Same Store NOI and Total NOI to net income (loss) and a discussion of how management uses this non-GAAP financial measure.

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

 

Same store NOI for the three months ended March 31, 2015 increased by 19.2% to $2.0 million from $1.7 million for the 2014 period. There was a 7.4% increase in same store property revenues as compared to the 2014 period, primarily attributable to a 4.0% increase in average rental rates per month, the acquisition of 22 additional units at our Enders property, and a 144 basis point increase in average occupancy. In addition, same store expenses decreased 7.4% compared to prior year period primarily as a result of a decrease in utilities and repairs and maintenance.

 

Property revenues and property expenses for our non-same store properties increased significantly due to the properties acquired during 2014 and 2015. The results of operations for these properties have been included in our consolidated statements of operations from the date of acquisition.

 

Net Operating Income

 

We believe that net operating income (“NOI”), is a useful measure of our operating performance. We define NOI as total property revenues less total property operating expenses, excluding depreciation and amortization and interest. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs.

 

We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use NOI to evaluate our performance on a same store and non-same store basis because NOI allows us to evaluate the operating performance of our properties because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance and captures trends in rental housing and property operating expenses.

  

However, NOI should only be used as an alternative measure of our financial performance. The following table reflects same store and non-same store contributions to consolidated NOI, together with a reconciliation of NOI to net income (loss), as computed in accordance with GAAP for the periods presented (amounts in thousands):

  

   Three Months Ended March 31, 
   2015   2014 
Net operating income          
Same store  $1,970   $1,653 
Non-same store   3,336    658 
Total net operating income   5,306    2,311 
Less:          
Interest expense   2,305    1,272 
Total property income   3,001    1,039 
Less:          
Noncontrolling interest pro-rata share of property income   1,041    693 
Other income related to JV/MM entities   19    10 
Pro-rata share of properties’ income   1,941    336 
Less pro-rata share of:          
Depreciation and amortization   1,911    475 
Amortization of non-cash interest expense   23    28 
Line of credit interest, net   -    187 
Asset management and oversight fees   1,417    125 
Acquisition and disposition costs   475    487 
Corporate operating expenses   838    529 
Add pro-rata share of:          
Other income   17    - 
Equity in operating earnings of unconsolidated joint ventures   696    - 
Gain on sale of joint venture interest   5,323    448 
Net income (loss) attributable to common stockholders  $3,313   $(1,047)

 

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Liquidity and Capital Resources

   

Liquidity is a measure of our ability to meet potential cash requirements. Our primary liquidity requirements relate to (a) our operating expenses and other general business needs, (b) distributions to our stockholders, (c) investments and capital requirements to fund development and renovations at existing properties and (d) ongoing commitments to repay borrowings, including our maturing short-term debt.

 

We believe the properties underlying the Company’s real estate investments are performing well and had a portfolio-wide debt service coverage ratio of 1.93x and occupancy of 94% at March 31, 2015. Prior to our IPO, our cash resources had been inadequate to meet our primary liquidity needs as our corporate operating expenses exceeded the cash flow received from our investments in real estate joint ventures. The primary reason for our previous negative operating cash flow had been the size of our portfolio relative to the general and administrative expenses required to operate as a public company. These costs included accounting and related fees to our independent auditors, legal fees, costs of being an SEC reporting company, director compensation and director and officer insurance premiums.

  

In January 2015, we completed an underwritten shelf takedown offering (the “January 2015 Follow-On Offering”) of 4,600,000 shares of Class A common stock, inclusive of shares sold pursuant to the full exercise of the overallotment option by the underwriters, on January 20, 2015. Net proceeds of the January 2015 Follow-On Offering were approximately $53.7 million after deducting underwriting discounts and commissions and offering costs.

 

The net proceeds of our IPO, the October 2014 Follow-On Offering and the January 2015 Follow-On Offering (the “Follow-On Offerings”), provided us with the ability to grow our asset base quickly and better service our general and administrative expenses. The Management Agreement with our Manager should provide an overall lower fee structure than our previous advisory agreement with our Former Advisor, which we believe will help reduce our corporate general and administrative expenses.

 

In general, we believe our cash flows from operations, available cash balances, the use of equity offerings and other financing arrangements will be sufficient to fund our liquidity requirements with respect to our existing portfolio for the next 12 months. We expect that the additional properties added to our portfolio in the contribution transactions at the initial closing of the IPO, together with borrowings we or our subsidiaries may obtain and the investments and acquisitions we have made with the proceeds from the IPO and expect to make as a result of the completion of the Follow-On Offerings, will have a significant positive impact on our future results of operations. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of anticipated future investments in and acquisitions of real estate, including our investments in development projects.

   

We may also selectively sell assets at appropriate times, which would be expected to generate cash sources for our liquidity needs.

 

We intend to continue to use prudent amounts of leverage in making our investments, which we define as having total indebtedness of approximately 65% of the fair market value of the properties in which we have invested as determined by our Manager. For purposes of calculating our leverage, we assume full consolidation of all of our real estate investments, whether or not they would be consolidated under GAAP, include assets we have classified as held for sale, and include any joint venture level indebtedness in our total indebtedness. However, we are not subject to any limitations on the amount of leverage we may use, and accordingly, the amount of leverage we use may be significantly less or greater than we currently anticipate. We expect our leverage to decline commensurately as we execute our business plan to grow our net asset value.

 

We may seek to utilize credit facilities or loans from unaffiliated parties when possible. Previously, we have relied on borrowing from affiliates to help finance our business activities. On October 2, 2012, we entered into the Fund LOC pursuant to which we were initially entitled to borrow up to $12.5 million. On April 2, 2014, the Fund LOC was paid in full with proceeds from our IPO and extinguished.

 

If we are unable to obtain financing on favorable terms or at all, we may have to curtail our investment activities, including acquisitions and improvements, to and developments of, real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We also may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and Investment Company Act exemption.

  

In prior quarters, including the three months ended March 31, 2015, our Former Advisor has deferred payment by us as needed of asset management fees, acquisition fees and organizational and offering costs incurred by us and our Manager has waived current year reimbursable operating expenses, to support our continued operations.

 

For the remainder of 2015, the Company expects to maintain a distribution paid on a monthly basis to all of our stockholders at a quarterly rate of $0.29 per share. To the extent the Company continues to pay distributions at this rate, the Company expects to substantially use cash flows from operations to fund distribution payments. The Board will review the distribution rate quarterly, and there can be no assurance that the current distribution level will be maintained. While our policy is generally to pay distributions from cash flow from operations, our distributions through March 31, 2015 have been paid from proceeds from our continuous registered public offering, proceeds from the IPO and Follow-On Offerings and sales of assets, and may in the future be paid from additional sources, such as from borrowings.

 

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Off-Balance Sheet Arrangements

 

As of March 31, 2015, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. As of March 31, 2015, we own interests in four joint ventures that are accounted for under the equity method as we exercise significant influence over, but do not control, the investee.

 

Cash Flows from Operating Activities

 

As of March 31, 2015, we owned indirect equity interests in thirteen real estate properties (ten operating properties and three development properties), nine of which are consolidated for reporting purposes.  During the three months ended March 31, 2015, net cash provided by operating activities was $3.3 million.  After the net income of $9.3 million was reduced for $7.6 million of non-cash items, net cash provided by operating activities consisted of the following:

 

  Increase in accounts payable and accrued liabilities of $1.0 million;
     
  Increase in our payables due to affiliates of $1.1 million; and
     
  Decrease in accounts receivable and other assets of $0.6 million.
     

Cash Flows from Investing Activities

 

During the three months ended March 31, 2015, net cash used in investing activities was $52.1 million, primarily due to the following:

 

  $66.6 million used in acquiring consolidated real estate investments;
     
  $8.7 million used in acquiring an investment in an unconsolidated joint venture;
     
  $0.4 million used on capital expenditures;
     
  Partially offset by a decrease of $8.1 million in our restricted cash balance; and
     
  $15.6 million in cash proceeds received for the sale of the Berry Hill property.

 

Cash Flows from Financing Activities

 

During the three months ended March 31, 2015, net cash provided by financing activities was $92.2 million, primarily due to the following:

 

  $53.7 million raised in our January 2015 Follow-On Offering on January 20, 2015;
     
  net borrowings of $42.6 million on mortgages payable;
     
  $0.6 million increase in capital contributions from noncontrolling interests;
     
  partially offset by $0.4 million in distributions paid to our joint venture partners;
     
  $3.6 million paid in cash distributions paid to stockholders;
     
  $0.4 million increase in deferred financing costs;
     
  and $0.4 million of repayments of our mortgages payable. 

 

Capital Expenditures

 

The following table summarizes our total capital expenditures for the three months ended March 31, 2015 and 2014 (amounts in thousands):

 

   For the three months ended March 31, 
   2015   2014 
New development  $   $3,316 
Redevelopment/renovations   248    111 
Routine capital expenditures   198    53 
Total capital expenditures  $446   $3,480 

 

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The majority of our capital expenditures during the three months ended March 31, 2014 related to our development property, Berry Hill, which was acquired in October 2012 and became stabilized during the three months ended September 30, 2014.

 

We define redevelopment and renovation costs as non-recurring capital expenditures for significant projects that upgrade units or common areas and projects that are revenue enhancing for the three months ended March 31, 2015. We define routine capital expenditures as capital expenditures that are incurred at every property and exclude development, investment, revenue enhancing and non-recurring capital expenditures.

 

Funds from Operations and Adjusted Funds from Operations

 

Funds from operations (“FFO”), is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We consider FFO to be an appropriate supplemental measure of our operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. We define FFO, consistent with the National Association of Real Estate Investment Trusts, or NAREIT's, definition, as net income, computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, plus impairment write-downs of depreciable real estate, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.

  

In addition to FFO, we use adjusted funds from operations (“AFFO”). AFFO is a computation made by analysts and investors to measure a real estate company's operating performance by removing the effect of items that do not reflect ongoing property operations.

 

In computing AFFO, we further adjust FFO by adding back certain items that are not added to net income in NAREIT's definition of FFO, such as acquisition expenses, equity based compensation expenses, and any other non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of our properties, and subtracting recurring capital expenditures (and when calculating the quarterly incentive fee payable to our Manager only, we further adjust FFO to include any realized gains or losses on our real estate investments).

 

We incurred $0.4 million of acquisition expense and $0.7 million of disposition expense during the three months ended March 31, 2015, of which $0.5 million was our pro-rata share of the expense. We incurred $0.02 million of acquisition expense and $1.68 million of disposition expense during the three months ended March 31, 2014, of which $0.5 million was our pro-rata share of the expense.

 

Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance after adjustment for certain non-cash items, such as depreciation and amortization expenses, and acquisition expenses and pursuit costs that are required by GAAP to be expensed but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our stockholders with an additional useful measure to compare our financial performance to certain other REITs. We also use AFFO for purposes of determining the quarterly incentive fee, if any, payable to our Manager.

 

Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity. 

 

The table below presents our calculation of FFO and AFFO for the three months ended March 31, 2015 and 2014 (in thousands).

 

We have acquired interests in nine additional properties subsequent to March 31, 2014 and sold four properties that were owned during the quarter ended March 31, 2014. The results presented in the table below are not directly comparable and should not be considered an indication of our future operating performance.

  

   Three Months Ended 
   March 31, 
   2015   2014 
Net income (loss) attributable to common stockholders  $3,313   $(1,047)
Common stockholders pro-rata share of:          
Real estate depreciation and amortization(1)   1,911    475 
Gain on sale of joint venture interests   (5,324)   (448)
FFO  $(100)  $(1,020)
Common stockholders pro-rata share of:          
Amortization of non-cash interest expense   23    28 
Acquisition and disposition costs   475    487 
Normally recurring capital expenditures(2)   (114)   (19)
Non-cash equity compensation   1,365    14 
AFFO  $1,649   $(510)
Weighted average common shares outstanding   12,547,895    1,060,889 

 

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(1)   The real estate depreciation and amortization amount includes our share of consolidated real estate-related depreciation and amortization of intangibles, less amounts attributable to noncontrolling interests, and our similar estimated share of unconsolidated depreciation and amortization, which is included in earnings of our unconsolidated real estate joint venture investments. 

(2)   Normally recurring capital expenditures exclude development, investment, revenue enhancing and non-recurring capital expenditures.

 

Operating cash flow, FFO and AFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and AFFO, such as tenant improvements, building improvements and deferred leasing costs.

 

Presentation of this information is intended to assist the reader in comparing the sustainability of the operating performance of different REITs, although it should be noted that not all REITs calculate FFO or AFFO the same way, so comparisons with other REITs may not be meaningful.  FFO or AFFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to make distributions.  Both FFO and AFFO should be reviewed in connection with other GAAP measurements.

 

Distributions

 

On October 10, 2014, the Board declared monthly dividends for the fourth quarter of 2014 equal to a quarterly rate of $0.29 per share on both the Company’s Class A common stock and Class B common stock, payable to the stockholders of record as of October 25, 2014, November 25, 2014 and December 25, 2014, which was paid in cash on November 5, 2014, December 5, 2014 and January 5, 2015, respectively.

 

The declared dividends equal a monthly dividend on the Class A common stock and Class B common stock as follows: $0.096666 per share for the dividend paid to stockholders of record as of October 25, 2014, and $0.096667 per share for the dividend paid to stockholders of record as of November 25, 2014, and December 25, 2014. A portion of each dividend may constitute a return of capital for tax purposes.

 

On January 9, 2015, the Board declared monthly dividends for the first quarter of 2015 equal to a quarterly rate of $0.29 per share on both the Company’s Class A common stock and Class B common stock, payable to the stockholders of record as of January 25, 2015, February 25, 2015 and March 25, 2015, which was paid in cash on February 5, 2015, March 5, 2015 and April 5, 2015, respectively.  Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of the Company's Class A common stock.

 

The declared dividends equal a monthly dividends on the Class A common stock and the Class B common stock as follows: $0.096666 per share for the distributions paid to stockholders of record as of January 25, 2015, $0.096667 per share for the distributions paid to stockholders of record as of February 25, 2015, and $0.096667 per share for the distributions paid to stockholders of record as of March 25, 2015. A portion of each distribution may constitute a return of capital for tax purposes.

 

On April 10, 2015, the Board declared monthly dividends for the second quarter of 2015 equal to a quarterly rate of $0.29 per share on both the Company’s Class A common stock and Class B common stock, payable to the stockholders of record as of April 25, 2015, May 25, 2015 and June 25, 2015, which will be paid in cash on May 5, 2015, June 5, 2015 and July 5, 2015, respectively. Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of the Company's Class A common stock.

 

 The declared dividends equal a monthly dividends on the Class A common stock and the Class B common stock as follows: $0.096666 per share for the distributions paid to stockholders of record as of April 25, 2015, $0.096667 per share for the distributions paid to stockholders of record as of May 25, 2015, and $0.096667 per share for the distributions paid to stockholders of record as of June 25, 2015. A portion of each distribution may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends at this rate.

 

Our Board will determine the amount of dividends to be paid to our stockholders. The Board’s determination will be based on a number of factors, including funds available from operations, our capital expenditure requirements and the annual distribution requirements necessary to maintain our REIT status under the Internal Revenue Code. As a result, our distribution rate and payment frequency may vary from time to time.  However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year. Especially during the early stages of our operations, we may declare distributions in excess of funds from operations.

  

Significant Accounting Policies and Critical Accounting Estimates

 

Our significant accounting policies and critical accounting estimates are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014 and Note 2 “Basis of Presentation and Summary of Significant Accounting Policies” to the Consolidated Financial Statements.

 

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Subsequent Events

 

Other than the items disclosed in Note 14, “Subsequent Events” to our interim Consolidated Financial Statements for the period ended March 31, 2015, no material events have occurred that required recognition or disclosure in these financial statements.  See Note 14 to our interim Consolidated Financial Statements for discussion.

  

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

We have omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, we are not required to provide such information.

 

Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Accounting Officer, evaluated, as of March 31, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of March 31, 2015, to provide reasonable assurance that information required to be disclosed by us in this report filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

  

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Other than the following, there have been no material changes to our potential risks and uncertainties presented in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the twelve months ended December 31, 2014 filed with the SEC on March 4, 2015.

 

We have paid and may continue to pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flow from operations or earnings are not sufficient to fund declared distributions. Rates of distribution to you will not necessarily be indicative of our operating results. If we make distributions from sources other than our cash flows from operations or earnings, we will have fewer funds available for the acquisition of properties and your overall return may be reduced.

 

 Our organizational documents permit us to make distributions from any source, including the net proceeds from an offering. There is no limit on the amount of offering proceeds we may use to pay distributions. During the early stages of our operations, we have funded and expect to continue to fund distributions from the net proceeds of our offerings, borrowings and the sale of assets to the extent distributions exceed our earnings or cash flows from operations. While our policy is generally to pay distributions from cash flow from operations, our distributions through March 31, 2015 have been paid from proceeds from our continuous registered offerings conducted prior to the IPO, proceeds from the IPO and the Follow-On Offerings, and sales of assets, and may in the future be paid from additional sources, such as from borrowings. To the extent we fund distributions from sources other than cash flow from operations, such distributions may constitute a return of capital and we will have fewer funds available for the acquisition of properties and your overall return may be reduced. Further, to the extent distributions exceed our earnings and profits, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder will be required to recognize capital gain.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

  

Item 6.  Exhibits 

 

 

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 Exhibit No. Description

 

  10.1 Purchase and Sale Agreement by and between Park Kingston Investors, LLC and Bluerock Real Estate, L.L.C., dated as of January 15, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.2 Amendment to Purchase and Sale Agreement by and between Park Kingston Investors, LLC and Bluerock Real Estate, L.L.C., dated as of February 17, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 20, 2015
     
  10.3 Second Amendment to Purchase and Sale Agreement by and between Park Kingston Investors, LLC and Bluerock Real Estate, L.L.C., dated as of February 20, 2015, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.4 Partial Assignment and Assumption of Purchase and Sale Agreement by and between Bluerock Real Estate, L.L.C. and BR Park & Kingston Charlotte, LLC, dated as of February 20, 2015, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.5 Limited Liability Company Agreement of BR Park & Kingston Charlotte, LLC by 23Hundred, LLC, dated effective as of January 8, 2015, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.6 Amendment to Amended and Restated Limited Liability Company Agreement of 23Hundred, LLC by BR Stonehenge 23Hundred JV, LLC, dated January 8, 2015, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.7 Multifamily Loan and Security Agreement (Non-Recourse) by and between BR Park & Kingston Charlotte, LLC and CBRE Multifamily Capital, Inc., dated as of March 16, 2015, incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.8 Multifamily Note by and between BR Park & Kingston Charlotte, LLC and CBRE Multifamily Capital, Inc., dated as of March 16, 2015, incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.9 Multifamily Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing by BR Park & Kingston Charlotte, LLC for the benefit of CBRE Multifamily Capital, Inc., dated as of March 16, 2015, incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.10 Assignment of Management Agreement by and between BR Park & Kingston Charlotte, LLC, CBRE Multifamily Capital, Inc., and Bell Partners Inc., dated as of March 16, 2015, incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.11 Environmental Indemnity Agreement and between BR Park & Kingston Charlotte, LLC and CBRE Multifamily Capital, Inc., dated as of March 16, 2015, incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

  10.12

Assignment of Collateral Agreements and Other Loan Documents by and between BR Park & Kingston Charlotte, LLC and CBRE Multifamily Capital, Inc., dated as of March 16, 2015, incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on March 20, 2015

 

 

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  10.13

Agreement of Purchase and Sale by and between WRPV XI FH Austin, L.P. and Bluerock Real Estate, L.L.C., dated as of January 19, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 1, 2015

 

  10.14

Assignment of Agreement of Purchase and Sale by and between Bluerock Real Estate, L.L.C., BR Fox Hills TIC-1, LLC, and BR Fox Hills TIC-2, LLC dated as of March 5, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.15

Tenants In Common Agreement by and among BR Fox Hills TIC-1, LLC and BR Fox Hills TIC-2, LLC, dated as of March 26, 2015, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.16

Limited Liability Company Agreement of BR Fox Hills TIC-1, LLC by and between 23Hundred, LLC and Bluerock Asset Management LLC, effective as of February 10, 2015, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.17

Limited Liability Company Agreement of BR Fox Hills TIC-2, LLC among Bell BR Waterford Crossing JV, LLC and Bluerock Asset Management LLC, effective as of February 10, 2015, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.18

Second Amended and Restated Limited Liability Company Agreement of Bell BR Waterford Crossing JV, LLC by and among BR Waterford JV Member, LLC, BR Waterford JV Minority Member, LLC, Durant Holdings, LLC, V BELLS LLC, and Craig S. West, effective as of March 26, 2015, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.19

Multifamily Loan and Security Agreement (Non-Recourse) by and between BR Fox Hills TIC-1, LLC, BR Fox Hills TIC-2, LLC, and Walker & Dunlop, LLC, effective as of March 26, 2015, incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.20

Guaranty of Non-Recourse Obligations by Bluerock Residential Growth REIT, Inc. for the benefit of Walker & Dunlop, LLC, dated as of March 26, 2015, incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.21

Multifamily Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing by BR Fox Hills TIC-1, LLC and BR Fox Hills TIC-2, LLC to Gary S. Farmer as trustee for the benefit of Walker & Dunlop, LLC, dated as of March 26, 2015, incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.22

Assignment of Security Instrument (Multifamily Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing) by Walker & Dunlop, LLC to Fannie Mae, dated as of March 26, 2015, incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.23

Multifamily Note by BR Fox Hills TIC-1, LLC and BR Fox Hills TIC-2, LLC for the benefit of Walker & Dunlop, LLC, dated as of March 26, 2015, incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.24

Subordination, Non-Disturbance and Attornment Agreement by and between BR Fox Hills TIC-1, LLC, BR Fox Hills TIC-2, LLC, Walker & Dunlop, LLC, and Coinmach Corporation, dated as of March 26, 2015, incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed on April 1, 2015

     
  10.25

Environmental Indemnity Agreement by BR Fox Hills TIC-1, LLC and BR Fox Hills TIC-2, LLC for the benefit of Walker & Dunlop, LLC, dated as of March 26, 2015, incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on April 1, 2015

 

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  10.26 Property Management Agreement by and between BR Fox Hills TIC-1, LLC, BR Fox Hills TIC-2, LLC, and Bluerock Property Management, LLC, dated as of March 26, 2015, incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed on April 1, 2015
     
  10.27 Assignment of Management Agreement by and between BR Fox Hills TIC-1, LLC and BR Fox Hills TIC-2, LLC, Walker & Dunlop, LLC, and Bluerock Property Management, LLC and Bell Partners Inc., dated as of March 26, 2015, incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed on April 1, 2015
     
  10.28 Property Management Agreement by and between BR Park & Kingston Charlotte, LLC and Bell Partners Inc., dated March 16, 2015
     
  10.29 Property Management Agreement by and between Bluerock Property Management, LLC and Bell Partners, Inc., dated March 26, 2015
     
  10.30 Leasehold Deed of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing and Financing Statement by BR Bellaire BLVD , LLC for the benefit of Bank of America, N.A., dated April 7, 2015
  10.31 Construction Loan Agreement among BR Bellaire Blvd, LLC, Bank of America, N.A. as Administrative Agent and Lender and the other financial institutions party thereto dated as of April 7, 2015
     
  10.32 Deed of Trust Note made by BR Bellaire Blvd, LLC in favor of Bank of America, N.A. dated as of April 7, 2015
     
  10.33 Ground Lease by and between Prokop Industries BH, L.P. and BR Bellaire BLVD, LLC, dated as of January 12, 2015

  

 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
  31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
  32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
     
  101.1 The following information from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets; (ii) Statements of Operations; (iii) Statement of Stockholders’ Equity; (iv) Statements of Cash Flows.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

    BLUEROCK RESIDENTIAL GROWTH REIT, INC.
       
DATE:  May 13, 2015   /s/ R. Ramin Kamfar
      R. Ramin Kamfar
      Chief Executive Officer and President
      (Principal Executive Officer)

 

DATE:  May 13, 2015   /s/ Christopher J. Vohs
      Christopher J. Vohs
      Chief Accounting Officer and Treasurer
      (Principal Financial Officer, Principal Accounting Officer)

 

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Section 2: EX-10.28 (EXHIBIT 10.28)

  

Exhibit 10.28

 

PROPERTY MANAGEMENT AGREEMENT

 

This PROPERTY MANAGEMENT AGREEMENT (the "Agreement"), entered into as of this 16th day of March, 2015 BR Park & Kingston Charlotte, LLC, a North Carolina limited liability company ("Owner") and Bell Partners Inc., a North Carolina corporation ("Manager").

 

IN CONSIDERATION of the mutual covenants and promises each to the other made herein, the Owner does hereby engage Manager exclusively as an independent contractor, and the Manager does hereby accept the engagement, to rent, lease, operate, repair and manage the property more particularly described below (the "Project") upon the following terms and conditions.

 

THE PROPERTY: Located in the City of Charlotte, County of Mecklenburg, State of North Carolina and being known to consist of l53 units, and more particularly described as:

 

Park & Kingston Apartments Phase I

125 West Park Avenue

Charlotte, NC 28203

 

At Owner's option, upon written notice to Manager, Owner shall have the right to add 15 units commonly known as Park & Kingston Apartments Phase II, 125 West Park Avenue, Charlotte, NC 28203 to the scope of this Agreement, whereupon all 168 units located at such address shall constitute the "Project" for all purposes under this Agreement.

 

SECTION 1:DEFINITIONS

 

1.1TERM

The term of this Agreement shall commence on the date hereof and shall, subject to the provisions hereof, terminate twelve (12) months following the date hereof. This Agreement will automatically renew on a year to year basis thereafter until and unless terminated in accordance with the terms hereof under Section 7.06.

 

1.2FEES

The management fee ("Base Management Fee") payable each month by Owner to Manager hereunder shall be an amount equal to Three percent (3.0%) of the Gross Receipts from the Project including any partial month in which Manager accepts engagement.

 

Yield Management. Owner agrees to deploy Yield Management (the process of balancing supply and demand to price apartments to maximize rental revenue) at the Project.

 

Manager provides Pricing Authority Support to include daily monitoring of apartment pricing, quarterly reporting and bi-weekly conference calls with site staff. Manager will review pricing recommendations and will have authority to make pricing decisions concerning the Property. Manager will be responsible for overseeing selection, set-up and maintenance of the revenue management software. Licensing fees and software costs to run revenue management software shall be paid at the then-prevailing rate by Owner to the software licensor (currently RealPage for Yieldstar product, but licensor and product subject to change at Manager's election) as a normal operating expense. Owner acknowledges and agrees that some revenue management software contracts may impose indemnification obligations on Owner with respect to third party providers and others;

 

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E-procurement and Invoice Management. Owner agrees to deploy Ops Technology (enables suppliers and service providers to present targeted pre-negotiated catalog pricing, receive orders electronically, and insert electronic invoices into the Manager's payment processing system) at the Project. Manager provides e-procurement and invoice management services to control property spending and optimize expenses. Such a platform enables suppliers and service providers to present pre-negotiated catalog pricing, receive orders electronically, and insert electronic invoices into Manager's payment processing system. Manager will provide oversight of the e-procurement and invoice management platform. If required by the software licensor (currently RealPage for OpsTechnology product, but licensor and product subject to change at Manager' s election), Owner shall pay a one-time licensing fee, a monthly use fee and a per-paper invoice processing fee at the then-prevailing rate as a normal operating expense. In addition, Property vendors will pay a fee directly to the software licensor to participate in the e-procurement and invoice management program. Owner acknowledges and agrees that some contracts with software providers may impose indemnification obligations on Owner with respect to third party providers and others.

 

Resident Utility Billing and Invoice Processing. Owner agrees to deploy Bell Utilities Management resident utility billing and invoice processing best practices at the Project including, but not limited to, third party resident utility billing, utilities invoice processing, meter maintenance, trash services and deregulated market company/consultants as selected by the Manager. Manager will provide Utilities Management support services in exchange for cost-offset compensation of ninety-nine cents ($.99) per unit per month that will be passed to the residents on the monthly Resident One Bill via the “Rent Service Fee” as a $0 net impact to the Owner. Utilities Management support services provided by Manager shall include implementation of Utilities Management Bell Best Practices in order to maximize utilities reimbursements and to minimize related fees and expenses. The Manager will review utilities management practices (resident utility billing and utility invoice processing) and shall have final authority for making utilities related decisions concerning the Project. Manager will be responsible for set-up and maintenance of the Utilities Management program.

 

1.3ADMINISTRATIVE CHARGES

Market rate fees or charges may also be charged or passed through for those services set forth below:

 

(a)Revenue Management Charge. To maximize total rental revenue at the Property, Owner agrees to deploy yield management software (software that uses algorithms to establish apartment rental rates) at the Property. Use of such software requires additional staffing and expertise on Manager's part ("Pricing Authority Support''). Owner will pay Manager a per-unit-per-month amount to provide Pricing Authority Support. Such amount will initially be $1.25_per-unit-per-month, and may be adjusted as part of the annual Budget process.

 

(b)Marketing and Training Charges. To maximize total rental revenue at the Property, Owner agrees to pay certain support amounts for marketing and training of Manager's employees. Such amounts shall be $1.32 per-unit-per-month for training and $37.00 per Property-per-month for marketing and shall increase thereafter only upon Owner's approval.

 

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(c)Contract Negotiation Charge. If, at Owner's request, Manager negotiates video (cable), data (internet), voice (phone) on behalf of the Owner to maximize revenue at the Property, and such agreements provide for the payment to Owner of an upfront or “door” fee payment, then Manager will be paid 10% of the upfront or “door” fee in return for negotiating and overseeing work performed under such contracts.

 

(d)Meter Replacement and Maintenance Oversight Charge. If a property-wide meter change-out or meter maintenance is required, Owner will pay to Manager a fee of 5% of total project cost for managing such project.

 

(e)Charges for Additional Services. If additional services not outlined herein are required by Owner of Manager, Owner shall pay Manager for such additional services under terms and conditions to be agreed upon by the parties. Manager shall be under no obligation to provide such additional services unless and until the parties have entered into a written agreement reflecting the terms and conditions thereof.

 

1.3DEPOSITORY

An FDIC insured bank located in the United States of America, designated by Manager and approved by Owner.

 

1.4FISCAL YEAR

The year beginning January 1st and ending December 31st.

 

1.5BUDGET

A composite of (i) an operations Budget, which shall be an estimate of receipts and expenditures for the full and complete operation (inclusive of all maintenance, repairs and alterations) of the Project during a Fiscal Year, including a schedule of expected apartment rentals (excluding security deposits) for the period stated herein and a schedule of expected special repairs and maintenance projects, and (ii) a capital Budget, which shall be an estimate of capital replacements, substitutions of, and additions to, the Project for the Fiscal Year.

 

1.6GROSS RECEIPTS

The entire amount of all receipts, determined on a cash basis, from (a) tenant rentals, parking rent and other charges collected pursuant to tenant leases for each month during the term hereof; provided, however, that there shall be excluded from tenant rentals any refundable tenant security deposits (except as provided below); (b) cleaning, tenant security and damage deposits forfeited by tenants in such period; (c) tenant reimbursements for utilities (gas, electric, water and sewer); (d) video (cable), data (internet), local or long-distance services (voice), laundry and vending machine income and other ancillary revenue generated as a percentage of gross receipts; (e) any and all receipts from the operation of the Project received and relating to such period; (f) proceeds from rental interruption insurance; and (g) any other sums and charges collected in connection with termination of the tenant leases. Gross Receipts do not include the proceeds of (i) any sale, exchange, refinancing, condemnation, or other disposition of all or any part of the Project, (ii) any loans to the Owner whether or not secured by all or any part of the Project, (iii) any capital contributions to the Owner, (iv) any insurance (other than rental interruption insurance) maintained with regard to the Project, (v) proceeds of casualty insurance or damage claims as a result of damage or loss to the Project or (vi) condemnation awards received pursuant to a government taking of all or any portion of the Project.

 

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1.7PROJECT EMPLOYEES

Those persons employed by Manager and located on-site as a management staff; e.g., senior manager, manager, assistant managers, leasing agents, maintenance personnel, courtesy officers, and other personnel necessary to be directly employed by the Manager in order to maintain and operate the Project.

 

SECTION 2: DUTIES AND RIGHTS OF MANAGER

 

2.1APPOINTMENT OF MANAGER

During the term of this Agreement, Manager agrees, for and in consideration of the compensation provided in Section 1.02, and Owner hereby grants to Manager the sole and exclusive right, to supervise and direct the leasing, management, repair, maintenance and operation of the Project as per the authority granted herein. All services performed by Manager under this Agreement shall be done as an independent contractor of Owner. All obligations or expenses incurred hereunder, including the pro rata portion used in connection with, or for the benefit of the Project for all purchases, contracts, sales or services in bulk or volume which Manager may obtain for discount or convenience in connection thereof shall be for the account of, on behalf of, and at the expense of, Owner except as otherwise specifically provided. Owner shall be obligated to reimburse Manager for all expenses of Manager incurred specifically for the Project.

 

Owner shall designate up to three people, to include a representatives from accounting and asset management to serve as Owner's representative (''Owner's Representative") in all dealings with Manager hereunder. Whenever the approval, consent, or other action of Owner is called hereunder, such approval, consent or action shall be binding on Owner if specified in writing via email, facsimile, or written correspondence and approved by Owner's Representative. The initial Owner's Representative is Laurance Kaufman. Manager shall be entitled to rely on all instruction of the Owner's representative pending further notification by Owner. The Owner's Representative may be changed at the discretion of Owner

 

All obligations or expenses incurred hereunder, including the pro rata portion used in connection with, or for the benefit of the Project for all purchases, contracts, sales or services in bulk or volume which Manager may obtain for discount or convenience in connection thereof shall be for the account of, on behalf of, and at the expense of, Owner except as otherwise specifically provided. Owner shall be obligated to reimburse Manager for all reasonable customary expenses of Manager incurred specifically for the Project, which were authorized in the Budget or otherwise approved in writing by the Owner.

 

2.2OWNER' S MINIMUM TECHNOLOGY REQUIREMENTS.

Owner agrees to use and pay associated software costs for Manager’s standard business application platform for property management (e.g. RealPage), financials (e.g. Yardi), and other business applications (e.g. HR/Payroll - Workday). Owner agrees to provide the Property with technology, including but not limited to, hardware (e.g. computer, printer, scanner, check scanner, etc.), software (e.g. Microsoft Windows, etc.), and high-speed internet access (e.g. bandwidth, etc.) that satisfies Manager's minimum technology standard, as may be modified from time to time. If the technology device falls below the minimum standard or upgraded technology is deemed necessary for continuing operations, Owner agrees to upgrade, at Owner's expense, as reasonably needed to achieve the agreed upon minimum standard attached hereto as Exhibit C (as the same may be modified from time to time) which were authorized in the Budget or otherwise approved in writing by Owner to reasonably achieve the minimum technology standard.

 

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2.3GENERAL OPERATION

Manager shall operate the Project in the same manner as is customary and usual in the operation of comparable facilities, and shall provide such services as are customarily provided by operators of apartment projects of comparable class and standing consistent with the Project's facilities, subject, however, in all events to the limitations of the Budget. In addition to the other obligations of Manager set forth herein, Manager shall render the following services and perform the following duties for Owner in a timely, faithful, diligent and efficient manner: (a) coordinate the plans of tenants for moving their personal effects into the Project or out of it, with a view toward scheduling such movements so that there shall be a minimum of inconvenience to other tenants; (b) maintain businesslike relations with tenants whose service requests shall be received, considered and recorded in systematic fashion in order to show the action taken with respect to each; (c) use its commercially reasonable efforts to collect all monthly rents due from tenants and rent for users or lessees of other non-dwelling facilities in the Project, if any; request, demand, collect, receive and receipt for any and all charges or rents which become due to Owner, and at Owner's expense, take such legal action as may be necessary or desirable to evict tenants delinquent in payment of monthly rental, other charges (security deposits, late charges, etc.); (d) prepare or cause to be prepared for execution and filing by the Manager as an independent contractor all forms, reports and returns required by all federal, state or local laws in connection with the unemployment insurance, workers' compensation insurance, disability benefits, Social Security and other similar taxes now in effect or hereafter imposed, and also any other requirements relating to the employment of personnel; (e) advertise when necessary, at Owner's expense and approval, the availability for rental for the Project units using commercially reasonable business strategies in connection with the use of promotional materials, market outreach efforts, internet and web-based marketing and display “for rent” or other similar signs upon the Project, it being understood that Manager may install one or more signs on or about the Project stating that same is under management of Manager and may use in a tasteful manner Manager1s name and logo in any display advertising which may be done on behalf of the Project; and (f) sign, renew and cancel tenant leases for the Project for terms and on forms agreed to by Manager and approved by Owner (or on a month to month basis following the expiration of the initial term of a tenant lease) to bona fide individuals based upon Manager's recommendations. Manager shall exercise its commercially reasonable efforts to include the Project in signage advertising rentals available to be placed at the Project during any lease-up period. Notwithstanding anything herein to the contrary, in the event the Project name contains the trade names and/or trademarks “Bell Partners” or “Bell” (collectively, the "Bell Brand Rights"), Owner shall not be entitled to any right, title or interest of Manager in the Bell Brand Rights. Owner, at its cost, shall immediately cease using any Bell Brand Right and shall replace all signage and all collateral material that contains a Bell Brand Right (1) during the term of this Agreement within 30 days after a request to do so by Bell; and (2) within 30 days after the termination of this Agreement;

 

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Security Services. It is understood and agreed that Manager is not in the business of, and will not be providing alarm systems, guards, patrols and/or similar services to the Project as a part of its management services. Should Owner choose to do so, Owner may separately contract with a company providing Security Services.

 

2.4BUDGET

(a) Attached hereto as Exhibit A is the Budget approved by Owner for the stated portion of the current Fiscal Year. For subsequent Fiscal years, Manager shall submit the Budget for the ensuing Fiscal Year for Owner's approval no later than ninety (90) days prior to the beginning of each successive Fiscal Year. Owner shall make reasonable business efforts to approve the proposed Budget prior to December 31. In the event Owner disapproves the Budget, in whole or in part, Owner will provide such edits for the Manager to make as may be reasonably practicable. Until a complete new Budget is approved, Manager shall operate on the Budget or part thereof which is approved and the disapproved items shall be governed by the like item approved for the prior Fiscal Year, with the exception of expenses for personnel which may be reasonably increased based on existing competitive conditions unless the increase for personnel is the item that is being disputed, in which case expenses for personnel will not be increased.

 

(b) The Budget shall reflect the schedule of monthly rents for the applicable Fiscal Year. It shall also constitute a major control under which Manager shall operate the Project, and Manager shall make all reasonable efforts to ensure there are no substantial variances therefrom except for the variations which are in compliance with Section 2.07(a)(ii). Consequently, no expenses may be incurred or commitments made by Manager in connection with the management or operation of the Project which exceed (or would cause the total expenses to exceed) by more than five percent (5%) for the "line item" amount allocated for such category of expense provided for in the approved Budget; provided, however, the foregoing limitation with respect to incurring expenses not covered by the Budget shall not apply to expenses relating to taxes, insurance or utilities. Manager makes no guaranty, warranty or representation whatsoever in connection with the Budgets or the operational results of owning the Project, such being intended as estimates only. Manager will use its commercially reasonable efforts to develop the Budget and manage the Project in accordance with the Budget.

 

(c) In the event there shall be a substantial variances (expenses exceeding 5% of any "line item" amount allocated for such category of expense, or Gross Receipts less than 95%, of projection) between the actual results of operations for any month and the estimated results of operations for such month as set forth in the Budget, Manager shall furnish to Owner, within ten (10) business days after the expiration of such month, a written explanation concerning the variances and the steps being taken by Manager to rectify the variances. If after a Budget has been approved substantial variations have occurred, or are anticipated by Manager during the course of the Fiscal Year, Manager shall immediately notify Owner and, upon Owner's request, shall prepare and submit to Owner a revised forecast of annual income and expenses for the remainder of the Fiscal Year based on actual year-to-date income and expenses and Manager's forecast of income and expenses for the remainder of the Fiscal Year. Such forecast shall not constitute a replacement Budget.

 

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2.5PROJECT EMPLOYEES AND OTHER PERSONNEL

(a) Manager shall investigate, hire, employ, instruct, pay, promote, direct, discharge and supervise the work of the Project employees and shall supervise, through the Project employees, the firing, promotion, discharge and work of all other operating and service employees performing services in, for or about the Project, all in the name of Manager. All necessary and appropriate training and training-related costs may be included in the Budget and paid accordingly. Manager shall be solely responsible for legal compliance concerning the foregoing activities and shall indemnify and hold harmless Owner from employee claims and violations of law by Manager in respect to employment matters. To the extent that some of the Project employees may be required to reside at the Project and be available on a full time basis in order to perform properly the duties of his/her employment, it is further understood and agreed that to the extent contemplated in the Budget or with Owner's prior written approval, such Project employees (including spouses or significant others and dependent children), in addition to salary and fringe benefits, may receive up to a 20% discount, or rental concession on the normal rental rates for any unit such employee is required to occupy.

 

(b) At all times, all Project employees shall at all times be deemed solely employees of Manager, and not of Owner. Owner nevertheless agrees to reimburse Manager, consistent with the Budget, bi-weekly for the total aggregate Budgeted compensation, including salary and fringe benefits, payable with respect to the Project employees and any temporary employees performing duties at the Project. The term "fringe" benefits, as used herein, shall mean and include the employee's and employer's contribution of FICA, unemployment compensation and other employment truces, workers' compensation, group life, accident and health insurance premiums, performance bonuses provided for in the Budget and approved by Owner, disability, vacation, holiday, and sick leave, 401(k) contributions and other similar benefits paid or payable to employees on other projects operated by Manager. Any 401(k) employee or employer contributions forfeited by the employee remain with the plan. The cost of such Project Employees' base salaries and fringe benefits shall be separately and specifically scheduled within the Payroll line item of the Budget. The compensation, payroll taxes, employee benefits, insurance, payroll and administrative costs of such employees shall be considered a normal operating expense and shall be paid as a Project expense, as provided and to the extent permitted in the Budget. In addition, if there is a sale of the Property during the term of this Agreement, Manager may pay and Owner shall reimburse, such "stay on bonuses" to on-site Property employees as Manager deems customary in the industry and approved by Owner in writing.

 

2.6CONTRACTS AND SUPPLIES

Subject to the Budget, the Manager shall, in the name of and on behalf of Owner and at Owner's expense, consummate arrangements with unrelated third party concessionaires, licensees, tenants or other intended users of the facilities of the Project, shall enter into contracts for furnishing to the Project electricity, gas, water, steam, telephone, cleaning, vermin exterminators, furnace and air-conditioning maintenance, security protection, pest control, landscaping, solid waste removal and any other utilities, services and concessions which are provided in connection with the maintenance and operation of apartment projects which are comparable to the Project and in accordance with standards comparable to those prevailing in other comparable apartment projects, and shall place purchase orders for such equipment, tools, appliances, materials and supplies as are reflected in the Budget and necessary to maintain the Project. Manager will make a reasonable attempt to make all contracts cancelable without penalty within (30) days written notice provided, however, that Owner's prior written consent shall be required for service contract or purchase order providing for a term or duration of more than one (1) year period; and further provided, that Owner's prior written consent shall be required for any such agreement that is not cancelable without penalty upon thirty (30) day written notice.

 

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In the event that utility or power companies require a surety bond or other form of security in order to provide utilities, electrical or other services to the Project, upon Owner's written consent thereto, the Manager is authori7.ed to obtain such bond at Owner's sole expense. Manager may, in its sole discretion, elect to guarantee, indemnify, defend and hold harmless those parties supplying such bonds or other form of security (the "Surety") for any premiums, liabilities, losses, costs, damages, attorney fees and other expenses, including interest, which the Surety may sustain or incur by reason of, or in connection with, the issuance, renewal or continuation of such bonds or other form of security. In such event, Owner will reimburse and indemnify Manager pursuant to Section 6.03 with regard to the same.

 

2.7MANAGER'S SERVICES

In the performance of its duties under this Agreement and subject to the limitations set forth in Section 2.05 hereof, it is agreed that Manager may enter into any contract on behalf of Owner with subsidiaries and affiliates of Manager for the furnishing of supplies and services to the Project, including but not limited to the purchasing of furniture, operating equipment, operating supplies, maintenance and landscaping services, and advertising, provided, however, that the net cost of such supplies and services to Owner is competitive with such similar services or supplies customarily used in the industry, whose services or supplies are reasonably available to the industry and whose services or supplies are reasonably available to the Project. Manager may implement a renter's insurance program through an insurance company affiliated with Manager provided rates are comparable with the industry standard.

 

2.8ALTERATIONS,REPAIRS AND MAINTENANCE

(a) (i) To the extent adequate funds are made available to Manager by Owner, Manager shall make or install, or cause to be made and installed at Owner's expense and in the name of Owner, all necessary or desirable repairs, interior and exterior cleaning, painting and decorating, plumbing, alterations, replacements, improvements and other normal maintenance and repair work on and to the Project as are customarily made by Manager in the operation of apartment Projects or are required by any lease. (ii) Manager may make emergency repairs involving manifest danger to life or property which are immediately necessary for the preservation of the safety of the Project, or for the safety of the tenants, or are required to avoid the suspension of any necessary service to the Project, in which event such reasonable expenditures may be made by the Manager without prior approval and irrespective of the cost limitations imposed by the Budget, provided that Owner or its successor in interest is notified in a timely manner and thereafter given written notice of such situation and such costs incurred.

 

(b)              In accordance with the terms of the Budget, by Manager's recommendation (with Owner's approval) or upon Owner demand and/or approval (except in the case of emergency), Manager shall, at Owner's expense, from time to time during the term hereof, make all required capital replacements or repairs to the Project (“Capital Project”). For any Capital Projects, including but not limited to Project improvements and rehab/renovation projects that cost more than $10,000 on an individual basis, Owner shall pay Manager a fee to supervise such Capital Projects equal to six percent (6%) of the total cost of the completed work, including both hard and soft costs.

 

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(c) In connection with this Agreement, Manager shall provide construction management services and supervision to restore or repair physical damage to the Property resulting from fortuitous loss or acts of God, including but not limited to, fire, wind, hail and flood ("Casualty Projects").

 

Manager shall be paid a construction management oversight fee of five percent (5%) based upon the total cost of the Casualty Project work, including hard and soft costs.

 

The construction management fee shall be paid to Manager by Owner as soon as practical, either at the earlier of as draws are paid, or at the completion of the project work.

 

Manager shall where applicable make reasonable efforts to secure at least three (3) bids for all insurance loss claims and casualty work. and shall use best efforts to obtain at least three (3) such bids for any contract for labor and/or material relating to the Project which has an aggregate cost to Owner of more than Twenty Five Thousand Dollars ($25,000).

 

(d)              Manager's responsibilities with respect to the Casualty Projects shall be performed with the professional skill and care of first-class construction managers in the geographic area in which the Project is located. The services to be provided will include, but not be limited to, the following: coordination of space planning; providing a detailed scope of work; coordination of acquisition of city approvals and permits to be obtained by General Contractor; acquisition of competitive bids from contractors where required by Owner; bid summary and recommendations for review by Owner; negotiation of construction contracts; handling relations with tenants of the Project; coordination of change orders; securing and recording conditional and unconditional lien releases (whether partial or final) from all contractors, subcontractors, material men, suppliers and the like prior to or concurrent with the making of any payments, and providing for such other arrangements as may be reasonably prudent under the circumstances to assure the appropriate application of construction funds; inspection of construction to ensure quality and completion prior to payment; timely filing or recording of notices of completion and posting of notices of non responsibility on behalf of Owner (if applicable) as well as otherwise taking all steps necessary to comply with all laws and procedures relating to keeping the Project free of liens; preparation of a final punch list, and supervising the completion of any punch list items of remaining or defective work; coordination of inspections upon completion; securing certificates of occupancy; obtaining final lien waivers; review, approval, and submittal to Owner of all payment applications; ensuring that all contractors, subcontractors, material men, suppliers and the like carry sufficient insurance; and, such other services as are reasonable and necessary in connection with completion of the work. Manager shall make available to Owner the advice, consultation and expertise of Manager's technical staff, and render such periodic progress reports to Owner as it shall reasonably request.

 

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2.9LICENSES AND PERMITS

Manager shall, in a timely manner, apply for, and thereafter use commercially reasonable efforts to obtain and maintain in the name and at the expense of Owner all licenses and permits (including deposits and bonds) required of Owner or Manager in connection with the management and operation of the Project. Owner agrees to execute and deliver any and all applications and other documents and to otherwise cooperate to the fullest extent with Manager in applying for, obtaining and maintaining such licenses and permits. Specifically, but without limitation, Manager acknowledges that the Project is subject to brownfields regulations, and agrees to comply with all environmental laws and regulations in connection therewith, to the extent that such laws and regulations relate to Manager's management, operation and maintenance obligations hereunder. Upon obtaining knowledge of any violation of any such law, Manager shall promptly notify Owner thereof in writing.

 

2.10COMPLIANCE WITH LAWS

Manager, at Owner's expense, shall use its commercially reasonable efforts to cause all acts and duties to be done in and about the Project to comply with all laws, regulations and requirements of any federal, state, regional, county or municipal government, having jurisdiction respecting the use or manner of use of the Project or the maintenance, alteration or operation thereof.

 

Owner shall use its commercially reasonable efforts to cause all acts and duties to be done in and about the Project to comply with all laws, regulations and requirements of any federal, state, regional, county or municipal government having jurisdiction over the use or manner of use of the Project or the maintenance, alteration or operation thereof.

 

2.11LEGAL PROCEEDINGS

Manager shall institute, in its own name or in the name of Owner, but in any event at the expense of Owner, any and all legal actions or proceedings which Manager deems reasonable to collect charges, rent or other income from the Project, or to dispossess tenants or other persons in possession, or to cancel or terminate any lease, license or concessions agreement for the breach thereof, or default thereunder by any tenant, licensee or concessionaire, provided, that the legal fees and related costs in connection with such proceeding do not exceed the Budget.

 

2.12DEBTS OF OWNER

In the performance of its duties as Manager, Manager shall act solely as the representative of the Owner. All debts and liabilities to third persons incurred by Manager in the course of its operation and management of the Project shall be the debts and liabilities of the Owner only, and Manager shall not be liable for any such debts or liabilities.

 

SECTION 3: MANAGEMENT FEES

 

3.1MANAGEMENT FEE

The Owner shall pay to Manager, during the term hereof, the Management Fees and other fees and costs due hereunder for the previous month on or before the tenth (10th) day of each subsequent month; provided, however that with respect to the Management Fee due for the last month of the term hereof, such Management Fee shall be payable on the last day of such month. Manager shall have the right to withdraw the monthly fee from the Operating Account established by Manager.

 

3.2PLACE OF PAYMENT

All sums payable by Owner to Manager hereunder shall be payable to Manager at 300 N. Greene Street, Suite 1000, Greensboro, NC 27401, unless the Manager shall, from time to time, specify a different address in writing.

 

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SECTION 4 : PROCEDURE FOR HANDLING RECEIPTS AND OPERATING CAPITAL

 

4.1BANK DEPOSITS

All monies received by Manager for or on behalf of Owner shall be deposited by Manager with the Depository. Manager shall maintain separate accounts for such funds consistent with the system of accounting of the Project. All funds on deposit shall be managed by Manager subject to the terms hereof. All monies of Owner held by Manager pursuant to the terms hereof shall be held by Manager in trust for the benefit of Owner to be held and disbursed as herein provided and shall not, unless Owner otherwise has agreed or directed, be commingled with the funds of any other person, including Manager or any affiliate of Manager. In no event shall Manager be responsible for any loss to amounts on deposit caused by the insolvency or other similar event or occurrence with respect to the Depository.

 

4.2SECURITY DEPOSIT ACCOUNT

Manager shall comply with all applicable laws with respect to security deposits paid by tenants. All security deposit funds held by Manager shall at all times be the property of Owner, subject to all applicable laws with respect thereto. Upon commencement of this Agreement, the Owner authorizes the Manager to make withdrawals therefrom for the purpose of returning them as required by the lease or by existing law.

 

4.3OPERATING ACCOUNT

Manager shall deposit all gross receipts from the operations of the Project into an Operating Account, on which both Manager and Owner shall be signatories and pay the normal operating expenses of the Project, including Manager's fees, debt and taxes as directed.

 

4.4DISBURSEMENT OF DEPOSITS

Manager shall disburse and pay all funds on deposit on behalf of and in the name of Owner, in such amounts and at such times as the same are required in connection with the ownership, maintenance and operation of the Project on account of all taxes, assessments and charges of every kind imposed by any governmental authority having jurisdiction over the Project, and all costs and expenses of maintaining, operating and supervising the operation of the Project, including, but not limited to, the Management Fees due hereunder, salaries, fringe benefits and expenses of the Project employees, insurance premiums, debt service, legal and accounting fees and the cost and expense of utilities, services, marketing, advertising and concessions. To the extent there are insufficient funds to pay all of such costs and expenses, Manager shall immediately notify Owner upon first projection or awareness of a cash shortage or pending cash storage. Manager shall pay such of the foregoing items in the order and manner directed by Owner, and shall thereafter submit to Owner a statement of all remaining unpaid bills except that Management Fees and payroll shall not be deferred and shall be paid in accordance with the Agreement. Nothing in this agreement shall require the Manager to advance money on the Owner's behalf.

 

4.5AUTHORIZED SIGNATURES

Any persons from time to time designated by Manager and agreed to in writing by Owner shall be authorized signatories on all bank accounts established by Manager hereunder and shall have authority to make disbursements from such accounts to the extent permitted in this Section 4. Funds may be withdrawn from all bank accounts established by Manager, in accordance with this Section 4, only upon the signature of an individual who has been granted that authority by Owner. Owner may at any time and at Owner’s sole discretion direct Manager to withdraw funds and make disbursements from such accounts, except all persons who are authorized signatories or who in any way handle funds for the Project shall be bonded or covered by dishonesty insurance in the minimum amount of $100,000 per employee. At the beginning of each year and as new persons shall be designated authorized signatories, Manager shall provide Owner with evidence of such bonding. Any expenses relating to such bond for on-site employees and for off-site employees shall be borne by Manager. Owner's designated agents shall be added as authorized signatories at Owner's request.

 

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SECTION 5: ACCOUNTING

 

5.1BOOKS AND RECORDS

Manager, on behalf of Owner, shall keep all books and accounts pertaining to the Project In accordance with Generally Accepted Accounting Principles in the U.S. The cutoff date of the accounting period shall be the last day of each calendar month. Manager, on behalf of Owner, shall also supervise and direct the keeping of a comprehensive system of office records, books and accounts pertaining to the Project. Such records shall be subject to examination at the office where they are maintained by Owner or its authorized agents, attorneys and accountant at all reasonable business hours and upon reasonable, advance notice to Manager. Capitalization and expense policy of Bluerock to be adhered to.

 

On or about the end of each calendar quarter of each year, Manager shall cause to be furnished to owner such information as reasonably requested in writing by Owner as is necessary for any reporting requirements of the any direct or indirect members of Owner or for any reporting requirements of any REIT Member (as defined in the Owner's Operating Agreement) (whether a direct or indirect owner) to determine its qualification as a real estate investment trust and its compliance with REIT Requirements (as defined in the Owner's Operating Agreement) as shall be reasonably requested by Owner. Further, the Manager shall cooperate in a reasonable manner at the request of Owner and any direct or indirect member of Owner to work in good faith with any designated accountants or auditors of such party or its Affiliates so that such party or its Affiliate is able to comply with its public reporting, attestation, certification and other requirements under the Securities Exchange Act of 1934, as amended, applicable to such entity, and to work in good faith with the designated accountants or auditors of the such party or any of its Affiliates in connection therewith, including for purposes of testing internal controls and procedures of such party or its Affiliates.

 

5.2PERIODIC STATEMENTS

(a)   On or before five (5) business days following the end of each calendar month, Manager shall deliver or cause to be delivered to Owner its standard financial reports customarily provided the owners of properties it manages, a list of which is set forth on Exhibit B. The reports are subject to change from time to time by Owner or Manager provided Manager shall not substantively decrease the quality of the information provided.

 

(b)   Within ten (10) business days but no later than the 151h of the month after the end of such Fiscal Year, Manager will deliver to the Owner, an income and expense statement as of Fiscal Year end, and the results of operation of the Project during the preceding Fiscal Year (anything contained herein to the contrary notwithstanding, however, Manager shall not be obligated to prepare any of Owner's state or federal income tax returns).

 

(c)   Manager shall also prepare and provide to Owner such reports and information as required by Owner to prepare the reports and tax returns required under Owner's Operating Agreement including without limitation, the quarterly reports that Owner may require under

 

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Section 5.01 hereof.

 

(d)   In the event that Owner or Owner's Mortgagee(s) requires an audit, the Manager shall cooperate with the auditors in a timely manner to complete the audit engagement. Also, Manager shall cooperate in a reasonable manner at the request of any indirect owner of Owner and shall work in good faith with its designated representatives, accountants or auditors to enable compliance with its public reporting, attestation, certification and other requirements under applicable securities laws and regulations, including for testing internal controls and procedures.

 

(e)   Owner may request and Manager shall provide when available such monthly, quarterly and/or annual leasing and management reports that relate to the operations of the project as Manager customarily provides the owners of properties it manages.

 

5.3EXPENSES

All costs and expenses incurred in connection with the preparation of any statements, budgets, schedules, computations and other reports required under this Section 5, or under any other provisions of this agreement, shall be borne by the Manager. Any costs and expenses incurred in connection with the preparation of any statement or report not a part of the Manager's standard reporting package, a list of which is set forth on Exhibit B. shall be borne by Owner with Owner's prior written consent thereto.

 

SECTION 6: GENERAL COVENANTS OFOWNER AND MANAGER

 

6.1OPERATING EXPENSES

The Owner shall be solely liable for, and shall pay, all costs and expenses of managing and operating the Project that have been incurred by Owner or by Manager in accordance with the provisions of this Agreement, and shall pay, or Manager shall pay on Owner's behalf, all such costs and expenses, including, without limitation, the salaries of all Project employees, provided however, Owner shall have no direct obligations to Project Employees for salaries or fringe benefits, as all Project Employees are employed solely by Manager and not by Owner. Nothing in this Agreement shall require Manager to advance funds on Owner's behalf, however if funds are advanced by Manager in the operation, or management of the Project due to insufficient funds being from Gross Receipts, these funds will be reimbursed by the Owner within thirty (30) days of submitting itemized invoices to the Owner. Given Manager's purchasing power, Manager is sometimes able to negotiate volume discounts which inure to the benefit of its managed properties. Owner's obligation to pay all costs and expenses of managing and operating the Property includes Owner's pro rata share of purchases, contracts, sales or services purchased by Manager in bulk for which Manager obtains for discount or convenience to benefit the Property. Owner further recognizes that the Project may be operated in conjunction with other projects and that costs may be allocated or shared between such projects. In such regard, Owner consents to such allocation of costs and/or sharing of any expenses in an effort to save costs and operate the Project in a more efficient manner, so long as all such allocations are clearly indicated and approved in the Budget and not otherwise detrimental to Owner.

 

6.2OWNER'S RIGHT OF INSPECTION AND REVIEW

Owner and Owner's accountants, attorneys and agents have the right to enter upon any part of the Project at any reasonable time during the Term of this Agreement for the purpose of examining or inspecting the Project or examining or making copies of books and records of the Project Any inspection shall be done with as little disruption to the business of the Project as possible. Books and records of the Project shall be kept, as of the commencement date, at the Project or at the location where any central accounting and bookkeeping services are performed by Manager but at all times shall be the property of Owner.

 

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6.3INDEMNIFICATION BY OWNER

 

Except for the gross negligence, willful misconduct or criminal actions of Manager (including Project Employees) in connection with its performance under this Agreement, Owner shall indemnify, hold harmless, and defend Manager (and Manager's partners, directors, shareholders, officers, employees, and agents), from and against any and all liabilities, claims, causes of action, suits, losses, demands and expenses whatsoever including, but not limited to reasonable legal fees and expenses arising out of or in the connection with the ownership, maintenance or operation of the Property or this Agreement or the performance of Manager's agreements hereunder (collectively “Claims”), including but not limited to, Claims alleging bodily injury or property damage, and/or the loss of use of property following and resulting from damage or destruction, unless caused by the gross negligence, willful misconduct or criminal actions of Manager. The indemnification by Owner contained in this Section 6.03 is in addition to any other indemnification obligations of Owner contained in this Agreement, and is not limited by or to Owner's Liability Insurance. It is the intent of the parties hereto, however, to look first to Owner's Liability Insurance with respect to all Claims hereunder. Nothing herein shall be construed to indemnify, defend or hold harmless the Manager from claims alleging the gross negligence, willful misconduct or criminal actions of the Manager or its employees, directors, officers, agents or representatives.

 

6.4INDEMNIFICATION BY MANAGER

Manager shall indemnify Owner from and against all Claims for bodily injury and property damage or for financial loss that (i) arise out of or are a result of the gross negligence, willful misconduct or criminal actions of Manager except where attributable to actions or policies approved in writing or required in writing by Owner and (ii) result in a claim against Owner arising out of the Manager's gross negligence, willful misconduct or criminal actions. Where Owner is sued as a result of Manager's gross negligence, willful misconduct or criminal actions, Manager shall indemnify, defend and hold harmless Owner. The indemnification by Manager contained in this Section 6.04 is in addition to any other indemnification obligations of Manager contained in this Agreement, and is not limited by or to Manager's Insurance. It is the intent of the parties hereto, however, to look first to Manager's Insurance, where applicable, as set forth herein.

 

6.5SURVIVAL OF INDEMNITY OBLIGATIONS

The indemnification and hold harmless obligations of the parties in the Sections 6.03 and 6.04 shall survive the expiration or earlier termination of this Agreement.

 

SECTION 7:DEFAULTS AND TERMINATION RIGHTS

 

7.1DEFAULT BY MANAGER

Manager shall be deemed to be in default hereunder in the event Manager shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Manager, and such default shall (i) result from Manager's grossly negligent acts or omissions or willful misconduct; (ii) involve Manager's misappropriation or intentional misapplication of funds received or held by Manager hereunder; or (iii) continue for a period of ten (10) days after written notice thereof by Owner to Manager as to any default in payment of money or thirty (30) days after written notice thereof by Owner to Manager as to any non-monetary default, or, if such non-monetary default cannot be cured within thirty (30) days, then such additional period as shall be reasonable provided that Manager is capable of curing same and has continuously attempted to cure such default. Manager shall also be deemed to be in default hereunder if a petition for bankruptcy, reorganization or rearrangement is filed under state or federal insolvency statutes by Manager, or if any such petition is filed against Manager and not removed or discharged within sixty (60) days thereafter.

 

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7.2REMEDIES OF OWNER

Upon the occurrence of an event of default by Manager as specified in Section 7.01 hereof, Owner shall have the right to pursue any remedy it may have at law or in equity (provided that in no event shall Manager ever be liable to Owner for, and Owner hereby waives all rights to receive, punitive, consequential or exemplary damages), it being expressly understood that although Owner has no further obligation to pay any fee due hereunder, Manager shall remain liable for any losses suffered as a result of Manager's default and the resulting termination of this Agreement. Promptly upon such termination, Manager shall deliver to Owner any funds, books and records of Owner then in the possession or control of Manager and all accounts established by Manager for security deposits.

 

7.3DEFAULTS BY OWNER

Owner shall be deemed to be in default hereunder in the event Owner shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Owner, and such default shall continue for a period of, in the case of any default which can be cured by the payment of a liquidated sum of money, ten (10) days and, in the case of all other defaults, thirty (30) days after notice thereof by Manager to Owner but, if such non-monetary default cannot be cured within thirty (30) days, then such additional period as shall be reasonable provided that Owner is capable of curing same and has continuously attempted to cure such default.

 

7.4REMEDIES OF MANAGER

Upon the occurrence of an event of default by Owner as specified in Section 7.03 hereof, Manager shall be entitled to terminate this Agreement, and upon any such termination by Manager pursuant to this Section 7.04, Manager shall have the right to pursue any remedy it may have at law or in equity (provided that in no event shall Owner ever be liable to Manager for, and Manager hereby waives all rights to receive, punitive, consequential or exemplary damages).,

 

7.5EXPIRATION OF TERM

Upon the expiration of the Term hereof pursuant to Section 1.0 I hereof, unless sooner terminated pursuant to the terms of this Agreement, Manager shall deliver to Owner all funds, including tenant security deposits, books and records of Owner then in possession or control of Manager, save and except such sums as are then due and owing to Manager hereunder. In addition, within sixty (60) days following expiration or termination, Manager shall deliver to Owner a final accounting, in writing, with respect to the operations of the Project, which obligation shall survive termination.

 

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7.6TERMINATION WITHOUT CAUSE

This Agreement shall be terminable by either party at any time without cause upon thirty (30) days prior written notice from Owner to Manager and ninety (90) days written notice from Manager to Owner. Additionally, this Agreement shall automatically terminate upon Owner's sale or other disposition of the Project or upon the condemnation of all or any material portion of the Project. Owner acknowledges Manager shall incur substantial expenses in the initial set-up of the management of the Project. In the event Owner terminates this Agreement without cause for any reason, including but not limited to, the sale or transfer of the Project's ownership or assignment of property management services to another property manager within 120 days of commencement, in addition to payments and reimbursable expenses due Manager through the date of termination, Owner agrees to pay Manager an additional amount equal to one month's Base Management Fee.

 

7.7EFFECT OF TERMINATION

Upon termination of this Agreement for any reason, neither the Owner, nor the Manager have any further rights or obligations under this Agreement other than obligations accrued prior to the termination or by the express terms surviving this Agreement.

 

SECTION 8:INSURANCE

 

8.1 OWNER'S INSURANCE: Owner shall obtain and maintain the following insurance (the specifications for which may be changed from time to time by Owner) necessary to protect the interest of Owner as it relates to the Property, at Owner's sole cost and expense, from authorized insurance companies with an AM Best rating of A IX or higher.

 

a.PROPERTY INSURANCE: Hazard insurance in the amount of the full replacement cost of the Property, and such other property insurance as Owner may elect, at Owner's expense.

 

b.LIABILITY INSURANCE: Commercial general liability insurance including contractual liability for insured contracts, on an "occurrence" basis, naming Manager as an additional insured, with limits of not less than three Million Dollars ($3,000,000.00) per occurrence (the "Owner's Liability Insurance"). This limit may be satisfied by a combination of COL and umbrella/excess liability insurance. The Owner's Liability Insurance shall include coverage for losses arising from the ownership, management, and operation of the Property. This insurance shall be primary for Owner and Manager with respect to the Project.

 

c.CERTIFICATE OF INSURANCE: Owner shall provide to Manager a certificate of insurance evidencing such coverage from an insurance carrier with an A.M. Best Rating of A VIII or higher reflecting that the Owner’s Liability Insurance is effective in accordance with this section and that the Owner’s Liability Insurance will not be canceled without at least thirty (30) days prior written notice to Manager.

 

8.2   MANAGER'S INSURANCE: Manager shall obtain and maintain the following insurance (the specifications for which may be changed from time to time by Owner) necessary to protect the interest of Owner as it relates to Manager's operations hereunder, at Manager's sole cost and expense, from authorized insurance companies approved by Owner rated by Best's Rating at A IX or higher.

 

a.COMMERCIAL GENERAL LIABILITY INSURANCE: Commercial general liability insurance for the benefit of Manager and Owner in the amount of $1,000,000 per occurrence and $2,000,000 in the aggregate covering claims for bodily injury, property damage, personal and advertising injury, products and completed operations (the "Manager's Liability Insurance").

 

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1.Coverage on an occurrence form.
2.Contractual liability coverage covering the indemnification section of this agreement.
3."Additional Insured - Owners, Lessees or Contractors - (FORM B), CG 20 10 11 85" or its equivalent providing coverage for both ongoing and completed operations and naming Owner as an additional insured.
4.Manager's policy shall not include a Limitation of Coverage Real Estate Operations (CG 22 60 07 98) endorsement, Real Estate Property Managed Endorsement (CG 22 70 11 85) or similar endorsements excluding or limiting coverage for bodily injury, property damage or personal and advertising injury.
5.Manager shall continue to name Owner as an additional insured for a period of three

years following the termination of the Agreement. Manager shall provide Owner with an original certificate of insurance not less than fifteen days prior to each renewal date during this three-year period.

6.If the Manager utilizes the services of an employee leasing company, then it's general liability policy must include ISO endorsement CG 04 24 10 93 Coverage for Injury to Leased Workers.
7.The pollution exclusion must be modified to include coverage for pollution claims related to a hostile fire as well as pollutants that are released from the building's heating equipment or equipment used to heat water.
8.A separation of insured clause.

 

b.UMBRELLA OR EXCESS LIABILITY: limits of $5,000,000: Providing follow-form coverage over the Commercial General Liability, Automobile Liability and Employers' Liability policies.

 

c.AUTO LIABILITY INSURANCE: Manager, at its expense which is not reimbursable, shall carry and maintain business auto liability insurance covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident. If the Manager utilizes the services of an employee leasing company then its Commercial Auto Liability policy must include ISO endorsement CA 23 25 07 97 Coverage for Injury to Leased Workers. Owner shall be named as additional insured.

 

d.WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE:

 

1.Workers' compensation - Statutory limits of insurance covering employees, including principals. In the event the principal has waived coverage for himself/herself, it is hereby agreed by all parties that the principal may not perform any work under this contract.
2.Employers' liability limits.
(A)$1,000,000 for bodily injury caused by accident, each accident.
(B)$1,000,000 for bodily injury caused by disease, each employee.

(C) $1,000,000 for bodily injury caused by disease, policy limit.

 

e.PROPERTY MANAGER' S ERRORS AND OMISSIONS LIABILITY:
1.Limits of Insurance:$1,000,000 per occurrence, $2,000,000 aggregate
2.If coverage is on a claims-made basis, the retroactive date must be a date that is not later than the date on which Manager began performing services on behalf of the Owner.
3.Contingent bodily injury and property damage coverage.

 

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4.Coverage shall be maintained for a period of three years after the termination of services. Manager shall provide Owner with an original certificate of insurance on or before each renewal date during this three-year period.
5.The policy shall include a separation of insureds clause.

 

f.COMMERCIAL CRIME INSURANCE:
1.Limits of Insurance: $1,000,000 employee dishonesty, $1,000,000 forgery or alteration, $1,000,000 computer fraud, $1,000,000 wire funds transfer fraud,

$1,000,000 money and securities on and off premises

2.Third party coverage.
3.No limitation or exclusion related to acts of collusion.
4.Owner shall be included as Loss Payees as its interest may appear.
5.Coverage shall be included for theft of Owner's property by Manager's owners, directors and officers.
6.The definition of employee shall include leased employees if the Manager utilizes the services of an employee leasing firm.

 

g.EMPLOYMENT PRACTICES LIABILTIY INSURANCE:

Employment Practices Liability insurance with limits of $1,000,000 per occurrence/aggregate, including third party coverage for sexual harassment, discrimination and other coverable employment-related torts.

 

h.CERTIFICATES OF INSURANCE: Manager shall not begin performing services hereunder until original certificates of insurance showing evidence of the coverages outlined below have been furnished to and approved by Owner. Each policy shall provide for thirty (30) days' advance written notice of cancellation or material change by mail to Owner from the insurance company, and this provision shall be evidenced on the certificates. Evidence of renewal or replacement coverages shall be furnished to the Owner and Manager not less than ten (10) days prior to expiration but in no event later than the renewal date itself.

 

8.4OWNER'S LIABILITY INSURANCE PRIMARY AND NON-CONTRIBUTORY

In connection with claims by third parties, as between Owner's Liability Insurance and Manager's Liability Insurance, Owner's Liability Insurance shall for all purposes be deemed the primary and non-contributory coverage. No claim shall be made by Owner or its insurance company under or with respect to any insurance maintained by Manager except in the event such claim is caused solely by gross negligence (except actions or policies specifically approved or required by Owner) or willful misconduct (except actions or policies specifically approved or required by Owner) on the part of Manager or Manager's employees.

 

8.5RENTER' S INSURANCE

If at the direction of the Owner, Manager implements a renter's insurance program at the Project whether it is a limited liability, or limited liability and personal contents coverage policy, any such policy held by the resident shall not remove, replace, reduce, or in any way modify the parties' indemnification obligations herein or the requirements of Owner or Manager to provide insurance and indemnification in accordance with Sections 6 and 8. Manager agrees to use best efforts to insure compliance on the part of Project residents. Manager assumes no responsibility, liability or reduction in payment of its Management Fee as a result of any expense incurred by Owner, including but not limited to payment by Owner of any insurance deductible amount, cause by the failure of a resident to have renter's insurance in place. This exclusion of liability on Manager's part applies whether the resident failed to procure renter's insurance at the time of initial lease signing, at the time the resident' s renter's insurance policy came up for renewal, or at any other time.

 

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8.6VENDOR INSURANCE COMPLIANCE

At no cost to the Owner, Owner agrees to utilize a Vendor Compliance Management Services Company to establish and manage vendor's insurance agreeable to Owner and Manager and approved by Manager. Utilizing such a company to manage vendor Liability Insurance Certificates and provide related services shall not remove, replace, reduce, or in any way modify the parties' indemnification obligations herein or the requirements of Owner or Manager to provide insurance and indemnification in accordance with Sections 6 and 8. Manager assumes no responsibility, liability or reduction in payment of its Management Fee, for property loss, personal injury (including death) or denial of claims based on the status of a vendor's policy whether its policy is amended, changed or lapsed. Further, Manager assumes no responsibility for the Vendor Compliance Management Services Company beyond that required under this Agreement.

 

8.6WAIVER OF SUBROGATION

Each insurance policy maintained by Owner or by Manager with respect to the Property shall contain a waiver of subrogation clause, so that no insurers shall have any claim over or against Owner or Manager, as the case may be, by way of subrogation or otherwise, with respect to any claims that are insured under such policy. All insurance relating to the Property shall be only for the benefit of the party securing said insurance and all others named as insureds. Notwithstanding any contrary provision of this Agreement, Owner and Manager hereby release each other from and waive all rights of recovery and claims under or through subrogation or otherwise for any and all losses and damages to property to the extent caused by a peril insured or insurable under the policies of insurance required to be maintained under this Agreement by the waiving party and agree that no insurer shall have a right to recover any amounts paid with respect to any claim against Owner or Manager by subrogation, assignment or otherwise.

 

8.7HANDLING CLAIMS

Manager shall report within a reasonable amount of time to Owner all accidents and claims of which it is aware for damage and injury relating to the ownership, operation, and maintenance of the Property and any damage or destruction to the Property coming to the attention of Manager and will assist Owner in Owner's attempts to comply with all reporting and cooperation provisions in all applicable policies. Manager is authorized to settle on Owner's behalf any and all claims against property insurers not in excess of $1,500, which includes authority for the execution of proof of loss, the adjustment of losses, signing of receipts, and the collection of money. If the claim is greater than $1,500, Manager shall act only with the prior written approval of Owner.

 

8.8AUTOMOBILE INSURANCE. INTENTIONALLY OMITTED

 

8.9WORKERS'COMPENSATION INSURANCE. INTENTIONALLY OMITTED

 

8.10DISHONESTY INSURANCE. INTENTIONALLY OMITTED

 

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8.11ENVIRONMENTAL INDEMNIFICATION

Owner agrees to defend, indemnify, and hold harmless Manager and Manager's partners, directors, shareholders, officers, and agents, against and from any and all actions, administrative proceedings, causes of action, charges, claims, commissions, costs, damages, decrees, demands, duties, expenses, fees, fines, judgments, liabilities, losses, obligations, orders, penalties, recourses, remedies, responsibilities, rights, suits, and undertakings of every nature and kind whatsoever, including, but not limited to, attorneys• fees and litigation expenses, from the presence of Hazardous Substances (as defined below) on, under or about the Project. Without limiting the generality of the foregoing, the indemnification provided by this paragraph shall specifically cover costs incurred in connection with any investigation of site conditions or any remediation, removal or restoration work required by any federal, state or local governmental agency because of the presence of Hazardous Substances in, on, under or about the Property, except to the extent that the Hazardous Substances are present as a result of gross negligence, criminal activity, or any willful misconduct of Manager or its employees. For purposes of this section, "Hazardous Substances" shall mean all substances defined as hazardous materials, hazardous wastes, hazardous substances, or extremely hazardous waste under any federal, state or local law or regulation.

 

SECTION 9: MISCELLANEOUS PROVISIONS

 

9.1GOVERNING LAW

This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of North Carolina. Manager represents that it has qualified to do business in the State of North Carolina in connection with all actions based on or arising out of this Agreement.

 

9.2NOTICES

All notices, demands, requests or other communications required or permitted to be given hereunder must be sent by (i) personal delivery, (ii) FedEx or a similar nationally recognized overnight courier service, or (iii) certified mail, return receipt requested. Any such notice, request, demand, tender or other communication shall be deemed to have been duly given:

(a) if served in person, when served; (b) if by overnight courier, on the first Business Day after delivery to the courier; or (c) if by certified mail, return receipt requested, upon receipt. Rejection or other refusal to accept, or inability to deliver because of changed address or facsimile number of which no notice was given, shall be deemed to be receipt of such notice, request, demand, tender or other communication. Any party hereto may at any time by giving ten (10) days written notice to the other party hereto designate any other address in substitution of the foregoing address to which such notice or communication shall be given.

 

OWNER: BR Park & Kingston Charlotte, LLC
  c/o Bluerock Real Estate
  712 Fifth Avenue, 9th Floor
  New York, NY 10019
  Attention: Jordan Ruddy
   
COPY TO: Bluerock Real Estate
  712 Fifth Avenue, 9th Floor
  New York, NY 10019
  Attention: Michael L. Konig, Esq.
   
MANAGER: Bell Partners Inc.
  300 N. Greene Street, Suite 1000
  Greensboro, NC 27401
  Attn: Gwyneth Cote', COO

 

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9.3SEVERABILITY

If any term, covenant or condition of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or such other documents, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Agreement or such other documents shall be valid and shall be enforced to the fullest extent permitted by law.

 

9.4NO JOINT VENTURE OR PARTNERSHIP

Owner and Manager hereby agree that nothing contained herein or in any document executed in connection herewith shall be construed as making Manager and Owner joint venturers or partners. In no event shall Manager have any obligation or liability whatsoever with respect to any debts, obligations or liabilities of Owner or vice versa, except as set forth herein or as set forth in any separate agreement signed by Manager.

 

9.5MODIFICATION TERMINATION

This Agreement terminates any and all prior management agreements between Owner and Manager relating to the Project, and any amendment, modification, termination or release hereof may be effected only by a written document executed by Manager and Owner.

 

9.6ATTORNEYS' FEES

Should either party be required to employ an attorney or attorneys to enforce any of the provisions hereof or to protect its interest in any manner arising under this Agreement, or to recover damages for the breach of this Agreement, the non-prevailing party in any actions (the finality of which is not legally contested) agrees to pay to the prevailing party all reasonable costs, damages and expenses, including reasonable attorneys' fees expended or incurred in connection therewith.

 

9.7TOTAL AGREEMENT

This Agreement is a total and complete integration of any and all undertakings existing between Manager and Owner and supersedes any prior oral or written agreements, promises or representations between them regarding the subject matter hereof.

 

9.8APPROVALS AND CONSENTS

If any provision hereof requires the approval or consent of Owner or Manager to any act or omission, such approval or consent shall not be unreasonably withheld or delayed except as otherwise specifically provided herein.

 

9.9CASUALTY

In the event that the Project, or any portion thereof, is substantially or totally damaged or destroyed by fire, tornado, windstorm, flood or other casualty during the term of this Agreement, Manager or Owner may terminate this Agreement upon giving the other party written notice of termination on or before the date which is thirty (30) days after the date of such casualty. In the event of termination pursuant to this Section 9.09, neither party hereto shall have any further liability hereunder except for those obligations which by their terms survive termination of this Agreement.

 

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9.10SPECIAL AGREEMENTS

Notwithstanding Manager's review of and recommendations in respect to capital repairs and replacements for the Property, Owner acknowledges that Manager is not an architect or engineer, and that all capital repairs, replacements and other construction in the Property will be designed and performed by independent architects, engineers and contractors. Accordingly, Manager does not guarantee or warrant that the construction documents for such work will comply with Applicable Law or will be free from errors or omissions, nor that any such work will be free from defects, and Manager will have no liability therefor. 1n the event of such errors, omissions, or defects, Manager will use reasonable efforts to cooperate in any action Owner desires to bring against such parties. Notwithstanding any contrary provision hereof, (i) Owner agrees that no partner, agent, director, member, officer, shareholder, or affiliate of Manager shall be personally liable to Owner or anyone claiming by, through or under Owner, by reason of any default by Manager under this Agreement, any obligation of Manager to Owner, or for any amount that may become due to Owner by Manager under the terms of this Agreement otherwise, and (ii)Manager agrees that no partner, agent, director, member, officer, shareholder, or affiliate of Owner shall be personally liable to Manager or anyone claiming by, through or under Manager, by reason of any default by Owner under this Agreement, any obligation of Owner to Manager, or for any amount that may become due to Manager by Owner under the terms of this Agreement otherwise.

 

9.11COMPETITIVE PROJECTS

Manager may, individually or with others, provide management services in regard to and possess an interest in any other projects and ventures of every nature and description, including, but not limited to, the ownership, financing, leasing, operation, management, brokerage, development and sale of real property and apartment projects other than the Project, whether or not such other ventures or projects are competitive with the Project, and Owner shall not have any right to the income or profits derived therefrom.

 

9.12SUCCESSORS AND ASSIGNS

Owner has entered into this Agreement with Manager based on Manager's abilities and, accordingly, Manager may not assign this Agreement without the prior written consent of Owner. Subject to this limitation on assignment, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their permitted successors and assigns. Either Manager or Owner may assign this Agreement upon obtaining the other party's prior written consent, provided that no consent shall be required for assignment to Owner's Mortgagee(s).

 

9.13WAIVER OF JURY TRIAL.

Owner and Manager hereby knowingly, voluntarily and intentionally, to the extent permitted by law, waive the right to a trial by jury in respect of any litigation based on, arising out of, under or in connection with this Agreement or any documents contemplated to be executed in connection herewith or any course of conduct, course of dealings, statements (whether oral or written) or actions of either party arising out of or related in any manner to the property (including, without limitation, any action to rescind or cancel this Agreement or any claims or defenses asserting that this Agreement was fraudulently induced or is otherwise void or voidable). This waiver is a material inducement for the Owner to enter into and accept this Agreement. Owner and Manager agree that should issues arise that would have required litigation; they mutually agree to resolve them via arbitration.

 

9.14HUD AMENDMENT

In the event Owner secures new financing or refinances the Project, Owner and Manager agree to amend this Agreement as may be reasonably required to satisfy any requirements of Owner's HUD financing, including but not limited to, Manager' s Base Management Fee.

 

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SECTION 11: SIGNATURES

 

IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement as of the day and year first above written.

 

MANAGER: Bell Partners Inc., a North Carolina corporation

 

By: /s/ Gwyneth Cote'  
   
Name:     Gwyneth Cote'  
   
Tide: Chief Operating Officer  

 

OWNER: BR Park & Kingston Charlotte, LLC, a North Carolina limited liability company

 

By:    
   
Name:      Jordan Ruddy  
   
Tide: Authorized Signatory  

 

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SECTION 11:SIGNATURES

 

IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement as of the day and year first above written.

 

MANAGER: Bell Partners Inc., a North Carolina corporation

 

By:    
   
Name:       E. Durant Bell  
   
Title: Executive Vice President  

 

OWNER: BR Park & Kingston Charlotte, LLC, a North Carolina limited liability company

 

By: /s/ Jordan Ruddy  
   
Name:      Jordan Ruddy  
   
Title: Authorized Signatory  

 

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EXHIBIT A

 

2015 BUDGET

 

To be inserted

 

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EXHIBIT B

 

I.MONTHLY REPORTS

 

1.Balance Sheet, including monthly comparison and comparison to year end (if applicable).
2.Budget Comparison (1), including month-to-date and year-to-date variances.
3.Detailed Income Statement, including prior 12 months.
4.Profit and loss statement compared to Budget with narrative for any large fluctuations compared to Budget.
5.Trial Balance that includes mapping of the accounts to the financial statements.
6.Account reconciliations for each balance sheet account within the trial balance.
7.Detailed support for each account reconciliation including the following:

a          Detail Accounts Payable Aging Listing: 0-30 days,31-60 days, 61-90 days and over 90 days.

b.         Detail Accounts Receivable/Delinquency Aging Report: 0-30 days, 31-60 days, 61-90 days, over 90 days and prepayments.

c.         Fixed asset roll-forward and support (invoices and checks) for any new acquisition/additions and/or support for any disposals to fixed assets. Purchases will be accounted for using Bluerock's capitalization policy.

8.Security Deposit Activity
9.Mortgage Statement
10.Monthly Management Fee Calculation
11.Monthly Distribution Calculation
12.General Ledger, with description and balance detail
13.Monthly Check Register including copies of all checks disbursed and copies of cancelled checks.
14.Market Survey, including property comparison trends, and concessions.
15.Rent Roll
16.Monthly Reporting and evidence of withdrawal, if any, of the Property Enhancement Reserves, and any other operating reserve accounts and capital expense reserve accounts, including, but not limited to, any calculations evidencing shortfalls payable thereunder.
17.Variance Report, including the following:
a.Cap Ex Summary and Commentary
b.Monthly Income/Expense Variance with notes
c.Yearly Income/Expense Variance with notes
d.Occupancy Commentary
e.Market/Competition Commentary
f.Rent Movement/Concessions Commentary
g.Crime Commentary
h.Staffing Commentary
i.Operating Summary, with leasing and traffic reporting
j.Other reasonable reporting, as requested (e.g. Renovation/Rehab report)

 

I.QUARTERLY REPORTS

 

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18.Within ten (10) business days of the end of each quarter of each year but no longer than the 15th of the month at the end of each quarter, Manager shall furnish to Owner such information as requested by Owner or its Members or affiliates as is necessary for any REIT Member of Owner (whether a direct or indirect owner) to determine its qualification as a real estate investment trust (a "REIT") and its compliance with any requirements for qualifying as a REIT (the "REIT Requirements") as shall be requested by Owner or its Members. Further, Manager shall cooperate in a reasonable manner at the request of any Member to work in good faith with any designated accountants or auditors of such Member or its Affiliates so that such Member or its Affiliate is able to comply with its public reporting, attestation, certification and other requirements under the Securities Exchange Act of 1934, as amended, applicable to such entity, and to work in good faith with the designated accountants or auditors of the Member or any of its Affiliates in connection therewith, including for purposes of testing internal controls and procedures of such Member or its Affiliates. The requesting Member shall bear the cost of any information or reports provided to such Member pursuant to this Exhibit.

 

III. OTHER REPORTS

 

19.Other reasonable reporting at Owner's expense, as requested and approved in writing by Owner at Owner's expense.

 

(1)Budget Comparison shall include (i) an unaudited income and expense statement showing the results of operation of the Property for the preceding calendar month and the Fiscal Year to-date; (ii) a comparison of monthly line item actual income and expenses with the monthly line item income and expenses projected in the Budget The balance sheet will show the cash balances for reserves and operating accounts as of the cut-off date for such month.

 

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EXHIBIT C

 

Minimum Technology Standards

 

Infrastructure Services -Hardware and Software

a.Leasing office computers must meet current minimum technical requirements and

standards. The current standard is a minimum of an Intel i3 processor (or equivalent) and 4 GB of RAM. On an annual basis, Manager's Information Technology Department will identify all computers that do not meet the then current minimum technical requirements and standards. Those computers that do not meet the minimum requirements or are greater than 3 years of age will be budgeted for replacement in the following budget year.

b.All computers for community associates must be a part of Manager's Microsoft licensing program. Every associate will be provided an Active Directory network account and a BellPartnerslnc.com e-mail address. The licenses include Microsoft Windows, Office, Exchange, SharePoint, Lync, Active Directory, Terminal Services, etc. These services will be provided through Manager's internal infrastructure or may run as a cloud service (such as Microsoft Office 365).
c.Each leasing office is required to supply a high-speed internet connection with a minimum of l0 Meg download / 1 Meg upload and a dedicated IP address.
d.Each leasing office or maintenance office internet connection must have a standard firewall in place. The current standard is a Meraki MX-60 firewall device.
e.Mobile devices such as smartphones and tablets must be supported by Manager's Information Technology Department which currently includes Apple and Android devices. All mobile devices connected to Manager's network for e-mail or other applications must be managed by the Manager's Mobile Device Management system.
f.Owner agrees to use and pay associated fees for Manager's standard telecom management platform.
g.Other security software and hardware that Manager deems necessary to protect the privacy of Residents, Employees & Reputation -Classes of solutions fall into the following areas:
i.Web Filtering
ii.Configuration Management
iii.Virus and Malware Protection
iv.E-mail Filtering
v.E-mail Archiving
vi.Intrusion Detection and Prevention
vii.Firewall and VPN Access
viii.Mobile Device Management
ix.Single Sign-on
x.Backup and Disaster Recovery.
h.Software vendors may perform periodic license audits or true-ups. Owner will reimburse Manager for any additional charges from software vendors that may result from audits or true-ups.

 

2.Reporting Tools and Business Intelligence Products
a.Prorated license and access charges for data extracts from vendor sources for management reporting -ex: RealPage, Yardi, etc.
b.License costs for applicable User Reporting tools such as IBM Cognos, SAP Business Objects, SAP Crystal Reports etc.

 

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3.Vendor Partnership and Product coats for what we have validated and integrated RealPage, Yardi. OpsTechnology etc.)
a.Owner agrees to use and pay associated software costs for Manager's standard business application platform for property management (e.g. RealPage), financials (e.g. Yardi), and other business applications (e.g. HR/Payroll -Workday). Manager has the right to evaluate, test, and implement platform products that will best meet the business needs of Owner and Manager. The current standard business application platform includes:
i.Yardi Voyager (Financials, General Ledger, Accounts Payable, Construction, Job Cost Accounting, Fixed Assets)
ii.RealPage OneSite Leasing and Rents
iii.RealPage SOE- Site Data Exchange Services
iv.RealPage OpsTechnology
v.RealPage Yield Star
vi.RealPage Payment Solutions
vii.RealPage Resident Screening
viii.RealPage Resident Portal
ix.RealPage Online Renewals
x.RealPage Online Leasing
xi.Community marketing websites
xii.Workday (HR and Payroll)

 

4.Integration Services between various suppliers
a.ETL products
b.Directory Management and Authentication

 

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EXHIBIT D

BROWNFIELDS ADDENDUM TO

RENTAL CONTRACT

(North Carolina)

 

Community Name:     Unit:  

 

Resident(s):     Lease Date  

 

This Brownfields Addendum to Rental Contract (this “Brownfields Addendum") is made and entered into as or the same date as the Rental Contract (the "Lease") to which this Brownfields Addendum is attached and made a part thcRar by and between the Owner of the above referenced Community and Resident named above. The term "Lease" shall include this Addendum and any other addenda executed by the Resident. The terms of this Brownfields Addendum shall be in addition to the terms of the Lease. In the event the terms of this Brownfields Addendum are inconsistent or conflict with the provisions of the Lease, the terms of this Brown fields Addendum shall control

 

For and In consideration of the mutual promises contained herein and in the Lease and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by all parties, the parties agree as follows:

 

l.Brownfields Property. The following shall be added as paragraph of the Lease and entitled "Brownfields Property":

 

Resident acknowledges and agrees that the Unit, any common area and other improvements and real property comprising the Community (collectively, the "Property") have: been classified as a "Brownfields Property" by the North Carolina Department of Environment and Natural Resources ("DENR"). The Property that the subject of this instrument is subject to the Brownfields Agreement attached as Exhibit A to the Notice of Brownfield Property recorded in the Mecklenburg County land records, Book 28491, Page: 249. The: Brownfield Agreement placed land use restrictions in the chain of title for the Property that must be complied with by Resident and Occupant at the Property, as well as their guests and invitees. A complete copy of the Brownfields Agreement is available for review from the property manager by Resident, and the land use restrictions applicable to the Property are incorporated into this Brownfields Addendum by reference (the "Restrictions"). Several or the Restrictions include, but are not limited to:

 

1)Underground water at the Property may not be used for any purpose;

 

2)Soil disturbances must be handled in accordance with a DENR approved Soil Management Plan, as subsequently modified by DENR;

 

3)No mining may be conducted on the Property;

 

4)No constituents in environmental media at the Property, including those listed in Paragraph 6 of the Brownfields Agreement, shall be used or stored at the Property, except in de minimis amounts for cleaning and other routine housekeeping activities.

 

Resident agrees to strictly comply with the Restrictions at the Property and use his/her/their best efforts to ensure other Occupants, as well as invitees, comply with the Restrictions. Upon pining knowledge or any violation of the Restrictions by any party, Resident shall immediately notify Owner in accordance with paragraph of the Lease.

 

The terms of this Brownfields Addendum are agreed to and accepted by:

 

OWNER: RESIDENT(S):  

    Signature:  

[Add proper signature lines] Name Printed:  

  Date:  

  Signature:  

  Name Printed:  

  Date:  

 

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(Back To Top)

Section 3: EX-10.29 (EXHIBIT 10.29)

 

Exhibit 10.29

 

PROPERTY MANAGEMENT AGREEMENT

 

This PROPERTY MANAGEMENT AGREEMENT (the “Agreement”), entered into as of this 26th day of March, 2015, by and between BLUEROCK PROPERTY MANAGEMENT, LLC, a Michigan limited liability company (“Bluerock”) and BELL PARTNERS INC., a North Carolina corporation (“Manager").

 

IN CONSIDERATION of the mutual covenants and promises each to the other made herein, Bluerock does hereby engage Manager exclusively as an independent contractor, and the Manager does hereby accept the engagement, to rent, lease, operate, repair and manage the property more particularly described below upon the following terms and conditions.

 

THE PROPERTY: Located in the City of Austin, County of Travis, State of Texas and being known to consist of approximately 288 units (the "Project"), and more particularly described as:

 

Fox Hill Apartments

8800 Highway 290 West

Austin, Texas 78736

 

SECTION 1: DEFINITIONS

 

1.1TERM

The term of this Agreement shall commence on the date hereof and shall, subject to the provisions hereof, terminate on March 31, 2016. This Agreement will automatically renew on a year to year basis thereafter until and unless terminated in accordance with the terms hereof under Section 7.06. Manager acknowledges and agrees that, effective as of the date hereof, the Project is owned by BR FOX HILLS TIC-1, LLC and BR FOX HILLS TIC-2, LLC (each a Delaware limited liability company), as tenants in common (collectively, “Property Owner”), which has entered into that certain Property Management Agreement with Bluerock dated as of the date hereof (the “Bluerock Management Agreement”) pursuant to which Property Owner has engaged Bluerock to manage, operate and maintain the Project and approved Bluerock’s engagement of Manager pursuant to this Agreement to manage directly the day to day operations of the Project. In addition to the termination rights set forth in Section 7 of this Agreement, Bluerock and Manager acknowledge and agree that this Agreement shall automatically terminate upon the Bluerock Management Agreement being terminated or expiring by its terms.

 

1.2FEES

The management fee ("Base Management Fee") payable each month by Bluerock to Manager hereunder shall be an amount equal to Three percent (3.0%) of the Gross Receipts from the Project including any partial month in which Manager accepts engagement.

 

Yield Management. Bluerock agrees to deploy Yield Management (the process of balancing supply and demand to price apartments to maximize rental revenue) at the Project.

 

Manager provides Pricing Authority Support to include daily monitoring of apartment pricing, quarterly reporting and bi-weekly conference calls with site staff. Manager will review pricing recommendations and will have authority to make pricing decisions concerning the Property. Manager will be responsible for overseeing selection, set-up and maintenance of the revenue management software. Licensing fees and software costs to run revenue management software shall be paid at the then-prevailing rate by Bluerock to the software licensor (currently RealPage for Yieldstar product, but licensor and product subject to change at Manager's election) as a normal operating expense. Bluerock acknowledges and agrees that some revenue management software contracts may impose indemnification obligations on Bluerock with respect to third party providers and others.

 

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Procurement and Invoice Management. Bluerock agrees to deploy Ops Technology (enables suppliers and service providers to present targeted pre-negotiated catalog pricing, receive orders electronically, and insert electronic invoices into the Manager's payment processing system) at the Project. Manager provides e-procurement and invoice management services to control property spending and optimize expenses. Such a platform enables suppliers and service providers to present pre-negotiated catalog pricing, receive orders electronically, and insert electronic invoices into Manager's payment processing system. Manager will provide oversight of the e-procurement and invoice management platform. If required by the software licensor (currently RealPage for OpsTechnology product, but licensor and product subject to change at Manager's election), Bluerock shall pay a one-time licensing fee, a monthly use fee and a per-paper invoice processing fee at the then-prevailing rate as a normal operating expense. In addition, Property vendors will pay a fee directly to the software licensor to participate in the e-procurement and invoice management program. Bluerock acknowledges and agrees that some contracts with software providers may impose indemnification obligations on Bluerock with respect to third party providers and others.

 

Resident Utility Billing and Invoice Processing. Bluerock agrees to deploy Bell Utilities Management resident utility billing and invoice processing best practices at the Project including, but not limited to, third party resident utility billing, utilities invoice processing, meter maintenance, trash services and deregulated market company/consultants as selected by the Manager. Manager will provide Utilities Management support services in exchange for cost-offset compensation of ninety-nine cents ($.99) per unit per month that will be passed to the residents on the monthly Resident One Bill via the "Rent Service Fee" as a $0 net impact to Bluerock. Utilities Management support services provided by Manager shall include implementation of Utilities Management Bell Best Practices in order to maximize utilities reimbursements and to minimize related fees and expenses. The Manager will review utilities management practices (resident utility billing and utility invoice processing) and shall have final authority for making utilities related decisions concerning the Project. Manager will be responsible for set-up and maintenance of the Utilities Management program.

 

1.3ADMINISTRATIVE CHARGES

Market rate fees or charges may also be charged or passed through for those services set forth below:

 

(a)          Revenue Management Charge. To maximize total rental revenue at the Property, Bluerock agrees to deploy yield management software (software that uses algorithms to establish apartment rental rates) at the Property. Use of such software requires additional staffing and expertise on Manager's part ("Pricing Authority Support"). Bluerock will pay Manager a per-unit-per-month amount to provide Pricing Authority Support. Such amount will amount will initially be $1.25per-unit-per-month, and may be adjusted as part of the annual Budget process.

 

(b)          Marketing and Training Charges. To maximize total rental revenue at the Property, Bluerock agrees to pay certain support amounts for marketing and training of Manager's employees. Such amounts shall be $1.32 per-unit-per-month for training and $37.00 per- Property-per-month for marketing and shall increase thereafter only upon Bluerock's approval.

 

(c)          Contract Negotiation Charge. If, at Bluerock's request, Manager negotiates video (cable), data (internet), voice (phone) on behalf of the Bluerock to maximize revenue at the Property, and such agreements provide for the payment to Bluerock of an upfront or "door" fee payment, then Manager will be paid 10% of the upfront or "door" fee in return for negotiating and overseeing work performed under such contracts.

 

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(d)          Meter Replacement and Maintenance Oversight Charge. If a property-wide meter change-out or meter maintenance is required, Bluerock will pay to Manager a fee of 5% of total project cost for managing such project.

 

(e)          Charges for Additional Services. If additional services not outlined herein are required by Bluerock of Manager, Bluerock shall pay Manager for such additional services under terms and conditions to be agreed upon by the parties. Manager shall be under no obligation to provide such additional services unless and until the parties have entered into a written agreement reflecting the terms and conditions thereof.

 

1.04 DEPOSITORY

An FDIC insured bank located in the United States of America, designated by Manager and approved by Bluerock.

 

1.05 FISCAL YEAR

The year beginning January 1st and ending December 31st.

 

1.06 BUDGET

A composite of (i) an operations Budget, which shall be an estimate of receipts and expenditures for the full and complete operation (inclusive of all maintenance, repairs and alterations) of the Project during a Fiscal Year, including a schedule of expected apartment rentals (excluding security deposits) for the period stated herein and a schedule of expected special repairs and maintenance projects, and (ii) a capital Budget, which shall be an estimate of capital replacements, substitutions of, and additions to, the Project for the Fiscal Year.

 

1.07 GROSS RECEIPTS

The entire amount of all receipts, determined on a cash basis, from (a) tenant rentals, parking rent and other charges collected pursuant to tenant leases for each month during the term hereof; provided, however, that there shall be excluded from tenant rentals any refundable tenant security deposits (except as provided below); (b) cleaning, tenant security and damage deposits forfeited by tenants in such period; (c) tenant reimbursements for utilities (gas, electric, water and sewer); (d) video (cable), data (internet), local or long-distance services (voice), laundry and vending machine income and other ancillary revenue generated as a percentage of gross receipts; (e) any and all receipts from the operation of the Project received and relating to such period; (f) proceeds from rental interruption insurance; and (g) any other sums and charges collected in connection with termination of the tenant leases. Gross Receipts do not include the proceeds of (i) any sale, exchange, refinancing, condemnation, or other disposition of all or any part of the Project, (ii) any loans to Bluerock whether or not secured by all or any part of the Project, (iii) any capital contributions to Bluerock , (iv) any insurance (other than rental interruption insurance) maintained with regard to the Project, (v) proceeds of casualty insurance or damage claims as a result of damage or loss to the Project or (vi) condemnation awards received pursuant to a government taking of all or any portion of the Project.

 

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1.08 PROJECT EMPLOYEES

Those persons employed by Manager and located on-site as a management staff; e.g., senior manager, manager, assistant managers, leasing agents, maintenance personnel, courtesy officers, and other personnel necessary to be directly employed by the Manager in order to maintain and operate the Project.

 

SECTION 2: DUTIES AND RIGHTS OF MANAGER

 

2.1APPOINTMENT OF MANAGER

During the term of this Agreement, Manager agrees, for and in consideration of the compensation provided in Section 1.02, and Bluerock hereby grants to Manager the sole and exclusive right, to supervise and direct the leasing, management, repair, maintenance and operation of the Project as per the authority granted herein. All services performed by Manager under this Agreement shall be done as an independent contractor of Bluerock. All obligations or expenses incurred hereunder, including the pro rata portion used in connection with, or for the benefit of the Project for all purchases, contracts, sales or services in bulk or volume which Manager may obtain for discount or convenience in connection thereof shall be for the account of, on behalf of, and at the expense of, Bluerock except as otherwise specifically provided. Bluerock shall be obligated to reimburse Manager for all expenses of Manager incurred specifically for the Project.

 

Bluerock shall designate up to three people, to include a representatives from accounting and asset management to serve as Bluerock's representative ("Bluerock's Representative") in all dealings with Manager hereunder. Whenever the approval, consent, or other action of Bluerock is called hereunder, such approval, consent or action shall be binding on Bluerock if specified in writing via email, facsimile, or written correspondence and approved by Bluerock's Representative. The initial Bluerock's Representative is Laurance Kaufman. Manager shall be entitled to rely on all instruction of Bluerock's representative pending further notification by Bluerock. Bluerock's Representative may be changed at the discretion of Bluerock.

 

All obligations or expenses incurred hereunder, including the pro rata portion used in connection with, or for the benefit of the Project for all purchases, contracts, sales or services in bulk or volume which Manager may obtain for discount or convenience in connection thereof shall be for the account of, on behalf of, and at the expense of, Bluerock except as otherwise specifically provided. Bluerock shall be obligated to reimburse Manager for all reasonable customary expenses of Manager incurred specifically for the Project, which were authorized in the Budget or otherwise approved in writing by Bluerock.

 

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2.2BLUEROCK'S MINIMUM TECHNOLOGY REQUIREMENTS.

Bluerock agrees to use and pay associated software costs for Manager's standard business application platform for property management (e.g. RealPage), financials (e.g. Yardi), and other business applications (e.g. HR/Payroll - Workday). Bluerock agrees to provide the Property with technology, including but not limited to, hardware (e.g. computer, printer, scanner, check scanner, etc.), software (e.g. Microsoft Windows, etc.), and high-speed internet access (e.g. bandwidth, etc.) that satisfies Manager's minimum technology standard, as may be modified from time to time. If the technology device falls below the minimum standard or upgraded technology is deemed necessary for continuing operations, Bluerock agrees to upgrade, at Bluerock's expense, as reasonably needed to achieve the agreed upon minimum standard attached hereto as Exhibit C (as the same may be modified from time to time) which were authorized in the Budget or otherwise approved in writing by Bluerock to reasonably achieve the minimum technology standard.

 

2.3GENERAL OPERATION

Manager shall operate the Project in the same manner as is customary and usual in the operation of comparable facilities, and shall provide such services as are customarily provided by operators of apartment projects of comparable class and standing consistent with the Project's facilities, subject, however, in all events to the limitations of the Budget. In addition to the other obligations of Manager set forth herein, Manager shall render the following services and perform the following duties for Bluerock in a timely, faithful, diligent and efficient manner: (a) coordinate the plans of tenants for moving their personal effects into the Project or out of it, with a view toward scheduling such movements so that there shall be a minimum of inconvenience to other tenants; (b) maintain businesslike relations with tenants whose service requests shall be received, considered and recorded in systematic fashion in order to show the action taken with respect to each; (c) use its commercially reasonable efforts to collect all monthly rents due from tenants and rent for users or lessees of other non-dwelling facilities in the Project, if any; request, demand, collect, receive and receipt for any and all charges or rents which become due to Bluerock, and at Bluerock's expense, take such legal action as may be necessary or desirable to evict tenants delinquent in payment of monthly rental, other charges (security deposits, late charges, etc.); (d) prepare or cause to be prepared for execution and filing by the Manager as an independent contractor all forms, reports and returns required by all federal, state or local laws in connection with the unemployment insurance, workers' compensation insurance, disability benefits, Social Security and other similar taxes now in effect or hereafter imposed, and also any other requirements relating to the employment of personnel; (e) advertise when necessary, at Bluerock's expense and approval, the availability for rental for the Project units using commercially reasonable business strategies in connection with the use of promotional materials, market outreach efforts, internet and web-based marketing and display "for rent" or other similar signs upon the Project, it being understood that Manager may install one or more signs on or about the Project stating that same is under management of Manager and may use in a tasteful manner Manager's name and logo in any display advertising which may be done on behalf of the Project; and (f) sign, renew and cancel tenant leases for the Project for terms and on forms agreed to by Manager and approved by Bluerock (or on a month to month basis following the expiration of the initial term of a tenant lease) to bona fide individuals based upon Manager's recommendations. Manager shall exercise its commercially reasonable efforts to include the Project in signage advertising rentals available to be placed at the Project during any lease-up period. Notwithstanding anything herein to the contrary, in the event the Project name contains the trade names and/or trademarks "Bell Partners" or "Bell" (collectively, the "Bell Brand Rights"), Bluerock shall not be entitled to any right, title or interest of Manager in the Bell Brand Rights. Bluerock, at its cost, shall immediately cease using any Bell Brand Right and shall replace all signage and all collateral material that contains a Bell Brand Right (1) during the term of this Agreement within 30 days after a request to do so by Bell; and (2) within 30 days after the termination of this Agreement;

 

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Security Services. It is understood and agreed that Manager is not in the business of, and will not be providing alarm systems, guards, patrols and/or similar services to the Project as a part of its management services. Should Bluerock choose to do so, Bluerock may separately contract with a company providing Security Services.

 

2.4BUDGET

(a)          Attached hereto as Exhibit A is the Budget approved by Bluerock for the stated portion of the current Fiscal Year. For subsequent Fiscal Years, Manager shall submit the Budget for the ensuing Fiscal Year for Bluerock's approval no later than ninety (90) days prior to the beginning of each successive Fiscal Year. Bluerock shall make reasonable business efforts to approve the proposed Budget prior to December 31. In the event Bluerock disapproves the Budget, in whole or in part, Bluerock will provide such edits for the Manager to make as may be reasonably practicable. Until a complete new Budget is approved, Manager shall operate on the Budget or part thereof which is approved and the disapproved items shall be governed by the like item approved for the prior Fiscal Year, with the exception of expenses for personnel which may be reasonably increased based on existing competitive conditions unless the increase for personnel is the item that is being disputed, in which case expenses for personnel will not be increased.

 

(b)          The Budget shall reflect the schedule of monthly rents for the applicable Fiscal Year. It shall also constitute a major control under which Manager shall operate the Project, and Manager shall make all reasonable efforts to ensure there are no substantial variances therefrom except for the variations which are in compliance with Section 2.07(a)(ii). Consequently, no expenses may be incurred or commitments made by Manager in connection with the management or operation of the Project which exceed (or would cause the total expenses to exceed) by more than five percent (5%) for the "line item" amount allocated for such category of expense provided for in the approved Budget; provided, however, the foregoing limitation with respect to incurring expenses not covered by the Budget shall not apply to expenses relating to taxes, insurance or utilities. Manager makes no guaranty, warranty or representation whatsoever in connection with the Budgets or the operational results of owning the Project, such being intended as estimates only. Manager will use its commercially reasonable efforts to develop the Budget and manage the Project in accordance with the Budget.

 

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(c)          In the event there shall be a substantial variances (expenses exceeding5% of any "line item" amount allocated for such category of expense, or Gross Receipts less than 95%, of projection) between the actual results of operations for any month and the estimated results of operations for such month as set forth in the Budget, Manager shall furnish to Bluerock, within ten (10) business days after the expiration of such month, a written explanation concerning the variances and the steps being taken by Manager to rectify the variances. If after a Budget has been approved substantial variations have occurred, or are anticipated by Manager during the course of the Fiscal Year, Manager shall immediately notify Bluerock and, upon Bluerock's request, shall prepare and submit to Bluerock a revised forecast of annual income and expenses for the remainder of the Fiscal Year based on actual year-to-date income and expenses and Manager's forecast of income and expenses for the remainder of the Fiscal Year. Such forecast shall not constitute a replacement Budget.

 

2.5PROJECT EMPLOYEES AND OTHER PERSONNEL

(a)          Manager shall investigate, hire, employ, instruct, pay, promote, direct, discharge and supervise the work of the Project employees and shall supervise, through the Project employees, the firing, promotion, discharge and work of all other operating and service employees performing services in, for or about the Project, all in the name of Manager. All necessary and appropriate training and training-related costs may be included in the Budget and paid accordingly. Manager shall be solely responsible for legal compliance concerning the foregoing activities and shall indemnify and hold harmless Bluerock from employee claims and violations of law by Manager in respect to employment matters. To the extent that some of the Project employees may be required to reside at the Project and be available on a full- time basis in order to perform properly the duties of his/her employment, it is further understood and agreed that to the extent contemplated in the Budget or with Bluerock's prior written approval, such Project employees (including spouses or significant others and dependent children), in addition to salary and fringe benefits, may receive up to a 20% discount, or rental concession on the normal rental rates for any unit such employee is required to occupy.

 

(b) At all times, all Project employees shall at all times be deemed solely employees of Manager, and not of Bluerock. Bluerock nevertheless agrees to reimburse Manager, consistent with the Budget, bi-weekly for the total aggregate Budgeted compensation, including salary and fringe benefits, payable with respect to the Project employees and any temporary employees performing duties at the Project. The term "fringe" benefits, as used herein, shall mean and include the employee's and employer's contribution of FICA, unemployment compensation and other employment taxes, workers' compensation, group life, accident and health insurance premiums, performance bonuses provided for in the Budget and approved by Bluerock, disability, vacation, holiday, and sick leave, 401(k) contributions and other similar benefits paid or payable to employees on other projects operated by Manager. Any 401(k) employee or employer contributions forfeited by the employee remain with the plan. The cost of such Project Employees' base salaries and fringe benefits shall be separately and specifically scheduled within the Payroll line item of the Budget. The compensation, payroll taxes, employee benefits, insurance, payroll and administrative costs of such employees shall be considered a normal operating expense and shall be paid as a Project expense, as provided and to the extent permitted in the Budget. In addition, if there is a sale of the Property during the term of this Agreement, Manager may pay and Bluerock shall reimburse, such "stay on bonuses" to on-site Property employees as Manager deems customary in the industry and approved by Bluerock in writing.

 

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2.6CONTRACTS AND SUPPLIES

Subject to the Budget, the Manager shall, in the name of and on behalf of Bluerock and at Bluerock's expense, consummate arrangements with unrelated third party concessionaires, licensees, tenants or other intended users of the facilities of the Project, shall enter into contracts for furnishing to the Project electricity, gas, water, steam, telephone, cleaning, vermin exterminators, furnace and air-conditioning maintenance, security protection, pest control, landscaping, solid waste removal and any other utilities, services and concessions which are provided in connection with the maintenance and operation of apartment projects which are comparable to the Project and in accordance with standards comparable to those prevailing in other comparable apartment projects, and shall place purchase orders for such equipment, tools, appliances, materials and supplies as are reflected in the Budget and necessary to maintain the Project. Manager will make a reasonable attempt to make all contracts cancelable without penalty within (30) days written notice provided, however, that Bluerock's prior written consent shall be required for service contract or purchase order providing for a term or duration of more than one (I) year period; and further provided, that Bluerock's prior written consent shall be required for any such agreement that is not cancelable without penalty upon thirty (30) day written notice.

 

In the event that utility or power companies require a surety bond or other form of security in order to provide utilities, electrical or other services to the Project, upon Bluerock's written consent thereto, the Manager is authorized to obtain such bond at Bluerock's sole expense. Manager may, in its sole discretion, elect to guarantee, indemnify, defend and hold harmless those parties supplying such bonds or other form of security (the "Surety") for any premiums, liabilities, losses, costs, damages, attorney fees and other expenses, including interest, which the Surety may sustain or incur by reason of, or in connection with, the issuance, renewal or continuation of such bonds or other form of security. In such event, Bluerock will reimburse and indemnity Manager pursuant to Section 6.03 with regard to the same.

 

2.7MANAGER'S SERVICES

In the performance of its duties under this Agreement and subject to the limitations set forth in Section 2.05 hereof, it is agreed that Manager may enter into any contract on behalf of Bluerock with subsidiaries and affiliates of Manager for the furnishing of supplies and services to the Project, including but not limited to the purchasing of furniture, operating equipment, operating supplies, maintenance and landscaping services, and advertising, provided, however, that the net cost of such supplies and services to Bluerock is competitive with such similar services or supplies customarily used in the industry, whose services or supplies are reasonably available to the industry and whose services or supplies are reasonably available to the Project. Manager may implement a renter's insurance program through an insurance company affiliated with Manager provided rates are comparable with the industry standard.

 

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2.8ALTERATIONS, REPAIRS AND MAINTENANCE

(a)          (i) To the extent adequate funds are made available to Manager by Bluerock, Manager shall make or install, or cause to be made and installed at Bluerock's expense and in the name of Bluerock, all necessary or desirable repairs, interior and exterior cleaning, painting and decorating, plumbing, alterations, replacements, improvements and other normal maintenance and repair work on and to the Project as are customarily made by Manager in the operation of apartment Projects or are required by any lease. (ii) Manager may make emergency repairs involving manifest danger to life or property which are immediately necessary for the preservation of the safety of the Project, or for the safety of the tenants, or are required to avoid the suspension of any necessary service to the Project, in which event such reasonable expenditures may be made by the Manager without prior approval and irrespective of the cost limitations imposed by the Budget, provided that Bluerock or its successor in interest is notified in a timely manner and thereafter given written notice of such situation and such costs incurred.

 

(b)          In accordance with the terms of the Budget, by Manager's recommendation (with Bluerock's approval) or upon Bluerock demand and/or approval (except in the case of emergency), Manager shall, at Bluerock's expense, from time to time during the term hereof, make all required capital replacements or repairs to the Project ("Capital Project"). For any Capital Projects, including but not limited to Project improvements and rehab/renovation projects that cost more than $10,000 on an individual basis, Bluerock shall pay Manager a fee to supervise such Capital Projects equal to six percent (6%) of the total cost of the completed work, including both hard and soft costs.

 

(c)          In connection with this Agreement, Manager shall provide construction management services and supervision to restore or repair physical damage to the Property resulting from fortuitous loss or acts of God, including but not limited to, fire, wind, hail and flood ("Casualty Projects").

 

Manager shall be paid a construction management oversight fee of five percent (5%) based upon the total cost of the Casualty Project work, including hard and soft costs.

 

The construction management fee shall be paid to Manager by Bluerock as soon as practical, either at the earlier of as draws are paid, or at the completion of the project work.

 

Manager shall where applicable make reasonable efforts to secure at least three (3) bids for all insurance loss claims and casualty work. and shall use best efforts to obtain at least three (3) such bids for any contract for labor and/or material relating to the Project which has an aggregate cost to Bluerock of more than Twenty Five Thousand Dollars ($25,000).

 

(d)          Manager's responsibilities with respect to the Casualty Projects shall be performed with the professional skill and care of first-class construction managers in the geographic area in which the Project is located. The services to be provided will include, but not be limited to, the following: coordination of space planning; providing a detailed scope of work; coordination of acquisition of city approvals and permits to be obtained by General Contractor; acquisition of competitive bids from contractors where required by Bluerock; bid summary and recommendations for review by Bluerock; negotiation of construction contracts; handling relations with tenants of the Project; coordination of change orders; securing and recording conditional and unconditional lien releases (whether partial or final) from all contractors, subcontractors, material men, suppliers and the like prior to or concurrent with the making of any payments, and providing for such other arrangements as may be reasonably prudent under the circumstances to assure the appropriate application of construction funds; inspection of construction to ensure quality and completion prior to payment; timely filing or recording of notices of completion and posting of notices of non- responsibility on behalf of Bluerock (if applicable) as well as otherwise taking all steps necessary to comply with all laws and procedures relating to keeping the Project free of liens; preparation of a final punch list, and supervising the completion of any punch list items of remaining or defective work; coordination of inspections upon completion; securing certificates of occupancy; obtaining final lien waivers; review, approval, and submittal to Bluerock of all payment applications; ensuring that all contractors, subcontractors, material men, suppliers and the like carry sufficient insurance; and, such other services as are reasonable and necessary in connection with completion of the work. Manager shall make available to Bluerock the advice, consultation and expertise of Manager's technical staff, and render such periodic progress reports to Bluerock as it shall reasonably request.

 

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2.9LICENSES AND PERMITS

Manager shall, in a timely manner, apply for, and thereafter use commercially reasonable efforts to obtain and maintain in the name and at the expense of Bluerock all licenses and permits (including deposits and bonds) required of Property Owner, Bluerock or Manager in connection with the management and operation of the Project. Bluerock agrees to execute and deliver any and all applications and other documents and to otherwise cooperate to the fullest extent with Manager in applying for, obtaining and maintaining such licenses and permits. Specifically, but without limitation, Manager agrees to comply with all environmental laws and regulations in connection with the Project, to the extent that such laws and regulations relate to Manager's management, operation and maintenance obligations hereunder. Upon obtaining knowledge of any violation of any such law, Manager shall promptly notify Bluerock thereof in writing.

 

2.10COMPLIANCE WITH LAWS

Manager, at Bluerock's expense, shall use its commercially reasonable efforts to cause all acts and duties to be done in and about the Project to comply with all laws, regulations and requirements of any federal, state, regional, county or municipal government, having jurisdiction respecting the use or manner of use of the Project or the maintenance, alteration or operation thereof.

 

Bluerock shall use its commercially reasonable efforts to cause all acts and duties to be done in and about the Project to comply with all laws, regulations and requirements of any federal, state, regional, county or municipal government having jurisdiction over the use or manner of use of the Project or the maintenance, alteration or operation thereof.

 

2.11LEGAL PROCEEDINGS

Manager shall institute, in its own name or in the name of Bluerock, but in any event at the expense of Bluerock, any and all legal actions or proceedings which Manager deems reasonable to collect charges, rent or other income from the Project, or to dispossess tenants or other persons in possession, or to cancel or terminate any lease, license or concessions agreement for the breach thereof, or default thereunder by any tenant, licensee or concessionaire, provided, that the legal fees and related costs in connection with such proceeding do not exceed the Budget.

 

2.12DEBTS OF BLUEROCK

In the performance of its duties as Manager, Manager shall act solely as the representative of Bluerock. All debts and liabilities to third persons incurred by Manager in the course of its operation and management of the Project shall be the debts and liabilities of Bluerock only, and Manager shall not be liable for any such debts or liabilities.

 

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SECTION 3: MANAGEMENT FEES

 

3.1MANAGEMENT FEE

The Bluerock shall pay to Manager, during the term hereof, the Management Fees and other fees and costs due hereunder for the previous month on or before the tenth (10th) day of each subsequent month; provided, however that with respect to the Management Fee due for the last month of the term hereof, such Management Fee shall be payable on the last day of such month. Manager shall have the right to withdraw the monthly fee from the Operating Account established by Manager.

 

3.2PLACE OF PAYMENT

All sums payable by Bluerock to Manager hereunder shall be payable to Manager at 300 N. Greene Street, Suite 1000, Greensboro, NC 27401, unless the Manager shall, from time to time, specify a different address in writing.

 

SECTION 4: PROCEDURE FOR HANDLING RECEIPTS AND OPERATING CAPITAL

 

4.1BANK DEPOSITS

All monies received by Manager for or on behalf of Bluerock shall be deposited by Manager with the Depository. Manager shall maintain separate accounts for such funds consistent with the system of accounting of the Project. All funds on deposit shall be managed by Manager subject to the terms hereof. All monies of Bluerock held by Manager pursuant to the terms hereof shall be held by Manager in trust for the benefit of Bluerock to be held and disbursed as herein provided and shall not, unless Bluerock otherwise has agreed or directed, be commingled with the funds of any other person, including Manager or any affiliate of Manager. In no event shall Manager be responsible for any loss to amounts on deposit caused by the insolvency or other similar event or occurrence with respect to the Depository.

 

4.2SECURITY DEPOSIT ACCOUNT

Manager shall comply with all applicable laws with respect to security deposits paid by tenants. All security deposit funds held by Manager shall at all times be the property of Bluerock, subject to all applicable laws with respect thereto. Upon commencement of this Agreement, the Bluerock authorizes the Manager to make withdrawals therefrom for the purpose of returning them as required by the lease or by existing law.

 

4.3OPERATING ACCOUNT

Manager shall deposit all gross receipts from the operations of the Project into an Operating Account, on which both Manager and Bluerock shall be signatories and pay the normal operating expenses of the Project, including Manager's fees, debt and taxes as directed.

 

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4.4DISBURSEMENT OF DEPOSITS

Manager shall disburse and pay all funds on deposit on behalf of and in the name of Bluerock, in such amounts and at such times as the same are required in connection with ownership, maintenance and operation of the Project on account of all taxes, assessments and charges of every kind imposed by any governmental authority having jurisdiction over the Project, and all costs and expenses of maintaining, operating and supervising the operation of the Project, including, but not limited to, the Management Fees due hereunder, salaries, fringe benefits and expenses of the Project employees, insurance premiums, debt service, legal and accounting fees and the cost and expense of utilities, services, marketing, advertising and concessions. To the extent there are insufficient funds to pay all of such costs and expenses, Manager shall immediately notify Bluerock upon first projection or awareness of a cash shortage or pending cash storage. Manager shall pay such of the foregoing items in the order and manner. directed by Bluerock, and shall thereafter submit to Bluerock a statement of all remaining unpaid bills except that Management Fees and payroll shall not be deferred and shall be paid in accordance with the Agreement. Nothing in this agreement shall require the Manager to advance money on Bluerock's behalf.

 

4.5AUTHORIZED SIGNATURES

Any persons from time to time designated by Manager and agreed to in writing by Bluerock shall be authorized signatories on all bank accounts established by Manager hereunder and shall have authority to make disbursements from such accounts to the extent permitted in this Section 4. Funds may be withdrawn from all bank accounts established by Manager, in accordance with this Section 4, only upon the signature of an individual who has been granted that authority by Bluerock. Bluerock may at any time and at Bluerock's sole discretion direct Manager to withdraw funds and make disbursements from such accounts, except all persons who are authorized signatories or who in any way handle funds for the Project shall be bonded or covered by dishonesty insurance in the minimum amount of $100,000 per employee. At the beginning of each year and as new persons shall be designated authorized signatories, Manager shall provide Bluerock with evidence of such bonding. Any expenses relating to such bond for on-site employees and for off-site employees shall be borne by Manager. Bluerock's designated agents shall be added as authorized signatories at Bluerock's request.

 

SECTION 5: ACCOUNTING

 

5.1BOOKS AND RECORDS

Manager, on behalf of Bluerock, shall keep all books and accounts pertaining to the Project In accordance with Generally Accepted Accounting Principles in the U.S. The cutoff date of the accounting period shall be the last day of each calendar month. Manager, on behalf of Bluerock, shall also supervise and direct the keeping of a comprehensive system of office records, books and accounts pertaining to the Project. Such records shall be subject to examination at the office where they are maintained by Bluerock or its authorized agents, attorneys and accountant at all reasonable business hours and upon reasonable, advance notice to Manager. Capitalization and expense policy of Bluerock to be adhered to.

 

On or about the end of each calendar quarter of each year, Manager shall cause to be furnished to Bluerock such information as reasonably requested in writing by Bluerock as is necessary for any reporting requirements of the any direct or indirect members of Bluerock or for any reporting requirements of any REIT Member (as defined in Bluerock's Operating Agreement) (whether a direct or indirect Bluerock) to determine its qualification as a real estate investment trust and its compliance with REIT Requirements (as defined in Bluerock 's Operating Agreement) as shall be reasonably requested by Bluerock. Further, the Manager shall cooperate in a reasonable manner at the request of Bluerock and any direct or indirect member of Bluerock to work in good faith with any designated accountants or auditors of such party or its Affiliates so that such party or its Affiliate is able to comply with its public reporting, attestation, certification and other requirements under the Securities Exchange Act of 1934, as amended, applicable to such entity, and to work in good faith with the designated accountants or auditors of the such party or any of its Affiliates in connection therewith, including for purposes of testing internal controls and procedures of such party or its Affiliates.

 

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5.2PERIODIC STATEMENTS

(a)          On or before five (5) business days following the end of each calendar month, Manager shall deliver or cause to be delivered to Bluerock its standard financial reports customarily provided to owners of properties it manages, a list of which is set forth on Exhibit B. The reports are subject to change from time to time by Bluerock or Manager provided Manager shall not substantively decrease the quality of the information provided.

 

(b)          Within ten (10) business days but no later than the 15th of the month after the end of such Fiscal Year, Manager will deliver to Bluerock , an income and expense statement as of Fiscal Year end, and the results of operation of the Project during the preceding Fiscal Year (anything contained herein to the contrary notwithstanding, however, Manager shall not be obligated to prepare any of Bluerock’s or Property Owner’s state or federal income tax returns).

 

(c)          Manager shall also prepare and provide to Bluerock such reports and information as required by Bluerock to Prepare the reports and tax returns required under the Bluerock Management Agreement, including without limitation, the quarterly reports that Bluerock may require under Section 5.01 hereof.

 

(d)          In the event that Bluerock or Property Owner’s Mortgagee(s) requires an audit, the Manager shall cooperate with the auditors in a timely manner to complete the audit engagement. Also, Manager shall cooperate in a reasonable manner at the request of Bluerock and shall work in good faith with its designated representatives, accountants or auditors to enable compliance with its public reporting, attestation, certification and other requirements under applicable securities laws and regulations, including for testing internal controls and procedures.

 

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(e)          Bluerock may request and Manager shall provide when available such monthly, quarterly and/or annual leasing and management reports that relate to the operations of the project as Manager customarily provides owners of properties it manages.

 

5.3EXPENSES

All costs and expenses incurred in connection with the preparation of any statements, budgets, schedules, computations and other reports required under this Section 5, or under any other provisions of this agreement, shall be borne by the Manager. Any costs and expenses incurred in connection with the preparation of any statement or report not a part of the Manager's standard reporting package, a list of which is set forth on Exhibit B, shall be borne by Bluerock with Bluerock's prior written consent thereto.

 

SECTION 6: GENERAL COVENANTS OF BLUEROCK AND MANAGER

 

6.1OPERATING EXPENSES

Bluerock shall be solely liable for, and shall pay, all costs and expenses of managing and operating the Project that have been incurred by Bluerock or by Manager in accordance with the provisions of this Agreement, and shall pay, or Manager shall pay on Bluerock's behalf, all such costs and expenses, including, without limitation, the salaries of all Project employees, provided however, Bluerock shall have no direct obligations to Project Employees for salaries or fringe benefits, as all Project Employees are employed solely by Manager and not by Bluerock. Nothing in this Agreement shall require Manager to advance funds on Bluerock's behalf, however if funds are advanced by Manager in the operation, or management of the Project due to insufficient funds being from Gross Receipts, these funds will be reimbursed by Bluerock within thirty (30) days of submitting itemized invoices to Bluerock. Given Manager's purchasing power, Manager is sometimes able to negotiate volume discounts which inure to the benefit of its managed properties. Bluerock's obligation to pay all costs and expenses of managing and operating the Property includes Bluerock's pro rata share of purchases, contracts, sales or services purchased by Manager in bulk for which Manager obtains for discount or convenience to benefit the Property. Bluerock further recognizes that the Project may be operated in conjunction with other projects and that costs may be allocated or shared between such projects. In such regard, Bluerock consents to such allocation of costs and/or sharing of any expenses in an effort to save costs and operate the Project in a more efficient manner, so long as all such allocations are clearly indicated and approved in the Budget and not otherwise detrimental to Bluerock.

 

6.2BLUEROCK'S RIGHT OF INSPECTION AND REVIEW

Bluerock and Bluerock's accountants, attorneys and agents have the right to enter upon any part of the Project at any reasonable time during the Term of this Agreement for the purpose of examining or inspecting the Project or examining or making copies of books and records of the Project. Any inspection shall be done with as little disruption to the business of the Project as possible. Books and records of the Project shall be kept, as of the commencement date, at the Project or at the location where any central accounting and bookkeeping services are performed by Manager but at all times shall be the property of Bluerock.

 

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6.3INDEMNIFICATION BY BLUEROCK

Except for the gross negligence, willful misconduct or criminal actions of Manager (including Project Employees) in connection with its performance under this Agreement, Bluerock and Property Owner shall indemnify, hold harmless, and defend Manager (and Manager's partners, directors, shareholders, officers, employees, and agents), from and against any and all liabilities, claims, causes of action, suits, losses, demands and expenses whatsoever including, but not limited to reasonable legal fees and expenses arising out of or in the connection with ownership, maintenance or operation of the Project or this Agreement or the performance of Manager's agreements hereunder (collectively "Claims"), including but not limited to, Claims alleging bodily injury or property damage, and/or the loss of use of property following and resulting from damage or destruction, unless caused by the gross negligence, willful misconduct or criminal actions of Manager. The indemnification by Bluerock contained in this Section 6.03 is in addition to any other indemnification obligations of Bluerock or Property Owner contained in this Agreement, and is not limited by or to Bluerock's Liability Insurance. It is the intent of the parties hereto, however, to look first to Bluerock's Liability Insurance with respect to all Claims hereunder. Nothing herein shall be construed to indemnify, defend or hold harmless the Manager from claims alleging the gross negligence, willful misconduct or criminal actions of the Manager or its employees, directors, officers, agents or representatives.

 

6.4INDEMNIFICATION BY MANAGER

Manager shall indemnify Bluerock and Property Owner from and against all Claims for bodily injury and property damage or for financial loss that (i) arise out of or are a result of the gross negligence, willful misconduct or criminal actions of Manager except where attributable to actions or policies approved in writing or required in writing by Bluerock and (ii) result in a claim against Bluerock or Property Owner arising out of the Manager's gross negligence, willful misconduct or criminal actions. Where Bluerock or Property Owner is sued as a result of Manager's gross negligence, willful misconduct or criminal actions, Manager shall indemnify, defend and hold harmless Bluerock and Property Owner. The indemnification by Manager contained in this Section 6.4 is in addition to any other indemnification obligations of Manager contained in this Agreement, and is not limited by or to Manager's Insurance. It is the intent of the parties hereto, however, to look first to Manager's Insurance, where applicable, as set forth herein.

 

6.4SURVIVAL OF INDEMNITY OBLIGATIONS

The indemnification and hold harmless obligations of the parties in the Sections 6.03 and 6.04 shall survive the expiration or earlier termination of this Agreement.

 

SECTION 7: DEFAULTS AND TERMINATION RIGHTS

 

7.1DEFAULT BY MANAGER

Manager shall be deemed to be in default hereunder in the event Manager shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Manager, and such default shall (i) result from Manager's grossly negligent acts or omissions or willful misconduct; (ii) involve Manager's misappropriation or intentional misapplication of funds received or held by Manager hereunder; or (iii) continue for a period often (10) days after written notice thereof by Bluerock to Manager as to any default in payment of money or thirty (30) days after written notice thereof by Bluerock to Manager as to any non-monetary default, or, if such non-monetary default cannot be cured within thirty (30) days, then such additional period as shall be reasonable provided that Manager is capable of curing same and has continuously attempted to cure such default. Manager shall also be deemed to be in default hereunder if a petition for bankruptcy, reorganization or rearrangement is filed under state or federal insolvency statutes by Manage, or if any such petition is filed against Manager and not removed or discharged within sixty (60) days thereafter.

 

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7.2REMEDIES OF BLUEROCK

Upon the occurrence of an event of default by Manager as specified in Section 7.01 hereof, Bluerock shall have the right to pursue any remedy it may have at law or in equity (provided that in no event shall Manager ever be liable to Bluerock for, and Bluerock hereby waives all rights to receive, punitive, consequential or exemplary damages), it being expressly understood that although Bluerock has no further obligation to pay any fee due hereunder, Manager shall remain liable for any losses suffered as a result of Manager's default and the resulting termination of this Agreement. Promptly upon such termination, Manager shall deliver to Bluerock any funds, books and records of Bluerock then in the possession or control of Manager and all accounts established by Manager for security deposits.

 

7.3DEFAULTS BY BLUEROCK

Bluerock shall be deemed to be in default hereunder in the event Bluerock shall fail to keep, observe or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed or performed by Bluerock, and such default shall continue for a period of, in the case of any default which can be cured by the payment of a liquidated sum of money, ten (10) days and, in the case of all other defaults, thirty (30) days after notice thereof by Manager to Bluerock but, if such non-monetary default cannot be cured within thirty (30) days, then such additional period as shall be reasonable provided that Bluerock is capable of curing same and has continuously attempted to cure such default.

 

7.4REMEDIES OF MANAGER

Upon the occurrence of an event of default by Bluerock as specified in Section 7.03 hereof, Manager shall be entitled to terminate this Agreement, and upon any such termination by Manager pursuant to this Section 7.04, Manager shall have the right to pursue any remedy it may have at law or in equity (provided that in no event shall Bluerock o r P roperty M anager ever be liable to Manager for, and Manager hereby waives all rights to receive, punitive, consequential or exemplary damages).

 

7.5EXPIRATION OF TERM

Upon the expiration of the Term hereof pursuant to Section 1.01 hereof, unless sooner terminated pursuant to the terms of this Agreement, Manager sha l deliver to Bluerock all funds, including tenant security deposits, books and records of Bluerock then in possession or control of Manager, save and except such sums as are then due and owing to Manager hereunder. In addition, within sixty (60) days following expiration or termination, Manager shall deliver to Bluerock a final accounting, in writing, with respect to the operations of the Project, which obligation shall survive termination.

 

7.6TERMINATION WITHOUT CAUSE

This Agreement shall be terminable by either party at any time without cause upon thirty (30) days prior written notice from Bluerock to Manager and ninety (90) days written notice from Manager to Bluerock. Additionally, this Agreement shall automatically terminate upon Property Owner’s sale or other disposition of the Project or upon the condemnation of all or any material portion o f t he Project Bluerock acknowledges Manager shall incur substantial expenses in the initial set-up of the management of the Project. In the event Bluerock terminates this Agreement without cause for any reason, including but not limited to, the sale or transfer of the Project's ownership or assignment of property management services to another property manager within 120 days of commencement, in addition to payments and reimbursable expenses due Manager through the date of termination, Bluerock agrees to pay Manager an additional amount equal to one month's Base Management Fee.

 

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7.7EFFECT OF TERMINATION

Upon termination of this Agreement for any reason, neither Bluerock, nor the Manager have any further rights or obligations under this Agreement other than obligations accrued prior to the termination or by the express terms surviving this Agreement.

 

SECTION 8: INSURANCE

 

8.1BLUEROCK'S INSURANCE:

Bluerock shall obtain and maintain the following insurance (the specifications for which may be changed from time to time by Bluerock) for t he benefit of Property Owner necessary to protect the interest of Bluerock and Property Owner as it relates to the Property, at Bluerock's sole cost and expense, from authorized insurance companies with an AM Best rating of A IX or higher.

 

a.PROPERTY INSURANCE: Hazard insurance in the amount of the full replacement cost of the Property, and such other property insurance as Bluerock may elect, at Bluerock's expense.

 

b.LIABILITY INSURANCE: Commercial general liability insurance including contractual liability for insured contracts, on an "occurrence" basis, naming Manager as an additional insured, with limits of not less than three Million Dollars ($3,000,000.00) per occurrence (the "Bluerock's Liability Insurance"). This limit may be satisfied by a combination of CGL and umbrella/excess liability insurance. Bluerock's Liability Insurance shall include coverage for losses arising from ownership, management, and operation of the Project. This insurance shall be primary for Bluerock, Property Owner and Manager with respect to the Project.

 

c.CERTIFICATE OF INSURANCE: Bluerock shall provide to Manager a certificate of insurance evidencing such coverage from an insurance carrier with an A.M. Best Rating of A VIII or higher reflecting that Bluerock 's Liability Insurance is effective in accordance with this section and that Bluerock's Liability Insurance will not be canceled without at least thirty (30) days prior written notice to Manager.

 

8.2MANAGER'S INSURANCE: Manager shall obtain and maintain the following insurance (the specifications for which may be changed from time to time by Bluerock) necessary to protect the interest of Bluerock and Property Owner as it relates to Manager's operations hereunder, at Manager's sole cost and expense, from authorized insurance companies approved by Bluerock rated by Best's Rating at A IX or higher.

 

a.COMMERCIAL GENERAL LIABILITY INSURANCE: Commercial general liability insurance for the benefit of Manager, Property Owner and Bluerock in the amount of $1,000,000 per occurrence and $2,000,000 in the aggregate covering claims for bodily injury, property damage, personal and advertising injury, products and completed operations (the "Manager's Liability Insurance").

 

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1.                      Coverage on an occurrence form.

2.                      Contractual liability coverage covering the indemnification section of this agreement.

3.                      "Additional Insured- Owners, Lessees or Contractors -(FORM B), CG 20 10 85" or its equivalent providing coverage for both ongoing and completed operations and naming Bluerock and Property Owner as additional insured parties.

4.                      Manager's policy shall not include a Limitation of Coverage Real Estate Operations (CG 22 60 07 98) endorsement, Real Estate Property Managed Endorsement (CG 22 70 11 85) or similar endorsements excluding or limiting coverage for bodily injury, property damage or personal and advertising injury.

5.                      Manager shall continue to name Bluerock and Property Owner as an additional insured for a period of three years following the termination of the Agreement. Manager shall provide Bluerock with an original certificate of insurance not less than fifteen days prior to each renewal date during this three-year period.

6.                      If the Manager utilizes the services of an employee leasing company, then it's general liability policy must include ISO endorsement CG 04 24 10 93 Coverage for Injury to Leased Workers.

7.                      The pollution exclusion must be modified to include coverage for pollution claims related to a hostile fire as well as pollutants that are released from the building's heating equipment or equipment used to heat water.

8.                      A separation of insured clause.

 

b.UMBRELLA OR EXCESS LIABILITY: limits of $5,000,000: Providing follow-form coverage over the Commercial General Liability, Automobile Liability and Employers' Liability policies.

 

c.AUTO LIABILITY INSURANCE: Manager, at its expense which is not reimbursable, shall carry and maintain business auto liability insurance covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident. If the Manager utilizes the services of an employee leasing company then its Commercial Auto Liability policy must include ISO endorsement CA 23 25 07 97 Coverage for Injury to Leased Workers. Bluerock and Property Owner shall be named as additional insured parties.

 

d.WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE:

 

1.Workers' compensation - Statutory limits of insurance covering employees, including principals. In the event the principal has waived coverage for himself/herself, it is hereby agreed by all parties that the principal may not perform any work under this contract.
2.Employers' liability limits.

(A) $1,000,000 for bodily injury caused by accident, each accident.

(B) $1,000,000 for bodily injury caused by disease, each employee.

(C) $1,000,000 for bodily injury caused by disease, policy limit.

 

e.PROPERTY MANAGER'S ERRORS AND OMISSIONS LIABILITY:
1.Limits of lnsurance: $1,000,000 per occurrence, $2,000,000 aggregate
2.If coverage is on a claims-made basis, the retroactive date must be a date that is not later than the date on which Manager began performing services on behalf of Bluerock .
3.Contingent bodily injury and property damage coverage.
4.Coverage shall be maintained for a period of three years after the termination of services. Manager shall provide Bluerock with an original certificate of insurance on or before each renewal date during this three-year period.
5.The policy shall include a separation of insureds clause.

 

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f.COMMERCIAL CRIME INSURANCE:
1.Limits of Insurance: $1,000,000 employee dishonesty, $1,000,000 forgery or alteration, $1,000,000 computer fraud, $1,000,000 wire funds transfer fraud,

$1,000,000 money and securities on and off premises

2.Third party coverage.
3.No limitation or exclusion related to acts of collusion.
4.Bluerock and Property Owner shall be included as Loss Payees as their interests may appear.

5.          Coverage shall be included for theft of Bluerock's property by Manager's owners, directors and officers.

6.The definition of employee shall include leased employees if the Manager utilizes the services of an employee leasing firm.

 

g.EMPLOYMENT PRACTICES LIABILTIY INSURANCE:

Employment Practices Liability insurance with limits of $1,000,000 per occurrence/aggregate, including third party coverage for sexual harassment, discrimination and other coverable employment-related torts.

 

h.CERTIFICATES OF INSURANCE: Manager shall not begin performing services hereunder until original certificates of insurance showing evidence of the coverages outlined below have been furnished to and approved by Bluerock. Each policy shall provide for thirty (30) days' advance written notice of cancellation or material change by mail to Bluerock from the insurance company, and this provision shall be evidenced on the certificates. Evidence of renewal or replacement coverages shall be furnished to Bluerock and Manager not less than ten (10) days prior to expiration but in no event later than the renewal date itself.

 

8.4BLUEROCK'S LIABILITY INSURANCE PRIMARY AND NON-CONTRIBUTORY

In connection with claims by third parties, as between Bluerock's Liability Insurance and Manager's Liability Insurance, Bluerock's Liability Insurance shall for all purposes be deemed the primary and non-contributory coverage. No claim shall be made by Bluerock or its insurance company under or with respect to any insurance maintained by Manager except in the event such claim is caused solely by gross negligence (except actions or policies specifically approved or required by Bluerock) or willful misconduct (except actions or policies specifically approved or required by Bluerock) on the part of Manager or Manager's employees.

 

8.5RENTER'S INSURANCE

If at the direction of Bluerock, Manager implements a renter's insurance program at the Project whether it is a limited liability, or limited liability and personal contents coverage policy, any such policy held by the resident shall not remove, replace, reduce, or in any way modify the parties' indemnification obligations herein or the requirements of Bluerock or Manager to provide insurance and indemnification in accordance with Sections 6 and 8. Manager agrees to use best efforts to insure compliance on the part of Project residents. Manager assumes no responsibility, liability or reduction in payment of its Management Fee as a result of any expense incurred by Bluerock, including but not limited to payment by Bluerock of any insurance deductible amount, caused by the failure of a resident to have renter's insurance in place. This exclusion of liability on Manager's part applies whether the resident failed to procure renter's insurance at the time of initial lease signing, at the time the resident's renter's insurance policy came up for renewal, or at any other time.

 

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8.6VENDOR INSURANCE COMPLIANCE

At no cost to Bluerock, Bluerock agrees to utilize a Vendor Compliance Management Services Company to establish and manage vendor's insurance agreeable to Bluerock and Manager and approved by Manager. Utilizing such a company to manage vendor Liability Insurance Certificates and provide related services shall not remove, replace, reduce, or in any way modify the parties' indemnification obligations herein or the requirements of Bluerock or Manager to provide insurance and indemnification in accordance with Sections 6 and 8. Manager assumes no responsibility, liability or reduction in payment of its Management Fee, for property loss, personal injury (including death) or denial of claims based on the status of a vendor's policy whether its policy is amended, changed or lapsed. Further, Manager assumes no responsibility for the Vendor Compliance Management Services Company beyond that required under this Agreement.

 

8.7WAIVER OF SUBROGATION

Each insurance policy maintained by Bluerock or Property Owner, on one hand, or by Manager, on the other hand, with respect to the Property shall contain a waiver of subrogation clause, so that no insurers shall have any claim over or against Bluerock, Property Owner or Manager, as the case may be, by way of subrogation or otherwise, with respect to any claims that are insured under such policy. All insurance relating to the Property shall be only for the benefit of the party securing said insurance and all others named as insureds. Notwithstanding any contrary provision of this Agreement, Bluerock and Manager hereby release each other from and waive all rights of recovery and claims under or through subrogation or otherwise for any and all losses and damages to property to the extent caused by a peril insured or insurable under the policies of insurance required to be maintained under this Agreement by the waiving party and agree that no insurer shall have a right to recover any amounts paid with respect to any claim against Bluerock or Manager by subrogation, assignment or otherwise.

 

8.7HANDLING CLAIMS

Manager shall report within a reasonable amount of time to Bluerock all accidents and claims of which it is aware for damage and injury relating to ownership, operation, and maintenance of the Property and any damage or destruction to the Property coming to the attention of Manager and will assist Bluerock in Bluerock's attempts to comply with all reporting and cooperation provisions in all applicable policies. Manager is authorized to settle on Bluerock's behalf any and all claims against property insurers not in excess of $1,500, which includes authority for the execution of proof of loss, the adjustment of losses, signing of receipts, and the collection of money. If the claim is greater than $1,500, Manager shall act only with the prior written approval of Bluerock.

 

8.8AUTOMOBILE INSURANCE. INTENTIONALLY OMITTED

 

8.9WORKERS' COMPENSATION INSURANCE. INTENTIONALLY OMITTED

 

8.10DISHONESTY INSURANCE. INTENTIONALLY OMITTED

 

8.11ENVIRONMENTAL INDEMNIFICATION

 

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Bluerock and Property Owner jointly agrees to defend, indemnify, and hold harmless Manager and Manager's partners, directors, shareholders, officers, and agents, against and from any and all actions, administrative proceedings, causes of action, charges, claims, commissions, costs, damages, decrees, demands, duties, expenses, fees, fines, judgments, liabilities, losses, obligations, orders, penalties, recourses, remedies, responsibilities, rights, suits, and undertakings of every nature and kind whatsoever, including, but not limited to, attorneys' fees and litigation expenses, from the presence of Hazardous Substances (as defined below) on, under or about the Project. Without limiting the generality of the foregoing, the indemnification provided by this paragraph shall specifically cover costs incurred in connection with any investigation of site conditions or any remediation, removal or restoration work required by any federal, state or local governmental agency because of the presence of Hazardous Substances in, on, under or about the Property, except to the extent that the Hazardous Substances are present as a result of gross negligence, criminal activity, or any willful misconduct of Manager or its employees. For purposes of this section, "Hazardous Substances" shall mean all substances defined as hazardous materials, hazardous wastes, hazardous substances, or extremely hazardous waste under any federal, state or local law or regulation.

 

SECTION 9: MISCELLANEOUS PROVISIONS

 

9.1GOVERNING LAW

This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas. Manager represents that it has qualified to do business in the State of Texas in connection with all actions based on or arising out of this Agreement.

 

9.2NOTICES

All notices, demands, requests or other communications required or permitted to be given hereunder must be sent by (i) personal delivery, (ii) FedEx or a similar nationally recognized overnight courier service, or (iii) certified mail, return receipt requested. Any such notice, request, demand, tender or other communication shall be deemed to have been duly given: (a) if served in person, when served; (b) if by overnight courier, on the first Business Day after delivery to the courier; or (c) if by certified mail, return receipt requested, upon receipt. Rejection or other refusal to accept, or inability to deliver because of changed address or facsimile number of which no notice was given, shall be deemed to be receipt of such notice, request, demand, tender or other communication. Any party hereto may at any time by giving ten (10) days written notice to the other party hereto designate any other address in substitution of the foregoing address to which such notice or communication shall be given.

 

BLUEROCK:Bluerock Property Management, LLC

16500 North Park Drive

Southfield, Michigan 48074

Attn: Ms. Patricia Anderson

 

COPY TO:Bluerock Real Estate

712 Fifth Avenue, 9th Floor

New York, NY 10019

Attention: Jordan Ruddy & Michael L. Konig, Esq.

 

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MANAGER:Bell Partners Inc.

300 N. Greene Street, Suite 1000

Greensboro, NC 27401

Attn: Gwyneth Cote', COO

 

9.3SEVERABILITY

If any term, covenant or condition of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or such other documents, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Agreement or such other documents shall be valid and shall be enforced to the fullest extent permitted by law.

 

9.4NO JOINT VENTURE OR PARTNERSHIP

Bluerock and Manager hereby agree that nothing contained herein or in any document executed in connection herewith shall be construed as making Manager and Bluerock joint venturers or partners. In no event shall Manager have any obligation or liability whatsoever with respect to any debts, obligations or liabilities of Bluerock or vice versa, except as set forth herein or as set forth in any separate agreement signed by Manager.

 

9.5MODIFICATION TERMINATION

This Agreement terminates any and all prior management agreements between Bluerock and Manager relating to the Project, and any amendment, modification, termination or release hereof may be effected only by a written document executed by Manager and Bluerock.

 

9.6ATTORNEYS' FEES

Should either party be required to employ an attorney or attorneys to enforce any of the provisions hereof or to protect its interest in any manner arising under this Agreement, or to recover damages for the breach of this Agreement, the non-prevailing party in any actions (the finality of which is not legally contested) agrees to pay to the prevailing party all reasonable costs, damages and expenses, including reasonable attorneys' fees expended or incurred in connection therewith.

 

9.7TOTAL AGREEMENT

This Agreement is a total and complete integration of any and all undertakings existing between Manager and Bluerock and supersedes any prior oral or written agreements, promises or representations between them regarding the subject matter hereof.

 

9.8APPROVALS AND CONSENTS

If any provision hereof requires the approval or consent of Bluerock or Manager to any act or omission, such approval or consent shall not be unreasonably withheld or delayed except as otherwise specifically provided herein.

 

9.9CASUALTY

In the event that the Project, or any portion thereof, is substantially or totally damaged or destroyed by fire, tornado, windstorm, flood or other casualty during the term of this Agreement, Manager or Bluerock may terminate this Agreement upon giving the other party written notice of termination on or before the date which is thirty (30) days after the date of such casualty. In the event of termination pursuant to this Section 9.09, neither party hereto shall have any further liability hereunder except for those obligations which by their terms survive termination of this Agreement.

 

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9.10SPECIAL AGREEMENTS

Notwithstanding Manager's review of and recommendations in respect to capital repairs and replacements for the Property, Bluerock acknowledges that Manager is not an architect or engineer, and that all capital repairs, replacements and other construction in the Property will be designed and performed by independent architects, engineers and contractors. Accordingly, Manager does not guarantee or warrant that the construction documents for such work will comply with Applicable Law or will be free from errors or omissions, nor that any such work will be free from defects, and Manager will have no liability therefore. In the event of such errors, omissions, or defects, Manager will use reasonable efforts to cooperate in any action Bluerock desires to bring against such parties. Notwithstanding any contrary provision hereof, (i) Bluerock agrees that no partner, agent, director, member, officer, shareholder, or affiliate of Manager shall be personally liable to Bluerock or anyone claiming by, through or under Bluerock, by reason of any default by Manager under this Agreement, any obligation of Manager to Bluerock, or for any amount that may become due to Bluerock by Manager under the terms of this Agreement otherwise, and (ii) Manager agrees that no partner, agent, director, member, officer, shareholder, or affiliate of Bluerock or Property Owner shall be personally liable to Manager or anyone claiming by, through or under Manager, by reason of any default by Bluerock under this Agreement, any obligation of Bluerock to Manager, or for any amount that may become due to Manager by Bluerock under the terms of this Agreement or otherwise.

 

9.11COMPETITIVE PROJECTS

Manager may, individually or with others, provide management services in regard to and possess an interest in any other projects and ventures of every nature and description, including, but not limited to, ownership, financing, leasing, operation, management, brokerage, development and sale of real property and apartment projects other than the Project, whether or not such other ventures or projects are competitive with the Project, and Bluerock shall not have any right to the income or profits derived therefrom.

 

9.12SUCCESSORS AND ASSIGNS

Bluerock has entered into this Agreement with Manager based on Manager's abilities and, accordingly, Manager may not assign this Agreement without the prior written consent of Bluerock. Subject to this limitation on assignment, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their permitted successors and assigns. Either Manager or Bluerock may assign this Agreement upon obtaining the other party's prior written consent, provided that no consent shall be required for assignment to Bluerock's Mortgagee(s).

 

9.13WAIVER OF JURY TRIAL.

Bluerock and Manager hereby knowingly, voluntarily and intentionally, to the extent permitted by law, waive the right to a trial by jury in respect of any litigation based on, arising out of, under or in connection with this Agreement or any documents contemplated to be executed in connection herewith or any course of conduct, course of dealings, statements (whether oral or written) or actions of either party arising out of or related in any manner to the property (including, without limitation, any action to rescind or cancel this Agreement or any claims or defenses asserting that this Agreement was fraudulently induced or is otherwise void or voidable). This waiver is a material inducement for Bluerock to enter into and accept this Agreement. Bluerock and Manager agree that should issues arise that would have required litigation; they mutually agree to resolve them via arbitration.

 

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9.14HUD AMENDMENT

In the event Bluerock secures new financing or refinances the Project, Bluerock and Manager agree to amend this Agreement as may be reasonably required to satisfy any requirements of Bluerock's HUD financing, including but not limited to, Manager's Base Management Fee.

 

[Signatures on Following Pages]

 

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SECTION 10: SIGNATURES

 

IN WITNESS WHEREOF, the parties hereto have executed this Management Agreement as of the day and year first above written.

 

MANAGER:  
   
Bell Partners Inc., a North Carolina corporation  
   
By: /s/ Gwyneth Cote'  
  Name: Gwyneth Cote'  
  Title: Chief Operating Officer  
   
BLUEROCK:  
   
BLUEROCK PROPERTY MANAGEMENT, LLC,  
a Michigan limited liability company  
   
By: Bluerock Real Estate, L.L.C.,  
  a Delaware limited liability company, its manager  
     
  By: /s/ Jordan Ruddy  
  Name: Jordan Ruddy  
  Title: Authorized Signatory  

 

[Additional Signatures on Following Page]

 

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Property Owner joins herein for the limited purpose of acknowledging the obligations imposed on it by Sections 6.03 and 8.11 hereof.

 

PROPERTY OWNER: BR FOX HILLS TIC-1, LLC,
  a Delaware limited liability company
   
  By: 23Hundred, LLC,
    a Delaware limited liability company,
    its sole member
   
    By: /s/ Jordan Ruddy
      Jordan Ruddy, Authorized Signatory
   
    BR FOX HILLS TIC-2, LLC,
    a Delaware limited liability company
   
    By: Bell BR Waterford Crossing JV, LLC, a Delaware limited liability company, its sole member
   
    By: /s/ Jordan Ruddy
      Jordan Ruddy, Authorized Signatory

 

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EXHIBIT A

 

2015 BUDGET

 

TO BE DELIVERED & APPROVED POST-CLOSING

 

EXHIBIT B

 

I.MONTHLYREPORTS

 

1.Balance Sheet, including monthly comparison and comparison to year end (if applicable).
2.Budget Comparison (1), including month-to-date and year-to-date variances.
3.Detailed Income Statement, including prior 12 months.
4.Profit and loss statement compared to Budget with narrative for any large fluctuations compared to Budget.
5.Trial Balance that includes mapping of the accounts to the financial statements.
6.Account reconciliations for each balance sheet account within the trial balance.
7.Detailed support for each account reconciliation including the following:
a.Detail Accounts Payable Aging Listing: 0-30 days, 31-60 days, 61-90 days and over 90 days.
b.Detail Accounts Receivable/Delinquency Aging Report: 0-30 days, 31-60 days, 61-90 days, over 90 days and prepayments.
c.Fixed asset roll-forward and support (invoices and checks) for any new acquisition/additions and/or support for any disposals to fixed assets. Purchases will be accounted for using Bluerock's capitalization policy.
8.Security Deposit Activity
9.Mortgage Statement
10.Monthly Management Fee Calculation
11.Monthly Distribution Calculation
12.General Ledger, with description and balance detail
13.Monthly Check Register including copies of all checks disbursed and copies of cancelled checks.
14.Market Survey, including property comparison, trends, and concessions.
15.Rent Roll
16.Monthly Reporting and evidence of withdrawal, if any, of the Property Enhancement Reserves, and any other operating reserve accounts and capital expense reserve accounts, including, but not limited to, any calculations evidencing shortfalls payable thereunder.
17.Variance Report, including the following:
a.Cap Ex Summary and Commentary
b.Monthly Income/Expense Variance with notes
 c.Yearly Income/Expense Variance with notes
d.Occupancy Commentary
e.Market/Competition Commentary
f.Rent Movement/Concessions Commentary
g.Crime Commentary
h.Staffing Commentary
1.Operating Summary, with leasing and traffic reporting
j.Other reasonable reporting, as requested (e.g. Renovation/Rehab report)

 

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II.QUARTERLY REPORTS

 

18.          Within ten (10) business days of the end of each quarter of each year but no longer than the 15TH day of the month at the end of each quarter, Manager shall furnish to Bluerock such information as requested by Bluerock as is necessary for any REIT Member of Property Owner (whether a direct or indirect owner) to determine its qualification as a real estate investment trust (a "REIT") and its compliance with any requirements for qualifying as a REIT (the "REIT Requirements") as shall be requested by Bluerock. Further, Manager shall cooperate in a reasonable manner at the request of Bluerock to work in good faith with any designate accountants or auditors of Property Owner o r a n y R EI T Member so that such REIT Member is able to comply with its public reporting, attestation, certification and other requirements under the Securities Exchange Act of 1934, as amended, applicable to such entity, and to work in good faith with the designated accountants or auditors of Property Owner or any REIT Member in connection therewith, including for purposes of testing internal controls and procedures. The requesting Property Owner or REIT Member shall bear the cost of any information or reports provided pursuant to this Exhibit.

 

III.OTHER REPORTS

 

19.          Other reasonable reporting at Bluerock's expense, as requested and approved in writing by Bluerock at Bluerock's expense.

 

Budget Comparison shall include (i) an unaudited income and expense statement showing the results of operation of the Property for the preceding calendar month and the Fiscal Year to-date; (ii) a comparison of monthly line item actual income and expenses with the monthly line item income and expenses projected in the Budget. The balance sheet will show the cash balances for reserves and operating accounts as of the cut-off date for such month.

 

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EXHIBIT C

Minimum Technology Standards

 

1.Infrastructure Services- Hardware and Software
a.Leasing office computers must meet current minimum technical requirements and standards. The current standard is a minimum of an Intel i3 processor (or equivalent) and 4GB of RAM. On an annual basis, Manager's Information Technology Department will identify all computers that do not meet the then current minimum technical requirements and standards. Those computers that do not meet the minimum requirements or are greater than 3 years of age will be budgeted for replacement in the following budget year.
b.All computers for community associates must be a part of Manager's Microsoft licensing program. Every associate will be provided an Active Directory network account and a BellPartnerslnc.com e-mail address. The licenses include Microsoft Windows, Office, Exchange, SharePoint, Lync, Active Directory, Terminal Services, etc. These services will be provided through Manager's internal infrastructure or may run as a cloud service (such as Microsoft Office 365).
c.Each leasing office is required to supply a high-speed internet connection with a minimum of 10 Meg download I 1 Meg upload and a dedicated IP address.
d.Each leasing office or maintenance office internet connection must have a standard firewall in place. The current standard is a Meraki MX-60 firewall device.
e.Mobile devices such as smartphones and tablets must be supported by Manager's Information Technology Department which currently includes Apple and Android devices. All mobile devices connected to Manager's network for e-mail or other applications must be managed by the Manager's Mobile Device Management system.
f.Bluerock agrees to use and pay associated fees for Manager's standard telecom management platform.
g.Other security software and hardware that Manager deems necessary to protect the privacy of Residents, Employees & Reputation -Classes of solutions fall into the following areas:

1.     Web Filtering

11.   Configuration Management

iii.    Virus and Malware Protection

IV.   E-mail Filtering

v.     E-mail Archiving

vi.    Intrusion Detection and Prevention

vii.   Firewall and VPN Access

viii.  Mobile Device Management

IX.   Single Sign-on

x.     Backup and Disaster Recovery.

h.Software vendors may perform periodic license audits or true-ups. Bluerock will reimburse Manager for any additional charges from software vendors that may result from audits or true-ups.

 

2.Reporting Tools and Business Intelligence Products
a.Prorated license and access charges for data extracts from vendor sources for management reporting- ex: RealPage, Yardi, etc.
b.License costs for applicable User Reporting tools such as IBM Cognos, SAP Business Objects, SAP Crystal Reports etc.
3.Vendor Partnership and Product costs for what we have validated and integrated (RealPage, Yardi, OpsTechnology etc.)
a.Bluerock agrees to use and pay associated software costs for Manager's standard business application platform for property management (e.g. RealPage), financials (e.g. Yardi), and other business applications (e.g. HR/Payroll- Workday). Manager has the right to evaluate, test, and implement platform products that will best meet the business needs of Bluerock and Manager. The current standard business application platform includes:

 

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i.Yardi Voyager (Financials, General Ledger, Accounts Payable, Construction, Job Cost Accounting, Fixed Assets)
u.RealPage OneSite Leasing and Rents
n1.RealPage SDE- Site Data Exchange Services iv. RealPage OpsTechnology
v.RealPage YieldStar
vi.RealPage Payment Solutions
vii.RealPage Resident Screening
viii.RealPage Resident Portal
IX.RealPage Online Renewals
x.RealPage Online Leasing
xi.Community marketing websites
xu.Workday (HR and Payroll)

 

4.Integration Services between various suppliers a.

BTL products

b. Directory Management and Authentication

 

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Section 4: EX-10.30 (EXHIBIT 10.30)

 

Exhibit 10.30

 

The mailing address to which this Deed of Trust
should be returned after recordation is:

 

Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, TX 75202
Attention: Debbie Robinowitz

 

LEASEHOLD DEED OF TRUST, ASSIGNMENT OF RENTS AND LEASES,
SECURITY AGREEMENT, FIXTURE FILING AND FINANCING STATEMENT

 

(This Document Serves as a Fixture Filing under Section 9.502 of the Texas Business and
Commerce Code)

Grantor’s Organizational Identification Number: 5660862

 

THIS LEASEHOLD DEED OF TRUST, ASSIGNMENT OF RENTS AND LEASES, SECURITY AGREEMENT, FIXTURE FILING AND FINANCING STATEMENT (this “Deed of Trust”) is made this ___ day of April, 2015, by Grantor, in favor of Trustee for the benefit of Administrative Agent, as agent for the benefit of itself and the Lenders.

 

ARTICLE 1

Definitions; Granting Clauses; Secured Indebtedness

 

Section 1.1           Secured Indebtedness. This Deed of Trust secures the Secured Indebtedness, as defined in Section 1.5 below, which includes the indebtedness evidenced by the Promissory Notes (defined below) in the aggregate principal amount of up to THIRTY-ONE MILLION EIGHT HUNDRED THOUSAND AND NO/100 DOLLARS ($31,800,000.00), together with interest thereon.