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Section 1: 10-Q (FORM 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 June 30, 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 August 5, 2015:

Class A Common Stock: 18,847,818 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

June 30, 2015

 

PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 3
     
  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 4
     
  Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2015 5
     
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
     
Item 4. Controls and Procedures 37
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 38
     
Item 1A. Risk Factors 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 38
     
Item 4. Mine Safety Disclosures 38
     
Item 5. Other Information 38
     
Item 6. Exhibits 38
     
SIGNATURES 39

 

 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)     
   June 30,
2015
   December 31,
2014
 
ASSETS          
Net Real Estate Investments          
Land  $45,281   $37,909 
Buildings and improvements   297,468    240,074 
Furniture, fixtures and equipment   8,501    6,481 
Total Gross Operating Real Estate Investments   351,250    284,464 
Accumulated depreciation   (16,121)   (10,992)
Total Net Operating Real Estate Investments   335,129    273,472 
Operating real estate held for sale, net   15,029    14,939 
Total Net Real Estate Investments   350,158    288,411 
Cash and cash equivalents   95,429    23,059 
Restricted cash   4,306    11,091 
Due from affiliates   1,481    570 
Accounts receivable, prepaid and other assets   2,616    753 
Investments in unconsolidated real estate joint ventures   58,539    18,331 
In-place lease intangible assets, net   634    745 
Deferred financing costs, net   2,457    2,199 
Non-real estate assets associated with operating real estate held for sale   917    927 
Total Assets  $516,537   $346,086 
           
LIABILITIES AND EQUITY          
Mortgages payable  $243,744   $201,343 
Mortgage payable associated with operating real estate held for sale   11,500    11,500 
Accounts payable   787    634 
Other accrued liabilities   5,394    3,345 
Due to affiliates   2,818    1,946 
Distributions payable   1,957    889 
Liabilities associated with operating real estate held for sale   345    418 
Total Liabilities   266,545    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; 18,847,818 and 7,531,188 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively   188    75 
Common stock - Class B-1, $0.01 par value, 804,605 shares authorized; none and 353,630 shares issued and outstanding as of June 30, 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   4    4 
Common stock - Class B-3, $0.01 par value, 804,605 shares authorized; 353,629 shares issued and outstanding   4    4 
Additional paid-in-capital   246,030    113,511 
Distributions in excess of cumulative earnings   (27,574)   (21,213)
Total Stockholders’ Equity   218,652    92,385 
Noncontrolling Interests          
Operating partnership units   2,850    2,949 
    Partially owned properties   28,490    30,677 
Total Noncontrolling Interests   31,340    33,626 
Total Equity   249,992    126,011 
TOTAL LIABILITIES AND EQUITY  $516,537   $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   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
Revenues                    
Net rental income  $9,918   $7,439   $18,562   $10,569 
Other property revenues   551    326    943    422 
Total revenues   10,469    7,765    19,505    10,991 
Expenses                    
Property operating   4,362    3,359    8,226    4,940 
General and administrative   738    741    1,666    1,270 
Management fees   706    206    2,155    323 
Acquisition costs   221    3,136    670    3,150 
Depreciation and amortization   3,741    3,783    6,506    4,819 
Total expenses   9,768    11,225    19,223    14,502 
Operating income (loss)   701    (3,460)   282    (3,511)
Other income (expense)                    
Other income   41    132    62    132 
Equity in income of unconsolidated real estate joint ventures   1,295    87    2,025    81 
(Loss) Gain on sale of  unconsolidated real estate joint venture interest   (15)       11,292     
Interest expense, net   (2,726)   (2,071)   (5,018)   (3,266)
Total other (expense) income   (1,405)   (1,852)   8,361    (3,053)
                     
Net (loss) income from continuing operations   (704)   (5,312)   8,643    (6,564)
                     
Discontinued operations                    
Loss on operations of rental property       (55)       (117)
Loss on early extinguishment of debt               (880)
Gain on sale of joint venture interest               1,006 
(Loss) income from discontinued operations       (55)       9 
                     
Net (loss) income   (704)   (5,367)   8,643    (6,555)
Net (loss) income attributable to noncontrolling interests                    
Operating partnership units   (10)   (205)   65    (205)
Partially-owned properties   (112)   (626)   5,847    (767)
Net (loss) income attributable to noncontrolling interests   (122)   (831)   5,912    (972)
Net (loss) income attributable to common stockholders  $(582)  $(4,536)  $2,731   $(5,583)
                     
(Loss) income per common share - Basic(1)                    
Continuing operations  $(0.04)  $(0.77)  $0.19   $(1.62)
Discontinued operations  $-   $(0.01)  $-   $- 
   $(0.04)  $(0.78)  $0.19   $(1.62)
                     
(Loss) income per common share – Diluted(1)                    
Continuing operations  $(0.04)  $(0.77)  $0.19   $(1.62)
Discontinued operations  $-   $(0.01)  $-   $- 
   $(0.04)  $(0.78)  $0.19   $(1.62)
                     
Weighted average basic common shares outstanding(1)   16,353,209    5,823,296    14,461,064    3,452,032 
Weighted average diluted common shares outstanding(1)   16,353,209    5,823,296    14,461,064    3,452,032 

 

(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 SIX MONTHS ENDED JUNE 30, 2015

CONSOLIDATED STATEMENT 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   10,948,000    109    -    -    -    -    -    -    131,204    -    -    -    131,313 
Conversion of Class B-1 into Class A shares   353,630    4    (353,630)   (4)   -    -    -    -    -    -    -    -    - 
Vesting of restricted stock compensation   -    -    -    -    -    -    -    -    77    -    -    -    77 
Issuance of restricted stock   15,000    -    -    -    -    -    -    -    -    -    -    -    - 
Issuance of Long-Term Incentive Plan ("LTIP") units for compensation   -    -    -    -    -    -    -    -    1,078    -    -    -    1,078 
Vesting of LTIP Unit compensation   -    -    -    -    -    -    -    -    617    -    -    -    617 
Capital contributions from noncontrolling interests   -    -    -    -    -    -    -    -    -    -    -    578    578 
Distributions declared   -    -    -    -    -    -    -    -    -    (9,092)   -    (164)   (9,256)
Disposition of noncontrolling interests   -    -    -    -    -    -    -    -    -    -    -    (7,410)   (7,410)
Change in additional paid-in capital due to acquisitions   -    -    -    -    -    -    -    -    (457)   -    -    -    (457)
Distributions to noncontrolling interests   -    -    -    -    -    -    -    -    -    -    -    (1,202)   (1,202)
Net income   -    -    -    -    -    -    -    -    -    -    2,731    5,912    8,643 
                                                                  
Balance, June 30, 2015   18,847,818   $188    -   $-    353,630   $4    353,629   $4   $246,030   $(19,022)  $(8,552)  $31,340   $249,992 

 

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)

 

   Six Months Ended 
   June 30, 
   2015   2014 
         
Cash flows from operating activities          
Net income (loss)  $8,643   $(6,555)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:          
Depreciation and amortization   6,694    5,131 
Amortization of fair value adjustments on mortgages payable   (130)   (158)
Equity in income of unconsolidated joint ventures   (2,025)   (81)
Gain on sale of real estate assets of unconsolidated joint ventures   (11,292)   (1,006)
Distributions from unconsolidated real estate joint ventures   1,716    40 
Share-based compensation attributable to directors' stock compensation plan   77    25 
Share-based compensation to Former Advisor - LTIP Units   617    - 
Share-based compensation to Manager - LTIP Units   1,078    - 
Changes in operating assets and liabilities:          
Due to affiliates, net   980    (151)
Accounts receivable, prepaids and other assets   (1,639)   (504)
Accounts payable and other accrued liabilities   2,129    1,821 
Net cash provided by (used in) operating activities   6,848    (1,438)
           
Cash flows from investing activities:          
Decrease in restricted cash   6,567    (2,425)
Acquisitions of consolidated real estate investments   (66,964)   (16,650)
Capital expenditures   (1,179)   (2,480)
Proceeds from sale of joint venture interests   -    4,985 
Proceeds from sale of unconsolidated real estate joint venture interests   15,590    - 
Purchases of interests from noncontrolling members   (7,866)   - 
Investment in unconsolidated joint venture   (45,192)   (2,961)
Net cash used in investing activities   (99,044)   (19,531)
           
Cash flows from financing activities:          
Distributions to common stockholders   (8,188)   (1,608)
Distributions to noncontrolling interests   (1,202)   (4,370)
Capital contributions from noncontrolling interests   578    4,281 
Borrowings on mortgages payable   43,225    5,497 
Repayments on mortgages payable   (694)   (313)
Repayments of line of credit   -    (7,571)
Payments of deferred financing fees   (466)   (1,527)
Net proceeds from issuance of common stock   131,313    43,977 
Net cash provided by financing activities   164,566    38,366 
           
Net increase in cash and cash equivalents  $72,370   $17,397 
           
Cash and cash equivalents at beginning of period  $23,059   $2,984 
           
Cash and cash equivalents at end of period  $95,429   $20,381 
Supplemental Disclosure of Cash Flow Information          
           
Cash paid during the period for interest  $5,000   $255 
Distributions payable – declared and unpaid  $1,068   $452 
Accrued offering costs  $-   $152 
Mortgages assumed upon property acquisitions  $-   $116,800 
Class A common stock issued for property acquisitions  $-   $15,188 
OP Units issued for property acquisition  $-   $4,100 

 

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, the Company was 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, the Company 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 prior to the IPO).

 

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

 

 

On May 22, 2015, the Company completed an underwritten shelf takedown offering (the “May 2015 Follow-On Offering”) of 6,348,000 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 $13.00 per share was announced on May 19, 2015. Net proceeds of the May 2015 Follow-On Offering were approximately $77.6 million after deducting underwriting discounts and commissions and offering costs.

 

As of June 30, 2015, the Company's portfolio consisted of interests in fifteen properties (eleven operating properties and four development properties). The Company’s fifteen properties are comprised of an aggregate of 4,624 units, comprised of 3,434 operating units and 1,190 units under development. As of June 30, 2015, these properties, exclusive of our development properties and Whetstone, a lease-up property, were approximately 95% 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 June 30, 2015, limited partners other than the Company owned approximately 3.40% of the Operating Partnership (1.40% is held by holders of limited partnership interest in the Operating Partnership (“OP Units”) and 2.00% 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 and are not consolidated in the Company’s financial statements.

 

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 joint ventures for consolidation in accordance with the provisions required by the of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810: Consolidation.

 

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 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 liability, consistent with debt discounts. 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 (Topic 606)” (“ASU 2014-09”). The updated standard is a new comprehensive revenue recognition model that requires revenue to be recognized in a manner that depicts the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In July 2015, the FASB voted to approve the deferral of the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company in the first quarter of the fiscal year ending December 31, 2018. Early adoption is permitted, but not earlier than the first quarter of the fiscal year ending December 31, 2017. The ASU allows for either full retrospective or modified retrospective adoption. The Company has not selected a transition method, and is currently evaluating the effect that ASU 2014-09 will have on the 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 that owned the Creekside property, 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 June 30, 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 and six months ended June 30, 2014 (amounts in thousands); there were no operations for the three and six months ended June 30, 2015 as the property was sold on March 28, 2014:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2015   2014   2015   2014 
Total revenues  $   $   $   $508 
Expenses                    
Property operating       (50)       (285)
Depreciation and amortization               (183)
Management fees       (5)       (8)
Interest, net               (149)
Loss on operations of rental property  $   $(55)  $   $(117)
Gain on sale of joint venture interest               1,006 
Loss on early extinguishment of debt               (880)
(Loss) Income from discontinued operations  $   $(55)  $   $9 

 

 9 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

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 six months ended June 30, 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 June 30, 2015, the Company was invested in eleven operating real estate properties and four 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.

 

 10 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Operating Properties   

 

 

Multifamily Community Name/Location

 

Number of

Units

  

Date

Built/Renovated (1)

  

Ownership

Interest

  

Average

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%   1,534    95%
Whetstone, Durham, NC (5)   204    2015        1,325    47%
Park & Kingston, Charlotte, NC   153    2014    96.00%   1,177    98%
Lansbrook Village/ Palm Harbor, FL   599    2004    76.81%   1,143    93%
ARIUM Grandewood/ Orlando, FL (6)   306    2005    95.00%   1,139    95%
Village Green of Ann Arbor/ Ann Arbor, MI   520    2013    48.61%   1,137    98%
Fox Hill, Austin , TX   288    2010    94.62%   1,077    94%
North Park Towers/ Southfield, MI (7)   313    2000    100.0%   1,052    95%
Springhouse at Newport News/ Newport News, VA   432    1985    75.00%   819    94%
Villas at Oak Crest/ Chattanooga, TN   209    1999    67.18%   813    98%
Total/Average   3,434             $1,156    95%

 

(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 June 30, 2015, excluding Whetstone which is still in lease-up. Total concessions for the three months ended June 30, 2015 amounted to approximately $77,000.

(3) Percent occupied is calculated as (i) the number of units occupied as of June 30, 2015, divided by (ii) total number of units, expressed as a percentage, excluding Whetstone which is still in lease-up.

(4) The MDA Apartments include 8,200 square feet of retail space. Average effective rent excluding the property’s retail space was $2,078.

(5) Whetstone is currently a preferred equity investment providing a stated investment return.

(6) ARIUM Grandewood was formerly called ARIUM Grand Lakes.

(7) This property is classified as held for sale as of June 30, 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 $2.8 million and $2.2 million for the three months ended June 30, 2015 and 2014, respectively, and $5.1 million and $3.4 million, for the six months ended June 30, 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 $0.9 million and $1.6 million for the three months ended June 30, 2015 and 2014, respectively, and $1.4 million and $1.6 million for the six months ended June 30, 2015 and 2014, respectively.

 

Development Properties

 

Multifamily Community Name/Location 

Number of

Units

  

Initial

Occupancy

 

Final Units to

be Delivered

  Pro Forma
Average Rent
(1)
 
               
Alexan CityCentre / Houston, TX   340   4Q 2016  4Q 2017  $2,144 
Alexan Southside Place / Houston, TX   269   2Q 2017  2Q 2018  $2,019 
Cheshire Bridge / Atlanta, GA   285   4Q 2016  2Q 2017  $1,559 
EOS / Orlando, FL (2)   296   3Q 2015  4Q 2015  $1,211 
Total/Average   1,190         $1,745 

 

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

(2) Formerly called UCF Orlando.

 

Note 5 – Acquisition of Real Estate

 

The following describes the Company’s significant acquisition activity during the six months ended June 30, 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 of $6.3 million 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 was 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.

 

In May 2015, the Company invested an additional $6.5 million, plus customary prorations, in equity in Park & Kingston, increasing the Company’s indirect ownership interest in the property from 46.95% to approximately 96.0%. The additional interests were purchased from Fund III, an affiliate of Bluerock.

  

 11 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Acquisition of Interest in Fox Hill

 

On March 26, 2015, the Company, through subsidiaries of its Operating Partnership, completed an investment of $10.2 million 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 was 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.

 

In May 2015, the Company invested an additional $1.1 million, plus customary prorations, in equity in Fox Hill, increasing the Company’s indirect ownership interest in the property from 85.27% to approximately 94.62%. The additional interests were purchased from Fund III, an affiliate of Bluerock.

 

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.

 

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 Grandewood, and Fox Hill, (collectively the "Recent Acquisitions"), had occurred on January 1, 2014 (amounts in thousands, except per share amounts). Park & Kingston is excluded from the pro forma information as the property was under development during 2014.

 

   Six Months Ended June 30,   Six Months Ended June 30, 
   2015   2014 
   As Reported   Pro-Forma
Adjustments
   Pro-Forma   As Reported   Pro-Forma
Adjustments
   Pro-Forma 
                         
Revenues  $19,505   $926   $20,431   $10,991   $9,607   $20,598 
Net income (loss)  $8,643   $1,137   $9,780   $(6,555)  $(3,882)  $(10,437)
Net income (loss) attributable to BRG  $2,731   $1,043   $3,774   $(5,583)  $(3,309)  $(8,892)
                               
Earnings (loss) per share, basic and diluted (1)  $0.19        $0.26   $(1.62)       $(2.58)

 

 

(1) Pro-forma earnings (loss) 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 consolidated statement of operations for the six months ended June 30, 2015 amounted to $12.4 million and $0.2 million, respectively.

 

 12 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 6 – Investments in Unconsolidated Real Estate Joint Ventures

 

Following is a summary of the Company’s ownership interests in the investments reported under the equity method of accounting. The carrying amount of the Company’s investments in unconsolidated real estate joint ventures as of June 30, 2015 and December 31, 2014 is summarized in the table below (amounts in thousands):

 

Property  June 30,
 2015
   December 31,
 2014
 
Villas at Oak Crest  $3,156   $3,170 
Alexan CityCentre   6,505    6,505 
EOS   3,629    3,629 
23Hundred@Berry Hill   57    4,906 
Alexan Southside Place   17,322    - 
Whetstone   12,231    - 
Cheshire Bridge   15,639    - 
Other   -    121 
Total  $58,539   $18,331 

 

The Company’s investments in Villas at Oak Crest, Alexan CityCentre, EOS, Alexan Southside Place, Whetstone and Cheshire Bridge represent preferred equity investments with the following stated returns:

 

   Current Pay
Annualized
   Accrued
Annualized
   Total
Annualized
 
Property  Preferred
Return
   Preferred
 Return
   Preferred
Return
 
Villas at Oak Crest   10.5%   4.5%   15.0%
Alexan CityCentre   15.0%       15.0%
EOS   15.0%       15.0%
Alexan Southside Place   15.0%       15.0%
Whetstone   15.0%       15.0%
Cheshire Bridge   15.0%       15.0%

 

The equity in income (loss) of the Company’s unconsolidated real estate joint ventures for the three and six months ended June 30, 2015 and 2014 is summarized below (amounts in thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
Property  2015   2014   2015   2014 
Villas at Oak Crest  $106   $114   $212   $114 
Alexan CityCentre   243        484     
Alexan Southside Place   424        686     
EOS   136        270     
Whetstone   206        206     
Cheshire Bridge   196        196     
The Estates at Perimeter/Augusta   (1)   (27)   (1)   (33)
Other   (15)       (28)    
Equity in earnings of unconsolidated joint venture  $1,295   $87   $2,025   $81 

 

Summary combined financial information for the Company’s investments in unconsolidated real estate joint ventures as of June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014, is as follows:

 

   June 30,
 2015
   December 31,
 2014
 
Balance Sheets:          
Real estate, net of depreciation  $114,153   $55,091 
Real estate, net of depreciation,  held for sale       31,334 
Other assets   23,374    1,193 
Other assets, held for sale   468    2,458 
Total assets  $137,995   $90,076 
           
Mortgages payable  $55,870   $19,820 
Mortgage payable, held for sale       23,569 
Other liabilities   3,340    2,812 
Other liabilities, held for sale   468    1,026 
Total liabilities  $59,678   $47,227 
Members’ equity   78,317    42,849 
Total liabilities and members’ equity  $137,995   $90,076 

 

 13 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
Operating Statement:                    
Rental revenues  $643   $1,189   $1,327   $1,823 
Operating expenses   (352)   (508)   (631)   (772)
Income before debt service, acquisition costs, and depreciation and amortization   291    681    696    1,051 
Interest expense, net   (197)   (345)   (377)   (532)
Acquisition costs   (65)      (66)    
Depreciation and amortization   (142)   (338)   (355)   (538)
Operating (loss)   (113)   (2)   (102)   (19)
Gain on sale   2        29,200     
Net (loss) income  $(111)  $(2)  $29,098   $(19)

 

Acquisition of Alexan Southside Place (formerly referred to as 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 Southside Place. Alexan Southside Place 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 $17.3 million has been funded as of June 30, 2015.

 

Alexan Southside Place 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 Southside Place property. The loan matures on April 7, 2019, and contains a one-year extension option, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty year amortization. The loan can be prepaid without penalty.

 

Acquisition of Whetstone Interests

 

On May 20, 2015, through BRG Whetstone Durham, 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 III, LLC, an affiliate of the Manager, and an affiliate of TriBridge Residential, LLC to acquire a 204-unit Class A apartment community located in Durham, North Carolina, to be known as Whetstone Apartments. The Company has made a capital commitment of $12.2 million to acquire 100% of the preferred equity interests in BRG Whetstone Durham, LLC of which $12.2 million has been funded as of June 30, 2015. The acquisition was partially funded by a bridge loan of approximately $25.2 million secured by the Whetstone Apartment property. The loan matures May 18, 2016 and bears interest on a floating basis based on LIBOR plus 2.0%. The loan can be prepaid without penalty. The Company provided certain standard scope non-recourse carveout guaranties in conjunction with the loan.

 

Acquisition of Cheshire Bridge Interests

 

On May 29, 2015, through BRG Cheshire, 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 III, LLC, an affiliate of the Manager, and an affiliate of Catalyst Development Partners II to develop a 285-unit Class A apartment community located in Atlanta, Georgia, to be known as Cheshire Bridge Apartments. The Company has made a capital commitment of $15.6 million to acquire 100% of the preferred equity interests in BRG Cheshire, LLC of which $15.6 million has been funded as of June 30, 2015.

 

 14 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 7 – Mortgages Payable

 

The following table summarizes certain information as of June 30, 2015 and December 31, 2014, with respect to the Company’s indebtedness (amounts in thousands). 

 

   Outstanding Principal   As of June 30, 2015 
Property  June 30, 2015   December 31, 2014   Interest Rate   Fixed/ Floating  Maturity Date
Springhouse at Newport News  $22,346   $22,515    5.66%  Fixed  January 1, 2020
Enders Place at Baldwin Park(1)   25,325    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   42,703    43,078    3.92%  Fixed  October 1, 2022
Lansbrook Village   43,628    42,357    4.40%  Blended (2)  March 31, 2018
ARIUM Grandewood   29,444    29,444    1.85%  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   243,001    200,469            
Fair value adjustments   743    874            
Total continuing operations   243,744    201,343            
North Park Towers - held for sale   11,500    11,500    5.65%  Fixed  January 6, 2024
Total  $255,244   $212,843            

 

(1) The principal includes a $17.3 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 $1.6 million that bears interest at a floating rate of three month LIBOR plus 3.00%, as of June 30, 2015, the additional advance had an interest rate of 3.31%.

(3) ARIUM Grandewood Senior Loan bears interest at a floating rate of 1.67% plus one month LIBOR. At June 30, 2015, the interest rate was 1.85%.

 

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 June 30, 2015, the Lansbrook Borrower has borrowed $1.6 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.

 

 15 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

As of June 30, 2015, contractual principal payments for the five subsequent years and thereafter are as follows (amounts in thousands):

 

Year  Total 
2015 (July 1-December 31)  $717 
2016   2,725 
2017   3,052 
2018   44,861 
2019   2,937 
Thereafter   200,209 
   $254,501 
Add: Unamortized fair value debt adjustment   743 
Total  $255,244 

 

The net book value of real estate assets providing collateral for these above borrowings were $350.2 million and $288.4 million at June 30, 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 June 30, 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 June 30, 2015 and December 31, 2014, the approximate fair value of mortgages payable were $259.5 million and $215.8 million, respectively, compared to the carrying value of $255.2 million and $212.8 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 June 30, 2015 and December 31, 2014, the Company has a corresponding payable to Fund II for this amount.

   

In May 2015, the Company invested an additional $6.5 million, plus customary prorations, in equity in Park & Kingston, increasing our indirect ownership interest in the property from 46.95% to approximately 96.0%. The additional interests were purchased from Fund III, an affiliate of Bluerock.

 

In May 2015, the Company invested an additional $1.1 million, plus customary prorations, in equity in Fox Hill, increasing our indirect ownership interest in the property from 85.27% to approximately 94.62%. The additional interests were purchased from Fund III, an affiliate of Bluerock.

 

As of March 31, 2014, the Company was externally managed by our Former Advisor pursuant to the Advisory Agreement. In connection with the completion of the IPO, the Company terminated our Advisory Agreement with our Former Advisor, and the Company entered into a new management agreement, (the “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.

 

 16 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Company pays 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 $0.7 million and $1.2 million for the three and six months ended June 30, 2015. The Company has amended the Management Agreement to provide that the base management fee can be payable in cash or LTIP Units, at the election of the Board. Base management fees of $0.7 million were expensed during the three months ended June 30, 2015, which will result in the issuance of approximately 55,800 LTIP Units during the third quarter of 2015, assuming a LTIP Unit price of $12.66 per unit, upon approval by the independent directors.  

 

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 caused the issuance of 67,837 LTIP Units on May 14, 2015. No incentive fees to the Manager were earned or expensed during the three months ended June 30, 2015.

 

Management fee expense of $0.2 million and $0.6 million was recorded as part of general and administrative expenses for the three and six months ended June 30, 2015 and $1.0 million 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 a price of $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 that began in April 2014, and 59,854 LTIP Units vested on April 30, 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 and six months ended June 30, 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.

 

 17 

 

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.

 

 18 

 

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 and $0.09 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 and six months ended June 30, 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 June 30, 2015 and December 31, 2014 (in thousands).

 

   June 30,
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   706    310 
Incentive fee   -    146 
Other   1    7 
Total payable to the Manager   707    463 
Total amounts payable to Former Advisor and Manager  $1,887   $1,643 

  

As of June 30, 2015 and December 31, 2014, we had $0.9 million and $0.3 million, respectively, in payables due to related parties other than our Manager and Former Advisor.

 

As of June 30, 2015 and December 31, 2014, we had $1.5 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.

 

 19 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
Net (loss) income from continuing operations attributable to common stockholders  $(582)  $(4,481)   2,731   $(5,591)
Dividends on restricted stock expected to vest   (5)   (2)   (7)   (4)
Basic net (loss) income from continuing operations attributable to common stockholders  $(587)  $(4,483)  $2,724   $(5,595)
Basic net (loss) income from discontinued operations attributable to common stockholders  $-   $(55)  $-   $9 
                     
Weighted average common shares outstanding(1)   16,353,209    5,823,296    14,461,064    3,452,032 
                     
Potential dilutive shares(2)           10,792     
Weighted average common shares outstanding and potential dilutive shares(1)   16,353,209    5,823,296    14,471,856    3,452,032 
                     
(Loss) income per common share, basic                    
Continuing operations  $(0.04)  $(0.77)  $0.19   $(1.62)
Discontinued operations  $-   $(0.01)  $-   $- 
   $(0.04)  $(0.78)  $0.19   $(1.62)
                     
(Loss) income per common share, diluted                    
Continuing operations  $(0.04)  $(0.77)  $0.19   $(1.62)
Discontinued operations  $-   $(0.01)  $-   $- 
   $(0.04)  $(0.78)  $0.19   $(1.62)

 

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)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 shares of Class A, B-1, B-2 and B-3, common shares and LTIP Units outstanding.

(2)Excludes 16,454 shares of common stock, for the three months ended June 30, 2015 and 5,933 and 6,199 shares of common stock, for the three and six months ended June 30, 2014, related to non-vested restricted stock, as the effect would be anti-dilutive.

 

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.

  

 20 

 

BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  

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.

 

The Company refers 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
  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.

 

Follow-On Equity Offerings

 

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.

 

On May 22, 2015, the Company completed an underwritten shelf takedown offering (the “May 2015 Follow-On Offering”) of 6,348,000 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 $13.00 per share was announced on May 19, 2015. Net proceeds of the May 2015 Follow-On Offering were approximately $77.6 million after deducting underwriting discounts and commissions and offering costs.

 

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 June 30, 2015, limited partners other than the Company owned approximately 3.40% of the Operating Partnership (1.40% is held by OP Unit holders and 2.00% 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.

 

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BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

Equity Incentive Plans

 

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. 

 

On May 28, 2015, the Company’s stockholders approved the amendment and restatement of the 2014 Individuals Plan, or the Amended Individuals Plan, and the 2014 Entities Plan, or the Amended Entities Plan (and together with the Amended Individuals Plan, the Amended 2014 Incentive Plans). The Amended 2014 Incentive Plans allow for the issuance of up to 475,000 shares of Class A common stock. The Amended 2014 Incentive Plans provide for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards.

 

A summary of the status of the Company’s non-vested shares as of June 30, 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 June 30, 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 June 30, 2015, there was $0.2 million 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 2.7 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.

 

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BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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.

 

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 monthly to the stockholders of record as of April 25, 2015, May 25, 2015 and June 25, 2015, which was paid in cash on May 5, 2015, June 5, 2015 and July 2, 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 April 25, 2015, and $0.096667 per share for the dividend paid to stockholders of record as of May 25, 2015, and 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.

 

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 Company has a dividend reinvestment plan that allows for participating stockholders to have their dividend distributions automatically invested in additional Class A common shares based on the average price of the shares on the investment date. The Company plans to issue Class A common shares to cover shares required for investment.

 

 Distributions declared and paid for the three and six months ended June 30, 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 first quarter 2015  $4,006   $3,560 
Second Quarter          
Class A Common Stock  $4,852   $4,236 
Class B-1 Common Stock   -    - 
Class B-2 Common Stock   103    103 
Class B-3 Common Stock   103    103 
OP Units   82    82 
LTIP Units   110    104 
Total second quarter 2015  $5,250   $4,628 
Total six months ended June 30, 2015  $9,256   $8,188 

 

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.

 

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.

 

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BLUEROCK RESIDENTIAL GROWTH REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 14 – Subsequent Events

 

Declaration of Dividends

 

On July 10, 2015, the Board declared monthly dividends for the third 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 July 25, 2015, August 25, 2015 and September 25, 2015, which will be paid in cash on August 5, 2015, September 5, 2015 and October 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: $0.096667 per share for the dividend paid to stockholders of record as of July 25, 2015, $0.096667 per share for the dividend paid to stockholders of record as of August 25, 2015, and $0.096666 per share for the dividend paid to stockholders of record as of September 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 June 30, 2015 (amounts in thousands):

  

Shares  Declaration
Date
  Record Date  Date Paid  Distributions
per Share
   Total
Distribution
 
Class A Common Stock  April 10, 2015  June 25, 2015  July 2, 2015  $0.096667   $1,822 
Class B-2 Common Stock  April 10, 2015  June 25, 2015  July 2, 2015  $0.096667   $34 
Class B-3 Common Stock  April 10, 2015  June 25, 2015  July 2, 2015  $0.096667   $34 
OP Units  April 10, 2015  June 25, 2015  July 2, 2015  $0.096667   $27 
LTIP Units  April 10, 2015  June 25, 2015  July 2, 2015  $0.096667   $39 
                    
Class A Common Stock  July 10, 2015  July 25, 2015  August 5, 2015  $0.096667   $1,822 
Class B-2 Common Stock  July 10, 2015  July 25, 2015  August 5, 2015  $0.096667   $34 
Class B-3 Common Stock  July 10, 2015  July 25, 2015  August 5, 2015  $0.096667   $34 
OP Units  July 10, 2015  July 25, 2015  August 5, 2015  $0.096667   $27 
LTIP Units  July 10, 2015  July 25, 2015  August 5, 2015  $0.096667   $66 
Total                $3,939 

 

Equity Incentive Plans - LTIP Grants

 

On July 2, 2015, the Company issued a grant of certain long-term incentive plan units, or LTIP Units, under the Amended 2014 Incentive Plans to the Company’s external manager, BRG Manager, LLC. The equity grant consisted of 283,390 LTIP Units. The LTIP Units will vest ratably over three years, subject to certain terms and conditions. The LTIP Units may be convertible into OP Units under certain conditions and then may be settled in shares of the Company’s Class A common stock. The LTIP Units provide for the payment of distribution equivalents at the same time distributions are paid to holders of the Company’s Class A common stock.

 

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.

  

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.

 

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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;
     
  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;

 

 25 

 

 

  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 June 30, 2015, our portfolio consisted of interests in fifteen properties (eleven operating properties and four development properties). The fifteen properties are comprised of an aggregate of 4,624 units, comprised of 3,434 operating units and 1,190 units under development. As of June 30, 2015, these properties, exclusive of our development properties and Whetstone, a lease-up property, were approximately 95% 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 our 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.

 

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.

 

 26 

 

 

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.

 

On May 22, 2015, we completed an underwritten shelf takedown offering (the “May 2015 Follow-On Offering”) of 6,348,000 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 $13.00 per share was announced on May 19, 2015. Net proceeds of the May 2015 Follow-On Offering were approximately $77.6 million after deducting underwriting discounts and commissions and offering costs.

 

Our total stockholders’ equity increased $126.3 million from $92.4 million as of December 31, 2014 to $218.7 million as of June 30, 2015. The increase in our total stockholders’ equity is primarily attributable to the January 2015 Follow-On Offering and the May 2015 Follow-On Offering, which increased our stockholders’ equity by approximately $131.3 million, our net income of $2.7 million, and was partially offset by dividends declared of $9.1 million, during the six months ended June 30, 2015.

 

Other Significant Developments

 

During the six months ended June 30, 2015, we made three convertible preferred investments, acquired two stabilized properties, and disposed of one joint venture equity interest as discussed below:

 

Acquisition of Alexan Southside Place (formerly referred to as Alexan Blaire House) Interests

 

On January 12, 2015, through a wholly-owned subsidiary of its Operating Partnership, BRG Southside, LLC, we 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 Southside Place. Alexan Southside Place 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 $17.3 million has been funded as of June 30, 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.

 

On April 7, 2015, we, 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 Southside Place property. The loan matures on April 7, 2019, and contains a one-year extension option, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty year amortization. The loan can be prepaid without penalty.

 

Acquisition of Interest in Park & Kingston

 

On March 16, 2015, we, 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”). Our indirect ownership interest in Park & Kingston was 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.

 

We also have 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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In May 2015, we invested an additional $6.5 million, plus customary prorations, in equity in Park & Kingston, increasing our indirect ownership interest in the property from 46.95% to approximately 96.0%. The additional interests were purchased from Fund III, an affiliate of Bluerock.

 

Acquisition of Interest in Fox Hill

 

On March 26, 2015, we, 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”). Our indirect ownership in Fox Hill was 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.

 

In May 2015, we invested an additional $1.1 million, plus customary prorations, in equity in Fox Hill, increasing our indirect ownership interest in the property from 85.27% to approximately 94.62%. The additional interests were purchased from Fund III, an affiliate of Bluerock.

 

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

 

On January 14, 2015, we, 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 our 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 our pro rata share of gain is $5.3 million before disposition expenses of $0.1 million.

 

Acquisition of Whetstone Interests

 

On May 20, 2015, through BRG Whetstone Durham, LLC, a wholly-owned subsidiary of its Operating Partnership, we made a convertible preferred equity investment in a multi-tiered joint venture along with Fund III, LLC, an affiliate of the Manager, and an affiliate of TriBridge Residential, LLC to develop a 204-unit Class A apartment community located in Durham, North Carolina, to be known as Whetstone Apartments. We have made a capital commitment of $12.2 million to acquire 100% of the preferred equity interests in BRG Whetstone Durham, LLC of which $12.2 million has been funded as of June 30, 2015. The acquisition was partially funded by a bridge loan of approximately $25.2 million secured by the Whetstone Apartment property. The loan matures May 18, 2016 and bears interest on a floating basis based on LIBOR plus 2.0%. The loan can be prepaid without penalty. We provided certain standard scope non-recourse carveout guaranties in conjunction with the loan.

 

Acquisition of Cheshire Bridge Interests

 

On May 29, 2015, through BRG Cheshire, LLC, a wholly-owned subsidiary of its Operating Partnership, we made a convertible preferred equity investment in a multi-tiered joint venture along with Fund III, LLC, an affiliate of the Manager, and an affiliate of Catalyst Development Partners II to develop a 285-unit Class A apartment community located in Atlanta, Georgia, to be known as Cheshire Bridge Apartments. We have made a capital commitment of $15.6 million to acquire 100% of the preferred equity interests in BRG Cheshire, LLC of which $15.6 million has been funded as of June 30, 2015.

 

Held for Sale – North Park Towers

 

North Park Towers is under contract to sell for $18.2 million. Closing of the transaction is subject to the satisfactory completion of the purchaser’s due diligence and other customary closing conditions, and there is no assurance that the conditions will be satisfied or that the sale will occur as contemplated.

  

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Results of Operations

 

The following is a summary of our stabilized operating real estate investments as of June 30, 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%   94%
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%   98%
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   599    76.8%   93%
ARIUM Grandewood  11/4/2014   306    95.0%   95%
Park & Kingston  3/16/2015   153    96.0%   98%
Fox Hill  3/26/2015   288    94.6%   94%
Total      3,230         95%

 

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

(2) Includes an additional 26 units acquired since the original acquisition in May 2014 of which 11 units were acquired in the six months ended June 30, 2015.

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Revenue

 

Net rental income increased $2.5 million, or 33%, to $9.9 million for the three months ended June 30, 2015 as compared to $7.4 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 Grandewood, 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 100%, to $0.6 million for the three months ended June 30, 2015 as compared to $0.3 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 $1.0 million, or 29%, to $4.4 million for the three months ended June 30, 2015 as compared to $3.4 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 41.2% of revenue for the three months ended June 30, 2015, from 43.3% of revenue in the same prior year period.

 

 General and administrative expenses amounted to $0.7 million for the three months ended June 30, 2015 as compared to $0.7 million for the same prior year period. Excluding non-cash amortization of LTIP Units of $0.2 million and $0.3 million for the three months ended June 30, 2015 and 2014, respectively, general and administrative expenses were $0.5 million, or 4.9% of revenues for the three months ended June 30, 2015 as compared to $0.4 million, or 5.0% of revenues, for the same prior year period.

 

Management fees increased to $0.7 million for the three months ended June 30, 2015 as compared to $0.2 million for the same prior year period. This was primarily due to an increase in equity as a result of the October 2014 Follow-On Offering, the January 2015 Follow-On Offering and the May 2015 Follow-On Offering. Base management fees of $0.7 million were paid in LTIP Units for the quarter ended June 30, 2015 in lieu of cash.

 

Acquisition costs decreased to $0.2 million for the three months ended June 30, 2015 as compared to $3.1 million for the same prior year period. This decrease was primarily due to the acquisition of the numerous properties during the second quarter of 2014 after the IPO as compared to the acquisition of preferred equity interests in Whetstone and Cheshire Bridge during the three months ended June 30, 2015.

 

Depreciation and amortization expenses was $3.7 million for the three months ended June 30, 2015 as compared to $3.8 million for the same prior year period.

 

Other Income and Expense

 

Other income and expenses amounted to an expense of $1.4 million for the three months ended June 30, 2015 as compared to other expense of $1.9 million same prior year period. This was primarily due to an increase of $1.2 million in income from unconsolidated joint venture interests due to an additional four investments, partially offset by an increase in interest expense, net, of $0.7 million, as the result of the increase in mortgages payable resulting from the acquisition of interests in the properties mentioned above.

 

Income from Discontinued Operations

 

Loss from discontinued operations was $0.06 million for the three months ended June 30, 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.

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Revenue

 

Net rental income increased $8.0 million, or 75%, to $18.6 million for the six months ended June 30, 2015 as compared to $10.6 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 Grandewood, and two properties during the first quarter of 2015, Park & Kingston and Fox Hill, offset by the sale of Berry Hill.

 

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Other property revenue increased $0.5 million, or 125%, to $0.9 million for the six months ended June 30, 2015 as compared to $0.4 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 $3.3 million, or 67%, to $8.2 million for the six months ended June 30, 2015 as compared to $4.9 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 42.2% of revenue for the six months ended June 30, 2015, from 44.9% of revenue in the same prior year period.

 

 General and administrative expenses amounted to $1.7 million for the six months ended June 30, 2015 as compared to $1.3 million for the same prior year period. Excluding non-cash amortization of LTIP Units of $0.7 million and $0.4 million for the six months ended June 30, 2015 and 2014, respectively, general and administrative expenses were $1.0 million, or 5.0% of revenues for the six months ended June 30, 2015 as compared to $0.9 million, or 8.2% of revenues, for the same prior year period.

 

Management fees increased to $2.2 million for the six months ended June 30, 2015 as compared to $0.3 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, the January 2015 Follow-On Offering and the May 2015 Follow-On Offering. Base management fees of $0.7 million were paid in LTIP Units for the six months ended June 30, 2015 in lieu of cash.

 

Acquisition costs decreased to $0.7 million for the six months ended June 30, 2015 as compared to $3.2 million for the same prior year period. This decrease was primarily due to the acquisition of the numerous properties during the second quarter of 2014 after the IPO as compared to the to the acquisition of the Park & Kingston and Fox Hill properties and the acquisition of preferred equity interests in Alexan Southside Place, Whetstone and Cheshire Bridge during the six months ended June 30, 2015.

 

Depreciation and amortization expenses increased to $6.5 million for the six months ended June 30, 2015 as compared to $4.8 million for the same prior year period. This increase was primarily due to additional depreciation expense related to the acquisition of interests in the properties noted above.

 

Other Income and Expense

 

Other income and expenses amounted to income of $8.4 million for the six months ended June 30, 2015 as compared to an expense of $3.1 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 in 2015 related to Berry Hill, an increase of $1.9 million in income from unconsolidated joint venture interests due to an additional four investments, partially offset by an increase in interest expense, net, of $1.8 million, as the result of the increase in mortgages payable resulting from the acquisition of interests in the properties mentioned above.

 

Income from Discontinued Operations

 

Income from discontinued operations was $0.01 million for the six months ended June 30, 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 June 30, 2015 and 2014, the same store properties included properties owned at April 1, 2014, excluding the Berry Hill property, which was under construction. Our same store properties for the three months ended June 30, 2015 and 2014 were Springhouse at Newport News, Enders Place at Baldwin Park, Village Green of Ann Arbor, North Park Towers and MDA Apartments. Our non-same store properties for the same period were The Estates at Perimeter/Augusta, The Reserve at Creekside Village, 23Hundred@Berry Hill, Lansbrook Village, ARIUM Grandewood, Park & Kingston and Fox Hill. Our same store properties for the six months ended June 30, 2015 and 2014 were Springhouse at Newport News, Enders Place at Baldwin Park and MDA Apartments.  Our non-same store properties for the same period 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 Grandewood, Park & Kingston and Fox Hill.

  

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The Estates at Perimeter/Augusta, Berry Hill, and Grove were accounted for under the equity method during the three months June 30, 2015, but are reflected in our table of net operating income as if they were consolidated. For the three months ended June 30, 2015, the components of non-same store property revenues, property expenses and net operating loss represented by these properties were $0.0 million, $0.03 million and $0.03 million, respectively. The Estates at Perimeter/Augusta was accounted for under the equity method and Creekside and Hillsboro were accounted for as discontinued operations during the three months ended June 30, 2014. For the three months ended June 30, 2014, the components of non-same store property revenues, property expenses and net operating income represented by these properties were $0.7 million, $0.3 million and $0.4 million, respectively. The Estates at Perimeter/Augusta, Berry Hill, and Grove were accounted for under the equity method during the six months June 30, 2015, but are reflected in our table of net operating income as if they were consolidated. For the six months ended June 30, 2015, the components of non-same store property revenues, property expenses and net operating income represented by these properties were $0.2 million, $0.05 million and $0.1 million, respectively. The Estates at Perimeter/Augusta was accounted for under the equity method and Creekside and Hillsboro were accounted for as discontinued operations during the six months ended June 30, 2014. For the six months ended June 30, 2014, the components of non-same store property revenues, property expenses and net operating income represented by these properties were $1.8 million, $0.8 million, and $1.0 million, 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 and six months ended June 30, 2015 and 2014:

 

   Three Months Ended
June 30,
   Change 
   2015   2014   $   % 
Property Revenues                    
Same Store  $5,903   $5,572   $331    5.9%
Non-Same Store   4,568    2,852    1,716    60.2%
Total property revenues   10,471    8,424    2,047    24.3%
                     
Property Expenses                    
Same Store   2,260    2,270    (10)   -0.4%
Non-Same Store   2,114    1,367    747    54.6%
Total property expenses   4,374    3,637    737    20.3%
                     
Same Store NOI   3,643    3,302    341    10.3%
Non-Same Store NOI   2,454    1,485    969    65.3%
Total NOI(1)  $6,097   $4,787   $1,310    27.4%

 

   Six Months Ended
June 30,
   Change 
   2015   2014   $   % 
Property Revenues                    
Same Store  $6,440   $6,039   $401    6.6%
Non-Same Store   13,215    6,753    6,462    95.7%
Total property revenues   19,655    12,792    6,863    53.7%
                     
Property Expenses                    
Same Store   2,438    2,485    (47)   -1.9%
Non-Same Store   5,811    3,210    2,601    81.0%
Total property expenses   8,249    5,695    2,554    44.8%
                     
Same Store NOI   4,002    3,554    448    12.6%
Non-Same Store NOI   7,404    3,543    3,861    109.0%
Total NOI(1)  $11,406   $7,097   $4,309    60.7%

 

(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 June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Same store NOI for the three months ended June 30, 2015 increased by 10.3% to $3.6 million from $3.3 million for the 2014 period. There was a 5.9% increase in same store property revenues as compared to the 2014 period, primarily attributable to a 3.8% increase in average rental rates per month and a 60 basis point increase in average occupancy. Same store expenses remained flat at $2.3 million compared to the prior year period.

 

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.

 

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Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Same store NOI for the six months ended June 30, 2015 increased by 12.6% to $4.0 million from $3.6 million for the 2014 period. There was a 6.6% increase in same store property revenues as compared to the 2014 period, primarily attributable to a 2.2% increase in average rental rates per month, the acquisition of 22 additional units at our Enders property, and a 140 basis point increase in average occupancy. In addition, same store expenses decreased 1.9% compared to prior year period primarily as a result of a decrease in utilities and insurance, offset by an increase in taxes as a result of rising assessed property values from municipalities.

 

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 (loss) income, as computed in accordance with GAAP for the periods presented (amounts in thousands):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2015   2014   2015   2014 
Net operating income                    
Same store  $3,643   $3,302   $4,002   $3,554 
Non-same store   2,454    1,485    7,404    3,543 
Total net operating income   6,097    4,787    11,406    7,097 
Less:                    
Interest expense   2,676    2,209    5,041    3,481 
Total property income   3,421    2,578    6,365    3,616 
Less:                    
Noncontrolling interest pro-rata share of property income   941    1,318    1,877    2,011 
Other (income) loss related to JV/MM entities   36    30    53    39 
Pro-rata share of properties’ income   2,444    1,230    4,435    1,566 
Less pro-rata share of:                    
Depreciation and amortization   2,647    2,225    4,559    2,700 
Amortization of non-cash interest expense   71    (36)   96    (8)
Line of credit interest, net       4        191 
Asset management and oversight fees   701    533    2,120    658 
Acquisition and disposition costs   210    2,852    685    3,339 
Corporate operating expenses   732    361    1,639    890 
Add pro-rata share of:                    
Other income   51    72    68    72 
Equity in operating earnings of unconsolidated joint ventures   1,286    101    2,005    101 
Gain on sale of joint venture interest, net of fees   (2)       5,322    448 
Net (loss) income attributable to common stockholders  $(582)  $(4,536)  $2,731   $(5,583)

 

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.

 

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We believe the properties underlying the Company’s real estate investments are performing well and had a portfolio-wide debt service coverage ratio of 1.99x and occupancy of 95% at June 30, 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.

 

On May 22, 2015, the Company completed an underwritten shelf takedown offering (the “May 2015 Follow-On Offering”) of 6,348,000 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 $13.00 per share was announced on May 19, 2015. Net proceeds of the May 2015 Follow-On Offering were approximately $77.6 million after deducting underwriting discounts and commissions and offering costs.

 

The net proceeds of our IPO, the October 2014 Follow-On Offering, the January 2015 Follow-On Offering and the May 2015 Follow-On Offering (collectively 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 have made or 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 June 30, 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 June 30, 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 June 30, 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 June 30, 2015, we own interests in six 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 June 30, 2015, we owned indirect equity interests in fifteen real estate properties (eleven operating properties and four development properties), nine of which are consolidated for reporting purposes.  During the six months ended June 30, 2015, net cash provided by operating activities was $6.8 million.  After the net income of $8.6 million was reduced for $3.3 million of non-cash items, net cash provided by operating activities consisted of the following:

 

  Increase in accounts payable and accrued liabilities of $2.1 million;
     
  Increase in our payables due to affiliates of $1.0 million; and offset by an
     
  Increase in accounts receivable and other assets of $1.6 million.

 

Cash Flows from Investing Activities

 

During the six months ended June 30, 2015, net cash used in investing activities was $99.0 million, primarily due to the following:

 

  $67.0 million used in acquiring consolidated real estate investments;
     
  $45.2 million used in acquiring an investment in an unconsolidated joint venture;
     
  $1.2 million used on capital expenditures;
     
  $7.9 million used on purchases of interests from noncontrolling members;
     
  Partially offset by a decrease of $6.6 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 six months ended June 30, 2015, net cash provided by financing activities was $164.6 million, primarily due to the following:

 

  $131.3 million raised in our January and May 2015 Follow-On Offerings on January 20, 2015 and May 22, 2015, respectively;
     
  net borrowings of $43.2 million on mortgages payable;
     
  $0.6 million increase in capital contributions from noncontrolling interests;
     
  partially offset by $1.2 million in distributions paid to our noncontrolling interests;
     
  $8.2 million paid in cash distributions paid to stockholders;
     
  $0.4 million increase in deferred financing costs; and
     
  $0.7 million of repayments of our mortgages payable. 

 

Capital Expenditures

 

The following table summarizes our total capital expenditures for the three and six months ended June 30, 2015 and 2014 (amounts in thousands):

 

   For the six months ended June 30, 
   2015   2014 
New development  $-   $1,902 
Redevelopment/renovations   622    319 
Routine capital expenditures   557    259 
Total capital expenditures  $1,179   $2,480 

 

 34 

 

 

The majority of our capital expenditures during the six months ended June 30, 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 and six months ended June 30, 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).

 

During the three months ended June 30, 2015, we incurred $0.2 million of acquisition expense and no disposition expense, of which $0.2 million was our pro rata share of the expense. During the six months ended June 30, 2015, we incurred $0.7 million of acquisition expense and $0.7 million of disposition expense, of which $0.7 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 and six months ended June 30, 2015 and 2014 (in thousands).

 

We have acquired interests in eight additional properties subsequent to March 31, 2014 and sold three properties that were owned during the quarter ended June 30, 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   Six Months Ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
Net (loss) income attributable to common stockholders  $(582)  $(4,536)  $2,731   $(5,583)
Common stockholders pro-rata share of:                    
Real estate depreciation and amortization(1)   2,647    2,225    4,559    2,700 
Loss (gain) on sale of joint venture interests   2        (5,322)   (448)
FFO  $2,067   $(2,311)  $1,968   $(3,331)
Common stockholders pro-rata share of:                    
 Amortization of non-cash interest expense (income)   72    (36)   95    (8)
Acquisition and disposition costs   210    2,852    685    3,339 
Normally recurring capital expenditures(2)   (184)   (71)   (298)   (90)
Non-cash equity compensation   927    337    2,292    351 
AFFO  $3,092   $771   $4,742   $261 
Weighted average common shares outstanding   16,353,209    5,823,296    14,461,064    3,452,032 

 

(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.

 

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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 was 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.

 

On July 10, 2015, the Board declared monthly dividends for the third 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 July 25, 2015, August 25, 2015 and September 25, 2015, which will be paid in cash on August 5, 2015, September 5, 2015 and October 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: $0.096667 per share for the dividend paid to stockholders of record as of July 25, 2015, $0.096667 per share for the dividend paid to stockholders of record as of August 25, 2015, and $0.096666 per share for the dividend paid to stockholders of record as of September 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.

 

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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.

 

Subsequent Events

 

Other than the items disclosed in Note 14, “Subsequent Events” to our interim Consolidated Financial Statements for the period ended June 30, 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 June 30, 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 June 30, 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 six months ended June 30, 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 June 30, 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

 

10.1 Assignment Agreement by and between Bluerock Real Estate, L.L.C. and BRG Ashton NC, LLC, dated May 12, 2015
   
10.2 Purchase Agreement by and between AR I Borrower, LLC and Bluerock Real Estate, L.L.C. dated May 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 June 30, 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:  August 11, 2015   /s/ R. Ramin Kamfar
      R. Ramin Kamfar
      Chief Executive Officer and President
      (Principal Executive Officer)

 

DATE:  August 11, 2015   /s/ Christopher J. Vohs
      Christopher J. Vohs
      Chief Accounting Officer and Treasurer
      (Principal Financial Officer, Principal Accounting Officer)

 

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(Back To Top)

Section 2: EX-10.1 (EXHIBIT 10.1)

 

Exhibit 10.1

 

ASSIGNMENT OF RIGHTS

 

(Ashton Reserve, Charlotte)

 

THIS ASSIGNMENT AGREEMENT (this “Assignment”) is made as of the 12th day of May, 2015, by and between BLUEROCK REAL ESTATE, L.L.C. (the “Assignor”) and BLUEROCK RESIDENTIAL GROWTH REIT, INC., through its subsidiary, BRG ASHTON NC, LLC (the “Assignee”).

 

WITNESSETH:

 

WHEREAS, AR I Borrower, LLC (“ARIB”) and Assignor entered into that certain Purchase and Sale Agreement and Escrow Instructions, joined in by AR Owner, LLC (“ARO”) (the “Purchase Contract”) to (i) acquire the Phase I Property (as defined in the Purchase Contract) and (ii) upon closing on the Phase I Property, take an assignment of ARO’s Purchase and Sale Agreement for the Phase II Property (as defined in the Purchase Contract) to take property (the “Property”); and

 

WHEREAS, Assignor desires to assign to Assignee all of its right, title and interest in, to and under the Purchase Contract.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Assignor hereby assigns to the Assignee, all of its right, title and interest in, to and under the Purchase Contract, and Assignee hereby accepts the same and assumes all of Assignor’s obligations under the Purchase Contract.

 

The recitals contained above are hereby incorporated herein.

 

[SIGNATURE PAGE FOLLOWS]

 

 

 

  

IN WITNESS WHEREOF, the parties hereto have caused this Assignment as of the day and year written above.

 

  ASSIGNOR:
  BLUEROCK REAL ESTATE, L.L.C.,
       
    By:  /s/ Jordan Ruddy
    Name: Jordan Ruddy
    Its: President
 
  ASSIGNEE:
 

BRG ASHTON NC, LLC,

a Delaware limited liability company

 
 
    By: BLUEROCK RESIDENTIAL HOLDINGS, L.P., Its sole member
         
      By:  /s/ Michael Konig
      Name: Michael Konig
      Its: COO and General Counsel

 

 

(Back To Top)

Section 3: EX-10.2 (EXHIBIT 10.2)

 

Exhibit 10.2

 

PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS

 

Between

 

AR I BORROWER, LLC

a Delaware limited liability company

 

(“Seller”)

 

and

 

BLUEROCK REAL ESTATE, L.L.C.

a Delaware limited liability company

(as the “Purchaser”)

 

Covering

 

Real property located at 10320 Grobie Way, Charlotte, North Carolina 28216,

known as Ashton Reserve at Northlake Phase I

 

 

 

 

PURCHASE AND SALE AGREEMENT
AND ESCROW INSTRUCTIONS

 

This PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS (this “Agreement”) is entered into as of May 12, 2015 (“Agreement Date”), by and between AR I BORROWER, LLC, a Delaware limited liability company (“Seller”) and BLUEROCK REAL ESTATE, L.L.C., a Delaware limited liability company (“Purchaser”), and is joined in as to certain matters by AR OWNER, LLC, a Delaware limited liability company (“AR Owner”).

 

RECITALS

 

A.           Seller is the fee owner of that certain real property located at 10320 Grobie Way, Charlotte, Mecklenburg County, North Carolina 28216, known as Ashton Reserve at Northlake Phase I, as more particularly described in Exhibit A attached hereto (the “Phase I Land”) and made a part hereof, and the improvements (the “Phase I Improvements”) thereon. The Phase I Land and the Phase I Improvements are sometimes hereafter referred to collectively as the “Phase I Real Property.”

 

B.           Seller is also the owner of the personal property more particularly described in Exhibit B attached hereto and made a part hereof (any therein being hereinafter collectively referred to as the “Phase I Personal Property”).

 

C.           Seller is also the landlord or lessor in, to and under the agreements listed on the rent roll attached hereto as Exhibit C and made a part hereof (the “Phase I Rent Roll”), or any such agreements hereafter executed by Seller in accordance with the terms of this Agreement, pursuant to which any portion of the Phase I Land or Phase I Improvements is used or occupied by anyone other than Seller (the property described in this clause (C) being herein referred to collectively as the “Phase I Leases”).

 

D.           Seller is also the holder of, or the Phase I Property benefits from, various intangible rights related to the Phase I Real Property and Phase I Personal Property, including books, records, tenant files, plans, specifications, diagrams, building permits, certificates of occupancy, warranties, guaranties and bonds and licenses and permits relating to the ownership and operation of the Phase I Real Property and Phase I Personal Property (collectively, the “Phase I Plans, Licenses and Permits”).

 

D.           Seller is also the obligee under certain service, supply, maintenance, and like agreements affecting the Phase I Property, which agreements are listed and described on Exhibit D attached hereto (collectively, the “Phase I Contracts”) and made a part hereof. The Phase I Real Property, the Phase I Personal Property, the Phase I Leases, the Phase I Plans, Licenses and Permits and the Phase I Contracts are sometimes hereafter referred to collectively as the “Phase I Property.”

 

E.           Seller is a party to a loan with SunLife Assurance Company of Canada, a Canadian corporation (“Existing Lender”), evidenced by a Promissory Note dated November 22, 2013 (the “Note”) given by Seller to the order of Existing Lender, which is secured by that certain Deed of Trust, Security Agreement and Fixture Filing dated of even date therewith (the “Trust Deed”), used to finance Seller’s acquisition of the Phase I Property (the “Existing Loan”).

 

 

 

 

F.           AR Owner, the sole member of Seller, is the purchaser under that certain Purchase and Sale Agreement dated October 31, 2013, as amended (the “Phase II Purchase Contract”) with Northlake Investors 288, LLC, an Alabama limited liability company, as seller (the “Phase II Seller”) pursuant to which AR Owner has contracted to acquire that certain real property and improvements constructed thereon located immediately adjacent to the Phase I Property and known as Ashton Reserve at Northlake Phase II (the “Phase II Property”).

 

G.           Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser, all of the Phase I Property, in accordance with the terms and conditions of this Agreement. In connection with such sale, AR Owner has also agreed to assign to Purchaser or Purchaser’s designee AR Owner’s rights under the Phase II Purchase Contract, on and subject to the terms and conditions of this Agreement.

 

AGREEMENT

 

Now, therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

1.           PURCHASE AND SALE OF PHASE I PROPERTY.

 

Subject to the terms and conditions herein set forth, Seller agrees that it will sell to Purchaser, and Purchaser agrees that it will acquire from Seller, on the Closing Date (as defined below), the Phase I Property. The purchase price for the Phase I Property shall be equal to Forty-Four Million Seven Hundred Fifty Thousand and 00/100 Dollars ($44,750,000.00), minus the Existing Loan Balance, in cash (the “Purchase Price”), payable in the manner set forth in Section 2 below.

 

2.           PURCHASE PRICE; DEPOSIT; OPENING OF ESCROW

 

The Purchase Price shall be paid as follows:

 

 2 
 

 

2.1           Deposit. No later than three (3) business days after the Agreement Date, Purchaser shall deposit with Calloway Title & Escrow, L.L.C. (with the address set forth in Section 14.3); attention: S. Marcus Calloway (“Escrow Holder”) in cash or other immediately available funds the sum of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00) (the “Initial Deposit”). Not later than the expiration of the Due Diligence Period (as hereinafter defined), if Purchaser provides Seller with the Notice to Proceed described in Section 5.3, Purchaser shall deposit with Escrow Holder in cash or other immediately available funds an additional deposit of Five Hundred Thousand and 00/100 Dollars ($500,000.00) (the “Second Deposit”). Escrow Holder shall place the Initial Deposit (and the Second Deposit, if made) into a segregated interest bearing account, and all interest thereon shall accrue for the benefit of the Purchaser. For purposes of this Agreement, “Deposit” means the Initial Deposit and, if and when paid, the Second Deposit. Notwithstanding anything to the contrary in this Agreement, the Initial Deposit shall be refundable to Purchaser for any reason prior to the expiration of the Due Diligence Period; provided, however, that after the expiration of the Due Diligence Period, the Deposit shall only be refundable to Purchaser in the event of (x) the failure of any of Purchaser’s Conditions Precedent to Closing set forth in Section 8, (y) a default by Seller or AR Owner hereunder, or (z) in connection with any other express provision of this Agreement. All interest earned on the Deposit shall not become part of the Deposit but rather shall be paid to Purchaser as it directs.

 

2.2           Purchase Price. At Closing the Purchaser shall deposit with Escrow Holder the full amount of the Purchase Price, as such amount may be increased or decreased by prorations, credits and other adjustments as herein provided, in cash, by wire transfer or in other immediately available funds no later than the Closing Date, and, in consideration of the AR Owner’s delivery of the Phase II Purchase Contract Assignment, including, without limitation, AR Owner's right, title and interest in and to the $750,000 earnest money deposit under the Phase II Contract, Purchaser shall pay to AR Holder by causing Escrow Holder to release to AR Owner the Purchaser's interest in the Deposit. For avoidance of doubt, the Deposit shall not be credited in favor of Purchaser against the Purchase Price at Closing but shall be paid to Seller by Escrow Holder at Closing (i.e. in addition to the Purchase Price) as contemplated in the manner above.

 

2.3           Opening of Escrow. Concurrently with the mutual execution of this Agreement (or as soon thereafter as reasonably possible) an escrow (“Escrow”) shall be established with Escrow Holder. For purposes of this Agreement, the “Opening of Escrow” shall mean for all purposes the Agreement Date. A fully executed copy of this Agreement shall serve as escrow instructions to Escrow Holder, and Escrow Holder shall be and is hereby authorized and instructed to deliver pursuant to the terms of this Agreement the documents and monies to be deposited into the Escrow.

 

3.          EXISTING LENDER APPROVAL OF SALE.

 

3.1           Existing Loan. For purposes of this Agreement, the principal balance owing Existing Lender pursuant to the Note as of the Closing Date is hereafter referred to as the “Existing Loan Balance.

  

 3 
 

 

3.2           Existing Loan Approval Contingency.

 

3.2.1       Consent Requirements; Selling Parties Release. Under the terms of the Trust Deed and the other documents relating to the Existing Loan (collectively, the “Existing Loan Documents”), Existing Lender’s consent to (i) the sale of the Phase I Property to Purchaser, and (ii) the assumption of the Existing Loan by Purchaser (collectively, the “Consent Requirements”) must be obtained prior to Closing or Seller will be in default under the Trust Deed. Additionally, in connection with the transaction that will be permitted by the Consent Requirements, Seller requires that Existing Lender consent to the release of Seller (and those acting and/or signing on behalf of Seller, including applicable guarantors) from all liabilities relating to the Existing Loan arising out of acts or omissions first occurring from and after the Closing (the “Selling Parties Release”). Obtaining Existing Lender’s approval of the Consent Requirements and the Selling Parties Release is hereinafter referred to as the “Existing Loan Approval Contingency.

 

3.2.2       Existing Loan Document Modifications. Immediately upon the mutual execution of this Agreement, Purchaser and Seller shall together use diligent and commercially reasonable efforts to secure Existing Lender’s approval with respect to the Consent Requirements and the Selling Parties Release; provided, however, that Seller acknowledges and agrees that Purchaser may require, in connection with any such Existing Lender approval, modifications of the Trust Deed and related Existing Loan Documents (the “Existing Loan Document Modifications”) specifically to permit future intra-party transfers among the parent entities of Purchaser to allow for, inter alia, compliance with certain REIT-related requirements. Seller shall have the right to review and approve Purchaser’s proposed Existing Loan Document Modifications (“Purchaser’s Proposed Existing Loan Modifications”) as follows:

 

(a) Purchaser shall provide Seller with Purchaser’s Proposed Existing Loan Document Modifications within five (5) days after the Agreement Date;

 

(b) Seller may, acting in good faith, within five (5) days thereafter reject such Purchaser’s Proposed Existing Loan Modifications; provided, however, that Seller shall accept Purchaser’s Proposed Existing Loan Modifications if Seller has no reasonable belief that such terms will not be accepted by Existing Lender in all material respects; and

 

(c) if Seller, in good faith, rejects Purchaser’s Proposed Existing Loan Modifications within such five (5) day period, then either Purchaser or Seller may terminate this Agreement and the Escrow by written notice to the other within five (5) days after the preceding five (5) day period, whereupon the Deposit shall be returned to Purchaser and the parties shall have no further obligations hereunder other than the “Surviving Obligations” (as hereinafter defined) and each party shall bear its own costs in connection with the transactions contemplated by this Agreement.

 

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3.2.3      Approved Existing Loan Document Modifications—Purchaser Termination Right.

 

(a)          If the Existing Loan Document Modifications, as approved by Existing Lender (the “Approved Existing Loan Modifications”), are materially consistent with Purchaser’s Proposed Existing Loan Modifications as actually submitted by Purchaser to Existing Lender (the “Pro Forma Existing Loan Document Modifications”) and do not contain any Material Adverse Modifications, then Purchaser shall approve the Approved Existing Loan Modifications. Purchaser understands that as part of the Existing Loan Approval Contingency, Existing Lender will require a creditworthy principal or affiliate of Purchaser to sign a guaranty of the non-recourse carveouts set forth in the Note, including but not limited to paragraph 12 of the Note, and possibly of certain environmental (hazardous materials) indemnity obligations, and Purchaser agrees to cause its principal or affiliate to sign such documents provided such documents are commercially reasonable in nature and do not otherwise contain any Material Adverse Modifications.

 

(b)          If the Approved Existing Loan Modifications contain any Material Adverse Modifications, or otherwise deviate from the Pro Forma Existing Loan Document Modifications in such a way as to have a material adverse impact on the overall transaction contemplated by this Agreement, the Purchaser or the proposed new guarantors or indemnitors for the Existing Loan, then Purchaser shall have the right in its reasonable discretion to terminate this Agreement upon written notice to Seller thereof, whereupon the Deposit shall be returned to Purchaser and the parties shall thereafter have no further obligations hereunder other than the Surviving Obligations.

 

(c)          For purposes of this Agreement “Material Adverse Modifications” shall mean any of the following: (i) an increase in the interest rate currently stated in the Note, (ii) a requirement to accelerate the pay down of the principal balance of the Existing Loan other than as currently stated in the Existing Loan Documents or an adverse adjustment of the maturity date or the amortization period thereunder, (iii) a requirement that the Purchaser pay or establish material escrows or expenditures other than as currently stated in the Existing Loan Documents, and/or (iv) a requirement that the Purchaser’s non-recourse guarantor agree to recourse provisions other than those currently stated in the Existing Loan Documents. As used in this Section 3.2.3, “currently stated in the Existing Loan Documents” shall mean as such loan terms appear in the Existing Loan Documents, and/or any modified terms as may be agreed by Seller, Purchaser and Existing Lender prior to the expiration of the Due Diligence Period to be effective following the assumption of the Existing Loan.

 

3.2.4     Seller Cooperation with Purchaser; Purchaser Negotiations with Existing Lender. Seller agrees to reasonably assist and cooperate with Purchaser in connection with the Existing Loan Approval Contingency, including the execution and delivery of all assumption-related documents to the extent required by Section 7.2 and to the extent such documents include the Selling Parties Release; provided, however, nothing herein shall obligate Purchaser to pay or reimburse Seller for Seller’s legal fees that may be incurred in the course of such cooperation. Purchaser shall have the right to negotiate directly with Existing Lender concerning the Existing Loan Approval Contingency and the terms and conditions of any and all documents associated with or required in conjunction with the Existing Loan Approval Contingency (collectively, the “Existing Loan Assumption Documents”), provided that same incorporate the Selling Parties Release.

 

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3.2.5      Existing Loan Approval Contingency Deadline. If the Existing Loan Approval Contingency is not satisfied within 75 days after the date of this Agreement (the “Existing Loan Approval Contingency Deadline”), then either Purchaser or Seller shall have the right to terminate this Agreement, in which event the Deposit shall be fully refunded to Purchaser and the parties shall have no further obligations to each other, except with respect to the Surviving Obligations.

 

3.2.6.     [Intentionally Deleted].

 

3.2.7      Surviving Obligations. As used in this Agreement, the “Surviving Obligations” shall mean all indemnity and related obligations under this Agreement and the provisions of Sections 3.2, 5.2, 6.3, 10.2, 10.4, 10.5, 10.8, 10.10, 11.1 through 11.5 (inclusive), 12.1, 12.3, 13.1 through 13.4 (inclusive), 14.11, 14.13, 14.18, 14.19, 14.20 and 14.21.

 

3.3         Due Diligence for Selling Parties Release. Purchaser agrees to permit Seller to use Purchaser’s Phase I environmental site assessment for purposes of obtaining the Selling Parties Release, and shall have, at Seller’s prior written request, Purchaser's Phase I environmental site assessment certified to Seller. Purchaser shall cooperate as needed to facilitate same.

 

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4.          TITLE MATTERS.

 

4.1           Title Policy. Purchaser and AR Owner shall instruct Escrow Holder to expeditiously deliver to Purchaser and Seller (a) a copy of Seller’s existing title policy (the “Existing Title Policy”) in regard to the Phase I Property; (b) a dated down title report covering the Phase I Real Property (“Phase I Prelim”), (c) copies of all exceptions to title reflected by said Existing Title Policy and Phase I Prelim (“Phase I Title Exceptions”), (d) Seller’s existing survey of the Phase I Real Property (the “Phase I Survey”, and together with the Phase I Prelim and the Phase I Title Exceptions, the “Phase I Title Documents”), (e) a copy of the current title commitment covering the Phase II Property (“Phase II Commitment”), (f) copies of all exceptions to title reflected by said Phase II Commitment (“Phase II Title Exceptions”), and (g) AR Owner’s existing survey of the Phase II Property (the “Phase II Survey”, and together with the Phase II Commitment and the Phase II Title Exceptions, the “Phase II Title Documents” and, together with the Phase I Title Documents, the “Title Documents”). Purchaser acknowledges that (x) title to the Phase I Property is, and will, subject to the objection rights set forth below, remain subject to all Phase I Title Exceptions reflected in the Existing Title Policy, including each item shown in the Phase I Survey, and the Title Company’s standard exceptions and exclusions (which are, unless constituting a Disapproved Exception, collectively referred to herein as “Phase I Permitted Exceptions”); provided, however, that delinquent real property taxes (if any) and other monetary judgments, liens and encumbrances to title with respect to the Phase I Property (other than those relating to the Existing Loan) shall be paid by Seller at the Closing, regardless of whether Purchaser objects to same as a Disapproved Exception and (y) title to the Phase II Property is, and will, subject to the objection rights set forth below, remain subject to all Phase II Title Exceptions reflected in the Phase II Title Commitment, including each item shown in the Phase II Survey, and the Title Company’s standard exceptions and exclusions (which are, unless constituting a Disapproved Exception, collectively referred to herein as “Phase II Permitted Exceptions”). Purchaser shall notify Seller and AR Owner no later than 5:00 p.m. (Eastern time) on May 15, 2015 (the “Title Deadline”) in writing of any Title Exceptions identified in the Title Documents which Purchaser disapproves (collectively, the “Disapproved Exceptions”). Seller and/or AR Owner, as applicable shall notify Purchaser, within five (5) days following receipt of Purchaser’s notice of any Disapproved Exceptions, whether (a) Seller will cure any such Disapproved Exceptions with respect to the Phase I Property and (b) AR Owner is able to get the Phase II Seller to agree to cure any Disapproved Exceptions with respect to the Phase II Property. In the event that Seller or AR Owner does not provide written notice of such party’s election to cure (or for which no commitment from the Phase II Seller to cure has been obtained, as applicable) all the Disapproved Exceptions in such five (5) day period, Purchaser may either elect to (a) accept the Phase I Property and the Phase II Property subject to the Disapproved Exceptions that Seller and/or AR Owner has not elected to cure (or obtained the Phase II Seller’s agreement to cure) and proceed to Closing without any reduction in the Purchase Price, (b) terminate this Agreement, in which event Purchaser shall be entitled to the return of the Deposit or (c) if the Disapproved Exceptions relate to the Phase II Property and, under the Phase II Purchase Contract, the Phase II Seller has the obligation to cure such Disapproved Exceptions, request that AR Owner exercise its default rights under the Phase II Purchase Contract, including, if applicable, to terminate the Phase II Purchase Contract (in which event the terms of Section 7.4 hereof shall apply). Seller, AR Owner and Purchaser hereby agree that, with the exception of the Existing Loan Documents associated with the Existing Loan, the existence of any mortgages, deeds of trust, liens or monetary encumbrances affecting the Phase I Property, the Phase II Property or any portion thereof, including, without limitation, judgment liens and mechanic’s liens not to exceed $100,000.00 in the aggregate (provided, however, in the event any judgment lien or mechanic's lien arises from the willful misconduct of Seller or AR Owner, then the aforementioned $100,000.00 limitation shall be inapplicable) (collectively, “Monetary Encumbrances”) shall be deemed to be Disapproved Exceptions without the necessity of the Purchaser otherwise expressly objecting thereto, and Seller and/or AR Owner shall be required to discharge or cause the Phase II Seller to agree to discharge all Monetary Encumbrances at or prior to the Closing Date; provided, however, that nothing herein shall require AR Owner to have the Phase II Seller actually cure any such Disapproved Exceptions at any time earlier than as required under the Phase II Purchase Contract. Finally, if any new Title Exceptions (including any matters first appearing on any update of the Phase I Survey (which update will be ordered by Seller within seven (7) days after the Agreement Date) or the Phase II Survey) first arise or are first identified to Purchaser following the Title Deadline (but in all events prior to the Closing of the issuance and sale of the New AR Owner Interests), Purchaser shall nevertheless have the right to object to such additional Disapproved Exceptions, in which event the procedure for Seller’s and/or AR Owner’s responses and Purchaser’s elections set forth above shall again be applicable as to such Title Exceptions, including Purchaser’s right to terminate this Agreement and receive the return of the Deposit.

 

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4.2          Title Policy. At the Closing, the Title Company shall issue a new title insurance policy (“New Owner Policy”) in the amount of $44,750,000, showing fee title to the Phase I Real Property as vested in Purchaser, subject to the Phase I Permitted Exceptions. Title Company shall further issue a date down/modification endorsement (as required by Existing Lender) with respect to the existing title policy issued to Existing Lender (“Existing Loan Policy”) with respect to the Phase I Property; provided, however, if the Title Company is unable to issue such “date down” endorsement to the Existing Loan Policy, then Purchaser may, alternatively, select an alternate title company to issue a new title insurance policy to Existing Lender for the Existing Loan (the “New Loan Policy” and, together with the New Owner Policy, each a “New Title Policy” and, collectively, the “New Title Policies”). All New Title Policies may, at Purchaser’s election, be issued through Madison Title Insurance Agency with a nationally recognized title firm, and, with regard to the Phase I Property only, on Chicago Title Insurance Company paper.

 

5.          DELIVERY OF INFORMATION.

 

5.1           Due Diligence Period. During the pendency of Escrow, Purchaser, upon twenty-four (24) hours’ prior written notice to Seller, shall have the right during normal business hours: to make physical inspections of the Phase I Property and, subject to the terms of the Phase II Purchase Contract, the Phase II Property; to review the books and records of Seller (and those relating to the ownership and operation of the Phase I Property and the Phase II Property); and to interview the management and leasing staff, which interviews will be coordinated by AR Developer, LLC, the managing member of AR Owner (and representatives of AR Developer, LLC shall have the right to be present at such interviews).

 

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Seller and AR Owner have made available, or shall, no later than three (3) business days after the Agreement Date, make available, to Purchaser the documents listed on Schedule 5.1 attached hereto to the extent they are in such parties’ possession or control (for purposes hereof, “control” shall mean in the possession of any asset or of any property management company engaged by Seller or AR Owner) (collectively, “Due Diligence Documents”). During the pendency of Escrow, Purchaser shall have the right to review the Due Diligence Documents, information disclosed by Seller and AR Owner, and any and all other documents and information as Purchaser shall reasonably require to the extent in the possession or control of Seller or AR Owner in order to satisfy itself with respect to the condition of title and the physical and economic condition of the Phase I Property and the Phase II Property.

 

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5.2           Physical Inspections. Purchaser understands and agrees that any on-site inspections of the Phase I Property and the Phase II Property (“Physical Inspections”) shall occur at reasonable times agreed upon by Seller, AR Owner and Purchaser (and the Phase II Seller for the Phase II Property) upon not less than twenty-four (24) hours’ prior written notice to such parties and shall be conducted so as not to interfere unreasonably with the use of the Phase I Property by Seller (and the Phase II Seller for the Phase II Property). If Purchaser desires to do any invasive Physical Inspections, including, without limitation, a Phase II environmental study or testing which would otherwise damage or disturb any portion of the Phase I Property or the Phase II Property, Purchaser shall do so only after notifying Seller and/or AR Owner, as applicable (and the Phase II Seller for the Phase II Property) and obtaining Seller’s and/or AR Owner’s (and Phase II Seller’s for the Phase II Property) prior written consent thereto, which consent may be subject to any terms and conditions imposed by Seller and/or AR Owner, as applicable (or by the Phase II Seller as and where permitted by the Phase II Purchase Contract) in its sole discretion, including, without limitation, Seller and/or AR Owner requiring Purchaser to provide such parties with evidence of insurance in form and substance reasonably satisfactory to Seller and/or AR Owner and the prompt restoration of the Phase I Property or the Phase II Property (as applicable) to its respective condition prior to any such inspections or tests, at Purchaser’s sole cost and expense. Purchaser agrees, at the request of AR Owner or Seller, as applicable, to disclose the results of all of its Physical Inspections to such parties, and, subject to the terms of Section 14.13 and to the right of Purchaser to disclose all such materials to its representatives in connection with the due diligence it performs on the Phase I Property and the Phase II Property, to keep all such information confidential and not disclose the same, or any part thereof, without the prior written consent of AR Owner and/or Seller, as applicable. In conjunction with due diligence with respect to the Phase II Property, AR Owner will use commercially reasonable efforts to provide assistance to obtain Phase II Seller’s consent to the access by Purchaser to the Phase II Property (or absent such consent, to perform all applicable due diligence on the Phase II Property at the request of Purchaser and in all instances consistent with the terms of the Phase II Purchase Contract). Further, Purchaser will be entitled to rely upon and use and update, as applicable, any third-party reports previously obtained by AR Owner for the Phase II Property, and AR Owner will use commercially reasonable efforts to obtain the consent of all applicable service providers thereto. Following the expiration of the Due Diligence Period, AR Owner will enforce all available rights of the purchaser under the Phase II Purchase Contract in the manner instructed by Purchaser, including communicating with, or obtaining Purchaser’s right to communicate with, the Phase II Seller on any specific matters requested by Purchaser, other than any right to terminate the Phase II Purchase Contract (which shall be governed by Section 7.4 below). Any inspections in connection with the Phase II Property performed by AR Owner at the request of Purchaser shall be at Purchaser’s expense, but Purchaser shall not be responsible for any costs incurred by AR Owner in excess of the costs that would have been incurred by Purchaser in connection with any such inspections had Purchaser been able to perform such inspections directly. In connection with the Physical Inspections, Purchaser shall maintain and cause its third-party agents to maintain (a) comprehensive general liability insurance (“CGL”) with coverages of not less than $1,000,000.00 for injury or death to any one person and $2,000,000.00 for injury or death to more than one person and $500,000.00 with respect to property damage, by water or otherwise, and (b) worker’s compensation insurance for all of their respective employees in accordance with applicable statutory requirements. Purchaser shall deliver proof of the insurance coverage required pursuant to this Agreement to Seller, as to the Phase I Property, and AR Owner, as to the Phase II Property (in the form of a certificate of insurance) prior to Purchaser’s or its agents’ entry onto the Phase I Property or the Phase II Property, as applicable (provided that if any agent’s certificate of CGL insurance does not show worker’s compensation coverage, such agent shall not be required to provide a separate certificate of insurance for such worker’s compensation coverage). The provisions of this paragraph shall survive the termination of this Agreement, and if not so terminated shall survive the Closing.

 

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With respect to such Physical Inspections, it is agreed as follows:

 

5.2.1      Indemnification. Purchaser shall protect, indemnify, defend and hold AR Owner, Seller, and the Phase I Property and the Phase II Property harmless from and against any claim for liabilities, losses, costs, expenses (including reasonable attorneys’ fees), damages or injuries arising out of or resulting from the Physical Inspections of the Phase I Property and the Phase II Property by Purchaser or its agents, employees, representatives or consultants, (including, without limitation, any materialmen’s or mechanics’ liens) or the breach of Purchaser’s obligations under this Section 5, and notwithstanding anything to the contrary in this Agreement, such obligation to indemnify, defend and hold harmless Seller, AR Owner, the Phase I Property, the Phase II Owner and the Phase II Property shall survive Closing or any termination of this Agreement for the period of the applicable statute of limitations. This indemnity shall not include, and shall specifically exclude, any loss, liability, damage, injury and claims arising out of or resulting solely from (a) the gross negligence or willful misconduct of Seller, AR Owner, AR Developer, LLC or their members, agents, representatives, contractors or employees, or (b) the mere discovery by Purchaser, or its agents, representatives, contractors or employees, acting within the scope of investigations permitted under this Agreement, of the presence of any toxic or hazardous substance in, on or under the Phase I Property or the Phase II Property, to the extent that Purchaser or its agents do not materially exacerbate such condition.

 

5.2.2      Compliance With Laws. Purchaser shall comply with all applicable governmental laws, ordinances and regulations in the conduct of any Physical Inspections or activities on the Phase I Property or the Phase II Property.

 

5.2.3      Service Contracts. Purchaser shall have the right, on or before the expiration of the Due Diligence Period (as defined below), to give notice to Seller of any Phase I Contracts that Purchaser wishes to terminate, in which case Seller shall terminate such Phase I Contracts, to the extent such Phase I Contracts are freely terminable by Seller, no later than Closing, failing which Purchaser may cause Seller to terminate such Phase I Contracts only upon Purchaser paying any applicable termination fee. The term “Phase I Assumed Contracts” shall mean collectively the Phase I Contracts, excluding those to be terminated pursuant to this Section 5.2.3. Purchaser shall assume (or request the termination of) the service contracts applicable to the Phase II Property as required under the Phase II Purchase Contract.

 

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5.3           Notice to Proceed. In the event that Purchaser elects to proceed to the Closing, Purchaser shall give written notice to Seller of Purchaser’s intention to do so (the “Notice to Proceed”) by no later than 5:00 p.m. (Eastern time) on May 13, 2015 (the “Due Diligence Period”). Following the issuance of the Notice to Proceed by Purchaser, the Deposit shall, subject to the terms of this Agreement, become nonrefundable, and Purchaser shall be deemed to have elected to proceed with the purchase of the Phase I Property and the assignment of AR Owner’s rights under the Phase II Purchase Contract and waived its right to terminate this Agreement pursuant to this Section 5. In the event Purchaser does not give a Notice to Proceed pursuant to the terms herein for any reason or no reason, then no party shall have any further rights or obligations hereunder or in connection with the Phase I Property or the Phase II Property (except for the Surviving Obligations), the Deposit shall be returned to Purchaser and each party shall bear its own costs incurred hereunder. For purposes of clarity, Purchaser shall not be obligated to give a notice of termination prior to the expiration of the Due Diligence Period. Notwithstanding the foregoing, even if Purchaser issues a Notice to Proceed, it will continue to reserve its rights to terminate this Agreement under the Title Exception provisions of this Agreement, through May 15, 2015.

 

6.           DISCLAIMERS AND WAIVERS.

 

6.1           No Reliance on Documents. Purchaser hereby represents, warrants and agrees to and with Seller and AR Owner that, as of the Closing, (a) Purchaser has independently conducted Purchaser’s own evaluation and inspection of the Phase I Property and the Phase II Property, obtained and reviewed such information and conducted such inspections as Purchaser has deemed adequate and appropriate, and (b) except as set forth in Section 10, Purchaser has not relied upon any investigation or analysis conducted by, advice or communication from, nor any warranty or representation by, Seller, AR Owner or any agent or employee of Seller or AR Owner, express or implied, concerning the condition, financial or otherwise, of the Phase I Property or the Phase II Property, or any tax or economic benefits of an acquisition of the Phase I Property and the Phase II Property. Purchaser acknowledges and agrees that all materials, data and information delivered or given by Seller and AR Owner to Purchaser in connection with the transaction contemplated hereby, if any (excluding those relating to the Existing Loan), are provided to Purchaser as a convenience only and that any reliance on or use of such materials, data or information by Purchaser shall be at the sole risk of Purchaser (excluding those relating to the Existing Loan and those with respect to any third-party reports applicable to the Phase II Property that are assumed by Purchaser in accordance with the terms of Section 5.2 above).

 

6.2           As-is Sale; Disclaimers. IT IS UNDERSTOOD AND AGREED THAT NEITHER SELLER NOR AR OWNER IS MAKING AND HAS NOT AT ANY TIME MADE ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE PHASE I PROPERTY OR THE PHASE II PROPERTY EXCEPT TO THE EXTENT SET FORTH IN SECTION 10 (“SELLING PARTIES REPRESENTATIONS”), INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OR REPRESENTATIONS AS TO HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR AS TO THE PHYSICAL, STRUCTURAL OR ENVIRONMENTAL CONDITION OF THE PHASE I PROPERTY OR THE PHASE II PROPERTY OR THEIR COMPLIANCE WITH LAWS.

 

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6.3         Survival of Disclaimers. The provisions of this Section 6 shall survive Closing or any termination of this Agreement.

 

6.4         THE PROVISIONS OF THIS SECTION 6 ARE MATERIAL AND INCLUDED AS A MATERIAL PORTION OF THE CONSIDERATION GIVEN TO SELLER BY PURCHASER IN EXCHANGE FOR SELLER’S AND AR OWNER’S PERFORMANCE HEREUNDER. SELLER AND AR OWNER HAVE GIVEN PURCHASER MATERIAL CONCESSIONS REGARDING THIS TRANSACTION IN EXCHANGE FOR PURCHASER AGREEING TO THE PROVISIONS OF THIS SECTION 6.

 

7.          CLOSING.

 

7.1         Closing of Escrow. The purchase and sale of the Phase I Property and assignment of the Phase II Purchase Contract shall close (“Close of Escrow” or the “Closing”) on the date (the “Closing Date”) which is the latter to occur of: (i) thirty (30) days following the expiration of the Due Diligence Period or (ii) the earlier of (A) twenty (20) days following the satisfaction of the Existing Loan Approval Contingency or (B) ten (10) business days after the Existing Loan Approval Contingency Deadline (unless the Agreement is terminated under Section 3.2.5) (as applicable, the “Outside Closing Date”); provided however, for the avoidance of doubt, in no event shall Purchaser be obligated to close on the assignment of the Phase II Contract unless and until it has closed on the Phase I Property. Possession of the Phase I Property shall be delivered at Closing, free and clear of all rights of third parties to possession other than the rights to possession of tenants under the Phase I Leases and other matters of record approved by Purchaser in accordance with the terms of this Agreement.

 

7.2         Deliveries by Seller and AR Owner.

 

(a)          Deliveries by Seller. At the Close of Escrow, Seller shall deliver the following:

 

(i)          to Purchaser, through escrow, a duly executed special warranty deed in the form attached hereto as Schedule 7.2(a)(i) and by this reference made a part hereof, conveying the Phase I Real Property to Purchaser subject to the Phase I Permitted Exceptions (the Deed”);

 

(ii)         to Purchaser, through escrow, a bill of sale and assignment and assumption of leases and service contracts, in the form attached hereto as Schedule 7.2(a)(ii) and by this reference made a part hereof, duly executed by Seller, pursuant to which (i) Seller shall convey the Phase I Personal Property and the Phase I Plans, Licenses and Permits, and (ii) Seller shall assign to Purchaser, and Purchaser shall assume from and after the Closing Date, Seller’s interest in and to the Phase I Leases and the Phase I Assumed Contracts, as amended or supplemented pursuant to this Agreement (the “Bill of Sale and Assignment”);

 

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(iii)        to Purchaser, through escrow, a notice also to be joined in by Purchaser (the “Tenant Notice”) in form and content reasonably satisfactory to Purchaser and Seller, which Purchaser shall send a copy thereof to each tenant under each of the Phase I Leases informing such tenant of the sale of the Property and of the assignment to Purchaser of Seller’s interest in, and obligations under, the Phase I Leases (including, if applicable any security deposits) and directing that all rent and other sums payable after the Closing under each such Phase I Lease shall be paid as set forth in the notice;

 

(iv)        to Purchaser, through escrow, a duly executed Certificate of Selling Parties signed by Seller, such form attached hereto as Schedule 7.2(a)(iv) and made a part hereof (the “Certificate of Selling Parties”), stating that the representations and warranties of Seller contained in Section 10.2 and Section 10.4 of this Agreement are true and correct in all material respects as of the Closing Date (with appropriate modifications to reflect any changes therein or identifying any representation or warranty which is not, or no longer is true and correct and explaining the state of facts giving rise to the change. For avoidance of doubt the inclusion of any such change shall not affect Purchaser's rights under this Agreement pursuant to Section 10.10 to the extent a representation was breached when made as of the Agreement Date nor shall the same affect the condition set forth in Section 8.3);

 

(v)         to Purchaser and the Title Company, such evidence as Purchaser and the Title Company may reasonably require as to the authority of the person or persons executing documents on behalf of Seller;

 

(vi)        to Purchaser, through escrow, an affidavit duly executed by Seller stating that Seller is not a “foreign person” as defined in the Federal Foreign Investment in Real Property Tax Act of 1980 and the 1984 Tax Reform Act;

 

(vii)       to the Title Company, a broker’s lien waiver, and a title insurance affidavit, if required by the Title Company, duly executed by Seller or a representative of Seller, in the form attached hereto as Schedule 7.2(a)(vii);

 

(viii)      to Purchaser, at the place of Closing or at the Phase I Property, the Phase I Leases, together with such leasing and property files and records in connection with the continued operation, leasing and maintenance of the Phase I Property, as well as all Phase I Assumed Contracts, all to the extent not previously delivered;

 

(ix)         to Existing Lender, Seller’s (and any existing guarantors, if needed) counterparts to the Existing Loan Assumption Documents;

 

(x)          to Purchaser, possession and occupancy of the Phase I Property, subject to the rights of tenants under the Phase I Leases and the Phase I Permitted Exceptions;

 

(xi)         to Purchaser, through escrow, Seller’s counterpart to the Closing Statement, and such additional documents as shall be reasonably requested by the Title Company or required to consummate the transaction contemplated by this Agreement; provided, however, that in no event shall Seller be required to indemnify the Title Company, Purchaser, or any other party pursuant to any such documents, or undertake any other material liability not expressly contemplated in this Agreement, unless Seller elects to do so in its sole discretion.

 

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(b)         Deliveries by AR Owner. At the Close of Escrow, AR Owner shall deliver to Purchaser or Purchaser’s designee, through escrow, (a) AR Owner’s counterpart of an Assignment and Assumption of Phase II Purchase Contract, in the form attached hereto as Schedule 7.2(b) (the “Phase II Purchase Contract Assignment”), and (b) AR Owner’s counterpart of the Certificate of Selling Parties, stating that the representations and warranties of AR Owner contained in Section 10.5 of this Agreement are true and correct in all material respects as of the Closing Date (with appropriate modifications to reflect any changes therein or identifying any representation or warranty which is not, or no longer is true and correct and explaining the state of facts giving rise to the change. For avoidance of doubt the inclusion of any such change shall not affect Purchaser's rights under this Agreement pursuant to Section 10.10 to the extent a representation was breached when made as of the Agreement Date nor shall the same affect the condition set forth in Section 8.3);

 

7.3          Purchaser’s Deliveries. At the Close of Escrow, Purchaser shall deliver the following:

 

(a)          to Seller, through escrow, the cash portion of the Purchase Price;

 

(b)          to Seller, through escrow, Purchaser’s counterparts to the Bill of Sale and Assignment, the Tenant Notice, and the Closing Statement;

 

(c)          to Seller, through escrow, a certificate of Purchaser, pursuant to which Purchaser shall (i) reaffirm the provisions of Section 6.2 hereof and confirm that such provisions remain and will continue in full force and effect as of and after the Closing, and (ii) state that the representations and warranties of Purchaser contained in Section 11 of this Agreement are true and correct in all material respects as of the Closing Date (with appropriate modifications to reflect any changes therein or identifying any representation or warranty which is not, or no longer is, true and correct and explaining the state of facts giving rise to the change);

 

(d)          to the Title Company, such information as the Title Company may reasonably require as to the authority of the person or persons executing documents on behalf of Purchaser;

 

(e)          to Existing Lender, Purchaser’s and any replacement guarantors’ or indemnitors’ counterparts to the Existing Loan Assumption Documents;

 

(f)          to AR Owner through escrow, Purchaser’s or Purchaser’s designee’s counterpart to the Phase II Purchase Contract Assignment;

 

(g)           to AR Owner through escrow, Purchaser’s interest in the Deposit; and

 

(h)          through escrow, such additional documents as shall be reasonably requested by the Title Company or required to consummate the transaction contemplated by this Agreement, provided, however, that in no event shall Purchaser be required to indemnify Seller, AR Owner, Title Company or any other party or undertake any other material liability not expressly contemplated in this Agreement, unless Purchaser elects to do so in its sole discretion.

 

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7.4           Closing of Phase II Escrow. The parties acknowledge that the Phase II Property is expected to close after the acquisition by Purchaser of the Phase I Property. The terms of the acquisition of the Phase II Property by Purchaser or its designee will be as provided under the existing Phase II Purchase Contract. Notwithstanding anything else to the contrary in this Agreement, if under the Phase II Contract a closing on the Phase II Property is required prior to the Outside Closing Date, the Purchaser shall have the option to terminate this Agreement by written notice to Seller and AR Owner, whereupon the Deposit shall be released back to Purchaser and the parties hereto shall have no further rights or obligations.

 

In the event that at any time there exists a right for AR Owner as purchaser thereunder to terminate the Phase II Purchase Contract (and seek damages, recoveries or return of the $750,000.00 earnest money thereunder, whether occurring before or after the end of the Due Diligence Period (but in all events prior to Closing, it being understood that following Closing any such determinations are the sole responsibility of Purchaser)), Purchaser and AR Owner agree to meet and collaborate, in good faith, to determine whether the Phase II Purchase Contract should, in the judgment of a reasonable purchaser, be terminated as a result of the event that creates such termination right. If Purchaser and AR Owner are not able to agree, notwithstanding such good faith efforts, on whether the Phase II Purchase Contract should be terminated, Purchaser shall have the following rights: (a) if such failure to agree occurs before the end of the Due Diligence Period, Purchaser can either (i) waive the disagreement and permit AR Owner to terminate or not terminate the Phase II Purchase Contract, as AR Owner in good faith elects, or (ii) exercise its right to terminate this Agreement and receive the return of the Deposit, or (b) if such failure to agree occurs after the end of the Due Diligence Period (but in all events prior to the Closing, it being understood that following Closing any such determinations are the sole responsibility of Purchaser), Purchaser can either (i) waive the disagreement and permit AR Owner to terminate or not terminate the Phase II Purchase Contract, as AR Owner in good faith elects, or (ii) terminate this Agreement. In the event that Purchaser elects to terminate this Agreement pursuant to clause (b)(ii), Purchaser shall only be entitled to the return of the Deposit if AR Owner (1) has failed to act in good faith in making the determination of what a reasonable purchaser would do, or (2) if it is determined that a reasonable person would terminate the Phase II Purchase Contract and AR Owner fails to communicate that termination to the Phase II Seller. If AR Owner has refused to terminate the Phase II Purchase Contract under these circumstances and Purchaser has exercised its right under clause (b)(ii), Purchaser will not be entitled to the return of its Deposit if AR Owner in refusing to do so has acted in good faith (measured by what a reasonable contract purchaser would do in the same circumstances), but Purchaser shall not be obligated to Close hereunder and Seller and AR Owner shall have no other claims or rights against Purchaser. Notwithstanding any other provisions of this Agreement, if the Phase II Purchase Contract is terminated in accordance with this paragraph, Purchaser shall, unless it has otherwise elected to terminate this Agreement in its entirety as set forth in this paragraph, be permitted to enforce the balance of this Agreement (i.e. with respect to the purchase of the Phase I Property) and, in such case, the Purchase Price and any other non-applicable terms of this Agreement will be modified and amended to reflect the fact that the Phase II Property is no longer involved in the transaction.

 

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8.          CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE.

 

Purchaser’s obligation to purchase the Phase I Property and to close the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions being satisfied on or before the Closing Date (collectively, “Purchaser’s Conditions Precedent to Closing”):

 

8.1           Deliveries. AR Owner and Seller shall have delivered to Escrow Holder the documents and other items set forth in Section 7.2.

 

8.2           Reserved.

 

8.3           Representations, Warranties and Covenants. The representations and warranties of AR Owner and Seller set forth in Section 10 shall be true as of the Closing Date in all material respects and all covenants of AR Owner and Seller contained in Sections 7.4 and 10 shall have been performed in full.

 

8.4           Consent of Existing Lender. The Existing Loan Approval Contingency has been satisfied and the Approved Existing Loan Modifications have been received and approved by Purchaser in accordance with Section 3.2.3 above (including the delivery by Existing Lender to Seller and Purchaser at least five (5) business days prior to Closing of execution sets of all documents required by Existing Lender to be signed in connection with Purchaser’s acquisition of the Phase I Property and assumption of the Existing Loan).

 

8.5           Phase II Purchase Contract. Except as otherwise provided in Section 7.4 above, the Phase II Purchase Contract shall remain in full force and effect as of the Closing Date, and AR Owner shall not have assigned any of its rights thereunder (including but not limited to in or to the $750,000 earnest money deposit thereunder), and AR Owner shall confirm, to the best of its knowledge, that there are no known, imminent or threatened breaches or defaults thereunder.

 

8.6           Reserved.

 

8.7           Waiver. Purchaser may waive in writing the satisfaction of any of the conditions set forth in this Section 8 or terminate this Agreement. If Purchaser waives any such conditions, then said waived conditions shall be deemed to have been satisfied. If Purchaser terminates this Agreement, then the Deposit shall be fully refunded to Purchaser, neither party shall have any further rights or obligations hereunder except for the Surviving Obligations, and each party shall bear its own costs incurred hereunder. Notwithstanding anything to the contrary in this Agreement, the occurrence of the Closing shall be deemed to be Purchaser’s waiver of any unsatisfied condition (other than any rights Purchaser may have under this Agreement with regard to any breaches of the Selling Parties Representations to the extent set forth, and subject to the limitations, in Sections 10.8 and 13.3).

 

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9.          CONDITIONS TO THE OBLIGATIONS OF SELLING PARTIES TO CLOSE.

 

Seller’s obligations to sell the Phase I Property, AR Owner’s obligation to assign its rights under the Phase II Purchase Contract, and each such party’s obligations to close the transactions contemplated by this Agreement are subject to the satisfaction of the following conditions on or before the Close of Escrow (collectively, “Selling Parties’ Conditions Precedent to Closing”):

 

9.1           Purchaser’s Deliveries. Purchaser shall have delivered to Escrow the items set forth in Section 7.3.

 

9.2           Consent of Existing Lender. The Existing Loan Approval Contingency has been satisfied (including the delivery by Existing Lender to Seller and Purchaser at least five (5) business days prior to Closing of execution sets of all documents required by Existing Lender to be signed in connection with Purchaser’s acquisition of the Phase I Property and assumption of the Existing Loan).

 

9.3           Purchaser’s Representations and Warranties. The representations and warranties of Purchaser set forth in Section 11 shall be true in all material respects.

 

9.4           Waiver. Seller may waive in writing the satisfaction of any of the conditions set forth in this Section 9 or terminate this Agreement. If Seller waives any such conditions, then said waived conditions shall be deemed to have been satisfied. If Seller terminates this Agreement, then the Deposit shall, to the extent such failure otherwise constitutes a default under this Agreement by Purchaser, be retained by Seller, or, if such failure does not constitute a default by Purchaser, then the Deposit will be returned to Purchaser, none of the parties shall have any further rights or obligations hereunder except for the Surviving Obligations and each party shall bear its own costs incurred hereunder. Notwithstanding anything to the contrary in this Agreement, the occurrence of the Closing shall be deemed to be Seller’s waiver of any unsatisfied condition (other than any rights Seller may have under this Agreement with regard to any unknown breaches of Purchaser representations and warranties to the extent set forth, and subject to the limitations, in Section 13.4).

 

10.         REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AND AR OWNER

 

10.1         Reserved.

 

10.2        Representations and Warranties as to Seller. As a material inducement to Purchaser to execute this Agreement and consummate the Closing, Seller represents and warrants to Purchaser with respect to Seller, that:

 

(a)          Seller is duly formed as a limited liability company, is validly existing and is in good standing under the laws of the State of Delaware and is authorized to exercise all of its limited liability company powers, rights and privileges.

 

(b)          Seller is qualified to do business in and is in good standing in the state where the Phase I Property is located.

 

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(c)          Seller has not had any employees and will not have any employees from the Agreement Date through the Closing Date.

 

(d)          Seller has not conveyed, transferred, assigned, pledged or hypothecated any interests in the Phase I Property, in whole or in part, or granted any rights, options or rights of first refusal or first offer to purchase any of such interests or any portion thereof (except as may be shown as a matter of record and for the rights of the Purchaser under this Agreement and the Existing Loan), nor is it a party to any material agreements other than those produced pursuant Schedule 3.1(e).

 

(e)          This Agreement and all documents executed by Seller which are to be delivered to Purchaser at the Closing are, or as of the Closing Date will be, duly authorized, executed, and delivered by Seller, and are, or as of the Closing Date will be, legal, valid, and binding obligations of Seller, and do not, and as of the Closing Date will not, violate any provisions of any agreement to which Seller is a party or to which it is subject or any law, judgment or order applicable to Seller. The execution, delivery and performance by Seller of this Agreement or any such documents will not violate, conflict with or result in any breach or contravention of any contractual obligation of Seller (excepting Seller’s obligations under the Existing Loan Documents unless the Existing Loan Approval Contingency is satisfied).

 

(f)          No proceedings under any bankruptcy or insolvency laws have been commenced by or against Seller; no general assignment for the benefit of creditors has been made by Seller; and no trustee or receiver of Seller’s property has been appointed.

 

(g)          Seller is not acting, directly or to its knowledge indirectly for, or on behalf of, any person, group, entity or nation named by any Executive Order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism) or the United States Treasury Department as a terrorist, “Specially Designated National and Blocked Person,” or other banned or blocked person, entity, or nation pursuant to any Law that is enforced or administered by the U.S. Office of Foreign Assets Control, and is not engaging in the transactions described herein, directly or to its knowledge indirectly, on behalf of, or instigating or facilitating the transactions described herein, directly or to its knowledge indirectly, on behalf of, any such person, group, entity or nation.

 

10.3        Reserved.

 

10.4       Representations and Warranties Regarding the Phase I Property. As a material inducement to Purchaser to execute this Agreement and consummate the Closing, Seller represents and warrants to Purchaser with respect to the Phase I Property, that:

 

(a)         The Phase I Rent Roll is the rent roll relied upon by Seller in the ordinary course of business. Seller has complied in all material respects with its obligations under each of the Phase I Leases. Except as set forth in the Phase I Rent Roll, the rents set forth in the Phase I Leases are being collected on a current basis and no tenant has paid rent more than one (1) month in advance, and Seller has not received any written notice of any uncured breaches or defaults by Seller as landlord under the leases from tenants who are still tenants under current leases.

 

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(b)         True, correct and complete copies of all Phase I Contracts have been included in the Due Diligence Materials. Other than the Phase I Contracts delivered to Purchaser as part of the Due Diligence Materials, there are no other property or asset management contracts or other arrangements, contracts and agreements to which Seller is a party affecting the ownership, repair, maintenance, leasing or operation of the Phase I Property. To Seller’s knowledge, the Seller is not in default under any Phase I Contract beyond any applicable notice or cure period.

 

(c)         Except for any litigation described in Schedule 10.2 (j) hereof, there are no pending or, to Seller’s knowledge, threatened (a) eminent domain proceedings for the condemnation of any portion of the Phase I Real Property or (b) litigation against Seller in respect of the Phase I Property which, if decided adversely, would have a material adverse effect on the Phase I Property.

 

(d)         Seller has not received written notice from any governmental authority or agency that Seller is not in compliance with all material licenses or permits necessary to operate the Phase I Property in material compliance with applicable laws and otherwise as presently operated.

 

(e)         Seller has not received written notice from any governmental authority or agency with jurisdiction over the Phase I Property alleging that the Phase I Property or its use is in material violation of any law, including any environmental law or regulation, that would have a material adverse effect.

 

(f)          To the best of Seller’s knowledge, except as may be disclosed in the environmental reports made available to Purchaser as a part of the Due Diligence Materials, Seller has not introduced Hazardous Materials onto the Phase I Property which introduction would constitute a violation of Environmental Laws. The term "Environmental Laws" shall mean, to the extent in existence as of the Agreement Date, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act and other federal laws governing the environment as in effect on the date of this Agreement together with their implementing regulations as of the date of this Agreement applicable to the Property, and all applicable state, regional, county, municipal and other local laws, regulations and ordinances that are equivalent or similar to the federal laws recited above or that purport to regulate hazardous or toxic substances and materials. The term "Hazardous Materials" includes petroleum (including crude oil or any fraction thereof) and any substance, material, waste, pollutant or contaminant listed or defined as hazardous or toxic under any Environmental Laws, in any case at levels or concentrations requiring monitoring, reporting, remediation or removal in accordance with Environmental Laws, but shall exclude mold, radon and other naturally occurring substances.

 

(g)         Copies of the Due Diligence Materials have been (or will be) delivered to Purchaser and are true, correct and complete copies.

 

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(h)          The copies of Existing Loan Documents delivered to Purchaser as part of the Due Diligence Materials are true, accurate and complete copies of all of the material documents and instruments in effect with respect to the Existing Loan, including all amendments, modifications and supplements thereto. To Seller’s knowledge, no material default or breach exists under any Existing Loan Document beyond any applicable cure period, nor does there exist any material default or breach, or any material event or circumstance, which with the giving of notice or passage of time, or both, would constitute a material default or breach by Seller or, to Seller’s knowledge, any other party under any of the Existing Loan Documents.

 

(i)          Seller is the owner of the Phase I Personal Property free and clear of all encumbrances other than the Phase I Permitted Exceptions, and has not previously assigned its rights in and to the Phase I Personal Property except for security interests granted as security for the Existing Loan. Except as set forth in the Due Diligence Materials, Seller does not lease any equipment or other personal property in connection with the ownership or operation of the Phase I Property.

 

(j)          Seller has not received written notice of any uncured violation of any declaration of covenants, conditions and restrictions, reciprocal easement agreements or similar instrument governing or affecting the use, operation, maintenance, management or improvement of all or any portion of the Phase I Property.

 

10.5       Representations and Warranties regarding the Phase II Property and the Phase II Purchase Contract. As a material inducement to Purchaser to execute this Agreement and consummate the Closing, AR Owner represents and warrants to Purchaser with respect to the Phase II Property and the Phase II Purchase Contract, that:

 

(a)          The Phase II Purchase Contract is in full force and effect, has not been modified or amended, and a true and complete copy thereof has been or will be provided to Purchaser as part of the Due Diligence Materials. AR Owner has not previously assigned any of its rights or obligations under the Phase II Purchase Contract. To AR Owner’s knowledge, neither AR Owner nor the Phase II Seller is in default under the Phase II Purchase Contract.

 

(b)          To AR Owner’s knowledge, none of the representations or warranties made by the Phase II Seller under the Phase II Purchase Contract are untrue or inaccurate in any material respect. AR Owner has no knowledge of any condition or matter involving the Phase II Property or the Phase II Purchase Contract that gives rise to a termination right by AR Owner thereunder. All reciprocal easements and similar agreements between the Phase I Property and the Phase II Property contemplated by the Phase II Purchase Contract have been completed and no party has issued (and, to AR Owner’s knowledge, no party has the right to issue) any default notices thereunder.

 

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(c)          This Agreement and all documents executed by AR Owner which are to be delivered to Purchaser at the Closing are, or as of the Closing Date will be, duly authorized, executed, and delivered by AR Owner, and are, or as of the Closing Date will be, legal, valid, and binding obligations of AR Owner, and do not, and as of the Closing Date will not, violate any provisions of any agreement to which Seller is a party or to which it is subject or any law, judgment or order applicable to AR Owner. The execution, delivery and performance by AR Owner of this Agreement or any such documents will not violate, conflict with or result in any breach or contravention of any contractual obligation of AR Owner.

 

(d)          No proceedings under any bankruptcy or insolvency laws have been commenced by or against AR Owner; no general assignment for the benefit of creditors has been made by AR Owner; and no trustee or receiver of AR Owner’s property has been appointed.

 

(e)          AR Owner is not acting, directly or to its knowledge indirectly for, or on behalf of, any person, group, entity or nation named by any Executive Order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism) or the United States Treasury Department as a terrorist, “Specially Designated National and Blocked Person,” or other banned or blocked person, entity, or nation pursuant to any Law that is enforced or administered by the U.S. Office of Foreign Assets Control, and is not engaging in the transactions described herein, directly or to its knowledge indirectly, on behalf of, or instigating or facilitating the transactions described herein, directly or to its knowledge indirectly, on behalf of, any such person, group, entity or nation.

 

10.6        Operation of Phase I Property. From and after the Agreement Date, and other than the Existing Loan, Seller shall not cause any new mortgage, deed of trust, lien, easement, restriction, covenant or other matter of title to affect the Phase I Property or permit the same to affect the Phase I Property, and shall continue to operate the Phase I Property in the ordinary course of business consistent with the manner in which the Phase I Property has been operated by Seller; provided, however, in no event shall Seller be obligated to make any repairs or replacements of a capital nature.

 

10.7        Contracts and Leases. During the pendency of Escrow, Seller shall not (i) modify, amend or allow to lapse or expire any of the Phase I Contracts or any leases representing greater than 3% of the rental revenue being generated from the Phase I Property as of the Agreement Date, in each case without Purchaser’s prior consent, (ii) enter into any new leases for space within the Phase I Property except on such terms (or better terms) as Seller leased units as of the Agreement Date, or (iii) enter into any service, supply, maintenance or other contracts pertaining to the Phase I Property or the operation of the Phase I Property which are not on prevailing market terms and cancelable without penalty after the Closing, upon thirty (30) days’ prior written notice, without, in each instance, obtaining the prior written consent of Purchaser, which consent shall not be unreasonably withheld.

 

10.8        Survival. The representations and warranties made in this Agreement by Seller and AR Owner shall survive the Closing for the period specified in Section 13.3.

 

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10.9        Knowledge. For purposes of this Agreement, references to the knowledge of Seller or AR Owner shall be deemed to mean the actual (i.e. not constructive or imputed) knowledge of Robert Meyer (Robert Meyer being hereinafter referred to as the "Designated Representative"), and shall not be construed, by imputation or otherwise, to refer to the knowledge of any property manager or broker, or to any other officer, agent, manager, representative or employee of Seller or AR Owner or any affiliate of such entities, or to impose upon such Designated Representative any duty to investigate the matter to which such actual knowledge, or the absence thereof, pertains. In no event shall Purchaser have any personal claim against the above-named individuals as a result of the reference thereto in this Section 10.9 and Purchaser waives and releases all such claims which Purchaser now has or may later acquire against them in connection with the transactions contemplated in this Agreement.

 

10.10       Change in Warranties and Representations. Notwithstanding anything to the contrary contained herein, Purchaser acknowledges that Purchaser shall not be entitled to rely on any representation made by Seller or AR Owner in this Agreement (and, therefore, Seller and AR Owner shall have no liability with respect to such representation) to the extent, prior to or at the Closing, Purchaser shall have obtained actual knowledge that such representation or warranty was inaccurate or incomplete in any material respect; provided, however, if Purchaser determines prior to Closing that there is a material adverse breach of, or change with respect to, any of the representations and warranties made by Seller or AR Owner above, then Purchaser may, at its option, by sending to Seller and AR Owner written notice of its election either to (i) terminate this Agreement within five (5) days of discovering such breach, or (ii) waive such breach and proceed to Closing with no adjustment in the Purchase Price and, in such event, Seller and AR Owner shall have no further liability as to such matter thereafter. In the event Purchaser terminates this Agreement for the reasons set forth above, the Deposit shall be immediately refunded to Purchaser, Seller shall reimburse Purchaser for its Due Diligence Costs (as hereinafter defined) and none of Purchaser, Seller or AR Owner shall thereafter have further liability hereunder other than the Surviving Obligations. The provisions of this Section 10.10 shall survive the Closing. The representations and warranties made in this Agreement by Seller and AR Owner shall survive the Closing for the period specified in Section 13.3.

 

11.         REPRESENTATIONS AND WARRANTIES OF PURCHASER

 

Purchaser hereby represents and warrants to Seller and AR Owner as follows:

 

11.1        Due Organization and Status. Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware.

 

11.2        Authorization; No Contravention. This Agreement and all documents executed by Purchaser which are to be delivered to Seller or AR Owner at the Closing are, or as of the Closing Date will be, duly authorized, executed, and delivered by Purchaser, and are, or as of the Closing Date will be, legal, valid, and binding obligations of Purchaser, and do not, and as of the Closing Date will not, violate any provisions of any agreement to which Purchaser is a party or to which it is subject or any law, judgment or order applicable to Purchaser. The execution, delivery and performance by Purchaser of this Agreement or any such documents will not violate, conflict with or result in any breach or contravention of any contractual obligation of Purchaser.

 

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11.3        Bankruptcy. No proceedings under any bankruptcy or insolvency laws have been commenced by or against Purchaser; no general assignment for the benefit of creditors has been made by Purchaser; and no trustee or receiver of Purchaser’s property has been appointed.

 

11.4        Reserved.

 

11.5        Anti-Terrorism. Purchaser is not acting, directly or to its knowledge indirectly for, or on behalf of, any person, group, entity or nation named by any Executive Order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism) or the United States Treasury Department as a terrorist, “Specially Designated National and Blocked Person,” or other banned or blocked person, entity, or nation pursuant to any Law that is enforced or administered by the U.S. Office of Foreign Assets Control, and is not engaging in the transactions described herein, directly or to its knowledge indirectly, on behalf of, or instigating or facilitating the transactions described herein, directly or to its knowledge indirectly, on behalf of, any such person, group, entity or nation.

 

The representations and warranties made in this Agreement by Purchaser shall survive the Closing for the period specified in Section 13.4.

 

12.         COSTS AND PRORATIONS.

 

12.1        Closing Prorations and Adjustments. A statement of prorations and other adjustments (the “Closing Statement”) shall be prepared by Escrow Holder in conformity with the provisions of this Agreement and submitted to Purchaser and Seller for review and approval not less than three (3) business days prior to the Closing Date.

 

(a)          The following items are to be prorated or adjusted, as the case may require, as of the Closing Date:

 

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(1)         The rents under the Phase I Leases and any other sums owing by tenants thereunder with respect to the Phase I Property shall be prorated for the month in which the Closing occurs on a per diem basis. On or before the Closing, Seller shall deliver to Purchaser a schedule of all rents, charges and other amounts, if any, payable by tenants of the Phase I Property before the Closing under the Phase I Leases which are unpaid on the Closing Date (such amounts are collectively referred to herein as the “Delinquent Amounts”). Notwithstanding the foregoing or any direction from such tenants to the contrary, rental and other payments received by Purchaser or Seller from such tenants shall first be applied toward the actual out-of-pocket costs of collection, then toward the payment of current rent and other charges owed to Purchaser or Seller for periods after the Closing, and any excess monies received shall be applied toward the payment of Delinquent Amounts. With respect to Delinquent Amounts owed by tenants of the Phase I Property, Purchaser shall reasonably cooperate (including, without limitation, permitting Seller, through its counsel, to file claims and institute suits if the parties have reasonably exhausted all other efforts for collection), at no expense to Purchaser, in Seller’s collection of such Delinquent Amounts; provided, however, that Seller shall not be entitled to exercise any right to terminate any leases or to evict any tenant of the Phase I Property, and all such collection efforts by Seller must cease by the six (6) month anniversary of the Closing Date. Purchaser and Seller shall reasonably cooperate in reconciling any operating expenses, taxes or other assessments reimbursable by the tenants of the Phase I Property under the Phase I Leases for the periods of their respective ownership (or deemed ownership).

 

(2)         The full amount of security deposits paid under the Phase I Leases, if any, and not theretofore applied, together with interest thereon to the extent any interest is required by law or otherwise to be paid to tenants thereunder, shall be delivered or credited by Seller to Purchaser on the Closing Date (and any letters of credit, if any, shall be delivered to, and assigned to, Purchaser at the Closing at Seller’s expense);

 

(3)         All other items of income and all items of expense related to the Phase I Property that are customarily prorated, including real estate taxes, personal property taxes and assessments, funds on hand in operating accounts, operating expenses, and Phase I Contracts payments (under Phase I Contracts not terminated by Purchaser pursuant to Section 5.2.3), shall be prorated through Escrow with all items of income and expense allocated (i) to Seller for the period up to the Close of Escrow, and (ii) to Purchaser for the period from and after the Close of Escrow. If Closing occurs before the current year's tax or assessment bills are available, an estimated proration shall be made based on the most recent assessed value and the current tax or assessment rates. Within thirty (30) days after receipt of the current year’s tax or assessment bill, Purchaser shall deliver a copy to Seller and Purchaser shall refund to Seller any amount overpaid by Seller, or and Seller shall pay to Purchaser the amount of any deficiency in the proration. If an estimated proration was made, the provisions of this subsection 12.1(a)(3) shall survive the Closing for a period of thirty (30) days following issuance of the current year’s tax or assessment bill.

 

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(4)         Interest under the Existing Loan will be prorated between Seller and Purchaser such that Seller is responsible for all interest due and payable, or accruing, prior to the Closing Date (including interest accruing through the day prior to the Closing Date as to interest accruing for the month in which the Closing Date occurs) and Purchaser shall be responsible for all interest thereunder from and after the Closing Date.

 

Any proration which must be estimated at the Closing shall be reprorated and finally adjusted as soon as practicable after the Closing Date with any refunds payable to Seller or Purchaser to be made as soon as practicable; otherwise all prorations shall be final. To the extent any prorations are subject to reimbursement from the tenants of the Phase I Property under their respective leases, the parties shall adjust such amounts upon receipt and such reimbursement shall be paid to Seller or Purchaser, as applicable, as soon as practicable. The terms of this Section 12.1 shall expressly survive Closing.

 

(b)         At Closing, Seller shall assign to Purchaser (if and to the extent assignable) and receive a credit for the then current balances, if any, held in escrow for taxes, insurance, replacement reserves, operating deficits and/or working capital reserves in connection with the Existing Loan (unless such reserves have been returned to Seller by Existing Lender, in which case no credit shall be given at Closing).

 

(c)         Amounts on deposit, if any, with utility companies or under any Phase I Contracts shall be returned to Seller, and Purchaser shall make separate arrangements with such utility companies or service providers.

 

(d)         Seller shall place, or cause to be placed, any units at the Phase I Property that are vacated at least five (5) business days prior to Closing in “rent ready condition,” failing which Purchaser shall receive a credit at Closing equal to the sum of $750.00 per unit that is not in such rent ready condition. A representative of Seller and Purchaser shall walk the vacant units two (2) days before the Close of Escrow to determine which vacant units are not rent ready, if any. For the purposes of this Section 12.1(d), “rent ready condition” shall mean: interior carpets have been cleaned or replaced where necessary, freshly painted interior walls, working kitchen and other appliances (and water heaters and HVAC to the extent such items serve only the individual vacant unit(s)), and no material damage to the doors, walls, ceilings, floors or windows inside such vacant units.

 

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12.2       Expenses of Closing. The expenses of Closing shall be paid in the following manner:

 

(a)          Seller shall be responsible for the costs of: (i) to the extent Purchaser (or the Existing Lender) desires a New Owner Policy (or, as to Lender, a new title policy for the Existing Loan), in connection with the acquisition of the Phase I Property, a base (i.e., without any endorsements) ALTA (or other form policy acceptable to Purchaser or Existing Lender) owner’s or mortgagee title insurance policy, as the case may be, with extended coverage, for the Phase I Property or, if Existing Lender agrees that the Existing Loan Policy for the Phase I Property will suffice, any endorsements to effectuate the down-dating of, and increase in coverage of, such Existing Loan Policy; (ii) update to the Phase I Survey; (iii) any applicable transfer taxes associated with or triggered by the sale of the Phase I Real Property; and (iv) 50% of Existing Lender’s consent fee in connection with the satisfaction of the Consent Requirements and 50% of all other costs incurred by the Existing Lender (e.g. lender legal fees) related to the satisfaction of the Consent Requirements which Existing Lender requires be paid or reimbursed to it (which consent fee is projected to be approximately one percent (1%) of the current principal balance of the Existing Loan at Closing). Purchaser shall be responsible for the payment of the other 50% of the Existing Lender consent fee, 50% of all other direct costs incurred by the Existing Lender (e.g. lender legal fees) related to the satisfaction of the Consent Requirements which Existing Lender requires be paid or reimbursed to it; 100% of the cost of any new third-party reports required by Existing Lender or Purchaser in connection with the Phase I Property, and any additional endorsements to the Existing Title Policy requested by Purchaser that are not described in clause (i) above.

 

(b)          Seller and Purchaser shall split equally all escrow and recording fees incurred in connection with the Closing. Seller and Purchaser shall pay the fees and expenses of their respective legal counsel incurred in connection with the transaction.

 

(c)          The Closing Statement shall be prepared by Escrow Holder at the Closing and shall set forth the manner of computation of the Closing adjustments and costs.

 

12.3        Broker’s, Finder’s or Similar Fees. Each party hereto represents and warrants to the other that it has dealt with no brokers or finders in connection with this transaction except for JLL Florida (“Broker”). If the sale of the Phase I Property closes pursuant to the terms of this Agreement (without modification), Purchaser and Seller agree to split a thirty (30) basis point commission payable to Broker (based on the $44.75 million purchase price for the Phase I Property), with the entirety of such commission to be paid to Broker at the closing of the Phase II Property. All other sales commissions associated with this transaction will be paid by Seller. Each party hereto agrees that if any person or entity, other than Broker, makes a claim for brokerage commissions or finder’s fees related to the sale of the Phase I Property or the Phase II Property by Seller to Purchaser, and such claim is made by, through or on account of any acts or alleged acts of said party or its representatives, said party will protect, indemnify, defend and hold the other party free and harmless from and against any and all loss, liability, cost, damage and expense (including reasonable attorneys’ fees) in connection therewith. The provisions of this Section 12.3 shall survive Closing or any termination of this Agreement.

 

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13.         DEFAULTS.

 

13.1         Liquidated Damages Upon Default by Purchaser. IF ESCROW FAILS TO CLOSE DUE TO PURCHASER’S DEFAULT UNDER THIS AGREEMENT, AND SUCH FAILURE IS NOT CURED WITHIN TEN (10) CALENDAR DAYS AFTER RECEIPT OF WRITTEN NOTICE FROM SELLER REGARDING SUCH DEFAULT, SELLER WILL BE DAMAGED AND WILL BE ENTITLED TO COMPENSATION FOR THOSE DAMAGES. SUCH DAMAGES WILL, HOWEVER, BE EXTREMELY DIFFICULT AND IMPRACTICAL TO ASCERTAIN FOR THE FOLLOWING REASONS: (1) THE DAMAGES TO WHICH SELLER WOULD BE ENTITLED IN A COURT OF LAW WILL BE BASED IN PART ON THE DIFFERENCE BETWEEN THE ACTUAL VALUE OF THE PHASE I PROPERTY AND PURCHASE RIGHTS UNDER THE PHASE II PURCHASE CONTRACT AT THE TIME SET FOR THE CLOSE OF ESCROW AND THE PURCHASE PRICE FOR THE SUCH PROPERTY AS SET FORTH IN THIS AGREEMENT; (2) PROOF OF THE AMOUNT OF SUCH DAMAGES WILL BE BASED ON OPINIONS OF VALUE OF THE PHASE I PROPERTY AND PHASE II PROPERTY, WHICH CAN VARY IN SIGNIFICANT AMOUNTS; AND (3) IT IS IMPOSSIBLE TO PREDICT AS OF THE DATE ON WHICH THIS AGREEMENT IS MADE WHETHER THE VALUE OF THE PHASE I PROPERTY AND PHASE II PROPERTY WILL INCREASE OR DECREASE AS OF THE DATE SET FOR THE CLOSE OF ESCROW. PURCHASER DESIRES TO LIMIT THE AMOUNT OF DAMAGES FOR WHICH PURCHASER MIGHT BE LIABLE SHOULD PURCHASER BREACH THIS AGREEMENT. PURCHASER AND SELLER WISH TO AVOID THE COSTS AND LENGTHY DELAYS WHICH WOULD RESULT IF SELLER FILED A LAWSUIT TO COLLECT ITS DAMAGES FOR A BREACH OF THIS AGREEMENT.

 

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THEREFORE, IF ESCROW FAILS TO CLOSE DUE TO PURCHASER’S DEFAULT, THE SUM REPRESENTED BY THE DEPOSIT SHALL BE DEEMED TO CONSTITUTE A REASONABLE ESTIMATE OF SELLER’S DAMAGES, AND SELLER’S (AND AR OWNER’S) SOLE AND EXCLUSIVE REMEDY IN THE EVENT OF THE FAILURE TO CLOSE ESCROW RESULTING FROM PURCHASER’S DEFAULT SHALL BE LIMITED TO RECOVERING SUCH AMOUNT AS LIQUIDATED DAMAGES, TOGETHER WITH ANY REASONABLE ATTORNEYS’ FEES AND COSTS INCURRED BY SELLER TO ENFORCE THIS PROVISION. BY INITIALING THIS PROVISION IN THE SPACES BELOW, SELLER AND PURCHASER EACH SPECIFICALLY AFFIRM THEIR RESPECTIVE AGREEMENTS CONTAINED IN THIS SECTION 13.1 AND AGREE THAT THE SUM REPRESENTED BY THE DEPOSIT IS A REASONABLE SUM CONSIDERING THE FACTS AND CIRCUMSTANCES AS THEY EXIST ON THE DATE OF THIS AGREEMENT, INCLUDING THE RELATIONSHIP OF SUCH AMOUNT TO THE RANGE OF HARM TO SELLER THAT COULD BE ANTICIPATED, AND THE ANTICIPATION THAT PROOF OF CAUSATION, FORESEEABILITY AND ACTUAL DAMAGES WOULD BE COSTLY AND/OR IMPRACTICAL. BY INITIALING THIS PROVISION BELOW, THE PARTIES SPECIFICALLY CONFIRM THE ACCURACY OF SUCH FACTS, THE FACT THAT THEY POSSESS APPROXIMATELY EQUAL BARGAINING STRENGTH AND SOPHISTICATION AND THE FACT THAT EACH OF THEM WAS REPRESENTED BY COUNSEL WHEN ENTERING INTO THIS AGREEMENT, WHICH COUNSEL EXPLAINED THE CONSEQUENCES OF THIS SECTION TO THEM AT THE TIME THIS AGREEMENT WAS MADE. NOTHING SET FORTH IN THIS SECTION SHALL ELIMINATE, ABROGATE OR OTHERWISE AFFECT SELLER’S OR AR OWNER’S RIGHTS UNDER ANY INDEMNITY GRANTED BY PURCHASER TO SUCH ENTITIES. THE PAYMENT OF SUCH LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER. THE PARTIES HAVE SET FORTH THEIR INITIALS BELOW TO INDICATE THEIR AGREEMENT WITH THE LIQUIDATED DAMAGES PROVISIONS CONTAINED IN THIS SECTION.

 

PURCHASER’S INITIALS /s/ MK   SELLER’S INITIALS /s/ RM

 

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13.2         Default by the Selling Parties. Subject to the limitations set forth in this Section 13.2, if the conveyance of the Phase I Property and the assignment of the Phase II Purchase Contract is not consummated by reason of any default by Seller or AR Owner and such default is not cured within ten (10) calendar days after receipt of written notice from Purchaser regarding such default, then Purchaser shall be entitled, as its sole remedy and at its sole election, to receive either (x) (i) reimbursement from Seller for the third-party costs and fees (including but not limited to legal fees) actually and reasonably incurred by Purchaser in connection with this Agreement, its due diligence on the Phase I Property and the Phase II Property and the assumption of the Existing Loan, not to exceed $100,000.00 in the aggregate (collectively, the “Due Diligence Costs”), (ii) the return of the Deposit and (iii) if the uncured default resulted from an Intentional Act (as hereinafter defined) to Close on the Phase I Property sale or the assignment of the Phase II Purchase Contract, liquidated damages equal to three percent (3%) of the Purchase Price (“Purchaser’s Liquidated Damages”): which payments when made in full shall operate to terminate this Agreement, or (y) to enforce specific performance of Seller’s obligations to convey the Phase I Property to Purchaser and AR Owner’s obligation to assign its rights under the Phase II Purchase Contract to Purchaser or its designee; provided, however, any claim for specific performance must be commenced within sixty (60) days from the date of Closing (or the date on which Closing was to have occurred), failing which, Purchaser shall have no further right to bring suit for specific performance under this Agreement. Any claim or right hereunder shall be asserted in writing within sixty (60) calendar days following the earlier of the date upon which the Closing was to have occurred or the Outside Closing Date (as such latter date may be further extended from time to time). In no event shall Seller or AR Owner be liable for consequential, speculative, remote or punitive damages, or any other damages other than liquidated damages as stated above, and Purchaser hereby waives and releases any right to seek or collect any such consequential, speculative, remote or punitive damages, or any its actual damages as set forth above. As used herein, "Intentional Act" shall mean any default by Seller or AR Owner attributable to willful misconduct, with an intent to deny or impair Purchaser from acquiring the property and interests described in this Agreement, including, without limitation, conveying the property and interests to be conveyed to Purchaser under this Agreement to a third party, encumbering or pledging such property and interests so that they cannot be transferred free and clear of liens, and/or failing to make the deliveries required pursuant to Section 7.2; provided, however, for the avoidance of doubt, Seller's or AR Owner’s non-compliance with the covenants set forth in this Agreement shall not, absent the showing of willful misconduct with an intent to deny or impair described above, constitute an Intentional Act.

 

13.3        Indemnification by Seller and AR Owner.

 

(a)          Seller agrees to hold harmless, indemnify and defend Purchaser from and against (i) any and all obligations, claims, debts, liabilities and damages resulting from any material inaccuracy in or material breach of any of those representations and warranties which are set forth in Section 10.2 and Section 10.4 of the Agreement, and (ii) all costs and expenses, including reasonable attorneys’ fees, incurred by Purchaser as a result of such claims. AR Owner further agrees to hold harmless, indemnify and defend Purchaser from and against (x) any and all obligations, claims, debts, liabilities and damages resulting from any material inaccuracy in or material breach of any of those representations and warranties which are set forth in Section 10.5 of the Agreement, and (y) all costs and expenses, including reasonable attorneys’ fees, incurred by Purchaser as a result of such claims.

 

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(b)          Seller’s and AR Owner’s respective obligations pursuant to this Section 13.3 shall survive for a period of nine (9) months after the Closing Date, after which time, respectively, all liabilities of such parties shall cease.

 

(c)          Valid claims under this Section 13.3 shall collectively aggregate at least $25,000.00 before they are actionable, and in no event shall Seller’s and AR Owner’s aggregate indemnity obligations hereunder exceed $500,000.00.

 

13.4         Purchaser’s Indemnification. Purchaser shall hold harmless, indemnify and defend AR Owner and Seller, as applicable, from and against: (i) any and all obligations, claims, debts, liabilities and damages resulting from any material inaccuracy in or material breach of representation or warranty of Purchaser hereunder, (ii) any and all obligations and other matters relative to any employees of Seller applicable to the period from and after the Closing where such employees are hired by Purchaser (but not otherwise), and (iii) all costs and expenses, including reasonable attorneys’ fees, incurred by Seller or AR Owner as a result of such claims. The provisions of this Section 13.4 shall survive the Closing, except any claim under this Section 13.4 must be submitted in writing by AR Owner or Seller to Purchaser within nine (9) months following the Closing, after which time all liability of Purchaser under this Section 13.4 shall cease. Additionally, valid claims under this Section 13.3 shall collectively aggregate at least $25,000.00 before they are actionable and in no event shall Purchaser’s aggregate indemnity obligations hereunder exceed $500,000.00.

 

14.         MISCELLANEOUS

 

14.1         Successors and Assigns. Subject to the provisions of this Section 14.1, the terms and provisions of this Agreement are to apply to and bind the permitted successors and assigns of the parties hereto. Purchaser may not assign its rights under this Agreement without first obtaining Seller’s written approval, and any such attempted assignment without Seller’s prior written approval shall be null and void. Notwithstanding the foregoing, Purchaser may assign all, but not less than all, of its rights under this Agreement to any Affiliate (as hereinafter defined) of Purchaser or to any other entity which is an Affiliate of Bluerock Residential Growth REIT, Inc. (“Bluerock REIT”). In the event Purchaser intends to assign its rights hereunder, (a) Purchaser shall send Seller written notice of its request (or notice if consent is not required) at least one (1) business day prior to the Closing Date, which notice shall include the legal name and structure of the proposed assignee, and (b) Purchaser and the proposed assignee shall execute an assignment and assumption of this Agreement and deliver a copy thereof to Seller. “Affiliate” means any person or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with Purchaser or Bluerock REIT. For the purposes of this definition, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have the meanings correlative to the foregoing. Except as provided in this Section 14.1, no person other than the parties hereto and their permitted successors and permitted assigns is intended to be a beneficiary of any of this Agreement.

 

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14.2        Intentionally Omitted.

 

14.3        Notices. Any notice, consent or approval required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given upon (i) hand delivery, (ii) one (1) business day after being deposited with Federal Express or another reliable overnight courier service for next day deliver, (iii) upon facsimile or e-mail transmission (except that if the date of such transmission is not a business day, then such notice shall be deemed to be given on the first business day following such transmission), or (iv) two (2) business days after being deposited in the United States mail, registered or certified mail, postage prepaid, return receipt required, and addressed as follows:

 

If to Seller or AR Owner: c/o Catalyst Development Partners, LLC
  880 Glenwood Avenue SE, Suite H
  Atlanta, Georgia 30316
  Attn:  Jorge Sardinas and Rob Meyer
  Email: JorgeS@catalystdp.com  and robm@catalystdp.com  
   
With a copy to: Eric Wilensky, Esq.
  Nelson Mullins Riley & Scarborough LLP
  Atlantic Station
  201 17th  Street NW, Suite 1700
  Atlanta, GA 30363
  Facsimile: (404) 322-6050
  Email: eric.wilensky@nelsonmullins.com
   
If to Purchaser: Bluerock Real Estate, L.L.C.
  712 Fifth Avenue, 9th Floor
  New York, New York 10019
  Attn: Jordan Ruddy and Michael L. Konig, Esq.
  Facsimile: (646) 278-4220
  Email: Jruddy@bluerockre.com; Mkonig@bluerockre.com
   
With a copy to: Hirschler Fleischer
  2100 E. Cary Street
  Richmond, Virginia 23223
  Attn: S. Edward Flanagan, Esq.
  Facsimile: (804) 644-0957
  Email: eflanagan@hf-law.com

 

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If to Escrow Holder: Calloway Title & Escrow, LLC
  4170 Ashford-Dunwoody Road, Suite 285
  Atlanta, GA 30319
  Attn: S. Marcus Calloway
  Facsimile: (770) 395-9610
  Email:  MarcusC@titlelaw.com

 

14.4        Amendment and Waiver.

 

(a)          No failure or delay on the part of Seller, AR Owner or Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available at law, in equity or otherwise.

 

(b)          Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by Seller, Purchaser and (to the extent such amendment pertains to the Phase II Property or the Phase II Purchase Contract) AR Owner, and (ii) only in the specific instance and for the specific purpose for which made or given.

 

14.5        Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Executed copies of this Agreement transmitted by facsimile shall be fully binding and effective upon receipt, but each party promptly shall deliver to the other an execution copy of this Agreement bearing an original signature. Each person signing this Agreement or any documents required hereunder on behalf of another party warrants that he or she is duly authorized to execute this Agreement and all documents required hereunder on behalf of such party.

 

14.6        Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

 

14.7        Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of North Carolina without regard to principles of conflict of laws of such state.

 

14.8        Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof.

 

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14.9         Entire Agreement. This Agreement (including any Exhibits and Schedules) is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. All Exhibits and Schedules which are attached hereto are incorporated in this Agreement as though fully set forth herein.

 

14.10      Further Assurances. Each of the parties shall execute such documents and perform such further acts (including obtaining any consents, exemptions, authorizations, or other actions by, or giving any notice to, or making any filings with, any governmental authority or any other person) as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement.

 

14.11      Attorneys’ Fees. If either Seller or Purchaser shall obtain legal counsel and bring an action or proceeding against the other by reason of an alleged breach of any covenant, provision or condition hereof, or otherwise arising out of this Agreement, the unsuccessful party shall pay to the prevailing party reasonable attorneys’ fees and costs, which shall be payable whether or not any proceeding is prosecuted to judgment or award. The term “prevailing party” shall include a party (i) who brings an action or proceeding against the other by reason of the other’s breach or default and obtains substantially the relief sought by judgment or award or (ii) who successfully defends an action or proceeding brought by the other party and against whom no material damages or specific performance are awarded.

 

14.12      Other Parties. Nothing in this Agreement shall be construed as giving any person, firm, corporation or other entity, other than the parties hereto, their successors and permitted assigns, any right, remedy or claim under or with respect to this Agreement or any provision hereof.

 

14.13      Confidentiality. Purchaser understands that all information obtained by Purchaser in connection with the transactions contemplated by this Agreement (including, but not limited to, the existence and terms of this Agreement, the Due Diligence Documents and other information relating to Seller, AR Owner, the Phase I Property and the Phase II Property) is confidential (“Confidential Information”) until Closing. Prior to Closing, Seller and Purchaser each agrees that except (i) as necessary in connection with the Existing Loan Approval Contingency or obtaining the New Title Policies or (ii) to the extent required by The Securities Act of 1933, The Securities and Exchange Act of 1934, and the rules and regulations promulgated thereunder, or other applicable law, neither shall take any action nor conduct itself in any fashion that would disclose to third parties (excluding attorneys, accountants and similar professionals assisting Purchaser with the transactions identified herein) unrelated to Purchaser, its acquisition of the Phase I Property or the Phase II Property, or any aspect of the contemplated transaction.

 

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14.14      Casualty. In the event of the damage or destruction of all or any part of the Phase I Property prior to Closing, the aggregate cost to repair or replace of which shall be $750,000.00 or more (as estimated by Seller’s insurance carrier), Purchaser may, at its option, exercisable by written notice to Seller, either (i) terminate this Agreement, whereupon neither party will have any further obligations hereunder other than the Surviving Obligations, and the Deposit shall be returned to Purchaser or (ii) continue under this Agreement, whereupon at Closing Seller will assign to Purchaser its respective interests in and to any insurance policies and proceeds thereof payable to either of them as a result of such damage or destruction, less such portion thereof payable as shall first be reimbursed to Seller for the costs of any restoration work incurred by Seller prior to the Closing, and pay Purchaser the amount of any deductible or self-insured retention under such policies. Seller shall notify Purchaser promptly in writing if all or any portion of the Phase I Property is damaged or destroyed prior to the Closing Date. Seller shall not settle any insurance claims without the consent of Purchaser, such consent not to be unreasonably withheld, conditioned or delayed. In the event that prior to Closing the Phase II Property is the subject of a casualty that would permit the purchaser under the Phase II Purchase Contract to terminate the Phase II Purchase Contract, Purchaser shall have the right to instruct AR Owner to terminate the Phase II Purchase Contract, in which event the terms of Section 7.4 hereof shall apply.

 

14.15      Condemnation; Zoning. In the event of (a) the taking of all or any material part of the Phase I Property, or conveyance in lieu thereof, prior to the Closing (e.g., not including the taking of strips of widths less than ten (10) feet of the Phase I Real Property running along adjacent roads and highways unless the same affects parking or access), by eminent domain or condemnation, or notice to Seller prior to the Closing of the initiation of governmental proceedings to take such action or an offer to purchase in lieu thereof, or (b) any change in zoning or other laws governing use of the Phase I Property, or notice thereof to Seller, prior to the Closing, then in any such event, Seller shall promptly notify Purchaser thereof in writing, and Purchaser, at its option, exercisable by written notice to Seller, may either (i) terminate this Agreement, whereupon neither party will have any further obligation hereunder other than the Surviving Obligations and the Deposit shall be returned to Purchaser, or (ii) continue under this Agreement, whereupon Seller shall have no interest in any award and proceeds thereof payable to Seller as a result of such taking shall be assigned to Purchaser. Seller shall notify Purchaser promptly in writing if all or any portion of the Phase I Property is taken by power of eminent domain or conveyed in lieu thereof, or if such taking or conveyance in lieu thereof is threatened, prior to the Closing Date. In the event that prior to Closing the Phase II Property is the subject of a condemnation or eminent domain proceeding that would permit the purchaser under the Phase II Purchase Contract to terminate the Phase II Purchase Contract, Purchaser shall have the right to instruct AR Owner to terminate the Phase II Purchase Contract, in which event the terms of Section 7.4 hereof shall apply.

 

14.16      Reserved.

 

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14.17      Computation of Time. Unless otherwise specified, in computing any period of time described in this Agreement, the day of the act or event after which the designated period of time begins to run is not to be included and the last day of the period so computed is to be included, unless such last day is a Saturday, Sunday or legal holiday under the laws of the State of North Carolina (all days other than Saturdays, Sundays or North Carolina legal holidays being deemed “business days” for purposes hereof), in which event the period shall run until the end of the next day which is neither a Saturday, Sunday nor legal holiday.

 

14.18      Exhibits and Schedules. The following exhibits and schedules attached hereto shall be deemed to be an integral part of this Agreement:

 

Exhibit A Legal Description of Phase I Land
Exhibit B Inventory of Phase I Personal Property
Exhibit C Phase I Rent Roll
Exhibit D Phase I Contracts
   
Schedule 5.1 Due Diligence Documents
Schedule 7.2(a)(i) Deed
Schedule 7.2(a)(ii) Bill of Sale and Assignment
Schedule 7.2(a)(iv) Certificate of Selling Parties
Schedule 7.2(a)(vii) Seller’s Affidavit
Schedule 7.2(b) Assignment and Assumption of Phase II Purchase Contract

 

14.19     Limitation of Selling Parties’ Liability. Except as expressly set forth in the Parent Joinder attached hereto, Purchaser shall have no recourse against any of the past, present or future, direct or indirect, shareholders, partners, members, managers, principals, directors, officers, agents, incorporators, affiliates or representatives of Seller or AR Owner or of any of the assets or property of any of the foregoing for the payment or collection of any amount, judgment, judicial process, arbitral award, fee or cost or for any other obligation or claim arising out of or based upon this Agreement and requiring the payment of money by AR Owner. This Section 14.19 shall survive the Closing.

 

14.20      Limitation of Purchaser’s Liability. Seller shall have no recourse against any of the past, present or future, direct or indirect, shareholders, partners, members, managers, principals, directors, officers, agents, incorporators, affiliates or representatives of Purchaser or of any of the assets or property of any of the foregoing for the payment or collection of any amount, judgment, judicial process, arbitral award, fee or cost or for any other obligation or claim arising out of or based upon this Agreement and requiring the payment of money by Purchaser. This Section 14.20 shall survive the Closing.

 

14.21      JURY WAIVER. IN ANY LAWSUIT OR OTHER PROCEEDING INITIATED BY SELLER OR PURCHASER UNDER OR WITH RESPECT TO THIS AGREEMENT, SELLER AND PURCHASER EACH WAIVE ANY RIGHT IT MAY HAVE TO TRIAL BY JURY. THIS SECTION 14.21 SHALL SURVIVE THE CLOSING.

 

[Remainder of page intentionally left blank – signature page follows]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above.

 

  PURCHASER:
   
  BLUEROCK REAL ESTATE, L.L.C.,
  a Delaware limited liability company
     
  By: /s/ Michael L. Konig
  Name: Michael L. Konig
  Title: Senior Vice President and General Counsel

 

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  SELLER:
   
  AR I BORROWER, LLC, a Delaware limited liability
company
   
  By: AR OWNER, LLC, a Delaware limited liability
company, its Sole Member and Sole Manager
   
    By: AR DEVELOPER, LLC, a Georgia limited
liability company, its Managing Member
   
      By: CATALYST DEVELOPMENT
PARTNERS II, LLC, a Georgia
limited liability company, its Sole
Member and Sole Manager
   
        By: /s/ Robert Meyer
          Name: Robert Meyer
          Title: Manager/Officer

 

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JOINDER OF AR OWNER

 

AR Owner hereby joins in this Agreement as to those matters pertaining to AR Owner, the Phase II Property, the Phase II Purchase Contract, and the transactions contemplated herein relating to the foregoing, and for no other purpose.

 

  AR OWNER:
   
  AR OWNER, LLC, a Delaware
  limited liability company
   
  By: AR DEVELOPER, LLC, a Georgia limited  liability company, its Managing Member
   
    By: CATALYST DEVELOPMENT
PARTNERS II, LLC, a Georgia limited
liability company, its Sole Member and Sole
Manager
         
      By: s/ Robert Meyer
        Name: Robert Meyer
        Title:  Manager/Officer

  

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PARENT JOINDER

 

This joinder (this “Parent Joinder”) is attached to and made a part of the foregoing Agreement and all terms capitalized but not defined herein shall have the respective meanings given to them in the Agreement. The undersigned, HKCG Realty Associates, LP, a Florida limited partnership, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby duly executes with proper authority and joins in the execution of this Agreement, and agrees that it is jointly and severally liable, as a principal and not as a surety, for the performance of the obligations of Seller and AR Owner pursuant to Section 13.3 of the Agreement which may arise following the Closing Date. Purchaser shall have the right to proceed directly against the undersigned without first making written demand to Seller (and without any obligation to bring suit against Seller) for the satisfaction of any such obligations.

 

The undersigned is an indirect owner of Seller, will derive substantial benefits from the transactions described in the Agreement and acknowledges that the execution of this Parent Joinder is a material inducement and condition to Purchaser’s execution of the Agreement. The undersigned represents and warrants that it has the legal right, power, authority and capacity to execute this Parent Joinder, that such execution does not violate the organizational documents of, or any other agreement or instrument by which the undersigned is bound, and that this Parent Joinder is binding and enforceable against the undersigned.

 

The undersigned unconditionally waives any guarantor or suretyship defenses that might otherwise be available to it with respect to its obligations under this Parent Joinder. The terms of this Joinder shall survive Closing.

 

The provisions set forth in Sections 14.3 though 14.13 of the Agreement are hereby incorporated by reference into this Parent Joinder as if fully set forth herein, provided that the undersigned shall be “Seller”, as applicable, under such Sections.

 

  HKCG Realty Associates, LP, a Florida limited partnership
   
  By: H. Katz Capital Group, Inc., its general partner
     
  By: /s/ Brian Siegel
     
  Name: Brian Siegel
     
  Title: Managing Director

 

 40 
 

 

PARENT JOINDER

 

This joinder (this “Parent Joinder”) is attached to and made a part of the foregoing Agreement and all terms capitalized but not defined herein shall have the respective meanings given to them in the Agreement. The undersigned, Catalyst Development Partners II, LLC, a Georgia limited partnership, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby duly executes with proper authority and joins in the execution of this Agreement, and agrees that it is jointly and severally liable, as a principal and not as a surety, for the performance of the obligations of Seller and AR Owner pursuant to Section 13.3 of the Agreement which may arise following the Closing Date. Purchaser shall have the right to proceed directly against the undersigned without first making written demand to Seller (and without any obligation to bring suit against Seller) for the satisfaction of any such obligations.

 

The undersigned is an indirect owner of Seller, will derive substantial benefits from the transactions described in the Agreement and acknowledges that the execution of this Parent Joinder is a material inducement and condition to Purchaser’s execution of the Agreement. The undersigned represents and warrants that it has the legal right, power, authority and capacity to execute this Parent Joinder, that such execution does not violate the organizational documents of, or any other agreement or instrument by which the undersigned is bound, and that this Parent Joinder is binding and enforceable against the undersigned.

 

The undersigned unconditionally waives any guarantor or suretyship defenses that might otherwise be available to it with respect to its obligations under this Parent Joinder. The terms of this Joinder shall survive Closing.

 

The provisions set forth in Sections 14.3 though 14.13 of the Agreement are hereby incorporated by reference into this Parent Joinder as if fully set forth herein, provided that the undersigned shall be “Seller”, as applicable, under such Sections.

 

  Catalyst Development Partners II, LLC, a Georgia
limited liability company
     
  By: /s/ Robert G. Meyer
     
  Name: Robert G. Meyer
     
  Title: Manager/Officer

 

 41 
 

 

EXHIBIT A

 

Legal Description of Phase I Real Property

 

Lying and being situate in Mecklenburg County, North Carolina, and being more particularly described as follows:

 

Being all of Parcels 1, 2 and the areas shown as the sixty-six (66) foot public right-of-way (“Prosser Way”) and the fifty (50) foot public right of way (“Skinner Lane”), as shown on a plat recorded in Map Book 53, page 886, and Parcel 3A as shown on a plat recorded in Map Book 55, page 355, Mecklenburg County Register of Deeds, reference to which is hereby made for a more particular description.

 

TOGETHER WITH the rights and easements conferred by that Sewer Easement Agreement recorded in Book 18053, at page 845, Mecklenburg County Register of Deeds, as amended by First Amendment to Sewer Agreement recorded in Book 20732, at page 68, and Second Amendment to Sewer Easement Agreement recorded in Book 22541, at page 189.

 

TOGETHER WITH easements contained in that Declaration of Easements, Covenants and Restrictions recorded in Book 28849 at page 615, Mecklenburg County Register of Deeds.

 

 42 
 

 

EXHIBIT B

 

Phase I PERSONAL Property

 

Ashton Reserve - Maintenance Shop Inventory

 

3 golf carts with chargers

2 back pack blowers

1 hand truck

2 snow shovels

5 gallon shop vac

2 hand held spreaders

pressure washer

portable a/c unit

portable air tank

cordless drill

cordless skill saw

cordless saw

saw

battery charger

carpet fan blower

hvac recovery machine

key machine

a/c vacuum pump

a/c torch set

30 lb a/c recovery tank

key machine

8 ft ladder

6 ft ladder

24 ft ladder

set of a/c gauges

caulk gun

miter saw

small refrigerator

bench grinder

 

 43 
 

 

POOL

 

Grill with Cover

54 Pool Chairs

28 white drink tables

4 trash cans

1 table with 6 chairs

4 high tables with 4 chairs each

2 end tables

6 Planters

4 lounge chairs with pillows

1 couch

1 chair with ottoman

 

Ashton Reserve - Office Inventory

 

Clubhouse/Media Room Bathrooms
2 couches 4 mirrors
4 lounge chairs 2 pieces of artwork
Lamp Stand 1 Rug
2 Flat Screen Tv 3 trash cans
2 Coffee Table  
4 End tables  
Dresser Manager office Manager office
Bench Seat 1 computer
6 mirrors Printer
4 pieces of wall art 2 prospect chairs
2 area rugs 2 computer chairs
5 barstools 1 desk
Water Machine 1 calculator
9 pieces of artwork 1 artwork
Microwave phone
Stove  
Dishwasher  
Ice Maker  
Keurig Assistant Manager office
Wireless printer computer
conference table w/ 6  
chairs desk
8 seats phone
1 loveseat calculator
5 lamps 1 piece of artwork
Entertainment Center Hanging File organizer

 

 44 
 

 

Leasing office  
2 desks Back Back  Office/File Room
2 desk chairs Computer
4 leasing chairs Desk
2 computers Computer Chair
2 phones Copier
Entry stand with  
vases Refridgerator
1 area rug Key Trac
1 wall art Dyscon Vaccuum Cleaner
paper Shredder
Helium Tank
Phone
4 radios with chargers
Laminator 

 

 45 
 

 

EXHIBIT C

 

Phase I RENT ROLL

 

[ATTACHED]

 

 46 
 

  

EXHIBIT D

 

Phase I CONTRACTS

 

1. That certain Advertiser Agreement by and between Catalyst and Network Communications, Inc. d/b/a Apartment Finder dated May 19, 2014;

 

2. That certain Ad Insertion Agreement by and between For Rent Media Solutions and Greystar dated February 8, 2012;

 

3. That certain Advertising Agreement by and between Greystar Real Estate Partners, LLC and Apartment Guide dated January 31, 2015;

 

4. That certain Advertising Agreement by and between Apartment Guide and Ashton Reserve at Northlake dated March 26, 2013;

 

5. That certain Pest Control Service Agreement by and between Ashton Reserve at Northlake and Cramer Pest Control dated June 4, 2014;

 

6. That certain Preventative Maintenance Agreement by and between Jasko Fitness Solutions, Inc. and Ashton Reserve at Northlake;

 

7. That certain Full Maintenance Agreement by and between New River Landscaping and Ashton Reserve at Northlake dated February 18, 2014;

 

8. That certain Order Form to Master Services Agreement by and between NWP Services Corporation and Northlake Investors 288, LLC for Ashton Reserve Northlake dated February 25, 2015;

 

9. That certain PPC Advertising Agreement by and among Standing Dog Interactive, Greystar and Ashton Reserve dated January 13, 2015;

 

10. That certain Commercial Propane Gas Sales Agreement by and between Suburban Propane and Ashton Reserve dated November 13, 2013;

 

11. That certain Change Order to Proposal or Contract by and between Suburban Propane and Ashton I Borrower LLC dated Decmber 5, 2013;

 

12. That certain Guaranteed Maintenance Agreement by and between Systel Business Equipment Co., Inc. and Ashton Reserve at Northlake dated March 12, 2012;

 

13. That certain Guaranteed Maintenance Agreement by and between Systel Business Equipment Co., Inc. and Ashton Reserve at Northlake dated September 23, 2013;

 

 47 
 

 

14. That certain Life Safety Agreement by and between Wayne Automatic Fire Sprinklers, Inc. and Ashton Reserve at Northlake dated October 22, 2012;

 

15. That certain Life Safety Agreement by and between Wayne Automatic Fire Sprinklers, Inc. and Ashton Reserve at Northlake dated November 22, 2011;

 

16. That certain Service Contract by and between WebListers LLC and Ashton Reserve at Northlake dated October 3, 2013; and

 

17. That certain Service and Marketing Agreement by and between Time Warner Enterprises, LLC and Northlake Investors 288, LLC dated November 14, 2013.

 

 48 
 

 

SCHEDULE 5.1

 

Due Diligence Documents

 

_____1. Business License or Permit

 

_____2. Survey or Site Plan

 

_____3. Building Plans and Specifications

 

_____4. Vendor List (with addresses and phone numbers)

 

_____5. Address, telephone number & account numbers for utility companies

 

_____6. Utility Log covering the last twelve month period, including copies of actual bills

 

_____7. Service Agreements/Contracts including account numbers, if available

 

_____8. List of related entities performing services at the properties indicating the type of service and amounts paid

 

_____9. Fire Inspection Reports

 

_____10. Critical Shut Off Locations (water, gas & electric)

 

_____11. Tax Bills

 

_____12. Present year Notice of Proposed Property Taxes and whether the proposed assessment is being appealed and any and all information regarding

 

_____13. Disclosure of all pending insurance claims

 

_____14. Personal Property Inventory

 

_____15. Current Insurance Certificates and premium breakdown of the coverage provided.

 

_____16. Insurance Loss Runs for the past five years

 

_____17. Current Market Survey

 

_____18. 12 Month Traffic History with marketing sources

 

_____19. Gross Rent Potential Schedule by unit type

 

 49 
 

 

_____20. Leasing Summary by month for last twelve months

 

_____21. Resident demographics information

 

_____22. Occupancy Report

 

_____23. Certificate of Occupancy

 

_____24. Income Statements for the three previous years in twelve-month format, including capital expenditures (if available)

 

_____25. YTD Income Statement with actuals in twelve-month format, including capital expenditures

 

_____26. Copy of the Balance Sheets (as of the end of the calendar year for the last 2 years and current year-to-date)

 

_____27. Current year Operating Budget and next year including capital items (if applicable or available)

 

_____28. Copy of the Cash Receipts Journals (last three months) and Bank Statements (last 12 months)

 

_____29. Copy of the Delinquency Report and/or Aged Receivable Report with prepaid rents (as of the last calendar year and end of the last calendar month)

 

_____30. Copy of the Aged Accounts Payable Schedule (as of the end of the last calendar year and the end of the last calendar month)

 

_____31. Copy of General Ledger and current Trial Balance

 

_____32. Check Run for last 30 days

 

_____33. Copy of any CPA and/or internal audits, reports or statements

 

_____34. Current Rent Roll - in Excel, if possible

 

_____35. Current Concessions Report

 

_____36. Current Detail Unit Status Report (status of Vacant/On-Notice units)

 

_____37. Current Lease Expiration Summary

 

_____38. Copy of Current Leases and Addenda

 

_____39. Current Security Deposit Report, if not listed on current rent roll

 

 50 
 

 

_____40. Listing of all down units (i.e., not rent ready)

 

_____41. Listing of non-revenue units (model, employee, office, courtesy officer, etc.)

 

_____42. Listing of amount of employee concessions

 

_____43. List of any charges and fees (application, NSF, month to month, date rent is due, redecoration, late, water, sewer and trash)

 

_____44. Service Request Log

 

_____45. Pest Control Log

 

_____46. Compensation package information and time on property for existing staff

 

_____47. Incident Reports

 

_____48. Termite Bond Letter (if available)

 

_____49. Construction plans (site plan)

 

_____50. Resident Ledgers

 

_____51. List of unit types/description and the number of each type unit

 

_____52. Unit List with amenities for each unit

 

_____53. Property Security Code List with descriptions

 

_____54. Mailing List for each individual apartment. Are building numbers included in the address?

 

_____55. Copies of Notices or Violations regarding Zoning, Building Department, Fire Safety, Health Department, Municipality, other Governmental Body.

 

 51 
 

 

SCHEDULE 7.2(a)(i)

 

DEED

 

Prepared by: Nelson Mullins (CMR)
  4140 Parklake Avenue, Suite 200
  Raleigh, NC 27612
   
Return after recording to:    Eric Wilensky, Esq.
  Nelson Mullins Riley & Scarborough LLP
  201 17th Street NW, Suite 1700
  Atlanta, GA 30363

 

Tax Parcel No.:

 

STATE OF NORTH CAROLINA

Excise Tax: $____________

COUNTY OF MECKLENBURG

 

NORTH CAROLINA SPECIAL WARRANTY DEED

 

THIS DEED is made as of the _____ day of ___________________, 2015, by and between AR I BORROWER, LLC, Grantor, and _________________________, a ___________________________, Grantee, having a mailing address of _________________________________________; the designation Grantor and Grantee as used herein shall include said parties, their heirs, successors, and assigns, and shall include singular, plural, masculine, feminine or neuter as required by context;

 

WITNESSETH, that the Grantor, for a valuable consideration paid by the Grantee, the receipt of which is hereby acknowledged, has and by these presents does grant, transfer and convey unto the Grantee in fee simple all those certain lots or parcels of land situated in Mecklenburg County, North Carolina, and more particularly described as follows:

 

See Exhibit A attached hereto and incorporated herein by reference.

 

 

 

 

The property hereinabove described was acquired by Grantor by instrument recorded in Book 28849 at Page 632 of the Mecklenburg County Public Registry.

 

A map showing the parcels described above is recorded in Map Book 55, Page 355, of the Mecklenburg County Public Registry.

 

The above described property ¨ does x does not include the primary residence of the Grantor.

 

TO HAVE AND TO HOLD the aforesaid lots or parcels of land and all privileges and appurtenances thereto belonging to the Grantee in fee simple forever;

 

AND THE GRANTOR covenants with Grantee that Grantor is seized of the above-described property in fee simple, has the right to convey the same in fee simple, and has done nothing to impair such title as Grantor received, and Grantor will warrant and defend the title against the lawful claims of all persons claiming by, under or through Grantor, except for the exceptions hereinafter stated.

 

See Exhibit B attached hereto and incorporated herein by reference.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

 

 

IN WITNESS WHEREOF, Grantor has caused this instrument to be signed the day and year first above written.

 

  AR I BORROWER, LLC, a Delaware limited
liability company
     
  By: AR OWNER, LLC, a Delaware limited
liability company, its Sole Member and Sole
Manager
     
    By: AR DEVELOPER, LLC, a Georgia
limited liability company, its
Managing Member
       
      By: CATALYST DEVELOPMENT PARTNERS II, LLC, a Georgia limited liability company, its Sole Member and Sole Manager
           
        By:  
          Name:
          Title:

 

STATE OF ________________

 

COUNTY OF ________________

 

I certify that the following person personally appeared before me this day, acknowledging to me that he voluntarily signed the foregoing document for the purpose stated therein: ____________________________ as the _____________________ of Catalyst Development Partners II, LLC, the sole member and sole manager of AR Developer, LLC, the managing member of AR Owner, LLC, the sole member and sole manager of AR I BORROWER, LLC.

 

Date: ___________________, 2015.

 

   
  Official Signature of Notary
   
   
  Notary’s printed or typed name
   
  My commission expires:   

(Official Seal)

 

 

 

 

Exhibits to Special Warranty Deed

 

A – Legal Description of Land

 

B – Permitted Exceptions

 

 

 

 

SCHEDULE 7.2(a)(ii)

 

BILL OF SALE AND ASSIGNMENT

 

Bill of Sale and Assignment and Assumption

of Leases and Service Contracts

 

This Bill of Sale and Assignment and Assumption of Leases and Service Contracts (this “Agreement”) is made and entered into this ____ day of _____________________, 2015, by and between AR I BORROWER, LLC, a Delaware limited liability company (“Seller”), and ___________________, a ___________ (“Purchaser”).

 

WITNESSETH:

 

WHEREAS, Seller and Purchaser have previously entered into that certain Purchase and Sale Agreement and Escrow Instructions, dated _________________, 2015 [DESCRIBE AMENDMENTS, IF APPLICABLE] (the “Contract”), having AR Owner, LLC join as an additional party for the limited purposes set forth therein;

 

WHEREAS, concurrently with the execution and delivery of this Agreement and pursuant to the Contract, Seller is conveying to Purchaser, by Special Warranty Deed, (i) those certain tracts or parcels of real property located in Mecklenburg County, North Carolina, and more particularly described on Exhibit A attached hereto and made a part hereof (collectively, the “Land”), (ii) all rights, easements and appurtenances pertaining to the Land (collectively, the “Related Rights”), and (iii) all buildings, structures, fixtures and other improvements on and within the Land (the “Improvements”; and the Land, the Related Rights and the Improvements being sometimes collectively referred to as the “Real Property”);

 

WHEREAS, Seller has agreed to convey to Purchaser certain personal property and assign to Purchaser certain leases and service contracts as hereinafter set forth;

 

NOW, THEREFORE, in consideration of the receipt of Ten Dollars ($10.00), the assumptions by Purchaser hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows:

 

1.           Bill of Sale.

 

(a)          Seller hereby sells, assigns, transfers and conveys to Purchaser all of Seller’s right, title and interest in, to and under the Phase I Personal Property and the Phase I Plans, Licenses and Permits. Seller warrants to Purchaser that Seller owns good and marketable title to the Phase I Personal Property, that the Phase I Personal Property is free and clear of all liens, charges and encumbrances other than the Phase I Permitted Exceptions (as defined in the Contract), and that Seller has full right, power and authority to sell the Phase I Personal Property and to make this Bill of Sale. Seller further warrants to Purchaser that Seller has not assigned or conveyed to any third party its right, title and interest, if any, in the Phase I Plans, Licenses and Permits.

 

 

 

 

(b)          “Phase I Personal Property” shall have the meaning ascribed to such term in the Contract.

 

(c)          “Phase I Plans, Licenses and Permits” shall have the meaning ascribed to such term in the Contract.

 

2.           Assignment and Assumption of Phase I Leases.

 

(a)          Seller hereby sells, assigns, transfers and conveys to Purchaser all of Seller’s right, title and interest as landlord in, to and under all tenant leases identified on Exhibit B attached hereto (collectively, the “Assigned Leases”), together with all refundable tenant security and other refundable deposits owing to tenants by the express terms of the Assigned Leases, minus any documented amounts properly applied by Seller pursuant to the terms of such Assigned Leases, as of the date of this Agreement, together with any interest owing thereon pursuant to the terms of the Assigned Leases or applicable law (collectively, the “Phase I Deposits”). The assignment of the Phase I Deposits has been made by means of a credit or payment on the closing statement executed by Seller and Purchaser pursuant to the Contract.

 

(b)          Purchaser hereby assumes all of the covenants, agreements, conditions and other terms and provisions stated in the Assigned Leases which, under the terms of the Assigned Leases, are to be performed, observed, and complied with by the landlord from and after the date of this Agreement. Purchaser acknowledges that Purchaser shall become solely responsible and liable as landlord under the Assigned Leases for obligations arising or accruing from and after the date hereof.

 

(c)          Purchaser shall indemnify, hold harmless and defend Seller from and against any and all claims, demands, causes of action, liabilities, losses, costs, damages and expenses (including reasonable attorneys’ fees and expenses and court costs incurred in defending any such claim or in enforcing this indemnity) that may be incurred by Seller by reason of the failure of Purchaser to perform, observe and comply with the landlord’s obligations under any of the Assigned Leases arising or accruing during the period from and after the date hereof, including, without limitation, claims made by tenants with respect to the Phase I Deposits on or after the date hereof (but only to the extent paid or assigned to Purchaser or for which Purchaser has received a credit or payment at Closing). Seller shall indemnify, hold harmless and defend Purchaser from and against any and all claims, demands, causes of action, liabilities, losses, costs, damages and expenses (including reasonable attorneys’ fees and expenses and court costs incurred in defending any such claim or in enforcing this indemnity) that may be incurred by Purchaser by reason of the failure of Seller to have performed, observed or complied with the landlord’s obligations under any of the Assigned Leases prior to the date hereof, including, without limitation, claims made by tenants with respect to the Phase I Deposits arising before the date hereof (to the extent such Phase I Deposits were not paid or assigned to Purchaser or for which Purchaser did not receive a credit or payment at Closing).

 

(d)          For purposes of this Paragraph 2, the word “landlord” means the landlord, lessor or other equivalent party under any of the Assigned Leases, and the word “tenant” means the tenant, lessee or other equivalent party under any of the Assigned Leases.

 

 

 

 

3.           Assignment and Assumption of Phase I Contracts.

 

(a)          Seller hereby sells, assigns, transfers and conveys to Purchaser all of Seller’s right, title and interest in, to and under those service, supply, equipment rental and similar agreements set forth on Exhibit C attached hereto and made part hereof by this reference (collectively, the “Phase I Contracts”).

 

(b)          Purchaser hereby assumes all of the covenants, agreements, conditions and other terms and provisions stated in the Phase I Contracts which, under the terms of the Phase I Contracts, are to be performed, observed, and complied with by the property owner from and after the date of this Agreement. Purchaser acknowledges that Purchaser shall become solely responsible and liable under the Phase I Contracts for obligations arising or accruing from and after the date hereof, including with respect to any and all payments coming due under the Phase I Contracts for which Purchaser has received a credit or payment on the closing statement executed by Purchaser and Seller, if any (collectively, the “Credited Payments”).

 

(c)          Purchaser shall indemnify, hold harmless and defend Seller from and against any and all claims, demands, causes of action, liabilities, losses, costs, damages and expenses (including reasonable attorneys’ fees and expenses and court costs incurred in defending any such claim or in enforcing this indemnity) that may be incurred by Seller by reason of the failure of Purchaser to perform, observe and comply with its obligations under any of the Phase I Contracts arising or accruing during the period from and after the date hereof, including without limitation, claims made by any other contract party with respect to the Credited Payments on or after the date hereof (to the extent paid or assigned to Purchaser or for which Purchaser received a credit or payment at Closing). Seller shall indemnify, hold harmless and defend Purchaser from and against any and all claims, demands, causes of action, liabilities, losses, costs, damages and expenses (including reasonable attorneys’ fees and expenses and court costs incurred in defending any such claim or in enforcing this indemnity) that may be incurred by Purchaser by reason of the failure of Seller to have performed, observed or complied with its obligations under any of the Phase I Contracts prior to the date hereof, including without limitation, claims made by any other contract party with respect to the Credited Payments arising before the date hereof (to the extent such Credited Payments were not paid or assigned to Purchaser or for which Purchaser did not receive a credit or payment at Closing).

 

4.          Qualifications. This Agreement is subject to the Phase I Permitted Exceptions (as defined in the Contract). This Agreement is also subject to those provisions of the Contract limiting Seller's liability to Purchaser.

 

5.          Counterparts. This Agreement may be executed in two or more identical counterparts, and it shall not be necessary that any one of the counterparts be executed by all of the parties hereto. Each fully or partially executed counterpart shall be deemed an original, but all of such counterparts taken together shall constitute one and the same instrument.

 

6.          Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the successors, executors, administrators, legal representatives and assigns of the parties hereto.

 

 

 

 

7.          Governing Law. This Agreement shall be construed under and enforced in accordance with the laws of the State of North Carolina.

 

 

 

 

EXECUTED effective as of the date first above written.

 

  SELLER:
   
  AR I BORROWER, LLC,
  a Delaware limited liability company
   
  By: AR OWNER, LLC,
    a Delaware limited liability company,
    its Sole Member and Sole Manager
       
    By: AR DEVELOPER, LLC,
      a Georgia limited liability company,
      its Managing Member
       
      By: CATALYST DEVELOPMENT
        PARTNERS II, LLC,
        a Georgia limited liability company,
        its Sole Member and Sole Manager
           
        By:  
        Name:  
        Title: