PART
I
General
ACRE
Realty Investors Inc. is a commercial real estate investment and operating company focused on commercial real estate investments.
On
January 30, 2015, our company and A-III Investment Partners LLC (“A-III”), a joint venture between affiliates of Avenue
Capital Group and C-III Capital Partners LLC, which is controlled by Island Capital Group LLC, closed a series of transactions
that recapitalized our company and resulted in a change in control of our company. At the closing, A-III purchased 8,450,704 shares
of our company’s common stock at a purchase price of $1.42 per share, for an aggregate purchase price of $12 million,
and our company issued to A-III warrants to purchase up to an additional 26,760,563 shares of our company’s common stock
at an exercise price of $1.42 per share ($38 million in the aggregate). The purchase price per share and the exercise price
of the warrants are subject to a potential post-closing adjustment upon completion of the sale of our company’s four legacy
land parcels held on January 30, 2015, which could result in the issuance of additional shares of common stock to A-III and an
increase in the number of shares of common stock issuable upon exercise of the warrants. We used a portion of the proceeds of
A-III’s investment to pay off certain of our outstanding indebtedness as discussed further below.
Immediately
after the closing, our company’s name was changed to ACRE Realty Investors Inc., and the name of our operating partnership
was changed to ACRE Realty LP. On February 2, 2015, our common stock began trading under the new ticker symbol “AIII”
(NYSE MKT: AIII). Our principal office was moved to 399 Park Avenue, 6
th
Floor, New York, New York 10022.
As
a result of the transaction, A-III is the largest shareholder of our company, owning as of December 31, 2016 approximately 41.24%
of our outstanding shares of common stock, or approximately 39.75% on a diluted basis assuming conversion of the outstanding
units of limited partnership interest in our operating partnership into our company’s common stock and assuming no exercise
of the warrants we granted to A-III.
Effective
as of the closing of the A-III transaction, our management was changed and our company became externally managed by A-III
Manager LLC (our “Manager”), which is a wholly-owned subsidiary of A-III, pursuant to a management agreement between
our company and the Manager that was executed at the closing of the A-III transaction on January 30, 2015. Immediately after the
closing, the Manager designated, and the Board of Directors (the “Board”) appointed, the following persons as executive
officers of the company: Edward Gellert is Chief Executive Officer and President; Robert Gellert is Executive Vice President,
Chief Operating Officer and Treasurer; Gregory Simon is Executive Vice President, General Counsel and Secretary; and Mark E. Chertok
is Chief Financial Officer. Charles S. Roberts, who previously served as the company’s Chairman, President and Chief Executive
Officer, was appointed as an Executive Vice President after the A-III transaction and through December 31, 2016, pursuant to an
Employment Agreement, which expired on December 31, 2016, at which time Mr. Roberts ceased to be an officer or employee of our
company.
We
currently own one remaining legacy property, a tract of land totaling 38 acres, which is held for sale as of December 31, 2016.
On October 7, 2016, the operating partnership entered into a sale contract with Roberts Capital Partners, LLC, which is an affiliate
of one of our directors. The sale of the property is expected to close during the second quarter of 2017, subject to an extension
option and certain closing conditions. Our current focus is on selling the remaining legacy property. We do not intend to focus
on development projects as we have in the past. Going forward, we expect to pursue a flexible real estate investment strategy.
We may invest in multifamily, office, mixed-use office, retail, industrial, healthcare or lodging properties, as well as preferred
equity or debt instruments secured by mortgages on these types of properties, mezzanine loans secured by pledges of equity interests
in entities that own these types of properties or other forms of subordinate debt in connection with these types of properties.
The
Operating Partnership
We
conduct our business through ACRE Realty LP, which owns the remaining legacy property that is held for sale and will own, either
directly or indirectly through subsidiaries or joint ventures, any future properties we acquire. We refer to ACRE Realty LP as
our operating partnership. The limited partnership agreement of our operating partnership provides that it is not required to
be dissolved until 2093. Our company is the sole general partner of our operating partnership and, as of December 31, 2016, owned
a 96.39% interest in our operating partnership. Our ownership interest in our operating partnership entitles us to share in cash
distributions from, and in the profits and losses of, the operating partnership generally in proportion to our ownership percentage.
In this report, we refer to units of limited partnership interest in the operating partnership as “units” and to the
holders of units as “unitholders.”
Under
the limited partnership agreement of our operating partnership, unitholders generally have the right to require the operating
partnership to redeem their units. A unitholder who submits units for redemption will receive, at our election, either (a) 1.647
shares for each unit submitted for redemption (the “Conversion Factor”), or (b) cash for those units at their fair
market value, based upon the then current trading price of the shares. Prior to December 29, 2015, we had an informal policy of
issuing shares, in lieu of cash, in exchange for units. On December 28, 2015, our Board formally adopted a policy whereby
we shall only issue our common shares for redemption of units, rather than paying cash for such redemption in accordance with
the operating partnership agreement.
Whenever
we issue and sell shares of our common stock, we are obligated to contribute the net proceeds from that issuance and sale to the
operating partnership and the operating partnership is obligated to issue units to us. The operating partnership agreement permits
the operating partnership, without the consent of the unitholders, to sell additional units and add limited partners.
Legacy
Property Sales
On
October 7, 2016, the operating partnership entered into a sale contract with Roberts Capital Partners, LLC, which is an affiliate
of one of our directors, to sell Highway 20 for a purchase price of $4,725,000, including a reimbursement of $1,050,000 relating
to prepaid sewer taps. This transaction is expected to close during the second quarter of 2017, subject to an extension option
and certain closing conditions.
Manager
In
connection with our recapitalization transactions with A-III, on January 30, 2015, our company, our operating partnership, and
the Manager entered into a management agreement, among other things, to provide for the day-to-day management of our company by
the Manager, including investment activities and operations of our company and its properties. The management agreement requires
the Manager to manage and administer the business activities and day-to-day operations of our company and its subsidiaries in
conformity with our company’s investment guidelines and other policies that are approved and monitored by our Board.
These investment guidelines and other policies may be modified and supplemented from time to time pursuant to approval by a majority
of the Board (which must include a majority of the independent directors) and the Manager’s investment committee.
The
Manager maintains an administrative services agreement with A-III, pursuant to which A-III and its affiliates, including Avenue
Capital Group and C-III Capital Partners, provide a management team along with appropriate support personnel for the Manager to
deliver the management services to us. Under the terms of the management agreement, among other things, the Manager is required
to refrain from any action that, in its reasonable judgment made in good faith, is not in compliance with our approved investment
guidelines and would, when applicable, adversely affect the qualification of our company as a REIT. The management agreement has
an initial five-year term and will be automatically renewed for additional one-year terms thereafter unless terminated either
by us or the Manager in accordance with its terms.
Because
we are externally managed by the Manager, we currently have no employees of our own. Charles S. Roberts, one of our directors,
was employed by us as our Executive Vice President after the A-III transaction and through December 31, 2016 pursuant to an Employment
Agreement that expired on December 31, 2016, at which time Mr. Roberts ceased to be an officer or employee of our company. Each
of our officers, other than our Chief Financial Officer, Mark Chertok, who is an employee of FTI Consulting, Inc. (“FTI”),
is an employee of the Manager or another affiliate of A-III.
Environmental
and Other Regulatory Matters
Under
various federal, state, and local environmental laws and regulations, the company may be required to investigate and clean up
the effects of hazardous or toxic substances at its properties, including properties that have previously been sold.
The
environmental assessments we have previously obtained on our properties have not revealed any environmental liability that we
believe would have a material adverse effect on our business, assets, or results of operations, nor are we aware of any liability
of that type.
Segment
Information
We
currently have one reportable operating segment: the land segment consisting of a single tract of land, including cash and cash
equivalents, other assets and general and administrative expenses.
For
more detailed information please see Note 8 – Segment Reporting, to the audited consolidated financial statements included
in this report. For information about our properties, please see Item 2—Properties, below.
Corporate
Information
ACRE
Realty Investors Inc. is a Georgia corporation formed in 1994. Our executive offices are located at 399 Park Avenue, 6
th
Floor, New York, 10022, and our telephone number is 212-878-3504.
We
file annual, quarterly, and current reports, proxy statements, and other information with the SEC that is available to the public
at the SEC’s website at www.sec.gov. We also maintain an Internet website at http://www.acrerealtyinvestors.com/
Investors
or potential investors in the company should carefully consider the risks described below. These risks are not the only ones we
face. Additional risks of which we are presently unaware or that we currently consider immaterial may also impair our business
operations and hinder our financial performance, including our ability to make distributions to our investors. We have organized
our summary of these risks into six subsections:
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real
estate related risks;
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risks
related to our relationship with our Manager;
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environmental
and other legal risks; and
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risks
for investors in our stock.
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This
section includes forward-looking statements.
Financing
Risks
If
we are unable to meet mortgage payments on any mortgaged property, the mortgage holder could foreclose upon the property and take
other actions.
Currently,
we do not have any outstanding debt. If we are unable to meet mortgage payments on any mortgaged property in the future, the mortgage
holder could foreclose upon the property, appoint a receiver, and receive an assignment of rents and leases, or pursue other remedies,
all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income without accompanying
cash proceeds.
Rising
interest rates could materially and adversely affect the cost of our indebtedness.
We
have incurred and may again in the future incur debt that bears interest at a variable rate. Accordingly, increases in interest
rates could increase our interest costs, which could materially and adversely affect our results of operations and our ability
to pay amounts due on our debt and to pay future distributions to our investors.
We
face the normal risks associated with debt financing.
We
are subject to the normal risks associated with debt financing, including the risks that our cash flow will be insufficient to
meet required payments of principal and interest and that we will not be able to renew, repay, or refinance our debt when it matures
or that the terms of any renewal or refinancing will not be as favorable as the existing terms of that debt. If we are unable
to pay our future obligations to our secured lenders, they could proceed against any or all of the collateral securing our indebtedness
to them. In addition, a breach of the restrictions or covenants contained in our loan documents for future indebtedness could
cause an acceleration of our indebtedness. We may not have or may be unable to obtain sufficient funds to repay our future indebtedness
in full upon acceleration. If we are unable to refinance our future debt upon acceleration or at scheduled maturity on acceptable
terms or at all, we face the risks described in the first risk factor above.
Real
Estate-Related Risks
We
face risks associated with land holdings and related activities and we may have a difficult time selling our remaining legacy
property.
We
hold undeveloped land that is currently under contract to be sold with a related party at a price above its carrying value. Real
estate markets are highly uncertain and, as a result, the value of the undeveloped land may fluctuate significantly in the future.
We may be unable to close on the sale of our remaining legacy property, and as such, we may either be forced to hold the parcel
for longer than we would like or to sell it at a price that is lower than we would like. The carrying costs can be significant
and can result in further losses if the sale does not materialize.
Real
estate properties are illiquid and are difficult to sell.
Real
estate investments are relatively illiquid, which limits our ability to react quickly to adverse changes in economic or other
market conditions. Our ability to dispose of assets depends on prevailing economic and market conditions. We may be unable to
sell our remaining legacy property, to repay indebtedness we incur in the future, to raise capital we need to fund our future
potential acquisitions, or to fund distributions to investors.
We
face substantial competition.
Our
remaining legacy property is located in a developed area where we face substantial competition from other properties and from
other real estate companies that own or may develop or renovate competing properties. The substantial number of competitive properties
and real estate companies in our market areas could have a material adverse effect on our ability to sell our remaining legacy
property. In addition, properties we acquire in the future will also likely face competition for tenants. These factors could
materially and adversely affect the value of our real estate portfolio, our results of operations, our ability to pay our obligations
and amounts due on our related mortgage debt, if any, that we incur in the future and our ability to pay distributions to our
investors.
Changes
in market or economic conditions may affect our business negatively.
General
economic conditions and other factors beyond our control may adversely affect real property income and capital appreciation.
Losses
from natural catastrophes may exceed our insurance coverage.
We
carry what we believe to be customary insurance on our properties in amounts and types that we believe are commercially reasonable
for the types of properties we hold. We intend to obtain commercially reasonable types and amounts of insurance coverage for properties
we acquire in the future. For income producing commercial properties we may acquire in the future, we expect to obtain comprehensive
liability, fire, flood, extended coverage, and rental loss insurance with policy specifications, insured limits and deductibles
that we believe are customary and prudent for similar properties. Nevertheless, some losses of a catastrophic nature, such as
losses from floods or high winds, may be subject to limitations. We may not be able to maintain our insurance at a reasonable
cost or in sufficient amounts to protect us against potential losses. Further, our insurance costs could increase in future periods.
If we suffer a substantial loss, our insurance coverage may not be sufficient to pay the full current market value of the lost
investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make
it impractical to use insurance proceeds to replace a damaged or destroyed property.
Our
real estate assets may be subject to further impairment charges.
We
recorded impairment losses on a number of our assets in 2015 and prior years, and we may have to record additional impairment
losses in the future. Although we believe we have applied reasonable estimates and judgments in determining the proper classification
of our real estate assets, these estimates require the use of estimated market values, which are difficult to assess. If changes
in circumstances require us to adjust our valuation assumptions for our assets, we could be required to record additional impairment
losses. Any future impairment could have a material adverse effect on our results of operations for the period in which we record
the impairment losses.
Failure
to succeed in new markets may limit our growth.
We
may in the future make acquisitions outside of our existing market areas. We may not be able to operate successfully in new markets,
and we may be exposed to a variety of risks if we choose to enter new markets. These risks include, among others:
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an inability to evaluate
accurately local real estate market conditions and local economies;
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an
inability to identify appropriate acquisition opportunities; and
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an
inability to hire and retain key personnel in those markets.
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We
may acquire or redevelop real estate and acquire related companies and this may create risks.
We
may acquire or redevelop properties or acquire real estate related companies when we believe doing so is consistent with our business
strategy. We may not succeed in (i) redeveloping or acquiring real estate and real estate related companies; (ii) completing these
activities on time or within budget; or (iii) leasing or selling redeveloped or acquired properties at amounts sufficient to cover
our costs. Competition in these activities could also significantly increase our costs. Difficulties in integrating acquisitions
may prove costly or time-consuming and could divert management’s attention. Acquisitions or redevelopments in new markets
or industries where we do not have the same level of market knowledge may result in weaker than anticipated performance. We may
also abandon acquisition or redevelopment opportunities that we have begun pursuing and consequently fail to recover expenses
already incurred. Furthermore, we may be exposed to the liabilities of properties or companies acquired, some of which we
may not be aware of at the time of acquisition.
From
time to time, we may seek to make one or more material acquisitions. The announcement of such a material acquisition may result
in a rapid and significant decline in the price of our common shares.
We
are continuously looking at material transactions that we believe will maximize shareholder value. However, an announcement by
us of one or more significant acquisitions could result in a quick and significant decline in the price of our common shares.
If
we enter into joint ventures or joint ownership of properties; our ability to control those joint ventures and partial interests
may be limited.
Instead
of purchasing properties directly, we may invest as a co-venturer. We may also choose to sell partial interests in certain properties
to co-venturers. Joint venturers may share control over the operations of the joint venture assets. The co-venturer in an investment
might become bankrupt, or have economic or business interests or goals that are inconsistent with our business interests or goals,
or be in a position to take action contrary to our instructions, requests, policies, or objectives. Consequently, a co-venturer’s
actions might subject property owned by the joint venture to additional risk. Although we intend to seek to maintain sufficient
influence upon any joint venture to achieve its objectives, we may be unable to take action without our joint venture partners’
approval, or joint venture partners could take actions binding on the joint venture without our consent. Additionally, if a joint
venture partner were to become bankrupt, we could become liable for that partner’s share of joint venture liabilities.
Terrorism
could impair our business.
Terrorist
attacks and other acts of violence or war could have a material adverse effect on our business and operating results. Attacks
that directly affect one or more of our properties could significantly affect our ability to operate those properties and impair
our ability to achieve the results we expect. Our insurance coverage may not cover losses caused by a terrorist attack. In addition,
the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a
material adverse effect on our business and results of operations.
Risks
Related to our Relationship with our Manager
Our
Manager has limited experience operating a public real estate company, and we cannot assure you that our Manager’s past
experience will be sufficient to successfully manage our business.
Our
Manager has limited experience operating a public real estate company. We cannot assure you that our Manager will be able to operate
our business successfully or implement our operating policies and strategies. The results of our operations depend on several
factors, including the availability of opportunities for the acquisition of targeted assets, the level and volatility of interest
rates, the availability of adequate financing, conditions in the financial markets and general economic conditions.
We
are dependent on our Manager and certain key personnel that are provided to us through our Manager and may not find a suitable
replacement if our Manager terminates the management agreement or such key personnel are no longer available to us.
Charles
S. Roberts, one of our directors, was our only employee after the A-III transaction and through December 31, 2016, pursuant to
an Employment Agreement that expired on December 31, 2016, at which time Mr. Roberts ceased to be an officer or employee of our
company. Our other officers, other than our chief financial officer, are employees of our Manager or one or more of its affiliates.
We have no separate facilities and are completely reliant on our Manager, which has significant discretion as to the implementation
of our operating policies and execution of our business strategies and risk management practices. We also depend on our Manager’s
access to the professionals and principals of its affiliates. The employees of our Manager’s affiliates identify, evaluate,
negotiate, structure, close, and monitor our portfolio. The departure of any of the senior officers of our Manager, or of a significant
number of investment professionals or principals of our Manager’s affiliates, could have a material adverse effect on our
ability to achieve our objectives. We can offer no assurance that our Manager will remain our manager or that we will continue
to have access to our Manager’s senior management. We are subject to the risk that our Manager will terminate the management
agreement or that we may deem it necessary to terminate the management agreement or prevent certain individuals from performing
services for us and that no suitable replacement will be found to manage us.
Our
chief financial officer is employed by a third party consulting firm, FTI, with whom we have contracted for our chief financial
officer’s services. As an employee of FTI, our chief financial officer may have other professional commitments that reduce
the amount of time he can devote to us.
Our
Board of Directors has approved very broad investment guidelines for our Manager and will not approve each decision made by our
Manager to acquire, dispose of, or otherwise manage an asset.
Our
Manager is authorized to follow very broad guidelines in pursuing our strategy. While our Board periodically reviews our guidelines
and our portfolio and asset-management decisions, it generally does not review all of our proposed acquisitions, dispositions,
and other management decisions. In addition, in conducting periodic reviews, our Board relies primarily on information provided
to them by our Manager. Our Manager has great latitude within the broad guidelines in determining the types of assets it may decide
are proper for us to acquire and other decisions with respect to the management of those assets. Poor decisions could have a material
adverse effect on our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
The
management agreement with our Manager may be costly and difficult to terminate.
Termination
of our management agreement without cause, including termination for poor performance or non-renewal, is subject to several conditions
which may make such a termination difficult and costly. The management agreement has a current term that expires on January
30, 2020, and will be automatically renewed for successive one-year terms thereafter unless notice of non-renewal is delivered
by either party to the other party at least 180 days prior to the expiration of the then current term. Subsequent to the initial
term the management agreement provides that it may be terminated by us, based on performance upon the affirmative vote of at least
two-thirds of our independent directors based either upon unsatisfactory performance by our Manager that is materially detrimental
to us or upon a determination by the Board that the management fee payable to our Manager is not fair, subject to our Manager’s
right to prevent such a termination by accepting a mutually acceptable reduction of management fees. In the event we terminate
the management agreement as discussed above, we will be required to pay our Manager a termination fee equal to four times the
sum of (i) the average annual Base Management Fee, (ii) the average annual Incentive Fee, and (iii) the average annual Acquisition
Fees and Disposition Fees, in each case earned by the Manager in the most recently completed eight calendar quarters prior to
the Effective Termination Date (as defined in the management agreement). These provisions will increase the effective cost to
us of terminating the management agreement, thereby adversely affecting our ability to terminate our Manager without cause.
Pursuant
to the management agreement, our Manager will not assume any responsibility other than to render the services called for thereunder
and will not be responsible for any action of our Board in following or declining to follow its advice or recommendations. Under
the terms of the management agreement, our Manager and its affiliates and their respective controlling persons, members, directors,
officers, employees, managers, owners and shareholders, will not be liable to us for acts or omissions performed in accordance
with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct or gross negligence
of their duties under the management agreement. In addition, we will indemnify our Manager and its affiliates and their respective
controlling persons, members, directors, officers, employees, managers, owners and shareholders, with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful
misconduct or gross negligence, performed in good faith in accordance with and pursuant to the management agreement.
Our
Manager’s failure to identify and acquire assets that meet our investment criteria or perform its responsibilities under
the management agreement could materially adversely affect our business, financial condition and results of operations.
Our
ability to achieve our objectives depends on our Manager’s ability to identify and acquire assets that meet our investment
criteria. Accomplishing our objectives is largely a function of our Manager’s structuring of our investment process, our
access to financing on acceptable terms, and general market conditions. Our shareholders do not have input into our investment
decisions. All of these factors increase the uncertainty, and thus the risk, of investing in shares of our common stock. The senior
management team of our Manager has substantial responsibilities under the management agreement. In order to implement certain
strategies, our Manager may need to hire, train, supervise, and manage new employees successfully. Any failure to manage our future
growth effectively could have a material adverse effect on our business, financial condition and results of operations.
We
may have conflicts of interest with the Manager and its affiliates, which could result in investment decisions that are not in
the best interests of our shareholders.
Numerous
conflicts of interest may exist between our interests and the interests of A-III and the Manager, which is a subsidiary of A-III,
including conflicts arising out of the fee arrangements with the Manager pursuant to the management agreement that might induce
the Manager to make investment decisions that are not in our best interests. Examples of these potential conflicts of interest
include:
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some
of the fees that we will be required to pay to the Manager for its services, such as the base management fee, property management
fees, and acquisition and disposition fees, will be payable whether or not our shareholders receive distributions and in some
cases whether or not we are profitable; and
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because
the incentive fee payable to the Manager will be payable on a quarterly basis based on our adjusted net income (as defined
in the management agreement), the Manager may have an incentive to make investment decisions with a view towards generating
short-term gains rather than focusing on creating long-term shareholder value.
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Any
of these and other conflicts of interest between us and the Manager and its affiliates could have a material adverse effect on
the returns on our investments, our ability to make distributions to shareholders and the trading price of our common stock.
A-III
owns a significant percentage of our outstanding shares of common stock, which gives A-III the ability to exert significant influence
over the company in a manner that may not be in the best interests of our other shareholders.
A-III
owns a significant percentage of our outstanding shares of common stock, which will give A-III the ability to exert significant
influence over the company, particularly with respect to matters that require the approval of our shareholders. This ability,
together with A-III’s rights under the Governance and Voting Agreement (as defined below), will give A-III significant influence
over the composition of our Board. To the extent that A-III’s interests are not aligned with the interests of our other
shareholders, A-III could use its influence to promote decisions regarding the company that benefit A-III and its affiliates,
but that may not be in the best interests of our other shareholders.
Tax
Risks
Our
operating partnership may fail to be treated as a partnership for federal income tax purposes.
Management
believes that our operating partnership qualifies, and has qualified since its formation in 1994, as a partnership for federal
income tax purposes and not as a publicly traded partnership taxable as a corporation. We can provide no assurances, however,
that the IRS will not challenge the treatment of the operating partnership as a partnership for federal income tax purposes or
that a court would not sustain such a challenge. If the IRS were successful in treating the operating partnership as a corporation
for federal income tax purposes, then the taxable income of the operating partnership would be taxable at regular corporate income
tax rates.
Our
ability to benefit from our net operating loss carryforwards is likely to be severely limited by the A-III transaction.
In
prior years, we have suffered losses, for tax and financial statement purposes that generated significant federal and state net
operating loss carryforwards. Our ability to use the net operating loss carryforwards to offset future taxable income is likely
to be severely limited under Section 382 of the Internal Revenue Code as a result of the ownership change we experienced
upon closing the recapitalization transaction with A-III.
A
redemption of units is taxable.
Holders
of units in the operating partnership should keep in mind that redemption of units will be treated as a sale of units for federal
income tax purposes. The exchanging holder will generally recognize gain in an amount equal to the value of the common shares
received, plus the amount of liabilities of the operating partnership allocable to the units being redeemed, less the holder’s
tax basis in the units. It is possible that the amount of gain recognized or the resulting tax liability could exceed the value
of the shares received in the redemption.
Environmental
and Other Legal Risks
We
may have liability under environmental laws.
Under
federal, state, and local environmental laws, ordinances, and regulations, we may be required to investigate and clean up the
effects of releases of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or responsibility,
simply because of our current or past ownership or operation of the real estate. Therefore, we may have liability with respect
to properties we have already sold. If environmental problems arise, we may have to take extensive measures to remedy the problems,
which could adversely affect our cash flow and our ability to pay distributions to our investors because:
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we
may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;
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the
law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused
the contamination;
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even
if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental
laws may be held responsible for all of the clean-up costs; and
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governmental
entities or other third parties may sue the past or present owners or operators of a contaminated site for damages and costs.
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These
costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous
or toxic substances or petroleum products and the failure to remediate that contamination properly may materially and adversely
affect our ability to borrow against, sell, or lease an affected property. In addition, applicable environmental laws create liens
on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.
We
face risks in complying with Section 404 of the Sarbanes-Oxley Act of 2002.
Failure
to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors
to lose confidence in our reported financial information, either of which could have an adverse effect on our stock price.
Effective
internal control is necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, we could be subject to regulatory action or other litigation, and our operating results
could be adversely affected. Since 2007, we have been required to document and test our internal control procedures to satisfy
the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires our management to assess annually the effectiveness
of our internal control over financial reporting.
Failure
to comply with the Americans with Disabilities Act or other similar laws could result in substantial costs.
A
number of federal, state, and local laws and regulations (including the Americans with Disabilities Act) may require modifications
to existing buildings or restrict certain renovations by requiring improved access to such buildings by disabled persons and may
require other structural features that add to the cost of buildings under construction. Legislation or regulations adopted in
the future may impose further burdens or restrictions on us with respect to improved access for disabled persons. The costs of
compliance with these laws and regulations may be substantial, and restrictions on construction or completion of renovations may
limit implementation of our strategy in certain instances or reduce overall returns on our investments, which could have a material
adverse effect on us and our ability to pay distributions to investors and to pay our mortgage debt, if any, as required.
Risks
for Investors in Our Stock
We
do not pay regular quarterly dividends, and we have no current plans to resume paying dividends.
We
have not paid a quarterly dividend since the third quarter of 2001 and we presently have no plans to pay a distribution or resume
paying regular quarterly dividends.
The
market price of our stock is subject to fluctuation as a result of our operating results and changes in the stock market in general.
The
daily trading volume of our common stock on the NYSE MKT exchange has historically been relatively light, and the market price
may not reflect the fair market value of our common stock (or our net asset value) at any particular moment. Prior sales data
does not necessarily indicate the prices at which our common stock would trade in a more active market. The market value of our
common stock may or may not reflect the market’s perception of our operating results, the potential for growth from acquisitions,
the potential for future cash dividends from property sales, and the real estate market value of our underlying assets. In addition,
general market conditions or market conditions of real estate companies in general could adversely affect the value of our common
stock.
Additional
issuances of equity securities may dilute the investment of our current shareholders.
Issuing
additional equity securities to finance future acquisitions instead of incurring additional debt could dilute the interests of
our existing shareholders. Our ability to execute our business and growth plan depends on our access to an appropriate blend of
capital, which could include a line of credit and other forms of secured and unsecured debt, equity financing, or joint ventures.
The
post-closing adjustment provision in the Stock Purchase Agreement may result in our issuance of additional shares of common stock
to A-III and a reduced exercise price for the warrants issuable to A-III, if it exercises the warrants.
Under
the Stock Purchase Agreement, dated November 19, 2014 (the “Stock Purchase Agreement”), upon completion of the sale
of all of the company’s legacy properties, we will be required to recalculate the closing date net asset value used to determine
the purchase price per share for the common stock that A-III purchased, substituting the actual net sale proceeds received by
the company (gross sale proceeds less all actual selling costs) in selling the legacy properties for the estimated net value of
such parcels used to determine the company’s net asset value at closing and reflecting (a) any changes in the liabilities
of the company calculated in accordance with generally accepted accounting principles (“GAAP”) that arose on or before
the closing date (other than certain post-closing obligations of the company that are required to be accrued on or before the
closing under GAAP accounting) that are discovered after the closing date and (b) the final costs associated with certain matters
described in the Stock Purchase Agreement. If the recalculated net asset value is lower than the estimated amount used to calculate
the purchase price per share at closing, then the purchase price per share will be adjusted accordingly. In that case, the company
will issue to A-III, as a purchase price adjustment, an additional number of shares of common stock equal to the difference between
(x) $12.0 million divided by the adjusted purchase price per share and (y) the number of shares issued to A-III at the closing.
The exercise price of the warrants will also be reduced to be equal to the adjusted purchase price per share. If the purchase
price per share and warrant exercise price are reduced, the dilutive effects of the transaction described in the risk factor above
will be magnified.
Restrictions
on changes of control could prevent a beneficial takeover for investors.
A
number of the provisions in our articles of incorporation and bylaws have or may have the effect of deterring a takeover of the
company, including:
|
·
|
our
classified Board, which may render more difficult a change in control of the company or removal of incumbent management, because
the term of office of only one-third of the directors expires in a given year;
|
|
·
|
the
ability of our Board to issue preferred stock;
|
|
·
|
provisions
in the articles of incorporation to the effect that no transaction of a fundamental nature, including mergers in which the
company is not the survivor, share exchanges, consolidations, or sale of all or substantially all of the assets of the company,
may be effectuated without the affirmative vote of at least three-quarters of the votes entitled to vote generally in any
such matter;
|
|
·
|
provisions
in the articles of incorporation to the effect that they may not be amended (except for certain limited matters) without the
affirmative vote of at least three-quarters of the votes entitled to be voted generally in the election of directors;
|
|
·
|
provisions
in the bylaws to the effect that they may be amended by either the affirmative vote of three-quarters of all shares outstanding
and entitled to vote generally in the election of the directors, or the affirmative vote of a majority of the company’s
directors then holding office, unless the shareholders prescribed that any such bylaw may not be amended or repealed by the
Board;
|
|
·
|
Georgia
anti-takeover statutes under which the company may elect to be protected; and
|
|
·
|
provisions
to the effect that directors elected by the holders of common stock may be removed only by the affirmative vote of shareholders
holding at least 75% of all of the votes entitled to be cast for the election of directors.
|
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
We
currently own one unencumbered track of land, Highway 20, which was acquired prior to the recapitalization transaction with A-III.
Highway 20 is 38 acres, zoned for 210 multifamily apartment units. The property is located on Georgia Highway 20 at the intersection
of Elm Street, three blocks from the elementary, middle, and high schools and just north of Cumming’s town square, which
provides shopping, restaurants, and other entertainment and educational venues.
ITEM
3. LEGAL PROCEEDINGS
The
company and the operating partnership are not presently subject to any material litigation nor, to our knowledge, is any material
litigation threatened against any of them. Routine litigation arising in the ordinary course of business is not expected to result
in any material losses to us or the operating partnership.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Data for 2016 and 2015
Our
common stock trades on the NYSE MKT exchange under the symbol “AIII.” The following table provides the quarterly high
and low sales prices per share reported on the NYSE MKT exchange during 2016 and 2015. We declared no dividends during 2016 or
2015.
Year
|
|
Quarter
Ended
|
|
High
|
|
Low
|
|
Dividends
Declared
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
First
Quarter
|
|
$
|
1.57
|
|
|
$
|
1.21
|
|
|
None
|
|
|
|
|
Second
Quarter
|
|
|
1.85
|
|
|
|
1.20
|
|
|
None
|
|
|
|
|
Third
Quarter
|
|
|
1.65
|
|
|
|
0.90
|
|
|
None
|
|
|
|
|
Fourth
Quarter
|
|
|
1.45
|
|
|
|
0.95
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
First
Quarter
|
|
$
|
1.95
|
|
|
$
|
1.06
|
|
|
None
|
|
|
|
|
Second
Quarter
|
|
|
1.79
|
|
|
|
1.39
|
|
|
None
|
|
|
|
|
Third
Quarter
|
|
|
1.60
|
|
|
|
1.26
|
|
|
None
|
|
|
|
|
Fourth
Quarter
|
|
|
1.86
|
|
|
|
1.23
|
|
|
None
|
Shareholder
Data
As
of March 7, 2017, there were approximately 209 holders of record of our common stock.
As
of March 7, 2017, we had 20,563,182 shares issued and 20,490,465 shares outstanding. In addition, 767,958
shares are reserved for issuance to unitholders from time to time upon the exercise of their redemption rights as explained
in Item 1, Business – The Operating Partnership. There is no established public trading market for the units. As of March
7, 2017, the operating partnership had 74 unitholders of record.
Distribution
Policy
We
have not paid a regular quarterly dividend since the third quarter of 2001, and we presently have no plans to pay a distribution
or to resume paying regular quarterly dividends.
Going
forward, we intend to sell our remaining legacy property and to identify and complete new real estate acquisitions with a focus
on income producing properties. We expect to elect to be treated as a real estate investment trust, or REIT, under the Internal
Revenue Code, after we complete such a real estate acquisition. As a REIT, under federal income tax law, we would be required
to distribute annually at least 90% of our REIT taxable income to our shareholders. Subject to the requirements of the Georgia
Business Corporation Code, if we elect and qualify to be treated as a REIT, we anticipate that we would pay dividends to our shareholders,
if and to the extent authorized by our Board, at least equal to the amounts required for us to qualify as a REIT.
Existing
Stock Repurchase Plan
Our
Board, as constituted prior to the A-III transaction, established a stock repurchase plan under which we are authorized to repurchase
shares of our outstanding common stock from time to time by means of open market purchases and in solicited and unsolicited privately
negotiated transactions, depending on the availability of shares, our cash position, and share price. We have purchased 59,638
shares and have the authority to repurchase an additional 540,362 shares under the plan. We have not repurchased any shares since
2009 or the period subsequent thereto. We do not expect to make any repurchases in the next 12 months. The plan does not have
an expiration date.
ITEM
6. SELECTED FINANCIAL DATA
Not
required for smaller reporting companies.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Safe
Harbor Statement under the Private Securities Litigation Reform Act of 1995. The statements in this report that are not historical
facts are forward-looking statements that involve a number of known and unknown risks, uncertainties, and other factors, all of
which are difficult or impossible to predict and many of which are beyond our control, that may cause our actual results, performance,
or achievements to be materially different from any future results, performance, or achievements expressed or implied by those
forward-looking statements. These risks are detailed in (a) Part I, Item 1A, Risk Factors, in this report and (b) our other
SEC filings. Please also see the cautionary statements included in the Note Regarding Forward-Looking Statements at the beginning
of this report.
Overview
ACRE
Realty Investors Inc. is a commercial real estate investment and operating company focused on commercial real estate investments.
On
January 30, 2015, our company and A-III closed a series of transactions that recapitalized our company and resulted in a change
in control of our company. At the closing, A-III purchased 8,450,704 shares of our company’s common stock at a purchase
price of $1.42 per share, for an aggregate purchase price of $12 million, and our company issued to A-III warrants to purchase
up to an additional 26,760,563 shares of our company’s common stock at an exercise price of $1.42 per share ($38 million
in the aggregate). The purchase price per share and the exercise price of the warrants are subject to a potential post-closing
adjustment upon completion of the sale of our company’s four legacy properties owned on January 30, 2015, which could result
in the issuance of additional shares of common stock to A-III and an increase in the number of shares of common stock issuable
upon exercise of the warrants. We used a portion of the proceeds of A-III’s investment to pay off certain of our outstanding
indebtedness as discussed further below.
Immediately
after the closing, our company’s name was changed to ACRE Realty Investors Inc., and the name of our operating partnership
was changed to ACRE Realty LP. On February 2, 2015, our common stock began trading under the new ticker symbol “AIII”
(NYSE MKT: AIII). Our principal office was moved to 399 Park Avenue, 6
th
Floor, New York, New York 10022.
As
a result of the transaction, A-III is the largest shareholder of our company, owning as of December 31, 2016 approximately 41.24%
of our outstanding shares of common stock, or approximately 39.75% on a diluted basis assuming conversion of the outstanding
units of limited partnership interest in our operating partnership into our company’s common stock and assuming no exercise
of the warrants we granted to A-III.
Effective
as of the closing of the A-III transaction, our management was changed and our company became externally managed by the Manager,
which is a wholly-owned subsidiary of A-III, pursuant to a management agreement between our company and the Manager that was executed
at the closing of the A-III transaction on January 30, 2015. Immediately after the closing, the Manager designated, and the Board
appointed, the following persons as executive officers of the company: Edward Gellert is Chief Executive Officer and President;
Robert Gellert is Executive Vice President, Chief Operating Officer and Treasurer; Gregory Simon is Executive Vice President,
General Counsel and Secretary; and Mark E. Chertok is Chief Financial Officer. Charles S. Roberts, who previously served as the
company’s Chairman, President and Chief Executive Officer, was appointed as an Executive Vice President after the A-III
transaction and through December 31, 2016, pursuant to an Employment Agreement, which expired on December 31, 2016, at which
time Mr. Roberts ceased to be an officer or employee of our company.
We
currently own one remaining legacy property, a tract of land totaling 38 acres, which is held for sale as of December 31,
2016. On October 7, 2016, the operating partnership entered into a sale contract with Roberts Capital Partners, LLC, which is
an affiliate of one of our directors. The sale of the property is expected to close during the second quarter of 2017, subject
to an extension option and certain closing conditions. Our current focus is on selling the remaining legacy property. We do not
intend to focus on development projects as we have in the past. Going forward, we expect to pursue a flexible real estate investment
strategy. We may invest in multifamily, office, mixed-use office, retail, industrial, healthcare or lodging properties, as well
as preferred equity or debt instruments secured by mortgages on these types of properties, mezzanine loans secured by pledges
of equity interests in entities that own these types of properties or other forms of subordinate debt in connection with these
types of properties.
The
Operating Partnership
We
conduct our business through ACRE Realty LP which owns the remaining legacy property that is held for sale and will own, either
directly or indirectly through subsidiaries or joint ventures, any future properties we acquire. We refer to ACRE Realty LP as
our operating partnership. The agreement of limited partnership of our operating partnership provides that it is not required
to be dissolved until 2093. Our company is the sole general partner of our operating partnership and, as of December 31, 2016,
owned a 96.39% interest in our operating partnership. Our ownership interest in our operating partnership entitles us to share
in cash distributions from, and in the profits and losses of, the operating partnership generally in proportion to our ownership
percentage. In this report, we refer to units of limited partnership interest in the operating partnership as “units”
and to the holders of units as “unitholders.”
Under
the limited partnership agreement of our operating partnership, unitholders generally have the right to require the operating
partnership to redeem their units. A unitholder who submits units for redemption will receive, at our election, either (a) 1.647
shares for each unit submitted for redemption (the “Conversion Factor”), or (b) cash for those units at their fair
market value, based upon the then current trading price of the shares. Prior to December 29, 2015, we had an informal policy of
issuing shares, in lieu of cash in exchange for units. On December 28, 2015, our Board formally adopted a policy whereby we shall
only issue our common shares for redemption of units, rather than paying cash for such redemption in accordance with the operating
partnership agreement.
Whenever
we issue and sell shares of our common stock, we are obligated to contribute the net proceeds from that issuance and sale to the
operating partnership and the operating partnership is obligated to issue units to us. The operating partnership agreement permits
the operating partnership, without the consent of the unitholders, to sell additional units and add limited partners.
Legacy
Property Sales
Northridge
Land
On
March 31, 2015, we entered into a sale contract with Vista Acquisitions, LLC pursuant to which we agreed to sell the Northridge
Land for $5,500,000. The Northridge Land is one of the legacy properties acquired prior to the recapitalization transaction with
A-III. The sale of the Northridge Land closed on June 30, 2015 and we recognized a gain of $1,022,871.
Bradley Park
Land
On
January 26, 2015, we entered into a contract to sell our Bradley Park Land for $4,178,000 to Bradley Park Apartments, LLC (“BPA”),
which is an affiliate of Mr. Roberts, who is a director of our company. There were subsequent amendments to the sale contract,
such as extending the closing date and payment of additional deposits, among other provisions. As a material inducement to the
company’s execution of the latest amendment dated November 30, 2015, Mr. Roberts signed a general release and covenant not
to sue in favor of the company and its affiliates. On December 4, 2015, we closed on the sale of the Bradley Park Land and concurrently,
paid in full the related outstanding loan. In connection with the sale, we recognized a gain of $579,304.
North Springs
Land
On
August 14, 2015, we entered into a contract to sell our North Springs Land for $12,000,000 to Maple by December 7, 2015. There
were subsequent amendments to the sale contract, such as extending the closing date and payment of additional deposits, among
other provisions. On December 17, 2015, we closed on the sale of the North Springs Land and recognized a gain of $967,450.
Highway
20
On October
7, 2016, the operating partnership entered into a sale contract with Roberts Capital Partners, LLC, a related party, to sell Highway
20 for a purchase price of $4,725,000, including a reimbursement of $1,050,000 relating to prepaid sewer taps. This transaction
is expected to close during the second quarter of 2017, subject to an extension option and certain closing conditions.
Critical
Accounting Policies and Estimates
We
prepare our financial statements in accordance with GAAP. See Recent Accounting Pronouncements below for information on recent
accounting pronouncements and the expected impact on our financial statements. A critical accounting policy is one that requires
significant judgment or difficult estimates, and is important to the presentation of our financial condition or results of operations.
Because we are in the business of acquiring, owning and operating real estate, and currently, we only own one remaining undeveloped
land parcel, our critical accounting policies relate to asset impairment evaluation and income taxes. The following is a summary
of our overall accounting policy in these areas.
Asset
Impairment Evaluation
We
periodically evaluate our real estate assets for impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable in accordance with FASB ASC Topic 360-10,
Property, Plant, and Equipment – Overall
.
FASB ASC Topic 360-10 requires impairment losses to be recorded on long-lived assets used in operations and land parcels held
for use when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are
less than the assets’ carrying amounts. The expected future cash flows depend on estimates made by management, including
(a) changes in the national, regional, and/or local economic climates, (b) rental rates, (c) competition, (d) operating costs,
(e) occupancy, (f) holding period, and (g) an estimated construction budget. A change in the assumptions used to determine future
economic events could result in an adverse change in the value of a property and cause an impairment to be recorded in the future.
Due to uncertainties in the estimation process, actual results could differ from those estimates. Our determination of fair value
is based on a discounted future cash flow analysis, which incorporates available market information as well as other assumptions
made by our management, evaluation of appraisals, and other applicable valuation techniques. Because the factors we use in generating
these cash flows are difficult to predict and are subject to future events that may alter our assumptions, we may not achieve
the discounted or undiscounted future operating and residual cash flows we estimate in our impairment analyses or those established
by appraisals, and we may be required to recognize future impairment losses on properties held for sale.
As
of December 31, 2016, we own one remaining legacy property, which is currently held for sale. During the year ended December 31,
2015, we recorded an impairment charge of $500,038. We do not believe that there were any indicators of impairment at this property
and as such, no such adjustment was required during the year ended December 31, 2016.
Income
Taxes
In
preparing our consolidated financial statements, management’s judgment is required to estimate our income taxes. Our estimates
are based on our interpretation of federal and state tax laws. We estimate our current tax due and assess temporary differences
resulting from differing treatment of asset and liability amounts for tax and accounting purposes. The temporary differences result
in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We recorded a full valuation allowance
against our net deferred tax assets based upon our analysis of the timing and reversal of future taxable amounts and our history
and future expectations of taxable income. Adjustments may be required by a change in assessment of our deferred tax assets and
liabilities, changes due to audit adjustments by federal and state tax authorities, and changes in tax laws. To the extent adjustments
are required in any given period, we will include the adjustments in the deferred tax assets and liabilities in our consolidated
financial statements.
In
general, a valuation allowance is recorded if based on the weight of available evidence it is more likely than not that some portion
or all of the deferred tax asset will not be realized. Realization of our deferred tax assets depends upon our generating sufficient
taxable income in future years in the appropriate tax jurisdiction. In addition, our ability to use the net operating loss carry
forwards is likely to be severely limited under Section 382 of the Internal Revenue Code as a result of the ownership change
we experienced upon closing the recapitalization transaction with A-III.
As
of December 31, 2016 and 2015, deferred tax assets were provided a full valuation allowance as it is more likely than not that
these deferred tax assets will not be realized.
Recent
Accounting Pronouncements
Please
refer to Note 2 – Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the notes to the
consolidated financial statements included in this annual report for a discussion of recent accounting standards and pronouncements
and the expected impact on our consolidated financial statements.
Results
of Operations
Comparison
of the year ended December 31, 2016 to 2015
The
following table highlights our operating results and should be read in conjunction with the consolidated financial statements
and the accompanying notes included in this Form 10-K.
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Total Revenues
|
|
$
|
—
|
|
|
$
|
432
|
|
|
$
|
(432
|
)
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, insurance and other expenses
|
|
|
13,639
|
|
|
|
37,715
|
|
|
|
(24,076
|
)
|
Real estate taxes
|
|
|
17,604
|
|
|
|
71,651
|
|
|
|
(54,047
|
)
|
Management fees, affiliate
|
|
|
391,065
|
|
|
|
389,111
|
|
|
|
1,954
|
|
Allocated salaries and other compensation, affiliate
|
|
|
533,814
|
|
|
|
500,000
|
|
|
|
33,814
|
|
Interest expense
|
|
|
—
|
|
|
|
416,047
|
|
|
|
(416,047
|
)
|
General and administrative expenses
|
|
|
2,463,635
|
|
|
|
2,380,014
|
|
|
|
83,621
|
|
Depreciation expense
|
|
|
—
|
|
|
|
13,654
|
|
|
|
(13,654
|
)
|
Total expenses
|
|
|
3,419,757
|
|
|
|
3,808,192
|
|
|
|
(388,435
|
)
|
Other Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
—
|
|
|
|
2,569,625
|
|
|
|
(2,569,625
|
)
|
Impairment on real estate
|
|
|
—
|
|
|
|
(500,038
|
)
|
|
|
500,038
|
)
|
Net Loss
|
|
$
|
(3,419,757
|
)
|
|
$
|
(1,738,173
|
)
|
|
$
|
(1,681,584
|
)
|
Net
loss increased by $1,681,584 for the year ended December 31, 2016 when compared to the year ended December 31, 2015. This increase
in net loss was due to the fact that there were no property sales during the year ended December 31, 2016, but was partially offset
by a decrease of $388,435 in expenses for the year ended December 31, 2016 and no impairment charge during the year ended December
31, 2016. We explain the major variances between the year ended December 2016 and 2015 below.
Property
insurance and other expenses consisting of utilities, repairs and maintenance, marketing, property insurance, and other expenses
decreased by $24,076 primarily resulting from the sale of all but one of the legacy properties in 2015.
Real
estate taxes decreased by $54,047, primarily as a result of the sales of the North Springs Land, which closed on December 17,
2015, the Bradley Park Land, which closed on December 4, 2015, and the Northridge Land, which closed on June 30, 2015. Real estate
taxes for the year ended December 31, 2016 were related to Highway 20 land, which was the only property held during the year.
Management
fees, affiliate, increased by $1,954 as a result of a shorter period in 2015 offset by a reduction in the fee computation base
attributable to the net loss recognized during the year ended December 31, 2016. The management agreement was entered into on
January 30, 2015 and the base management fee is equal to 1.50% per annum of our equity, as defined in that agreement.
Allocated
salaries and other compensation, affiliate, increased $33,814, primarily due to the reimbursements for the year ended December
31, 2016 being based on actual amounts compared to the year ended December 31, 2015 that was capped at $500,000, and that the
management agreement became effective on January 30, 2015. Under the management agreement, we are required to reimburse our Manager
for the costs of the wages, salaries, and benefits incurred by the Manager with respect to certain dedicated officers and employees
that the Manager elects to provide to us.
Interest
expense decreased by $416,047, resulting from the repayment of all of our debt in 2015. There is no debt on the remaining legacy
property.
General
and administrative expenses increased by $83,621, primarily resulting from the professional fees associated with a potential transaction
that we are no longer pursuing in the amount of $428,625, which the company determined it would no longer pursue as of September
30, 2016 and increase in audit and tax fees in 2016 due to change of our audit firm to a firm with higher fees. These increases
were partially offset by a decrease in directors fees as a result of one-time payments paid to members of our Board in 2015 who
resigned in connection with the A-III transaction, a decrease in related party consulting fees and reimbursements to the Robert
Companies as a result of the termination of the related management agreement, legal fees and overall financial accounting outsourcing
fees since in 2015 costs incurred were related to the restatements of our previously issued financial statements and the filing
of amended tax returns.
Depreciation
expense decreased by $13,654, as a result of us fully depreciating all furniture, fixtures and equipment in 2015.
Gain
on sale of assets decreased by $2,569,625 since there were no property sales during the year ended December 31, 2016. The gain
on sale of assets for the year ended December 31, 2015 was associated with the sale of the Northridge Land, Bradley Park Land
and North Springs Land.
Impairment
loss for the year ended December 31, 2015 was related to our remaining legacy property, Highway 20. No additional write-down was
necessary for this property for the year ended December 31, 2016.
Liquidity
and Capital Resources
Overview
We
require capital to fund our operating activities. Our capital sources include our cash balance of $16,638,702 and future proceeds
from the sale of our remaining legacy property.
Short-
and Long-Term Liquidity Outlook
Our
operating revenues are not adequate to provide short-term (12 months) liquidity for the payment of all operating expenses. At
December 31, 2016, we had a cash balance of $16,638,702. We are currently using our cash balance to meet our short-term liquidity
requirements, including general and administrative expenses, and funding the carrying costs of our remaining land parcel. We have
no mortgage debt at December 31, 2016 or 2015.
Our
primary sources of funds for liquidity going forward will consist of proceeds from the sale of our one remaining legacy land parcel
and our cash balance of $16,638,702. Our potential equity sources, depending on market conditions, consist of proceeds from capital
market transactions (public and/or private) including the issuance of common, convertible and/or preferred equity securities.
We
believe our existing sources of funds will be adequate for purposes of meeting our short-term liquidity needs. Our ability to
meet our long-term liquidity and capital resource requirements is subject to obtaining additional debt and equity financing. Any
decision by lenders and investors to enter into such transactions with us will depend upon a number of factors, such as our financial
performance, compliance with the terms of our existing or future credit arrangements, industry or market trends, the general availability
of and rates applicable to financing transactions, such lenders’ and investors’ resources and policies concerning
the terms under which they make such capital commitments and the relative attractiveness of alternative investment or lending
opportunities.
Cash
flows
The
following presents a summary of our consolidated statements of cash flows for the year ended December 31, 2016 and 2015.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flow (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(3,236,213
|
)
|
|
$
|
(3,499,061
|
)
|
Investing activities
|
|
|
—
|
|
|
|
21,654,537
|
|
Financing activities
|
|
|
—
|
|
|
|
1,481,172
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(3,236,213
|
)
|
|
$
|
19,636,648
|
|
Year
Ended December 31, 2016 Compared to December 31, 2015
Net
cash used in operating activities decreased by $262,848, primarily due to a decrease in property related expenditures as a result
of the sale of all but one of our legacy properties in 2015, partially offset by an increase in costs associated with pursuing
potential transactions.
Net
cash provided by investing activities decreased by $21,654,537 due to the fact that there were no property sales during the year
ended December 31, 2016. Net cash provided by investing activities for the year ended December 31, 2015 primarily resulted from
the sale of the three legacy properties.
Net
cash provided by financing activities decreased by $1,481,172 due to the fact that there were no capital contributions and there
was no debt outstanding during the year ended December 31, 2016. Net cash provided by financing activities for the year ended
December 31, 2015 resulted from the $12,000,000 cash proceeds attributable to the closing of the A-III transaction and the $2,000,000
cash proceeds from the Northridge land loan, which were offset by the repayments of $12,258,625 of our land loans.
Capitalization
Common
Stock and Operating Partnership Units
As
of December 31, 2016, we had 20,490,465 shares of common stock outstanding and 466,259 operating partnership units that could
be exchanged for 767,959 shares of common stock, which are held by persons other than us.
Warrants
In
connection with the A-III transaction, we issued warrants to purchase up to an additional 26,760,563 shares of our common stock
at an exercise price of $1.42 per share to A-III ($38,000,000 in the aggregate). The exercise price of the warrants are subject
to a potential post-closing adjustment upon completion of the sale of our four land parcels owned at January 30, 2015, which could
result in the issuance of additional shares of common stock to A-III and an increase in the number of shares of common stock issuable
upon exercise of the warrants.
Restricted
Stock
On
October 12, 2015, based on the recommendation of our Compensation Committee of the Board, the Board approved restricted stock
grants of 260,000 shares of common stock to our independent directors and certain of our officers which were issued on March 28,
2016. The restricted stock was awarded pursuant to our 2006 Restricted Stock Plan, as amended. Vesting of the awards for the independent
directors and officers is subject to continued service through the vesting period. Each of our four independent directors was
awarded 20,000 shares of restricted common stock, which vested on January 30, 2016. Certain of our officers were awarded an aggregate
of 180,000 shares of restricted common stock, which vest in equal one-third installments. There were 60,000 shares, which vested
on each of January 30, 2016 and October 12, 2016. The remaining 60,000 shares will vest on October 12, 2017.
Contractual
Obligations and Commitments
The
following table summarizes our future estimated cash payments due under existing contractual obligations as of December 31, 2016:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than One Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Thereafter
|
|
Allocated salaries and other compensation, affiliates
(1)
|
|
$
|
1,787,879
|
|
|
$
|
662,879
|
|
|
$
|
1,080,000
|
|
|
$
|
45,000
|
|
|
$
|
—
|
|
Sublease of office space
|
|
|
8,177
|
|
|
|
8,177
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,796,056
|
|
|
$
|
671,056
|
|
|
$
|
1,080,000
|
|
|
$
|
45,000
|
|
|
$
|
—
|
|
(1)
We are required to reimburse our manager for salaries and other compensation of certain dedicated officers and employees
that the Manager elects to provide to us.
The
table above only includes the allocated salaries and other compensation due under our Management Agreement and does not include
the base management fee, incentive fee, property management fee, acquisition fee and disposition fee as such obligations, discussed
below, do not have fixed and determinable payments. See Note 9 to the consolidated financial statements, included under Item 15
in this Form 10-K for a discussion with respect to our obligations pursuant to the management agreement.
Management
Agreement
In
connection with the recapitalization transactions with A-III, on January 30, 2015, we entered into a management agreement with
our Manager, which is a wholly-owned subsidiary of A-III, to among other things, provide for the day-to-day management of our
company by the Manager, including investment activities and operations of our company and its properties. The Management Agreement
requires the Manager to manage and administer the business activities and day-to-day operations of our company and all of its
subsidiaries in conformity with our investment guidelines and other policies that are approved and monitored by the Board.
For
the services to be provided by the Manager, we are required to pay the Manager the following fees:
|
·
|
an
annual base management fee equal to 1.50% of our Equity (as defined in the Management Agreement – see Note 9), calculated
and payable quarterly in arrears in cash;
|
|
·
|
a
property management fee equal to 4.0% of the gross rental receipts received by us or our subsidiaries’ properties, calculated
and payable monthly in arrears in cash;
|
|
·
|
an
acquisition fee equal to 1.0% of the gross purchase price paid for any property or other investment acquired by us or any
of our subsidiaries, subject to certain conditions and limitations and payable in arrears in cash with respect to all such
acquisitions occurring after the date of the Management Agreement;
|
|
·
|
a
disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such disposition and (b) 1.0% of the sale
price with respect to any sale or other disposition by us or any of our subsidiaries of any property or other investment,
subject to certain conditions and limitations and payable in arrears in cash with respect to all such dispositions occurring
after the date of the agreement with certain exceptions (this disposition fee does not apply to the sale of the four legacy
land parcels that we owned at January 30, 2015); and
|
|
·
|
an
incentive fee (as described below) based on the our “Adjusted Net Income” (as defined in the Management Agreement
– see Note 9) for the trailing four quarter period in excess of the “Hurdle Amount” (as defined in Note
9), calculated and payable in arrears in cash on a rolling quarterly basis.
|
Effect
of Floating Rate Debt
As
of the filing date of this report, we have no outstanding indebtedness.
Off-Balance
Sheet Arrangements
We
do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured
investment vehicles, special purpose entities or variable interest entities, established to facilitate off-balance sheet arrangements
or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities
or entered into any commitment or intend to provide additional funding to any such entities.
Quarterly
Dividends
We
have not paid regular quarterly dividends since the third quarter of 2001, and we have no present plans to pay dividends or to
resume paying regular quarterly dividends.
Inflation
Inflation
in the United States has been relatively low in recent years and did not have a significant impact on our results of operations
for the periods shown in the audited consolidated financial statements. Although the impact of inflation has been relatively insignificant
in recent years, it does remain a factor in the United States economy and could increase the cost of acquiring, selling, replacing
or leasing properties in the future.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
financial statements are listed under Item 15(a) and are filed as part of this annual report on the pages indicated.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
ITEM
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
company’s management, with the participation of the company’s Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act). Based upon such evaluation, the company’s Chief Executive Officer and Chief Financial Officer concluded
that its disclosure controls and procedures were effective, as of December 31, 2016, to provide assurance that the information
that is required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported, within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the company
in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment
of the effectiveness of internal control over financial reporting. Our internal control over financial reporting is a process
designed, as defined in Rule 13a-15(f) under the Exchange Act, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As
of the end of the period covered by this report, our management assessed the effectiveness of our internal control over financial
reporting. Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in the 2013 Internal Control - Integrated Framework (2013). As of December 31, 2016, our internal control over financial reporting
was effective based on the criteria established in the Internal Control—Integrated Framework issued by COSO.
This
annual report does not include an attestation report of our independent registered public accounting firm regarding internal control
over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting
firm pursuant to the rules of the SEC that require the Company to include only management’s report in this annual report.
Changes
in Internal Control
There
were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules
13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2016 that have materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The
design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.
There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless
of how remote.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS and Corporate Governance
Directors
and Executive Officers
The
following table provides information about our directors and executive officers as of the date of this report. Each of our directors
and executive officers, other than Charles S. Roberts, have held their respective positions with the company described below since
the completion of our transaction with A-III in January of 2015.
Name
|
|
Age
|
|
Term
as Director Expires
|
|
Position
|
Edward
Gellert
|
|
50
|
|
2017
|
|
Chairman
of the Board, Chief Executive Officer and President
|
Robert
Gellert
|
|
46
|
|
—
|
|
Executive
Vice President, Chief Operating Officer and Treasurer
|
Gregory
I. Simon
|
|
50
|
|
—
|
|
Executive
Vice President, General Counsel and Secretary
|
Mark
E. Chertok
|
|
60
|
|
—
|
|
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
|
Charles
S. Roberts
(1)
|
|
70
|
|
2017
|
|
Director
|
Bruce
D. Frank
|
|
62
|
|
2019
|
|
Director
|
Robert
C. Lieber
|
|
62
|
|
2017
|
|
Director
|
Robert
L. Loverd
|
|
74
|
|
2019
|
|
Director
|
Robert
G. Koen
|
|
70
|
|
2018
|
|
Director
|
Kyle
A. Permut
|
|
54
|
|
2018
|
|
Director
|
(1)
Mr.
Roberts served as our Executive Vice President from January 30, 2015 to December 31, 2016. His Employment Agreement expired on
December 31, 2016. Pursuant to the Extension of Governance and Voting Agreement, the parties agreed to nominate Mr. Roberts for
re-election to the Board. Mr. Roberts was elected by the company’s shareholders at the annual meeting on December 14, 2016.
Mr. Roberts has agreed to resign from the Board upon the first to occur of the following two events: (i) in the event he fails
to continuously maintain beneficial ownership of at least 1,100,000 shares of common stock (subject to adjustment for stock splits,
stock dividends and other similar adjustments to the shares of common stock) and (ii) upon the expiration of the Governance and
Voting Agreement on June 30, 2017.
Biographical
Information
Edward
Gellert
. Mr. Gellert has approximately 25 years of real estate industry experience, including investment and portfolio management,
the operation and development of real estate assets, lending, distressed investing and deal sourcing. Since 2004, Mr. Gellert
has been responsible for directing the investment activities of the Avenue Real Estate Strategy, first as Portfolio Manager and
then as Senior Portfolio Manager. During that time, Avenue has invested in hotel, residential, office, retail, and land assets
throughout the United States. Prior to joining Avenue Capital Group in 2004, Mr. Gellert founded EDGE Partners LLC, and through
its affiliates was a co-managing member of joint venture entities that developed, repositioned, and owned over 1.2 million square
feet of properties. Before founding EDGE Partners LLC, Mr. Gellert sourced and arranged distressed debt and property acquisitions
while associated with Argent Ventures and Amroc Investments. Prior to joining Amroc, Mr. Gellert served as an analyst and asset
manager at BRT Realty Trust, a publicly-traded mortgage REIT. Mr. Gellert received a B.S.M. from the AB Freeman School of Business
at Tulane University (1988). Mr. Edward Gellert is the brother of Mr. Robert Gellert, who serves as the company’s Executive
Vice President, Chief Operating Officer, and Treasurer. Mr. Edward Gellert currently serves as our Chairman of the Board, Chief
Executive Officer and President.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Gellert should serve as a director because of
his extensive experience in the real estate industry in a variety of types of transactions, including real estate investments.
Robert
Gellert.
Mr. Gellert joined Avenue Capital Group in 2004, where he has served as a Portfolio Manager since 2007. Mr. Gellert
is responsible for assisting with the direction of the investment activities of the Avenue Real Estate Strategy. Before joining
Avenue Capital, Mr. Gellert was at EDGE Partners LLC, as well as The Carlton Group, Ltd. and Argent Ventures, where he directed
the marketing, leasing, and sales operations of commercial and multifamily real estate, including real estate foreclosed by lenders
and loan assets. Mr. Gellert received a B.S. in Economics from the State University of New York at Albany in 1992. Mr. Robert
Gellert is the brother of Mr. Edward Gellert.
Gregory
I. Simon.
Mr. Simon joined Avenue Capital Group in February 2014 as a Senior Vice President of the Avenue Real Estate Strategy.
Before joining Avenue, Mr. Simon was a Senior Vice President at Glenmont Capital Management LLC, an institutionally backed manager
of closed-end opportunistic real estate funds, where he was responsible for overseeing Glenmont’s asset management and legal
activities from May 2007 through February 2014. Prior to that, he was Counsel in the real estate department of Herrick Feinstein
LLP and, prior to that, was Counsel in the real estate department of Hogan & Hartson LLP and an associate at a predecessor
firm. Mr. Simon received a B.A. from Emory University (1988) and a J.D. from Illinois Institute of Technology Chicago-Kent College
of Law (1992).
Mark
E. Chertok
. Mr. Chertok is a senior managing director of FTI, in the Real Estate Solutions practice, where he has directed
the Financial Outsourcing group since 2008. Mr. Chertok has over 35 years of experience in the real estate and real estate finance
industry. From January 2007 through August 2008 Mr. Chertok was an independent financial consultant. Previously, Mr. Chertok was
the executive vice president and chief financial officer at The El-Ad Group Ltd, a fully-integrated real estate company that acquires,
redevelops, converts, develops, and owns primarily residential properties for sale or rent in urban, high-density markets in the
United States and Canada. Prior to El-Ad, Mr. Chertok was chief financial officer of NorthStar Realty Finance Corp. (NYSE: NRF),
a mortgage real estate investment trust and NorthStar Capital Investment Corp. At Northstar, Mr. Chertok was instrumental in taking
NRF public in 2004. Prior to Northstar, Mr. Chertok was chief financial officer and a principal of Emmes and Company LLC, an opportunistic
real estate investment company specializing in acquiring under-performing real estate and ‘hard money’ lending. Mr.
Chertok has extensive experience working-out complex defaulted real estate loans. Previously, Mr. Chertok was with two public
accounting firms, as a partner at Margolin, Winer & Evens LLP and as a principal at Laventhol & Horwath and was involved
in all aspects of client service including accounting, tax and management advisory services, with a specialization in providing
services to the real estate industry.
Robert
C. Lieber
. Mr. Lieber joined Island Capital Group in July 2010 as an Executive Managing Director, and subsequently became
an Executive Managing Director and member of the executive management committee of C-III Capital Partners LLC, which was sponsored
by Island Capital, in August 2010. In May 2016, Mr. Lieber became CEO of Resource Capital Corp. and joined the Board of Trustees
of Resource Innovation Office REIT, Inc. Prior to that, Mr. Lieber served under New York City Mayor Michael R. Bloomberg as President
of the Economic Development Corp. beginning in January 2007 and Deputy Mayor beginning in January 2008. Mr. Lieber entered the
public sector upon retiring from Lehman Brothers after 23 years, serving most recently as a Managing Director in Lehman’s
Real Estate Private Equity Fund and before that as the Global Head of Real Estate Investment Banking. He currently serves as Independent
Director of Tutor Perini Corporation, a construction company whose shares are listed on the NYSE, and he also serves as a Board
member and Secretary of the Board as well as a Trustee for the Urban Land Institute. He also serves on the executive committee
and was previously the Chairman of the Zell-Lurie Real Estate Center at the Wharton School, University of Pennsylvania. Mr. Lieber
holds a Bachelor of Arts degree from the University of Colorado and a Masters in Business Administration from the Wharton School
at the University of Pennsylvania.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Lieber should serve as a director because of
his decades of real estate experience, his expertise in real estate finance, his deep relationships in the real estate business,
and his experience in serving as a director of a public company whose shares are listed on the NYSE.
Charles
S. Roberts
. Mr. Roberts served as our Chairman of the Board, Chief Executive Officer, and President since he founded the company
in 1994. On January 30, 2015, upon the closing of our recapitalization transaction with A-III, Mr. Roberts resigned from his positions
with the company and was immediately re-appointed as an Executive Vice President and a director. Mr. Roberts’s employment
as Executive Vice President continued through December 31, 2016 but he continues to serve as a director. Mr. Roberts owns, directly
or indirectly, all of the outstanding stock of, and is the president and sole director of, Roberts Properties, Inc. (“Roberts
Properties”), Roberts Properties Management, LLC, Roberts Capital Partners, LLC and Roberts Properties Construction, Inc.,
(“Roberts Construction,” collectively, “Roberts Companies”), which develop, construct, and manage multifamily
apartment communities. Mr. Roberts has been a national speaker on the topic of developing upscale multifamily housing and has
been recognized as a leader in this industry. On a regional level, Roberts Properties has been awarded 21 prestigious Aurora Awards
by the Southeast Builders Conference; including eight times for the best rental apartment community. Roberts Properties has also
been awarded the coveted Golden Aurora Award for best overall development in the Southeast. On a national level, Roberts Properties
Management, LLC was recognized as the Property Management company of the Year by the National Association of Home Builders, and
Roberts Properties has twice been awarded the prestigious Pillars of the Industry Award from the National Association of Home
Builders for the best upscale apartment community.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Roberts should serve as a director because of
his experience as our former Chief Executive Officer since he founded the company in 1994 until the closing of the recapitalization
transaction with A-III. He is one of our largest shareholders and he has more than 40 years of experience in real estate development,
construction, and management, particularly with respect to multifamily apartment communities.
Bruce
D. Frank
. Mr. Frank has more than 35 years of experience providing assurance services to prominent public and private owners,
investors and developers, both domestically and globally, on a wide range of real estate holding types, including office and apartment
buildings, shopping centers, hotels, resorts, industrial, warehouse and other commercial properties. Mr. Frank served at Ernst
& Young LLP from 1997 to 2014 and most recently worked as a Senior Partner within the assurance line of Ernst & Young’s
real estate practice. Prior to Ernst & Young, Mr. Frank was at KPMG LLP for 17 years. His extensive experience has included
working on initial public offerings and assisting acquirers in consummating acquisition transactions. He serves on the Real Estate
Advisory Board of the New York University Schack Institute of Real Estate and is an active member of the National Association
of Real Estate Investment Trusts. In February 2015, Mr. Frank was elected as an independent director of the Board of Directors
of Landsea Holdings Corp. and was appointed chair of its Audit Committee and a member of its Compensation Committee and Investment
Committee. From July 2014 until February 2017, Mr. Frank served as an independent director of the Board of Directors of VEREIT,
Inc. and chair of its Audit Committee and a member of the Compensation Committee. Mr. Frank also provides real estate services
as an independent consultant. Mr. Frank received a Bachelor of Science degree in Accounting from Bentley College, is a member
of the American Institute of Certified Public Accountants and is a Certified Public Accountant in the State of New York.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Frank should serve as a director because of
his experience as a certified public accountant with a “Big Four” accounting firm with a focus on the real estate
business, including advising real estate companies seeking to access the public securities markets. The committee also took into
account that Mr. Frank is “independent” under SEC Rule 10A-3 and under Section 803A of the NYSE MKT exchange listing
standards, that his financial expertise qualifies him to serve on our Audit Committee, and that he is an “audit committee
financial expert.”
Robert
L. Loverd
. Mr. Loverd was a managing trustee (independent trustee), Chairman of the Board and chairman of the Board’s
Compensation Committee and a member of the Board’s Nominating and Corporate Governance and Audit Committees, of Centerline
Holding Company. Mr. Loverd served in these capacities while Centerline was a publicly listed company until Centerline completed
a “going private” transaction and de-registered on March 15, 2013. Mr. Loverd is the former Group Chief Financial
Officer and a founding partner of MC European Capital (Holdings), a London investment banking and securities firm, which was established
in 1995 and substantially sold in 2000. From 1979 to 1994, Mr. Loverd held various positions in New York and London in the Investment
Banking Departments of Credit Suisse and First Boston. Prior to that, Mr. Loverd was a shareholder in the International Investment
Banking Department of Kidder, Peabody & Co. Incorporated. Mr. Loverd is a member of the Board of Directors of Harbus Investors,
a privately owned investment vehicle. Mr. Loverd has been nominated to become a member of the SoulCycle Inc. board of directors
upon the closing of its initial public offering. Mr. Loverd received a Bachelor of Arts degree from Princeton University and a
Masters in Business Administration degree from Harvard Business School.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Loverd should serve as a director because of
his experience as an investment banker and chief financial officer and his prior service on the board of a public real estate
company. The committee also took into account that Mr. Loverd is “independent” under SEC Rule 10A-3 and under Section
803A of the NYSE MKT exchange listing standards and that his financial expertise qualifies him to serve on our Audit Committee.
Robert
G. Koen
. Mr. Koen is a senior partner and head of the New York Real Estate practice of Mayer Brown, a global law firm, where
he has worked for the last five years. Prior to that time, Mr. Koen was a partner at DLA Piper LLP, a global law firm, where he
served as co-head of the New York real estate practice from 2005 to 2010. At Mayer Brown, Mr. Koen focuses on commercial real
estate, with a concentration in real estate acquisitions, finance, and complex restructurings for both lender and borrower entities.
His extensive experience includes the negotiation, structuring and documentation of acquisitions, dispositions, and co-investment
transactions; the structuring of real estate joint ventures and partnerships; commercial lending, including conventional loan
transactions; construction lending; preferred equity investments; mezzanine financings; REIT-related transactions (including formation
merger and acquisition transactions); hotel acquisition and development; commercial project development (including land and negotiation
of construction and development agreements); and real estate loan and investment workouts, as well as restructurings. Mr. Koen
holds a Bachelor of Arts degree from the University of Wisconsin and a Juris Doctor degree from Georgetown Law School.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Koen should serve as a director because of his
extensive legal expertise in advising developers, lenders, borrowers, and other participants in the commercial real estate industry.
The committee also took into account that Mr. Koen is “independent” under SEC Rule 10A-3 and under Section 803A of
the NYSE MKT exchange listing standards and that his financial expertise qualifies him to serve on our Audit Committee.
Kyle
A. Permut
. Mr. Permut served as a Consultant for Arbor Realty Trust, Inc. from January 2012 to January 2013. From August 2005
until January 2012, he served as a member of the Board of Directors of Arbor Realty Trust, Inc. and as a member of its Compensation
Committee. From November 1997 until March 2005, he served as a managing director at Canadian Imperial Bank of Commerce (CIBC),
the largest bank in Canada and one of the 10 largest in North America. In this position, he was head of CIBC World Markets Debt
Capital Markets Group in the United States. He was a member of the firm’s USA Management Committee, its executive board
and the Debt Capital Markets Management Committee. Mr. Permut retired from CIBC in 2005. Mr. Permut holds a Bachelor of Arts degree
from Cornell University.
The
Nominating and Corporate Governance Committee of our Board has concluded that Mr. Permut should serve as a director because of
his high level banking experience with a large commercial bank and his prior service on the board of a public REIT. The committee
also took into account that Mr. Permut is “independent” under SEC Rule 10A-3 and under Section 803A of the NYSE MKT
exchange listing standards.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934 requires the company’s directors, executive officers, and persons who own beneficially
more than 10% of our outstanding common stock to file with the SEC initial reports of ownership and reports of changes in their
ownership of our common stock. Directors, executive officers and greater than 10% shareholders are required by SEC regulations
to furnish us with copies of the forms they file. To our knowledge, based solely on a review of the copies of such reports furnished
to us, during the fiscal year ended December 31, 2016 and 2015, our directors, executive officers and greater than 10% shareholders
complied with all applicable Section 16(a) filing requirements.
Code
of Business Conduct and Ethics
The
Board has established a Code of Business Conduct and Ethics that applies to our officers, directors and employees when such individuals
are acting for or on our behalf. A current copy of the Code of Business Conduct and Ethics can be found on our website at www.acrerealtyinvestors.com.
Any waiver of the Code of Business Conduct and Ethics may be made only by the Nominating and Corporate Governance Committee and
will be promptly disclosed to shareholders in accordance with applicable SEC rules and applicable standards of the NYSE MKT.
Board
Meetings
The
Board meets regularly to review significant developments affecting us and to act on matters requiring its approval. The Board
in place during 2016 held 7 meetings. No director, during his period of service in 2016, attended fewer than 75% of the total
number of meetings of the Board and committees on which he served. All of the directors serving on our Board attended the 2016
annual meeting of shareholders.
Audit
Committee
The
current members of the Audit Committee are Mr. Frank (Chairman), Mr. Loverd and Mr. Koen. Each of these members has been determined
to be “independent” within the meaning of the applicable standards of the NYSE MKT and Rule 10A-3 of the Securities
Exchange Act of 1934, as amended. In addition, each of these members meets the financial literacy requirements for audit committee
membership under applicable standards of the NYSE MKT and the rules and regulations of the SEC. Our Board has determined that
Mr. Frank is an “audit committee financial expert” as such term is defined in Item 407(d)(5)(ii) and (iii) of Regulation S-K.
No member of the Audit Committee serves on the audit committee of more than three public companies.
The
current Audit Committee held 4 meetings in 2016. The primary purpose of the Audit Committee is to assist our Board in fulfilling
its oversight responsibility relating to: (i) the integrity of the company’s financial statements and financial reporting
process, our systems of internal accounting and financial controls and other financial information we provide; (ii) the performance
of the internal audit services function; (iii) the annual independent audit of our financial statements, the engagement of the
independent auditors and the evaluation of the independent auditors’ qualifications, independence and performance; (iv)
our compliance with legal and regulatory requirements, including our disclosure controls and procedures; and (v) the evaluation
of risk assessment and risk management policies.
The
Audit Committee is responsible for reviewing any transactions that involve potential conflicts of interest, including any potential
conflicts involving executive officers, directors and their immediate family members. See “Code of Business Conduct and
Ethics.”
Nominating
and Corporate Governance Committee
The
current members of the Nominating and Corporate Governance Committee are Mr. Koen (Chairman), Mr. Permut and Mr. Loverd. Our Board
has determined that each member of the Nominating and Corporate Governance Committee is “independent” within the meaning
of the applicable standards of the NYSE MKT.
The
Nominating and Corporate Governance Committee held one meeting in 2016. The primary purpose of the Nominating and Corporate Governance
Committee is to assist our Board by: (i) identifying individuals qualified to become members of our Board, consistent with any
guidelines and criteria approved by our Board; (ii) considering and recommending director nominees for our Board to select in
connection with each annual meeting of shareholders; (iii) considering and recommending nominees for election to fill any vacancies
on our Board and to address related matters; (iv) developing and recommending to our Board corporate governance guidelines applicable
to us; (v) overseeing an annual evaluation of our Board’s and management’s performance; and (vi) providing counsel
to our Board with respect to the organization, function and composition of our Board and its committees.
Compensation
Committee
The
members of the Compensation Committee are Mr. Permut (Chairman), Mr. Frank and Mr. Loverd. Our Board has determined that each
member of the Compensation Committee is “independent” within the meaning of the applicable standards of the NYSE MKT.
Each member of the Compensation Committee qualifies as an “outside director” as such term is defined under Section
162(m) of the Internal Revenue Code and as a “non-employee director” for purposes of Rule 16b-3 of the Exchange Act.
The
current Compensation Committee held three meetings in 2016. The primary purpose of the Compensation Committee is to assist our
Board in discharging its responsibilities relating to the management agreement with our Manager and the compensation of our Manager,
directors and executive officers and administration of our compensation plans, policies and programs. The Compensation Committee
has overall responsibility for evaluating and recommending changes to the compensation plans, our policies and programs and approving
and recommending to our Board for its approval awards under our equity and compensation plans.
Corporate
Governance Guidelines
Our
Board has adopted Corporate Governance Guidelines, which provide the framework for our governance and represent our Board’s
current views with respect to selected corporate governance issues considered to be of significance to our shareholders. A current
copy of the Corporate Governance Guidelines can be found on our website at www.acrerealtyinvestors.com.
Determination
of Director Independence
We
have established an Audit Committee, a Nominating and Corporate Governance Committee and a Compensation Committee. Our Audit Committee
is currently composed of Mr. Frank (Chairman), Mr. Loverd, and Mr. Koen. Our Board has determined that each member of the Audit
Committee is “independent” under SEC Rule 10A-3 and Section 803A of the NYSE MKT exchange listing standards. Our compensation
committee is currently composed of Mr. Permut (Chairman), Mr. Frank, and Mr. Loverd. Each member of the Compensation Committee
qualifies as an “outside director” as such term is defined under Section 162(m) of the Internal Revenue Code and as
a “non-employee director” for purposes of Rule 16b-3 of the Exchange Act. Our Nominating and Corporate Governance
Committee is currently composed of Mr. Koen (Chairman), Mr. Permut and Mr. Loverd. Our Board has determined that each member of
the Nominating and Corporate Governance Committee is “independent” within the meaning of the applicable standards
of the NYSE MKT.
Availability
of Corporate Governance Materials
Shareholders
may view our corporate governance materials, including the charters of our Audit Committee, our Compensation Committee, our Nominating
and Corporate Governance Committee, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics, on our website
at www.acrerealtyinvestors.com and these documents are available in print to any Shareholder upon request by writing to ACRE Realty
Investors Inc. c/o Avenue Capital Group, 399 Park Avenue, 6
th
Floor, New York, NY 10022, Attention: Corporate Secretary.
Information at or connected to our website is not and should not be considered a part of this annual report.
Governance and Voting Agreement
In
connection with our recapitalization transactions with A-III, on January 30, 2015, the company, A-III, and Mr. Roberts entered
into a Governance and Voting Agreement, that provided for the composition of the new Board immediately following the closing of
the transactions contemplated by the Stock Purchase Agreement and certain other related matters. Under the terms of the Governance
and Voting Agreement, the new Board is composed of a total of seven directors, including two directors designated by A-III, four
new independent directors designated by A-III satisfying the independence requirements of the applicable listing standards and
SEC rules, and Mr. Roberts, who will serve on the new Board until the first anniversary of the closing of the transaction with
A-III. A-III will maintain its rights to designate two directors and to nominate four independent directors only if A-III and
its members, and their respective affiliates, collectively maintain continuous beneficial ownership of an aggregate of at least
100% of the shares of common stock initially acquired at the closing of the recapitalization transaction. One of the two A-III
designees is Chairman of the Board.
Under
the terms of the Governance and Voting Agreement, the company and A-III agreed to nominate Mr. Roberts for re-election to the
Board at any meeting of the shareholders of the company held after the closing of the recapitalization transaction and before
the first anniversary of the closing date to consider a vote on the election of directors of the class in which Mr. Roberts serves
(or, to the extent the company has de-classified the Board, which the parties acknowledge is the company’s intent, to consider
a vote on the election of all directors), and not to take any action that is designed to interfere with his election or re-election
to the Board during such one-year period. Mr. Roberts agreed to resign from the Board immediately upon the first to occur of the
following two events: (a) if he fails to continuously maintain beneficial ownership of at least 1,100,000 shares of common stock
(subject to adjustment for stock splits, stock dividends and other similar adjustments to the shares of common stock) and (b)
the first anniversary of the closing date of the recapitalization transaction.
From
and after the closing of the recapitalization transaction, A-III and Mr. Roberts agreed to vote in favor of the election or re-election,
as the case may be, of the directors designated by the parties under the Governance and Voting Agreement. A-III’s voting
obligations with respect to the election of Mr. Roberts as a director will only apply while Mr. Roberts has the right to be nominated
for election as a director, and Mr. Roberts’ obligations with respect to the election of the two A-III designees and the
four independent directors will terminate upon the first to occur of the termination of Mr. Roberts’ right to be nominated
for election as a director and Mr. Roberts’ resignation from the Board.
Mr.
Roberts agrees to vote all shares of the company’s capital stock beneficially owned by him and entitled to vote in favor
of any resolution or proposal approved by a majority of the independent directors and recommended by the board for approval by
shareholders of the company, provided that his voting obligations will expire upon the first to occur of the termination of his
right to be nominated for election as a director and his resignation from the board. Those matters may include any of the following
matters, which the company and A-III have stated that they intend to effectuate as soon as is practicable after the closing:
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·
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any
proposal to reincorporate the company as a Maryland corporation, whether through an affiliated merger or otherwise;
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·
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any
proposal to de-classify the Board;
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·
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any
proposal to effectuate a reverse split of the common stock;
|
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·
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any
proposal to amend the company’s articles of incorporation or bylaws to waive the application of the corporate opportunity
doctrine to the two A-III designees with respect to investment opportunities identified by them or their affiliates for the
benefit of the other investment funds and accounts managed by them or their affiliates; and
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·
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any
proposal to adopt amended or restated articles of incorporation in furtherance of any of the foregoing matters that requires
such an amendment or restatement.
|
Under
the terms of the Governance and Voting Agreement, so long as A-III and its members, and their respective affiliates, collectively
maintain continuous beneficial ownership of an aggregate of at least 100% of the shares of common stock initially acquired at
the closing (subject to adjustment for stock splits, stock dividends and other similar adjustments to the shares of common stock),
Mr. Roberts will maintain beneficial ownership of a sufficient number of shares of common stock that will allow A-III and Mr.
Roberts to collectively maintain beneficial ownership of a majority of the shares of common stock outstanding upon the completion
of the closing; provided, however, that Mr. Roberts’ obligations in this regard will expire upon the first to occur of the
termination of his right to be nominated for election as a director and his resignation from the Board. In no event will Mr. Roberts
be required to purchase additional shares of common stock.
Employment
Agreement
At
the closing of the transactions with A-III on January 30, 2015, the company and Mr. Roberts entered into an employment agreement
(the “Employment Agreement”) pursuant to which Mr. Roberts was engaged to serve as an Executive Vice President for
a term of one year from the date of the agreement, or until the sale of all four of the land parcels then owned by the company
is completed, if earlier. Under the Employment Agreement, Mr. Roberts was responsible for the marketing process for these properties.
The company paid Mr. Roberts an annual salary of $250,000. Under the Employment Agreement, Mr. Roberts was not eligible for a
bonus, nor did he receive a severance payment.
Extension
Agreement Extending Term of Governance and Voting Agreement and Employment Agreement
On
February 1, 2016, the company, A-III and Mr. Roberts, entered into an agreement (the “First Extension Agreement”),
effective as of January 28, 2016, extending the terms of the Employment Agreement and the Governance and Voting Agreement, each
dated as of January 30, 2015. On June 15, 2016, the Company, A-III and Mr. Roberts, entered into an amendment to the First Extension
Agreement (the “Second Extension Agreement”), effective as of June 15, 2016, further extending the terms of the Employment
Agreement and the Governance and Voting Agreement. As a result of these amendments, the parties agreed to extend the expiration
of the term of each of the Employment Agreement and the Governance and Voting Agreement from June 30, 2016, the first extension
date, to December 31, 2016. As a result, all of the respective rights and obligations of the parties under, and all other terms,
conditions and provisions of, the Employment Agreement and the Governance and Voting Agreement continued in full force and effect
until December 31, 2016. On December 31, 2016, the Employment Agreement expired and Mr. Roberts ceased to be an officer or employee
of our company.
On
October 10, 2016, the Company, A-III and Mr. Roberts, entered into an agreement (the “Extension of Governance and Voting
Agreement”), effective as of October 10, 2016, further extending the term of the Governance and Voting Agreement, but not
the Employment Agreement. As a result of the Extension of Governance and Voting Agreement, the parties agreed to extend the expiration
of the term of the Governance and Voting Agreement from December 31, 2016 to June 30, 2017. As a result, all of the respective
rights and obligations of the parties under, and all other terms, conditions and provisions of, the Governance and Voting Agreement
shall continue in full force and effect until June 30, 2017, unless the Governance and Voting Agreement is amended in writing
by the parties or is sooner terminated in accordance with the provisions thereof. Pursuant to the Extension of Governance and
Voting Agreement, the parties agreed to nominate Mr. Roberts for re-election to the Board. Mr. Roberts was duly elected by the
Company’s shareholders at the annual meeting on December 14, 2016. Mr. Roberts has agreed to resign from the Board immediately
upon the first to occur of the following two events: (a) if he fails to continuously maintain beneficial ownership of at least
1,100,000 shares of common stock (subject to adjustment for stock splits, stock dividends and other similar adjustments to the
shares of common stock) and (b) upon the expiration of the Governance and Voting Agreement on June 30, 2017.
Management
Agreement
In
connection with our recapitalization transactions with A-III, on January 30, 2015, our company, our operating partnership, and
the Manager entered into a management agreement (the “Management Agreement”), among other things, to provide for the
day-to-day management of our company by the Manager, including investment activities and operations of our company and its properties.
The Management Agreement requires the Manager to manage and administer the business activities and day-to-day operations of the
company and all of its subsidiaries in conformity with our company’s investment guidelines and other policies that are approved
and monitored by our Board. These investment guidelines and other policies may be modified and supplemented from time to time
pursuant to approval by a majority of the entire Board (which must include a majority of the independent directors) and the Manager’s
investment committee.
The
Manager maintains an administrative services agreement with A-III, pursuant to which A-III and its affiliates, including Avenue
Capital Group and C-III Capital Partners, provide a management team along with appropriate support personnel for the Manager to
deliver the management services to us. Under the terms of the Management Agreement, among other things, the Manager must refrain
from any action that, in its reasonable judgment made in good faith, is not in compliance with the investment guidelines and would,
when applicable, adversely affect the qualification of our company as a REIT. The Management Agreement has an initial five-year
term and will be automatically renewed for additional one-year terms thereafter unless terminated either by us or the Manager
in accordance with its terms.
For
the services to be provided by the Manager, our company is required to pay the Manager the following fees:
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·
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an
annual base management fee equal to 1.50% of our company’s “Equity” (as defined below), calculated and payable
quarterly in arrears in cash;
|
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·
|
a
property management fee equal to 4.0% of the gross rental receipts received each month at our company’s and its subsidiaries’
properties, calculated and payable monthly in arrears in cash;
|
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·
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an
acquisition fee equal to 1.0% of the gross purchase price paid for any property or other investment acquired by our company
or any of its subsidiaries, subject to certain conditions and limitations and payable in arrears in cash with respect to all
such acquisitions occurring after the date of the Management Agreement;
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·
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a
disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such disposition and (b) 1.0% of the sale
price with respect to any sale or other disposition by our company or any of its subsidiaries of any property or other investment,
subject to certain conditions and limitations and payable in arrears in cash with respect to all such dispositions occurring
after the date of the Management Agreement with certain exceptions (this disposition fee will not apply to the sale of the
four legacy land parcels); and
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·
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an
incentive fee (as described below) based on our company’s “Adjusted Net Income” (as defined below) for the
trailing four quarter period in excess of the “Hurdle Amount” (as defined below), calculated and payable in arrears
in cash on a rolling quarterly basis.
|
For
purposes of calculating the base management fee, “Equity” means (a) the sum of (1) the net proceeds from all issuances
of our company’s common stock and OP Units (without double counting) and other equity securities on and after the closing,
which will include the common stock issued to A-III in the recapitalization transaction (allocated on a pro rata basis for such
issuances during the fiscal quarter of any such issuance) and any issuances of common stock or OP Units in exchange for property
investments and other investments by our company, plus (2) the product of (x) the sum of (i) the number of shares of common stock
issued and outstanding immediately before the closing and (ii) the number of shares of common stock for which the number of OP
Units issued and outstanding immediately before the date of the closing (excluding any OP Units held by our company) may be redeemed
in accordance with the terms of the agreement of limited partnership of our operating partnership and (y) the purchase price per
share paid by A-III for the shares of common stock we issued to A-III in the recapitalization transaction, as the purchase price
per share may be subsequently adjusted as described above, plus (3) the retained earnings of our company and the operating partnership
(without double counting) calculated in accordance with GAAP at the end of the most recently completed fiscal quarter (without
taking into account any non-cash equity compensation expense incurred in current or prior periods), minus (b) any amount in cash
that our company or the operating partnership has paid to repurchase common stock, OP Units, or other equity securities of our
company as of the closing date of the recapitalization transaction. Equity excludes (1) any unrealized gains, losses or non-cash
equity compensation expenses that have impacted shareholders’ equity as reported in our financial statements prepared in
accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, (2)
one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above in each case, after discussions
between the Manager and our company’s independent directors and approval by a majority of the independent directors and
(3) our company’s accumulated deficit as of the closing date of the recapitalization transaction.
For
purposes of the Management Agreement, “Incentive Fee” means an incentive fee, calculated and payable after each fiscal
quarter, in an amount equal to the excess, if any, of (i) the product of (A) 20% and (B) the excess, if any, of (1) the company’s
Adjusted Net Income (described below) for such fiscal quarter and the immediately preceding three fiscal quarters over (2) the
Hurdle Amount (described below) for such four fiscal quarters, less (ii) the sum of the Incentive Fees already paid or payable
for each of the three fiscal quarters preceding that fiscal quarter. Any adjustment to the Incentive Fee calculation proposed
by the Manager will be subject to the approval of a majority of the independent directors.
For
purposes of calculating the Incentive Fee, “Adjusted Net Income” for the preceding four fiscal quarters means the
net income calculated in accordance with GAAP after all base management fees but before any acquisition expenses, expensed costs
related to equity issuances, incentive fees, depreciation and amortization and any non-cash equity compensation expenses for such
period. Adjusted Net Income will be adjusted to exclude one-time events pursuant to changes in GAAP, as well as other non-cash
charges after discussion between the Manager and our independent directors and approval by a majority of the independent directors
in the case of non-cash charges. Adjusted Net Income includes net realized gains and losses, including realized gains and losses
resulting from dispositions of properties and other investments during the applicable measurement period.
For
purposes of calculating the Incentive Fee, the “Hurdle Amount” is, with respect to any four fiscal quarter period,
the product of (i) 7% and (ii) the weighted average gross proceeds per share of all issuances of common stock and OP Units (excluding
issuances of common stock and OP Units, or their equivalents, as equity incentive awards), with each such issuance weighted by
both the number of shares of common stock and OP Units issued in such issuance and the number of days that such issued shares
of common stock and OP Units were outstanding during such four fiscal quarter period.
The
first Incentive Fee calculation will not occur until after completion of the 2015 fiscal year. The Incentive Fee will be prorated
for partial quarterly periods based on the number of days in such partial period compared to a 90-day quarter.
The
Manager is also entitled to receive a termination fee from our company under certain circumstances equal to four times the sum
of (x) the average annual base management fee, (y) the average annual incentive fee, and (y) the average annual acquisition fees
and disposition fees, in each case earned by the Manager in the most recently completed eight calendar quarters immediately preceding
the termination.
Additionally,
the company will be responsible for paying all of its own operating expenses and the Manager is responsible for paying its own
expenses, except that we are required to pay or reimburse certain expenses incurred by the Manager and its affiliates in connection
with the performance of the Manager’s obligations under the Management Agreement, including:
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·
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reasonable
out of pocket expenses incurred by personnel of the Manager for travel on our company’s behalf;
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·
|
the
portion of any costs and expenses incurred by the Manager or its affiliates with respect to market information systems and
publications, research publications and materials that are allocable to our company in accordance with the expense allocation
policies of the Manager or such affiliates;
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·
|
all
insurance costs incurred with respect to insurance policies obtained in connection with the operation of our business, including
errors and omissions insurance covering activities of the Manager and its affiliates and any of their employees relating to
the performance of the Manager’s duties and obligations under the Management Agreement or of its affiliates under the
administrative services agreement between the Manager and A-III, other than insurance premiums incurred by the Manager for
employer liability insurance;
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·
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expenses
relating to any office or office facilities, including disaster backup recovery sites and facilities, maintained expressly
for our company and separate from offices of the Manager;
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·
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the
costs of the wages, salaries, and benefits incurred by the Manager with respect to certain Dedicated Employees (as hereafter
defined) that the Manager elects to provide to our company pursuant to the Management Agreement; provided that (A) if any
such Dedicated Employee devotes less than 100% of his or her working time and efforts to matters related to our company and
its business, our company will be required to bear only a pro rata portion of the costs of the wages, salaries and benefits
the Manager incurs for such Dedicated Employees based on the percentage of such employee’s working time and efforts
spent on matters related to our company, (B) the amount of such wages, salaries and benefits paid or reimbursed with respect
to the Dedicated Employees shall be subject to the approval of the Compensation Committee of our Board and, if required by
the Board, of the Board and (C) during the one-year period following the date of the Management Agreement, the aggregate amount
of cash compensation paid to Dedicated Employees of the Manager and its affiliates by our company, or reimbursed by our company
to the Manager in respect thereof, will not exceed $500,000; and
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·
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any
equity-based compensation that our company, upon the approval of the Board or the Compensation Committee of the Board, elects
to pay to any director, officer or employee of our company or the Manager or any of the Manager’s affiliates who provides
services to our company or any of its subsidiaries.
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Other
than as expressly provided above, our company will not be required to pay any portion of the rent, telephone, utilities, office
furniture, equipment, machinery and other office, internal and overhead expenses of the Manager and its affiliates. In particular,
the Manager is not entitled to be reimbursed for wages, salaries and benefits of its officers and employees, other than as described
above.
Subject
to any required Board approval, the Manager may retain, for and on behalf, and at the sole cost and expense, of our company, such
services of non-affiliate third party accountants, legal counsel, appraisers, insurers, brokers, transfer agents, registrars,
developers, contractors, investment banks, financial advisors, banks and other lenders and others as the Manager deems necessary
or advisable in connection with the management and operations of our company. In lieu of retaining non-affiliate outside service
providers as described in the preceding sentence, the Manager may retain, on behalf of and at the cost and expense of our company,
affiliates of the Manager, or to direct officers or employees of the Manager or its affiliates, to provide any services that the
Manager deems necessary or advisable in connection with the management and operations of our company and its properties and other
investments, provided that the amounts paid by our company for such services do not exceed the fees and expenses that a commercially
reasonable third party service provider would have charged for such services. If the Manager proposes to retain any affiliate
of the Manager, or to direct officers or employees of the Manager or its affiliates, to provide any services that the Manager
deems necessary or advisable in connection with the management and operations of our company and its properties and other investments
pursuant to the preceding sentence, then such arrangement will be subject to the prior approval of a majority of our independent
directors.
For
the year ended December 31, 2016, the Company incurred a base management fee of $391,065 and $533,814 to reimburse the Manager
for Dedicated Employees who are employees of affiliates of A-III and for fees paid by the Manager to FTI for the services of Mark
E. Chertok, our Chief Financial Officer. At December 31, 2016 the unpaid portion of the base management fee and the reimbursable
expenses was $216,991.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
of Executive Officers
Executive
Compensation since Completion of the A-III Recapitalization Transaction on January 30, 2015
Concurrent
with the closing of our transaction with A-III on January 30, 2015, we became an externally-managed company. As an externally-managed
company, we do not pay or provide benefits, nor do we reimburse the cost of any compensation or benefits paid by our Manager or
its affiliates, to our executive officers or other employees, other than (i) the compensation payable by us to Mr. Charles S.
Roberts (who is not an employee of our Manager but was an employee of the company through December 31, 2016) pursuant to the Employment
Agreement we entered into with him on January 30, 2015, which expired on December 31, 2016 and (ii) the costs of the wages, salaries,
and benefits incurred by the Manager with respect to any dedicated or partially dedicated chief financial officer, chief operating
officer, controller, investor relations professional or internal legal counsel (“Dedicated Employees”) if the Manager
elects to provide any such employee to our company pursuant to the Management Agreement; provided that (A) if any such Dedicated
Employee devotes less than 100% of his or her working time and efforts to matters related to our company and its business, our
company will be required to bear only a pro rata portion of the costs of the wages, salaries and benefits the Manager incurs for
such partially Dedicated Employee based on the percentage of such employee’s working time and efforts spent on matters related
to our company, (B) the amount of such wages, salaries and benefits paid or reimbursed with respect to the Dedicated Employees
will be subject to the approval of the Compensation Committee of our Board and, if required by the Board, of the Board and (C)
during the one-year period following the date of the Management Agreement, our company was not required to reimburse more than
$500,000 of total cash compensation paid to Dedicated Employees.
The
Compensation Committee of our Board determined, with our Manager’s consent, to apply the $500,000 limit on this reimbursement
to the 2015 fiscal year, but no such limit was applied to 2016 or will be applied to subsequent years. For the year ended December
31, 2016, we incurred an aggregate of $533,814 of expenses to reimburse the Manager for Dedicated Employees who are employees
of affiliates of A-III and for fees paid by the Manager to FTI for the services of Mark E. Chertok, our Chief Financial Officer.
Executive
Compensation for the 2016 and 2015 Fiscal Years
During
the year ended December 31, 2016, our executive officers were Edward Gellert, Chief Executive Officer, President and Chairman
of the Board; Robert Gellert, Executive Vice President, Chief Operating Officer and Treasurer; Mark E. Chertok, Chief Financial
Officer; Gregory I. Simon, Executive Vice President, General Counsel and Secretary; and Charles S. Roberts, Executive Vice President.
Prior
to January 30, 2015, Mr. Roberts served as our Chief Executive Officer, President and Chairman of the Board. In addition, Mr.
Anthony Shurtz served as our Chief Financial Officer, Treasurer and Secretary in 2014 and through January 30, 2015. Mr. Roberts
was our only executive officer in 2015 and 2016 that had an employment agreement.
As
stated above, for the year ended December 31, 2016, we did not pay any cash compensation to any of our executive officers other
than Mr. Roberts, whose Employment Agreement expired on December 31, 2016, and the $533,814 reimbursement described above. For
the period from January 1, 2015 through December 31, 2015, we only paid cash compensation to Mr. Roberts and for the period from
January 1, 2015 through January 30, 2015, we paid cash compensation to Mr. Shurtz.
Summary
Compensation Table for 2016 and 2015
Name and
Principal Position
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|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Restricted
Stock
($)
|
|
|
Total
($)
|
|
Charles S. Roberts, Executive Vice President and
|
|
|
2016
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
Former Chief Executive Officer, President and Chairman of the Board
(1)
|
|
|
2015
|
|
|
|
248,205
|
|
|
|
—
|
|
|
|
—
|
|
|
|
248,205
|
|
Anthony Shurtz, Former Chief Financial Officer,
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Treasurer and Secretary
(2)
|
|
|
2015
|
|
|
|
11,775
|
|
|
|
70,000
|
|
|
|
—
|
|
|
|
81,775
|
|
Edward Gellert, Chief Executive Officer
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
President and Chairman of the Board
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127,000
|
|
|
|
127,000
|
|
Robert Gellert, Executive Vice President, Chief
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating Officer and Treasurer
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,800
|
|
|
|
50,800
|
|
Gregory I. Simon, Executive Vice President
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
General Counsel and Secretary
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,100
|
|
|
|
38,100
|
|
Mark E. Chertok, Chief Financial Officer
(3)
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
Mr.
Roberts served as Chief Executive Officer, President and Chairman of the Board prior to January 30, 2015, and as our Executive
Vice President from January 30, 2015 to December 31, 2016. His Employment Agreement expired on December 31, 2016.
(2)
Mr.
Shurtz served as our Chief Financial Officer, Treasurer and Secretary prior to January 30, 2015. His employment was terminated
on January 30, 2015.
(3)
Mr.
Chertok is an employee of FTI.
Compensation
of Directors
The
following table summarizes the compensation we paid to our independent directors in 2016. On April 6, 2015, the Compensation Committee
as constituted following the closing of our transaction with A-III approved new compensation arrangements for the independent
members of our board of directors and board committees which became effective retroactively to January 30, 2015 (the “Director
Compensation Plan”). Under the Director Compensation Plan, directors are entitled to receive cash or equity-based compensation,
as described below:
|
1.
|
All directors
are to be reimbursed for their out of pocket expenses for attendance at Board meetings and committee meetings.
|
|
|
2.
|
Annual
fee for independent directors - $40,000
|
|
|
3.
|
Annual
fee for Chair of Audit Committee - $20,000
|
|
|
4.
|
Annual
fee for Chair of Compensation Committee - $7,500
|
|
|
5.
|
Annual
fee for Chair of Nominating and Corporate Governance Committee - $7,500
|
|
|
6.
|
Independent
directors shall receive the following fees per meeting:
|
|
|
a.
|
Board meetings
- $2,000
|
|
|
b.
|
Committee
meetings - $1,000 (unless in conjunction with in person Board meeting)
|
|
|
c.
|
Teleconference
Board and Committee meetings - $1,000
|
|
|
7.
|
Equity or equity-linked awards
may be issued in lieu of paying these fees in cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
Compensation for 2016
Name
|
|
Fees Earned
or Paid in Cash
($)
|
|
|
Restricted
Stock ($)
|
|
|
Total
($)
|
|
Bruce D. Frank
(1)
|
|
$
|
76,000
|
|
|
$
|
—
|
|
|
$
|
76,000
|
|
Kyle A. Permut
(1)
|
|
|
59,855
|
|
|
|
—
|
|
|
|
59,855
|
|
Robert L. Loverd
(1)
|
|
|
57,000
|
|
|
|
—
|
|
|
|
57,000
|
|
Robert G. Koen
(1)
|
|
|
60,500
|
|
|
|
—
|
|
|
|
60,500
|
|
(1)
Appointed on January 30, 2015 in connection with the A-III transaction.
During
2016, we paid our independent directors an annual fee of $40,000 for attendance, in person or by telephone, at meetings of the
Board and its committees. We paid additional compensation of $20,000 to Mr. Frank for serving as the chairman of the Audit Committee,
$7,500 to Mr. Koen for serving as the chairman of the Nominating and Corporate Governance Committee, and $7,500 to Mr. Permut
for serving as the chairman of the Compensation Committee. In addition, we paid our independent directors $2,000 and $1,000 per
in-person or telephonic board meeting, respectively. We also paid our independent directors $1,000 per committee meeting, unless
the meeting is in conjunction with an in-person board meeting. We also reimburse our directors for reasonable travel expenses
and out-of-pocket expenses incurred in connection with their activities on our behalf. These reimbursements are not reflected
in the table above.
Equity Compensation
Plan Information
On
October 12, 2015, based on the recommendation of our Compensation Committee of the Board, the Board approved restricted stock
grants of an aggregate of 260,000 shares of common stock to our independent directors and certain of our officers. The restricted
stock grants were awarded pursuant to our 2006 Restricted Stock Plan, as amended (the “Plan”). The Plan provides for
the grant of stock awards to our employees, directors, consultants and advisors. The maximum number of shares of restricted stock
that may be granted to any one individual during the term of the Plan may not exceed 20% of the aggregate number of shares of
restricted stock that may be issued under the Plan. Under the Plan as amended on January 27, 2009, we could grant up to 654,000
shares of restricted common stock under the Plan, subject to the anti-dilution provisions of the Plan. The vesting of the awards
for the independent directors and officers is subject to continued service through each of the vesting periods. Each of our four
independent directors was awarded 20,000 shares of restricted common stock, which vested on January 30, 2016. Certain of our officers
were awarded an aggregate of 180,000 shares of restricted common stock, which vest in equal one-third installments. There were
60,000 shares, which vested on each of January 30, 2016 and October 12, 2016. The remaining 60,000 shares will vest on October
12, 2017. The Plan expired on August 21, 2016.
Outstanding
Equity Awards at Fiscal Year-End
Name
|
|
Number of shares
or units of stock that
have not vested(#)
|
|
|
Market value of shares
of units of stock that
have not vested ($)
(1)
|
|
Edward Gellert
|
|
|
33,333
|
|
|
$
|
42,333
|
|
Robert Gellert
|
|
|
13,333
|
|
|
$
|
16,933
|
|
Gregory I. Simon
|
|
|
10,000
|
|
|
$
|
12,700
|
|
(1) Market
value is based on the closing price of the Company’s common stock on the grant date October 12, 2015 of $1.27.
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Ownership
of Common Stock
The
table below describes the beneficial ownership of shares of our common stock as of December 31, 2016 for:
|
·
|
each
person or entity known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock;
|
|
·
|
each
director and each named executive officer; and
|
|
·
|
our
directors and executive officers as a group.
|
Except
as noted in the footnotes, each person named in the following table directly owns our common stock and has sole voting and investment
power.
Name of
Beneficial Owner
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Total
|
|
|
Percent of
Class
(1)
|
|
5% Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
A-III Investment Partners LLC
(2)
|
|
|
35,211,267
|
|
|
|
35,211,267
|
|
|
|
74.52
|
%
|
Charles S. Roberts
(3)
|
|
|
4,282,634
|
|
|
|
4,282,634
|
|
|
|
20.90
|
%
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward Gellert
(4)
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
*
|
|
Robert Gellert
(4)
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
*
|
|
Gregory I. Simon
(4)
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
*
|
|
Mark E. Chertok
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
Robert C. Lieber
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
Bruce D. Frank
(5)
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
*
|
|
Robert L. Loverd
(5)
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
*
|
|
Robert G. Koen
(5)
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
*
|
|
Kyle A. Permut
(5)
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
*
|
|
Charles S. Roberts
(3)
|
|
|
4,282,634
|
|
|
|
4,282,634
|
|
|
|
20.90
|
%
|
All directors and executive officers as a group: (10 persons)
|
|
|
4,532,634
|
|
|
|
4,532,634
|
|
|
|
22.12
|
%
|
* Less than 1%.
(1)
|
The
total number of shares outstanding used in calculating this percentage is 20,490,465, which is the number of shares deemed
outstanding at December 31, 2016, except for calculating the percent of class of A-III Investment Partners LLC. The total
number of shares used in calculating that percentage is 47,251,028 which is the sum of (a) 20,490,465, the number of shares
deemed outstanding, for the purposes of this calculation as of December 31, 2016, plus (b) 26,760,563, the number of shares
issuable upon exercise of warrants owned by A-III Investment Partners LLC as of December 31, 2016.
|
(2)
|
Derived
from a Form D filed with the SEC on February 9, 2015. The address for A-III Investment Partners LLC is 399 Park Avenue, 6
th
Floor, New York, NY 10022. Includes 26,760,563 shares issuable upon the exercise of warrants owned by A-III Investment
Partners LLC.
|
(3)
|
Derived
from a Form 4 filed with the SEC on July 7, 2015. The address for Charles S. Roberts is 375 Northridge Road, Suite 330, Atlanta,
Georgia 30350. Includes 258,705 shares owned by Mr. Roberts’ spouse. Mr. Roberts disclaims beneficial ownership of those
shares.
|
(4)
|
Consists
of restricted stock grants awarded pursuant to the Company’s 2006 Restricted Stock Plan, as amended, two-thirds of which
vested as a result of the prior lapsing of forfeiture restrictions to which the grants were subject when the grants were made
and subject to forfeiture restrictions that will lapse (“vesting”) with respect to the remaining one-third of
the grants on October 12, 2017 (the second anniversary of the date of grant), subject to continued service as an officer of
the Company through each vesting date.
|
(5)
|
Consists
of restricted stock grants awarded pursuant to the company’s 2006 Restricted Stock Plan, as amended, which vested on
January 30, 2016.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
General
The
company conducts its business through ACRE Realty LP, which we refer to as the operating partnership. The company owns a 96.39%
interest in the operating partnership as of March 7, 2017 and is its sole general partner.
Under
applicable SEC rules, this Item 13 describes any transaction that has occurred since January 1, 2015, or any currently proposed
transaction, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent
of our total assets at year-end for the last two completed fiscal years, and in which our officers, directors, and certain other
“related persons” as defined in the SEC rules had or will have a direct or indirect material interest. Notes 3 and
9 to our audited consolidated financial statements included in this annual report on Form 10-K provide further detail regarding
some of the transactions described in this section.
Transactions
with A-III Investment Partners LLC
Governance
and Voting Agreement
The
company, A-III, and Mr. Roberts are parties to a Governance and Voting Agreement (the “Governance and Voting Agreement”),
that among other things, provides for the composition of the new Board immediately following the closing of the transactions contemplated
by the Stock Purchase Agreement with A-III, for Mr. Roberts to vote his shares in favor of certain proposals approved by the new
Board, and certain other related matters. Under the terms of the Governance and Voting Agreement, the new Board effective January
30, 2015 is composed of a total of seven directors, including Mr. Roberts. For a more detailed description of the terms of this
agreement, as further amended, see Part III, Item 10, Directors, Executive Officers and Corporate Governance above.
Management
Agreement
The
company, the operating partnership and the Manager entered into a Management Agreement, that among other things, provides for
the day-to-day management of the company by the Manager, including investment activities and operations of the company and its
properties. The Management Agreement requires the Manager to manage and administer the business activities and day-to-day operations
of the company and all of its subsidiaries in conformity with the company’s investment guidelines and other policies that
are approved and monitored by the company’s Board. Edward Gellert, our Chief Executive Officer, President and Chairman of
our Board of Directors, is an officer of our Manager. A description of the material terms of the Management Agreement is included
in Part III, Item 10, Directors, Executive Officers and Corporate Governance above.
The
Manager maintains an administrative services agreement with A-III, pursuant to which A-III and its affiliates, including Avenue
Capital Group and C-III Capital Partners, provide a management team along with appropriate support personnel for the Manager to
deliver the management services to the company. The Management Agreement has an initial five-year term and will be automatically
renewed for additional one-year terms thereafter unless terminated either by the company or the Manager in accordance with its
terms.
Registration
Rights Agreement
The
company and A-III are parties to a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to
which the company agreed, among other things, to file on or before the date that is 180 days after the closing date of the transaction
with A-III (or July 30, 2015) a shelf registration statement on Form S-11 or such other form then available to the company. The
registration statement will cover the resale from time to time of shares issued or to be issued to A-III under the Stock Purchase
Agreement and the Warrant Agreement. The company previously announced that, on each of September 3, 2015, May 30, 2016 and October
14, 2016, the company’s Board of Directors unanimously approved a deferral of the deadline for the company to file a shelf
registration statement to register for resale A-III’s shares of company common stock until up to May 31, 2016, December
31, 2016 and June 30, 2017, respectively. The company’s Board of Directors unanimously approved the extension of the latest
filing deadline on October 14, 2016. This deferral will allow the company to use Form S-3, which will be less costly for the Company
than Form S-11. Other than the foregoing deferral of the registration deadline to June 30, 2017, all terms and conditions of the
Registration Rights Agreement remain in full force and effect.
Tax
Protection Agreement
In
July 2013, the operating partnership privately offered to investors who held both OP Units and shares of common stock the opportunity
to contribute shares to the operating partnership in exchange for OP Units (provided that the investors were “accredited
investors” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended). This offering remains
open to such investors. The company, the operating partnership, A-III, and the Manager are parties to a Tax Protection Agreement
(the “Tax Protection Agreement”) that provides that the parties will take the actions necessary to cause the operating
partnership to continue the offering to such investors and to retain the shares it has previously acquired in the offering and
any shares it acquires in the future in the offering.
Warrant
Agreement
The
company and A-III are parties to a Warrant Agreement, pursuant to which the company issued to A-III warrants to purchase 26,760,563
shares of the company’s common stock at an exercise price of $1.42 per share ($38,000,000 in aggregate), subject to the
post-closing adjustment described above (subject to further adjustment for stock splits, stock dividends, and other similar stock
adjustments during the exercise term of such warrants).
Transactions
with the Roberts Companies and its Affiliates
Mr.
Charles S. Roberts, our former Chief Executive Officer, owns all of the outstanding shares of each of the Roberts Companies. Prior
to the recapitalization transaction with A-III, which became effective January 30, 2015, we were engaged in various transactions
with the Roberts Companies and paid them to perform services for us. Effective January 30, 2015, all agreements and arrangements
between the company and the Roberts Companies have been terminated, except for the reimbursement arrangement for consulting services,
as outlined below.
Overview
.
We have paid fees to the Roberts Companies for various services. We reimburse the Roberts Companies for the costs of certain services
and personnel the Roberts Companies provide to us, and we have retained the Roberts Companies for development services and construction
services for some of our land parcels in the past. For a period of 180 days after the closing of the recapitalization transaction
with A-III, the company had the right to request the reasonable assistance of employees of Roberts Properties with respect to
transition issues and questions relating to the company’s properties and operations. This 180 day period terminated July
30, 2015, but this arrangement continues on a periodic basis. Under Mr. Robert’s Employment Agreement, Mr. Roberts has agreed
to supervise the disposition of the legacy properties. Affiliates of Mr. Roberts may provide services to us in connection with
the sale of such properties. The fees and costs we pay for such services will be considered selling costs for purposes of the
true-up arrangement under the Stock Purchase Agreement.
Sale
Contract on Bradley Park Land Parcel.
On January 26, 2015, we entered into a contract to sell our Bradley Park land parcel
for $4,178,000 to BPA, which is an affiliate of Mr. Roberts, our former President, CEO and Chairman of the Board. There were subsequent
amendments to the sale contract, such as extending the closing date and payment of additional deposits, among other provisions.
On December 4, 2015, we closed on the sale of the Bradley Park land parcel and concurrently, paid in full the related outstanding
land loan.
The
Bradley Park land parcel is one of the four legacy properties that was acquired prior to the recapitalization transaction with
A-III. Our Audit Committee, as constituted prior to the A-III transaction, approved the transaction in accordance with the committee’s
charter and in compliance with applicable standards of the NYSE MKT. Our Board as constituted prior to and after the A-III transaction
also approved the transaction in accordance with our Code of Business Conduct and Ethics.
Sale
Contract on Highway 20.
On October 7, 2016, the operating partnership, entered into a sales contract with Roberts Capital
Partners, LLC, a Georgia limited liability company (the “Purchaser”), pursuant to which the operating partnership
agreed to sell, and the Purchaser agreed to purchase, subject to the conditions in the contract, that certain parcel of approximately
37.693 acres of real property located in Cumming, Forsyth County, Georgia, fronting on State Route 20 (“Highway 20”).
Highway 20 is one of the legacy properties acquired prior to the recapitalization transaction with A-III. As described in this
Form 10-K, Highway 20 is the only remaining legacy property that the company has not sold. The company’s Audit Committee
approved the transaction in accordance with the committee’s charter and in compliance with applicable listing rules of the
Exchange. The company’s Board also approved the transaction in accordance with its Code of Business Conduct and Ethics.
Under
the terms of the sales contract, the purchase price for Highway 20 is $4,725,000, including a reimbursement of $1,050,000 relating
to prepaid sewer taps. This transaction is expected to close during the second quarter of 2017, subject to an extension option
and certain closing conditions.
Sublease
of Office Space
. The company is under a sublease agreement for 1,817 square feet
of office space with Roberts Capital Partners, LLC, since April 7, 2014, the lease commencement date. Roberts Capital Partners,
LLC is owned by Mr. Charles S. Roberts, our former Chairman of the Board, Chief Executive Officer and President. The terms of
the sublease agreement were the same terms that Roberts Capital Partners, LLC had with the unrelated third party landlord. Roberts
Capital Partners, LLC is liable to the landlord for the full three-year term of its lease; however, the company negotiated a 90-day
right to terminate our sublease. The sublease expires on April 7, 2017, subject to a one-year extension option. The company paid
a security deposit of $20,577 upon the execution of the lease. During the years ended December 31, 2016 and 2015, the company
incurred rent expense of $33,274 and $31,003, respectively.
Other
Payments to Roberts Construction.
At our request, Roberts Construction performed repairs and maintenance and made tenant improvements
for new leases at our retail centers and office building. Roberts Construction also performed maintenance on the land parcels.
Roberts Construction received cost reimbursements of $68 and $2,104 during the years ended December 31, 2016 and 2015, respectively.
Reimbursements
to Roberts Properties for Consulting Services
. We entered into a reimbursement arrangement for services provided by Roberts
Properties, effective February 4, 2008, as amended January 1, 2014. Under the terms of the arrangement, we reimburse Roberts
Properties the cost of providing consulting services in an amount equal to an agreed-upon hourly billing rate for each employee
multiplied by the number of hours that the employee provided services to us. As amended, the arrangement provides that the appropriate
billing rate shall be calculated by multiplying an hourly cost for an employee (which is defined as the employee’s salary,
plus benefits paid by the Roberts Companies, divided by 2,080 annual hours) by a factor of 2.25 for all employees (increased from
a factor of 1.7), including Roberts Properties’ Chief Financial Officer (increased from a factor of 1.8). The reimbursement
arrangement allows us to obtain services from experienced and knowledgeable personnel without having to bear the cost of employing
them on a full-time basis. Under this arrangement, we incurred costs of $68,513 and $119,589 during the years ended December 31,
2016 and 2015, respectively.
Other
Reimbursements to Roberts Properties
. We reimbursed Roberts Properties $86 in 2016 and $9,768 in 2015 for our operating costs
and other expenses.
Agreements with Charles S. Roberts
During
2016, we were party to three agreements with Mr. Roberts, a member of our Board of Directors. These agreements are the Governance
and Voting Agreement described in this Item 13 above under the heading “Transactions with A-III Investment Partners”
and described in more detail in Item 10 of this annual report on Form 10-K, the Employment Agreement described in Item 10 of this
Form 10-K under the heading “Employment Agreement,” which expired on December 31, 2016, and the Extension Agreement
described in Item 10 of this annual report on Form 10-K under the heading “Extension Agreement Extending Term of Governance
and Voting Agreement and Employment Agreement.” Please refer to Item 10 for more detailed description of these agreements.
Agreements
with FTI Consulting, Inc.
On
January 30, 2015, our Manager entered into two engagement agreements with FTI, which is the employer of Mark E. Chertok, our Chief
Financial Officer.
Under
the first agreement, our Manager engaged FTI, on our behalf, to provide Mr. Chertok to serve as our Chief Financial Officer reporting
to the Board or a committee of the Board. Accordingly, Mr. Chertok reports to the Audit Committee of the Board.
Under this agreement, our Manager pays FTI a monthly fee for Mr. Chertok’s services, which is reimbursed by us to our Manager
under the reimbursement arrangement for Dedicated Employees described in Item 11. Executive Compensation above. FTI is also reimbursed
for the reasonable allocated and direct expenses incurred by FTI in the performance of its services.
Under
the second agreement with FTI, our Manager engaged FTI, on our behalf, to provide various accounting and financial reporting services
in conjunction with the services that Mr. Chertok provides as the company’s Chief Financial Officer. The company pays FTI
monthly fees based on the hourly rates of the FTI employees who perform the services.
Approval
of Transactions with Related Persons
We
have two types of policies and procedures for the review, approval, or ratification of any transaction we are required to report
in the preceding portion of this Item 13. The first is our longstanding policy that conflicting interest transactions by directors
as defined under Georgia law must be authorized by a majority of the disinterested directors, but only if there are at least two
directors who are disinterested with respect to the matter at issue. The second is that under our Code of Business Conduct and
Ethics, related party transactions are subject to appropriate review and oversight by the Audit Committee of our Board.
The
Board is subject to provisions of Georgia law that are designed to eliminate or minimize potential conflicts of interest. Under
Georgia law, a director may not misappropriate corporate opportunities that he learns of solely by serving as a member of the
Board. In addition, under Georgia law, a transaction effected by us or any entity we control (including the operating partnership)
in which a director, or specified related persons and entities of the director, have a conflicting interest of such financial
significance that it would reasonably be expected to exert an influence on the director’s judgment, may not be enjoined,
set aside, or give rise to damages on the grounds of that interest if either:
|
·
|
the
transaction is approved, after disclosure of the interest, by the affirmative vote of a majority of the disinterested directors,
or by the affirmative vote of a majority of the votes cast by disinterested shareholders; or
|
|
·
|
the
transaction is established to have been fair to us.
|
Under
our Code of Business Conduct and Ethics, a “conflict of interest” occurs when an individual’s private interest
interferes or appears to interfere with the interests of the company. A conflict situation can arise when our employee, officer
or director takes actions or has interests that may make it difficult to perform his or her services to the company objectively
and effectively. For example, a conflict of interest would arise if a director or officer, or a member or his or her family, receives
improper personal benefits as a result of his or her position in the company.
Conflicts
of interest are prohibited as a matter of company policy, except under guidelines approved by the Board of Directors of the company
or as provided by the Management Agreement.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES.
On
August 9, 2016 and September 10, 2015, the Audit Committee of our Board of Directors approved the engagement of Deloitte &
Touche LLP (“Deloitte”) as the company’s independent registered public accounting firm for the purposes of auditing
the company’s financial statements for the year ended December 31, 2016 and as of September 10, 2015, respectively. This
selection resulted in the dismissal by the Audit Committee of Cherry Bekaert LLP (“Cherry Bekaert”), which had served
in that role, until September 10, 2015. See “—Change in Independent Registered Public Accounting Firm” below.
The
following is a summary of the fees incurred by the company with Deloitte and Cherry Bekaert, the company’s former and current
independent registered public accounting firms for professional services rendered for the years ended December 31, 2016 and
2015.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deloitte:
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
258,334
|
|
|
$
|
147,250
|
|
Audit-Related Fees
|
|
|
—
|
|
|
|
—
|
|
Tax Fees
|
|
|
83,200
|
|
|
|
83,200
|
|
All Other Fees
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
341,534
|
|
|
$
|
230,450
|
|
Cherry Bekaert:
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
—
|
|
|
$
|
22,706
|
|
Audit-Related Fees
|
|
|
—
|
|
|
|
—
|
|
Tax Fees
|
|
|
—
|
|
|
|
—
|
|
All Other Fees
|
|
|
6,252
|
|
|
|
4,500
|
|
Total
|
|
$
|
6,252
|
|
|
$
|
27,206
|
|
Audit Fees
“Audit
Fees” consist of fees and expenses billed for professional services rendered for the audit of the financial statements,
review of the interim consolidated financial statements, review of registration statements and the preparation of comfort letters
and services that are normally provided by accountants in connection with statutory and regulatory filings or engagements.
Audit-Related
Fees
“Audit-Related
Fees” consist of fees and expenses for assurance and related services that are reasonably related to the performance of
the audit or review of our financial statements that are not “Audit Fees.”
Tax
Fees
“Tax
Fees” consist of fees and related expenses billed for professional services for tax compliance, tax advice and tax planning.
These services include assistance regarding federal and state tax compliance and tax planning and structuring and research.
All
Other Fees
“All
Other Fees” consist of fees and expenses for products and services that are not “Audit Fees,” “Audit-Related
Fees” or “Tax Fees.”
Pre-Approval
Policy
All
audit, tax and other services provided to us are reviewed and pre-approved by the Audit Committee. All of the fees paid to Cherry
Bekaert and Deloitte in 2016 and 2015 that are described above were approved by the Board.
The
Audit Committee has considered whether, and has determined that, the provision by Cherry Bekaert and Deloitte of the services
described under “Audit-Related Fees,” “Tax Fees” and “Other Fees” is compatible with maintaining
Cherry Bekaert’s and Deloitte’s independence from management and the company.
Change
in Independent Registered Public Accounting Firm
Effective
September 10, 2015, the Audit Committee engaged Deloitte as the company’s independent registered public accounting firm
for the fiscal year ended December 31, 2015, and dismissed Cherry Bekaert from that role. Cherry Bekaert was the company’s
independent registered public accounting firm for the year ended December 31, 2014 and until September 10, 2015. The Audit Committee
of the Board approved the change.
From
January 1, 2015 through September 10, 2015, (i) there were no disagreements with Cherry Bekaert on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures that, if not resolved to Cherry Bekaert’s
satisfaction, would have caused Cherry Bekaert to make reference in connection to their opinion to the subject matter of the disagreement
and (ii) there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
The
company provided Cherry Bekaert with a copy of the disclosures made in a Current Report on Form 8-K (the “Report”)
prior to the time the Report was filed with the SEC and requested that Cherry Bekaert furnish the company with a letter addressed
to the Securities and Exchange Commission stating whether it agrees with the statements made by the company therein and, if not,
stating the respects in which it does not agree. The letter from Cherry Bekaert to the Securities and Exchange Commission dated
as of September 10, 2015 was filed on our Form 8-K dated September 11, 2015 and is incorporated herein by reference.
During
the years ended December 31, 2016 and 2015, neither the company nor (to the company’s knowledge) anyone acting on behalf
of the company consulted with Deloitte regarding either (i) the application of accounting principles to a specified transaction
(either completed or proposed), (ii) the type of audit opinion that might be rendered on the company’s financial statements,
or (iii) any matter that was either the subject matter of a “disagreement,” as described in Item 304(a)(1) of Regulation S-K,
or a “reportable event.”
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS AND ORGANIZATION
ACRE Realty Investors Inc. (the “company”)
(formerly known as Roberts Realty Investors, Inc. until its name was changed on January 30, 2015), a Georgia corporation, was formed
on July 22, 1994 to serve as a vehicle for investments in, and ownership of, a professionally managed real estate portfolio of
multifamily apartment communities. The company’s strategy has since changed upon the consummation of the transaction with
A-III Investment Partners LLC, as described below.
The company conducts all of its operations
and owns all of its assets in and through ACRE Realty LP (formerly known as Roberts Properties Residential, L.P. until its name
was changed on January 30, 2015), a Georgia limited partnership (the “operating partnership”), or through wholly owned
subsidiaries of the operating partnership. The company controls the operating partnership as its sole general partner and has a
96.39% and a 95.66% ownership interest in the operating partnership at December 31, 2016 and 2015, respectively.
On November 19, 2014, the company and its operating
partnership entered into a Stock Purchase Agreement with A-III Investment Partners LLC (“A-III”) (the “Stock
Purchase Agreement”). On January 30, 2015, the company and A-III closed the transactions contemplated under the Stock Purchase
Agreement. At the closing, A-III purchased 8,450,704 shares of the company’s common stock at a purchase price of $1.42 per
share, for an aggregate purchase price of $12 million, and the company issued to A-III warrants to purchase up to an additional
26,760,563 shares of common stock at an exercise price of $1.42 per share ($38 million in the aggregate). The purchase price per
share and the exercise price of the warrants are subject to a potential post-closing adjustment upon completion of the sale of
the company’s four land parcels owned at January 30, 2015, which could result in the issuance of additional shares of common
stock to A-III and an increase in the number of shares of common stock issuable upon exercise of the warrants.
After the closing, Roberts Realty Investors, Inc. amended its articles of incorporation to change its name
to ACRE Realty Investors Inc. At the closing, the company, A-III and Mr. Roberts, Roberts Realty Investors, Inc.’s chairman
and chief executive officer, entered into a Governance and Voting Agreement, dated January 30, 2015 (the “Governance and
Voting Agreement”) and the company and Mr. Roberts entered into an employment agreement pursuant to which Mr. Roberts was
appointed and employed by the company to serve as an Executive Vice President of our company. Pursuant to two extension agreements,
the Governance and Voting Agreement and Employment Agreement were extended until December 31, 2016. On December 31, 2016, the Employment
Agreement expired and Mr. Roberts ceased to be an officer or employee of our company. On October 10, 2016, the company, A-III and
Mr. Roberts, entered into an agreement (the “Extension of Governance and Voting Agreement”), effective as of October
10, 2016, further extending the term of the Governance and Voting Agreement, but not the Employment Agreement. As a result of the
Extension of Governance and Voting Agreement, the parties have agreed to extend the expiration of the term of the Governance and
Voting Agreement from December 31, 2016 to June 30, 2017. As a result, all of the respective rights and obligations of the parties
under, and all other terms, conditions and provisions of, the Governance and Voting Agreement shall continue in full force and
effect until June 30, 2017, unless the Governance and Voting Agreement is amended in writing by the parties or is sooner terminated
in accordance with the provisions thereof. Pursuant to the Extension of Governance and Voting Agreement, the parties agreed to
nominate Mr. Roberts for re-election to the Board. Mr. Roberts was elected by the company’s shareholders at the annual meeting
on December 14, 2016. Mr. Roberts has agreed to resign from the Board immediately upon the first to occur of the following two
events: (a) if he fails to continuously maintain beneficial ownership of at least 1,100,000 shares of common stock (subject to
adjustment for stock splits, stock dividends and other similar adjustments to the shares of common stock) and (b) upon the expiration
of the Governance and Voting Agreement on June 30, 2017.
2.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation.
The accompanying
consolidated financial statements include the consolidated accounts of the company and the operating partnership. All inter-company
accounts and transactions have been eliminated in consolidation. The financial statements of the company have been adjusted for
the non-controlling interest of the unitholders in the operating partnership.
Principles of Consolidation.
The accompanying
consolidated financial statements include the consolidated accounts of the company and the operating partnership, which is controlled
by the company. The operating partnership is a variable interest entity (“VIE”), in which the company is considered
to be the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The financial
statements of the company have been adjusted for the non-controlling interest of the unitholders in the operating partnership.
The company consolidates the operating partnership,
a VIE, in which it is considered to be the primary beneficiary. The primary beneficiary is the entity that has (i) the power to
direct the activities that most significantly impact the entity’s economic performance and (ii) the obligation to absorb
losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The company is required to
reassess whether it is the primary beneficiary of a VIE for each reporting period. Our maximum exposure to loss is the carrying
value of assets and liabilities of our operating partnership which represents all of our assets and liabilities.
Use of Estimates.
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the 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.
Real Estate Asset Held For Sale.
Real
estate asset held for sale is recorded at the lower of the carrying amount or fair value less estimated selling costs. The company
reviews the real estate asset held for sale each reporting period to determine that the carrying amount remains recoverable. If
the carrying amount of the real estate asset exceeds the fair value, the asset will be written down by the amount the carrying
amount exceeds the fair value amount. The fair value is determined by an evaluation of an appraisal, discounted cash flow analysis,
sale price and other applicable valuation techniques. As of December 31, 2016, the carrying amount of our real estate asset remained
recoverable.
The company recognizes gains on the sales of
assets in accordance with FASB ASC Topic 360-20,
Property, Plant, and Equipment – Real Estate Sales
. If any significant
continuing obligation exists at the date of sale, the company defers a portion of the gain attributable to the continuing obligation
until the continuing obligation has expired or is removed. There were no such continuing obligations on the sales of any of the
company’s assets as of December 31, 2016 and December 31, 2015.
Cash and Cash Equivalents.
The company
considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
The company maintains cash and cash equivalent balances with financial institutions that may at times exceed the limits for insurance
provided by the Federal Depository Insurance Corporation. The company has not experienced any losses related to these excess balances
and management believes its credit risk is minimal.
Deferred Financing Costs.
Deferred financing
costs include fees and expenses incurred to obtain financing and are amortized to interest expense in the consolidated statements
of operations, using the straight-line method over the terms of the related indebtedness. Although GAAP requires that the effective-yield
method be used to amortize financing costs, the effect of using the straight-line method is not materially different from the results
that would have been obtained using the effective-yield method. Effective January 1, 2016, the company adopted the newly issued
accounting guidance for presentation of debt financing costs. Under the new standard, debt financing costs are required to be presented
in the consolidated balance sheets as a direct deduction from the carrying value of the associated debt liability. There was
no debt or deferred financing costs at December 31, 2016 or 2015.
Equity Issuance Costs.
Costs related to raising the equity
are accounted for as a deduction from equity.
Warrants.
The company accounts for the
warrants issued in connection with the A-III Stock Purchase Agreement in accordance with ASC 815, Accounting for Derivative Instruments
and Hedging Activities, which provides guidance on the specific accounting treatment of a multitude of derivative instruments.
The company received proceeds in a private placement stock offering and issued detachable warrants. The company evaluated the warrants
to determine their relative fair value, using the backsolve method of the market approach, incorporating the adjusted Black-Scholes
option valuation model at their time of issuance and allocated a portion of the proceeds from the private placement to the warrants
based on their fair value. The warrants were recorded as a component of equity. In connection with the A-III recapitalization transaction
that occurred on January 30, 2015, the company allocated values of $8,990,000 and $3,010,000 to the warrants and common shares,
respectively, in the company’s Form 10-Q for the quarterly period ended June 30, 2015. As disclosed in the company’s
Form 10-K for the year ended December 31, 2015, subsequent to the issuance of the company’s aforementioned interim financial statements,
the company determined that it needed to revise this allocation based on the application of a valuation methodology which should
have considered the market transaction and results in a corrected allocation of $4,910,000 and $7,090,000 amongst warrants and
common shares, respectively. This reallocation had no effect on net income, equity, net change in cash, or total assets of the
company reported for that period.
Earnings Per Share.
Earnings per share
is computed using the two-class method of accounting, which includes the weighted-average number of shares of common stock outstanding
during the period and other securities that participate in dividends, such as our vested restricted stock, to arrive at total common
equivalent shares. In applying the two-class method, earnings are allocated to both shares of common stock and securities that
participate in dividends based on their respective weighted-average shares outstanding for the period. During periods of net loss,
losses are allocated only to the extent that the participating securities are required to absorb such losses. Diluted earnings
per share is calculated to reflect the potential dilution of all instruments or securities that are convertible into shares of
common stock. For the company, this includes the warrants and unvested restricted stock during the periods presented. The company
uses the two-class method or the treasury method, whichever is more dilutive.
Share-Based Compensation
. The company
records share-based awards to directors, which have no vesting conditions other than time of service, at the fair value of the
award, measured at the date of grant. The fair value of share-based grants is being amortized to compensation expense ratably over
the requisite service period, which is the vesting period. The company records share-based awards to non-employee officers, based
on the estimated fair value of such award at the grant date that is remeasured quarterly for unvested awards. We amortize expense
over the requisite service period related to share-based awards granted to non-employee officers
.
Income Taxes.
The company follows the
asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The company recognizes the effect of income tax positions only if those positions are
more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment
occurs.
In general, a valuation allowance is recorded
if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will
not be realized. Realization of the company’s deferred tax assets depends upon the company generating sufficient taxable
income in future years in the appropriate tax jurisdictions to obtain a benefit from the reversal of deductible temporary differences
and from loss carryforwards. The company records a valuation allowance, based on the expected timing of reversal of existing taxable
temporary differences and its history of losses and future expectations of reporting taxable losses, if management does not believe
it met the requirements to realize the benefits of certain of its deferred tax assets.
Fair Value of Financial Instruments.
The
company is required to disclose the fair value information about its financial instruments, whether or not recognized in the consolidated
balance sheets, for which it is practicable to estimate fair value. See Note 7 - Fair Value Measurements.
Recent Accounting Pronouncements
In May 2014, the FASB issued an update (“ASU
2014-09”) establishing ASC Topic 606,
Revenue from Contracts with Customers
. ASU 2014-09 establishes a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue
recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
and also requires certain additional disclosures. In August 2015, the FASB issued an update (“ASU 2015-14”) to ASC
606,
Deferral of the Effective Date
, which defers the adoption of ASU 2014-09 to interim and annual reporting periods in
fiscal years that begin after December 15, 2017. In March 2016, the FASB issued an update (“ASU 2016-08”) to ASC 606,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal
versus agent considerations in the new revenue recognition standard pursuant to ASU 2014-09. In April 2016, the FASB issued an
update (“ASU 2016-10”) to ASC 606, Identifying Performance Obligations and Licensing, which clarifies guidance related
to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. In May 2016, the FASB issued
an update (“ASU 2016-12”) to ASC 606, Narrow-Scope Improvements and Practical Expedients, which amends certain aspects
of the new revenue recognition standard pursuant to ASU 2014-09. The company is currently evaluating the impact of the adoption
of these ASUs on the company’s consolidated financial statements.
In June 2014, the FASB issued an update (“ASU
2014-12”) to ASC Topic 718,
Compensation – Stock Compensation
. ASU 2014-12 requires an entity to treat performance
targets that can be met after the requisite service period of a share based award has ended, as a performance condition that affects
vesting. ASU 2014-12 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015.
The adoption of this update on January 1, 2016 did not have any impact on the company’s consolidated financial statements.
In August 2014, the FASB issued an
update (“ASU 2014-15”),
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern
, which will require an entity’s management to evaluate whether there is substantial doubt about an
entity’s ability to continue as a going concern and to provide related footnote disclosures. According to the new
guidance, substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that
the entity will be unable to meet its obligations as they become due within one year after the date the financial statements
are issued. The term “probable” is used consistently with its current use in GAAP for loss contingencies.
Disclosures will be required if conditions give rise to substantial doubt about the entity’s ability to continue as a
going concern, including whether management’s plans that are intended to mitigate those conditions will alleviate the
substantial doubt when implemented. The guidance is effective for interim and annual periods ending after December 15,
2016, with early adoption permitted. The adoption of this update in 2016 had no impact on the
company’s consolidated financial statements.
In February 2015, the FASB issued an update
(“ASU 2015-02”),
Amendments to the Consolidation Analysis
to ASC Topic 810,
Consolidation
. ASU 2015-02
affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically,
the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities
(“VIEs”) or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited
partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope
exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15,
2015. The adoption of this update on January 1, 2016 did not have a material impact on the company’s consolidated financial
statements. See Principles of Consolidation above.
In April 2015, the FASB issued an update (“ASU
2015-03”),
Simplifying the Presentation of Debt Issuance Costs
to ASC Topic 835,
Interest
. ASU 2015-03 requires
that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability
to which they relate, consistent with debt discounts, as opposed to being presented as assets. ASU 2015-03 is effective for interim
and annual reporting periods in fiscal years that begin after December 15, 2015. The adoption of this update on January 1, 2016
had no impact on the company’s consolidated financial statements.
In February 2016, the FASB issued an update
(“ASU 2016-02”), Leases (Topic 842), which sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties to a contract. ASU 2016-02 requires lessees to apply a dual
approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively
a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective
interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset
and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term
of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors
to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing
leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective
on January 1, 2019, with early adoption permitted. The company is currently in the process of evaluating the impact the adoption
of ASU 2016-02 will have on the company’s consolidated financial statements.
In March 2016, the FASB issued guidance
(“ASU 2016-09”),
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting.
ASU 2016-09 changes the accounting for certain aspects of share-based payments to employees. The
guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are
settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of
an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance
allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. For a public
company, the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods
within that reporting period. Early adoption is permitted in any interim or annual period. The company is
currently assessing the impact that this guidance will have on the company’s consolidated financial statements when
adopted.
In August 2016, the FASB issued an update (“ASU
2016-15”),
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 amends
ASC 230,
Statement of Cash Flows
, to provide guidance on the classification of certain cash receipts and payments in the
statement of cash flows. For a public company, the standard is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted. The company is currently assessing the impact that this
guidance will have on the company’s consolidated financial statements when adopted.
In November 2016, the FASB issued an update
(ASU 2016-18),
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).
ASU
2016-18 provides guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the new
guidance, restricted cash will be included in the cash and cash equivalent balances in the statement of cash flows. This guidance
is effective for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. Early adoption
is permitted. The company has evaluated the impact that this guidance will have on the company’s consolidated financial statements
and related disclosures and determined it will not have a material impact.
In January 2017, the FASB issued an update
(“ASU 2017-01”),
Clarifying the Definition of a Business to ASC Topic 805, Business Combinations
. ASU 2017-01
clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. This guidance is effective prospectively for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. Early adoption is permitted for transactions that occurred before the issuance date
or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available
for issuance. The adoption of this ASU 2017-01 will result in less real estate acquisitions qualifying as businesses and, accordingly,
acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The company is currently
assessing the impact that this guidance will have on the company’s consolidated financial statements when adopted.
3.
REAL ESTATE ASSET
HELD FOR SALE
Real Estate Assets Held for Sale
As of December 31, 2016 and 2015, the company
owned the land parcel known as Highway 20, a 38-acre site located in the City of Cumming, Georgia in Forsyth County, in the North
Atlanta metropolitan area, zoned for 210 multifamily apartment units, which is classified as held for sale. During the fourth quarter
of 2015, the company determined that the carrying amount of Highway 20 was not fully recoverable. Accordingly, the company recorded
an impairment charge of $500,038. No such adjustment was required during the year ended December 31, 2016. On October 7, 2016,
the operating partnership entered into a sale contract with Roberts Capital Partners, LLC, a related party, to sell Highway 20
for a purchase price of $4,725,000, including a reimbursement of $1,050,000 relating to prepaid sewer taps. This transaction is
expected to close during the second quarter of 2017, subject to an extension option and certain closing conditions.
FASB ASC Topic 360-10,
Property, Plant and
Equipment – Overall
requires a long-lived asset to be classified as “held for sale” in the period in which
certain criteria are met. The company classifies real estate assets as held for sale after the following conditions have been satisfied:
i) receipt of approval from its board of directors (the “Board”) to sell the asset; ii) the initiation of an active
program to sell the asset; iii) the asset is available for immediate sale; iv) it is probable that the sale of the asset will be
completed within one year; and v) it is unlikely the plan to sell will change. When assets are classified as held for sale, they
are recorded at the lower of the assets’ carrying amount or fair value, less the estimated selling costs.
The table below sets forth the assets and
liabilities related to real estate asset held for sale as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Real Estate Asset Held for Sale
|
|
$
|
4,283,385
|
|
|
$
|
4,283,385
|
|
|
|
|
|
|
|
|
|
|
Liabilities Related to Real Estate Asset Held For Sale
|
|
$
|
1,498
|
|
|
$
|
2,612
|
|
There was no real estate sold during the year
ended December 31, 2016. During the year ended December 31, 2015, the company sold three land parcels known as North Springs Land,
Northridge Land and Bradley Park Land for an aggregate sales price of $21,647,073 and recognized in aggregate a gain of $2,569,625.
Except for Bradley Park, the related mortgages of North Springs Land, Northridge Land and Highway 20 aggregating to $9,270,000
were repaid using a portion of the proceeds from the A-III transaction. The land loan encumbering the Bradley Park land was paid
in full at the closing of its sale.
4.
NON-CONTROLLING
INTEREST – OPERATING PARTNERSHIP
Holders of operating partnership units (“OP
Units”) generally have the right to require the operating partnership to redeem their units for shares of the company’s
common stock. Upon submittal of units for redemption, the operating partnership has the option either (a) to acquire those units
in exchange for shares, currently on the basis of 1.647 shares for each unit submitted for redemption (the “Conversion Factor”),
or (b) to pay cash for those units at their fair market value, based upon the then current trading price of the shares and using
the same exchange ratio. Prior to December 29, 2015, we had an informal policy of issuing shares, in lieu of cash in exchange for
units. On December 28, 2015, our Board formally adopted a policy whereby we shall only issue our common stock for redemption of
units, rather than paying cash for such redemption in accordance with the operating partnership agreement. As a result of this
change in policy, the company now requires the issuance of shares of common stock of the company in payment for the redemption
of OP Units and therefore has effective control over the redemption and therefore the non-controlling interest is now being classified
in permanent equity as of December 28, 2015 as opposed to temporary equity, and similarly at December 31, 2016 and 2015.
In July 2013, the operating partnership privately
offered to investors who held both units of the operating partnership and shares of common stock the opportunity to contribute
shares to the operating partnership in exchange for units (provided that the investors were “accredited investors”
under SEC Rule 501 of Regulation D under the Securities Act of 1933, as amended). This opportunity remains open to those accredited
investors. Consistent with the Conversion Factor noted above, the offering of units uses a “Contribution Factor” such
that an accredited investor who contributes shares to the operating partnership will receive one unit for every 1.647 shares contributed.
The non-controlling interest of the unitholders
in the operating partnership on the accompanying consolidated balance sheets is calculated by multiplying the non-controlling interest
ownership percentage at the balance sheet date by the operating partnership’s net assets (total assets less total liabilities).
The non-controlling interest ownership percentage is calculated at any point in time by dividing (x) (the number of units outstanding
multiplied by 1.647) by (y) the total number of shares plus (the number of units outstanding multiplied by 1.647). The non-controlling
interest ownership percentage will change as additional shares and/or units are issued or as units are redeemed for shares of the
company’s common stock or as the company’s common stock is contributed to the operating partnership and units are issued
in accordance with the Contribution Factor. The non-controlling interest of the unitholders in the income or loss of the operating
partnership in the accompanying consolidated statements of operations is calculated based on the weighted average percentage of
units outstanding during the period, which was 3.89% for the year ended December 31, 2016 and 6.64% for the year ended December
31, 2015. There were 466,259 units outstanding at December 31, 2016 and 553,625 units outstanding as of December 31, 2015. The
equity balance of the non-controlling interest of the unitholders was $735,116 at December 31, 2016 and $1,026,751 at December
31, 2015.
The following table details the components
of non-controlling interest in the operating partnership as of December 31, 2015 which was classified as a liability through December
28, 2015:
|
|
December 31,
2015
|
Beginning balance
|
|
$
|
3,468,972
|
|
Net loss attributable to non-controlling interest
|
|
|
(206,065
|
)
|
Redemptions of non-controlling partnership units
|
|
|
(3,285,713
|
)
|
Adjustment to non-controlling interest in the operating partnership
|
|
|
1,054,968
|
|
Non-controlling interest liability balance at December 28, 2015
|
|
|
1,032,162
|
|
Transfer non-controlling interest from liability to equity
|
|
|
(1,032,162
|
)
|
Non-controlling interest liability - ending balance
|
|
$
|
—
|
|
5.
SHAREHOLDERS’
EQUITY
Private Placement.
On January 30, 2015,
A-III purchased 8,450,704 shares of the company’s common stock at a purchase price of $1.42 per share, for an aggregate purchase
price of $12,000,000, and the company, for no additional consideration, issued to A-III warrants to purchase up to an additional
26,760,563 shares of the company’s common stock at an exercise price of $1.42 per share ($38,000,000 in the aggregate). The
purchase price per share and the exercise price of the warrants are subject to a potential post-closing adjustment upon completion
of the sale of the company’s four land parcels owned at January 30, 2015, which could result in the issuance of additional
shares of common stock to A-III and an increase in the number of shares of common stock issuable upon exercise of the warrants.
Warrants.
Each of the aforementioned
warrants entitles the holder to acquire one share of the company’s common stock. At the time of issuance, each warrant had
an exercise price of $1.42 per share, subject to post-closing adjustments related to the sales of the legacy properties. The company
evaluated the warrants to determine their relative fair value, using a variation of the adjusted Black-Scholes option valuation
model at their time of issuance and allocated $4,910,000 of the proceeds from the private placement to the warrants based on their
fair value. The warrants were recorded as a component of equity. The warrants expire on January 30, 2018. As of December 31, 2016,
the warrants remained unexercised.
Redemption of Units for Shares.
In accordance
with the conversion factor explained in Note 4
–
Non-controlling Interest – Operating Partnership, 87,366 OP
Units were redeemed for 143,897 shares of the company’s common stock for the year ended December 31, 2016, and 597,799 OP
Units were redeemed for 984,572 shares during the year ended December 31, 2015. Redemptions are reflected in the accompanying consolidated
financial statements at the closing price of the company’s stock on the date of redemption.
Contribution of Shares to the Operating
Partnership.
In accordance with the contribution factor explained in Note 4 – Non-controlling Interest –
Operating Partnership, for the years ended December 31, 2016 and 2015, there were no contribution of shares to the operating
partnership. Contributions, if any, are reflected in the accompanying consolidated financial statements based on the closing price
of the company’s stock on the date of contribution.
Restricted Stock.
Shareholders of the
company approved and adopted the company’s 2006 Restricted Stock Plan (the “Plan”) in August 2006. The Plan provides
for the grant of stock awards to employees, directors, consultants, and advisors. Under the Plan, as amended, the company may grant
up to 654,000 shares of restricted common stock, subject to the anti-dilution provisions of the Plan. The maximum number of shares
of restricted stock that may be granted to any one individual during the term of the Plan may not exceed 20% of the aggregate number
of shares of restricted stock that may be issued. The Plan is administered by the Compensation Committee of the company’s
Board. On October 12, 2015, based on the recommendation of the Compensation Committee of the Board of Directors, the Board approved
a restricted stock grant of 260,000 shares of common stock to the independent directors and certain officers of the company, which
was issued on March 28, 2016. The restricted stock was awarded pursuant to the Plan. Vesting of the awards for the independent
directors and officers is subject to continued service through the vesting period. The company’s independent directors were
each awarded 20,000 shares of restricted common stock, which vested on January 30, 2016. Certain of the company’s officers
were awarded an aggregate of 180,000 shares of restricted common stock, which vest in equal one-third installments. There were
60,000 shares, which vested on each of January 30, 2016 and October 12, 2016. The remaining 60,000 shares will vest on October
12, 2017. Compensation expense related to restricted stock was $124,762 and $154,307 for the years ended December 31, 2016 and
2015, respectively. On December 31, 2016, the Company had unamortized compensation expense of $25,930 which is expected to be recognized
over a weighted average period of 0.78 years. The Plan expired on August 21, 2016.
Treasury Stock.
The company has a stock
repurchase plan under which it is authorized to repurchase up to 600,000 shares of its outstanding common stock. Under the stock
repurchase plan, as of December 31, 2016, the company had authority to repurchase up to 540,362 shares of its outstanding common
stock. The stock repurchase plan does not have an expiration date. The company did not repurchase any additional shares for the
years ended December 31, 2016 and December 31, 2015.
Earnings Per Share.
The following table
shows the reconciliations of income (loss) available for common shareholders and the weighted average number of shares used in
the company’s basic and diluted earnings per share computations.
|
|
Year Ended December 31,
|
Numerator
|
|
2016
|
|
2015
|
Net loss attributable to common shareholders – basic
|
|
$
|
(3,287,105
|
)
|
|
$
|
(1,530,061
|
)
|
Loss attributable to non-controlling interest
|
|
|
(132,652
|
)
|
|
|
(208,112
|
)
|
Net loss – diluted
|
|
$
|
(3,419,757
|
)
|
|
$
|
(1,738,173
|
)
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic
|
|
|
20,319,270
|
|
|
|
18,976,996
|
|
Effect of potential dilutive securities:
|
|
|
|
|
|
|
|
|
Weighted average number of operating partnership units, assuming conversion of all units to common shares
|
|
|
821,340
|
|
|
|
1,350,002
|
|
Weighted average number of shares – diluted
(a)
|
|
|
21,140,610
|
|
|
|
20,326,998
|
|
(a)
|
Due to the net loss for the years ended December 31, 2016 and 2015, the incremental shares related to the unvested restricted stock and the warrants were excluded as they were anti-dilutive. Furthermore, the average share price of the company’s common stock was below the exercise price of the warrants for both the years ended December 31, 2016 and 2015. During the years ended December 31, 2016 and 2015, we have excluded the incremental shares of 2,541,412 and 129,951, respectively, for the warrants, and 117,814 and 57,699, respectively, for the unvested restricted stock, as they were not dilutive.
|
6.
INCOME TAXES
At December 31, 2016, the company had a federal
net operating loss carryforward of approximately $27.8 million, which begins to expire during the fiscal year ending in
2029 and will fully expire by the end of the fiscal year ending 2036. Deferred taxes at December 31, 2016 and 2015
consisted of the following:a
|
|
December 31,
|
|
|
2016
|
|
2015
|
Net operating loss carry forwards
|
|
$
|
10,563,821
|
|
|
$
|
9,536,644
|
|
Impairment of real estate
|
|
|
744,111
|
|
|
|
738,476
|
|
Other
|
|
|
13,677
|
|
|
|
314
|
|
Total deferred tax assets
|
|
|
11,321,609
|
|
|
|
10,275,434
|
|
Valuation allowance
|
|
|
(10,692,355
|
)
|
|
|
(9,592,386
|
)
|
Net deferred tax assets
|
|
|
629,254
|
|
|
|
683,048
|
|
Deferred gains
|
|
|
(612,692
|
)
|
|
|
(650,026
|
)
|
Amortization of shared-based compensation expense
|
|
|
(16,562
|
)
|
|
|
(33,022
|
)
|
Total deferred tax liabilities
|
|
|
(629,254
|
)
|
|
|
(683,048
|
)
|
Balance
|
|
$
|
—
|
|
|
$
|
—
|
|
In assessing the realization of deferred tax
assets, management considered whether it was more likely than not that some, or all, of the deferred tax asset will be realized.
The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income. Management has considered
the history of the company’s operating losses and believes that the realization of the benefit of the deferred tax assets
is not more likely than not. In addition, under Internal Revenue Code Section 382, the company’s ability to utilize these
net operating loss carryforwards has been limited or eliminated as a result of the A-III transaction due to a change in ownership.
No Section 382 study has been completed for the company.
The company has no federal or state current
or deferred tax expense or benefit. The company’s effective tax rate differs from the applicable federal statutory tax rate.
The reconciliation of these rates for the years ended December 31, 2016 and 2015 is as follows:
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Federal Rate
|
|
|
(34.00
|
%)
|
|
|
(34.00
|
%)
|
State tax rate, net of federal benefit
|
|
|
(3.96
|
)
|
|
|
(5.31
|
)
|
Permanent differences
|
|
|
(0.02
|
)
|
|
|
(11.6
|
)
|
Change in valuation allowance
|
|
|
37.98
|
|
|
|
50.91
|
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The company
applies the provisions of ASC 740, “Accounting for Uncertainty in Income Taxes,” which requires financial statement
expense to be recognized for positions taken for tax return purposes when it is not more likely than not that the income tax position
will be sustained. The company believes it has no uncertain tax positions at restatement. The company’s tax returns for
the years 2010 through 2015
remain open to
examination by the major domestic taxing jurisdictions to which the company is subject.
7.
FAIR VALUE MEASUREMENTS
As discussed in Note 2, GAAP requires disclosure
of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which
it is practicable to estimate that value. The company measures and/or discloses the estimated fair value of financial assets and
liabilities based on a hierarchy that distinguishes between market participant assumptions based on market data obtained from sources
independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This
hierarchy consists of three broad levels:
|
·
|
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date;
|
|
·
|
Level 2 - inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
|
|
·
|
Level 3 - unobservable inputs for the asset or liability that are used when little or no market data is available.
|
The fair value hierarchy gives the highest
priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the company uses valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Considerable judgment
is necessary to interpret Level 2 and 3 inputs in determining fair value of financial and non-financial assets and liabilities.
Accordingly, the fair values may not reflect the amounts ultimately realized on a sale or other disposition of these assets. Below
summarizes the methods and assumptions used to estimate the fair value of each class of financial instruments, for which it is
practicable to estimate that value.
|
·
|
Cash and cash equivalents: The carrying amount of the cash approximates fair value.
|
|
·
|
Real estate asset held for sale: Highway 20 is carried at the lower of carrying amount or fair value, less the estimated selling costs.
|
|
·
|
Accounts payable and accrued expenses: The carrying amount approximates fair value due to the short term nature of these liabilities.
|
The company held no financial assets or liabilities required to be measured at fair value on a recurring or
nonrecurring basis as of December 31, 2016 and December 31, 2015. From time to time, we record certain assets at fair value
on a nonrecurring basis when there is evidence of impairment. As discussed in Note 3, we recorded an impairment charge on Highway
20 during the year ended December 31, 2015 as its fair value, less the estimated costs to sell, was lower than its carrying value.
We determined the fair value of Highway 20 using Level 3 inputs. As of December 31, 2016, Highway 20 is carried at net realizable
value.
8.
SEGMENT REPORTING
FASB ASC Topic 280-10, Segment Reporting –
Overall, established standards for reporting financial and descriptive information about operating segments in annual financial
statements. Operating segments are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The company operated in a single business segment, which is the ownership and management of real estate assets.
9.
RELATED PARTY TRANSACTIONS
Management Agreement.
In connection
with the recapitalization transactions with A-III, on January 30, 2015, the company entered into a management agreement (the “Management
Agreement”) with A-III Manager LLC (the “Manager”), which is a wholly-owned subsidiary of A-III, among other
things, to provide for the day-to-day management of the company by the Manager, including investment activities and operations
of the company and its properties. The Management Agreement requires the Manager to manage and administer the business activities
and day-to-day operations of the company and all of its subsidiaries in conformity with the company’s investment guidelines
and other policies that are approved and monitored by the Board.
The Manager maintains an administrative services
agreement with A-III, pursuant to which A-III and its affiliates, including Avenue Capital Group and C-III Capital Partners, will
provide a management team along with appropriate support personnel for the Manager to deliver the management services to the company.
Under the terms of the Management Agreement, among other things, the Manager will refrain from any action that, in its reasonable
judgment made in good faith, is not in compliance with the investment guidelines and would, when applicable, adversely affect the
qualification of the company as a REIT. The Management Agreement has an initial five-year term and will be automatically renewed
for additional one-year terms thereafter unless terminated either by the company or the Manager in accordance with its terms.
For the services to be provided by the Manager,
the company is required to pay the Manager the following fees:
|
·
|
an annual base management fee equal to 1.50% of the company’s “Equity” (as defined below), calculated and payable quarterly in arrears in cash;
|
|
·
|
a property management fee equal to 4.0% of the gross rental receipts received each month at the company’s and its subsidiaries’ properties, calculated and payable monthly in arrears in cash;
|
|
·
|
an acquisition fee equal to 1.0% of the gross purchase price paid for any property or other investment acquired by the company or any of its subsidiaries, subject to certain conditions and limitations and payable in arrears in cash with respect to all such acquisitions occurring after the date of the Management Agreement;
|
|
·
|
a disposition fee equal to the lesser of (a) 50% of a market brokerage commission for such disposition and (b) 1.0% of the sale price with respect to any sale or other disposition by the company or any of its subsidiaries of any property or other investment, subject to certain conditions and limitations and payable in arrears in cash with respect to all such dispositions occurring after the date of the Management Agreement with certain exceptions (this disposition fee will not apply to the sale of the four legacy land parcels); and
|
|
·
|
an incentive fee (as described below) based on the company’s “Adjusted Net Income” (as defined below) for the trailing four quarter period in excess of the “Hurdle Amount” (as defined below), calculated and payable in arrears in cash on a rolling quarterly basis.
|
For purposes of calculating the base management
fee, “Equity” means (a) the sum of (1) the net proceeds from all issuances of the company’s common stock and
OP Units (without double counting) and other equity securities on and after the closing, which will include the common stock issued
to A-III in the recapitalization transaction (allocated on a pro rata basis for such issuances during the fiscal quarter of any
such issuance) and any issuances of common stock or OP Units in exchange for property investments and other investments by the
company, plus (2) the product of (x) the sum of (i) the number of shares of common stock issued and outstanding immediately before
the closing of the recapitalization transaction and (ii) the number of shares of common stock for which the number of OP Units
issued and outstanding immediately before the date of the closing of the recapitalization transaction (excluding any OP Units held
by the company) may be redeemed in accordance with the terms of the agreement of limited partnership of the operating partnership
and (y) the purchase price per share paid by A-III for the shares of common stock the company issued to A-III in the recapitalization
transaction, as the purchase price per share may be subsequently adjusted as described above, plus (3) the retained earnings of
the company and the operating partnership (without double counting) calculated in accordance with GAAP at the end of the most recently
completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods),
minus (b) any amount in cash that the company or the operating partnership has paid to repurchase common stock, OP Units, or other
equity securities of the company as of the closing date of the recapitalization transaction. Equity excludes (1) any unrealized
gains, losses or non-cash equity compensation expenses that have impacted shareholders’ equity as reported in the financial
statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss,
or in net income, (2) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above in
each case, after discussions between the Manager and the company’s independent directors and approval by a majority of the
independent directors and (3) the company’s accumulated deficit as of the closing date of the recapitalization transaction.
For purposes of the Management Agreement, “Incentive
Fee” means an incentive fee, calculated and payable after each fiscal quarter, in an amount equal to the excess, if any,
of (i) the product of (A) 20% and (B) the excess, if any, of (1) the company’s Adjusted Net Income (described below) for
such fiscal quarter and the immediately preceding three fiscal quarters over (2) the Hurdle Amount (described below) for such four
fiscal quarters, less (ii) the sum of the Incentive Fees already paid or payable for each of the three fiscal quarters preceding
that fiscal quarter. Any adjustment to the Incentive Fee calculation proposed by the Manager will be subject to the approval of
a majority of the independent directors.
For purposes of calculating the Incentive Fee,
“Adjusted Net Income” for the preceding four fiscal quarters means the net income calculated in accordance with GAAP
after all base management fees but before any acquisition expenses, expensed costs related to equity issuances, incentive fees,
depreciation and amortization and any non-cash equity compensation expenses for such period. Adjusted Net Income will be adjusted
to exclude one-time events pursuant to changes in GAAP, as well as other non-cash charges after discussion between the Manager
and the independent directors and approval by a majority of the independent directors in the case of non-cash charges. Adjusted
Net Income includes net realized gains and losses, including realized gains and losses resulting from dispositions of properties
and other investments during the applicable measurement period.
For purposes of calculating the Incentive Fee,
the “Hurdle Amount” is, with respect to any four fiscal quarter period, the product of (i) 7% and (ii) the weighted
average gross proceeds per share of all issuances of common stock and OP Units (excluding issuances of common stock and OP Units,
or their equivalents, as equity incentive awards), with each such issuance weighted by both the number of shares of common stock
and OP Units issued in such issuance and the number of days that such issued shares of common stock and OP Units were outstanding
during such four fiscal quarter period.
The first Incentive Fee calculation will not
occur until after completion of the 2015 fiscal year. The Incentive Fee will be prorated for partial quarterly periods based on
the number of days in such partial period compared to a 90-day quarter.
The Manager is also entitled to receive a termination
fee from the company under certain circumstances equal to four times the sum of (x) the average annual base management fee, (y)
the average annual incentive fee, and (z) the average annual acquisition fees and disposition fees, in each case earned by the
Manager in the most recently completed eight calendar quarters immediately preceding the termination.
Additionally, the company will be responsible
for paying all of its own operating expenses and the Manager will be responsible for paying its own expenses, except that the company
will be required to pay or reimburse certain expenses incurred by the Manager and its affiliates in connection with the performance
of the Manager’s obligations under the Management Agreement, including:
|
·
|
reasonable out of pocket expenses incurred by personnel of the Manager for travel on the company’s behalf;
|
|
·
|
the portion of any costs and expenses incurred by the Manager or its affiliates with respect to market information systems and publications, research publications and materials that are allocable to the company in accordance with the expense allocation policies of the Manager or such affiliates;
|
|
·
|
all insurance costs incurred with respect to insurance policies obtained in connection with the operation of the company’s business, including errors and omissions insurance covering activities of the Manager and its affiliates and any of their employees relating to the performance of the Manager’s duties and obligations under the Management Agreement or of its affiliates under the administrative services agreement between the Manager and A-III, other than insurance premiums incurred by the Manager for employer liability insurance;
|
|
·
|
expenses relating to any office or office facilities, including disaster backup recovery sites and facilities, maintained expressly for the company and separate from offices of the Manager;
|
|
·
|
the costs of the wages, salaries, and benefits incurred by the Manager with respect to certain Dedicated Employees
that the Manager elects to provide to the company pursuant to the Management Agreement; provided that (A) if any such Dedicated Employee devotes less than 100% of his or her working time and efforts to matters related to the company and its business, the company will be required to bear only a pro rata portion of the costs of the wages, salaries and benefits the Manager incurs for such Dedicated Employees based on the percentage of such employee’s working time and efforts spent on matters related to the company, (B) the amount of such wages, salaries and benefits paid or reimbursed with respect to the Dedicated Employees shall be subject to the approval of the Compensation Committee of the Board and, if required by the Board, of the Board and (C) during the one-year period following the date of the Management Agreement, the aggregate amount of cash compensation paid to Dedicated Employees of the Manager and its affiliates by the company, or reimbursed by the company to the Manager in respect thereof, will not exceed $500,000; and
|
|
·
|
any equity-based compensation that the company, upon the approval of the Board or the Compensation Committee of the Board, elects to pay to any director, officer or employee of the company or the Manager or any of the Manager’s affiliates who provides services to the company or any of its subsidiaries.
|
For the years ended December 31, 2016 and
2015, the company incurred a base management fee of $391,065 and $389,111, respectively, which was classified in management
fee, affiliates in the consolidated statements of operations. In addition to the base management fee, the company is required
to reimburse certain expenses, related wages, salaries and benefits incurred by the Manager. For the years ended December 31,
2016 and 2015, the company reimbursed expenses of $533,814 and $500,000, respectively, which was classified in allocated
salaries and other compensation, affiliates in the consolidated statements of operations. At December 31, 2016 and 2015,
the unpaid portion of the base management fee and allocated expenses in the amount of $216,991 and $245,753, respectively, was
recorded in due to affiliates in the consolidated balance sheets.
For the year ended December 31, 2015, the company
paid legal fees on behalf of the Manager in the amount of $18,442, for which it was reimbursed.
Additionally, for the year ended December 31,
2015, the Manager paid professional fees on behalf of the company in the amount of $50,000, which was reimbursed to the Manager
in July 2015.
Transactions with Roberts Properties, Inc.
and Roberts Properties Construction (the “Roberts Companies”) and its Affiliates
Reimbursement Arrangement for Consulting
Services.
The company entered into a reimbursement arrangement for services provided by the Roberts Companies, effective February 4, 2008,
as amended January 1, 2014. Under the terms of the arrangement, the company reimburses the Roberts Companies for the cost of providing
consulting services in an amount equal to an agreed-upon hourly billing rate for each employee multiplied by the number of hours
that the employee provided services to the company.
Additionally, at the request of the company,
Roberts Construction performed repairs and maintenance and other consulting services related to the company’s land parcels.
Roberts Construction received cost reimbursements of $68 and $2,104 for the years ended December 31, 2016 and 2015, respectively,
which were recorded in general and administrative expenses in the consolidated statements of operations.
For a period of 180 days after the closing
of the recapitalization transaction with A-III, the company had the right to request the reasonable assistance of employees of
Roberts Properties, Inc. with respect to transition issues and questions relating to the company’s properties and operations.
This 180 day period terminated July 30, 2015. The employees of Roberts Properties, Inc. continued to provide limited services with
respect to transition issues from July 30, 2015 through December 31, 2016. Consistent with the expired arrangement for transition
services, the cost for these services was reimbursed in an amount equal to an agreed-upon hourly billing rate for each employee
multiplied by the number of hours that the employee provided such services to the company. Under Mr. Robert’s Employment
Agreement, First Extension Agreement and Second Extension Agreement, Mr. Roberts has agreed to supervise the disposition of the
remaining legacy property. Affiliates of Mr. Roberts may provide services to the company in connection with the sale of such property.
The fees and costs we pay for such services will be considered selling costs for purposes of the true-up arrangement under the
Stock Purchase Agreement.
Under these arrangements, the company incurred
costs with Roberts Properties of $68,513 and $119,589 for the years ended December 31, 2016 and 2015, respectively, which were
recorded in general and administrative expenses in the consolidated statements of operations. Roberts Properties also received
cost reimbursements in the amount of $86 and $9,768 for the years ended December 31, 2016 and 2015, respectively, for the company’s
operating costs and other related expenses paid by Roberts Properties. At December 31, 2016 and 2015, the unpaid portion of these
costs in the amount of $85 and $2,179, respectively, was recorded in due to affiliates, which none was related to real estate assets
held for sale in the consolidated balance sheets. Included in the liabilities related to real estate assets held for sale as of
December 31, 2015 were unpaid costs of $640.
Sale of Bradley Park Land
. The company entered into a contract to sell its Bradley Park Land to Bradley Park Apartments, LLC, which is
an affiliate of Mr. Roberts, who is a director of the company. The company’s Audit Committee in existence prior to and after
the A-III transaction approved the transaction in accordance with the committee’s charter and in compliance with applicable
listing rules of the Exchange. The company’s Board in existence prior to and after the A-III transaction also approved the
transaction in accordance with its Code of Business Conduct and Ethics. See Note 3 for details of the transaction.
Sale of Highway 20
.
The operating partnership entered into a contract to sell Highway 20 to Roberts Capital Partners, LLC, which is an affiliate of
Mr. Roberts, who is a director of the company. The company’s Audit Committee approved the transaction in accordance with
the committee’s charter and in compliance with applicable listing rules of the Exchange. The company’s Board also
approved the transaction in accordance with its Code of Business Conduct and Ethics. See Note 3 for details of the transaction.
Sublease of Office Space.
The company
is under a sublease agreement for 1,817 square feet of office space with Roberts Capital Partners, LLC since April 7, 2014, the
lease commencement date. Roberts Capital Partners, LLC is owned by Mr. Roberts. The terms of the sublease agreement were the same
terms that Roberts Capital Partners, LLC has with the unrelated third party landlord. Roberts Capital Partners, LLC is liable to
the building owner for the full three-year term of its lease; however, the company negotiated a 90-day right to terminate its sublease.
The sublease expires on April 7, 2017, subject to a one-year extension option. The company paid a security deposit of $20,577 upon
the execution of the lease. During the years ended December 31, 2016 and 2015, the company incurred rent expense of $33,274 and
$31,003, respectively.
Extension Agreement Extending Term of Governance and Voting Agreement
and Employment Agreement
On February 1, 2016, the company, A-III and
Mr. Roberts, entered into the First Extension Agreement, effective as of January 28, 2016, extending the terms of the Employment
Agreement by and between the company and Mr. Roberts and the Governance and Voting Agreement by and among the company, A-III and
Mr. Roberts. On June 15, 2016, the company, A-III and Mr. Roberts, entered into the Second Extension Agreement, effective as of
June 15, 2016, further extending the terms of the Employment Agreement and the Governance and Voting Agreement. As a result of
these amendments, the parties agreed to extend the expiration of the term of each of the Employment Agreement and the Governance
and Voting Agreement from June 30, 2016, the first extension date, to December 31, 2016. On December 31, 2016, the Employment Agreement
expired and Mr. Roberts ceased to be an officer or employee of our company. On October 10, 2016, the company, A-III and Mr. Roberts,
entered into the Extension of Governance and Voting Agreement, effective as of October 10, 2016, further extending the term of
the Governance and Voting Agreement, but not the Employment Agreement. As a result of the Extension of Governance and Voting Agreement,
the parties have agreed to extend the expiration of the term of the Governance and Voting Agreement from December 31, 2016 to June
30, 2017. As a result, all of the respective rights and obligations of the parties under, and all other terms, conditions and provisions
of, the Governance and Voting Agreement shall continue in full force and effect until June 30, 2017, unless the Governance and
Voting Agreement is amended in writing by the parties or is sooner terminated in accordance with the provisions thereof.
10.
COMMITMENTS AND CONTINGENCIES
The company and the operating partnership may
be subject to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these
matters cannot be predicted with certainty, management believes that the final outcome of these matters should not have a material
adverse effect on the company’s financial position, results of operations or cash flows.
Under various federal, state, and local environmental
laws and regulations, the company may be required to investigate and clean up the effects of hazardous or toxic substances at its
properties, including properties that have previously been sold. The preliminary environmental assessment of the company’s
property has not revealed any environmental liability that the company believes would have a material adverse effect on its business,
assets, or results of operations, nor is the company aware of any such environmental liability.
See Note 9 - Related Party Transactions for
details of the company’s management agreement and sublease for office space with related parties.
Exhibit
No.
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Description
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3.1
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Amended
and Restated Articles of Incorporation of Roberts Realty Investors, Inc. filed with the Georgia Secretary of State on
July 22, 2004. [Incorporated by reference to Exhibit 3.1 in our quarterly report on Form 10-Q for the quarter ended September
30, 2004.]
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3.2
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Articles
of Amendment to Amended and Restated Articles of Incorporation of Roberts Realty Investors, Inc. to eliminate ownership
limit, effective January 30, 2015. [Incorporated by reference to Exhibit 3.1 in our current report on Form 8-K dated February
2, 2015.]
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3.3
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Articles of Amendment
to Amended and Restated Articles of Incorporation of Roberts Realty Investors, Inc. to change company name, effective January
30, 2015. [Incorporated by reference to Exhibit 3.1 in our current report on Form 8-K dated February 2, 2015.]
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3.4
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Amended and Restated
Bylaws of Roberts Realty Investors, Inc. [Incorporated by reference to Exhibit 3.1 in our current report on Form
8-K dated February 4, 2008.]
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3.5
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Amendment to Amended
and Restated Bylaws of Roberts Realty Investors, Inc. to give the Board of Directors the authority to fix the number of Directors
at five or any greater number, effective January 30, 2015. [Incorporated by reference to Exhibit 3.1 in our current report
on Form 8-K dated February 2, 2015.]
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4.1
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Agreement of Limited
Partnership of Roberts Properties Residential, L.P., dated October 4, 1994. [Incorporated by reference to Exhibit
4.1 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
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4.1.1
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First Amended and
Restated Agreement of Limited Partnership of Roberts Properties Residential, L.P., dated as of October 4, 1994, as amended. [Incorporated
by reference to Exhibit 4.1.1 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
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4.1.2
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Amendment #1 to First
Amended and Restated Agreement of Limited Partnership of Roberts Properties Residential, L.P., dated as of October 13, 1994. [Incorporated
by reference to Exhibit 4.1.2 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
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4.1.3
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Amendment #2 to First
Amended and Restated Agreement of Limited Partnership of Roberts Properties Residential, L.P. [Incorporated by
reference to Exhibit 10.1 in our Registration Statement on Form S-3 filed July 8, 1999, registration number 333-82453.]
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4.2
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Certificate
of Limited Partnership of Roberts Properties Residential, L.P. filed with the Georgia Secretary of State on July 22, 1994. [Incorporated
by reference to Exhibit 4.2 in our quarterly report on Form 10-Q for the quarter ended June 30, 2011.]
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Highway 20
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10.1.1
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Design and Development
Agreement between Roberts Properties Residential, L.P. and Roberts Properties, Inc. for the Highway 20 land parcel in Cumming,
Georgia, dated as of February 21, 2006. [Incorporated by reference to Exhibit 10.1 in our current report on Form
8-K dated February 21, 2006.]
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10.1.2
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Construction
Contract between Roberts Properties Residential, L.P. and Roberts Properties Construction, Inc. for the Highway 20 land
parcel in Cumming, Georgia, dated as of February 21, 2006. [Incorporated by reference to Exhibit 10.2 in our
current report on Form 8-K dated February 21, 2006.]
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Exhibit
No.
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Description
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10.1.3
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Sales Contract dated
October 7, 2016, by and between ACRE Realty LP and Roberts Capital Partners, LLC, a Georgia limited liability company. [Incorporated
by reference to Exhibit 10.1 in our current report on Form 8-K dated October 13, 2016.]
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Compensation Agreements
and Arrangements, and Restricted Stock Plan
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10.2.1
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2006 Roberts Realty
Investors, Inc. Restricted Stock Plan, as amended effective January 27, 2009. [Incorporated by reference to Exhibit
4.1 in the company’s post-effective amendment to its Registration Statement on Form S-8 filed with the SEC on January
29, 2009.]
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10.2.2
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Revised
Form of Restricted Stock Award Agreement (supersedes the form of restricted stock award agreement attached as Exhibit
A to Annex A to our proxy statement for our 2006 annual meeting filed with the SEC on July 20, 2006). [Incorporated by
reference to Exhibit 10.3 in our quarterly report on Form 10-Q for the quarter ended March 31, 2007.]
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10.2.3
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Form
of Independent Director Restriction Agreement. [Incorporated by reference to Exhibit 10.1 in our current report on Form
8-K dated October 14, 2015.]
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10.2.4
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Form of Officer Restriction
Agreement. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated October 14, 2015.]
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Miscellaneous Agreements
with Affiliates
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10.3.1
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Reimbursement arrangement
between Roberts Realty Investors, Inc. and Roberts Properties, Inc., effective February 8, 2008. [Incorporated
by reference to Exhibit 10.1 in our current report on Form 8-K dated February 4, 2008.]
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10.3.2
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Summary of Amended
Reimbursement Arrangement Between Roberts Realty Investors, Inc. and Each of Roberts Properties, Inc. and Roberts Properties
Construction, Inc. (effective January 1, 2011). [Incorporated by reference to Exhibit 10.3 in our current
report on Form 8-K dated January 24, 2011.]
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10.3.3
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Summary of Amended
Reimbursement Arrangement Between Roberts Realty Investors, Inc. and Each of Roberts Properties, Inc. and Roberts Properties
Construction, Inc. (effective January 1, 2014). [Incorporated by reference to our current report on Form 8-K
dated January 20, 2014.]
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10.3.4
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Office Lease by and
between Roberts Capital Partners, LLC, as Landlord, and Roberts Properties Residential, L.P., as Tenant, dated as of February
19, 2014. [Incorporated by reference to our current report on Form 8-K dated February 19, 2014.]
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10.3.5
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Stock Purchase Agreement
dated as of November 19, 2014 by and among Roberts Realty Investors, Inc., Roberts Properties Residential, L.P., and A-III
Investment Partners LLC. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated November
19, 2014.]
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10.3.6
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Form of Indemnification
Agreement dated as of November 19, 2014 by and between Roberts Realty Investors, Inc. and each of its directors and officers. [Incorporated
by reference to Exhibit 10.2 in our current report on Form 8-K dated November 19, 2014.]
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10.3.7
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Management Agreement,
dated as of January 30, 2015 by and among Roberts Realty Investors, Inc., Roberts Properties Residential, L.P. and A-III Manager
LLC. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated February 2, 2015.]
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10.3.8
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Governance and Voting
Agreement, dated as of January 30, 2015 by and among Roberts Realty Investors, Inc., A-III Investment Partners LLC and Charles
S. Roberts. [Incorporated by reference to Exhibit 10.2 in our current report on Form 8-K dated February 2, 2015.]
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10.3.9
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Employment Agreement,
dated as of January 30, 2015 by and between Roberts Realty Investors, Inc. and Charles S. Roberts. [Incorporated by reference
to Exhibit 10.3 in our current report on Form 8-K dated February 2, 2015.]
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10.3.10
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Extension Agreement,
dated as of January 28, 2016, by and among ACRE Realty Investors Inc., A-III Investment Partners LLC and Charles S. Roberts.
[Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated February 2, 2016.]
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Exhibit
No.
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Description
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10.3.11
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Release Agreement
and Covenant Not to Sue of Charles S. Roberts dated November 30, 2015. [Incorporated by reference to Exhibit 10.1 in our current
report on Form 8-K dated December 3, 2015.]
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10.3.12
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Registration Rights
Agreement, dated as of January 30, 2015 by and between Roberts Realty Investors, Inc. and A-III Investment Partners LLC. [Incorporated
by reference to Exhibit 10.4 in our current report on Form 8-K dated February 2, 2015.]
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10.3.13
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Tax Protection Agreement,
dated as of January 30, 2015 by and among Roberts Realty Investors, Inc., Roberts Properties Residential, L.P., A-III Investment
Partners LLC and A-III Manager LLC. [Incorporated by reference to Exhibit 10.5 in our current report on Form 8-K dated February
2, 2015.]
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10.3.14
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Warrant Agreement,
dated as of January 30, 2015 by and between Roberts Realty Investors, Inc. and A-III Investment Partners LLC. [Incorporated
by reference to Exhibit 10.6 in our current report on Form 8-K dated February 2, 2015.]
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10.3.15
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Second Extension Agreement,
dated as of June 15, 2016, by and among ACRE Realty Investors Inc., A-III Investment Partners LLC and Charles S. Roberts.
[Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated June 15, 2016.]
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10.3.16
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Extension of Governance
and Voting Agreement, dated as of October 10, 2016, by and among ACRE Realty Investors, Inc., A-III Investment Partners LLC
and Charles S. Roberts. [Incorporated by reference to Exhibit 10.1 in our current report on Form 8-K dated October 14, 2016.]
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Other Exhibits:
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21
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Subsidiaries of ACRE
Realty Investors Inc.
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23.1
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Consent of Independent
Registered Public Accounting Firm – Deloitte & Touche LLP.
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31
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Certifications of
Edward Gellert and Mark E. Chertok pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32
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Certifications of
Edward Gellert and Mark E. Chertok pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not
“filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided
by applicable rules of the Securities and Exchange Commission.
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101
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The following materials
from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in eXtensible Business
Reporting Language (XBRL): (a) Consolidated Balance Sheets at December 31, 2016 and December 31, 2015; (b)
Consolidated Statements of Operations for each of the years ended December 31, 2016 and 2015; (c) Consolidated Statements
of Shareholders’ Equity for each of the years ended December 31, 2016 and 2015; (d) Consolidated Statements
of Cash Flows for each of the years ended December 31, 2016 and 2015; and (e) Notes to Consolidated Financial Statements.*
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* Pursuant to Rule 406T of
Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of
the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.