KBS Strategic Opportunity REIT, Inc. (Form: 10-Q, Received: 05/12/2017 06:10:02)

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

x (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q

______________________________________________________

(Mark One)



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

For the quarterly period ended March 31, 2017



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

For the transition period from to

Commission file number 000-54382

______________________________________________________

KBS STRATEGIC OPPORTUNITY REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________________________________________



Maryland		26-3842535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
800 Newport Center Drive, Suite 700 Newport Beach, California		92660
(Address of Principal Executive Offices)		(Zip Code)

(949) 417-6500

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

As of May 5, 2017 , there were 56,675,205 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.

Table of Contents

KBS STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

March 31, 2017

INDEX



PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	2
		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2017 and 2016	3
		Consolidated Statements of Equity for the Year Ended December 31, 2016 and the Three Months Ended March 31, 2017 (unaudited)	4
		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2017 and 2016	5
		Condensed Notes to Consolidated Financial Statements as of March 31, 2017 (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION		40
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
	Item 3.	Defaults upon Senior Securities	41
	Item 4.	Mine Safety Disclosures	41
	Item 5.	Other Information	41
	Item 6.	Exhibits	42
SIGNATURES			43

Table of Contents


PART I.	FINANCIAL INFORMATION


Item 1.	Financial Statements

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	March 31, 2017			December 31, 2016
	(unaudited)
Assets
Real estate held for investment, net	$	1,192,127		$	1,107,031
Real estate debt securities, net	9,754			4,683
Total real estate and real estate-related investments, net	1,201,881			1,111,714
Cash and cash equivalents	55,880			40,432
Restricted cash	23,348			24,018
Investments in unconsolidated joint ventures	16,538			75,849
Rents and other receivables, net	29,518			28,264
Due from affiliate	269			—
Above-market leases, net	544			633
Prepaid expenses and other assets	35,698			29,206
Total assets	$	1,363,676		$	1,310,116
Liabilities and equity
Notes and bonds payable, net	$	1,018,101		$	950,624
Accounts payable and accrued liabilities	30,520			26,624
Due to affiliate	27			55
Below-market leases, net	6,533			6,551
Other liabilities	15,396			18,095
Redeemable common stock payable	12,013			12,617
Total liabilities	1,082,590			1,014,566
Commitments and contingencies (Note 1 1 )
Redeemable common stock	—			—
Equity
KBS Strategic Opportunity REIT, Inc. stockholders' equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 56,708,525 and 56,775,767 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively	567			568
Additional paid-in capital	455,221			455,373
Cumulative distributions and net losses	(176,628		)	(162,289		)
Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity	279,160			293,652
Noncontrolling interests	1,926			1,898
Total equity	281,086			295,550
Total liabilities and equity	$	1,363,676		$	1,310,116

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)



	Three Months Ended March 31,
	2017			2016
Revenues:
Rental income	$	30,646		$	22,831
Tenant reimbursements	5,637			4,754
Other operating income	1,553			780
Interest income from real estate debt securities	160			—
Total revenues	37,996			28,365
Expenses:
Operating, maintenance, and management	10,908			9,520
Real estate taxes and insurance	4,737			3,874
Asset management fees to affiliate	2,748			2,088
General and administrative expenses	1,744			1,137
Foreign currency transaction loss, net	4,671			303
Depreciation and amortization	14,600			11,008
Interest expense	9,386			5,176
Total expenses	48,794			33,106
Other income (loss):
Income from unconsolidated joint venture	1,869			—
Other interest income	25			5
Equity in loss of unconsolidated joint venture	(154		)	(196		)
Total other income (loss), net	1,740			(191		)
Net loss	(9,058		)	(4,932		)
Net (income) loss attributable to noncontrolling interests	(34		)	38
Net loss attributable to common stockholders	$	(9,092	)	$	(4,894	)
Net loss per common share, basic and diluted	$	(0.16	)	$	(0.08	)
Weighted-average number of common shares outstanding, basic and diluted	56,782,447			58,699,129

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Year Ended December 31, 2016 and the Three Months Ended March 31, 2017

(unaudited)

(dollars in thousands)




	Common Stock					Additional Paid-in Capital			Cumulative Distributions and Net Losses			Total Stockholders' Equity			Noncontrolling Interest			Total Equity
	Shares		Amounts			Additional Paid-in Capital			Cumulative Distributions and Net Losses			Total Stockholders' Equity			Noncontrolling Interest			Total Equity

Balance, December 31, 2015	58,696,115		$	587		$	504,303		$	(111,527	)	$	393,363		$	15,427		$	408,790
Net loss	—		—			—			(28,918		)	(28,918		)	(208		)	(29,126		)
Issuance of common stock	938,662		9			12,607			—			12,616			—			12,616
Transfers from redeemable common stock	—		—			957			—			957			—			957
Redemptions of common stock	(2,859,010	)	(28		)	(38,545		)	—			(38,573		)	—			(38,573		)
Distributions declared	—		—			—			(21,844		)	(21,844		)	—			(21,844		)
Acquisitions of noncontrolling interests	—		—			(23,942		)	—			(23,942		)	(14,044		)	(37,986		)
Other offering costs	—		—			(7		)	—			(7		)	—			(7		)
Noncontrolling interests contributions	—		—			—			—			—			803			803
Distributions to noncontrolling interests	—		—			—			—			—			(80		)	(80		)
Balance, December 31, 2016	56,775,767		$	568		$	455,373		$	(162,289	)	$	293,652		$	1,898		$	295,550
Net (loss) income	—		—			—			(9,092		)	(9,092		)	34			(9,058		)
Issuance of common stock	197,428		2			2,922			—			2,924			—			2,924
Transfers from redeemable common stock	—		—			677			—			677			—			677
Redemptions of common stock	(264,670	)	(3		)	(3,751		)	—			(3,754		)	—			(3,754		)
Distributions declared	—		—			—			(5,247		)	(5,247		)	—			(5,247		)
Noncontrolling interests contributions	—		—			—			—			—			1			1
Distributions to noncontrolling interests	—		—			—			—			—			(7		)	(7		)
Balance, March 31, 2017	56,708,525		$	567		$	455,221		$	(176,628	)	$	279,160		$	1,926		$	281,086

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Three Months Ended March 31,
	2017			2016
Cash Flows from Operating Activities:
Net loss	$	(9,058	)	$	(4,932	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss due to property damages	—			421
Equity in loss of unconsolidated joint venture	154			196
Depreciation and amortization	14,600			11,008
Unrealized loss on derivative instrument	57			—
Deferred rent	(925		)	(556		)
Bad debt expense	(36		)	210
Amortization of above- and below-market leases, net	(894		)	(188		)
Amortization of deferred financing costs	1,299			721
Interest accretion on real estate securities	(69		)	—
Net amortization of discount and (premium) on bond and notes payable	11			9
Foreign currency transaction loss, net	4,671			303
Changes in assets and liabilities:
Rents and other receivables	(340		)	(773		)
Prepaid expenses and other assets	(3,396		)	(3,970		)
Accounts payable and accrued liabilities	(3,767		)	(647		)
Due from affiliate	(269		)	(141		)
Due to affiliates	(28		)	(41		)
Other liabilities	1,381			178
Net cash provided by operating activities	3,391			1,798
Cash Flows from Investing Activities:
Acquisitions of real estate	(82,235		)	—
Improvements to real estate	(5,493		)	(6,683		)
Insurance proceeds received for property damages	744			700
Purchase of interest rate cap	(107		)	—
Investment in unconsolidated joint venture	—			(600		)
Distributions of capital from unconsolidated joint ventures	59,157			—
Investment in real estate debt securities, net	(5,000		)	—
Funding of development obligations	(159		)	(842		)
Net cash used in investing activities	(33,093		)	(7,425		)
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable	87,405			286,300
Principal payments on notes and bonds payable	(35,808		)	(13,645		)
Payments of deferred financing costs	(1,329		)	(8,824		)
Payments to redeem common stock	(3,681		)	(44		)
Payments of other offering costs	(140		)	—
Distributions paid	(2,323		)	(2,271		)
Noncontrolling interests contributions	1			167
Distributions to noncontrolling interests	(7		)	—
Acquisitions of noncontrolling interests	—			(741		)
Net cash provided by financing activities	44,118			260,942
Effect of exchange rate changes on cash, cash equivalents and restricted cash	362			8,811
Net increase in cash, cash equivalents and restricted cash	14,778			264,126
Cash, cash equivalents and restricted cash, beginning of period	64,450			28,865
Cash, cash equivalents and restricted cash, end of period	$	79,228		$	292,991
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $564 and $458 for the three months ended March 31, 2017 and 2016, respectively	$	10,390		$	3,584
Supplemental Disclosure of Noncash Investing and Financing Activities:
Application of escrow deposits to acquisition of real estate	$	2,000		$	—
Increase in deferred financing payable	$	—		$	331
Increase in accrued improvements to real estate	$	7,858		$	122
Increase in redeemable common stock payable	$	677		$	10,855
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	2,924		$	3,201

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(unaudited)


1.	ORGANIZATION

KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, KBS Strategic Opportunity BVI issued one certificate containing 10,000 common shares with no par value to KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.

Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2016 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate, real estate-related debt securities and other real estate-related investments. The Advisor owns 20,000 shares of the Company’s common stock.

On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.

The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million . As of March 31, 2017 , the Company had sold 6,232,598 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $68.3 million . Also, as of March 31, 2017 , the Company had redeemed 6,405,292 shares for $80.8 million . Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million , respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.

On March 2, 2016, KBS Strategic Opportunity BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25% . On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25% . KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to KBS Strategic Opportunity BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments. The Operating Partnership owns all of the issued and outstanding equity of KBS Strategic Opportunity BVI. As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through KBS Strategic Opportunity BVI.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

As of March 31, 2017 , the Company consolidated 21 real estate investments comprised of 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, and owned two investments in unconsolidated joint ventures and an investment in real estate debt securities.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016 , except for the adoption of ASU No. 2017-01 on January 1, 2017. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 .

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, KBS Strategic Opportunity BVI and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period. During the year ended December 31, 2016, the Company elected to early adopt ASU No. 2016-18 (as defined below). As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

Segments

The Company has invested in non-performing loans, opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in non-performing loans, opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of non-performing loans, opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views non-performing loans, opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from non-performing loans, opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three months ended March 31, 2017 and 2016 .

Distributions declared per share were $0.09246575 and $0.09323770 during the three months ended March 31, 2017 and 2016 , respectively.

Square Footage, Occupancy and Other Measures

Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Recently Issued Accounting Standards Updates

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 was to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU No. 2015-14”), which defers the effective date of ASU No. 2014-09 by one year. Early adoption is permitted but not before the original effective date. As the primary source of revenue for the Company is generated through leasing arrangements, which are excluded from this standard, the Company does not expect the adoption of ASU No. 2014-09 to have a significant impact on its financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”). The amendments in ASU No. 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 primarily affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU No. 2016-01 also requires entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the balance sheet or in the accompanying notes to the financial statements. ASU No. 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU No. 2016-01 to have a significant impact on its financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale securities. An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures. For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”). ASU No. 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on eight specific cash flow issues, including the following that are or may be relevant to the Company: (a) Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; (b) Cash payments relating to contingent consideration made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities; (c) Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement); (d) Relating to distributions received from equity method investments, ASU No. 2016-15 provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can be classified using a (1) cumulative earnings approach, or (2) nature of distribution approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities. Alternatively, an investor can choose to classify the distributions based on the nature of activities of the investee that generated the distribution. If the necessary information is subsequently not available for an investee to determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and report a change in accounting principle on a retrospective basis; (e) In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the impact of adopting ASU No. 2016-15 on its financial statements, but does not expect the adoption of ASU No. 2016-15 to have a material impact on its financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company elected to early adopt ASU No. 2016-18 for the reporting period ending December 31, 2016 and was applied retrospectively. As a result of adoption of ASU No. 2016-18, the Company no longer presents the changes within restricted cash in the consolidated statements of cash flows.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU No. 2017-01”) to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, ASU No. 2017-01 (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace missing elements. ASU No. 2017-01 provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments can be applied to transactions occurring before the guidance was issued (January 5, 2017) as long as the applicable financial statements have not been issued. The Company elected to early adopt ASU No. 2017-01 for the reporting period beginning January 1, 2017. As a result of the adoption of ASU No. 2017-01, the Company’s acquisitions of investment properties beginning January 1, 2017 could qualify as asset acquisitions (as opposed to business combinations). Transaction costs associated with asset acquisitions are capitalized, while transaction costs associated with business combinations will continue to be expensed as incurred.


3.	REAL ESTATE HELD FOR INVESTMENT

As of March 31, 2017 , the Company owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property encompassing, in the aggregate, approximately 6.0 million rentable square feet. As of March 31, 2017 , these properties were 84% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 92% occupied. The Company also owned two investments in undeveloped land encompassing an aggregate of 1,670 acres. The following table summarizes the Company’s real estate held for investment as of March 31, 2017 and December 31, 2016 , respectively (in thousands):



	March 31, 2017			December 31, 2016
Land	$	346,475		$	322,499
Buildings and improvements	922,790			855,744
Tenant origination and absorption costs	53,626			48,964
Total real estate, cost	1,322,891			1,227,207
Accumulated depreciation and amortization	(130,764		)	(120,176		)
Total real estate, net	$	1,192,127		$	1,107,031

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

The following table provides summary information regarding the Company’s real estate held for investment as of March 31, 2017 (in thousands):



Property	Date Acquired or Foreclosed on	City	State	Property Type	Land		Building and Improvements		Tenant Origination and Absorption		Total Real Estate at Cost		Accumulated Depreciation and Amortization			Total Real Estate, Net		Ownership %
Northridge Center I & II	03/25/2011	Atlanta	GA	Office	$	2,234	$	7,335	$	—	$	9,569	$	(2,563	)	$	7,006	100.0	%
Iron Point Business Park	06/21/2011	Folsom	CA	Office	2,671		19,525		—		22,196		(5,182		)	17,014		100.0	%
Richardson Portfolio:
Palisades Central I	11/23/2011	Richardson	TX	Office	1,037		10,423		657		12,117		(2,779		)	9,338		90.0	%
Palisades Central II	11/23/2011	Richardson	TX	Office	810		17,817		256		18,883		(4,456		)	14,427		90.0	%
Greenway I	11/23/2011	Richardson	TX	Office	561		2,399		—		2,960		(753		)	2,207		90.0	%
Greenway III	11/23/2011	Richardson	TX	Office	702		3,800		559		5,061		(1,564		)	3,497		90.0	%
Undeveloped Land	11/23/2011	Richardson	TX	Undeveloped Land	3,134		—		—		3,134		—			3,134		90.0	%
Total Richardson Portfolio					6,244		34,439		1,472		42,155		(9,552		)	32,603
Park Highlands ⁽¹⁾	12/30/2011	North Las Vegas	NV	Undeveloped Land	35,173		—		—		35,173		—			35,173		⁽¹⁾
Bellevue Technology Center	07/31/2012	Bellevue	WA	Office	25,506		56,960		3,577		86,043		(11,580		)	74,463		100.0	%
Powers Ferry Landing East	09/24/2012	Atlanta	GA	Office	1,643		8,016		99		9,758		(2,602		)	7,156		100.0	%
1800 West Loop	12/04/2012	Houston	TX	Office	8,360		60,453		4,634		73,447		(13,447		)	60,000		100.0	%
West Loop I & II	12/07/2012	Houston	TX	Office	7,300		32,280		1,793		41,373		(6,287		)	35,086		100.0	%
Burbank Collection	12/12/2012	Burbank	CA	Retail	4,175		11,915		725		16,815		(1,852		)	14,963		90.0	%
Austin Suburban Portfolio	03/28/2013	Austin	TX	Office	8,288		68,870		1,513		78,671		(10,723		)	67,948		100.0	%
Westmoor Center	06/12/2013	Westminster	CO	Office	10,058		72,537		5,175		87,770		(12,994		)	74,776		100.0	%
Central Building	07/10/2013	Seattle	WA	Office	7,015		26,802		1,428		35,245		(4,033		)	31,212		100.0	%
50 Congress Street	07/11/2013	Boston	MA	Office	9,876		41,383		2,265		53,524		(7,065		)	46,459		100.0	%
1180 Raymond	08/20/2013	Newark	NJ	Apartment	8,292		37,872		—		46,164		(4,256		)	41,908		100.0	%
Park Highlands II	12/10/2013	North Las Vegas	NV	Undeveloped Land	23,839		—		—		23,839		—			23,839		100.0	%
Maitland Promenade II	12/18/2013	Orlando	FL	Office	3,434		25,040		3,520		31,994		(4,956		)	27,038		100.0	%
Plaza Buildings	01/14/2014	Bellevue	WA	Office	53,040		139,005		7,228		199,273		(20,168		)	179,105		100.0	%
424 Bedford	01/31/2014	Brooklyn	NY	Apartment	8,860		25,521		—		34,381		(2,236		)	32,145		90.0	%
Richardson Land II	09/04/2014	Richardson	TX	Undeveloped Land	3,418		—		—		3,418		—			3,418		90.0	%
Westpark Portfolio	05/10/2016	Redmond	WA	Office/Flex/Industrial	36,085		85,172		8,636		129,893		(6,150		)	123,743		100.0	%
353 Sacramento	07/11/2016	San Francisco	CA	Office	58,374		112,836		5,572		176,782		(4,552		)	172,230		100.0	%
Crown Pointe	02/14/2017	Dunwoody	GA	Office	22,590		56,829		5,989		85,408		(566		)	84,842		100.0	%
					$	346,475	$	922,790	$	53,626	$	1,322,891	$	(130,764	)	$	1,192,127

_____________________

⁽¹⁾ On March 18, 2016, the Company increased its membership interest in the Park Highlands joint venture from 50.1% to 51.58% by acquiring an additional 1.48% membership interest from one of the joint venture partners. On June 6, 2016, the Company increased its membership interest in the Park Highlands joint venture from 51.58% to 97.62% by acquiring an additional 46.04% membership interest from one of the joint venture partners. On June 25, 2016, the Company increased its membership interest in the Park Highlands joint venture from 97.62% to 100% by acquiring the remaining 2.38% membership interest from the remaining joint venture partner. On September 7, 2016, a subsidiary of the Company that owns a portion of Park Highlands, sold 820 units of 10% Class A non-voting preferred membership units for $0.8 million to accredited investors. The amount of the Class A non-voting preferred membership units raised, net of offering costs, is included in other liabilities on the accompanying consolidated balance sheets.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

Operating Leases

Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2017 , the leases, excluding options to extend and apartment leases, which have terms that are generally one year or less, had remaining terms of up to 11.0 years with a weighted-average remaining term of 3.5 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions or foreclosures related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $7.9 million and $7.2 million as of March 31, 2017 and December 31, 2016 , respectively.

During the three months ended March 31, 2017 and 2016 , the Company recognized deferred rent from tenants of $0.9 million and $0.6 million , respectively, net of lease incentive amortization. As of March 31, 2017 and December 31, 2016 , the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $27.8 million and $26.8 million , respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $3.0 million and $3.2 million of unamortized lease incentives as of March 31, 2017 and December 31, 2016 , respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

As of March 31, 2017 , the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):



April 1, 2017 through December 31, 2017	$	81,886
2018	98,129
2019	82,552
2020	65,195
2021	48,604
Thereafter	99,018
	$	475,384

As of March 31, 2017 , the Company’s commercial real estate properties were leased to approximately 700 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Computer System Design & Programming	61	$	11,991	10.6	%
Professional, Scientific & Legal	71	11,647		10.3	%
Insurance Carriers & Related Activities	34	11,543		10.2	%
Finance	54	11,355		10.0	%
		$	46,536	41.1	%

_____________________

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2017 , adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

Geographic Concentration Risk

As of March 31, 2017 , the Company’s real estate investments in Washington, California and Texas represented 30.0% , 15.0% and 14.6% of the Company’s total assets, respectively. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Washington, California and Texas real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Recent Acquisition

On February 14, 2017, the Company, through an indirect wholly owned subsidiary, acquired an office property consisting of two office buildings containing an aggregate of 499,968 rentable square feet in Dunwoody, Georgia (“Crown Pointe”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of Crown Pointe was $83.1 million plus $1.1 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $22.6 million to land, $56.6 million to building and improvements, $6.0 million to tenant origination and absorption costs and $1.0 million to below-market lease liabilities during the three months ended March 31, 2017 . The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 4.9 years for tenant origination and absorption costs and 4.2 years for below-market lease liabilities. During the three months ended March 31, 2017 , the Company recognized $1.2 million of total revenues and $0.9 million of operating expenses from this property.


4.	TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of March 31, 2017 and December 31, 2016 , the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016
Cost	$	53,626		$	48,964		$	1,877		$	1,877		$	(11,605	)	$	(10,945	)
Accumulated Amortization	(25,604		)	(23,989		)	(1,333		)	(1,244		)	5,072			4,394
Net Amount	$	28,022		$	24,975		$	544		$	633		$	(6,533	)	$	(6,551	)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three months ended March 31, 2017 and 2016 were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2017		2016
Amortization	$	(2,943	)	$	(2,211	)	$	(89	)	$	(120	)	$	983	$	308

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

Additionally, as of March 31, 2017 and December 31, 2016 , the Company had recorded tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $6.0 million and $6.3 million , respectively. During the three months ended March 31, 2017 and 2016 , the Company recorded amortization expense of $0.3 million and $0.2 million related to tax abatement intangible assets, respectively.


5.	REAL ESTATE DEBT SECURITIES

As of March 31, 2017 , the Company owned an investment in real estate debt securities. The information for those real estate debt securities as of March 31, 2017 and December 31, 2016 is set forth below (in thousands):



Debt Securities Name	Date Originated	Debt Securities Type	Outstanding Principal Balance as of March 31, 2017 ⁽¹⁾		Book Value as of March 31, 2017 ⁽²⁾		Book Value as of December 31, 2016 ⁽²⁾		Contractual Interest Rate ⁽³⁾		Annualized Effective Interest Rate ⁽³⁾		Maturity Date
Battery Point Series B Preferred Units	10/28/2016	Series B Preferred Units	$	10,000	$	9,754	$	4,683	9.0	%	13.1	%	10/28/2019

_____________________

⁽¹⁾ Outstanding principal balance as of March 31, 2017 represents principal balance outstanding under the real estate debt securities. Under the Battery Point purchase agreement, we may be required to purchase additional real estate debt securities.

⁽²⁾ Book value of the real estate debt securities represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.

⁽³⁾ Contractual interest rate is the stated interest rate on the face of the real estate securities. Annualized effective interest rate is calculated as the actual interest income recognized in 2017 , using the interest method, annualized (if applicable) and divided by the average amortized cost basis of the investment. The annualized effective interest rate and contractual interest rate presented are as of March 31, 2017 .

The following summarizes the activity related to real estate debt securities for the three months ended March 31, 2017 (in thousands):



Real estate debt securities - December 31, 2016	$	4,683
Face value of additional real estate debt securities acquired	5,000
Deferred interest receivable and interest accretion	44
Commitment fee, net of closing costs and acquisition fee	2
Accretion of commitment fee, net of closing costs	25
Real estate debt securities - March 31, 2017	$	9,754

For the three months ended March 31, 2017 , interest income from real estate debt securities consisted of the following (in thousands):



Contractual interest income	$	91
Interest accretion	44
Accretion of commitment fee, net of closing costs and acquisition fee	25
Interest income from real estate debt securities	$	160

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)


6.	NOTES AND BONDS PAYABLE

As of March 31, 2017 and December 31, 2016 , the Company’s notes and bonds payable consisted of the following (dollars in thousands):



	Book Value as of March 31, 2017			Book Value as of December 31, 2016			Contractual Interest Rate as of March 31, 2017 ⁽¹⁾	Effective Interest Rate at March 31, 2017 ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾
Richardson Portfolio Mortgage Loan	$	40,435		$	40,594		One-Month LIBOR + 2.10%	2.89%	Principal & Interest	05/01/2017 ⁽³⁾
Bellevue Technology Center Mortgage Loan	59,220			59,400			One-Month LIBOR + 2.25%	3.03%	Principal & Interest	03/01/2019
Portfolio Revolving Loan Facility ⁽⁴⁾	11,559			11,799			One-Month LIBOR + 2.25%	3.03%	Principal & Interest	05/01/2017 ⁽⁵⁾
Portfolio Mortgage Loan	107,483			106,479			One-Month LIBOR + 2.25%	3.03%	Principal & Interest	07/01/2017
Burbank Collection Mortgage Loan	9,711			9,812			One-Month LIBOR + 2.35%	3.16%	Principal & Interest	09/30/2017
50 Congress Mortgage Loan	31,429			31,525			One-Month LIBOR + 1.90%	2.68%	Principal & Interest	10/01/2017
1180 Raymond Bond Payable	6,595			6,635			6.50%	6.50%	Principal & Interest	09/01/2036
Central Building Mortgage Loan	27,600			27,600			One-Month LIBOR + 1.75%	2.53%	Interest Only	11/13/2018
Maitland Promenade II Mortgage Loan	20,774			20,877			One-Month LIBOR + 2.90%	3.69%	Principal & Interest	01/01/2018
Westmoor Center Mortgage Loan	61,940			62,000			One-Month LIBOR + 2.25%	3.03%	Principal & Interest	02/01/2018
Plaza Buildings Senior Loan	109,545			109,866			One-Month LIBOR + 1.90%	2.68%	Principal & Interest	01/14/2018
424 Bedford Mortgage Loan	24,693			24,832			3.91%	3.91%	Principal & Interest	10/01/2022
1180 Raymond Mortgage Loan	31,000			31,000			One-Month LIBOR + 2.25%	3.03%	Interest Only	12/01/2017
KBS SOR (BVI) Holdings, Ltd. Series A Debentures ⁽⁶⁾	267,782			251,811			4.25%	4.25%	⁽⁶⁾	03/01/2023
Westpark Portfolio Mortgage Loan	83,200			83,200			One-Month LIBOR + 2.50%	3.28%	Interest Only ⁽⁷⁾	07/01/2020
353 Sacramento Mortgage Loan ⁽⁸⁾	87,033			85,500			One-Month LIBOR + 2.75%	3.66%	Interest Only	10/14/2018
Crown Pointe Mortgage Loan ⁽⁹⁾	50,500			—			One-Month LIBOR + 2.60%	3.38%	Interest Only	02/13/2020
Total Notes and Bonds Payable principal outstanding	1,030,499			962,930
Net Premium/(Discount) on Notes and Bonds Payable ⁽¹⁰⁾	99			88
Deferred financing costs, net	(12,497		)	(12,394		)
Total Notes and Bonds Payable, net	$	1,018,101		$	950,624

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2017 . Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2017 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at March 31, 2017 , where applicable.

⁽²⁾ Represents the initial maturity date or the maturity date as extended as of March 31, 2017 ; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

⁽³⁾ Subsequent to March 31, 2017 , the maturity date of the Richardson Portfolio Mortgage Loan was extended to July 1, 2017.

⁽⁴⁾ The Portfolio Revolving Loan Facility is secured by the 1800 West Loop Building and the Iron Point Business Park. The Portfolio Revolving Loan Facility was comprised of $63.5 million of revolving debt and $12.2 million of non-revolving debt available to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. As of March 31, 2017 , $11.6 million of non-revolving debt had been disbursed to the Company and the remaining $63.5 million of revolving debt and $ 0.6 million of non-revolving debt is available for future disbursements, subject to certain conditions contained in the loan documents.

⁽⁵⁾ Subsequent to March 31, 2017 , the Company entered into a loan modification agreement to extend the maturity date of the Portfolio Revolving Loan Facility to May 1, 2019. As a result of this modification, the Portfolio Revolving Loan Facility bears interest at a floating rate of 2.75% over one-month LIBOR. The Portfolio Revolving Loan Facility is comprised of $30.0 million of revolving debt and $45.0 million of non-revolving debt.

⁽⁶⁾ See “ – Israeli Bond Financing” below.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

⁽⁷⁾ Represents the payment type required under the loan as of March 31, 2017 . Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.

⁽⁸⁾ As of March 31, 2017 , $87.0 million had been disbursed to the Company and up to $28.5 million is available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. In addition, the Company has entered into an interest rate cap that effectively limits one-month LIBOR on up to $115.5 million of the outstanding loan balance at 3.0% effective October 14, 2016 through October 14, 2018.

⁽⁹⁾ As of March 31, 2017 , $50.5 million had been disbursed to the Company and up to $12.0 million is available for future disbursements to be used for tenant improvements, leasing commissions and as an earn-out advance, subject to certain terms and conditions contained in the loan documents. In addition, the Company has entered into an interest rate cap that effectively limits one-month LIBOR on up to $46.9 million of the outstanding loan balance at 3.0% effective February 21, 2017 through February 13, 2020.

⁽¹⁰⁾ Represents the unamortized premium/discount on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bonds payable.

During the three months ended March 31, 2017 and 2016 , the Company incurred $9.4 million and $5.2 million of interest expense, respectively. Included in interest expense for the three months ended March 31, 2017 and 2016 was $1.3 million and $0.7 million of amortization of deferred financing costs, respectively. Additionally, during the three months ended March 31, 2017 and 2016 , the Company capitalized $0.6 million and $0.5 million of interest to its investments in undeveloped land, respectively. As of March 31, 2017 , the Company’s deferred financing costs were $12.5 million , net of amortization, which are included in notes and bonds payable, net. As of December 31, 2016 , the Company’s deferred financing costs were $12.5 million , net of amortization, of which $12.4 million is included in notes and bonds payable, net and $0.1 million is included in prepaid expenses and other assets on the accompanying consolidated balance sheets, respectively. As of March 31, 2017 and December 31, 2016 , the Company’s interest payable was $2.9 million and $5.3 million , respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of March 31, 2017 (in thousands):



April 1, 2017 through December 31, 2017	$	234,433
2018	307,111
2019	113,406
2020	186,570
2021	54,435
Thereafter	134,544
	$	1,030,499

The Company’s notes payable contain financial debt covenants. As of March 31, 2017 , the Company was in compliance with all of these debt covenants.

Israeli Bond Financing

On March 2, 2016, KBS Strategic Opportunity BVI, a wholly owned subsidiary of the Company, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25% . On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016 ) in both the institutional and public tenders at an annual interest rate of 4.25% . KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023. As of March 31, 2017 , the Company has entered into four separate foreign currency collars for an aggregate notional amount of $250.0 million to hedge its exposure to foreign currency exchange rate movements. See note 7 , “Derivative Instruments” for a further discussion on the Company’s foreign currency collars.

The deed of trust that governs the terms of the Debentures contains various financial covenants. As of March 31, 2017 , the Company was in compliance with all of these financial debt covenants.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)


7 .	DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates and foreign currency exchange rate movements. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.

The Company enters into foreign currency collars to mitigate its exposure to foreign currency exchange rate movements on its bonds payable outstanding denominated in Israeli new Shekels. The foreign currency collar consists of a purchased call option to buy and a sold put option to sell the Israeli new Shekels. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices.

The following table summarizes the notional amount and other information related to the Company’s foreign currency collars as of March 31, 2017 and December 31, 2016 . The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):



Derivative Instruments	Notional Amount		Strike Price	Trade Date	Maturity Date
Derivative instruments not designated as hedging instruments
Foreign currency collar	$	100,000	3.72 - 3.83 ILS-USD	08/08/2016	08/08/2017
Foreign currency collar	50,000		3.67 - 3.77 ILS-USD	08/16/2016	08/16/2017
Foreign currency collar	50,000		3.68 - 3.78 ILS-USD	08/16/2016	08/16/2017
Foreign currency collar	50,000		3.67 - 3.77 ILS-USD	08/22/2016	08/22/2017
	$	250,000

The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.

As of March 31, 2017 , the Company had two interest rate caps outstanding, which were not designated as hedging instruments. The following table summarizes the notional amount and other information related to the Company’s derivative instruments as of March 31, 2017 and December 31, 2016 . The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):



Derivative Instruments	Effective Date	Maturity Date	Notional Value		Reference Rate
Interest Rate Cap	10/14/2016	10/14/2018	$	115,500	One-month LIBOR at 3.00%
Interest Rate Cap	02/21/2017	02/13/2020	$	46,900	One-month LIBOR at 3.00%

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of March 31, 2017 and December 31, 2016 (dollars in thousands):



		March 31, 2017			December 31, 2016
Derivative Instruments	Balance Sheet Location	Number of Instruments	Fair Value		Number of Instruments	Fair Value
Derivative instruments not designated as hedging instruments
Interest rate caps	Prepaid expenses and other assets	2	$	62	1	$	12
Foreign currency collars	Prepaid expenses and other assets (Other liabilities)	4	$	7,227	4	$	(3,910	)

The change in fair value of foreign currency collars that are not designated as cash flow hedges are recorded as foreign currency transaction gains or losses in the accompanying consolidated statements of operations. During the three months ended March 31, 2017 , the Company recognized an $11.1 million gain related to the foreign currency collars, which is shown net against $15.8 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three months ended March 31, 2017 , the Company recorded an unrealized loss of $0.1 million on interest rate caps, which was included in interest expense on the accompanying consolidated statements of operations.


8.	FAIR VALUE DISCLOSURES

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

Cash and cash equivalents, rent and other receivables and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

Real estate debt securities : The Company’s real estate debt securities are presented in the accompanying consolidated balance sheets at their amortized cost net of recorded loss reserves (if any) and not at fair value. The fair value of real estate debt securities was estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral dependent loans) and estimated yield requirements of institutional investors for real estate debt securities with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.

Notes and bonds payable: The fair values of the Company’s notes and bonds payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs. The Company’s bonds issued in Israel are publicly traded on the Tel-Aviv Stock Exchange. The Company used the quoted price as of March 31, 2017 for the fair value of its bonds issued in Israel. The Company classifies this input as a Level 1 input.

Derivative instruments : The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs.

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of March 31, 2017 and December 31, 2016 , which carrying amounts do not approximate the fair values (in thousands):



	March 31, 2017						December 31, 2016
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial asset:
Real estate debt securities	$	10,000	$	9,754	$	9,789	$	5,000	$	4,683	$	4,683
Financial liabilities:
Notes and bond payable	$	762,717	$	758,223	$	763,219	$	711,119	$	707,169	$	711,425
KBS SOR (BVI) Holdings, Ltd. Series A Debentures	$	267,782	$	259,878	$	273,834	$	251,811	$	243,455	$	253,120

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

As of March 31, 2017 , the Company measured the following assets at fair value (in thousands):



			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Asset derivatives - interest rate caps	$	62	$	—	$	62	$	—
Asset derivatives - foreign currency collars	$	7,227	$	—	$	7,227	$	—

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)


9.	RELATED PARTY TRANSACTIONS

The Advisory Agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments and the disposition of real estate and real estate-related investments (including the discounted payoff of non-performing loans) among other services, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. The Advisory Agreement may also entitle the Advisor to certain back-end cash flow participation fees. The Company also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with KBS Capital Markets Group LLC, the dealer manager for the Company’s initial public offering (the “Dealer Manager”), pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. The insurance program was renewed and is effective through June 30, 2017.

During the three months ended March 31, 2017 and 2016 , no other business transactions occurred between the Company and these other KBS-sponsored programs.

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2017 and 2016 , respectively, and any related amounts payable as of March 31, 2017 and December 31, 2016 (in thousands):



	Incurred				Payable as of
	Three Months Ended March 31,				March 31, 2017		December 31, 2016
	2017		2016		March 31, 2017		December 31, 2016
Expensed
Asset management fees	$	2,748	$	2,088	$	—	$	—
Reimbursable operating expenses ⁽¹⁾	69		44		27		55
Capitalized
Acquisition fees on real estate ⁽²⁾	836		—		—		—
	$	3,653	$	2,132	$	27	$	55

_____________________

⁽¹⁾ The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $55,000 and $44,000 for the three months ended March 31, 2017 and 2016 , respectively, and were the only employee costs reimbursed under the Advisory Agreement during these periods. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company's direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company.

⁽²⁾ As a result of the adoption of ASU No. 2017-01, the Company’s acquisitions of real estate properties beginning January 1, 2017 could qualify as an asset acquisition (as opposed to a business combination). Acquisition fees associated with asset acquisitions will be capitalized, while these costs associated with business combinations will continue to be expensed as incurred.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

As of March 31, 2017 , the Company had $0.3 million due from the Advisor related to a property insurance rebate and legal fees incurred in connection with certain strategic transactions for which the Advisor has agreed to reimburse the Company.


10.	INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of March 31, 2017 and December 31, 2016 , the Company’s investments in unconsolidated joint ventures were composed of the following (dollars in thousands):



				Investment Balance at
Joint Venture	Number of Properties	Location	Ownership %	March 31, 2017		December 31, 2016
NIP Joint Venture	12	Various	Less than 5.0%	$	4,317	$	5,305
110 William Joint Venture	1	New York, New York	60.0%	12,221		70,544
				$	16,538	$	75,849

Investment in National Industrial Portfolio Joint Venture

On May 18, 2012, the Company, through an indirect wholly owned subsidiary, entered into a joint venture (the “NIP Joint Venture”) with OCM NIP JV Holdings, L.P. and HC KBS NIP JV, LLC (“HC-KBS”). As of March 31, 2017 , the NIP Joint Venture owned 12 industrial properties and a master lease with respect to another industrial property encompassing 5.2 million square feet. The Company made an initial capital contribution of $8.0 million which represents less than a 5.0% ownership interest in the NIP Joint Venture as of March 31, 2017 . The Company has virtually no influence over the NIP Joint Venture’s operations, financial policies or decision making. Accordingly, the Company has accounted for its investment in the NIP Joint Venture under the cost method of accounting. Income, losses and distributions from the NIP Joint Venture are generally allocated among the members based on their respective equity interests.

KBS REIT I, an affiliate of the Advisor, is a member of HC-KBS and has a participation interest in certain future potential profits generated by the NIP Joint Venture. However, KBS REIT I does not have any equity interest in the NIP Joint Venture. None of the other joint venture partners are affiliated with the Company or the Advisor.

As of March 31, 2017 and December 31, 2016 , the book value of the Company’s investment in the NIP Joint Venture was $4.3 million and $5.3 million , respectively. During the three months ended March 31, 2017 , the Company received a distribution of $2.9 million related to its investment in the NIP Joint Venture. The Company recognized $1.9 million of income distributions and $1.0 million of return of capital from the NIP Joint Venture. During the three months ended March 31, 2016 , the Company did not receive any distributions related to its investment in the NIP Joint Venture.

Investment in 110 William Joint Venture

On December 23, 2013, the Company, through an indirect wholly owned subsidiary, entered into an agreement with SREF III 110 William JV, LLC (the “110 William JV Partner”) to form a joint venture (the “110 William Joint Venture”). On May 2, 2014, the 110 William Joint Venture acquired an office property containing 928,157 rentable square feet located on approximately 0.8 acres of land in New York, New York (“110 William Street”). Each of the Company and the 110 William JV Partner hold a 60% and 40% ownership interest in the 110 William Joint Venture, respectively.

The Company exercises significant influence over the operations, financial policies and decision making with respect to the 110 William Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 110 William Joint Venture under the equity method of accounting. Income, losses, contributions and distributions are generally allocated based on the members’ respective equity interests.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

As of March 31, 2017 and December 31, 2016 , the book value of the Company’s investment in the 110 William Joint Venture was $12.2 million and $70.5 million , respectively, which includes $1.5 million of unamortized acquisition fees and expenses incurred directly by the Company. During the three months ended March 31, 2017 , the 110 William Joint Venture made a $58.2 million return of capital distribution to the Company and a $38.8 million return of capital distribution to the 110 William JV Partner funded with proceeds from the 110 William refinancing discussed below.

Summarized financial information for the 110 William Joint Venture follows (in thousands):



	March 31, 2017		December 31, 2016
Assets:
Real estate assets, net of accumulated depreciation and amortization	$	260,159	$	262,192
Other assets	26,668		23,355
Total assets	$	286,827	$	285,547
Liabilities and equity:
Notes payable, net ⁽¹⁾	$	257,155	$	157,628
Other liabilities	11,814		12,872
Partners’ capital	17,858		115,047
Total liabilities and equity	$	286,827	$	285,547

_____________________

⁽¹⁾ See "- 110 William Joint Venture Refinance" below.



	Three Months Ended March 31,
	2017			2016
Revenues	$	8,392		$	8,251
Expenses:
Operating, maintenance, and management	2,396			2,505
Real estate taxes and insurance	1,617			1,434
Depreciation and amortization	3,232			3,121
Interest expense	1,400			1,516
Total expenses	8,645			8,576
Other income	14			16
Net loss	$	(239	)	$	(309	)
Company’s equity in loss of unconsolidated joint venture	$	(154	)	$	(196	)

110 William Joint Venture Refinance

On May 2, 2014, in connection with the acquisition of 110 William Street, the 110 William Joint Venture assumed a mortgage loan with a face amount of $141.5 million and a mezzanine loan with a face amount of $20.0 million (the “110 William Street Existing Loans”). On March 6, 2017, the 110 William Joint Venture closed the refinancing of the 110 William Street Existing Loans (the “Refinancing”). The 110 William Joint Venture repaid $156.0 million of principal related to the 110 William Street Existing Loans. The Refinancing was comprised of the following loans from unaffiliated lenders: (i) a mortgage loan in the maximum amount of up to $232.3 million from Morgan Stanley Bank, N.A., a national banking association (the “110 William Street Mortgage Loan”), (ii) a senior mezzanine loan in the maximum amount of up to $33.8 million from Morgan Stanley Mortgage Capital Holdings LLC, a New York limited liability company (the “110 William Street Senior Mezzanine Loan”), and (iii) a junior mezzanine loan in the maximum amount of up to $33.8 million from Morgan Stanley Mortgage Capital Holdings LLC, a New York limited liability company (the “110 William Street Junior Mezzanine Loan”).

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)

The loans under the Refinancing mature on March 7, 2019, with three one -year extension options. The 110 William Street Mortgage Loan bears interest at a floating rate of 2.2472% over one-month LIBOR. The 110 William Street Senior Mezzanine Loan and the 110 William Street Junior Mezzanine Loan bear interest at a floating rate of 6.25% over one-month LIBOR. The 110 William Joint Venture entered into three interest rate caps that effectively limit one-month LIBOR at 3.00% on $275.0 million of the Refinancing amount as of the effective date, up to $300.0 million , accreting according to a notional schedule, effective March 6, 2017 through March 7, 2019. The loans under the Refinancing have monthly payments that are interest-only with the entire unpaid principal balance and all outstanding interest and fees due at maturity. The 110 William Joint Venture has the right to prepay the loans in whole at any time or in part from time to time to the extent necessary, subject to the payment of certain expenses potentially incurred by the lender as a result of the prepayment, the payment of a prepayment premium and breakage costs in certain circumstances, and certain other conditions contained in the loan documents. At closing, $205.0 million had been disbursed from the 110 William Street Mortgage Loan to the 110 William Joint Venture with $27.3 million remaining available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. At closing, $29.85 million had been disbursed from the 110 William Street Senior Mezzanine Loan to the 110 William Joint Venture and $29.85 million had been disbursed from the 110 William Junior Mezzanine Loan to the 110 William Joint Venture, with $4.0 million remaining available under the 110 William Street Senior Mezzanine Loan and $4.0 million remaining available under the 110 William Street Junior Mezzanine Loan for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents under the 110 William Street Senior Mezzanine Loan and the 110 William Street Junior Mezzanine Loan.


11.	COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide these services, the Company will be required to obtain such services from other sources.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations as of March 31, 2017 . However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is a party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and the possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2017

(unaudited)


12.	SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Partial Real Estate Sale Subsequent to March 31, 2017

Park Highlands

On May 1, 2017, the Company sold an aggregate of 102 acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $18.4 million , excluding closing costs. The purchasers are not affiliated with the Company or the Advisor.

Purchase and Sale Agreement for Real Estate Property Subsequent to March 31, 2017

50 Congress Street

On July 11, 2013, the Company, through an indirect wholly owned subsidiary, purchased an office building containing 179,872 rentable square feet located on approximately 0.4 acres of land in Boston, Massachusetts (“50 Congress Street”). On April 13, 2017, the Company entered into a purchase and sale agreement and escrow instructions for the sale of 50 Congress Street to purchasers unaffiliated with the Company or the Advisor. Pursuant to the purchase and sale agreement, the sale price for 50 Congress Street is $79.0 million , subject to certain concessions and credits that will be finalized at closing. There can be no assurance that the Company will complete the sale of 50 Congress Street. The purchasers would be obligated to purchase 50 Congress Street only after satisfaction of agreed upon closing conditions.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Strategic Opportunity REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Strategic Opportunity REIT, Inc., a Maryland corporation, and, as required by context, KBS Strategic Opportunity Limited Partnership, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Strategic Opportunity REIT, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•

We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our property investments could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, limiting our ability to pay distributions to our stockholders.


•	Our opportunistic investment strategy involves a higher risk of loss than would a strategy of investing in some other types of real estate and real estate-related investments.

•

We have paid distributions from financings and in the future we may not pay distributions solely from our cash flow from operations or gains from asset sales. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have less funds available for investment in loans, properties and other assets, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

•

All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. Fees paid to our advisor in connection with transactions involving the origination, acquisition and management of our investments are based on the cost of the investment, not on the quality of the investment or services rendered to us. This arrangement could influence our advisor to recommend riskier transactions to us.


•	We pay substantial fees to and expenses of our advisor and its affiliates. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase our stockholders’ risk of loss.

•

We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program, future funding obligations under any real estate loans receivable we acquire, the funding of capital expenditures on our real estate investments or the repayment of debt. If such funds are not available from the dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.


•	We have focused, and may continue to focus, our investments in non-performing real estate and real estate-related loans, real estate-related loans secured by non-stabilized assets and real estate-related securities, which involve more risk than investments in performing real estate and real estate-related assets

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”).

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview

We were formed on October 8, 2008 as a Maryland corporation, elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010 and intend to operate in such manner. KBS Capital Advisors LLC (“KBS Capital Advisors”) is our advisor. As our advisor, KBS Capital Advisors manages our day-to-day operations and our portfolio of investments. KBS Capital Advisors also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors. KBS Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. We have sought to invest in and manage a diverse portfolio of real estate‑related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments. We conduct our business primarily through our operating partnership, of which we are the sole general partner.

On January 8, 2009, we filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public, of which 100,000,000 shares were registered in our primary offering and 40,000,000 shares were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on November 14, 2012. We sold 56,584,976 shares of common stock in the primary offering for gross offering proceeds of $561.7 million . We continue to offer shares of common stock under the dividend reinvestment plan. As of March 31, 2017 , we had sold 6,232,598 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $ 68.3 million . Also as of March 31, 2017 , we had redeemed 6,405,292 of the shares sold in our offering for $ 80.8 million . Additionally, on December 29, 2011 and October 23, 2012, we issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million , respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On March 2, 2016, KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), our wholly owned subsidiary, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016 ) in both the institutional and public tenders at an annual interest rate of 4.25%. KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

Market Outlook – Real Estate and Real Estate Finance Markets

The following discussion is based on management’s beliefs, observations and expectations with respect to the real estate and real estate finance markets.

Conditions in the global capital markets remain unsettled as of the first quarter of 2017. Current economic data and financial market developments suggest that the global economy is improving, although at a slow and uneven pace. European economic growth has recently picked up, whereas the U.K. and China remain areas of concern. Against this backdrop, the central banks of the world’s major industrialized economies are beginning to back away from their strong monetary accommodation. Quantitative easing in Japan and Europe is slowing, but the liquidity generated from these programs continues to impact the global capital markets.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

At a duration of 94 months (as of the end of first quarter 2017), the current business cycle, which commenced in June 2009, is the fourth longest in U.S. history, including the post-World War II cycle, which lasted 58 months. In March 2017, the U.S. Federal Reserve (the “FED”) increased interest rates for the third time in three years. Expectations are for the rate increases to continue in the wake of ongoing economic growth and some acceleration in inflationary pressures, with the goal of the FED to normalize the level of interest rates. Little in the U.S. macroeconomic data suggests that the economy is growing too rapidly, the primary symptom of trouble ahead for a business cycle. Real gross domestic product (“GDP”) growth has averaged approximately 2% per year over the past two years, and job growth has averaged about 1.7%. Personal income growth has started to pick up and unemployment statistics indicate that labor force conditions are finally showing real improvements.

The U.S. commercial real estate market continues to benefit from inflows of foreign capital, particularly from China. With a backdrop of global political conflict, and stabilizing international economic conditions, the U.S. dollar has remained a safe haven currency. The volume of available capital that is seeking “core” properties has helped to push the pricing of some assets past prior peaks, making some markets look expensive. Reduced leverage ratios have shifted more risk toward the equity investor. Traditional sources of capital are favoring a “risk-off” approach, where investors’ appetite for risk falls, when valuing investments. Investors acquiring properties are extremely selective, with cap rate compression having spread into secondary markets over the last two years. Commercial real estate returns are increasingly being driven by property income (yield), as opposed to price appreciation through cap rate compression.

Lenders with long memories remain disciplined in their underwriting of investments. For balance sheet lenders, such as banks and insurance companies, underwriting standards for commercial real estate have been tightened. This has resulted in lower loan-to-value and higher debt coverage ratios. CMBS originations also have been limited as lenders are attempting to adjust to new securitization rules which require issuers to maintain an ongoing equity stake in pooled transactions. These trends have led to increased uncertainty in the level and cost of debt for commercial properties, and in turn has injected some volatility into commercial real estate markets.

A major factor contributing to the strength of the real estate cycle is the difficulty of securing construction financing. Lack of construction financing is effectively keeping an oversupply of commercial real estate, which is typical late in a real estate cycle, from emerging. Bank regulators and new risk-based capital guidelines have enforced discipline in lending, which has helped reduce new construction.

Liquidity and Capital Resources

Our principal demand for funds during the short and long-term is and will be for the acquisition of real estate and real estate-related investments, payment of operating expenses, capital expenditures and general and administrative expenses, payments under debt obligations, redemptions of common stock and payments of distributions to stockholders. To date, we have had six primary sources of capital for meeting our cash requirements:


•	Proceeds from the primary portion of our initial public offering;


•	Proceeds from our dividend reinvestment plan;


•	Proceeds from our public bond offering in Israel;


•	Debt financing;


•	Proceeds from the sale of real estate and the repayment of real estate-related investments; and


•	Cash flow generated by our real estate and real estate-related investments.

We sold 56,584,976 shares of common stock in the primary portion of our initial public offering for gross offering proceeds of $561.7 million . We ceased offering shares in the primary portion of our initial public offering on November 14, 2012. We continue to offer shares of common stock under the dividend reinvestment plan. As of March 31, 2017 , we had sold 6,232,598 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $68.3 million . To date, we have invested all of the net proceeds from our initial public offering in real estate and real estate-related investments. We intend to use our cash on hand, proceeds from debt financing, proceeds from the issuance of our 4.25% bonds in Israel, cash flow generated by our real estate operations and real estate-related investments and proceeds from our dividend reinvestment plan as our primary sources of immediate and long-term liquidity.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures and corporate general and administrative expenses. Cash flow from operations from our real estate investments is primarily dependent upon the occupancy levels of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of March 31, 2017 , our properties, excluding apartment properties, were collectively 84% occupied and our apartment properties were collectively 92% occupied.

Investments in real estate-related investments generate cash flow in the form of interest income, which are reduced by loan service fees, asset management fees and corporate general and administrative expenses. As of March 31, 2017 , we had an investment in real estate debt securities outstanding with a total book value of $9.8 million .

As of March 31, 2017 , we had outstanding debt obligations in the aggregate principal amount of $1.0 billion , with a weighted average remaining term of 2.7 years. As of March 31, 2017 , we had $63.5 million of unrestricted secured revolving debt available for future disbursements under a portfolio loan facility, subject to certain conditions set forth in the loan agreement.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended March 31, 2017 did not exceed the charter imposed limitation.

For the three months ended March 31, 2017 , our cash needs for capital expenditures, redemptions of common stock and debt servicing were met with proceeds from debt financing, proceeds from our dividend reinvestment plan and cash on hand. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments and cash on hand. As of March 31, 2017 , we had a total of $425.3 million of debt obligations scheduled to mature within 12 months of that date. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates.

We have elected to be taxed as a REIT and intend to operate as a REIT. To maintain our qualification as a REIT, we are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level.

Cash Flows from Operating Activities

As of March 31, 2017 , we consolidated 21 real estate investments comprised of 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, and owned two investments in unconsolidated joint ventures and an investment in real estate debt securities. During the three months ended March 31, 2017 , net cash provided by operating activities was $3.4 million . We expect that our cash flows from operating activities will increase in future periods as a result of leasing additional space that is currently unoccupied and anticipated future acquisitions of real estate and real estate-related investments. However, our cash flows from operating activities may decrease to the extent that we dispose of assets.

Cash Flows from Investing Activities

Net cash used in investing activities was $33.1 million for the three months ended March 31, 2017 and primarily consisted of the following:


•	Acquisition of an office property for $82.2 million ;


•	Distributions of capital from unconsolidated joint ventures of $59.2 million , of which $58.2 million relates to the 110 William Joint Venture and $1.0 million relates to the NIP Joint Venture;


•	Improvements to real estate of $5.5 million ;


•	Investment in real estate debt securities of $5.0 million ;


•	Insurance proceeds for property damages of $0.7 million ;


•	Funding of development obligations of $0.2 million ; and


•	Purchase of an interest rate cap for $0.1 million .

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Flows from Financing Activities

Net cash provided by financing activities was $44.1 million for the three months ended March 31, 2017 and consisted primarily of the following:


•	$50.3 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $87.4 million , partially offset by principal payments on notes and bonds payable of $35.8 million and payments of deferred financing costs of $1.3 million ;


•	$3.7 million of cash used for redemptions of common stock;


•	$2.3 million of net cash distributions to stockholders, after giving effect to distributions reinvested by stockholders of $2.9 million ; and


•	$0.1 million of payments made in connection with a potential offering.

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets; however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of March 31, 2017 , our borrowings and other liabilities were approximately 73% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

In March 2016, we, through a wholly-owned subsidiary, issued 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016 ) in 4.25% bonds to investors in Israel pursuant to a public offering registered in Israel. The bonds have a seven year term, with 20% of the principal payable each year from 2019 to 2023. We have used a portion of the proceeds from the issuance of these bonds to make additional investments.

In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our advisor and our dealer manager. During our offering stage, these payments included payments to our dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to our dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. During our acquisition and development stage, we expect to continue to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us as well as for any dispositions of assets (including the discounted payoff of non-performing loans). In addition, an affiliate of our advisor, KBS Management Group, was recently formed to provide property management services with respect to certain properties owned by KBS-advised companies. In the future, we may engage KBS Management Group with respect to one or more of our properties to provide property management services. With respect to any such properties, we would expect to pay KBS Management Group a monthly fee equal to a percentage of the rent (to be determined on a property by property basis, consistent with current market rates).

The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee.

Among the fees payable to our advisor is an asset management fee. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment, inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan or other investment, plus the fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the sum of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property, and inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment, inclusive of our proportionate share of any fees and expenses related thereto.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2017 (in thousands):



			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2017		2018-2019		2020-2021		Thereafter
Outstanding debt obligations ⁽¹⁾	$	1,030,499	$	234,433	$	420,517	$	241,005	$	134,544
Interest payments on outstanding debt obligations ⁽²⁾	83,959		23,522		37,525		16,137		6,775
Outstanding funding obligations under real estate debt securities ⁽³⁾	15,000		15,000		—		—		—

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts, maturity dates, foreign currency rates and interest rates in effect at March 31, 2017 . We incurred interest expense of $8.6 million , excluding amortization of deferred financing costs of $1.3 million and unrealized losses on interest rate caps of $0.1 million and including interest capitalized of $0.6 million , for the three months ended March 31, 2017 .

⁽³⁾ Under the Battery Point purchase agreement, we may be required to purchase additional real estate debt securities.

Results of Operations

Overview

As of March 31, 2016 , we owned 10 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures. As of March 31, 2017 , we owned 12 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, two investments in unconsolidated joint ventures and an investment in real estate debt securities. Our results of operations for the three months ended March 31, 2017 may not be indicative of those in future periods as the occupancy in our properties has not been stabilized. As of March 31, 2017 , our office and retail properties were collectively 84% occupied and our apartment properties were collectively 92% occupied. However, due to the short outstanding weighted-average lease term in the portfolio of less than four years, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our assets will increase, or that we will recognize a gain on the sale of our assets. We funded the acquisitions of these investments with proceeds from our initial public offering and debt financing. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and acquiring additional assets but decrease due to disposition activity.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended March 31, 2017 versus the three months ended March 31, 2016

The following table provides summary information about our results of operations for the three months ended March 31, 2017 and 2016 (dollar amounts in thousands):



	Three Months Ended March 31,				Increase (Decrease)		Percentage Change		$ Change Due to Acquisitions/ Originations/ Dispositions ⁽¹⁾		$ Change Due to Investments Held Throughout Both Periods ⁽²⁾
	2017		2016		Increase (Decrease)		Percentage Change
Rental income	$	30,646	$	22,831	$	7,815	34	%	$	6,782	$	1,033
Tenant reimbursements	5,637		4,754		883		19	%	939		(56		)
Other operating income	1,553		780		773		99	%	32		741
Interest income from real estate debt securities	160		—		160		n/a		160		—
Operating, maintenance, and management costs	10,908		9,520		1,388		15	%	1,860		(472		)
Real estate taxes and insurance	4,737		3,874		863		22	%	1,013		(150		)
Asset management fees to affiliate	2,748		2,088		660		32	%	599		61
General and administrative expenses	1,744		1,137		607		53	%	n/a		n/a
Foreign currency transaction loss, net	4,671		303		4,368		1,442	%	n/a		n/a
Depreciation and amortization	14,600		11,008		3,592		33	%	4,184		(592		)
Interest expense	9,386		5,176		4,210		81	%	n/a		n/a
Income from unconsolidated joint venture	1,869		—		1,869		n/a		—		1,869

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 related to real estate and real estate-related investments acquired, originated, repaid or disposed on or after January 1, 2016 .

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

Rental income and tenant reimbursements increased from $22.8 million and $4.8 million , respectively, for the three months ended March 31, 2016 to $30.6 million and $5.6 million , respectively, for the three months ended March 31, 2017 , primarily as a result of the growth in our real estate portfolio and an increase in occupancy related to our properties held throughout both periods. The occupancy of our office and retail properties, collectively, held throughout both periods increased from 85% as of March 31, 2016 to 87% as of March 31, 2017 . The occupancy of our apartment properties, collectively, held throughout both periods increased from 91% as of March 31, 2016 to 92% as of March 31, 2017 . In addition, annualized base rent per square foot increased from $21.65 as of March 31, 2016 to $22.20 as of March 31, 2017 related to properties (excluding apartments) held throughout both periods. We expect rental income and tenant reimbursements to increase in future periods as a result of owning real estate acquired in 2017 for an entire period, future acquisitions of real estate and leasing additional space but to decrease to the extent we dispose of properties.

Property operating costs and real estate taxes and insurance increased from $9.5 million and $3.9 million , respectively, for the three months ended March 31, 2016 to $10.9 million and $4.7 million , respectively, for the three months ended March 31, 2017 , primarily as a result of the growth in our real estate portfolio, increase in occupancy, increase in assessed property values and inflation. We expect property operating costs and real estate taxes and insurance to increase in future periods as a result of owning real estate acquired in 2017 for an entire period, future acquisitions of real estate, increasing occupancy of our real estate assets and inflation but to decrease to the extent we dispose of properties.

Asset management fees increased from $2.1 million for the three months ended March 31, 2016 to $2.7 million for the three months ended March 31, 2017 , primarily as a result of the growth in our real estate portfolio. We expect asset management fees to increase in future periods as a result of owning real estate acquired in 2017 for an entire period, future acquisitions of real estate and capital expenditures but to decrease to the extent we dispose of properties. All asset management fees incurred as of March 31, 2017 have been paid.

General and administrative expenses increased from $1.1 million for the three months ended March 31, 2016 to $1.7 million for the three months ended March 31, 2017 , primarily due to increased legal costs as a result of our ongoing Israeli securities law compliance requirements related to our outstanding bonds and legal services provided in connection with certain strategic transactions. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Foreign currency transaction loss, net increased from $0.3 million for the three months ended March 31, 2016 to $4.7 million for the three months ended March 31, 2017 as a result of holding the Series A debentures issued in Israel for an entire period. These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses based on changes in foreign currency exchange rates, but expect our exposure to be limited to the extent that we have entered into a foreign currency collar or hedge. For the three months ended March 31, 2017 , the foreign currency transaction loss, net consists of $15.8 million of foreign currency transaction loss, partially offset by a $11.1 million gain related to our foreign currency collars.

Depreciation and amortization increased from $11.0 million for the three months ended March 31, 2016 to $14.6 million for the three months ended March 31, 2017 , primarily as a result of the growth in our real estate portfolio. We expect depreciation and amortization to increase in future periods as a result of owning real estate acquired in 2017 for an entire period but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties.

Interest expense increased from $5.2 million for the three months ended March 31, 2016 to $9.4 million for the three months ended March 31, 2017 , primarily due to increased borrowings as a result of our bond offering and additional mortgage financing. Excluded from interest expense was $0.6 million and $0.5 million of interest capitalized to our investments in undeveloped land during the three months ended March 31, 2017 and 2016 , respectively. Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

During the three months ended March 31, 2017 , we received a distribution of $2.9 million related to our investment in the NIP Joint Venture. We recognized $1.9 million of income distributions and $1.0 million of return of capital from the NIP Joint Venture. During the three months ended March 31, 2016 , we did not receive any distributions related to our investment in the NIP Joint Venture.

Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses); adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land.

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs, prior to our early adoption of ASU No. 2017-01 on January 1, 2017, from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, the amortization of discounts and closing costs and mark to market foreign currency transaction adjustment are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

•

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

•

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate;

•

Amortization of discounts and closing costs. Discounts and closing costs related to debt investments are amortized over the term of the loan as an adjustment to interest income. This application results in income recognition that is different than the underlying contractual terms of the debt investments. We have excluded the amortization of discounts and closing costs related to our debt investments in our calculation of MFFO to more appropriately reflect the economic impact of our debt investments, as discounts will not be economically recognized until the loan is repaid and closing costs are essentially the same as acquisition fees and expenses on real estate (discussed below). We believe excluding these items provides investors with a useful supplemental metric that directly addresses core operating performance; and

•

Mark-to-market foreign currency transaction adjustments. The U.S. dollar is our functional currency. Transactions denominated in currency other than our functional currency are recorded upon initial recognition at the exchange rate on the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are remeasured at each reporting date into the foreign currency at the exchange rate on that date. In addition, we have entered into foreign currency collars that results in a foreign currency transaction adjustment. These amounts can increase or reduce net income. We exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain of our investments in undeveloped land. We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net income (loss), FFO and MFFO.

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the three months ended March 31, 2017 and 2016 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Three Months Ended March 31,
	2017			2016
Net loss attributable to common stockholders	$	(9,092	)	$	(4,894	)
Depreciation of real estate assets	8,507			6,475
Amortization of lease-related costs	6,093			4,533
Adjustments for noncontrolling interests - consolidated entities ⁽¹⁾	(120		)	(127		)
Adjustments for investment in unconsolidated entity ⁽²⁾	1,950			1,883
FFO attributable to common stockholders	7,338			7,870
Straight-line rent and amortization of above- and below-market leases	(1,819		)	(744		)
Amortization of discounts and closing costs	(69		)	—
Amortization of net premium/discount on bond and notes payable	11			9
Unrealized loss on derivative instruments	57			—
Mark-to-market foreign currency transaction loss, net	4,671			303
Adjustments for noncontrolling interests - consolidated entities ⁽¹⁾	(13		)	(4		)
Adjustments for investment in unconsolidated entity ⁽²⁾	(1,199		)	(1,150		)
MFFO attributable to common stockholders	8,977			6,284
Other capitalized operating expenses ⁽³⁾	(649		)	(605		)
Adjustments for noncontrolling interests - consolidated entities ⁽¹⁾	—			61
Adjusted MFFO attributable to common stockholders	$	8,328		$	5,740

_____________________

⁽¹⁾ Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO.

⁽²⁾ Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO for our equity investment in an unconsolidated joint venture.

⁽³⁾ Reflects real estate taxes, property insurance and financing costs that are capitalized with respect to certain of our investments in undeveloped land. During the periods in which we are incurring costs necessary to bring these investments to their intended use, certain normal recurring operating costs are capitalized in accordance with GAAP and not reflected in our net loss, FFO and MFFO.

FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we continue to lease up vacant space and acquire additional assets. We expect FFO, MFFO and Adjusted MFFO to decrease as a result of dispositions.

Distributions

Distributions declared, distributions paid and cash flows provided by operations were as follows for the first quarter of 2017 (in thousands, except per share amounts):



	Distribution Declared		Distributions Declared Per Share		Distributions Paid						Cash Flows Provided by Operations
Period	Distribution Declared		Distributions Declared Per Share		Cash		Reinvested		Total		Cash Flows Provided by Operations
First Quarter 2017	$	5,247	$	0.092	$	2,323	$	2,924	$	5,247	$	3,391

On March 9, 2017 , our board of directors authorized a distribution in the amount of $0.09246575 per share of common stock to stockholders of record as of the close of business on March 13, 2017 . We paid this distribution on March 16, 2017 and this was the only distribution declared and paid during the first quarter of 2017 .

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

For the three months ended March 31, 2017 , we paid aggregate distributions of $5.2 million , including $2.3 million of distributions paid in cash and $2.9 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the three months ended March 31, 2017 was $9.1 million and our cash flows provided by operations were $3.4 million . Our cumulative distributions paid and net loss attributable to common stockholders from inception through March 31, 2017 were $110.0 million and $66.6 million , respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with proceeds from debt financing of $18.7 million , proceeds from the dispositions of property of $13.7 million and cash provided by operations of $77.6 million . To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have fewer funds available for investment in real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC. There have been no significant changes to our policies during 2017 .

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Partial Real Estate Sale Subsequent to March 31, 2017

Park Highlands

On May 1, 2017, we sold an aggregate of 102 acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $18.4 million, excluding closing costs. The purchasers are not affiliated with us or our advisor.

Purchase and Sale Agreement for Real Estate Property Subsequent to March 31, 2017

50 Congress Street

On July 11, 2013, we, through an indirect wholly owned subsidiary, purchased an office building containing 179,872 rentable square feet located on approximately 0.4 acres of land in Boston, Massachusetts (“50 Congress Street”). On April 13, 2017, we entered into a purchase and sale agreement and escrow instructions for the sale of 50 Congress Street to purchasers unaffiliated with the us or our advisor. Pursuant to the purchase and sale agreement, the sale price for 50 Congress Street is $79.0 million, subject to certain concessions and credits that will be finalized at closing. There can be no assurance that we will complete the sale of 50 Congress Street. The purchasers would be obligated to purchase 50 Congress Street only after satisfaction of agreed upon closing conditions.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity, fund distributions and to fund the refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans and the acquisition of real estate securities. We are also exposed to the effects of foreign currency changes in Israel with respect to the 4.25% bonds issued to investors in Israel in March 2016. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes and foreign currency changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. In order to limit the effects of changes in foreign currency on our operations, we may utilize a variety of foreign currency hedging strategies such as cross currency swaps, forward contracts, puts or calls. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments. Additionally, certain of these strategies may cause us to fund a margin account periodically to offset changes in foreign currency rates which may also reduce the funds available for payments to holders of our common stock.

As of March 31, 2017 , we had entered into four foreign currency collars to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar. The foreign currency collars expire in August 2017 and have an aggregate U.S. Dollar notional amount of $250.0 million. The foreign currency collars consist of purchased call options to buy Israeli new Shekels ranging from 3.6686 to 3.7245 and sold put options to sell the Israeli new Shekels ranging from 3.7695 to 3.826. The foreign currency collars are intended to permit us to exchange, on the settlement date of the collars and net of the effect of the collars, $250.0 million for an amount of Israeli new Shekels ranging from 923.1 million to 948.4 million.

As of March 31, 2017 , we held 0.2 million Israeli new Shekels and 21.8 million Israeli new Shekels in cash and restricted cash, respectively. In addition, as of March 31, 2017 , we had bonds outstanding and the related interest payable in the amounts of 970.2 million Israeli new Shekels and 3.4 million Israeli new Shekels, respectively. Foreign currency exchange rate risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates. Based solely on the remeasurement for the three months ended March 31, 2017 , if foreign currency exchange rates were to increase or decrease by 10%, our net income would increase or decrease by approximately $23.9 million and $29.2 million for the same period, respectively. The foreign currency transaction income or loss as a result of the change in foreign currency exchange rates does not take into account any gains or losses on our foreign currency collars as a result of such change, which would reduce our foreign currency exposure.

We borrow funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of March 31, 2017 , the fair value of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was $273.8 million and the outstanding principal balance was $267.8 million . As of March 31, 2017 , excluding the KBS SOR (BVI) Holdings, Ltd. Series A Debentures, the fair value of our fixed rate debt was $32.7 million and the outstanding principal balance of our fixed rate debt was $31.3 million. The fair value estimate of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was calculated using the quoted bond price as of March 31, 2017 on the Tel Aviv Stock Exchange of 102.26 Israeli new Shekels. The fair value estimate of our fixed rate debt was calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated as of March 31, 2017 . As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting changes in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on variable rate debt and loans receivable would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of March 31, 2017 , we were exposed to market risks related to fluctuations in interest rates on $731.4 million of variable rate debt outstanding. Based on interest rates as of March 31, 2017 , if interest rates were 100 basis points higher during the 12 months ending March 31, 2018 , interest expense on our variable rate debt would increase by $7.3 million. As of March 31, 2017 , one-month LIBOR was 0.98278% and if the LIBOR index was reduced to 0% during the 12 months ending March 31, 2018 , interest expense on our variable rate debt would decrease by $7.1 million.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

The weighted-average interest rates of our fixed rate debt and variable rate debt as of March 31, 2017 were 4.3% and 3.1%, respectively. The interest rate and weighted-average interest rate represent the actual interest rate in effect as of March 31, 2017 (consisting of the contractual interest rate and the effect of contractual floor rates, if applicable), using interest rate indices as of March 31, 2017 where applicable.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 4.	Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents


PART II.	OTHER INFORMATION


Item 1.	Legal Proceedings

None.


Item 1A.	Risk Factors

Please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.


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


a)	During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.


b)	Not applicable.


c)	We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

Pursuant to the share redemption program there are several limitations on our ability to redeem shares:


•	Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.


•	During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.


•	We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

•

In 2017, we may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that we redeem less than $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) in a given fiscal quarter, any remaining excess capacity to redeem shares in such fiscal quarter will be added to our capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during succeeding fiscal quarters. The last $1.0 million of net proceeds from the dividend reinvestment plan during 2016 is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” with any excess funds being available to redeem shares not requested in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” during the December 2017 redemption date. We may increase or decrease this limit upon ten business days’ notice to stockholders. Our board of directors may approve an increase in this limit to the extent that we have received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors.

We may amend, suspend or terminate the program upon 10 business days’ notice to our stockholders. We may provide notice to our stockholders by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

Table of Contents


PART II.	OTHER INFORMATION (CONTINUED)


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During the three months ended March 31, 2017 , we fulfilled redemption requests eligible for redemption under our share redemption program and received in good order and funded redemptions under our share redemption program with the net proceeds from our dividend reinvestment plan and cash on hand. We redeemed shares pursuant to our share redemption program as follows:



Month	Total Number of Shares Redeemed	Average Price Paid Per Share ⁽¹⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2017	24,963	$	14.81	⁽²⁾
February 2017	1,500	$	14.81	⁽²⁾
March 2017	227,362	$	14.12	⁽²⁾
Total	253,825

_____________________

⁽¹⁾ On December 8, 2016, our board of directors adopted a tenth amended and restated share redemption program (the “Tenth Amended Share Redemption Program”). Pursuant to the Tenth Amended Share Redemption Program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence,” the price at which we will redeem shares is 95% of our most recent estimated value per share as of the applicable redemption date. The Tenth Amended Share Redemption Program was effective on December 30, 2016.

On December 8, 2016, our board of directors approved an estimated value per share of our common stock of $14.81, based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding as of September 30, 2016. The change in the redemption price became effective for the December 2016 redemption date and is effective until the estimated value per share is updated. We expect to engage KBS Capital Advisors and/ or an independent valuation firm to update our estimated value per share in December 2017.

⁽²⁾ We limit the dollar value of shares that may be redeemed under the program as described above. During the three months ended March 31, 2017 , we redeemed $3.6 million of common stock, which represented all redemption requests received in good order and eligible for redemption through the March 2017 redemption date, except for the $26.2 million of shares in connection with redemption requests not made upon a stockholder’s death, “qualifying disability” or “determination of incompetence,” which redemption requests will be fulfilled subject to the limitations described above. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2016 , we have $9.0 million available for redemptions during the remainder of 2017 , subject to the limitations described above.

In addition to the redemptions under the share redemption program described above, during the three months ended March 31, 2017 , we repurchased an additional 10,845 shares of our common stock at $14.07 per share for an aggregate price of $0.2 million.


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.


Item 5.	Other Information

None.

Table of Contents


PART II.	OTHER INFORMATION (CONTINUED)


Item 6.	Exhibits



Ex.		Description

3.1		Second Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed February 4, 2010

3.2		Second Amended and Restated Bylaws, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 17, 2016

4.1		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, Commission File No. 333-156633

4.2		Fifth Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2015

10.1		110 William Street Building Loan Agreement dated as of March 6, 2017, by and between 110 William Property Investors III, LLC and Morgan Stanley Mortgage Capital Holdings LLC

10.2		Consolidated, Amended and Restated Senior Loan Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of March 6, 2017, by and between 110 William Property Investors III, LLC and Morgan Stanley Mortgage Capital Holdings LLC

10.3		Consolidated, Amended and Restated Senior Loan Promissory Note dated March 6, 2017, by and between 110 William Property Investors III, LLC and Morgan Stanley Bank, N.A.

10.4		Senior Mezzanine Pledge and Security Agreement dated as of March 6, 2017, by and between 110 William Mezz III, LLC and Morgan Stanley Mortgage Capital Holdings LLC

10.5		Senior Mezzanine Promissory Note dated March 6, 2017, by and between 110 William Mezz III, LLC and Morgan Stanley Mortgage Capital Holdings LLC

10.6		Junior Mezzanine Pledge and Security Agreement dated as of March 6, 2017, by and between 110 William Junior Mezz III, LLC and Morgan Stanley Mortgage Capital Holdings LLC

10.7		Junior Mezzanine Promissory Note dated March 6, 2017, by and between 110 William Junior Mezz III, LLC and Morgan Stanley Mortgage Capital Holdings LLC

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

99.1		Tenth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed December 15, 2016

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		KBS STRATEGIC OPPORTUNITY REIT, INC.

Date:	May 11, 2017	By:	/S/ K EITH D. H ALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Date:	May 11, 2017	By:	/S/ J EFFREY K. W ALDVOGEL
			Jeffrey K. Waldvogel
			Chief Financial Officer, Treasurer and Secretary
			(principal financial officer)



ARTICLE I		DEFINITIONS; PRINCIPLES OF CONSTRUCTION	1

	Section 1.1	Definitions	1
	Section 1.2	Principles of Construction	47

ARTICLE II		GENERAL TERMS	47

	Section 2.1	Loan Commitment; Disbursement to Borrower	47
	2.1.1	Agreement to Lend and Borrow	47
	2.1.2	No Reborrowings	48
	2.1.3	The Note, Building Loan Mortgage and Loan Documents	48
	2.1.4	Use of Proceeds	48

	Section 2.2	Interest Rate	48
	2.2.1	Interest Rate	48
	2.2.2	Interest Calculation	48
	2.2.3	Determination of Interest Rate	49
	2.2.4	Default Rate	50
	2.2.5	Usury Savings	50
	2.2.6	Breakage Indemnity	50

	Section 2.3	Debt Service Payments	51
	2.3.1	Payments Generally	51
	2.3.2	Monthly Debt Service Payment	51
	2.3.3	Payment on Maturity Date	51
	2.3.4	Late Payment Charge	51
	2.3.5	Method and Place of Payment	52
	2.3.6	Administrative Fee	52

	Section 2.4	Prepayments	52
	2.4.1	Voluntary Prepayments	52
	2.4.2	Mandatory Prepayments	53
	2.4.3	Prepayments Made While an Event of Default Exhibits	54
	2.4.4	Allocation of Prepayments	54

	Section 2.5	Advances	55
	2.5.1	Future Leasing Expense Advances	55
	2.5.2	Future Cap-Ex Advances; CapEx Budget	57
	2.5.3	No Obligation to do Work	59
	2.5.4	Inspections	59
	2.5.5	Additional Inspection Provisions	59
	2.5.6	No Waiver	60
	2.5.7	Additional Conditions to Advances	60
	2.5.8	Forced Funding of Future Funding Amount	60
	2.5.9	Cancellation of Advances	61
	2.5.10	Spec Buildout Work	61
	2.5.11	Make Ready Work	62
	2.5.12	Future Advances Generally	63




	Section 2.6	Release of Property	63
	2.6.1	Release on PAyment in Full	63

	Section 2.7	Cash Management	64
	2.7.1	Clearing Account	64
	2.7.2	Cash Management Account	65
	2.7.3	Reserved	68
	2.7.4	Control of Accounts	68

	Section 2.8	Interest Rate Cap Agreement	69
	2.8.1	Interest Rate Cap Agreement	69
	2.8.2	Pledge and Collateral Assignment	70
	2.8.3	Covenants	70
	2.8.4	Replacement Interest Rate Cap Agreement	71

	Section 2.9	Extension Options	72
	2.9.1	Extension Options	72
	2.9.2	Extension Documentation	74

	Section 2.10	Change in Law; Taxes	74
	2.10.1	Increased Costs	74
	2.10.2	Other Taxes	75

	Section 2.11	Taxes	75

ARTICLE III		EXCULPATION	77

	Section 3.1	Exculpation	77

ARTICLE IV		REPRESENTATIONS AND WARRANTIES	81

	Section 4.1	Borrower Representations	81
	4.1.1	Organization	81
	4.1.2	Proceedings	81
	4.1.3	No Conflicts	81
	4.1.4	Litigation	82
	4.1.5	Agreements	82
	4.1.6	Title	82
	4.1.7	Solvency	82
	4.1.8	Full and Accurate Disclosure	83
	4.1.9	No Plan Assets	83
	4.1.10	Compliance	84
	4.1.11	Financial Information	84
	4.1.12	Condemnation	84
	4.1.13	Federal Reserve Regulations	84
	4.1.14	Utilities and Public Access	84
	4.1.15	Not a Foreign Person	85
	4.1.16	Separate Lots	85
	4.1.17	Assessments	85



	4.1.18	Enforceability	85
	4.1.19	No Prior Assignment	85
	4.1.20	Insurance	85
	4.1.21	Use of Property	85
	4.1.22	Certificate of Occupancy; Licenses	86
	4.1.23	Flood Zone	86
	4.1.24	Physical Condition	86
	4.1.25	Boundaries	86
	4.1.26	Leases	86
	4.1.27	Survey	87
	4.1.28	Principal Place of Business; State of Organization	87
	4.1.29	Filing and Recording Taxes	87
	4.1.30	Special Purpose Entity/Separateness	87
	4.1.31	Management Agreement; Leasing Agreement; Project Management Agreement	89
	4.1.32	Illegal Activity	89
	4.1.33	No Change in Facts or Circumstances; Disclosure	89
	4.1.34	Investment Company Act	89
	4.1.35	Embargoed Person	90
	4.1.36	Cash Management Account	90
	4.1.37	Filing of Returns; Payment of Taxes	91
	4.1.38	Section 22 Affidavit	91
	4.1.39	Reserved	91
	4.1.40	Environmental Representations	91
	4.1.41	Intentionally Omitted	92
	4.1.42	Labor Matters	92

	Section 4.2	Survival of Representations	92

ARTICLE V		BORROWER COVENANTS	92

	Section 5.1	Affirmative Covenants	92
	5.1.1	Existence; Compliance with Legal REquirements	92
	5.1.2	Taxes and Other Charges	93
	5.1.3	Litigation	94
	5.1.4	Access to Property	94
	5.1.5	Notice of Default	94
	5.1.6	Cooperate in Legal Proceedings	94
	5.1.7	Perform Loan Documents	94
	5.1.8	Award and Insurance Benefits	94
	5.1.9	Further Assurances	95
	5.1.10	Mortgage Taxes	95
	5.1.11	Financial Reporting	95
	5.1.12	Business and Operations	100
	5.1.13	Title to the Property	100



	5.1.14	Costs of Enforcement	100
	5.1.15	Estoppel Statement	101
	5.1.16	Reserved	101
	5.1.17	Loan Proceeds	101
	5.1.18	Performance by Borrower	101
	5.1.19	Confirmation of Representations	101
	5.1.20	No Joint Assessment	101
	5.1.21	Leasing Matters	101
	5.1.22	Alterations	103
	5.1.23	Operation of Property	103
	5.1.24	No Credits on Account of the Obligations	106
	5.1.25	Personal Property	106
	5.1.26	Appraisals	106
	5.1.27	Financing Statements	106
	5.1.28	Initially Omitted	106
	5.1.29	ERISA	107
	5.1.30	CapEx	107
	5.1.31	Municipal Violations	108
	5.1.32	Temporary Certificates of Occupancy	108
	5.1.33	EDC Space	108

	Section 5.2	Negative Covenants	108
	5.2.1	Operation of Property	108
	5.2.2	Liens	109
	5.2.3	Dissolution	110
	5.2.4	Change in Business	110
	5.2.5	Debt Cancellation	110
	5.2.6	Zoning	110
	5.2.7	No Joint Assessment	110
	5.2.8	Principal Place of Business and Organization	111
	5.2.9	ERISA	111
	5.2.10	Transfers	111
	5.2.11	Reserved	115
	5.2.12	Special Purpose Entity/Separateness	115
	5.2.13	Embargoed Person; OFAC	115

	Section 5.3	Reserved	116
	Section 5.4	Environmental Covenants	116
	Section 5.5	Labor Matters	117

ARTICLE VI		INSURANCE; CASUALTY; CONDEMNATION	118

	Section 6.1	Insurance	118
	6.1.2	Insurance Company	122

	Section 6.2	Casualty	123



	Section 6.3	Condemnation	123
	Section 6.4	Restoration	124

ARTICLE VII		RESERVE FUNDS	128

	Section 7.1	Tax and Insurance Escrow	128
	7.1.1	Tax and Insurance Escrow Funds	128
	7.1.2	Disbursements from Tax and Insurance Escrow Funds	129

	Section 7.2	Replacements and Replacement Reserve	129
	7.2.1	Replacement Reserve Funds	129
	7.2.2	Disbursements from Replacement Reserve Account	130
	7.2.3	Balance in the Replacement Reserve Account	130

	Section 7.3	Rollover Reserve	131
	7.3.1	Deposits to Rollover Reserve Funds	131
	7.3.2	Disbursements of Rollover Reserve Funds	132

	Section 7.4	Reserved	132
	Section 7.5	Reserved	132
	Section 7.6	Reserved	132
	Section 7.7	Excess Cash Reserve Funds	132
	Section 7.8	Reserve Funds, Generally	133
	Section 7.9	Distributions to Mezzanine Borrower	134

ARTICLE VIII		DEFAULTS	135

	Section 8.1	Event of Default	135
	Section 8.2	Remedies	139
	Section 8.3	Remedies Cumulative; Waivers	141

ARTICLE IX		SPECIAL PROVISIONS	142

	Section 9.1	Transfer of Loan	142
	Section 9.2	Cooperation	143
	Section 9.3	Servicer	144
	Section 9.4	Restructuring of Loan	145
	Section 9.5	Creation of Security Interest	146
	Section 9.6	Assignments and Participations	146

ARTICLE X		MISCELLANEOUS	147

	Section 10.1	Survival	147
	Section 10.2	Agent's Discretion	147
	Section 10.3	Governing Law	147
	Section 10.4	Modification, Waiver in Writing	149
	Section 10.5	Delay Not a Waiver	149
	Section 10.6	Notices	149
	Section 10.7	Trial by Jury	150
	Section 10.8	Headings	151
	Section 10.9	Severability	151



	Section 10.10	Preferences	151
	Section 10.11	Waiver of Notice	151
	Section 10.12	Remedies of Borrower	151
	Section 10.13	Expenses; Indemnity	152
	Section 10.14	Schedules Incorporated	153
	Section 10.15	Offsets, Counterclaims and Defenses	153
	Section 10.16	No Joint Venture of Partnership; No Third Party Beneficiaries	153
	Section 10.17	Publicity; Confidentiality	154
	Section 10.18	Waiver of Marshalling of Assets	154
	Section 10.19	Waiver of Counterclaim	154
	Section 10.20	Conflict; Construction of Documents; Reliance	154
	Section 10.21	Brokers and Financial Advisors	155
	Section 10.22	Prior Agreements	155
	Section 10.23	Cumulative Rights	155
	Section 10.24	Counterparts	155
	Section 10.25	Time Is of the Essence	156
	Section 10.26	Consent of Holder	156
	Section 10.27	Successor Laws	156
	Section 10.28	Performance by Borrower, Agent and Lender; Reliance on Third Parties	156
	Section 10.29	Acknowledgment and Consent to Bail-In of EEA Financial Institutions.	156
	Section 10.30	Intercreditor Agreement	157

ARTICLE XI		AGENT	157

	Section 11.1	Appointment and Authorization of Agent; Removal and Resignation of Agent	157
	Section 11.2	Reliance on Agent	158
	Section 11.3	Agent as a Lender	158


If to Agent:	Morgan Stanley Mortgage Capital Holdings LLC 1585 Broadway, 25 ^th Floor New York, New York 10036 Attention: George Kok


With a copy to:	Cadwalader, Wickersham & Taft LLP 227 West Trade Street, Suite 2400 Charlotte, North Carolina 28202 Attention: Holly Chamberlain, Esq.


If to Lenders:	At their respect lending offices as disclosed to Borrower and Agent


If to Borrower:	c/o Savanna 430 Park Avenue, 12th Floor New York, New York 10022 Attention: Valerie Kitay, General Counsel


With a copy to:	Hunton & Williams LLP 200 Park Avenue, 52 ^nd Floor New York, NY 10166 Attention: Laurie Grasso, Esq.


By:	/s/ Christopher Schlank Name: Christopher Schlank Title: Authorized Signatory


By:	/s/ Kristin Sansone Name: Kristin Sansone Title: Authorized Signatory


1.	An elevator violation issued February 4, 2016 with violation number 9027/564328.


3.	An elevator violation issued February 5, 2016 with violation number 9027/566853.


4.	An elevator violation issued November 14, 2016 with violation number 00335 for failure to correct defects on 2014 Cat 1 INSP/TST.


6.	An elevator violation issued January 1, 2017 with violation number 00272 for failure to correct defects on 2015 Cat 1 INSP/TST.


7.	An elevator violation issued January 3, 2017 with violation number 00273 for failure to correct defects on 2015 Cat 1 INSP/TST.


Mortgagee:	The Equitable Life Assurance Society of the United States


Assignor:	The Equitable Life Assurance Society of the United States


Assignee:	LaSalle Bank National Association, as Trustee for the Holders of TrizecHahn Office Properties Trust Commercial Mortgage Pass-Through Certificates, Series 2001-TZH


Mortgagor:	Lehman Brothers Holdings Inc. d/b/a Lehman Capital, a division of Lehman Brothers Holdings Inc.


Assignee:	LaSalle Bank National Association, in its capacity as Trustee for the Registered Holders of LB Commercial Mortgage Trust 2007-C3, Commercial Mortgage Pass-Through Certificates, Series 2007-C3


Assignor:	Bank of America, N.A., a national banking association (successor by merger to LaSalle Bank National Association, a national banking association), as Trustee for the Registered Holders of LB Commercial Mortgage Trust 2007-C3, Commercial Mortgage Pass-Through Certificates, Series 2007-C3


Assignee:	U.S. Bank National Association, a national banking association organized and 3 existing under the laws of the United States of America, not in its individual capacity but solely in its capacity as Trustee for the Registered Holders of LB Commercial Mortgage Trust 2007-C3, Commercial Mortgage Pass-Through Certificates Series 2007-C3


Assignee:	UBS Real Estate Securities Inc., a Delaware corporation


Mortgagor:	110 William, LLC, a Delaware limited liability company


Assignee:	U.S. Bank National Association, as Trustee for the Registered Holders of UBS-Barclays Commercial Mortgage Trust 2012-C2, Commercial Mortgage Pass-Through Certificates, Series 2012-C2


1.	I have reviewed this quarterly report on Form 10-Q of KBS Strategic Opportunity REIT, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and