Table of Contents


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 September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-54382
______________________________________________________
 
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):
Large Accelerated Filer
 
¨
 
Accelerated Filer
 
¨
Non-Accelerated Filer
 
x   (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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 November 9, 2017 , there were 52,107,629 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.

Table of Contents

KBS STRATEGIC OPPORTUNITY REIT, INC.
FORM 10-Q
September 30, 2017
INDEX  
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.

1
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)
 
 
September 30, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate held for investment, net
 
$
1,045,671

 
$
1,060,098

Real estate held for sale, net
 
—

 
46,933

Real estate equity securities
 
47,022

 
—

Real estate debt securities, net
 
17,642

 
4,683

Total real estate and real estate-related investments, net
 
1,110,335

 
1,111,714

Cash and cash equivalents
 
97,487

 
40,432

Restricted cash
 
16,086

 
24,018

Investments in unconsolidated joint ventures
 
58,329

 
75,849

Rents and other receivables, net
 
30,252

 
27,521

Above-market leases, net
 
395

 
618

Assets related to real estate held for sale, net
 
—

 
1,488

Prepaid expenses and other assets
 
31,469

 
28,476

Total assets
 
$
1,344,353

 
$
1,310,116

Liabilities and equity
 
 
 
 
Notes and bonds payable, net
 
 
 
 
Notes and bonds payable related to real estate held for investment, net
 
$
990,248

 
$
919,174

Notes payable related to real estate held for sale, net
 
—

 
31,450

Total notes and bonds payable, net
 
990,248

 
950,624

Accounts payable and accrued liabilities
 
27,473

 
26,624

Due to affiliate
 
33

 
55

Below-market leases, net
 
3,751

 
6,029

Liabilities related to real estate held for sale, net
 
—

 
522

Other liabilities
 
21,904

 
18,095

Redeemable common stock payable
 
11,386

 
12,617

Total liabilities
 
1,054,795

 
1,014,566

Commitments and contingencies (Note 14 )
 

 

Redeemable common stock
 
52,000

 
—

Equity
 
 
 
 
KBS Strategic Opportunity REIT, Inc. stockholders' equity
 
 
 
 
Preferred stock, $.01 par value per share; 10,000,000 shares authorized, no shares issued and outstanding
 
—

 
—

Common stock, $.01 par value per share; 1,000,000,000 shares authorized, 56,795,632  and 56,775,767  shares issued and outstanding as of September 30, 2017  and December 31, 2016 , respectively
 
568

 
568

Additional paid-in capital
 
405,220

 
455,373

Cumulative distributions and net losses
 
(173,964
)
 
(162,289
)
Accumulated other comprehensive income
 
3,714

 
—

Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
235,538

 
293,652

Noncontrolling interests
 
2,020

 
1,898

Total equity
 
237,558

 
295,550

Total liabilities and equity
 
$
1,344,353

 
$
1,310,116

See accompanying condensed notes to consolidated financial statements.

2
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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
27,850

 
$
29,229

 
$
90,200

 
$
76,646

Tenant reimbursements
 
6,094

 
5,902

 
18,188

 
15,484

Other operating income
 
944

 
1,002

 
3,484

 
2,580

Interest income from real estate debt securities
 
511

 
—

 
1,271

 
—

Dividend income from real estate equity securities
 
1,015

 
—

 
1,505

 
—

Interest income from real estate loan receivable
 
—

 
—

 
—

 
3,655

Total revenues
 
36,414

 
36,133

 
114,648

 
98,365

Expenses:
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
11,431

 
10,932

 
33,638

 
29,755

Real estate taxes and insurance
 
4,780

 
4,516

 
14,932

 
12,419

Asset management fees to affiliate
 
2,800

 
2,639

 
8,404

 
6,932

Real estate acquisition fees to affiliate
 
—

 
1,690

 
—

 
2,964

Real estate acquisition fees and expenses
 
—

 
274

 
—

 
542

General and administrative expenses
 
1,170

 
1,337

 
4,291

 
4,172

Foreign currency transaction  loss , net
 
4,356

 
6,639

 
11,454

 
4,602

Depreciation and amortization
 
13,228

 
14,337

 
43,136

 
37,436

Interest expense
 
9,618

 
7,992

 
29,327

 
20,354

Total expenses
 
47,383

 
50,356

 
145,182

 
119,176

Other  income (loss):
 
 
 
 
 
 
 
 
Income from unconsolidated joint venture
 
—

 
—

 
1,869

 
—

Other interest income
 
340

 
7

 
536

 
22

Equity in loss  of unconsolidated joint ventures
 
(2,152
)
 
(791
)
 
(3,928
)
 
(1,139
)
Gain on sale of real estate
 
2,239

 
—

 
36,267

 
—

Total other  income (loss) , net
 
427

 
(784
)
 
34,744

 
(1,117
)
Net (loss) income
 
(10,542
)
 
(15,007
)
 
4,210

 
(21,928
)
Net loss  attributable to noncontrolling interests
 
8

 
56

 
10

 
124

Net  (loss) income  attributable to common stockholders
 
$
(10,534
)
 
$
(14,951
)
 
$
4,220

 
$
(21,804
)
Net (loss) income  per common share, basic and diluted
 
$
(0.19
)
 
$
(0.25
)
 
$
0.07

 
$
(0.37
)
Weighted-average number of common shares outstanding, basic and diluted
 
56,643,160

 
58,642,752

 
56,712,752

 
58,676,546

See accompanying condensed notes to consolidated financial statements.

3
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net (loss) income
 
$
(10,542
)
 
$
(15,007
)
 
$
4,210

 
$
(21,928
)
Other comprehensive income :
 
 
 
 
 
 
 
 
Unrealized gain on real estate securities
 
2,865

 
—

 
3,714

 
—

Total other comprehensive income
 
2,865

 
—

 
3,714

 
—

Total comprehensive  (loss) income
 
(7,677
)
 
(15,007
)
 
7,924

 
(21,928
)
Total comprehensive loss  attributable to noncontrolling interests
 
8

 
56

 
10

 
124

Total comprehensive (loss) income  attributable to common stockholders
 
$
(7,669
)
 
$
(14,951
)
 
$
7,934

 
$
(21,804
)
See accompanying condensed notes to consolidated financial statements.

4
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 Nine Months Ended September 30, 2017
(unaudited)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions and Net Losses
 
Accumulated Other Comprehensive Income
 
Total Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
Shares
 
Amounts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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  income (loss)
—

 
—

 
—

 
4,220

 
—

 
4,220

 
(10
)
 
4,210

Other comprehensive income
—

 
—

 
—

 
—

 
3,714

 
3,714

 
—

 
3,714

Issuance of common stock
585,192

 
6

 
8,660

 
—

 
—

 
8,666

 
—

 
8,666

Transfers to  redeemable common stock
—

 
—

 
(50,769
)
 
—

 
—

 
(50,769
)
 
—

 
(50,769
)
Redemptions of common stock
(565,327
)
 
(6
)
 
(8,044
)
 
—

 
—

 
(8,050
)
 
—

 
(8,050
)
Distributions declared
—

 
—

 
—

 
(15,895
)
 
—

 
(15,895
)
 
—

 
(15,895
)
Noncontrolling interests contributions
—

 
—

 
—

 
—

 
—

 
—

 
150

 
150

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(18
)
 
(18
)
Balance , September 30, 2017
56,795,632

 
$
568

 
$
405,220

 
$
(173,964
)
 
$
3,714

 
$
235,538

 
$
2,020

 
$
237,558

See accompanying condensed notes to consolidated financial statements.

5
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)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cash Flows from Operating Activities:
 
 
 
 
Net  income (loss)
 
$
4,210

 
$
(21,928
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Loss due to property damages
 
668

 
2,017

Equity in loss  of unconsolidated joint ventures
 
3,928

 
1,139

Depreciation and amortization
 
43,136

 
37,436

Gain on real estate
 
(36,267
)
 
—

Unrealized loss on interest rate caps
 
102

 
—

Deferred rent
 
(1,678
)
 
(2,020
)
Bad debt expense
 
66

 
488

Amortization of above- and below-market leases, net
 
(2,253
)
 
(1,375
)
Amortization of deferred financing costs
 
3,578

 
2,908

Interest accretion on real estate debt securities
 
(456
)
 
—

Net amortization of discount and (premium) on bond and notes payable
 
36

 
28

Foreign currency transaction  loss , net
 
11,454

 
4,602

Changes in assets and liabilities:
 
 
 
 
Rents and other receivables
 
(2,245
)
 
(2,656
)
Prepaid expenses and other assets
 
(6,368
)
 
(7,255
)
Accounts payable and accrued liabilities
 
1,575

 
3,950

Due to affiliates
 
(22
)
 
(8
)
Other liabilities
 
261

 
2,700

Net cash provided by  operating activities
 
19,725

 
20,026

Cash Flows from Investing Activities:
 
 
 
 
Acquisitions of real estate
 
(165,465
)
 
(293,831
)
Improvements to real estate
 
(28,775
)
 
(21,466
)
Proceeds from sales of real estate, net
 
130,580

 
—

Principal proceeds from assignment of real estate loan receivable
 
—

 
27,850

Insurance proceeds received for property damages
 
744

 
1,767

Purchase of interest rate cap
 
(107
)
 
—

Purchase of foreign currency option
 
(3,434
)
 
—

Proceeds from termination of foreign currency collars
 
6,557

 
—

Investment in unconsolidated joint venture
 
—

 
(2,820
)
Distributions of capital from unconsolidated joint ventures
 
59,157

 
—

Investment in real estate securities
 
(43,308
)
 
—

Investment in real estate debt securities
 
(12,514
)
 
—

Proceeds for future development obligations
 
1,367

 
—

Funding of development obligations
 
(926
)
 
(2,726
)
Net cash used in  investing activities
 
(56,124
)
 
(291,226
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes and bonds payable
 
176,777

 
462,178

Principal payments on notes and bonds payable
 
(73,907
)
 
(74,707
)
Payments of deferred financing costs
 
(2,339
)
 
(10,641
)
Payments to redeem common stock
 
(8,050
)
 
(31,454
)
Payments of prepaid other offering costs
 
(376
)
 
(168
)
Distributions paid
 
(7,229
)
 
(6,948
)
Noncontrolling interests contributions
 
150

 
769

Distributions to noncontrolling interests
 
(18
)
 
(80
)
Acquisitions of noncontrolling interests
 
—

 
(37,986
)
Other financing proceeds, net
 
—

 
693

Net cash  provided by  financing activities
 
85,008

 
301,656

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
514

 
3,711

Net increase  in cash, cash equivalents and restricted cash
 
49,123

 
34,167

Cash, cash equivalents and restricted cash, beginning of period
 
64,450

 
28,865

Cash, cash equivalents and restricted cash, end of period
 
$
113,573

 
$
63,032

See accompanying condensed notes to consolidated financial statements.

6
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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, 2017 (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 September 30, 2017 , the Company had sold 6,620,362  shares of common stock under its dividend reinvestment plan for gross offering proceeds of $74.0 million . Also, as of September 30, 2017 , the Company had redeemed 6,705,949 shares for $85.0 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.

7
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)
September 30, 2017
(unaudited)

As of September 30, 2017 , the Company consolidated 20 real estate investments comprised of 11 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 with approximately 1,100 developable acres, and owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and an investment in real estate equity 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 and the addition of an accounting policy with respect to real estate equity securities. 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 and nine months ended September 30, 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.
Real Estate Equity Securities
The Company determines the appropriate classification for real estate equity securities at acquisition (on the trade date) and reevaluates such designation as of each balance sheet date. As of September 30, 2017 , the Company classified its investment in real estate equity securities as available-for-sale as the Company intends to hold the securities for the purpose of collecting dividend income and for longer term price appreciation. These investments are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Unrealized gains and losses are reported in accumulated other comprehensive income (loss). Upon the sale of a security, the previously recognized unrealized gain (loss) would be reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) recognized in earnings. Dividend income is recognized on an accrual basis based on eligible shares as of the ex-dividend date.

8
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)
September 30, 2017
(unaudited)

Any non-temporary decline in the market value of an available-for-sale real estate equity security below cost results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the real estate security is established. When a real estate equity security is impaired, the Company considers whether it has the ability and intent to hold the investment for a time sufficient to allow for any anticipated recovery in market value and considers whether evidence indicating the cost of the investment being recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to period end and forecasted performance of the investee.
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. During the nine months ended September 30, 2017 , the Company disposed of one office property. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented.
Redeemable Common Stock
On December 8, 2016, the Company adopted a tenth amended and restated share redemption program (the “Tenth Amended Share Redemption Program”) that may enable stockholders to sell their shares to the Company in limited circumstances. 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.
Pursuant to the share redemption program there are several limitations on the Company’s 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), the Company may not redeem shares until the stockholder has held the shares for one year.
• The Company 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 the Company redeems 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 the Company’s 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 the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence.” The share redemption plan also provides that, to the extent that in the last month of any calendar year the amount of redemption requests in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” is less than the $1.0 million reserved for such redemptions under the share redemption plan, any excess funds may be used to redeem shares not requested in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” during such month. The Company may increase or decrease this limit upon ten business days’ notice to stockholders.  The Company’s board of directors may approve an increase in this limit to the extent that the Company has received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors.

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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)
September 30, 2017
(unaudited)

• During any calendar year, the Company may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
• The Company has 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.
The Company’s board of directors may amend, suspend or terminate the share redemption program with ten business days’ notice to its stockholders.
On September 14, 2017 , the Company commenced a self-tender offer (the “SOR Offer”) for up to 3,553,660 shares of common stock at a price of $14.07 per share, or approximately $50.0 million of shares. On October 18, 2017 , the Company increased the number of shares accepted for payment in the SOR Offer by up to 1,135,912 shares at a price of $14.07 per share, or approximately $16.0 million of shares. On October 23, 2017 , the Company accepted for purchase 4,688,671 shares for an aggregate cost of $66.0 million , excluding fees and expenses related to the SOR Offer.
Because of the SOR Offer, the Tenth Amended Share Redemption Program was suspended from September 29, 2017 through October 31, 2017 , meaning no redemptions were made in September or October (including those requested following a stockholder’s death, “qualifying disability” or “determination of incompetence”). The Company cancelled all outstanding redemption requests under the SRP as of the commencement of the SOR Offer and was not accepting any redemption requests under the SRP during the term of the SOR Offer.
The Company records amounts that are redeemable under the share redemption program and the SOR Offer as redeemable common stock in its consolidated balance sheets because the shares are redeemable at the option of the holder to the extent there is sufficient capacity under the share redemption program and therefore their redemption is outside the control of the Company. However, because the amounts that can be redeemed will be determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company presents the net proceeds from the current year and prior year DRP, net of current year redemptions, as redeemable common stock in its consolidated balance sheets.
The Company classifies as liabilities financial instruments that represent a mandatory obligation of the Company to redeem shares. The Company’s redeemable common shares are contingently redeemable at the option of the holder. When the Company determines it has a mandatory obligation to repurchase shares under the share redemption program, it will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.
The Company limits the dollar value of shares that may be redeemed under the program as described above. The Company recorded $11.4 million of other liabilities on the Company’s balance sheet as of September 30, 2017 related to shares submitted for tender under the SOR Offer as of September 30, 2017 . The Company recorded $12.6 million of other liabilities on the Company’s balance sheet as of December 31, 2016 related to unfulfilled redemption requests received in good order under the share redemption program as of December 31, 2016 . As of September 30, 2017 , the Company recorded $52.0 million of redeemable common stock consisting of (i) $38.6 million of the amount available to tender related to the SOR Offer (excludes shares already submitted for tender as of September 30, 2017 ), (ii) $4.7 million available for all redemptions in the remainder of 2017, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence” based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2016 and (iii) $8.7 million available for all redemptions in 2018, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence” based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2017.

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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)
September 30, 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 and nine months ended September 30, 2017 and 2016 .
Distributions declared per share were $0.09452055 and $0.28047945 during the three and nine months ended September 30, 2017 , respectively, and $0.09426230 and $0.28073770 during the three and nine months ended September 30, 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. The primary source of revenue for the Company is generated through leasing arrangements, which are excluded from this standard. The Company’s revenues that may be impacted by this standard primarily include other operating income, sales of real estate, including land parcels and operating properties, and other ancillary income earned at its properties. In 2016, other operating income and other ancillary income were approximately 5% of consolidated revenue. The Company is in the process of evaluating how this standard will impact sales of real estate. The Company continues to evaluate the impact that the standard will have on its consolidated financial statements. The Company expects to adopt the standard using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the adoption.

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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)
September 30, 2017
(unaudited)

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 supersedes the guidance to classify equity securities with readily determinable fair values into different categories (that is, trading or available-for-sale) and requires equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income. 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 of certain provisions of the standard is permitted for financial statements that have not been previously issued. Upon adoption, the Company will be required to record net unrealized gain or loss on real estate equity securities in earnings and record a cumulative effect adjustment to the balance sheet.
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.

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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)
September 30, 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); and (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.

13
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)
September 30, 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 September 30, 2017 , the Company owned 11 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 September 30, 2017 , these properties were 83% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 97% occupied. The Company also owned two investments in undeveloped land with approximately 1,100 developable acres. The following table summarizes the Company’s real estate held for investment as of September 30, 2017 and December 31, 2016 , respectively (in thousands):
 
 
September 30, 2017
 
December 31, 2016
Land
 
$
280,254

 
$
312,623

Buildings and improvements
 
847,773

 
814,347

Tenant origination and absorption costs
 
49,210

 
46,557

Total real estate, cost
 
1,177,237

 
1,173,527

Accumulated depreciation and amortization
 
(131,566
)
 
(113,429
)
Total real estate, net
 
$
1,045,671

 
$
1,060,098


14
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)
September 30, 2017
(unaudited)

The following table provides summary information regarding the Company’s real estate held for investment as of September 30, 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 (1)
 
03/25/2011
 
Atlanta
 
GA
 
Office
 
$
2,234

 
$
6,914

 
$
—

 
$
9,148

 
$
(2,584
)
 
$
6,564

 
100.0
%
Iron Point Business Park (1)
 
06/21/2011
 
Folsom
 
CA
 
Office
 
2,671

 
19,547

 
—

 
22,218

 
(5,648
)
 
16,570

 
100.0
%
Richardson Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Palisades Central I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
1,037

 
10,278

 
—

 
11,315

 
(2,202
)
 
9,113

 
90.0
%
Palisades Central II
 
11/23/2011
 
Richardson
 
TX
 
Office
 
810

 
17,540

 
—

 
18,350

 
(4,111
)
 
14,239

 
90.0
%
Greenway I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
561

 
2,309

 
—

 
2,870

 
(791
)
 
2,079

 
90.0
%
Greenway III
 
11/23/2011
 
Richardson
 
TX
 
Office
 
702

 
3,802

 
559

 
5,063

 
(1,736
)
 
3,327

 
90.0
%
Undeveloped Land
 
11/23/2011
 
Richardson
 
TX
 
Undeveloped Land
 
3,134

 
—

 
—

 
3,134

 
—

 
3,134

 
90.0
%
Total Richardson Portfolio
 
 
 
 
 
 
 
 
 
6,244

 
33,929

 
559

 
40,732

 
(8,840
)
 
31,892

 
 
Park Highlands (2)
 
12/30/2011
 
North Las Vegas
 
NV
 
Undeveloped Land
 
33,594

 
—

 
—

 
33,594

 
—

 
33,594

 
(2)  

Bellevue Technology
Center (1)
 
07/31/2012
 
Bellevue
 
WA
 
Office
 
25,506

 
56,409

 
1,767

 
83,682

 
(10,418
)
 
73,264

 
100.0
%
Powers Ferry Landing
East (1)
 
09/24/2012
 
Atlanta
 
GA
 
Office
 
1,643

 
7,642

 
—

 
9,285

 
(2,505
)
 
6,780

 
100.0
%
1800 West Loop (1)
 
12/04/2012
 
Houston
 
TX
 
Office
 
8,360

 
60,481

 
4,176

 
73,017

 
(14,100
)
 
58,917

 
100.0
%
West Loop I & II (1)
 
12/07/2012
 
Houston
 
TX
 
Office
 
7,300

 
32,867

 
1,662

 
41,829

 
(7,024
)
 
34,805

 
100.0
%
Burbank Collection
 
12/12/2012
 
Burbank
 
CA
 
Retail
 
4,175

 
12,551

 
725

 
17,451

 
(2,198
)
 
15,253

 
90.0
%
Austin Suburban Portfolio (3)
 
03/28/2013
 
Austin
 
TX
 
Office
 
8,288

 
69,478

 
836

 
78,602

 
(10,851
)
 
67,751

 
100.0
%
Westmoor Center (1)
 
06/12/2013
 
Westminster
 
CO
 
Office
 
10,058

 
73,283

 
5,083

 
88,424

 
(15,050
)
 
73,374

 
100.0
%
Central Building
 
07/10/2013
 
Seattle
 
WA
 
Office
 
7,015

 
27,055

 
1,428

 
35,498

 
(4,701
)
 
30,797

 
100.0
%
1180 Raymond
 
08/20/2013
 
Newark
 
NJ
 
Apartment
 
8,292

 
38,049

 
—

 
46,341

 
(4,938
)
 
41,403

 
100.0
%
Park Highlands II
 
12/10/2013
 
North Las Vegas
 
NV
 
Undeveloped Land
 
24,692

 
—

 
—

 
24,692

 
—

 
24,692

 
100.0
%
Maitland Promenade II (1)
 
12/18/2013
 
Orlando
 
FL
 
Office
 
3,434

 
25,033

 
3,313

 
31,780

 
(5,492
)
 
26,288

 
100.0
%
Plaza Buildings (1)
 
01/14/2014
 
Bellevue
 
WA
 
Office
 
53,040

 
139,383

 
7,190

 
199,613

 
(23,723
)
 
175,890

 
100.0
%
424 Bedford
 
01/31/2014
 
Brooklyn
 
NY
 
Apartment
 
8,860

 
25,615

 
—

 
34,475

 
(2,616
)
 
31,859

 
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

 
88,125

 
7,663

 
131,873

 
(7,871
)
 
124,002

 
100.0
%
Crown Pointe
 
02/14/2017
 
Dunwoody
 
GA
 
Office
 
22,590

 
57,815

 
5,855

 
86,260

 
(2,807
)
 
83,453

 
100.0
%
125 John Carpenter
 
09/15/2017
 
Irving
 
TX
 
Office
 
2,755

 
73,597

 
8,953

 
85,305

 
(200
)
 
85,105

 
100.0
%
 
 
 
 
 
 
 
 
 
 
$
280,254

 
$
847,773

 
$
49,210

 
$
1,177,237

 
$
(131,566
)
 
$
1,045,671

 
 
_____________________
(1) On November 8, 2017 , the Company sold this property. See note 15 , “Subsequent Events - Singapore Transaction ” for more information.
(2) 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.
(3) On November 8, 2017 , the Company sold two of the three office properties, Westech 360 and Great Hills Plaza. See note 15 , “Subsequent Events - Singapore Transaction ” for more information.

15
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)
September 30, 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 September 30, 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 14.7  years with a weighted-average remaining term of 3.8  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 $7.3 million and $7.2 million as of September 30, 2017 and December 31, 2016 , respectively.
During the nine months ended September 30, 2017 and 2016 , the Company recognized deferred rent from tenants of $1.7 million and $2.0 million , respectively, net of lease incentive amortization. As of September 30, 2017 and December 31, 2016 , the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $27.0 million and $26.1 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 September 30, 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 September 30, 2017 , the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):
October 1, 2017 through December 31, 2017
$
25,468

2018
99,939

2019
87,116

2020
71,983

2021
55,922

Thereafter
137,582

 
$
478,010

As of September 30, 2017 , the Company’s commercial real estate properties were leased to approximately 600 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
Insurance Carriers & Related Activities
 
35
 
$
11,256

 
10.6
%
Computer System Design & Programming
 
55
 
11,246

 
10.6
%
 
 
 
 
$
22,502

 
21.2
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of September 30, 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.
No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

16
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)
September 30, 2017
(unaudited)

Geographic Concentration Risk
As of September 30, 2017 , the Company’s real estate investments in Washington and Texas represented 30.0% and 21.0% , respectively, of the Company’s total assets.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Washington 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 Real Estate Land Sale
On May 1, 2017, the Company sold an aggregate of 102 developable acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $17.4 million , excluding closing costs. The purchasers are not affiliated with the Company or the Advisor. The Company recognized a gain on sale based on the percentage of completion method due to the Company’s continuing development obligations to the purchasers. The Company recognized a gain on sale of $5.2 million related to the land sale, which is net of deferred profit of $2.6 million . In addition, the Company deferred $1.7 million related to proceeds received from the purchasers and another developer for the value of land that was contributed to a master association which is consolidated by the Company.
Recent Sale of Partial Interest of Real Estate
On July 6, 2017, KBS SOR Properties, LLC, an indirect wholly owned affiliate of the Company, entered into (i) a Common Unit Purchase and Sale Agreement and Escrow Instructions with Migdal Insurance Company LTD., Migdal-Makefet Pension and Provident Funds LTD. and affiliates (the “Migdal Members”) (the “Purchase and Sale Agreement”), (ii) the Amended and Restated Limited Liability Company Agreement of KBS SOR Acquisition XXIX, LLC (the “Joint Venture Agreement”), (iii) an Investment Agreement with Migdal Members and Willowbrook Asset Management LLC, which is owned by Keith D. Hall and Peter McMillan III, who are principals of the Advisor and directors and officers of the Company (“WBAM”), and (iv) a waiver letter agreement with the Advisor (the “Waiver Agreement”).
Pursuant to the Purchase and Sale Agreement, on July 6, 2017, KBS SOR Properties, LLC sold a 45% equity interest in an entity that owns an office building containing 284,751 rentable square feet located on approximately 0.35 acres of land in San Francisco, California (“353 Sacramento”) for approximately $39.1 million (the “353 Sacramento Transaction”) to the Migdal Members, third parties unaffiliated with the Company or the Advisor. The sale resulted in 353 Sacramento being owned by a joint venture (the “353 Sacramento Joint Venture”) in which the Company indirectly owns 55% of the equity interests and the Migdal Members indirectly own 45% in the aggregate of the equity interests.
The Company exercises significant influence over the operations, financial policies and decision making with respect to the 353 Sacramento Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 353 Sacramento Joint Venture under the equity method of accounting. Income, losses, contributions and distributions are generally allocated based on the members’ respective equity interests.
Therefore, as of July 6, 2017, the Company deconsolidated 353 Sacramento and accounted for this investment as an unconsolidated joint venture under the equity method of accounting. The Company recognized a gain on sale of $1.7 million related to the sale and deconsolidation. See note 12 , “Investment in Unconsolidated Joint Ventures” for a further discussion on the Company’s investment in the 353 Sacramento Joint Venture.

17
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)
September 30, 2017
(unaudited)

Recent Acquisitions
Crown Pointe
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. 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 and nine months ended September 30, 2017 , the Company recognized $2.3 million and $6.1 million , respectively, of total revenues and $1.9 million and $4.7 million , respectively, of operating expenses from this property.
125 John Carpenter
On September 15, 2017, the Company, through an indirect wholly owned subsidiary, acquired an office property consisting of two office buildings containing an aggregate of 442,039 rentable square feet in Irving, Texas (“125 John Carpenter”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of 125 John Carpenter was $82.8 million plus $0.5 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $2.7 million to land, $73.6 million to building and improvements, $9.0 million to tenant origination and absorption costs and $2.1 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 6.9 years for tenant origination and absorption costs and 5.2 years for below-market lease liabilities. During the three and nine months ended September 30, 2017 , the Company recognized $0.5 million of total revenues and $0.3 million of operating expenses from this property.
4.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES
As of September 30, 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
 
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Cost
 
$
49,210

 
$
46,557

 
$
1,330

 
$
1,808

 
$
(6,015
)
 
$
(9,189
)
Accumulated Amortization
 
(21,621
)
 
(22,327
)
 
(935
)
 
(1,190
)
 
2,264

 
3,160

Net Amount
 
$
27,589

 
$
24,230

 
$
395

 
$
618

 
$
(3,751
)
 
$
(6,029
)

18
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)
September 30, 2017
(unaudited)

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 and nine months ended September 30, 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
September 30,
 
For the Three Months Ended
September 30,
 
For the Three Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Amortization
 
$
(2,190
)
 
$
(3,068
)
 
$
(62
)
 
$
(119
)
 
$
278

 
$
1,045

 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Nine Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Amortization
 
$
(8,268
)
 
$
(7,765
)
 
$
(229
)
 
$
(359
)
 
$
2,482

 
$
1,734

Additionally, as of September 30, 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 $5.6 million and $6.3 million , respectively.  During the three and nine months ended September 30, 2017 , the Company recorded amortization expense of $0.2 million and $0.7 million , respectively, related to tax abatement intangible assets.  During the three and nine months ended September 30, 2016 , the Company recorded amortization expense of $0.2 million and $0.7 million , respectively, related to tax abatement intangible assets.
5.
REAL ESTATE EQUITY SECURITIES
During the nine months ended September 30, 2017 , the Company purchased 3,603,189 shares of common stock of Whitestone REIT (Ticker: WSR) for an aggregate purchase price of $43.3 million , including $0.4 million of acquisition fees paid to the Advisor. The Company's investment in real estate equity securities is classified as available-for-sale as the Company intends to hold the securities for the purpose of collecting dividend income and for longer term price appreciation. These investments are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Unrealized gains and losses are reported in accumulated other comprehensive income (loss). The following summarizes the activity related to real estate equity securities for the nine months ended September 30, 2017 (in thousands): 
 
 
Amortized Cost Basis
 
Unrealized Gains
 
Total
Real estate equity securities - December 31, 2016
 
$
—

 
$
—

 
$
—

Purchase of real estate equity securities
 
42,845

 
—

 
42,845

Acquisition fee to affiliate and purchase commission
 
463

 
—

 
463

Unrealized change in market value of real estate equity securities
 
—

 
3,714

 
3,714

Real estate equity securities -  September 30, 2017
 
$
43,308

 
$
3,714

 
$
47,022

During the three and nine months ended September 30, 2017 , the Company recognized $1.0 million and $1.5 million , respectively, of dividend income from real estate equity securities.

19
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)
September 30, 2017
(unaudited)

6.
REAL ESTATE DEBT SECURITIES
As of September 30, 2017 , the Company owned an investment in real estate debt securities. The Company’s investment in real estate debt securities is classified as held to maturity, as the Company has the intent and ability to hold its investment until maturity, and it is not more likely than not that the Company would be required to sell its investment before recovery of the Company’s amortized cost basis.  The information for those real estate debt securities as of September 30, 2017 and December 31, 2016 is set forth below (in thousands):
Debt Securities Name
 
Dates Acquired
 
Debt Securities Type
 
Outstanding Principal Balance as of
September 30, 2017 (1)
 
Book Value as of
September 30, 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 /
03/30/2017 /
05/12/2017
 
Series B Preferred Units
 
$
17,500

 
$
17,642

 
$
4,683

 
9.0
%
 
11.1
%
 
10/28/2019
_____________________
(1) Outstanding principal balance as of September 30, 2017 represents principal balance outstanding under the 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 September 30, 2017 .
The following summarizes the activity related to real estate debt securities for the nine months ended September 30, 2017 (in thousands): 
Real estate debt securities - December 31, 2016
 
$
4,683

Face value of additional real estate debt securities acquired
 
12,500

Deferred interest receivable and interest accretion
 
218

Closing costs
 
3

Accretion of commitment fee, net of closing costs
 
238

Real estate debt securities - September 30, 2017
 
$
17,642

For the three and nine months ended September 30, 2017 , interest income from real estate debt securities consisted of the following (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2017
Contractual interest income
 
$
403

 
$
815

Interest accretion
 
97

 
218

Accretion of commitment fee, net of closing costs and acquisition fee
 
11

 
238

Interest income from real estate debt securities
 
$
511

 
$
1,271


20
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)
September 30, 2017
(unaudited)

7.
REAL ESTATE SALES
During the three and nine months ended September 30, 2017 , the Company disposed of one office property. During the year ended December 31, 2016 , the Company did not dispose of any real estate properties.
On July 11, 2013, the Company, through an indirect wholly owned subsidiary, acquired an office building containing 179,872 rentable square feet located in Boston, Massachusetts (“50 Congress Street”). On May 15, 2017, the Company sold 50 Congress Street to a purchaser unaffiliated with the Company or the Advisor for $79.0 million , or $78.8 million net of concessions and credits. The carrying value of 50 Congress Street as of the disposition date was $47.7 million , which was net of $5.9 million of accumulated depreciation and amortization. The Company recognized a gain on sale of $29.4 million related to the disposition of 50 Congress Street.
The following summary presents the major components of assets and liabilities related to real estate held for sale as of September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
Assets related to real estate held for sale
 
 
 
Real estate, cost
$
—

 
$
53,680

Accumulated depreciation and amortization
—

 
(6,747
)
Real estate, net
—

 
46,933

Other assets
—

 
1,488

Total assets related to real estate held for sale
$
—

 
$
48,421

Liabilities related to real estate held for sale
 
 
 
Notes payable, net
—

 
31,450

Other liabilities
—

 
522

Total liabilities related to real estate held for sale
$
—

 
$
31,972

The operations of this property and gain on sale are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to this property for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
 
Rental income
 
$
—

 
$
1,481

 
$
2,287

 
$
4,462

Tenant reimbursements and other operating income
 
—

 
151

 
98

 
323

Total revenues
 
$
—

 
$
1,632

 
$
2,385

 
$
4,785

Expenses
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
$
—

 
$
400

 
$
714

 
$
1,244

Real estate taxes and insurance
 
—

 
269

 
475

 
864

Asset management fees to affiliate
 
—

 
102

 
150

 
303

Depreciation and amortization
 
—

 
593

 
604

 
1,808

Interest expense
 
—

 
209

 
396

 
599

Total expenses
 
$
—

 
$
1,573

 
$
2,339

 
$
4,818


21
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)
September 30, 2017
(unaudited)

8.
NOTES AND BONDS PAYABLE
As of September 30, 2017 and December 31, 2016 , the Company’s notes and bonds payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):
 
 
Book Value as of September 30, 2017
 
Book Value as of December 31, 2016
 
Contractual Interest Rate as of September 30, 2017   (1)
 
Effective Interest Rate at
September 30, 2017 (1)
 
Payment Type
 
Maturity
Date (2)
Richardson Portfolio Mortgage Loan
 
$
37,036

 
$
40,594

 
One-Month LIBOR + 2.10%
 
3.34%
 
Principal & Interest
 
05/01/2018
Bellevue Technology Center Mortgage Loan (3)
 
58,860

 
59,400

 
One-Month LIBOR + 2.25%
 
3.49%
 
Principal & Interest
 
03/01/2019
Portfolio Revolving Loan Facility (4)
 
44,600

 
11,799

 
One-Month LIBOR + 2.75%
 
3.99%
 
Principal & Interest
 
05/01/2019
Portfolio Mortgage Loan (5)
 
107,905

 
106,479

 
One-Month LIBOR + 2.25%
 
3.49%
 
Principal & Interest
 
07/01/2018
Burbank Collection Mortgage Loan
 
9,591

 
9,812

 
One-Month LIBOR + 2.35%
 
3.60%
 
Principal & Interest
 
09/30/2018
50 Congress Mortgage Loan (6)
 
—

 
31,525

 
(6)  
 
(6)  
 
(6)  
 
(6)  
1180 Raymond Bond Payable
 
6,505

 
6,635

 
6.50%
 
6.50%
 
Principal & Interest
 
09/01/2036
Central Building Mortgage Loan
 
27,600

 
27,600

 
One-Month LIBOR + 1.75%
 
2.99%
 
Interest Only
 
11/13/2018
Maitland Promenade II Mortgage Loan (3)
 
21,830

 
20,877

 
One-Month LIBOR + 2.90%
 
4.13%
 
Principal & Interest
 
01/01/2018
Westmoor Center Mortgage Loan (3)
 
61,582

 
62,000

 
One-Month LIBOR + 2.25%
 
3.49%
 
Principal & Interest
 
02/01/2018
Plaza Buildings Senior Loan (3)
 
108,886

 
109,866

 
One-Month LIBOR + 1.90%
 
3.14%
 
Principal & Interest
 
01/14/2018
424 Bedford Mortgage Loan
 
24,422

 
24,832

 
3.91%
 
3.91%
 
Principal & Interest
 
10/01/2022
1180 Raymond Mortgage Loan
 
31,000

 
31,000

 
One-Month LIBOR + 2.25%
 
3.49%
 
Interest Only
 
12/01/2017
KBS SOR (BVI) Holdings, Ltd. Series A Debentures (7)
 
274,541

 
251,811

 
4.25%
 
4.25%
 
(7)  
 
03/01/2023
Westpark Portfolio Mortgage Loan
 
85,200

 
83,200

 
One-Month LIBOR + 2.50%
 
3.74%
 
Interest Only (8)
 
07/01/2020
353 Sacramento Mortgage Loan (9)
 
—

 
85,500

 
(9)  
 
(9)  
 
(9)  
 
(9)  
Crown Pointe Mortgage Loan
 
50,500

 
—

 
One-Month LIBOR + 2.60%
 
3.84%
 
Interest Only
 
02/13/2020
125 John Carpenter Mortgage Loan
 
50,130

 
—

 
(10)  
 
2.99%
 
Interest Only
 
10/01/2022
Total Notes and Bonds Payable principal outstanding
 
1,000,188

 
962,930

 
 
 
 
 
 
 
 
Net Premium/(Discount) on Notes and Bonds Payable (11)
 
124

 
88

 
 
 
 
 
 
 
 
Deferred financing costs, net
 
(10,064
)
 
(12,394
)
 
 
 
 
 
 
 
 
Total Notes and Bonds Payable, net
 
$
990,248

 
$
950,624

 
 
 
 
 
 
 
 
_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2017 . Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2017 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at September 30, 2017 , where applicable.
(2) Represents the initial maturity date or the maturity date as extended as of September 30, 2017 ; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.
(3) On November 8, 2017 , in connection with the sale of property, the Company repaid the entire principal balance and all other sums due under this loan. See note 15 , “Subsequent Events - Singapore Transaction ” for more information.


22
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)
September 30, 2017
(unaudited)

(4) The Portfolio Revolving Loan Facility is secured by the 1800 West Loop Building and the Iron Point Business Park. On May 1, 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 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 September 30, 2017 , $44.6 million of non-revolving debt had been disbursed to the Company and $29.8 million of revolving debt is available for future disbursements, subject to certain conditions contained in the loan documents. On November 8, 2017 , in connection with the sale of property, the Company repaid the entire principal balance and all other sums due under this loan. See note 15 , “Subsequent Events - Singapore Transaction ” for more information.
(5) On November 8, 2017 , in connection with the sale of certain properties secured by this loan, the Company repaid all but $10.0 million principal balance. The Portfolio Mortgage Loan is now only secured by one office property in the Austin Suburban Portfolio, Park Centre. See note 15 , “Subsequent Events - Singapore Transaction ” for more information.
(6) On May 15, 2017, in connection with the disposition of 50 Congress Street, the Company repaid the $31.4 million outstanding principal balance due under the 50 Congress Street Mortgage Loan.
(7) See “ – Israeli Bond Financing” below.
(8) Represents the payment type required under the loan as of September 30, 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.
(9) On July 6, 2017, in connection with the partial interest sale of 353 Sacramento, the 353 Sacramento Mortgage Loan was deconsolidated from the Company's balance sheet. See note 12 , “Investment in Unconsolidated Joint Ventures” for a further discussion on the Company’s partial sale of 353 Sacramento.
(10) The 125 John Carpenter Mortgage Loan bears interest at a floating rate of the greater of (a) 2.0% or (b) 175 basis points over one-month LIBOR.
(11) 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 and nine months ended September 30, 2017 , the Company incurred $9.6 million and $29.3 million of interest expense, respectively. Included in interest expense for the three and nine months ended September 30, 2017 was $1.0 million and $3.6 million of amortization of deferred financing costs, respectively. Additionally, during the three and nine months ended September 30, 2017 , the Company capitalized $0.6 million and $1.7 million of interest to its investments in undeveloped land, respectively. During the three and nine months ended September 30, 2016 , the Company incurred $8.0 million and $20.4 million of interest expense, respectively. Included in interest expense for the three and nine months ended September 30, 2016 was $1.1 million and $2.9 million of amortization of deferred financing costs, respectively. Additionally, during the three and nine months ended September 30, 2016 , the Company capitalized $0.5 million and $1.5 million of interest to its investments in undeveloped land, respectively.
As of September 30, 2017 , the Company’s deferred financing costs were $10.1 million , net of amortization, which are included in notes and bonds payable, net on the accompanying consolidated balance sheets. 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 September 30, 2017 and December 31, 2016 , the Company’s interest payable was $3.0 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 September 30, 2017 (in thousands):
October 1, 2017 through December 31, 2017
 
$
32,706

2018
 
376,228

2019
 
158,157

2020
 
189,922

2021
 
55,787

Thereafter
 
187,388

 
 
$
1,000,188

The Company’s notes payable contain financial debt covenants. As of September 30, 2017 , the Company was in compliance with all of these debt covenants.

23
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)
September 30, 2017
(unaudited)

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 September 30, 2017 , the Company has one foreign currency option for an aggregate notional amount of $285.4 million to hedge its exposure to foreign currency exchange rate movements. See note 9 , “Derivative Instruments” for a further discussion on the Company’s foreign currency option.
The deed of trust that governs the terms of the Debentures contains various financial covenants. As of September 30, 2017 , the Company was in compliance with all of these financial debt covenants.
9 .
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 options and 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 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 foreign currency option consists of a call option to buy Israeli new Shekels.
The following table summarizes the notional amount and other information related to the Company’s foreign currency collars as of 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

 
 
 
 
 
 
On August 3, 2017, the Company terminated the foreign currency collars and as a result received $6.6 million . On August 3, 2017, the Company entered into a foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar as it now has the right, but not the obligation, to purchase up to 970.2 million Israeli Shekels at the rate of ILS 3.4 per USD. The cost of the foreign currency option was $3.4 million .

24
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)
September 30, 2017
(unaudited)

The following table summarizes the notional amount and other information related to the Company’s foreign currency option as of September 30, 2017 . 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 Instrument
 
Notional Amount
 
Strike Price
 
Trade Date
 
Maturity Date
Derivative instrument not designated as hedging instrument
 
 
 
 
 
 
Foreign currency option
 
$
285,361

 
3.40 ILS-USD
 
08/03/2017
 
08/03/2018
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 September 30, 2017 , the Company had entered into an interest rate cap, which was not designated as a hedging instrument. The following table summarizes the notional amount and other information related to the Company’s derivative instrument as of September 30, 2017 . The notional amount is an indication of the extent of the Company’s involvement in the instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Notional Value
 
Reference Rate
Interest rate cap
 
02/21/2017
 
02/13/2020
 
$
46,875

 
One-month LIBOR at 3.00%
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 September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
September 30, 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 cap
 
Prepaid expenses and other assets
 
1
 
$
17

 
1
 
$
12

Foreign currency collars
 
Other liabilities
 
—
 
$
—

 
4
 
$
(3,910
)
Foreign currency option
 
Prepaid expenses and other assets
 
1
 
$
3,884

 
—
 
$
—

The change in fair value of foreign currency options and 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 September 30, 2017 , the Company recognized a $8.1 million loss related to the foreign currency option and collars, which is shown net against $3.7 million of foreign currency transaction gain in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the nine months ended September 30, 2017 , the Company recognized a $10.9 million gain related to the foreign currency option and collars, which is shown net against $22.4 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three and nine months ended September 30, 2016 , the Company recognized $1.5 million of foreign currency transaction gain, which is shown net against $8.2 million and $6.1 million , respectively, of foreign currency transaction losses in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the three and nine months ended September 30, 2017 , the Company recorded unrealized losses of $14,000 and $102,000 , respectively, on interest rate caps, which was included in interest expense on the accompanying consolidated statements of operations.

25
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)
September 30, 2017
(unaudited)

10.
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.
Real estate equity securities : The Company's real estate equity securities are presented at fair value on the accompanying consolidated balance sheets. The fair value of real estate equity securities was based on a quoted price in an active market on a major stock exchange. The Company classifies these inputs as Level 1 inputs.
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 September 30, 2017 for the fair value of its bonds issued in Israel. The Company classifies this input as a Level 1 input.

26
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)
September 30, 2017
(unaudited)

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 fair value of interest rate caps (floors) are determined using the market standard methodology of discounting the future expected cash payments (receipts) which would occur if variable interest rates rise above (below) the strike rate of the caps (floors). The variable interest rates used in the calculation of projected payments (receipts) on the cap (floor) are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The fair value of foreign currency option is based on a Black-Scholes model tailored for currency derivatives.
The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2017 and December 31, 2016 , which carrying amounts do not approximate the fair values (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Face Value
 
Carrying Amount
 
Fair Value
 
Face Value
 
Carrying Amount
 
Fair Value
Financial asset:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate debt securities
 
$
17,500

 
$
17,642

 
$
17,358

 
$
5,000

 
$
4,683

 
$
4,683

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Notes and bond payable
 
$
725,647

 
$
722,673

 
$
727,521

 
$
711,119

 
$
707,169

 
$
711,425

KBS SOR (BVI) Holdings, Ltd. Series A Debentures
 
$
274,541

 
$
267,575

 
$
288,817

 
$
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 September 30, 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:
 
 
 
 
 
 
 
 
Real estate equity securities
 
$
47,022

 
$
47,022

 
$
—

 
$
—

Asset derivatives - interest rate caps
 
$
17

 
$
—

 
$
17

 
$
—

Asset derivative - foreign currency option
 
$
3,884

 
$
—

 
$
3,884

 
$
—


27
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)
September 30, 2017
(unaudited)

11.
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. In June 2017, the Company renewed its participation in the program, and the program is effective through June 30, 2018. As KBS REIT I is implementing its plan of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage.
During the three and nine months ended September 30, 2017 and 2016 , no other business transactions occurred between the Company and these other KBS-sponsored programs.

28
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)
September 30, 2017
(unaudited)

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 2017 and 2016 , respectively, and any related amounts payable as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
Incurred
 
Payable as of
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
September 30, 2017
 
December 31, 2016
 
 
2017
 
2016
 
2017
 
2016
 
 
Expensed
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
 
$
2,800

 
$
2,639

 
$
8,404

 
6,932

 
$
—

 
$
—

Acquisition fees on real estate (1)
 
—

 
1,690

 
—

 
2,964

 
—

 
—

Reimbursable operating expenses (2)
 
51

 
57

 
184

 
170

 
33

 
55

Disposition fees (3)
 
—

 
—

 
785

 
279

 
—

 
—

Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees on real estate (1)
 
71

 
—

 
907

 
—

 
—

 
—

Acquisition fees on real estate equity securities
 
43

 
—

 
429

 
—

 
—

 
—

 
 
$
2,965

 
$
4,386

 
$
10,709

 
$
10,345

 
$
33

 
$
55

_____________________
(1) As a result of the adoption of ASU No. 2017-01, the Company’s acquisitions of real estate properties beginning January 1, 2017 generally qualify as an asset acquisition (as opposed to a business combination).  Acquisition fees associated with asset acquisitions will be capitalized, while costs associated with business combinations will continue to be expensed as incurred.
(2) 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 $49,000 and $168,000 for the three and nine months ended September 30, 2017 , respectively, and $30,000 and $114,000 for the three and nine months ended September 30, 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.
(3) Disposition fees with respect to real estate sold are included in the gain on sale of real estate in the accompanying consolidated statements of operations. Disposition fees with respect to the assignment of the Company's real estate loan receivable are included in general and administrative expenses in the accompanying consolidated statements of operations.
During the nine months ended September 30, 2017 , the Advisor reimbursed the Company $0.4 million for expenses incurred to evaluate certain strategic transactions for which the Advisor has agreed to reimburse the Company and $0.1 million for a property insurance rebate. During the nine months ended September 30, 2016 , the Advisor reimbursed the Company $0.1 million for a property insurance rebate and $0.1 million for legal and professional fees.
Pursuant to the Waiver Agreement, the Advisor waived any right it may have had to receive a disposition fee in connection with the 353 Sacramento Transaction and also waived its rights to future acquisition fees in an amount equal to 45% of the acquisition fees paid to the Advisor in connection with the Company’s original purchase of 353 Sacramento in July of 2016. Accordingly, the Advisor waived $0.8 million of acquisition fees for the purchase of 125 John Carpenter.
In connection with the 353 Sacramento Transaction, the Company paid a $0.1 million broker commission to Monarch Global Partners, LLC. The son of a member of the board of directors of KBS Strategic Opportunity BVI is a partner at Monarch Global Partners, LLC.

29
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)
September 30, 2017
(unaudited)

12 .
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
As of September 30, 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 %
 
September 30, 2017
 
December 31, 2016
NIP Joint Venture
 
8
 
Various
 
Less than 5.0%
 
$
4,317

 
$
5,305

110 William Joint Venture
 
1
 
New York, New York
 
60.0%
 
8,668

 
70,544

353 Sacramento Joint Venture
 
1
 
San Francisco, California
 
55.0%
 
45,344

 
—

 
 
 
 
 
 
 
 
$
58,329

 
$
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 September 30, 2017 , the NIP Joint Venture owned eight industrial properties and a master lease with respect to another industrial property encompassing 4.4 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 September 30, 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 September 30, 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 September 30, 2017 , the Company did not receive any distributions related to its investment in the NIP Joint Venture. During the nine months ended September 30, 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 and nine months ended September 30, 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.

30
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)
September 30, 2017
(unaudited)

As of September 30, 2017 and December 31, 2016 , the book value of the Company’s investment in the 110 William Joint Venture was $8.7 million and $70.5 million , respectively, which includes $1.5 million of unamortized acquisition fees and expenses incurred directly by the Company. During the nine months ended September 30, 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):
 
 
September 30, 2017
 
December 31, 2016
Assets:
 
 
 
 
       Real estate assets, net of accumulated depreciation and amortization
 
$
252,428

 
$
262,192

       Other assets
 
31,135

 
23,355

       Total assets
 
$
283,563

 
$
285,547

Liabilities and equity:
 
 
 
 
       Notes payable, net (1)
 
$
259,123

 
$
157,628

       Other liabilities
 
12,468

 
12,872

       Partners’ capital
 
11,972

 
115,047

Total liabilities and equity
 
$
283,563

 
$
285,547

_____________________
(1) See “- 110 William Joint Venture Refinance” below.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
9,614

 
$
8,461

 
$
27,328

 
$
25,100

Expenses:
 
 
 
 
 
 
 
 
       Operating, maintenance, and management
 
2,577

 
3,162

 
7,343

 
8,120

       Real estate taxes and insurance
 
1,637

 
1,535

 
4,725

 
4,502

       Depreciation and amortization
 
4,664

 
3,563

 
12,277

 
9,831

       Interest expense
 
3,951

 
1,517

 
9,150

 
4,541

Total expenses
 
12,829

 
9,777

 
33,495

 
26,994

Other income
 
14

 
16

 
42

 
48

Net loss
 
$
(3,201
)
 
$
(1,300
)
 
$
(6,125
)
 
$
(1,846
)
Company’s equity in loss  of unconsolidated joint venture
 
$
(1,930
)
 
$
(791
)
 
$
(3,706
)
 
$
(1,139
)

31
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)
September 30, 2017
(unaudited)

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”).
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.
Investment in 353 Sacramento Joint Venture
On July 6, 2017, the Company, through an indirect wholly owned subsidiary, entered into an agreement with the Migdal Members to form the 353 Sacramento Joint Venture. On July 6, 2017, the Company sold a 45% equity interest in an entity that owns 353 Sacramento to the Migdal Members. The sale resulted in 353 Sacramento being owned by the 353 Sacramento Joint Venture, in which the Company indirectly owns 55% of the equity interests and the Migdal Members indirectly own 45% in the aggregate of the equity interests.
The Company exercises significant influence over the operations, financial policies and decision making with respect to the 353 Sacramento Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 353 Sacramento Joint Venture under the equity method of accounting. Income, losses, contributions and distributions are generally allocated based on the members’ respective equity interests.
As of September 30, 2017 , the book value of the Company’s investment in the 353 Sacramento Joint Venture was $45.3 million . During the three and nine months ended September 30, 2017 , the Company did not receive any distributions related to its investment in the 353 Sacramento Joint Venture.

32
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)
September 30, 2017
(unaudited)

Summarized financial information for the 353 Sacramento Joint Venture follows (in thousands):
 
 
September 30, 2017
Assets:
 
 
       Real estate assets, net of accumulated depreciation and amortization
 
$
170,477

       Other assets
 
5,438

       Total assets
 
$
175,915

Liabilities and equity:
 
 
       Notes payable, net
 
$
87,605

       Other liabilities
 
6,358

       Partners’ capital
 
81,952

Total liabilities and equity
 
$
175,915

 
 
For the Period from July 6, 2017 to September 30, 2017
Revenues
 
$
3,507

Expenses:
 
 
       Operating, maintenance, and management
 
936

       Real estate taxes and insurance
 
603

       Depreciation and amortization
 
1,724

       Interest expense
 
1,138

Total expenses
 
4,401

Net loss
 
$
(894
)
Company’s equity in loss  of unconsolidated joint venture
 
$
(222
)
13.
SUPPLEMENTAL CASH FLOW AND SIGNIFICANT NONCASH TRANSACTION DISCLOSURES
Supplemental cash flow and significant noncash transaction disclosures were as follows (in thousands):
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Interest paid, net of capitalized interest of $1,732   and $1,478  for the nine  months ended September 30, 2017  and 2016 , respectively
 
$
27,732

 
$
16,146

Supplemental Disclosure of Significant Noncash Transactions:
 
 
 
 
Assets and liabilities deconsolidated in connection with the 353 Sacramento partial sale:
 
 
 
 
Real estate, net
 
170,586

 
—

Rents and other receivables, net
 
1,244

 
—

Prepaid expenses and other assets
 
555

 
—

Notes payable, net
 
87,132

 
—

Accounts payable and accrued liabilities
 
1,574

 
—

Below-market leases, net
 
2,960

 
—

Other liabilities
 
924

 
—

Application of escrow deposits to acquisition of real estate
 
2,000

 
—

Increase in accrued improvements to real estate
 
1,319

 
1,686

Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan
 
8,666

 
9,520


33
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)
September 30, 2017
(unaudited)

14.
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 September 30, 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.
15 .
SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the consolidated financial statements are issued.
Singapore Transaction
On November 8, 2017 , the Company, through 11 wholly owned subsidiaries, sold 11 of its properties (the “Singapore Portfolio”) to various subsidiaries of Keppel-KBS US REIT, a newly formed Singapore real estate investment trust (the “SREIT”) that was listed on the Singapore Stock Exchange (the “Singapore Transaction”).  The sale price of the Singapore Portfolio was $804.0 million , before third-party closing costs of approximately $7.7 million and excluding any disposition fees payable to the Advisor. The Singapore Portfolio consists of the following properties: 1800 West Loop, Westech 360 (part of the Austin Suburban Portfolio), Great Hills Plaza (part of the Austin Suburban Portfolio), Westmoor Center, Iron Point Business Park, the Plaza Buildings, Bellevue Technology Center, Northridge Center I and II, West Loop I and II, Powers Ferry Landing East and Maitland Promenade II. As of September 30, 2017 , the carrying value of the Singapore Portfolio was $546.5 million . In connection with the Singapore Transaction, the Company repaid $401.7 million of outstanding debt secured by the properties in the Singapore Portfolio. The Company also used approximately $52.5 million of the proceeds to acquire units in the SREIT representing a 9.5% ownership interest. Currently, the SREIT does not own any properties other than the Singapore Portfolio. The SREIT was established with the investment strategy of principally investing, directly or indirectly, in a diversified portfolio of income-producing commercial assets and real estate-related assets in the key growth markets of the United States.
The SREIT will be externally managed by a joint venture (the “Manager”) between (i) an entity in which Keith D. Hall, the Company’s Chief Executive Officer and a director, and Peter McMillan III, the Company’s President and Chairman of the board of directors, have an indirect ownership interest and (ii) Keppel Capital Holding Pte. Ltd., which is not affiliated with the Company. The SREIT is expected to pay certain purchase and sale commissions and asset management fees to the Manager in exchange for the provision of certain management services.

34
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”).

35
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 September 30, 2017 , we had sold 6,620,362  shares of common stock under the dividend reinvestment plan for gross offering proceeds of $74.0 million . Also as of September 30, 2017 , we had redeemed 6,705,949 of the shares sold in our offering for $85.0 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.
As of September 30, 2017 , we consolidated 20 real estate investments comprised of 11 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 with approximately 1,100 developable acres, and owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and an investment in real estate securities.
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.
The global economy is broadly improving albeit at an uneven pace. European economic growth has recently picked up, with improving employment data in most of the European Union countries. The U.K. and China remain areas of concern. The U.K. is working through its BREXIT process, whereas the Chinese economy has shown signs of stabilization, but is still struggling with uncertainty in its banking system in relation to bad loans. 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 (“QE”) in Japan and Europe is slowing, but the liquidity generated from these programs continues to impact the global capital markets.

36
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 100 months (as of the end of third quarter 2017), the current business cycle, which commenced in June 2009, is the third longest in U.S. history, behind only the periods between 1961 - 1969 and 1991 - 2001. In June 2017, the U.S. Federal Reserve (the “Fed”) increased interest rates for the fourth time in three years. Expectations are that the Fed will increase rates again in December, citing low unemployment and strong economic growth. The Fed is still attempting to normalize the level of interest rates in the United States. U.S. interest rates are relatively high when compared to Europe, where the European Central Bank is still engaging in QE. Global inflation is starting to show signs of life, as U.S. inflation has grown to approximately 1.9% versus 2.9% in the U.K. and 1.5% in the Eurozone. Real gross domestic product (“GDP”) in the United States has had two consecutive quarters of 3.0% or greater growth, and the U.S. unemployment rate is currently a relatively low 4.2%. Personal income growth has started to increase and unemployment statistics indicate that labor market conditions are finally showing real improvements. Political uncertainty surrounding the current administration’s budget, tax reform plans and the continued weakness in retailers, all may adversely impact business and consumer confidence.
In 2017, the U.S. commercial real estate market has seen a decline in transaction volume and a slowing of price increases. In the aggregate, property level operating income growth has begun to slow, while lending standards have tightened. The United States continues to benefit from inflows of foreign capital, albeit at a slowing rate. The capital flows from China have dropped as the Chinese government has successfully imposed constraints on capital leaving the country. The industrial property sector is a standout for investors, as internet sales volumes continue to increase the demand for warehouses and logistics-related assets. Traditional sources of capital are favoring a “risk-off” approach, as capital flows have shifted equity towards debt, or secured, investing. 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 tightened. This has resulted in lower loan-to-value and higher debt coverage ratios. CMBS originations rebounded in the third quarter as banks and insurance companies tightened loan terms. CMBS volumes are on pace to beat 2016 issuance volumes. This is a positive for the U.S. commercial real estate markets as it illustrates the virtues of having a diversified set of funding sources.
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 (including shares purchased under a tender offer) 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 September 30, 2017 , we had sold 6,620,362 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $74.0 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 asset sales, proceeds from debt financing, 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.

37
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 September 30, 2017 , our properties, excluding apartment properties, were collectively 83% occupied and our apartment properties were collectively 97% occupied. 
Investments in real estate debt securities 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. Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As of September 30, 2017 , we had an investment in real estate debt securities outstanding with a total book value of $17.6 million and an investment in real estate equity securities outstanding with a total book value of $47.0 million .
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 September 30, 2017 did not exceed the charter imposed limitation.
For the nine months ended September 30, 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 September 30, 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 September 30, 2017 , we had a total of $380.4 million of debt obligations scheduled to mature within 12 months of that date. On November 8, 2017 , we repaid $291.9 million of this outstanding balance at September 30, 2017 , see “Subsequent Events - Singapore Transaction ” for more information. 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 September 30, 2017 , we consolidated 20 real estate investments comprised of 11 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 with approximately 1,100 developable acres, and owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and an investment in real estate equity securities. During the nine months ended September 30, 2017 , net cash provided by operating activities was $19.7 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.

38
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 Investing Activities
Net cash used in investing activities was $56.1 million for the nine months ended September 30, 2017 and primarily consisted of the following:
•
Acquisition of two office properties for $165.5 million ;
•
Proceeds from the sale of one office property, 102 acres of undeveloped land and the partial sale of 353 Sacramento of $130.6 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;
•
Investment in real estate securities of $43.3 million ;
•
Improvements to real estate of $28.8 million ;
•
Investment in real estate debt securities of $12.5 million ;
•
Proceeds from disposition of foreign currency collars of $6.6 million ;
•
Purchase of a foreign currency option for $3.4 million ;
•
Proceeds for future development obligations of $1.4 million ;
•
Funding of development obligations of $0.9 million ;
•
Insurance proceeds for property damages of $0.7 million ; and
•
Purchase of an interest rate cap for $0.1 million .
Cash Flows from Financing Activities
Net cash provided by financing activities was $85.0 million for the nine months ended September 30, 2017 and consisted primarily of the following:
•
$100.5 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $176.8 million , partially offset by principal payments on notes and bonds payable of $73.9 million and payments of deferred financing costs of $2.3 million ;
•
$8.1 million of cash used for redemptions of common stock;
•
$7.2 million of net cash distributions to stockholders, after giving effect to distributions reinvested by stockholders of $8.7 million ;
•
$0.4 million of payments made in connection with a potential offering; and
•
$0.2 million of contributions to noncontrolling interests.
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 September 30, 2017 , our borrowings and other liabilities were approximately 72% 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.
On September 14, 2017 , we commenced a self-tender offer (the “SOR Offer”) for up to 3,553,660 shares of common stock at a price of $14.07 per share, or approximately $50.0 million of shares. On October 18, 2017 , we increased the number of shares accepted for payment in the SOR Offer by up to 1,135,912 shares at a price of $14.07 per share, or approximately $16.0 million of shares. On October 23, 2017 , we accepted for purchase 4,688,671 shares for an aggregate cost of $66.0 million , excluding fees and expenses related to the SOR Offer.

39
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Because of the SOR Offer, the share redemption program was suspended from September 29, 2017 through October 31, 2017 , meaning no redemptions were made in September or October (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). We cancelled all outstanding redemption requests under the share redemption program as of the commencement of the SOR Offer and were not accepting any redemption requests under the share redemption program during the term of the SOR Offer.
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.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of September 30, 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)
 
$
1,000,188

 
$
32,706

 
$
534,385

 
$
245,709

 
$
187,388

Interest payments on outstanding debt obligations (2)
 
82,210

 
9,278

 
45,271

 
19,689

 
7,972

_____________________
(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 September 30, 2017 . We incurred interest expense of $27.3 million , excluding amortization of deferred financing costs of $3.6 million and unrealized losses on interest rate caps of $0.1 million and including interest capitalized of $1.7 million , for the nine months ended September 30, 2017 .

40
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations
Overview
As of September 30, 2016 , we owned 11 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, one first mortgage loan and two investments in unconsolidated joint ventures. As of September 30, 2017 , we owned 11 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 with approximately 1,100 developable acres, three investments in unconsolidated joint ventures, an investment in real estate debt securities and an investment in real estate equity securities. Our results of operations for the three and nine months ended September 30, 2017 may not be indicative of those in future periods due to acquisition and disposition activities. Additionally, the occupancy in our properties has not been stabilized. As of  September 30, 2017 , our office and retail properties were collectively 83% occupied and our apartment properties were collectively 97% 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.
Comparison of the three months ended September 30, 2017 versus the three months ended September 30, 2016
The following table provides summary information about our results of operations for the three months ended September 30, 2017 and 2016 (dollar amounts in thousands):
 
 
Three Months Ended September 30,
 
Increase (Decrease)
 
Percentage Change
 
$ Change Due to Acquisitions/ Originations/ Dispositions (1)
 
$ Change Due to 
Investments Held Throughout
Both Periods (2)
 
 
2017
 
2016
 
 
 
 
Rental income
 
$
27,850

 
$
29,229

 
$
(1,379
)
 
(5
)%
 
$
(1,895
)
 
$
516

Tenant reimbursements
 
6,094

 
5,902

 
192

 
3
 %
 
(277
)
 
469

Other operating income
 
944

 
1,002

 
(58
)
 
(6
)%
 
38

 
(96
)
Interest income from real estate debt securities
 
511

 
—

 
511

 
n/a

 
511

 
—

Dividend income from real estate equity securities
 
1,015

 
—

 
1,015

 
n/a

 
1,015

 
—

Operating, maintenance, and management costs
 
11,431

 
10,932

 
499

 
5
 %
 
(151
)
 
650

Real estate taxes and insurance
 
4,780

 
4,516

 
264

 
6
 %
 
(395
)
 
659

Asset management fees to affiliate
 
2,800

 
2,639

 
161

 
6
 %
 
100

 
61

Real estate acquisition fees to affiliate
 
—

 
1,690

 
(1,690
)
 
n/a

 
(1,690
)
 
—

Real estate acquisition fees and expenses
 
—

 
274

 
(274
)
 
n/a

 
(274
)
 
—

General and administrative expenses
 
1,170

 
1,337

 
(167
)
 
(12
)%
 
n/a

 
n/a

Foreign currency transaction  loss , net
 
4,356

 
6,639

 
(2,283
)
 
(34
)%
 
n/a

 
n/a

Depreciation and amortization
 
13,228

 
14,337

 
(1,109
)
 
(8
)%
 
(682
)
 
(427
)
Interest expense
 
9,618

 
7,992

 
1,626

 
20
 %
 
n/a

 
n/a

Equity in loss  of unconsolidated joint ventures
 
(2,152
)
 
(791
)
 
(1,361
)
 
172
 %
 
(222
)
 
(1,139
)
Gain on sale of real estate
 
2,239

 
—

 
2,239

 
n/a

 
2,239

 
—

_____________________
(1) Represents the dollar amount increase (decrease) for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 related to real estate and real estate-related investments acquired, originated, repaid, disposed or deconsolidated on or after July  1,  2016 .
(2) Represents the dollar amount increase (decrease) for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

41
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Rental income decreased from $29.2 million for the three months ended September 30, 2016 to $27.9 million for the three months ended September 30, 2017 and tenant reimbursements increased from $5.9 million for the three months ended September 30, 2016 to $6.1 million for the three months ended September 30, 2017 , primarily as a result of the sale of a 45% interest in the 353 Sacramento property, which resulted in deconsolidation, and a decrease in occupancy related to our office and retail properties held throughout both periods, partially offset by the growth in our real estate portfolio, an increase in annualized base rent per square foot related to our properties held throughout both periods and an increase in occupancy related to our apartment properties held throughout both periods. Annualized base rent per square foot increased from $20.46 as of September 30, 2016 to $20.90 as of September 30, 2017 related to properties (excluding apartments) held throughout both periods. The occupancy of our office and retail properties, collectively, held throughout both periods decreased from 87% as of September 30, 2016 to 85% as of September 30, 2017 and the occupancy of our apartment properties, collectively, held throughout both periods increased from 90% as of September 30, 2016 to 97% as of September 30, 2017 . 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 $10.9 million and $4.5 million , respectively, for the three months ended September 30, 2016 to $11.4 million and $4.8 million , respectively, for the three months ended September 30, 2017 , primarily as a result of the growth in our real estate portfolio, increase in assessed property values and inflation, offset by the sale of a 45% interest in the 353 Sacramento property, which resulted in deconsolidation. 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 $2.6 million for the three months ended September 30, 2016 to $2.8 million for the three months ended September 30, 2017 primarily as a result of the growth in our real estate portfolio, offset by the sale of a 45% interest in the 353 Sacramento property, which resulted in deconsolidation. We expect asset management fees to increase in future periods as a result of owning real estate-related investments 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 September 30, 2017 have been paid.
Real estate acquisition fees and expenses to affiliates and non-affiliates were $2.0 million for the three months ended September 30, 2016 . During the three months ended September 30, 2017 , we did not acquire any investments accounted for as a business combination. We adopted ASU No. 2017-01 for the reporting period beginning January 1, 2017.  As a result of the adoption of ASU No. 2017-01, our acquisitions of real estate properties beginning January 1, 2017 qualified 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. We expect real estate acquisition fees and expenses to vary in future periods based upon acquisition activity.
General and administrative expenses decreased from $1.3 million for the three months ended September 30, 2016 to $1.2 million for the three months ended September 30, 2017 , primarily due to decreased legal and auditor costs related to the Israeli securities law compliance requirements of KBS Strategic Opportunity BVI. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.
We recognized $6.6 million of foreign currency transaction loss, net, for the three months ended September 30, 2016 and $4.4 million of foreign currency transaction loss, net, for the three months ended September 30, 2017 related to the Series A debentures issued in Israel. 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 September 30, 2017 , the foreign currency transaction loss, net, consists of $3.7 million of foreign currency transaction gain, partially offset by a $8.1 million loss related to our foreign currency collars and hedge.
Depreciation and amortization decreased from $14.3 million for the three months ended September 30, 2016 to $13.2 million for the three months ended September 30, 2017 , primarily as a result of the sale of a 45% interest in the 353 Sacramento property, which resulted in deconsolidation, partially offset by 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 and future acquisitions of real estate properties, but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties.

42
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Interest expense increased from $8.0 million for the three months ended September 30, 2016 to $9.6 million for the three months ended September 30, 2017 , primarily due to increased borrowings as a result of acquisition activity. 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 September 30, 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 and will decrease to the extent we dispose of properties and paydown debt.
Equity in loss of unconsolidated joint ventures increased from $0.8 million for the three months ended September 30, 2016 to $2.2 million for the three months ended September 30, 2017 , primarily due to increased interest expense as a result of increased borrowings associated with the 110 William Joint Venture refinancing of its mortgage loans on March 6, 2017 and the equity in loss related to 353 Sacramento, which has been accounted for as an unconsolidated joint venture under the equity method of accounting beginning July 2017.
During the three months ended September 30, 2016 , we had no dispositions. During the three months ended September 30, 2017 , we sold a 45% interest in the 353 Sacramento property, which resulted in deconsolidation, and recognized deferred profit related to the sale of 102 acres of undeveloped land that resulted in a total gain on sale of $2.2 million . We recognized a gain on sale of $1.7 million related to the sale of a 45% interest in the 353 Sacramento property. We recognized $0.5 million of the deferred profit related to the land sale.
Comparison of the nine months ended September 30, 2017 versus the nine months ended September 30, 2016
The following table provides summary information about our results of operations for the nine months ended September 30, 2017 and 2016 (dollar amounts in thousands):
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
Percentage Change
 
$ Change Due to Acquisitions/ Originations/ Dispositions (1)
 
$ Change Due to 
Investments Held Throughout
Both Periods (2)
 
 
2017
 
2016
 
 
 
 
Rental income
 
$
90,200

 
$
76,646

 
$
13,554

 
18
%
 
$
11,521

 
$
2,033

Tenant reimbursements
 
18,188

 
15,484

 
2,704

 
17
%
 
1,573

 
1,131

Other operating income
 
3,484

 
2,580

 
904

 
35
%
 
104

 
800

Interest income from real estate debt securities
 
1,271

 
—

 
1,271

 
n/a

 
1,271

 
—

Dividend income from real estate equity securities
 
1,505

 
—

 
1,505

 
n/a

 
1,505

 
—

Interest income from real estate loan receivable
 
—

 
3,655

 
(3,655
)
 
n/a

 
(3,655
)
 
—

Operating, maintenance, and management costs
 
33,638

 
29,755

 
3,883

 
13
%
 
4,218

 
(335
)
Real estate taxes and insurance
 
14,932

 
12,419

 
2,513

 
20
%
 
1,477

 
1,036

Asset management fees to affiliate
 
8,404

 
6,932

 
1,472

 
21
%
 
1,291

 
181

Real estate acquisition fees to affiliate
 
—

 
2,964

 
(2,964
)
 
n/a

 
(2,964
)
 
—

Real estate acquisition fees and expenses
 
—

 
542

 
(542
)
 
n/a

 
(542
)
 
—

General and administrative expenses
 
4,291

 
4,172

 
119

 
3
%
 
n/a

 
n/a

Foreign currency transaction  loss , net
 
11,454

 
4,602

 
6,852

 
149
%
 
n/a

 
n/a

Depreciation and amortization
 
43,136

 
37,436

 
5,700

 
15
%
 
7,005

 
(1,305
)
Interest expense
 
29,327

 
20,354

 
8,973

 
44
%
 
n/a

 
n/a

Income from unconsolidated joint venture
 
1,869

 
—

 
1,869

 
n/a

 
—

 
1,869

Equity in loss  of unconsolidated joint ventures
 
(3,928
)
 
(1,139
)
 
(2,789
)
 
245
%
 
(222
)
 
(2,567
)
Gain on sale of real estate
 
36,267

 
—

 
36,267

 
n/a

 
36,267

 
—

_____________________
(1) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 related to real estate and real estate-related investments acquired, originated, repaid, disposed or deconsolidated on or after January  1,  2016 .
(2) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

43
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Rental income and tenant reimbursements increased from $76.6 million and $15.5 million , respectively, for the nine months ended September 30, 2016 to $90.2 million and $18.2 million , respectively, for the nine months ended September 30, 2017 , primarily as a result of the growth in our real estate portfolio, an increase in annualized base rent per square foot related to our properties held throughout both periods and an increase in occupancy related to our apartment properties held throughout both periods, partially offset by a decrease in occupancy related to our office and retail properties held throughout both periods. Annualized base rent per square foot increased from $21.42 as of September 30, 2016 to $21.95 as of September 30, 2017 related to properties (excluding apartments) held throughout both periods. The occupancy of our office and retail properties, collectively, held throughout both periods decreased from 88% as of September 30, 2016 to 85% as of September 30, 2017 and the occupancy of our apartment properties, collectively, held throughout both periods increased from 90% as of September 30, 2016 to 97% as of September 30, 2017 . 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 $29.8 million and $12.4 million , respectively, for the nine months ended September 30, 2016 to $33.6 million and $14.9 million , respectively, for the nine months ended September 30, 2017 , primarily as a result of the growth in our real estate portfolio, 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 $6.9 million for the nine months ended September 30, 2016 to $8.4 million for the nine months ended September 30, 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-related investments 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 September 30, 2017 have been paid.
Real estate acquisition fees and expenses to affiliates and non-affiliates were $3.5 million for the nine months ended September 30, 2016 . During the nine months ended September 30, 2017 , we did not acquire any investments accounted for as a business combination. We adopted ASU No. 2017-01 for the reporting period beginning January 1, 2017.  As a result of the adoption of ASU No. 2017-01, our acquisitions of real estate properties beginning January 1, 2017 qualified 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. We expect real estate acquisition fees and expenses to vary in future periods based upon acquisition activity.
We recognized $4.6 million of foreign currency transaction loss, net, for the nine months ended September 30, 2016 and $11.5 million of foreign currency transaction loss, net, for the nine months ended September 30, 2017 related to the Series A debentures issued in Israel. 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 nine months ended September 30, 2017 , the foreign currency transaction loss, net, consists of $22.4 million of foreign currency transaction loss, partially offset by a $10.9 million gain related to our foreign currency collars and hedge.
Depreciation and amortization increased from $37.4 million for the nine months ended September 30, 2016 to $43.1 million for the nine months ended September 30, 2017 , primarily as a result of the growth in our real estate portfolio, partially offset by a decrease related to properties held throughout both periods as a result of amortization of tenant origination costs related to lease expirations. We expect depreciation and amortization to increase in future periods as a result of owning real estate acquired in 2017 for an entire period and future acquisitions of real estate properties, but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties.
Interest expense increased from $20.4 million for the nine months ended September 30, 2016 to $29.3 million for the nine months ended September 30, 2017 , primarily due to increased borrowings as a result of our bond offering and acquisition activity. Excluded from interest expense was $1.7 million and $1.0 million of interest capitalized to our investments in undeveloped land during the nine months ended September 30, 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 and will decrease to the extent we dispose of properties and paydown debt.

44
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

During the nine months ended September 30, 2017 , we received a distribution of $2.9 million related to our investment in the NIP Joint Venture consisting of $1.9 million of income distributions and $1.0 million of return of capital from the NIP Joint Venture. During the nine months ended September 30, 2016 , we did not receive any distributions related to our investment in the NIP Joint Venture.
Equity in loss of unconsolidated joint ventures increased from $1.1 million for the nine months ended September 30, 2016 to $3.9 million for the nine months ended September 30, 2017 , primarily due to increased interest expense as a result of increased borrowings associated with the 110 William Joint Venture refinancing of its mortgage loans on March 6, 2017 and the equity in loss related to 353 Sacramento, which has been accounted for as an unconsolidated joint venture under the equity method of accounting beginning July 2017.
During the nine months ended September 30, 2016 , we had no dispositions. During the nine months ended September 30, 2017 ,we sold one office property, a 45% interest in the 353 Sacramento property and 102 acres of undeveloped land that resulted in a gain on sale of $36.3 million . We recognized a gain on sale of $29.4 million related to the disposition of the office property. We recognized a gain on sale of $1.7 million related to the sale of a 45% interest in the 353 Sacramento property. We recognized a gain on sale related to the disposition of the undeveloped land based on the percentage of completion method due to our continuing development obligations to the purchasers. We recognized a gain on sale of $5.2 million related to the land sale, which is net of deferred profit of $2.6 million . In addition, we deferred $1.7 million related to proceeds received from the purchasers and another developer for the value of land that was contributed to a master association that we consolidated.
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.
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. 

45
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

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, mark to market foreign currency transaction adjustment and acquisition fees and expenses (as applicable) 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;
•
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 and foreign currency options 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; and

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Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•
Acquisition fees and expenses.  Prior to our early adoption of ASU No. 2017-01 on January 1, 2017, acquisition fees and expenses related to the acquisition of real estate were generally expensed.  Although these amounts reduced net income in 2016, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis.  Additionally, acquisition fees and expenses have been funded from the proceeds from our now-terminated initial public offering and debt financings and not from our operations.  We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance.
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 and nine months ended September 30, 2017 and 2016 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net  (loss) income  attributable to common stockholders
$
(10,534
)
 
$
(14,951
)
 
$
4,220

 
$
(21,804
)
Depreciation of real estate assets
8,354

 
8,047

 
25,650

 
21,512

Amortization of lease-related costs
4,874

 
6,290

 
17,486

 
15,924

Gain on sale of real estate
(2,239
)
 
—

 
(36,267
)
 
—

Adjustments for noncontrolling interests - consolidated entities (1)
(120
)
 
(121
)
 
(377
)
 
(371
)
Adjustments for investments in unconsolidated entities  (2)
3,757

 
2,148

 
8,346

 
5,930

FFO attributable to common stockholders
4,092

 
1,413

 
19,058

 
21,191

Straight-line rent and amortization of above- and below-market leases
(524
)
 
(1,971
)
 
(3,931
)
 
(3,395
)
Amortization of discounts and closing costs
(108
)
 
—

 
(456
)
 
—

Real estate acquisition fees to affiliate
—

 
1,690

 
—

 
2,964

Real estate acquisition fees and expenses
—

 
274

 
—

 
542

Amortization of net premium/discount on bond and notes payable
13

 
11

 
36

 
28

Unrealized loss on derivative instruments
14

 
—

 
102

 
—

Mark-to-market foreign currency transaction loss , net
4,356

 
6,639

 
11,454

 
4,602

Adjustments for noncontrolling interests - consolidated entities (1)
(8
)
 
(2
)
 
(31
)
 
(11
)
Adjustments for investments in unconsolidated entities (2)
(1,146
)
 
(1,042
)
 
(2,820
)
 
(3,381
)
MFFO attributable to common stockholders
6,689

 
7,012

 
23,412

 
22,540

Other capitalized operating expenses (3)
(684
)
 
(610
)
 
(1,992
)
 
(1,787
)
Adjustments for noncontrolling interests - consolidated entities (1)
—

 
—

 
—

 
61

Adjusted MFFO attributable to common stockholders
$
6,005

 
$
6,402

 
$
21,420

 
$
20,814

_____________________
(1) Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net income (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 income (loss) attributable to common stockholders to FFO, MFFO and Adjusted MFFO for our equity investments in unconsolidated joint ventures.
(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 income (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.

47
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Distributions
Distributions declared, distributions paid and cash flows provided by operations were as follows for the first , second and third quarters of 2017 (in thousands, except per share amounts):
 
 
Distribution Declared
 
Distributions Declared Per Share
 
Distributions Paid
 
Cash Flows Provided by Operations
Period
 
 
 
Cash
 
Reinvested
 
Total
 
First Quarter 2017
 
$
5,247

 
$
0.092

 
$
2,323

 
$
2,924

 
$
5,247

 
$
3,391

Second Quarter 2017
 
5,298

 
0.093

 
2,405

 
2,893

 
5,298

 
9,466

Third Quarter 2017
 
5,350

 
0.095

 
2,501

 
2,849

 
5,350

 
6,868

 
 
$
15,895

 
$
0.280

 
$
7,229

 
$
8,666

 
$
15,895

 
$
19,725

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 .
On June 6, 2017 , our board of directors authorized a distribution in the amount of $0.09349315 per share of common stock to stockholders of record as of the close of business on June 12, 2017 . We paid this distribution on June 15, 2017 and this was the only distribution declared and paid during the second quarter of 2017 .
On September 13, 2017 , our board of directors authorized a distribution in the amount of $0.09452055 per share of common stock to stockholders of record as of the close of business on September 15, 2017 . We paid this distribution on September 22, 2017 and this was the only distribution declared and paid during the third quarter of 2017 .
For the nine months ended September 30, 2017 , we paid aggregate distributions of $15.9 million , including $7.2 million of distributions paid in cash and $8.7 million of distributions reinvested through our dividend reinvestment plan. Our net income attributable to common stockholders for the nine months ended September 30, 2017 was $4.2 million and our cash flows provided by operations were $19.7 million . Our cumulative distributions paid and net loss attributable to common stockholders from inception through September 30, 2017 were $120.7 million and $53.3 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 $88.3 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 , except for the adoption of ASU No. 2017-01 on January 1, 2017 and the addition of an accounting policy with respect to real estate equity securities.

48
Table of Contents
PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Real Estate Equity Securities
We determine the appropriate classification for real estate equity securities at acquisition (on the trade date) and reevaluate such designation as of each balance sheet date. As of September 30, 2017 , we classified our investment in real estate equity securities as available-for-sale as we intend to hold the securities for the purpose of collecting dividend income and for longer term price appreciation. These investments are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Unrealized gains and losses are reported in accumulated other comprehensive income (loss). Upon the sale of a security, the previously recognized unrealized gain (loss) would be reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) recognized in earnings. Dividend income is recognized on an accrual basis based on eligible shares as of the ex-dividend date.
Any non-temporary decline in the market value of an available-for-sale real estate equity security below cost results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the real estate equity security is established. When a real estate equity security is impaired, we consider whether we have the ability and intent to hold the investment for a time sufficient to allow for any anticipated recovery in market value and consider whether evidence indicating the cost of the investment being recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to period end and forecasted performance of the investee.
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial statements are issued.
Singapore Transaction
On November 8, 2017 , we, through 11 wholly owned subsidiaries, sold 11 of our properties (the “Singapore Portfolio”) to various subsidiaries of Keppel-KBS US REIT, a newly formed Singapore real estate investment trust (the “SREIT”) that was listed on the Singapore Stock Exchange (the “Singapore Transaction”).  The sale price of the Singapore Portfolio was $804.0 million , before third-party closing costs of approximately $7.7 million and excluding any disposition fees payable to our advisor. The Singapore Portfolio consists of the following properties: 1800 West Loop, Westech 360 (part of the Austin Suburban Portfolio), Great Hills Plaza (part of the Austin Suburban Portfolio), Westmoor Center, Iron Point Business Park, the Plaza Buildings, Bellevue Technology Center, Northridge Center I and II, West Loop I and II, Powers Ferry Landing East and Maitland Promenade II. As of September 30, 2017 , the carrying value of the Singapore Portfolio was $546.5 million . In connection with the Singapore Transaction, we repaid $401.7 million of outstanding debt secured by the properties in the Singapore Portfolio. We also used approximately $52.5 million of the proceeds to acquire units in the SREIT representing a 9.5% ownership interest. Currently, the SREIT does not own any properties other than the Singapore Portfolio. The SREIT was established with the investment strategy of principally investing, directly or indirectly, in a diversified portfolio of income-producing commercial assets and real estate-related assets in the key growth markets of the United States.
The SREIT will be externally managed by a joint venture (the “Manager”) between (i) an entity in which Keith D. Hall, our Chief Executive Officer and a director, and Peter McMillan III, our President and Chairman of the board of directors, have an indirect ownership interest and (ii) Keppel Capital Holding Pte. Ltd., which is not affiliated with us. The SREIT is expected to pay certain purchase and sale commissions and asset management fees to the Manager in exchange for the provision of certain management services.

49
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 September 30, 2017 , we had entered into one foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar. The foreign currency option expires in August 2018 and has an aggregate U.S. Dollar notional amount of $285.4 million . The Company has the right, but not the obligation, to purchase up to 970.2 million Israeli Shekels at the rate of ILS 3.4 per USD.
As of September 30, 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 September 30, 2017 , we had bonds outstanding and the related interest payable in the amounts of 970.2 million Israeli new Shekels and 20.6 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 nine months ended September 30, 2017 , if foreign currency exchange rates were to increase or decrease by 10%, our net income would increase or decrease by approximately $24.6 million and $30.0 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 option 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 September 30, 2017 , the fair value of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was $288.8 million and the outstanding principal balance was $274.5 million . As of September 30, 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 $30.9 million . The fair value estimate of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was calculated using the quoted bond price as of September 30, 2017 on the Tel Aviv Stock Exchange of 105.20 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 September 30, 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 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 September 30, 2017 , we were exposed to market risks related to fluctuations in interest rates on $694.7 million of variable rate debt outstanding. Based on interest rates as of September 30, 2017 , if interest rates were 100 basis points higher or lower during the 12 months ending September 30, 2018 , interest expense on our variable rate debt would increase or decrease by $6.9 million .
The weighted-average interest rates of our fixed rate debt and variable rate debt as of September 30, 2017 were 4.3% and 3.5% , respectively. The interest rate and weighted-average interest rate represent the actual interest rate in effect as of September 30, 2017 (consisting of the contractual interest rate and the effect of contractual floor rates, if applicable), using interest rate indices as of September 30, 2017 where applicable.

50
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.

51
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.
On September 14, 2017 , we commenced the SOR Offer for up to 3,553,660 shares of common stock at a price of $14.07 per share, or approximately $50.0 million of shares. On October 18, 2017 , we increased the number of shares accepted for payment in the SOR Offer by up to 1,135,912 shares at a price of $14.07 per share, or approximately $16.0 million of shares. On October 23, 2017 , we accepted for purchase 4,688,671 shares for an aggregate cost of $66.0 million , excluding fees and expenses related to the SOR Offer.
Because of the SOR Offer, the share redemption program was suspended from September 29, 2017 through October 31, 2017 , meaning no redemptions were made in September or October (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). We cancelled all outstanding redemption requests under the share redemption program as of the commencement of the SOR Offer and were not accepting any redemption requests under the share redemption program during the term of the SOR Offer.

52
Table of Contents
PART II.
OTHER INFORMATION (CONTINUED)
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During the nine months ended September 30, 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)  
April 2017
 
33,319

 
$
14.81

 
(2)  
May 2017
 
8,213

 
$
14.81

 
(2)  
June 2017
 
222,798

 
$
14.10

 
(2)  
July 2017
 
8,811

 
$
14.81

 
(2)  
August 2017
 
27,516

 
$
14.81

 
(2)  
September 2017
 
—

 
$
—

 
(2)  
Total
 
554,482

 
 
 
 
_____________________
(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. The Tenth Amended Share Redemption Program was suspended from September 29, 2017 through October 31, 2017 , meaning no redemptions were made in September or October (including those requested following a stockholder’s death, qualifying disability or determination of incompetence). We cancelled all outstanding redemption requests under the share redemption program as of the commencement of the SOR Offer and were not accepting any redemption requests under the share redemption program during the term of the SOR Offer.
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 nine months ended September 30, 2017 , we redeemed $7.9 million of common stock. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2016, we have $4.7 million available for all redemptions in the remainder of 2017 under the Tenth Amended Share Redemption Program, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence” subject to the limitations described above.
In addition to the redemptions under the share redemption program described above, during the nine months ended September 30, 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.

53
Table of Contents
PART II.
OTHER INFORMATION (CONTINUED)
Item 6.
Exhibits

Ex.
 
Description
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
99.1
 
 
 
 
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

54
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:
November 14, 2017
By:
/S/ K EITH  D. H ALL        
 
 
 
Keith D. Hall
 
 
 
Chief Executive Officer and Director
 
 
 
(principal executive officer)
 
 
 
 
Date:
November 14, 2017
By:
/S/ J EFFREY  K. W ALDVOGEL        
 
 
 
Jeffrey K. Waldvogel
 
 
 
Chief Financial Officer, Treasurer and Secretary
 
 
 
(principal financial officer)

55

Exhibit 10.1













ADVISORY AGREEMENT

between

KBS STRATEGIC OPPORTUNITY REIT, INC.

and

KBS CAPITAL ADVISORS LLC





October 8, 2017







TABLE OF CONTENTS
 
 
 
Page

ARTICLE 1 - DEFINITIONS
1

ARTICLE 2 - APPOINTMENT
9

ARTICLE 3 - DUTIES OF THE ADVISOR
9

 
3.01
Organizational and Offering Services
9

 
3.02
Acquisition Services
10

 
3.03
Asset Management Services
10

 
3.04
Stockholder Services
13

 
3.05
Other Services
13

ARTICLE 4 - AUTHORITY OF ADVISOR
14

 
4.01
General
14

 
4.02
Powers of the Advisor
14

 
4.03
Approval by the Board
14

 
4.04
Modification or Revocation of Authority of Advisor
14

ARTICLE 5 - BANK ACCOUNTS
14

ARTICLE 6 - RECORDS AND FINANCIAL STATEMENTS
15

ARTICLE 7 - LIMITATION ON ACTIVITIES
15

ARTICLE 8 - FEES
16

 
8.01
Acquisition Fees
16

 
8.02
Asset Management Fees
16

 
8.03
Disposition Fees
17

 
8.04
Subscription Processing Fee
18

 
8.05
Subordinated Share of Cash Flows
18

 
8.06
Subordinated Incentive Fee
19

 
8.07
Changes to Fee Structure
19

ARTICLE 9 - EXPENSES
19

 
9.01
General
19

 
9.02
Timing of and Limitations on Reimbursements
21

ARTICLE 10 - VOTING AGREEMENT
22

ARTICLE 11 - RELATIONSHIP OF ADVISOR AND COMPANY; OTHER ACTIVITIES OF THE ADVISOR
22

 
11.01
Relationship
22

 
11.02
Time Commitment
22

 
11.03
Investment Opportunities and Allocation
23

ARTICLE 12 - THE KBS NAME
23

ARTICLE 13 - TERM AND TERMINATION OF THE AGREEMENT
23

 
13.01
Term
23

 
13.02
Termination by Either Party
24

 
13.03
Payments on Termination and Survival of Certain Rights and Obligations
24

ARTICLE 14 - ASSIGNMENT
24

ARTICLE 15 - INDEMNIFICATION AND LIMITATION OF LIABILITY
25

 
15.01
Indemnification
25


i



 
15.02
Limitation on Indemnification
25

 
15.03
Limitation on Payment of Expenses
26

ARTICLE 16 - MISCELLANEOUS
26

 
16.01
Notices
26

 
16.02
Modifications
26

 
16.03
Severability
26

 
16.04
Construction
27

 
16.05
Entire Agreement
27

 
16.06
Waiver
27

 
16.07
Gender
27

 
16.08
Titles Not to Affect Interpretation
27

 
16.09
Counterparts
27

 
 
 
 














ii



ADVISORY AGREEMENT
This Advisory Agreement, dated as of October 8, 2017 (the “Agreement”), is between KBS Strategic Opportunity REIT, Inc., a Maryland corporation (the “Company”), and KBS Capital Advisors LLC, a Delaware limited liability company (the “Advisor”).
W I T N E S S E T H
WHEREAS, the Company desires to avail itself of the knowledge, experience, sources of information, advice, assistance and certain facilities available to the Advisor and to have the Advisor undertake the duties and responsibilities hereinafter set forth, on behalf of, and subject to the supervision of, the board of directors of the Company (the “Board”), all as provided herein; and
WHEREAS, the Advisor is willing to undertake to render such services, subject to the supervision of the Board, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
The following defined terms used in this Agreement shall have the meanings specified below:
“Acquisition Expenses” means any and all expenses, excluding the fee payable to the Advisor pursuant to Section 8.01, incurred by the Company, the Advisor or any Affiliate of either in connection with the selection, acquisition or development of any property, loan or other potential investment, whether or not acquired or originated, as applicable, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on properties or other investments not acquired, accounting fees and expenses, title insurance premiums and miscellaneous expenses related to the selection, acquisition or development of any property, loan or other potential investment.
“Acquisition Fees” means the fee payable to the Advisor pursuant to Section 8.01 plus all other fees and commissions, excluding Acquisition Expenses, paid by any Person to any Person in connection with making or investing in any Property, Loan or other Permitted Investment or the purchase, development or construction of any Property by the Company. Included in the computation of such fees or commissions shall be any real estate commission, selection fee, Development Fee, Construction Fee, nonrecurring management fee, loan fees or points or any fee of a similar nature, however designated. Excluded shall be Development Fees and Construction Fees paid to Persons not Affiliated with the Advisor in connection with the actual development and construction of a Property.
“Advisor” means (i) KBS Capital Advisors LLC, a Delaware limited liability company, or (ii) any successor advisor to the Company.

1
 


“Affiliate” or “Affiliated” An Affiliate of another Person includes any of the following: (i) any Person directly or indirectly controlling, controlled by, or under common control with such other Person; (ii) any Person directly or indirectly owning, controlling, or holding with the power to vote 10% or more of the outstanding voting securities of such other Person; (iii) any legal entity for which such Person acts as an executive officer, director, trustee, or general partner; (iv) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other Person; and (v) any executive officer, director, trustee, or general partner of such other Person. An entity shall not be deemed to control or be under common control with an Advisor-sponsored program unless (i) the entity owns 10% or more of the voting equity interests of such program or (ii) a majority of the board of directors (or equivalent governing body) of such program is composed of Affiliates of the entity.
“Appraised Value” means the value according to an appraisal made by an Independent Appraiser.
“Asset Management Fee” shall have the meaning set forth in Section 8.02.
“Average Invested Assets” means, for a specified period, the average of the aggregate book value of the assets of the Company invested, directly or indirectly, in Properties, Loans and other Permitted Investments secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period.
“Board” means the board of directors of the Company, as of any particular time.
“Bylaws” means the bylaws of the Company, as amended from time to time.
“Cash from Financings” means the net cash proceeds realized by the Company from the financing of Properties, Loans or other Permitted Investments or from the refinancing of any Company indebtedness (after deduction of all expenses incurred in connection therewith).
“Cash from Sales and Settlements” means the net cash proceeds realized by the Company (i) from the sale, exchange or other disposition of any of its assets or any portion thereof after deduction of all expenses incurred in connection therewith and (ii) from the prepayment, maturity, workout or other settlement of any Loan or Permitted Investment or portion thereof after deduction of all expenses incurred in connection therewith. In the case of a transaction described in clause (i) (C) of the definition of “Sale” and (i)(B) of the definition of “Settlement,” Cash from Sales and Settlements means the proceeds of any such transaction actually distributed to the Company from the Joint Venture or partnership. Cash from Sales and Settlements shall not include Cash from Financings.
“Cash from Sales, Settlements and Financings” means the total sum of Cash from Sales and Settlements and Cash from Financings.
“Charter” means the articles of incorporation of the Company, as amended from time to time.

2
 


“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. Reference to any provision of the Code shall mean such provision as in effect from time to time, as the same may be amended, and any successor provision thereto, as interpreted by any applicable regulations as in effect from time to time.
“Company” means KBS Strategic Opportunity REIT, Inc., a corporation organized under the laws of the State of Maryland.
“Competitive Real Estate Commission” means a real estate or brokerage commission for the purchase or sale of property that is reasonable, customary, and competitive in light of the size, type, and location of the property.
“Conflicts Committee” shall have the meaning set forth in the Company’s Charter.
“Construction Fee” means a fee or other remuneration for acting as general contractor and/or construction manager to construct improvements, supervise and coordinate projects or to provide major repairs or rehabilitation on a Property.
“Contract Sales Price” means the total consideration received by the Company for the sale of a Property, Loan or other Permitted Investment.
“Cost of Loans and other Permitted Investments” means the sum of the cost of all Loans and Permitted Investments held, directly or indirectly, by the Company, calculated each month on an ongoing basis, and calculated as follows for each investment: the lesser of (i) the amount actually paid or allocated to acquire or fund the Loan or Permitted 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 Permitted Investment (plus the fees and expenses related to the acquisition or funding of such investment), as of the time of calculation. With respect to any Loan or Permitted Investment held by the Company through a Joint Venture or partnership of which it is, directly or indirectly, a partner, such amount shall be the Company’s proportionate share thereof.
“Cost of Real Estate Investments” means the sum of (i) with respect to Properties wholly owned, directly or indirectly, by the Company, the amount actually paid or allocated to the purchase, development, construction or improvement of Properties, inclusive of fees and expenses related thereto, plus the amount of any outstanding debt attributable to such Properties and (ii) in the case of Properties owned by any Joint Venture or partnership in which the Company or the Partnership is, directly or indirectly, a partner, the portion of the amount actually paid or allocated to the purchase, development, construction or improvement of Properties, inclusive of fees and expenses related thereto, plus the amount of any outstanding debt associated with such Properties that is attributable to the Company’s investment in the Joint Venture or partnership.
“Dealer Manager” means (i) KBS Capital Markets Group LLC, a Delaware limited liability company, or (ii) any successor dealer manager to the Company.

3
 


“Development Fee” means a fee for the packaging of a Property, including negotiating and approving plans, and undertaking to assist in obtaining zoning and necessary variances and necessary financing for the Property, either initially or at a later date.
“Director” means a member of the board of directors of the Company.
“Disposition Fee” shall have the meaning set forth in Section 8.03.
“Distributions” means any distributions of money or other property by the Company to owners of Shares, including distributions that may constitute a return of capital for federal income tax purposes.
“GAAP” means accounting principals generally accepted in the United States.
“Gross Proceeds” means the aggregate purchase price of all Shares sold for the account of the Company through an Offering, without deduction for Organization and Offering Expenses.
“Independent Appraiser” means a person or entity with no material current or prior business or personal relationship with the Advisor or the Directors, who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Company, and who is a qualified appraiser of real estate as determined by the Board. Membership in a nationally recognized appraisal society such as the American Institute of Real Estate Appraisers (M.A.I.) or the Society of Real Estate Appraisers (S.R.E.A.) shall be conclusive evidence of such qualification.
“Initial Public Offering” means the initial public offering of Shares registered on Registration Statement No. 333-156633 on Form S-11.
“Invested Capital” means the amount calculated by multiplying the total number of Shares purchased by Stockholders by the issue price, reduced by any amounts paid by the Company to repurchase Shares pursuant to the Company’s plan for redemption of Shares.
“Joint Venture” means any joint venture, limited liability company or other Affiliate of the Company that owns, in whole or in part, on behalf of the Company any Properties, Loans or other Permitted Investments.
“Listed” or “Listing” shall have the meaning set forth in the Company’s Charter.
“Loans” means mortgage loans and other types of debt financing investments made by the Company or the Partnership, either directly or indirectly, including through ownership interests in a Joint Venture or partnership, including, without limitation, mezzanine loans, B-notes, bridge loans, convertible mortgages, wraparound mortgage loans, construction mortgage loans, loans on leasehold interests, and participations in such loans.
“Market Value” shall have the meaning set forth in Section 8.06.
“NASAA Guidelines” means the NASAA Statement of Policy Regarding Real Estate Investment Trusts as in effect on the date hereof.

4
 


“Net Income” means, for any period, the total revenues applicable to such period, less the total expenses applicable to such period excluding additions to reserves for depreciation, bad debts or other similar non-cash reserves; provided, however, Net Income for purposes of calculating total allowable Operating Expenses (as defined herein) shall exclude the gain from the sale of the Company’s assets.
“Offering” means any offering of Shares that is registered with the SEC, excluding Shares offered under any employee benefit plan.
“Operating Cash Flow” means Operating Revenue Cash Flows minus the sum of (i) Operating Expenses, (ii) all principal and interest payments on indebtedness and other sums paid to lenders, (iii) the expenses of raising capital such as Organization and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and tax incurred in connection with the issuance, distribution, transfer, registration and Listing of the Shares, (iv) taxes, (v) incentive fees paid in compliance with Section IV.F. of the NASAA Guidelines and (vi) Acquisition Fees, Acquisition Expenses, real estate commissions on the resale of real property, and other expenses connected with the acquisition, disposition, and ownership of real estate interests, loans or other property (other than commissions on the sale of assets other than real property), such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property.
“Operating Expenses” means all costs and expenses incurred by the Company, as determined under GAAP, that in any way are related to the operation of the Company or to Company business, including fees paid to the Advisor, but excluding (i) the expenses of raising capital such as Organization and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration, and other fees, printing and other such expenses and tax incurred in connection with the issuance, distribution, transfer, registration and Listing of the Shares, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad loan reserves, (v) incentive fees paid in compliance with Section IV.F. of the NASAA Guidelines and (vi) Acquisition Fees, Acquisition Expenses, real estate commissions on the resale of real property, and other expenses connected with the acquisition, disposition, and ownership of real estate interests, loans or other property (other than commissions on the sale of assets other than real property), such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property.
“Operating Revenue Cash Flows” means the Company’s cash flow from ownership and/or operation of (i) Properties, (ii) Loans, (iii) Permitted Investments, (iv) short-term investments, and (v) interests in Properties, Loans and Permitted Investments owned by any Joint Venture or any partnership in which the Company or the Partnership is, directly or indirectly, a partner.
“Organization and Offering Expenses” means all expenses incurred by or on behalf of the Company in connection with or preparing the Company for registration of and subsequently offering and distributing its Shares to the public, whether incurred before or after the date of this Agreement, which may include but are not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters’ attorneys); any expense allowance granted by the Company to the underwriter or any reimbursement of expenses of the underwriter by the Company;

5
 


expenses for printing, engraving and mailing; compensation of employees while engaged in sales activity; charges of transfer agents, registrars, trustees, escrow holders, depositaries and experts; and expenses of qualification of the sale of the securities under Federal and State laws, including taxes and fees, accountants’ and attorneys’ fees.
“Partnership” means KBS Strategic Opportunity Limited Partnership, a Delaware limited partnership formed to own and operate Properties, Loans and other Permitted Investments on behalf of the Company.
“Permitted Investments” means all investments (other than Properties and Loans) in which the Company may acquire an interest, either directly or indirectly, including through ownership interests in a Joint Venture or partnership, pursuant to its Charter, Bylaws and the investment objectives and policies adopted by the Board from time to time, other than short-term investments acquired for purposes of cash management.
“Person” means an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c) (17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, or any government or any agency or political subdivision thereof, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
“Property” means any real property or properties transferred or conveyed to the Company or the Partnership, either directly or indirectly, including through ownership interests in a Joint Venture or partnership.
“Property Manager” means an entity that has been retained to perform and carry out at one or more of the Properties property-management services, excluding persons, entities or independent contractors retained or hired to perform facility management or other services or tasks at a particular Property, the costs for which are passed through to and ultimately paid by the tenant at such Property.
“Registration Statement” means the registration statement filed by the Company with the SEC on Form S-11 (Reg. No. 333-156633), as amended from time to time, in connection with the Initial Public Offering.
“REIT” means a “real estate investment trust” under Sections 856 through 860 of the Code.
“Sale” means any transaction or series of transactions whereby: (A) the Company or the Partnership sells, grants, transfers, conveys, or relinquishes its ownership of any Property, Loan or other Permitted Investment or portion thereof, including the transfer of any Property that is the subject of a ground lease, including any event with respect to any Property, Loan or other Permitted Investment that gives rise to a significant amount of insurance proceeds or condemnation awards, and including the issuance by one of the Company’s subsidiaries of any asset-backed securities or collateralized debt obligations as part of a securitization transaction; (B) the Company or the Partnership sells, grants, transfers, conveys, or relinquishes its ownership of all or substantially all of the interest of the Company or the Partnership in any Joint Venture or any partnership in which

6
 


it is a partner; or (C) any Joint Venture or any partnership in which the Company or the Partnership is a partner, sells, grants, transfers, conveys, or relinquishes its ownership of any Property, Loan or other Permitted Investment or portion thereof, including any event with respect to any Property, Loan or other Permitted Investment that gives rise to insurance claims or condemnation awards, and including the issuance by such Joint Venture or any partnership or one of its subsidiaries of any asset-backed securities or collateralized debt obligations as part of a securitization transaction.
“SEC” means the United States Securities and Exchange Commission.
“Settlement” means the prepayment, maturity, workout or other settlement of any Loan or other Permitted Investment or portion thereof owned, directly or indirectly, by (A) the Company or the Partnership or (B) any Joint Venture or any partnership in which the Company or the Partnership is, directly or indirectly, a partner.
“Shares” means shares of common stock of the Company, par value $.01 per share.
“Stockholders” means the registered holders of the Shares.
“Stockholders’ 7% Return” means, as of any date, an aggregate amount equal to a 7% cumulative, non-compounded, annual return on Invested Capital (calculated like simple interest on a daily basis based on a three hundred sixty-five day year). For purposes of calculating the Stockholders’ 7% Return, Invested Capital shall be determined for each day during the period for which the Stockholders’ 7% Return is being calculated and shall be calculated net of (1) Distributions of Operating Cash Flow to the extent such Distributions of Operating Cash Flow provide a cumulative, non-compounded, annual return in excess of 7%, as such amounts are computed on a daily basis based on a three hundred sixty-five day year and (2) Distributions of Cash from Sales, Settlements and Financings, except to the extent such Distributions would be required to supplement Distributions of Operating Cash Flow in order to achieve a cumulative, non-compounded, annual return of 7%, as such amounts are computed on a daily basis based on a three hundred sixty-five day year.
“Subordinated Incentive Fee” means the fee payable to the Advisor under certain circumstances if the Shares are Listed, as calculated in Section 8.06.
“Subordinated Incentive Fee Threshold” has the meaning set forth in Section 8.06.
“Subordinated Performance Fee Due Upon Termination” means a fee payable in the form of an interest bearing promissory note (the “Performance Fee Note”) in a principal amount equal to (1) 15% of the amount, if any, by which (a) the Appraised Value of the Company’s Properties at the Termination Date, less amounts of all indebtedness secured by the Company’s Properties, plus the fair market value of all other Loans and Permitted Investments of the Company at the Termination Date, less amounts of indebtedness related to such Loans and Permitted Investments, plus total Distributions (excluding any stock dividend) through the Termination Date exceeds (b) the sum of Invested Capital plus total Distributions required to be made to the stockholders in order to pay the Stockholders’ 7% Return from inception through the Termination Date less (2) any prior payment to the Advisor of a Subordinated Share of Cash Flows (the amount calculated under (b) is the “Termination Fee Threshold”). Interest on the Performance Fee Note will accrue beginning on the

7
 


Termination Date at a rate deemed fair and reasonable by the Conflicts Committee. The Company shall repay the Performance Fee Note at such time as the Company completes the first Sale or Settlement after the Termination Date using Cash from Sales and Settlements. If the Cash from Sales and Settlements from the first Sale or Settlement after the Termination Date is insufficient to pay the Performance Fee Note in full, including accrued interest, then the Performance Fee Note shall be paid in part from the Cash from Sales and Settlements from the first Sale or Settlement, and in part from the Cash from Sales and Settlements from each successive Sale or Settlement until the Performance Fee Note is repaid in full, with interest. If the Performance Fee Note has not been paid in full within five years from the Termination Date, then the Advisor, its successors or assigns, may elect to convert the balance of the fee, including accrued but unpaid interest, into Shares at a price per Share equal to the average closing price of the Shares over the ten trading days immediately preceding the date of such election if the Shares are Listed at such time. If the Shares are not Listed at such time, the Advisor, its successors or assigns, may elect to convert the balance of the fee, including accrued but unpaid interest, into Shares at a price per Share equal to the fair market value for the Shares as determined by the Board based upon the Appraised Value of Company’s Properties on the date of election plus the fair market value of all other Loans and Permitted Investments of the Company on the date of election.
“Subordinated Share of Cash Flows” has the meaning set forth in Section 8.05.
“Subordinated Share of Cash Flows Threshold” has the meaning set forth in Section 8.05.
“Subscription Processing Fee” has the meaning set forth in Section 8.04.
“Termination Date” means the date of termination of the Agreement determined in accordance with Article 13 hereof.
“Termination Fee Threshold” has the meaning set forth in the definition of Subordinated Performance Fee Due Upon Termination.
“2%/25% Guidelines” means the requirement pursuant to the NASAA Guidelines that, in any period of four consecutive fiscal quarters, total Operating Expenses not exceed the greater of 2% of the Company’s Average Invested Assets during such 12-month period or 25% of the Company’s Net Income over the same 12-month period.
ARTICLE 2
APPOINTMENT
The Company hereby appoints the Advisor to serve as its advisor and asset manager on the terms and conditions set forth in this Agreement, and the Advisor hereby accepts such appointment.
ARTICLE 3
DUTIES OF THE ADVISOR
The Advisor is responsible for managing, operating, directing and supervising the operations and administration of the Company and its assets. The Advisor undertakes to use its best efforts to present to the Company potential investment opportunities, to make investment decisions on behalf

8
 


of the Company subject to the limitations in the Company’s Charter, the direction and oversight of the Board and Section 4.03 hereof, and to provide the Company with a continuing and suitable investment program consistent with the investment objectives and policies of the Company as determined and adopted from time to time by the Board. Subject to the limitations set forth in this Agreement, including Article 4 hereof, and the continuing and exclusive authority of the Board over the management of the Company, the Advisor shall, either directly or by engaging an Affiliate or third party, perform the following duties:
3.01 Organizational and Offering Services. The Advisor shall perform all services related to the organization of the Company or any Offering or private sale of the Company’s securities, other than services that (i) are to be performed by the Dealer Manager, (ii) the Company elects to perform directly or (iii) would require the Advisor to register as a broker-dealer with the SEC or any state.
3.02 Acquisition Services.
(i) Serve as the Company’s investment and financial advisor and provide relevant market research and economic and statistical data in connection with the Company’s assets and investment objectives and policies;
(ii) Subject to Section 4 hereof and the investment objectives and policies of the Company: (a) locate, analyze and select potential investments; (b) structure and negotiate the terms and conditions of transactions pursuant to which investments in Properties, Loans and other Permitted Investments will be made; (c) acquire, originate and dispose of Properties, Loans and other Permitted Investments on behalf of the Company; (d) arrange for financing and refinancing and make other changes in the asset or capital structure of investments in Properties, Loans and other Permitted Investments; and (e) enter into leases, service contracts and other agreements for Properties, Loans and other Permitted Investments;
(iii) Perform due diligence on prospective investments and create due diligence reports summarizing the results of such work;
(iv) With respect to prospective investments presented to the Board, prepare reports regarding such prospective investments that include recommendations and supporting documentation necessary for the Directors to evaluate the proposed investments;
(v) Obtain reports (which may be prepared by the Advisor or its Affiliates), where appropriate, concerning the value of contemplated investments of the Company;
(vi) Deliver to or maintain on behalf of the Company copies of all appraisals obtained in connection with the Company’s investments; and
(vii) Negotiate and execute approved investments and other transactions, including prepayments, maturities, workouts and other settlements of Loans and other Permitted Investments.

9
 


3.03 Asset Management Services.
(i) Real Estate and Related Services:
(a) Investigate, select and, on behalf of the Company, engage and conduct business with (including enter contracts with) such Persons as the Advisor deems necessary to the proper performance of its obligations as set forth in this Agreement, including but not limited to consultants, accountants, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, developers, construction companies, Property Managers and any and all Persons acting in any other capacity deemed by the Advisor necessary or desirable for the performance of any of the foregoing services;
(b) Negotiate and service the Company’s debt facilities and other financings;
(c) Monitor applicable markets and obtain reports (which may be prepared by the Advisor or its Affiliates) where appropriate, concerning the value of investments of the Company;
(d) Monitor and evaluate the performance of each asset of the Company and the Company’s overall portfolio of assets, provide daily management services to the Company and perform and supervise the various management and operational functions related to the Company’s investments;
(e) Formulate and oversee the implementation of strategies for the administration, promotion, management, operation, maintenance, improvement, financing and refinancing, marketing, leasing and disposition of Properties, Loans and other Permitted Investments on an overall portfolio basis;
(f) Consult with the Company’s officers and the Board and assist the Board in the formulation and implementation of the Company’s financial policies, and, as necessary with respect to investment and borrowing opportunities presented to the Board, furnish the Board with advice and recommendations with respect to the making of investments consistent with the investment objectives and policies of the Company and in connection with any borrowings proposed to be undertaken by the Company;
(g) Oversee the performance by the Property Managers of their duties, including collection and proper deposits of rental payments and payment of Property expenses and maintenance;
(h) Conduct periodic on-site property visits to some or all (as the Advisor deems reasonably necessary) of the Properties to inspect the physical condition of the Properties and to evaluate the performance of the Property Managers;

10
 


(i) Review, analyze and comment upon the operating budgets, capital budgets and leasing plans prepared and submitted by each Property Manager and aggregate these property budgets into the Company’s overall budget;
(j) Coordinate and manage relationships between the Company and any Joint Venture partners; and
(k) Consult with the Company’s officers and the Board and provide assistance with the evaluation and approval of potential asset disposition, sale and refinancing opportunities that are presented to the Board.
(ii) Accounting and Other Administrative Services:
(a) Provide the day-to-day management of the Company and perform and supervise the various administrative functions reasonably necessary for the management of the Company;
(b) From time to time, or at any time reasonably requested by the Board, make reports to the Board on the Advisor’s performance of services to the Company under this Agreement;
(c) Make reports to the Conflicts Committee each quarter of the investments that have been made by other programs sponsored by the Advisor or any of its Affiliates, including KBS Realty Advisors LLC, as well as any investments that have been made by the Advisor or any of its Affiliates directly;
(d) Provide or arrange for any administrative services and items, legal and other services, office space, office furnishings, personnel and other overhead items necessary and incidental to the Company’s business and operations;
(e) Provide financial and operational planning services;
(f) Maintain accounting and other record-keeping functions at the Company and investment levels, including information concerning the activities of the Company as shall be required to prepare and to file all periodic financial reports, tax returns and any other information required to be filed with the SEC, the Internal Revenue Service and any other regulatory agency;
(g) Maintain and preserve all appropriate books and records of the Company;
(h) Provide tax and compliance services and coordinate with appropriate third parties, including the Company’s independent auditors and other consultants, on related tax matters;
(i) Provide the Company with all necessary cash management services;
(j) Manage and coordinate with the transfer agent the dividend process and payments to Stockholders;

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(k) Consult with the Company’s officers and the Board and assist the Board in evaluating and obtaining adequate insurance coverage based upon risk management determinations;
(l) Provide the Company’s officers and the Board with timely updates related to the overall regulatory environment affecting the Company, as well as managing compliance with such matters, including but not limited to compliance with the Sarbanes-Oxley Act of 2002;
(m) Consult with the Company’s officers and the Board relating to the corporate governance structure and appropriate policies and procedures related thereto;
(n) Perform all reporting, record keeping, internal controls and similar matters in a manner to allow the Company to comply with applicable law, including federal and state securities laws and the Sarbanes-Oxley Act of 2002;
(o) Notify the Board of all proposed material transactions before they are completed; and
(p) Do all things necessary to assure its ability to render the services described in this Agreement.
3.04 Stockholder Services.
(i) Manage services for and communications with Stockholders, including answering phone calls, preparing and sending written and electronic reports and other communications;
(ii) Oversee the performance of the transfer agent and registrar;
(iii) Establish technology infrastructure to assist in providing Stockholder support and service; and
(iv) Consistent with Section 3.01, the Advisor shall perform the various subscription processing services reasonably necessary for the admission of new Stockholders.
3.05 Other Services. Except as provided in Article 7, the Advisor shall perform any other services reasonably requested by the Company (acting through the Conflicts Committee).
ARTICLE 4
AUTHORITY OF ADVISOR
4.01 General. All rights and powers to manage and control the day-to-day business and affairs of the Company shall be vested in the Advisor. The Advisor shall have the power to delegate all or any part of its rights and powers to manage and control the business and affairs of the Company to such officers, employees, Affiliates, agents and representatives of the Advisor or the Company as it may deem appropriate. Any authority delegated by the Advisor to any other Person shall be

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subject to the limitations on the rights and powers of the Advisor specifically set forth in this Agreement or the Charter.
4.02 Powers of the Advisor. Subject to the express limitations set forth in this Agreement and the continuing and exclusive authority of the Board over the management of the Company, the power to direct the management, operation and policies of the Company, including making, financing and disposing of investments, shall be vested in the Advisor, which shall have the power by itself and shall be authorized and empowered on behalf and in the name of the Company to carry out any and all of the objectives and purposes of the Company and to perform all acts and enter into and perform all contracts and other undertakings that it may in its sole discretion deem necessary, advisable or incidental thereto to perform its obligations under this Agreement.
4.03 Approval by the Board. Notwithstanding the foregoing, the Advisor may not take any action on behalf of the Company without the prior approval of the Board or duly authorized committees thereof if the Charter or Maryland General Corporation Law require the prior approval of the Board. If the Board or a committee of the Board must approve a proposed investment, financing or disposition or chooses to do so, the Advisor will deliver to the Board or committee, as applicable, all documents required by it to evaluate such investment, financing or disposition.
4.04 Modification or Revocation of Authority of Advisor. The Board may, at any time upon the giving of notice to the Advisor, modify or revoke the authority or approvals set forth in Article 3 and this Article 4 hereof; provided, however, that such modification or revocation shall be effective upon receipt by the Advisor and shall not be applicable to investment transactions to which the Advisor has committed the Company prior to the date of receipt by the Advisor of such notification.
ARTICLE 5
BANK ACCOUNTS
The Advisor may establish and maintain one or more bank accounts in its own name for the account of the Company or in the name of the Company and may collect and deposit into any such account or accounts, and disburse from any such account or accounts, any money on behalf of the Company, under such terms and conditions as the Board may approve, provided that no funds shall be commingled with the funds of the Advisor. The Advisor shall from time to time render appropriate accountings of such collections and payments to the Board and the independent auditors of the Company.
ARTICLE 6
RECORDS AND FINANCIAL STATEMENTS
The Advisor, in the conduct of its responsibilities to the Company, shall maintain adequate and separate books and records for the Company’s operations in accordance with GAAP, which shall be supported by sufficient documentation to ascertain that such books and records are properly and accurately recorded. Such books and records shall be the property of the Company and shall be available for inspection by the Board and by counsel, auditors and other authorized agents of the Company, at any time or from time to time during normal business hours. Such books and records shall include all information necessary to calculate and audit the fees or reimbursements

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paid under this Agreement. The Advisor shall utilize procedures to attempt to ensure such control over accounting and financial transactions as is reasonably required to protect the Company’s assets from theft, error or fraudulent activity. All financial statements that the Advisor delivers to the Company shall be prepared on an accrual basis in accordance with GAAP, except for special financial reports that by their nature require a deviation from GAAP. The Advisor shall liaise with the Company’s officers and independent auditors and shall provide such officers and auditors with the reports and other information that the Company so requests.
ARTICLE 7
LIMITATION ON ACTIVITIES
Notwithstanding any provision in this Agreement to the contrary, the Advisor shall not take any action that, in its sole judgment made in good faith, would (i) adversely affect the ability of the Company to qualify or continue to qualify as a REIT under the Code, (ii) subject the Company to regulation under the Investment Company Act of 1940, as amended, (iii) violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Company, its Shares or its other securities, (iv) require the Advisor to register as a broker-dealer with the SEC or any state, or (v) violate the Charter or Bylaws. In the event an action that would violate (i) through (v) of the preceding sentence but such action has been ordered by the Board, the Advisor shall notify the Board of the Advisor’s judgment of the potential impact of such action and shall refrain from taking such action until it receives further clarification or instructions from the Board. In such event, the Advisor shall have no liability for acting in accordance with the specific instructions of the Board so given.
ARTICLE 8
FEES
8.01 Acquisition Fees. As compensation for the investigation, selection, sourcing and acquisition or origination (by purchase, investment or exchange) of Properties, Loans and other Permitted Investments, the Company shall pay an Acquisition Fee to the Advisor for each such investment (whether an acquisition or origination). With respect to the acquisition or origination of a Property, Loan or other Permitted Investment to be wholly owned, directly or indirectly, by the Company, the Acquisition Fee payable to the Advisor shall equal 1.0% of the sum of the amount actually paid or allocated to fund the acquisition, origination, development, construction or improvement of the Property, Loan or other Permitted Investment, inclusive of the Acquisition Expenses associated with such Property, Loan or other Permitted Investment and the amount of any debt associated with, or used to fund the investment in, such Property, Loan or other Permitted Investment. With respect to the acquisition or origination of a Property, Loan or other Permitted Investment through any Joint Venture or any partnership in which the Company or the Partnership is, directly or indirectly, a partner, the Acquisition Fee payable to the Advisor shall equal 1.0% of the portion of the amount actually paid or allocated to fund the acquisition, origination, development, construction or improvement of the Property, Loan or other Permitted Investment, inclusive of the Acquisition Expenses associated with such Property, Loan or other Permitted Investment, plus the amount of any debt associated with, or used to fund the investment in, such Property, Loan or other Permitted Investment that is attributable to the Company’s investment in such Joint Venture or partnership. Notwithstanding anything herein to the contrary, the payment of Acquisition Fees by

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the Company shall be subject to the limitations on Acquisition Fees contained in (and defined in) the Company’s Charter. The Advisor shall submit an invoice to the Company following the closing or closings of each acquisition or origination, accompanied by a computation of the Acquisition Fee. Generally, the Acquisition Fee payable to the Advisor shall be paid at the closing of the transaction upon receipt of the invoice by the Company. However, the Acquisition Fee may or may not be taken, in whole or in part, as to any year in the sole discretion of the Advisor. All or any portion of the Acquisition Fees not taken as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine.
8.02 Asset Management Fees.
(i) Except as provided in Section 8.02(ii) hereof, the Company shall pay the Advisor as compensation for the services described in Section 3.03 hereof a monthly fee (the “Asset Management Fee”) in an amount equal to one-twelfth of 0.75% of the sum of the Cost of Real Estate Investments and the Cost of Loans and other Permitted Investments. The Advisor shall submit a monthly invoice to the Company, accompanied by a computation of the Asset Management Fee for the applicable period. Generally, the Asset Management Fee payable to the Advisor shall be paid on the last day of such month, or the first business day following the last day of such month. However, the Asset Management Fee may or may not be taken, in whole or in part, as to any year in the sole discretion of the Advisor. All or any portion of the Asset Management Fees not taken as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine.
(ii) Notwithstanding anything contained in Section 8.02(i) to the contrary, a Property, Loan or other Permitted Investment that has suffered an impairment in value, reduction in cash flow or other negative circumstances may either be excluded from the calculation of the Cost of Real Estate Investments or the Cost of Loans and other Permitted Investments or included in such calculation at a reduced value that is recommended by the Advisor and the Company’s management and then approved by a majority of the Company’s independent directors, and the resulting change in the Asset Management Fee with respect to such an investment will be applicable upon the earlier to occur of the date on which (i) such investment is sold, (ii) such investment is surrendered to a Person other than the Company, its direct or indirect wholly owned subsidiary or a Joint Venture or partnership in which the Company has an interest, (iii) the Advisor determines that it will no longer pursue collection or other remedies related to such investment, or (iv) the Advisor recommends a revised fee arrangement with respect to such investment.
8.03 Disposition Fees. If the Advisor or any of its Affiliates provide a substantial amount of services (as determined by the Conflicts Committee) in connection with a Sale, the Advisor or such Affiliate shall receive a fee at the closing (the “Disposition Fee”) equal to 1% of the Contract Sales Price; provided, however, that if in connection with such Sale commissions are paid to third parties other than the Advisor or its Affiliates, the fee paid to the Advisor or any of its Affiliates may not exceed the commissions paid to such unaffiliated third parties; and provided further that no Disposition Fee shall be payable to the Advisor for any Sale if such Sale involves the Company selling all or substantially all of its assets in one or more transactions designed to effectuate a business combination transaction (as opposed to a Company liquidation, in which case the

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Disposition Fee would be payable if the Advisor or an Affiliate provides a substantial amount of services as provided above). The payment of any Disposition Fees by the Company shall be subject to the limitations contained in the Company’s Charter. Any Disposition Fee payable under this Section 8.03 may be paid in addition to commissions paid to non-Affiliates, provided that the total commissions (including such Disposition Fee) paid to all Persons by the Company for each Sale shall not exceed an amount equal to the lesser of (i) 6% of the aggregate Contract Sales Price of each Property, Loan or other Permitted Investment or (ii) the Competitive Real Estate Commission for each Property, Loan or other Permitted Investment. The Advisor shall submit an invoice to the Company following the closing or closings of each disposition, accompanied by a computation of the Disposition Fee. Generally, the Disposition Fee payable to the Advisor shall be paid at the closing of the transaction upon receipt of the invoice by the Company. However, the Disposition Fee may or may not be taken, in whole or in part, as to any year in the sole discretion of the Advisor. All or any portion of the Disposition Fees not taken as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine.
8.04 Subscription Processing Fee. The Company shall pay the Advisor as compensation for the services described in Section 3.04(iv) hereof a monthly fee (the “Subscription Processing Fee”) in an amount equal to $35 per subscription agreement for Shares received and processed by the Advisor. The Advisor shall submit a monthly invoice to the Company, accompanied by a computation of the total amount of the Subscription Processing Fee for the applicable period. Generally, the Subscription Processing Fee payable to the Advisor shall be paid on the last day of such month, or the first business day following the last day of such month. However, the Subscription Processing Fee may or may not be taken, in whole or in part, as to any year in the sole discretion of the Advisor. All or any portion of the Subscription Processing Fees not taken as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine. The Subscription Processing Fee is an Organization and Offering Expense of the Company and is subject to the limitations on Organization and Offering Expenses in Article 9 hereof.
8.05 Subordinated Share of Cash Flows. The Subordinated Share of Cash Flows shall be payable to the Advisor in an amount equal to 15% of Operating Cash Flow and Cash from Sales, Settlements and Financings remaining after the Stockholders have received Distributions of Operating Cash Flow and of Cash from Sales, Settlements and Financings such that the owners of all outstanding Shares have received Distributions in an aggregate amount equal to the sum of:
a.    the Stockholders’ 7% Return and
b.    Invested Capital.
When determining whether the above threshold (the “Subordinated Share of Cash Flows Threshold”) has been met:
(A)
Any stock dividend shall not be included as a Distribution; and
(B)
Distributions paid on Shares redeemed by the Company (and thus no longer included in the determination of Invested Capital), shall not be included as a Distribution.

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Following Listing, no Subordinated Share of Cash Flows will be paid to the Advisor.
If the Subordinated Share of Cash Flows is payable to the Advisor, the Advisor shall submit a monthly invoice to the Company, accompanied by a computation of the total amount of the Subordinated Share of Cash Flows for the applicable period. Generally, the Subordinated Share of Cash Flows payable to the Advisor shall be paid on the last day of such month, or the first business day following the last day of such month. However, the Subordinated Share of Cash Flows may or may not be taken, in whole or in part, as to any year in the sole discretion of the Advisor. All or any portion of the Subordinated Share of Cash Flows not taken as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine.
8.06 Subordinated Incentive Fee. Upon Listing, the Advisor shall be entitled to the Subordinated Incentive Fee in an amount equal to 15% of the amount by which (i) the market value of the outstanding Shares of the Company, measured by taking the average closing price or the average of the bid and asked price, as the case may be, over a period of 30 days during which the Shares are traded, with such period beginning 180 days after Listing (the “Market Value”), plus the total of all Distributions paid to Stockholders (excluding any stock dividends) from the Company’s inception until the date that Market Value is determined, exceeds (ii) the sum of (A) 100% of Invested Capital and (B) the total Distributions required to be paid to the Stockholders in order to pay the Stockholders’ 7% Return from inception through the date Market Value is determined (the sum of (A) and (B) is the “Subordinated Incentive Fee Threshold”). The Company shall have the option to pay such fee in the form of cash, Shares, a promissory note or any combination of the foregoing. The Subordinated Incentive Fee will be reduced by the amount of any prior payment to the Advisor of a Subordinated Share of Cash Flows. In the event the Subordinated Incentive Fee is paid to the Advisor following Listing, no other performance fee will be paid to the Advisor. In addition, the Subordinated Incentive Fee may or may not be taken, in whole or in part, as to any year in the sole discretion of the Advisor. All or any portion of the Subordinated Incentive Fee not taken as to any fiscal year shall be deferred without interest and may be paid in such other fiscal year as the Advisor shall determine.
8.07 Changes to Fee Structure. The Advisor and the Company shall not agree to reduce the Subordinated Share of Cash Flows Threshold, the Subordinated Incentive Fee Threshold or the Termination Fee Threshold without the approval of Stockholders holding a majority of the Shares. In the event of Listing, the Company and the Advisor shall negotiate in good faith to establish a fee structure appropriate for a perpetual-life entity.
ARTICLE 9
EXPENSES
9.01 General. In addition to the compensation paid to the Advisor pursuant to Article 8 hereof, the Company shall pay directly or reimburse the Advisor for all of the expenses paid or incurred by the Advisor or its Affiliates on behalf of the Company or in connection with the services provided to the Company pursuant to this Agreement, including, but not limited to:
(i) All Organization and Offering Expenses; provided, however, that the Company shall not reimburse the Advisor to the extent such reimbursement would cause the total

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amount spent by the Company on Organization and Offering Expenses to exceed 15% of the Gross Proceeds raised as of the date of the reimbursement and provided further that within 60 days after the end of the month in which an Offering terminates, the Advisor shall reimburse the Company to the extent the Company incurred Organization and Offering Expenses exceeding 15% of the Gross Proceeds raised in the completed Offering; the Company shall not reimburse the Advisor for any Organization and Offering Expenses that are not fair and commercially reasonable to the Company, and the Advisor shall reimburse the Company for any Organization and Offering Expenses that are not fair and commercially reasonable to the Company;
(ii) Acquisition Fees and Acquisition Expenses incurred in connection with the selection and acquisition of Properties, Loans and other Permitted Investments, including such expenses incurred related to assets pursued or considered but not ultimately acquired by the Company, provided that, notwithstanding anything herein to the contrary, the payment of Acquisition Fees and Acquisition Expenses by the Company shall be subject to the limitations contained in the Company’s Charter;
(iii) The actual out-of-pocket cost of goods and services used by the Company and obtained from entities not Affiliated with the Advisor;
(iv) Interest and other costs for borrowed money, including discounts, points and other similar fees;
(v) Taxes and assessments on income or Properties, taxes as an expense of doing business and any other taxes otherwise imposed on the Company and its business, assets or income;
(vi) Out-of-pocket costs associated with insurance required in connection with the business of the Company or by its officers and Directors;
(vii) Expenses of managing, improving, developing, operating and selling Properties, Loans and other Permitted Investments owned, directly or indirectly, by the Company, as well as expenses of other transactions relating to such Properties, Loans and other Permitted Investments, including but not limited to prepayments, maturities, workouts and other settlements of Loans and other Permitted Investments;
(viii) All out-of-pocket expenses in connection with payments to the Board and meetings of the Board and Stockholders;
(ix) Personnel and related employment costs incurred by the Advisor or its Affiliates in performing the services described in Article 3 hereof, including but not limited to reasonable salaries and wages, benefits and overhead of all employees directly involved in the performance of such services, provided that, other than reimbursement of travel and communications expenses, no reimbursement shall be made for compensation of such employees of the Advisor or its Affiliates to the extent that such employees perform services for which the Advisor receives Acquisition Fees or Disposition Fees;

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(x) Out-of-pocket expenses of providing services for and maintaining communications with Stockholders, including the cost of preparation, printing, and mailing annual reports and other Stockholder reports, proxy statements and other reports required by governmental entities;
(xi) Audit, accounting and legal fees, and other fees for professional services relating to the operations of the Company and all such fees incurred at the request, or on behalf of, the Board, the Conflicts Committee or any other committee of the Board;
(xii) Out-of-pocket costs for the Company to comply with all applicable laws, regulations and ordinances;
(xiii) Expenses connected with payments of Distributions made or caused to be made by the Company to the Stockholders;
(xiv) Expenses of organizing, redomesticating, merging, liquidating or dissolving the Company or of amending the Charter or the Bylaws; and
(xv) All other out-of-pocket costs incurred by the Advisor in performing its duties hereunder.
9.02 Timing of and Additional Limitations on Reimbursements.
(i) Expenses incurred by the Advisor on behalf of the Company and reimbursable pursuant to this Article 9 shall be reimbursed no less than monthly to the Advisor. The Advisor shall prepare a statement documenting the expenses of the Company during each quarter and shall deliver such statement to the Company within 45 days after the end of each quarter.
(ii) Notwithstanding anything else in this Article 9 to the contrary, the expenses enumerated in this Article 9 shall not become reimbursable to the Advisor unless and until the Company has raised $2.5 million in the Initial Public Offering.
(iii) Commencing upon the earlier to occur of four fiscal quarters after (i) the Company’s making of its first investment or (ii) six months after commencement of the Initial Public Offering, the following limitation on Operating Expenses shall apply: The Company shall not reimburse the Advisor at the end of any fiscal quarter for Operating Expenses that in the four consecutive fiscal quarters then ended (the “Expense Year”) exceed (the “Excess Amount”) the greater of 2% of Average Invested Assets or 25% of Net Income (the “2%/25% Guidelines”) for such year unless the Conflicts Committee determines that such excess was justified, based on unusual and nonrecurring factors that the Conflicts Committee deems sufficient. If the Conflicts Committee does not approve such excess as being so justified, any Excess Amount paid to the Advisor during a fiscal quarter shall be repaid to the Company. If the Conflicts Committee determines such excess was justified, then, within 60 days after the end of any fiscal quarter of the Company for which total reimbursed Operating Expenses for the Expense Year exceed the 2%/25% Guidelines, the Advisor, at the direction of the Conflicts Committee, shall cause such fact to be disclosed

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to the Stockholders in writing (or the Company shall disclose such fact to the Stockholders in the next quarterly report of the Company or by filing a Current Report on Form 8-K with the SEC within 60 days of such quarter end), together with an explanation of the factors the Conflicts Committee considered in determining that such excess expenses were justified. The Company will ensure that such determination will be reflected in the minutes of the meetings of the Board. All figures used in the foregoing computation shall be determined in accordance with GAAP applied on a consistent basis.
ARTICLE 10
VOTING AGREEMENT
The Advisor agrees that, with respect to any Shares now or hereinafter owned by it, the Advisor will not vote or consent on matters submitted to the stockholders of the Company regarding (i) the removal of the Advisor or any Affiliate of the Advisor, (ii) any transaction between the Company and the Advisor or any of its Affiliates, (iii) the election of directors of the Company or (iv) the approval or termination of any contract with the Advisor or any Affiliate of the Advisor. This voting restriction shall survive until such time that the Advisor is both no longer serving as such and is no longer an Affiliate of the Company.
ARTICLE 11
RELATIONSHIP OF ADVISOR AND COMPANY;
OTHER ACTIVITIES OF THE ADVISOR
11.01 Relationship. The Company and the Advisor are not partners or joint venturers with each other, and nothing in this Agreement shall be construed to make them such partners or joint venturers. Nothing herein contained shall prevent the Advisor from engaging in other activities, including, without limitation, the rendering of advice to other Persons (including other REITs) and the management of other programs advised, sponsored or organized by the Advisor or its Affiliates. Nor shall this Agreement limit or restrict the right of any manager, director, officer, employee or equityholder of the Advisor or its Affiliates to engage in any other business or to render services of any kind to any other Person. The Advisor may, with respect to any investment in which the Company is a participant, also render advice and service to each and every other participant therein. The Advisor shall promptly disclose to the Board the existence of any condition or circumstance, existing or anticipated, of which it has knowledge, that creates or could create a conflict of interest between the Advisor’s obligations to the Company and its obligations to or its interest in any other Person.
11.02 Time Commitment. The Advisor shall, and shall cause its Affiliates and their respective employees, officers and agents to, devote to the Company such time as shall be reasonably necessary to conduct the business and affairs of the Company in an appropriate manner consistent with the terms of this Agreement. The Company acknowledges that the Advisor and its Affiliates and their respective employees, officers and agents may also engage in activities unrelated to the Company and may provide services to Persons other than the Company or any of its Affiliates.
11.03 Investment Opportunities and Allocation. The Advisor shall be required to use commercially reasonable efforts to present a continuing and suitable investment program to the Company that is consistent with the investment policies and objectives of the Company, but neither

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the Advisor nor any Affiliate of the Advisor shall be obligated generally to present any particular investment opportunity to the Company even if the opportunity is of character that, if presented to the Company, could be taken by the Company. In the event an investment opportunity is located, the allocation procedure set forth under the caption “Conflicts of Interest – Certain Conflict Resolution Measures – Allocation of Investment Opportunities” in the Registration Statement shall govern the allocation of the opportunity among the Company and Affiliates of the Advisor.
ARTICLE 12
THE KBS NAME
The Advisor and its Affiliates have a proprietary interest in the name “KBS.” The Advisor hereby grants to the Company a non-transferable, non-assignable, non-exclusive royalty-free right and license to use the name “KBS” during the term of this Agreement. Accordingly, and in recognition of this right, if at any time the Company ceases to retain the Advisor or one of its Affiliates to perform advisory services for the Company, the Company will, promptly after receipt of written request from the Advisor, cease to conduct business under or use the name “KBS” or any derivative thereof and the Company shall change its name and the names of any of its subsidiaries to a name that does not contain the name “KBS” or any other word or words that might, in the reasonable discretion of the Advisor, be susceptible of indication of some form of relationship between the Company and the Advisor or any its Affiliates. At such time, the Company will also make any changes to any trademarks, servicemarks or other marks necessary to remove any references to the word “KBS.” Consistent with the foregoing, it is specifically recognized that the Advisor or one or more of its Affiliates has in the past and may in the future organize, sponsor or otherwise permit to exist other investment vehicles (including vehicles for investment in real estate) and financial and service organizations having “KBS” as a part of their name, all without the need for any consent (and without the right to object thereto) by the Company.
ARTICLE 13
TERM AND TERMINATION OF THE AGREEMENT
13.01 Term. This Agreement shall have an initial term of one year from the date hereof and may be renewed for an unlimited number of successive one-year terms upon mutual consent of the parties. The Company (acting through the Conflicts Committee) will evaluate the performance of the Advisor annually before renewing this Agreement, and each such renewal shall be for a term of no more than one year. Any such renewal must be approved by the Conflicts Committee.
13.02 Termination by Either Party. This Agreement may be terminated upon 60 days written notice without cause or penalty by either the Company (acting through the Conflicts Committee) or the Advisor. The provisions of Articles 1, 10, 12, 13, 15 and 16 shall survive termination of this Agreement.
13.03 Payments on Termination and Survival of Certain Rights and Obligations. Payments to the Advisor pursuant to this Section 13.03 shall be subject to the 2%/25% Guidelines to the extent applicable.

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(i) After the Termination Date, the Advisor shall not be entitled to compensation for further services hereunder except it shall be entitled to receive from the Company within 30 days after the effective date of such termination (A) all unpaid reimbursements of expenses and all earned but unpaid fees payable to the Advisor prior to termination of this Agreement and (B) the Subordinated Performance Fee Due Upon Termination, provided that no Subordinated Performance Fee Due Upon Termination will be paid if the Company has paid or is obligated to pay the Subordinated Incentive Fee.
(ii) The Advisor shall promptly upon termination:
(a) pay over to the Company all money collected pursuant to this Agreement, if any, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled;
(b) deliver to the Board a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board;
(c) deliver to the Board all assets and documents of the Company then in the custody of the Advisor; and
(d) cooperate with the Company to provide an orderly transition of advisory functions.
ARTICLE 14
ASSIGNMENT
This Agreement may be assigned by the Advisor to an Affiliate with the consent of the Conflicts Committee. The Advisor may assign any rights to receive fees or other payments under this Agreement without obtaining the approval of the Board. This Agreement shall not be assigned by the Company without the consent of the Advisor, except in the case of an assignment by the Company to a corporation or other organization that is a successor to all of the assets, rights and obligations of the Company, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company is bound by this Agreement.
ARTICLE 15
INDEMNIFICATION AND LIMITATION OF LIABILITY
15.01 Indemnification. Except as prohibited by the restrictions provided in this Section 15.01, Section 15.02 and Section 15.03, the Company shall indemnify, defend and hold harmless the Advisor and its Affiliates, including their respective officers, directors, equity holders, partners and employees, from all liability, claims, damages or losses arising in the performance of their duties hereunder, and related expenses, including reasonable attorneys’ fees, to the extent such liability, claims, damages or losses and related expenses are not fully reimbursed by insurance. Any indemnification of the Advisor may be made only out of the net assets of the Company and not from Stockholders.

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Notwithstanding the foregoing, the Company shall not indemnify the Advisor or its Affiliates for any loss, liability or expense arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met: (i) there has been a successful adjudication on the merits of each count involving alleged material securities law violations as to the particular indemnitee; (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the SEC and of the published position of any state securities regulatory authority in which securities of the Company were offered or sold as to indemnification for violations of securities laws.
15.02 Limitation on Indemnification. Notwithstanding the foregoing, the Company shall not provide for indemnification of the Advisor or its Affiliates for any liability or loss suffered by any of them, nor shall any of them be held harmless for any loss or liability suffered by the Company, unless all of the following conditions are met:
(i)    The Advisor or its Affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in the best interests of the Company.
(ii)    The Advisor or its Affiliates were acting on behalf of or performing services for the Company.
(iii)    Such liability or loss was not the result of negligence or misconduct by the Advisor or its Affiliates.
15.03 Limitation on Payment of Expenses. The Company shall pay or reimburse reasonable legal expenses and other costs incurred by the Advisor or its Affiliates in advance of the final disposition of a proceeding only if (in addition to the procedures required by the Maryland General Corporation Law, as amended from time to time) all of the following are satisfied: (a) the proceeding relates to acts or omissions with respect to the performance of duties or services on behalf of the Company, (b) the legal proceeding was initiated by a third party who is not a stockholder or, if by a stockholder acting in his or her capacity as such, a court of competent jurisdiction approves such advancement and (c) the Advisor or its Affiliates undertake to repay the amount paid or reimbursed by the Company, together with the applicable legal rate of interest thereon, if it is ultimately determined that the particular indemnitee is not entitled to indemnification.
ARTICLE 16
MISCELLANEOUS
16.01 Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is required by the Charter, the Bylaws or is accepted by the party to whom it is given, and shall be given by being delivered by hand or by overnight mail or other overnight delivery service to the addresses set forth herein:

23
 


To the Company or the Board:
KBS Strategic Opportunity REIT, Inc.
620 Newport Center Drive, Suite 1300
Newport Beach, California 92660
To the Advisor:
KBS Capital Advisors LLC
620 Newport Center Drive, Suite 1300
Newport Beach, California 92660
Either party may at any time give notice in writing to the other party of a change in its address for the purposes of this Section 16.01.
16.02 Modification. This Agreement shall not be changed, modified, terminated or discharged, in whole or in part, except by an instrument in writing signed by both parties hereto, or their respective successors or permitted assigns, and any change or modification to this Agreement must be in accordance with Section 8.07 hereof, to the extent applicable.
16.03 Severability. The provisions of this Agreement are independent of and severable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part.
16.04 Construction. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware.
16.05 Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing.
16.06 Waiver. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.
16.07 Gender. Words used herein regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires.

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16.08 Titles Not to Affect Interpretation. The titles of Articles and Sections contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof.
16.09 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories.


[The remainder of this page is intentionally left blank.
Signature page follows.]


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

 
 


 
 
KBS STRATEGIC OPPORTUNITY REIT, INC.

By:     /s/ Keith D. Hall              
Keith D. Hall, Chief Executive Officer


KBS CAPITAL ADVISORS LLC

By: PBren Investments, L.P., a Manager

By: PBren Investments, LLC, as general partner

By:     /s/ Peter M. Bren           
 Peter M. Bren, Manager

By: Schreiber Real Estate Investments, L.P., a Manager

By: Schreiber Investments, LLC, as general partner

By:     /s/ Charles J. Schreiber, Jr.   
 Charles J. Schreiber, Jr., Manager

By:  GKP Holding LLC, a Manager

By:     /s/ Peter McMillan III    
 Peter McMillan III, Manager
           
By:     /s/ Keith D. Hall             
Keith D. Hall, Manager


 




26



Exhibit 31.1
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Keith D. Hall, certify that:
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
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
    
Date:
November 14, 2017
By:
/S / K EITH  D. H ALL
 
 
 
Keith D. Hall
 
 
 
Chief Executive Officer and Director
 
 
 
(principal executive officer)




Exhibit 31.2
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeffrey K. Waldvogel, certify that:
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
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 14, 2017
By:
/S/ J EFFREY  K. W ALDVOGEL
 
 
 
Jeffrey K. Waldvogel
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)




Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350,
as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of KBS Strategic Opportunity REIT, Inc. (the “Registrant”) for the quarter ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Keith D. Hall, Chief Executive Officer and Director of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date:
November 14, 2017
By:
/ S / K EITH  D. H ALL
 
 
 
Keith D. Hall
 
 
 
Chief Executive Officer and Director
 
 
 
(principal executive officer)





Exhibit 32.2
Certification pursuant to 18 U.S.C. Section 1350,
as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of KBS Strategic Opportunity REIT, Inc. (the “Registrant”) for the quarter ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jeffrey K. Waldvogel, the Chief Financial Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date:
November 14, 2017
By:
/S/ J EFFREY  K. W ALDVOGEL
 
 
 
Jeffrey K. Waldvogel
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)