UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023
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 No. 000-52596
ARES REAL ESTATE INCOME TRUST INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (303) 228-2200
Securities registered pursuant to Section 12(b) of the Act: None
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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.
Large accelerated filer | ☐ | Accelerated filer | ☐ | Smaller reporting company | ☐ |
Non-accelerated filer | ☒ | 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 ☒
As of August 7, 2023, there were 28,865,771 shares of the registrant’s Class T common stock, 49,176,013 shares of the registrant’s Class S common stock, 7,065,763 shares of the registrant’s Class D common stock, 67,113,185 shares of the registrant’s Class I common stock and 49,914,011 shares of the registrant’s Class E common stock outstanding.
ARES REAL ESTATE INCOME TRUST INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of | ||||||
(in thousands, except per share data) | June 30, 2023 |
| December 31, 2022 | |||
(Unaudited) | ||||||
ASSETS |
|
| ||||
Net investment in real estate properties | $ | 3,595,617 | $ | 3,605,578 | ||
Investments in unconsolidated joint venture partnerships |
| 124,075 |
| 120,372 | ||
Investments in real estate debt and securities (includes $85,198 and $14,896 at fair value as of June 30, 2023 and December 31, 2022, respectively) |
| 353,879 |
| 275,335 | ||
Cash and cash equivalents |
| 12,905 |
| 13,336 | ||
Restricted cash |
| 4,265 |
| 3,850 | ||
DST Program Loans |
| 103,314 |
| 81,897 | ||
Other assets | 90,436 | 74,356 | ||||
Total assets | $ | 4,284,491 | $ | 4,174,724 | ||
LIABILITIES AND EQUITY |
|
|
| |||
Liabilities |
|
|
| |||
Accounts payable and accrued expenses | $ | 63,773 | $ | 58,097 | ||
Debt, net |
| 1,664,611 |
| 1,616,475 | ||
Intangible lease liabilities, net |
| 39,109 |
| 42,444 | ||
Financing obligations, net |
| 1,232,793 |
| 1,130,810 | ||
Other liabilities | 96,079 | 114,901 | ||||
Total liabilities |
| 3,096,365 |
| 2,962,727 | ||
Commitments and contingencies (Note 14) |
|
|
| |||
Redeemable noncontrolling interest |
| 17,282 |
| 18,130 | ||
Equity |
|
| ||||
Stockholders’ equity: |
|
| ||||
Preferred stock, $0.01 par value—200,000 shares authorized, none issued and outstanding |
|
| ||||
Class T common stock, $0.01 par value—500,000 shares authorized, 28,741 shares and 26,884 shares and , respectively |
| 287 |
| 269 | ||
Class S common stock, $0.01 par value—500,000 shares authorized, 49,750 shares and 49,237 shares and , respectively |
| 498 |
| 492 | ||
Class D common stock, $0.01 par value—500,000 shares authorized, 7,227 shares and 7,871 shares and , respectively |
| 72 |
| 79 | ||
Class I common stock, $0.01 par value—500,000 shares authorized, 68,105 shares and 69,142 shares and , respectively |
| 681 |
| 691 | ||
Class E common stock, $0.01 par value—500,000 shares authorized, 51,047 shares and 52,974 shares and , respectively |
| 511 |
| 530 | ||
Additional paid-in capital |
| 1,727,632 |
| 1,744,022 | ||
Distributions in excess of earnings |
| (1,033,940) |
| (973,395) | ||
Accumulated other comprehensive income |
| 15,872 |
| 13,148 | ||
Total stockholders’ equity |
| 711,613 |
| 785,836 | ||
Noncontrolling interests |
| 459,231 |
| 408,031 | ||
Total equity | 1,170,844 | 1,193,867 | ||||
Total liabilities and equity | $ | 4,284,491 | $ | 4,174,724 | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended |
| For the Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||||
(in thousands, except per share data) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Revenues: |
|
|
|
| |||||||||
Rental revenues | $ | 77,204 | $ | 73,494 | $ | 155,164 | $ | 135,999 | |||||
Debt-related income |
| 7,189 |
| 846 |
| 12,950 |
| 4,314 | |||||
Total revenues |
| 84,393 |
| 74,340 |
| 168,114 |
| 140,313 | |||||
Operating expenses: |
|
|
|
|
| ||||||||
Rental expenses |
| 28,839 |
| 24,896 |
| 57,139 |
| 46,210 | |||||
Real estate-related depreciation and amortization |
| 33,858 |
| 36,903 |
| 67,055 |
| 64,354 | |||||
General and administrative expenses |
| 2,973 |
| 2,594 |
| 6,017 |
| 4,631 | |||||
Advisory fees |
| 9,623 |
| 8,227 |
| 19,161 |
| 15,370 | |||||
Performance participation allocation |
| — |
| 6,186 |
| — |
| 18,379 | |||||
Acquisition costs and reimbursements |
| 1,849 |
| 1,093 |
| 3,018 |
| 2,722 | |||||
Impairment loss on debt-related investment held for sale |
| 1,260 |
| — |
| 3,780 |
| — | |||||
Total operating expenses |
| 78,402 |
| 79,899 |
| 156,170 |
| 151,666 | |||||
Other expenses (income): |
|
|
|
|
| ||||||||
Equity in loss (income) from unconsolidated joint venture partnerships |
| 203 |
| (1,718) |
| 2,649 |
| (708) | |||||
Interest expense |
| 37,882 |
| 33,774 |
| 75,427 |
| 58,184 | |||||
Gain on sale of real estate property |
| — |
| (29,643) |
| (36,884) |
| (83,524) | |||||
Loss on extinguishment of debt and financing commitments, net |
| — |
| — |
| 700 |
| — | |||||
Gain on derivative instruments | (192) | (982) | (89) | (2,532) | |||||||||
Provision for current expected credit losses | (1,632) | — | 3,998 | — | |||||||||
Other income |
| (1,016) |
| (423) |
| (2,032) |
| (1,000) | |||||
Total other expenses (income) |
| 35,245 |
| 1,008 |
| 43,769 |
| (29,580) | |||||
Net (loss) income |
| (29,254) |
| (6,567) |
| (31,825) |
| 18,227 | |||||
Net loss (income) attributable to redeemable noncontrolling interests | 226 | 60 | 244 | (186) | |||||||||
Net loss (income) attributable to noncontrolling interests |
| 6,278 |
| 919 |
| 6,827 |
| (2,618) | |||||
Net (loss) income attributable to common stockholders | $ | (22,750) | $ | (5,588) | $ | (24,754) | $ | 15,423 | |||||
Weighted-average shares outstanding—basic |
| 206,214 |
| 191,158 |
| 206,493 |
| 184,878 | |||||
Weighted-average shares outstanding—diluted |
| 264,963 |
| 224,857 |
| 263,975 |
| 217,806 | |||||
Net (loss) income attributable to common stockholders per common share—basic and diluted | (0.11) | (0.03) | (0.12) | 0.08 | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| For the Three Months Ended |
| For the Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net (loss) income | $ | (29,254) | $ | (6,567) | $ | (31,825) | $ | 18,227 | |||||
Change from cash flow hedging activities |
| 10,108 |
| 1,819 |
| 3,052 |
| 13,813 | |||||
Change from activities related to available-for-sale securities |
| (24) |
| — |
| 53 |
| — | |||||
Comprehensive (loss) income |
| (19,170) |
| (4,748) |
| (28,720) |
| 32,040 | |||||
Comprehensive loss (income) attributable to redeemable noncontrolling interests | 148 | 43 | 221 | (322) | |||||||||
Comprehensive loss (income) attributable to noncontrolling interests |
| 4,247 |
| 680 |
| 6,469 |
| (4,580) | |||||
Comprehensive (loss) income attributable to common stockholders | $ | (14,775) | $ | (4,025) | $ | (22,030) | $ | 27,138 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Stockholders’ Equity |
|
| |||||||||||||||||
Accumulated | ||||||||||||||||||||
| Additional |
| Distributions |
| Other |
|
| |||||||||||||
Common Stock |
| Paid-in |
| in Excess of |
| Comprehensive | Noncontrolling | Total | ||||||||||||
(in thousands) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Interests |
| Equity | ||||||
FOR THE THREE MONTHS ENDED JUNE 30, 2022 | ||||||||||||||||||||
Balance as of March 31, 2022 | 182,042 | $ | 1,820 | $ | 1,551,814 | $ | (860,546) | $ | (3,266) | $ | 232,692 | $ | 922,514 | |||||||
Net loss (excluding $60 attributable to redeemable noncontrolling interest) | — | — | — | (5,588) | — | (919) | (6,507) | |||||||||||||
Change from cash flow hedging activities (excluding $17 attributable to redeemable noncontrolling interest) | — | — | — | — | 1,563 | 239 | 1,802 | |||||||||||||
Issuance of common stock |
| 14,679 | 147 | 127,869 | — | — | — |
| 128,016 | |||||||||||
Share-based compensation |
| — | — | 50 | — | — | — |
| 50 | |||||||||||
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | — |
| — |
| (3,821) |
| — |
| — |
| — | (3,821) | ||||||||
Trailing distribution fees | — |
| — |
| (5,335) |
| 1,259 |
| — |
| — | (4,076) | ||||||||
Redemptions of common stock |
| (1,620) | (16) | (13,929) | — | — | — |
| (13,945) | |||||||||||
Other noncontrolling interests net distributions | — | — | — |
| — |
| — |
| (40) | (40) | ||||||||||
Distributions declared on common stock and noncontrolling interests (excludes $191 attributable to redeemable noncontrolling interest) |
| — | — | — | (17,920) | — | (2,966) |
| (20,886) | |||||||||||
Redemption value allocation adjustment to redeemable noncontrolling interest | — | — | (1,114) | — | — | — | (1,114) | |||||||||||||
Redemptions of noncontrolling interests |
| — | — | (239) | — | — | (821) |
| (1,060) | |||||||||||
Balance as of June 30, 2022 |
| 195,101 | $ | 1,951 | $ | 1,655,295 | $ | (882,795) | $ | (1,703) | $ | 228,185 | $ | 1,000,933 | ||||||
FOR THE THREE MONTHS ENDED JUNE 30, 2023 | ||||||||||||||||||||
Balance as of March 31, 2023 | 207,448 | $ | 2,075 | $ | 1,751,993 | $ | (993,320) | $ | 7,897 | $ | 393,098 | $ | 1,161,743 | |||||||
Net loss (excluding $226 attributable to redeemable noncontrolling interest) | — | — | — | (22,750) | — | (6,278) | (29,028) | |||||||||||||
Change from securities and cash flow hedging activities (excluding $78 attributable to redeemable noncontrolling interest) | — | — | — | — | 7,975 | 2,031 | 10,006 | |||||||||||||
Issuance of common stock |
| 4,122 | 41 | 36,079 | — | — | — |
| 36,120 | |||||||||||
Share-based compensation |
| — | — | 75 | — | — | — |
| 75 | |||||||||||
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | — |
| — |
| (1,200) |
| — |
| — |
| — | (1,200) | ||||||||
Trailing distribution fees | — |
| — |
| (503) |
| 1,463 |
| — |
| (5,102) | (4,142) | ||||||||
Redemptions of common stock |
| (6,700) | (67) | (57,797) | — | — | — |
| (57,864) | |||||||||||
Issuances of OP Units for DST Interests |
| — | — | — | — | — | 84,725 |
| 84,725 | |||||||||||
Other noncontrolling interests net distributions | — | — | — |
| — |
| — |
| (3) | (3) | ||||||||||
Distributions declared on common stock and noncontrolling interests (excludes $192 attributable to redeemable noncontrolling interest) |
| — | — | — | (19,333) | — | (5,318) |
| (24,651) | |||||||||||
Redemption value allocation adjustment to redeemable noncontrolling interest | — | — | 169 | — | — | — | 169 | |||||||||||||
Redemptions of noncontrolling interests |
| — | — | (1,184) | — | — | (3,922) |
| (5,106) | |||||||||||
Balance as of June 30, 2023 |
| 204,870 | $ | 2,049 | $ | 1,727,632 | $ | (1,033,940) | $ | 15,872 | $ | 459,231 | $ | 1,170,844 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| Stockholders’ Equity |
|
| |||||||||||||||||
Accumulated | ||||||||||||||||||||
| Additional |
| Distributions |
| Other |
|
| |||||||||||||
Common Stock |
| Paid-in |
| in Excess of |
| Comprehensive | Noncontrolling | Total | ||||||||||||
(in thousands) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Interests |
| Equity | ||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2022 | ||||||||||||||||||||
Balance as of December 31, 2021 | 169,665 | $ | 1,696 | $ | 1,457,296 | $ | (865,844) | $ | (13,418) | $ | 196,696 | $ | 776,426 | |||||||
Net income (excluding $186 attributable to redeemable noncontrolling interest) | — | — | — | 15,423 | — | 2,618 | 18,041 | |||||||||||||
Change from cash flow hedging activities (excluding $136 attributable to redeemable noncontrolling interest) | — | — | — | — | 11,715 | 1,962 | 13,677 | |||||||||||||
Issuance of common stock |
| 28,844 | 289 | 244,237 | — | — | — |
| 244,526 | |||||||||||
Share-based compensation |
| — | — | 100 | — | — | — |
| 100 | |||||||||||
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | — |
| — |
| (5,401) |
| — |
| — |
| — | (5,401) | ||||||||
Trailing distribution fees | — |
| — |
| (10,372) |
| 2,289 |
| — |
| (3,823) | (11,906) | ||||||||
Redemptions of common stock |
| (3,408) | (34) | (28,466) | — | — | — |
| (28,500) | |||||||||||
Issuances of OP Units for DST Interests |
| — | — | — | — | — | 39,441 |
| 39,441 | |||||||||||
Other noncontrolling interests net distributions | — | — | — | — | — | (23) |
| (23) | ||||||||||||
Distributions declared on common stock and noncontrolling interests (excludes $351 attributable to redeemable noncontrolling interest) |
| — | — | — | (34,663) | — | (5,824) |
| (40,487) | |||||||||||
Redemption value allocation adjustment to redeemable noncontrolling interest | — | — | (1,596) | — | — | — | (1,596) | |||||||||||||
Redemptions of noncontrolling interests |
| — | — | (503) | — | — | (2,862) |
| (3,365) | |||||||||||
Balance as of June 30, 2022 |
| 195,101 | $ | 1,951 | $ | 1,655,295 | $ | (882,795) | $ | (1,703) | $ | 228,185 | $ | 1,000,933 | ||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2023 |
| |||||||||||||||||||
Balance as of December 31, 2022 |
| 206,108 | $ | 2,061 | $ | 1,744,022 | $ | (973,395) | $ | 13,148 | $ | 408,031 | $ | 1,193,867 | ||||||
Net loss (excluding $244 attributable to redeemable noncontrolling interest) |
| — |
| — |
| — |
| (24,754) |
| — |
| (6,827) |
| (31,581) | ||||||
Change from securities and cash flow hedging activities (excluding $23 attributable to redeemable noncontrolling interest) |
| — |
| — |
| — |
| — |
| 2,724 |
| 358 |
| 3,082 | ||||||
Issuance of common stock |
| 9,488 |
| 95 |
| 83,716 |
| — |
| — |
| — |
| 83,811 | ||||||
Share-based compensation |
| — |
| — |
| 150 |
| — |
| — |
| — |
| 150 | ||||||
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs |
| — |
| — |
| (2,637) |
| — |
| — |
| — |
| (2,637) | ||||||
Trailing distribution fees |
| — |
| — |
| (1,296) |
| 2,924 |
| — |
| (3,970) |
| (2,342) | ||||||
Redemptions of common stock |
| (10,726) |
| (107) |
| (93,212) |
| — |
| — |
| — |
| (93,319) | ||||||
Issuances of OP Units for DST Interests |
| — |
| — |
| — |
| — |
| — |
| 84,725 |
| 84,725 | ||||||
Other noncontrolling interests net distributions | — |
| — |
| — |
| — |
| — |
| (7) | (7) | ||||||||
Distributions declared on common stock and noncontrolling interests (excludes $384 attributable to redeemable noncontrolling interest) |
| — |
| — |
| — |
| (38,715) |
| — |
| (10,397) |
| (49,112) | ||||||
Redemption value allocation adjustment to redeemable noncontrolling interest |
| — |
| — | 243 | — | — | — |
| 243 | ||||||||||
Redemptions of noncontrolling interests |
| — | — | (3,354) | — | — | (12,682) |
| (16,036) | |||||||||||
Balance as of June 30, 2023 |
| 204,870 | $ | 2,049 | $ | 1,727,632 | $ | (1,033,940) | $ | 15,872 | $ | 459,231 | $ | 1,170,844 | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended June 30, | |||||
(in thousands) |
| 2023 |
| 2022 | ||
Operating activities: |
|
| ||||
Net (loss) income | $ | (31,825) | $ | 18,227 | ||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
| ||||
Real estate-related depreciation and amortization |
| 67,055 |
| 64,354 | ||
Straight-line rent and amortization of above- and below-market leases |
| (3,481) |
| (4,018) | ||
Gain on sale of real estate property |
| (36,884) |
| (83,524) | ||
Performance participation allocation | — | 18,379 | ||||
Impairment loss on debt-related investment held for sale | 3,780 | — | ||||
Equity in loss (income) of unconsolidated joint venture partnership | 2,649 | (708) | ||||
Loss on extinguishment of debt and financing commitments, net |
| 700 |
| — | ||
Provision for current expected credit losses | 3,998 | — | ||||
Amortization of deferred financing costs | 3,578 | 3,633 | ||||
Financing obligation liability appreciation | 4,784 | 12,531 | ||||
Unrealized loss (gain) on derivative instruments not designated as cash flow hedges | 2,325 | (2,532) | ||||
Other |
| 2,439 |
| 3,995 | ||
Changes in operating assets and liabilities | ||||||
Other assets, accounts payable and accrued expenses and other liabilities | 3,567 | 19,283 | ||||
Cash settlement of accrued performance participation allocation |
| (23,747) |
| — | ||
Net cash (used in) provided by operating activities |
| (1,062) |
| 49,620 | ||
Investing activities: |
|
|
| |||
Real estate acquisitions |
| (48,122) |
| (1,180,365) | ||
Capital expenditures |
| (23,187) |
| (13,960) | ||
Proceeds from disposition of real estate property |
| 53,735 |
| 251,822 | ||
Investments in debt-related investments |
| (14,850) |
| (3,655) | ||
Principal collections on debt-related investments |
| — |
| 1,336 | ||
Investments in unconsolidated joint venture partnerships | (7,910) | (47,904) | ||||
Purchases of available-for-sale debt securities |
| (71,079) |
| — | ||
Other |
| 2,089 |
| (48) | ||
Net cash used in investing activities |
| (109,324) |
| (992,774) | ||
Financing activities: |
|
|
| |||
Repayments of mortgage notes |
| (71,141) |
| (1,157) | ||
Net proceeds from (repayments of) line of credit |
| 117,000 |
| 127,000 | ||
Proceeds from term loan | — | 275,000 | ||||
Redemptions of common stock |
| (93,319) |
| (28,500) | ||
Distributions paid to common stockholders, redeemable noncontrolling interest holders and noncontrolling interest holders |
| (28,968) |
| (23,274) | ||
Proceeds from issuance of common stock |
| 67,832 |
| 230,603 | ||
Proceeds from financing obligations, net |
| 159,095 |
| 393,330 | ||
Offering costs for issuance of common stock and private placements |
| (8,091) |
| (8,667) | ||
Redemption of noncontrolling interests |
| (16,036) |
| (3,365) | ||
Redemption of redeemable noncontrolling interests | — | (7,724) | ||||
Deferred financing costs paid | (956) | (6) | ||||
Interest rate cap premiums |
| (15,046) |
| — | ||
Net cash provided by financing activities |
| 110,370 |
| 953,240 | ||
Net (decrease) increase in cash, cash equivalents and restricted cash |
| (16) |
| 10,086 | ||
Cash, cash equivalents and restricted cash, at beginning of period |
| 17,186 |
| 14,352 | ||
Cash, cash equivalents and restricted cash, at end of period | $ | 17,170 | $ | 24,438 | ||
See accompanying Notes to Condensed Consolidated Financial Statements.
8
ARES REAL ESTATE INCOME TRUST INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Unless the context otherwise requires, the “Company,” “we,” “our” or “us” refers to Ares Real Estate Income Trust Inc. and its consolidated subsidiaries. We are externally managed by our advisor.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain disclosures normally included in the annual audited financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been omitted. As such, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 20, 2023 (“2022 Form 10-K”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Global macroeconomic conditions, including heightened inflation, changes to fiscal and monetary policy, higher interest rates and challenges in the supply chain, coupled with the war in Ukraine, have the potential to negatively impact us. These current macroeconomic conditions may continue or aggravate and could cause the United States to experience an economic slowdown or recession. We anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with GAAP.
As used herein, the term “commercial” refers to our office, retail and industrial properties or customers, as applicable.
Reclassifications
Certain items in our condensed consolidated balance sheets as of December 31, 2022 and our condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three and six months ended June 30, 2022 have been reclassified to conform to the 2023 presentation.
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2. INVESTMENTS IN REAL ESTATE PROPERTIES
The following table summarizes our consolidated investments in real estate properties.
| As of | |||||
(in thousands) |
| June 30, 2023 |
| December 31, 2022 | ||
Land | $ | 693,097 | $ | 694,998 | ||
Buildings and improvements |
| 3,203,625 |
| 3,152,553 | ||
Intangible lease assets |
| 316,588 |
| 317,141 | ||
| 13,637 |
| 13,637 | |||
Investment in real estate properties |
| 4,226,947 |
| 4,178,329 | ||
Accumulated depreciation and amortization |
| (631,330) |
| (572,751) | ||
Net investment in real estate properties | $ | 3,595,617 | $ | 3,605,578 | ||
Acquisitions
During the six months ended June 30, 2023, we acquired 100% of the following properties through asset acquisitions:
($ in thousands) |
| Property Type |
| Acquisition Date |
| Total Purchase Price (1) | |
2023 Acquisitions: | |||||||
VM8 Logistics Center | Industrial | 1/19/2023 | $ | 17,511 | |||
Moreno Valley Distribution Center | Industrial | 5/2/2023 | 33,421 | ||||
Total 2023 acquisitions |
|
|
|
| $ | 50,932 | |
| (1) | Total purchase price is equal to the total consideration paid plus any debt assumed at fair value. There was no debt assumed in connection with the 2023 acquisitions. |
During the six months ended June 30, 2023, we allocated the purchase price of our acquisitions to land, building and improvements and intangible lease assets as follows:
For the Six Months Ended | |||
($ in thousands) |
| June 30, 2023 | |
Land | $ | 6,121 | |
Building and improvements |
| 41,547 | |
Intangible lease assets |
| 3,052 | |
Above-market lease assets |
| 212 | |
Total purchase price (1) | $ | 50,932 | |
| (1) | Total purchase price is equal to the total consideration paid plus any debt assumed at fair value. There was no debt assumed in connection with the 2023 acquisitions. |
The weighted-average amortization period for the intangible lease assets acquired in connection with our acquisitions during the six months ended June 30, 2023, as of the respective date of each acquisition, was 4.8 years.
Dispositions
During the six months ended June 30, 2023, we sold one partial retail property for net proceeds of approximately $53.7 million. We recorded a net gain on sale of approximately $36.9 million.
During the six months ended June 30, 2022, we sold five retail properties, one office property and one retail land parcel for net proceeds of approximately $251.8 million. We recorded a net gain on sale of approximately $83.5 million.
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Intangible Lease Assets and Liabilities
Intangible lease assets and liabilities as of June 30, 2023 and December 31, 2022 include the following:
| As of June 30, 2023 |
| As of December 31, 2022 | |||||||||||||||
|
| Accumulated |
|
|
| Accumulated |
| |||||||||||
(in thousands) |
| Gross |
| Amortization |
| Net |
| Gross | Amortization |
| Net | |||||||
Intangible lease assets (1) | $ | 293,443 | $ | (223,894) | $ | 69,549 | $ | 294,208 | $ | (214,201) | $ | 80,007 | ||||||
Above-market lease assets (1) |
| 23,145 |
| (20,106) |
| 3,039 |
| 22,933 |
| (19,707) |
| 3,226 | ||||||
Below-market lease liabilities |
| (73,331) |
| 34,222 |
| (39,109) |
| (76,033) |
| 33,589 |
| (42,444) | ||||||
| (1) | Included in net investment in real estate properties on the condensed consolidated balance sheets. |
Rental Revenue Adjustments and Depreciation and Amortization Expense
The following table summarizes straight-line rent adjustments, amortization recognized as an increase (decrease) to rental revenues from above- and below-market lease assets and liabilities and real estate-related depreciation and amortization expense:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Increase (decrease) to rental revenue: |
|
|
|
| |||||||||
Straight-line rent adjustments | $ | 674 | $ | 1,240 | $ | 1,742 | $ | 1,966 | |||||
Above-market lease amortization |
| (213) |
| (185) |
| (399) |
| (354) | |||||
Below-market lease amortization |
| 1,124 |
| 1,210 |
| 2,138 |
| 2,406 | |||||
Real estate-related depreciation and amortization: |
|
|
|
|
|
|
|
| |||||
Depreciation expense | $ | 27,081 | $ | 25,349 | $ | 53,498 | $ | 45,547 | |||||
Intangible lease asset amortization |
| 6,777 |
| 11,554 |
| 13,557 |
| 18,807 | |||||
3. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURE PARTNERSHIPS
We have acquired interests in joint venture partnerships for purposes of investing in properties across the U.S. We record our investments in AREIT-McDowell Vue Parent LLC (“Vue 1400 JV”), Pathfinder Core AREIT JV NNN Holdings, LLC (“Net Lease JV I”), Pathfinder Core AREIT Net Lease Aggregator LLC (“Net Lease JV II”) and Pathfinder Core AREIT Net Lease TRS Aggregator LLC (“Net Lease JV III”) under the equity method on our condensed consolidated balance sheets as we have the ability to exercise significant influence in each partnership but do not have control of the entities. Other partners in Net Lease JV I, Net Lease JV II and Net Lease JV III are affiliates of our Advisor.
The following table summarizes our investments in unconsolidated joint venture partnerships as of June 30, 2023 and December 31, 2022:
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4. INVESTMENTS IN REAL ESTATE DEBT AND SECURITIES
Debt-Related Investments
The following table summarizes our debt-related investments as of June 30, 2023 and December 31, 2022:
Weighted-Average | Weighted-Average | |||||||||||
($ in thousands) | Carrying Amount (1) | Outstanding Principal (1) | Interest Rate | Remaining Life (Years) | ||||||||
As of June 30, 2023 | ||||||||||||
Senior loans (2) | $ | 161,922 | $ | 169,915 | 9.5 | % | 1.7 | |||||
Mezzanine loans | 106,759 | 108,500 | 11.2 | 1.4 | ||||||||
Total debt-related investments (2) | $ | 268,681 | $ | 278,415 | 10.3 | % | 1.5 | |||||
As of December 31, 2022 | ||||||||||||
Senior loans (2) | $ | 151,645 | $ | 154,622 | 8.5 | % | 2.1 | |||||
Mezzanine loans | 108,794 | 108,500 | 10.4 | 1.9 | ||||||||
Total debt-related investments (2) | $ | 260,439 | $ | 263,122 | 9.5 | % | 2.0 | |||||
| (1) | The difference between the carrying amount and the outstanding principal amount of the debt-related investments consists of unamortized purchase discount, deferred financing costs, loan origination costs, and any recorded credit loss reserves, if applicable. |
| (2) | As of June 30, 2023 and December 31, 2022, carrying amounts include $37.8 million and $42.0 million, respectively, related to one senior loan debt-related investment that was in default and on non-accrual status. Outstanding principal includes $43.8 million related to this senior loan as of June 30, 2023 and December 31, 2022. During the three months ended June 30, 2023, we recorded an impairment loss of $1.3 million, and during the six months ended June 30, 2023, we recorded an impairment loss of $3.8 million related to this senior loan. The impairment loss is included in impairment loss on debt-related investment held for sale on the condensed consolidated statements of operations. This senior loan is held-for-sale and therefore the carrying amount has been reduced to its fair value as of both June 30, 2023 and December 31, 2022. Weighted-average interest rate and weighted-average remaining life excludes this senior loan from its calculations. |
Current Expected Credit Losses
Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requires us to reflect current expected credit losses (“CECL”) on both the outstanding balances and unfunded commitments on loans held for investment and requires consideration of a broad range of historical experience adjusted for current conditions and reasonable and supportable forecast information to inform credit loss estimates (the “CECL Reserve”). ASU No. 2016-13 was effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. ASU No. 2016-13 was adopted by us as of January 1, 2020. Increases and decreases to expected credit losses impact earnings and are recorded within the provision for current expected credit losses in our condensed consolidated statements of operations. The CECL Reserve related to outstanding balances on loans held for investment required under ASU No. 2016-13 is a valuation account that is deducted from the amortized cost basis of our loans held for investment in our condensed consolidated balance sheets. The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in our condensed consolidated balance sheets.
We estimate our CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Calculation of the CECL Reserve requires loan specific data, which includes capital senior to us when we are the subordinate lender, changes in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of our floating rate loan portfolio and (iv) our current and future view of the macroeconomic environment. We may consider loan-specific qualitative factors on certain loans to estimate our CECL Reserve. In order to estimate the future expected loan losses relevant to our portfolio, we utilize historical market loan loss data licensed from a third-party data service. For periods beyond the reasonable and supportable forecast period, we revert back to historical loss data.
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Loan balances that are deemed to be uncollectible are written off as a realized loss and are deducted from our CECL Reserve. The write-offs are recorded in the period in which the loan balance is deemed uncollectible based on management’s judgment.
As of June 30, 2023, our CECL Reserve for our debt-related investment portfolio is $4.0 million or 1.1% of our debt- related investment commitment balance of $358.3 million, excluding debt-related investments held-for-sale. During the three months ended June 30, 2023, we recognized a decrease in provision for current expected credit losses of $1.6 million, and during the six months ended June 30, 2023, we recognized an increase in provision for current expected credit losses of $4.0 million. The debt-related investment commitment balance is comprised of $234.6 million of funded commitments and $123.7 million of unfunded commitments with associated CECL Reserves of $2.3 million and $1.7 million, respectively. The CECL Reserve for unfunded commitments is based on the unfunded portion of the loan commitment over the full contractual period over which we are exposed to credit risk through a current obligation to extend credit and is recorded as an other liability on the condensed consolidated balance sheets. The calculation of the CECL Reserve excludes one debt-related investment that is currently held for sale. There have been no write-offs or related to any of our existing debt-related investments. CECL Reserves were immaterial in prior periods.
Available-for-Sale Debt Securities
We acquire debt securities that are commercial real estate collateralized loan obligations (“CRE CLOs”) primarily for cash management and investment purposes. Additionally in the second quarter of 2023, we originated a preferred equity investment that is recognized as a debt security as it has a mandatory redemption feature and meets the definition of a security under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 320, Investments—Debt Securities. On the acquisition date, we designate investments in real estate debt securities as available-for-sale. Investments in debt securities that are classified as available-for-sale are carried at fair value. These assets are valued on a recurring basis and any unrealized holding gains and losses other than those associated with a credit loss are recorded each period in other comprehensive income. There were no credit losses associated with our available-for-sale debt securities as of and for the period ended June 30, 2023.
As of June 30, 2023 we had one preferred equity investment and one CRE CLO designated as available-for-sale debt securities. As of December 31, 2022, we had one CRE CLO designated as available-for-sale debt securities. As of June 30, 2023, the weighted-average remaining term of our CRE CLO, which is based on the estimated fully extended maturity dates of the underlying loans of the debt security, was approximately 3.6 years and the remaining term of our preferred equity investment was 3.6 years. The following table summarizes our investments in available-for-sale debt securities as of June 30, 2023 and December 31, 2022:
| (1) | Includes unamortized purchase discount and unamortized loan origination fees received on debt securities. |
| (2) | Represents cumulative unrealized gain beginning from acquisition date. |
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5. DEBT
A summary of our consolidated debt is as follows:
Weighted-Average | ||||||||||||
Effective Interest Rate as of | Balance as of | |||||||||||
June 30, | December 31, | June 30, | December 31, | |||||||||
($ in thousands) |
| 2023 |
| 2022 |
| Current Maturity Date |
| 2023 |
| 2022 | ||
Line of credit (1) | 5.17 | % | 5.72 | % | November 2025 | $ | 352,000 | $ | 235,000 | |||
Term loan (2) |
| 3.31 | 3.90 | November 2026 | 400,000 |
| 400,000 | |||||
Term loan (3) |
| 4.26 | 4.56 | January 2027 |
| 400,000 |
|
| 400,000 | |||
Fixed-rate mortgage notes |
| 3.40 | 3.48 | January 2027 - May 2031 |
| 309,875 |
|
| 380,316 | |||
Floating-rate mortgage notes (4) |
| 4.59 | 4.52 | October 2024 - October 2026 |
| 207,600 |
|
| 207,600 | |||
Total principal amount / weighted-average (5) |
| 4.11 | % | 4.31 | % |
| $ | 1,669,475 |
| $ | 1,622,916 | |
Less: unamortized debt issuance costs |
|
|
|
|
|
| $ | (12,751) |
| $ | (14,849) | |
Add: unamortized mark-to-market adjustment on assumed debt |
|
|
|
|
|
|
| 7,887 |
|
| 8,408 | |
Total debt, net |
|
|
|
|
|
| $ | 1,664,611 |
| $ | 1,616,475 | |
Gross book value of properties encumbered by debt | $ | 895,040 | $ | 970,310 | ||||||||
| (1) | The effective interest rate is calculated based on the Term Secured Overnight Financing Rate (”Term SOFR”) plus an 11.448 basis point adjustment (“Adjusted Term SOFR”), plus a margin ranging from 1.25% to 2.00% depending on our consolidated leverage ratio. As of June 30, 2023, the unused and available portions under the line of credit were approximately $548.0 million and $547.9 million, respectively. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate cap agreements relating to $150.0 million in borrowings under this line of credit. The line of credit is available for general business purposes including, but not limited to, refinancing of existing indebtedness and financing the acquisition of permitted investments, including commercial properties. |
| (2) | The effective interest rate is calculated based on Adjusted Term SOFR, plus a margin ranging from 1.20% to 1.90% depending on our consolidated leverage ratio. Total commitments for this term loan are $400.0 million. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate swap agreements relating to $300.0 million in borrowings under this term loan and an interest rate cap agreement relating to $100.0 million in borrowings under this term loan. |
| (3) | The effective interest rate is calculated based on Adjusted Term SOFR, plus a margin ranging from 1.20% to 1.90% depending on our consolidated leverage ratio. Total commitments for this term loan are $400.0 million. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate swap agreements relating to $350.0 million in borrowings under this term loan and an interest rate cap agreement relating to $50.0 million in borrowings under this term loan. |
| (4) | The effective interest rate is calculated based on either the London Interbank Offered Rate (“LIBOR”) or Adjusted Term SOFR plus a margin. As of both June 30, 2023 and December 31, 2022, our floating-rate mortgage notes were subject to interest rate spreads ranging from 1.55% to 2.50%. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate cap agreements which capped the effective interest rates of our two floating-rate mortgage notes at 4.61% and 4.55%, respectively, as of June 30, 2023. |
| (5) | The weighted-average remaining term of our consolidated borrowings was approximately 3.4 years as of June 30, 2023, excluding the impact of certain extension options. |
For the three months ended June 30, 2023 and 2022, the amount of interest incurred related to our consolidated indebtedness, excluding amortization of debt issuance costs, was $20.6 million and $12.1 million, respectively. For the six months ended June 30, 2023 and 2022, the amount of interest incurred related to our consolidated indebtedness, excluding amortization of debt issuance costs, was $40.2 million and $21.8 million, respectively. See “Note 6” for the amount of interest incurred related to the DST Program (as defined below).
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As of June 30, 2023, the principal payments due on our consolidated debt during each of the next five years and thereafter were as follows:
| (1) | The term of the line of credit may be extended pursuant to two six-month extension options, subject to certain conditions. |
| (2) | A $127.0 million mortgage note matures in October 2024 and the term may be extended pursuant to a one-year extension option, subject to certain conditions. A $115.0 million mortgage note matures in January 2027 and may be extended pursuant to two one-year extension options, subject to certain conditions. |
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate as its preferred alternative rate for LIBOR in derivatives and other financial contracts. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
LIBOR has been phased out and ceased publication after June 2023. As of June 30, 2023, one of our mortgage notes had an initial or extended maturity date beyond June 2023 with exposure to LIBOR. Effective July 1, 2023, we have converted the interest rate of this mortgage note to Term SOFR and our consolidated debt no longer has exposure to LIBOR.
Debt Covenants
Our line of credit, term loans and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, the line of credit and term loan agreements contain certain corporate-level financial covenants, including leverage ratio, fixed charge coverage ratio and tangible net worth thresholds. We were in compliance with our debt covenants as of June 30, 2023.
Derivative Instruments
To manage interest rate risk for certain of our variable-rate debt, we use interest rate derivative instruments as part of our risk management strategy. These derivatives are designed to mitigate the risk of future interest rate increases by either providing a fixed interest rate or capping the variable interest rate for a limited, pre-determined period of time. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the interest rate swap agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable amounts from a counterparty at the end of each period in which the interest rate exceeds the agreed fixed price. Certain of our variable-rate borrowings are not hedged, and therefore, to an extent, we have ongoing exposure to interest rate movements.
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss is recorded as a component of accumulated other comprehensive income (loss) (“AOCI”) on the condensed consolidated balance sheets and is reclassified into earnings as interest expense for the same period that the hedged transaction affects earnings, which is when the interest expense is recognized on the related debt. During the next 12 months, we estimate that approximately $18.0 million will be reclassified as a decrease to interest expense related to active effective hedges of existing floating-rate debt.
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As of June 30, 2023, we have two interest rate cap derivative instruments that are not designated as cash flow hedges and therefore, changes in fair value are recognized through income. As a result, in periods with high interest rate volatility, we may experience significant fluctuations in our net income (loss).
The following table summarizes the location and fair value of our consolidated derivative instruments on our condensed consolidated balance sheets:
The following table presents the effect of our consolidated derivative instruments on our condensed consolidated financial statements:
| (1) | Unrealized (loss) gain on changes in fair value of derivative instruments relates to mark-to-market changes on our derivatives not designated as cash flow hedges. |
| (2) | Realized gain on derivative instruments relates to interim cash settlements for our derivatives not designated as cash flow hedges. |
6. DST PROGRAM
We have a program to raise capital through private placement offerings by selling beneficial interests (“DST Interests”) in specific Delaware statutory trusts holding real properties (the “DST Program”). Under the DST Program, each private placement offers interests in one or more real properties placed into one or more Delaware statutory trusts by AREIT Operating Partnership LP (the “Operating Partnership”) or its affiliates (“DST Properties”).
In order to facilitate additional capital raise through the DST Program, we have made and may continue to offer loans (“DST Program Loans”) to finance a portion of the sale of DST Interests in the trusts holding DST Properties to potential investors. As of June 30, 2023 and December 31, 2022, our DST Program Loans had a combined carrying value of $103.3 million and $81.9 million, respectively, a weighted-average interest rate of 4.86% and 4.47%, respectively, and a weighted-average maturity of 9.1 years and 9.2 years, respectively. We include our investments in DST Program Loans separately on our condensed consolidated balance sheets in the DST Program Loans line item and we include income earned from DST Program Loans in other income on our condensed consolidated statements of operations. Credit loss reserves associated with our DST Program Loans were immaterial as of and for the periods ended June 30, 2023 and 2022.
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The following table presents our DST Program activity for the three and six months ended June 30, 2023 and 2022:
| (1) | Included in other income and expenses on the condensed consolidated statements of operations. |
| (2) | Included in interest expense on the condensed consolidated statements of operations. |
The Operating Partnership retains a fair market value purchase option giving it the right, but not the obligation, to acquire the interests in the Delaware statutory trusts from the investors at a later time in exchange for OP Units. We record DST Interests as financing obligation liabilities for accounting purposes. If we exercise our option to reacquire a DST property by issuing OP units in exchange for DST Interests, we extinguish the financing obligation liability and record the issuance of the OP units as an issuance of equity. During the six months ended June 30, 2023 and 2022, 9.8 million partnership units (“OP Units”) in the “Operating Partnership and 4.8 million OP Units, respectively, were issued in exchange for DST Interests, for a net investment of $84.7 million and $39.4 million, respectively, in accordance with our Umbrella Partnership Real Estate Investment Trust (“UPREIT”) structure.
7. FAIR VALUE
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of the amounts that we would realize upon disposition of our financial instruments.
Fair Value Measurements on a Recurring Basis
The following table presents our financial instruments measured at fair value on a recurring basis:
|
|
|
| Total | ||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||
As of June 30, 2023 | ||||||||||||
Assets: | ||||||||||||
Derivative instruments | $ | — | $ | 38,686 | $ | — | $ | 38,686 | ||||
Available-for-sale debt securities | — | 14,960 | 70,238 | 85,198 | ||||||||
Total assets measured at fair value | $ | — | $ | 53,646 | $ | 70,238 | $ | 123,884 | ||||
As of December 31, 2022 |
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
| ||||
Derivative instruments | $ | — | $ | 24,448 | $ | — | $ | 24,448 | ||||
Available-for-sale debt securities | — | 14,896 | — | 14,896 | ||||||||
Total assets measured at fair value | $ | — | $ | 39,344 | $ | — | $ | 39,344 | ||||
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Instruments. The derivative instruments are interest rate swaps and interest rate caps whose fair value is estimated using market-standard valuation models. Such models involve using market-based observable inputs, including interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and respective counterparty’s nonperformance risk in the fair value measurements, which we have concluded are not material to the valuation. Due to these derivative instruments being unique and not actively traded, the fair value is classified as Level 2. See “Note 5” above for further discussion of our derivative instruments.
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Available-for-Sale Debt Securities. The available-for-sale debt securities are either preferred equity investments in real estate properties or CRE CLOs. The fair value for CRE CLOs are estimated using third-party broker quotes, which provide valuation estimates based upon contractual cash flows, observable inputs comprising credit spreads and market liquidity. We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements, which we have concluded are not material to the valuation. Due to these CRE CLOs being unique and not actively traded, the fair value is classified as Level 2. Our preferred equity investments are unlikely to have readily available market quotations. In such cases, we will generally determine the initial value based on the acquisition price of such investment if we acquire the investment or the par value of such investment if we originate the investment. Following the initial measurement, we will determine fair value by utilizing or reviewing certain inputs that are generally considered Level 3. As of June 30, 2023, we had one preferred equity investment without a readily available market quotation. The investment was originated in May 2023, and as such, the fair value of the security was determined to equal cost as of June 30, 2023.
Nonrecurring Fair Value Measurements
As of June 30, 2023 and December 31, 2022, the fair values of cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses and distributions payable approximate their carrying values because of the short-term nature of these instruments. The table below includes fair values for certain of our financial instruments for which it is practicable to estimate fair value. The carrying values and fair values of these financial instruments were as follows:
As of June 30, 2023 | As of December 31, 2022 | |||||||||||
| Carrying |
| Fair | Carrying |
| Fair | ||||||
(in thousands) | Value (1) | Value | Value (1) | Value | ||||||||
Assets: | ||||||||||||
Debt-related investments | $ | 278,415 | $ | 272,458 | $ | 263,122 | $ | 260,841 | ||||
DST Program Loans |
| 103,314 |
| 99,310 |
| 81,897 |
| 79,049 | ||||
Liabilities: |
|
|
|
|
|
|
|
| ||||
Line of credit | $ | 352,000 | $ | 352,000 | $ | 235,000 | $ | 235,000 | ||||
Term loans |
| 800,000 |
| 800,000 |
| 800,000 |
| 800,000 | ||||
Mortgage notes |
| 517,475 |
| 477,969 |
| 587,916 |
| 541,558 | ||||
| (1) | The carrying value reflects the principal amount outstanding. |
8. EQUITY
Public Offerings
We intend to conduct a continuous public offering that will not have a predetermined duration, subject to continued compliance with the rules and regulations of the SEC and applicable state laws. On May 3, 2022, the SEC declared our registration statement on Form S-11 with respect to our fourth public offering of up to $10.0 billion of shares of its common stock effective, and the fourth public offering commenced the same day. We ceased selling shares of our common stock under our third public offering of up to $3.0 billion of shares immediately upon the effectiveness of the registration statement for the fourth public offering. Under the fourth public offering, we are offering up to $8.5 billion of shares of our common stock in the primary offering and up to $1.5 billion of shares of our common stock pursuant to our distribution reinvestment plan, in any combination of Class T shares, Class D shares, Class S shares and Class I shares. We may reallocate amounts between the primary offering and distribution reinvestment plan.
Pursuant to our public offerings, we offered and continue to offer shares of our common stock at the “transaction price,” plus applicable upfront selling commissions and dealer manager fees. The “transaction price” generally is equal to the net asset value (“NAV”) per share of our common stock most recently disclosed. Our NAV per share is calculated as of the last calendar day of each month for each of our outstanding classes of stock, and will be available generally within 15 calendar days after the end of the applicable month. Shares issued pursuant to our distribution reinvestment plan are offered at the transaction price, as indicated above, in effect on the distribution date. We may update a previously disclosed transaction price in cases where we believe there has been a material change (positive or negative) to our NAV per share relative to the most recently disclosed monthly NAV per share.
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During the six months ended June 30, 2023, we raised gross proceeds of approximately $83.8 million from the sale of approximately 9.5 million shares of our common stock in our ongoing public offerings, including proceeds from our distribution reinvestment plan of approximately $16.0 million.
Common Stock
The following table describes the changes in each class of common shares during the periods presented below:
| Class T |
| Class S |
| Class D |
| Class I |
| Class E |
| Total | |
(in thousands) | Shares | Shares | Shares | Shares | Shares | Shares | ||||||
FOR THE THREE MONTHS ENDED JUNE 30, 2022 | ||||||||||||
Balance as of March 31, 2022 |
| 19,007 |
| 40,489 |
| 7,662 |
| 59,433 |
| 55,451 |
| 182,042 |
Issuance of common stock: |
|
|
|
| ||||||||
Primary shares |
| 2,634 |
| 5,663 | 388 | 5,165 | — |
| 13,850 | |||
Distribution reinvestment plan |
| 100 |
| 200 | 38 | 305 | 186 |
| 829 | |||
Redemptions of common stock | (30) |
| (189) | (141) | (201) | (1,059) | (1,620) | |||||
Conversions |
| (39) |
| — | — | 39 | — |
| — | |||
Balance as of June 30, 2022 |
| 21,672 |
| 46,163 |
| 7,947 |
| 64,741 |
| 54,578 |
| 195,101 |
FOR THE THREE MONTHS ENDED JUNE 30, 2023 | ||||||||||||
Balance as of March 31, 2023 |
| 28,173 |
| 49,899 |
| 7,439 |
| 69,387 |
| 52,550 |
| 207,448 |
Issuance of common stock: |
|
|
|
| ||||||||
Primary shares |
| 1,182 |
| 997 |
| 31 |
| 987 |
| — |
| 3,197 |
Distribution reinvestment plan |
| 139 |
| 232 |
| 37 |
| 339 |
| 178 |
| 925 |
Redemptions of common stock | (735) | (1,378) | (189) | (2,717) | (1,681) | (6,700) | ||||||
Conversions |
| (18) |
| — |
| (91) |
| 109 |
| — |
| — |
Balance as of June 30, 2023 |
| 28,741 |
| 49,750 |
| 7,227 |
| 68,105 |
| 51,047 |
| 204,870 |
FOR THE SIX MONTHS ENDED JUNE 30, 2022 | ||||||||||||
Balance as of December 31, 2021 |
| 16,425 |
| 35,757 |
| 6,749 |
| 54,406 |
| 56,328 |
| 169,665 |
Issuance of common stock: |
|
|
|
|
|
|
| |||||
Primary shares |
| 5,189 |
| 10,324 |
| 1,493 |
| 10,183 |
| — |
| 27,189 |
Distribution reinvestment plan |
| 192 |
| 393 |
| 75 |
| 607 | 388 |
| 1,655 | |
Redemptions of common stock |
| (33) | (311) | (370) | (556) | (2,138) |
| (3,408) | ||||
Conversions | (101) | — | — | 101 | — | — | ||||||
Balance as of June 30, 2022 |
| 21,672 |
| 46,163 |
| 7,947 |
| 64,741 |
| 54,578 |
| 195,101 |
FOR THE SIX MONTHS ENDED JUNE 30, 2023 | ||||||||||||
Balance as of December 31, 2022 |
| 26,884 |
| 49,237 |
| 7,871 |
| 69,142 |
| 52,974 |
| 206,108 |
Issuance of common stock: |
|
|
|
|
|
|
| |||||
Primary shares |
| 2,507 |
| 1,969 |
| 76 |
| 3,104 |
| — |
| 7,656 |
Distribution reinvestment plan |
| 273 |
| 459 |
| 77 |
| 670 |
| 353 |
| 1,832 |
Redemptions of common stock |
| (804) |
| (1,939) |
| (429) |
| (5,274) |
| (2,280) |
| (10,726) |
Conversions | (119) | 24 | (368) | 463 | — | — | ||||||
Balance as of June 30, 2023 |
| 28,741 |
| 49,750 |
| 7,227 |
| 68,105 |
| 51,047 |
| 204,870 |
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Distributions
The following table summarizes our distribution activity (including distributions to noncontrolling interests and distributions reinvested in shares of our common stock) for the periods below:
Amount | ||||||||||||||||||
|
| Common Stock |
|
|
| |||||||||||||
Declared per | Distributions | Other Cash | Reinvested in | Distribution | Gross | |||||||||||||
(in thousands, except per share data) | Common Share (1) | Paid in Cash | Distributions (2) | Shares | Fees (3) | Distributions (4) | ||||||||||||
2023 |
|
|
|
|
|
|
|
|
|
|
| |||||||
March 31 | $ | 0.09375 | $ | 9,912 | $ | 5,271 | $ | 8,009 | $ | 1,461 | $ | 24,653 | ||||||
June 30 |
| 0.09375 |
| 9,896 |
| 5,510 |
| 7,974 |
| 1,463 |
| 24,843 | ||||||
Total | $ | 0.18750 | $ | 19,808 | $ | 10,781 | $ | 15,983 | $ | 2,924 | $ | 49,496 | ||||||
2022 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
March 31 | $ | 0.09375 | $ | 8,837 | $ | 3,018 | $ | 6,876 | $ | 1,030 | $ | 19,761 | ||||||
June 30 |
| 0.09375 |
| 9,299 |
| 3,157 |
| 7,362 |
| 1,259 |
| 21,077 | ||||||
September 30 |
| 0.09375 |
| 9,684 |
| 3,972 |
| 7,732 |
| 1,399 |
| 22,787 | ||||||
December 31 |
| 0.09375 |
| 9,859 |
| 4,559 |
| 7,923 |
| 1,478 |
| 23,819 | ||||||
Total | $ | 0.37500 | $ | 37,679 | $ | 14,706 | $ | 29,893 | $ | 5,166 | $ | 87,444 | ||||||
| (1) | Amount reflects the total gross quarterly distribution rate authorized by our board of directors per Class T share, per Class S share, per Class D share, per Class I share and per Class E share of common stock. Distributions were declared and paid as of monthly record dates. These monthly distributions have been aggregated and presented on a quarterly basis. The distributions on Class T shares, Class S shares and Class D shares of common stock are reduced by the respective distribution fees that are payable with respect to Class T shares, Class S shares and Class D shares. |
| (2) | Consists of distribution fees paid to Ares Wealth Management Solutions, LLC (the “Dealer Manager”) with respect to OP Units and distributions paid to holders of OP Units and other noncontrolling interest holders. |
| (3) | Distribution fees are paid monthly to the Dealer Manager, with respect to Class T shares, Class S shares and Class D shares issued in the primary portion of our public offerings only. All or a portion of these amounts will be retained by, or reallowed (paid) to, participating broker-dealers and servicing broker-dealers. |
| (4) | Gross distributions are total distributions before the deduction of any distribution fees relating to Class T shares, Class S shares and Class D shares issued in the primary portion of our public offerings. |
Redemptions and Repurchases
Below is a summary of redemptions and repurchases pursuant to our share redemption program for the six months ended June 30, 2023 and 2022. All eligible redemption requests were fulfilled for the periods presented. Eligible redemption requests are requests submitted in good order by the request submission deadline set forth in the share redemption program. Our board of directors may modify or suspend our current share redemption programs if it deems such action to be in the best interest of our stockholders.
For the Six Months Ended June 30, | ||||||||
(in thousands, except for per share data) |
| 2023 |
| 2022 | ||||
Number of shares redeemed or repurchased |
| 10,726 |
| 3,408 | ||||
Aggregate dollar amount of shares redeemed or repurchased | $ | 93,319 | $ | 28,500 | ||||
Average redemption or repurchase price per share | $ | 8.70 | $ | 8.37 | ||||
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9. REDEEMABLE NONCONTROLLING INTERESTS
The Operating Partnership’s net income and loss will generally be allocated to the general partner and the limited partners in accordance with the respective percentage interest in the OP Units issued by the Operating Partnership.
The Operating Partnership issued OP Units to the Advisor and Black Creek Diversified Property Advisors Group LLC (the “Former Sponsor”) as payment of the performance participation allocation (also referred to as the performance component of the advisory fee) pursuant to the advisory agreement. We have classified these OP Units as redeemable noncontrolling interests in mezzanine equity on the condensed consolidated balance sheets. The redeemable noncontrolling interests are recorded at the greater of the carrying amount, adjusted for its share of the allocation of income or loss and dividends, or the redemption value, which is equivalent to fair value, of such OP Units at the end of each measurement period. As of both June 30, 2023 and December 31, 2022, we had 2.0 million redeemable OP Units outstanding.
The following table summarizes the redeemable noncontrolling interests activity for the six months ended June 30, 2023 and 2022:
For the Six Months Ended June 30, | |||||||
($ in thousands) |
| 2023 | 2022 |
| |||
Balance at beginning of the year | $ | 18,130 | $ | 8,994 | |||
Settlement of prior year performance participation allocation (1) | — | 15,327 | |||||
Distributions to redeemable noncontrolling interests | (384) | (351) | |||||
Redemptions to redeemable noncontrolling interests (2) | — | (7,724) | |||||
Net (loss) income attributable to redeemable noncontrolling interests | (244) | 186 | |||||
Change from securities and cash flow hedging activities attributable to redeemable noncontrolling interests | 23 | 136 | |||||
Redemption value allocation adjustment to redeemable noncontrolling interests (3) | (243) | 1,596 | |||||
Ending balance | $ | 17,282 | $ | 18,164 | |||
| (1) | There were no OP Units issued related to the 2022 performance participation allocation, as the $23.7 million payable as of December 31, 2022 was, at the election of the Advisor, settled in cash in January 2023. The 2021 performance participation allocation in the amount of $15.3 million became payable on December 31, 2021, and was issued as 1.9 million Class I OP Units in January 2022. At the direction of the Advisor and in light of our Former Sponsor having been the holder of a separate series of partnership interests in the Operating Partnership with special distribution rights (the “Special Units”) for the first six months of 2021, the holder of the Special Units designated 465,000 of these Class I OP Units to an entity owned indirectly by our Chairman at the time, Mr. Mulvihill, and 465,000 of these Class I OP Units to an entity owned indirectly by a member of our Former Sponsor. The holder of the Special Units transferred 945,000 Class I OP Units to the Advisor thereafter. |
| (2) | At the request of the Advisor, the Operating Partnership redeemed all Class I OP Units issued to the Advisor in January 2022 for $7.7 million. |
| (3) | Represents the adjustment recorded in order to mark to the redemption value, which is equivalent to fair value, at the end of the measurement period. |
21
10. NONCONTROLLING INTERESTS
OP Units
The following table summarizes the number of OP Units issued and outstanding to third-party investors (excludes interests held by redeemable noncontrolling interest holders):
For the Six Months Ended June 30, | ||||||
(in thousands) |
| 2023 |
| 2022 | ||
Balance at beginning of period |
| 55,079 |
| 27,180 | ||
Issuance of units |
| 9,845 |
|
| 4,825 | |
Redemption of units |
| (1,831) |
| (407) | ||
Balance at end of period | 63,093 | 31,598 | ||||
Subject to certain restrictions and limitations, the holders of OP Units may redeem all or a portion of their OP Units for either: shares of the equivalent class of common stock, cash or a combination of both. If we elect to redeem OP Units for shares of our common stock, we will generally deliver one share of our common stock for each such OP Unit redeemed (subject to any redemption fees withheld), and such shares may, subsequently, only be redeemed for cash in accordance with the terms of our share redemption program. If we elect to redeem OP Units for cash, the cash delivered per unit will equal the then-current NAV per unit of the applicable class of OP Units (subject to any redemption fees withheld), which will equal the then-current NAV per share of our corresponding class of shares. During the three months ended June 30, 2023 and 2022, the aggregate amount of OP Units redeemed was $5.1 million and $1.1 million, respectively. During the six months ended June 30, 2023 and 2022, the aggregate amount of OP Units redeemed was $16.0 million and $3.4 million, respectively. The estimated maximum redemption value (unaudited) as of June 30, 2023 and December 31, 2022 was $533.2 million and $488.3 million, respectively.
11. RELATED PARTY TRANSACTIONS
Summary of Fees and Expenses
The table below summarizes the fees and expenses incurred by us for services provided by the Advisor and its affiliates, and by the Dealer Manager related to the services the Dealer Manager provided in connection with our public offerings and any related amounts payable:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Payable as of | |||||||||||||||||
(in thousands) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| June 30, 2023 |
| December 31, 2022 | |||||||
Selling commissions and dealer manager fees (1) | $ | 448 | $ | 1,238 | $ | 960 | $ | 2,280 | $ | — | $ | — | |||||||
Ongoing distribution fees (1)(2) | 2,190 | 1,576 | 4,344 | 2,874 | 759 | 748 | |||||||||||||
Advisory fees—fixed component | 9,623 | 8,227 | 19,161 | 15,370 | 2,890 | 2,868 | |||||||||||||
Performance participation allocation (3) |
| — |
| 6,186 |
| — |
| 18,379 |
| — |
| 23,747 | |||||||
Other expense reimbursements—Advisor (4)(5) |
| 3,749 |
| 3,206 |
| 6,855 |
| 5,346 |
| 4,158 |
| 4,192 | |||||||
Other expense reimbursements—Dealer Manager |
| 160 |
| 143 |
| 160 |
| 170 |
| 82 |
| 109 | |||||||
Property accounting fee (6) | 481 | 303 | 970 | 303 | 481 | 478 | |||||||||||||
DST Program selling commissions, dealer manager and distribution fees (1) |
| 2,072 |
| 5,660 |
| 4,743 |
| 13,184 |
| 254 |
| 241 | |||||||
Other DST Program related costs—Advisor (5) |
| 1,627 |
| 3,490 |
| 3,558 |
| 8,441 |
| 162 |
| 146 | |||||||
Total | $ | 20,350 | $ | 30,029 | $ | 40,751 | $ | 66,347 | $ | 8,786 | $ | 32,529 | |||||||
| (1) | All or a portion of these amounts will be retained by, or reallowed (paid) to, participating broker-dealers and servicing broker-dealers. |
| (2) | The distribution fees are payable monthly in arrears. Additionally, we accrue for future estimated amounts payable related to ongoing distribution fees. The future estimated amounts payable of approximately $63.3 million and $60.9 million as of June 30, 2023 and December 31, 2022, respectively, are included in other liabilities on the condensed consolidated balance sheets. |
| (3) | The 2022 performance participation allocation in the amount of $23.7 million became payable on December 31, 2022, and the Advisor elected to settle the amounts owed in cash in January 2023. |
22
| (4) | Other expense reimbursements include certain expenses incurred for organization and offering, acquisition and general administrative services provided to us under the advisory agreement, including, but not limited to, certain expenses described below after footnote 6, allocated rent paid to both third parties and affiliates of our Advisor, equipment, utilities, insurance, travel and entertainment. |
| (5) | Includes costs reimbursed to the Advisor related to the DST Program. |
| (6) | The cost of the property management fee, including the property accounting fee, is generally borne by the tenant or tenants at each real property, either via a direct reimbursement to us or, in the case of tenants subject to a gross lease, as part of the lease cost. In certain circumstances, we may pay for a portion of the property management fee, including the property accounting fee, without reimbursement from the tenant or tenants at a real property. |
Certain of the expense reimbursements described in the table above include a portion of the compensation expenses of officers and employees of the Advisor or its affiliates related to activities for which the Advisor did not otherwise receive a separate fee. Amounts incurred related to these compensation expenses for the three months ended June 30, 2023, and 2022 were approximately $3.5 million and $2.9 million, respectively. Amounts incurred related to these compensation expenses for the six months ended June 30, 2023, and 2022 were approximately $6.3 million and $5.4 million, respectively. No reimbursement is made for compensation of our named executive officers unless the named executive officer is providing stockholder services, as outlined in the advisory agreement.
Advisory Agreement
Ares Real Estate Income Trust Inc., the Operating Partnership and the Advisor previously entered into that certain Amended and Restated Advisory Agreement (2022), effective as of May 1, 2022 (the “2022 Advisory Agreement”). The term of the 2022 Advisory Agreement continued through April 30, 2023, subject to an unlimited number of successive one-year renewals. Ares Real Estate Income Trust Inc., the Operating Partnership and the Advisor renewed the 2022 Advisory Agreement on substantially the same terms through April 30, 2024, by entering into the Amended and Restated Advisory Agreement (2023) (the “2023 Advisory Agreement”), effective as of April 30, 2023.
On June 3, 2023, Ares Real Estate Income Trust Inc., the Operating Partnership and the Advisor amended and restated the 2023 Advisory Agreement by entering into the Second Amended and Restated Advisory Agreement (2023) (the “Amended Advisory Agreement”). The Amended Advisory Agreement amends the 2023 Advisory Agreement to provide that if the Company engages affiliates of the Advisor (“Product Specialists”) to provide certain specialist services to the Company, the Operating Partnership or any of their subsidiaries pursuant to a separate agreement approved by the Company’s independent directors, the fees and expense reimbursements paid to the Product Specialist will not be subject to the provisions of the Advisory Agreement or affect the compensation and expense reimbursements paid to the Advisor and its affiliates for services provided pursuant to the Advisory Agreement. Other immaterial changes were also made in the Amended Advisory Agreement.
Limited Partnership Agreement
On June 3, 2023, Ares Real Estate Income Trust Inc. and AREIT Incentive Fee LP, an affiliate of our Advisor, replaced the then-current limited partnership agreement of the Operating Partnership by entering into a Twelfth Amended and Restated Limited Partnership Agreement (the “Amended OP Agreement”). The Amended OP Agreement authorizes Ares Real Estate Income Trust Inc., as general partner, to cause the Operating Partnership to issue profits interests in the Operating Partnership in multiple series via award letters with the rights and obligations of such profits interests set forth in such award letters or an exhibit thereto. Other immaterial changes were also made in the Amended OP Agreement.
Student Housing Investment Arrangement
The changes in the Amended Advisory Agreement and Amended OP Agreement were made in contemplation of a Project Specialist arrangement in student housing investments. Under this arrangement, affiliates of Timberline Real Estate Ventures (“Timberline”), a fully integrated, operationally focused privately held real estate operator and investment manager specializing in the development, acquisition and operation of student housing, multifamily, and mixed-use retail/residential communities, will enter into a joint venture with affiliates of the Advisor to create a Product Specialist (collectively, with its affiliated entities, the “Student Housing Product Specialist”). The Company will, through the Operating Partnership and their subsidiaries, enter into the agreements described in further detail below with the Student Housing Product Specialist in connection with student housing investments. More specifically, for each student housing investment by the Company made through the Student Housing Product Specialist, the Student Housing
23
Product Specialist will be retained under a management services agreement, engaged as property manager under a property management agreement and receive a profits interest through the Operating Partnership in such investment. The Advisor or its affiliates will have an economic interest in these agreements except the profits interests, with respect to which the Advisor and its affiliates will have no economic interest.
Each such student housing investment will be made through a subsidiary of the Company (each, an “AREIT TREV Vehicle”) that will be 100% owned, managed and controlled by the Company as the managing member of the operating company. The Company will have the sole authority to make and approve all decisions and take all actions with respect to and on behalf of each AREIT TREV Vehicle, subject to certain limited fundamental decisions which will require the consent of both the Company and the Student Housing Product Specialist. The Student Housing Product Specialist will be the non-economic administrative member of each AREIT TREV Vehicle, required to participate in and oversee the day-to-day business, affairs, management, operation and administration of the AREIT TREV Vehicle and be responsible for implementing the business plan and budget approved by the Company and otherwise implementing the Company’s decisions. If there is any material default or breach by the Student Housing Product Specialist of its obligations under the ARES TREV Vehicle’s operating agreement or the management services agreement (described below) that remains uncured (beyond any applicable notice and cure periods), the Company will have the right to remove the Student
Housing Product Specialist as the administrative member and terminate the management services agreement, the property management agreement and the profits interest.
Pursuant to a management services agreement, in consideration for the sourcing of student housing investments by the Student Housing Product Specialist, the Student Housing Product Specialist will be paid a reasonable market rate acquisition fee by the AREIT TREV Vehicle. In addition, in consideration of supervision of property management by the Student Housing Product Specialist, as well as management of the Company investment and certain accounting and tax reporting duties, the Student Housing Product Specialist will be paid a property management oversight fee by the AREIT TREV Vehicle based on reasonable market rates for such duties. To the extent that renovation work with respect to a Company investment is approved by the Company, the Student Housing Project Specialist will be paid a reasonable market rate construction management fee. If the Student Housing Product Specialist is removed as the administrative member of the applicable AREIT TREV Vehicle, or if there is an uncured breach under the management services agreement, the Company may terminate the management services agreement without penalty. Additionally, the management services agreement will terminate automatically on its terms (without penalty) upon the sale of the applicable property.
At the closing of each of our student housing investments, the AREIT TREV Vehicle will enter into a property management agreement with the Student Housing Project Specialist pursuant to which it will perform property management services in exchange for a property management fee consistent with the local market where our applicable investment is located as well as its size, scope and rental rates and otherwise consistent with an agreed fee schedule; provided that such fees will be payable on a percentage of revenue basis, considering local market rates, total number of beds and overall gross potential rent, subject to reasonable market rate minimum per investment. If (a) the Student Housing Project Specialist is removed as the administrative member of the applicable AREIT TREV Vehicle or (b) there is a bad act (e.g., gross negligence, willful misconduct) or an uncured breach by the Student Housing Project Specialist under the property management agreement, the Company may terminate the agreement without penalty. The Company may also terminate the property management agreement for convenience upon 30 days prior written notice to the Student Housing Project Specialist or if certain operating performance metrics of the property are not met, and the property management agreement automatically terminates on its terms upon the sale of the applicable property; however, if any of the foregoing terminations occurs prior to the one year anniversary of the effective date, property management fees through the first year anniversary will be due to the Student Housing Project Specialist.
With respect to each student housing investment made under this arrangement, an affiliate of the Student Housing Project Specialist will receive a profits interest through the Operating Partnership, with respect to which the Advisor and its affiliates will have no economic interest.
As of and for the periods ended June 30, 2023, there have been no student housing investments made through this arrangement nor have any fees been incurred with the Student Housing Product Specialist.
24
Performance Participation Allocation
As used below, “Fund Interests” means our outstanding shares of common stock, along with OP Units, which may be or were held directly or indirectly by the Advisor, the Former Sponsor, members or affiliates of the Former Sponsor, and third parties.
The performance participation allocation is a performance-based amount that will be paid to the Advisor. This amount is calculated on the basis of the overall investment return provided to holders of Fund Interests (i.e., our outstanding shares and OP Units held by third-party investors) in any calendar year such that the Advisor will receive the lesser of (1) 12.5% of (a) the annual total return amount less (b) any loss carryforward, and (2) the amount equal to (x) the annual total return amount, less (y) any loss carryforward, less (z) the amount needed to achieve an annual total return amount equal to 5% of the NAV per Fund Interest at the beginning of such year (the “Hurdle Amount”). The foregoing calculations are calculated on a per Fund Interest basis and multiplied by the weighted-average Fund Interests outstanding during the year. In no event will the performance participation allocation be less than zero. Accordingly, if the annual total return amount exceeds the Hurdle Amount plus the amount of any loss carryforward, then the Advisor will earn a performance participation allocation equal to 100% of such excess, but limited to 12.5% of the annual total return amount that is in excess of the loss carryforward. Additionally, the Advisor will provide us with a waiver of a portion of its fees generally equal to the amount of the performance component that would have been payable with respect to the Class E shares and the Series 1 Class E OP Units held by third parties until the NAV of such shares or units exceeds $10.00 a share or unit, the benefit of which will be shared among all holders of Fund Interests.
The allocation of the performance participation interest is ultimately determined at the end of each calendar year and will be paid in Class I OP units or cash, at the election of the Advisor. The performance hurdle was not achieved as of June 30, 2023, therefore no performance participation allocation expense was recognized in our condensed consolidated statements of operations for the six months ended June 30, 2023. As the performance hurdle was achieved as of June 30, 2022, we recognized approximately $6.2 million for the three months ended June 30, 2022 and $18.4 million for the six months ended June 30, 2022, respectively, of performance participation allocation expense in our condensed consolidated statements of operations.
12. NET INCOME (LOSS) PER COMMON SHARE
The computation of our basic and diluted net income (loss) per share attributable to common stockholders is as follows:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||
(in thousands, except per share data) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Net (loss) income attributable to common stockholders—basic | $ | (22,750) | $ | (5,588) | $ | (24,754) | $ | 15,423 | |||||
Net (loss) income attributable to redeemable noncontrolling interests | (226) | (60) | (244) | 186 | |||||||||
Net (loss) income attributable to noncontrolling interests |
| (6,278) |
| (919) |
| (6,827) |
| 2,618 | |||||
Net (loss) income attributable to common stockholders—diluted | $ | (29,254) | $ | (6,567) | $ | (31,825) | $ | 18,227 | |||||
Weighted-average shares outstanding—basic |
| 206,214 |
| 191,158 |
| 206,493 |
| 184,878 | |||||
Incremental weighted-average shares effect of conversion of noncontrolling interests |
| 58,749 |
| 33,699 |
| 57,482 |
| 32,928 | |||||
Weighted-average shares outstanding—diluted |
| 264,963 |
| 224,857 |
| 263,975 |
| 217,806 | |||||
Net (loss) income per share attributable to common stockholders: |
|
|
|
|
|
|
|
| |||||
Basic | $ | (0.11) | $ | (0.03) | $ | (0.12) | $ | 0.08 | |||||
Diluted | $ | (0.11) | $ | (0.03) | $ | (0.12) | $ | 0.08 | |||||
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13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and disclosure of non-cash investing and financing activities is as follows:
For the Six Months Ended June 30, | ||||||
(in thousands) | 2023 | 2022 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||
Distributions reinvested in common stock | $ | 15,979 | $ | 13,922 | ||
Increase in accrued future ongoing distribution fees | 2,342 | 11,908 | ||||
Increase in DST Program Loans receivable through DST Program capital raising |
| 27,315 |
| 28,032 | ||
Redeemable noncontrolling interest issued as settlement of performance participation allocation | — | 15,327 | ||||
Issuances of OP Units for DST Interests |
| 84,725 |
| 39,441 | ||
Restricted Cash
Restricted cash consists of lender and property-related escrow accounts. The following table presents the components of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the condensed consolidated statements of cash flows:
For the Six Months Ended June 30, | |||||||
(in thousands) |
| 2023 |
| 2022 | |||
Beginning of period: | |||||||
Cash and cash equivalents | $ | 13,336 | $ | 10,605 | |||
Restricted cash |
| 3,850 |
| 3,747 | |||
Cash, cash equivalents and restricted cash | $ | 17,186 | $ | 14,352 | |||
End of period: | |||||||
Cash and cash equivalents | $ | 12,905 | $ | 19,529 | |||
Restricted cash |
| 4,265 |
| 4,909 | |||
Cash, cash equivalents and restricted cash | $ | 17,170 | $ | 24,438 | |||
14. COMMITMENTS AND CONTINGENCIES
Litigation
We and the Operating Partnership are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our investments.
Environmental Matters
A majority of the properties we acquire have been or will be subject to environmental reviews either by us or the previous owners. In addition, we may incur environmental remediation costs associated with certain land parcels we may acquire in connection with the development of land. We have acquired or may in the future acquire certain properties in urban and industrial areas that may have been leased to or previously owned by commercial and industrial companies that discharged hazardous materials. We may purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liabilities that we believe would have a material adverse effect on our business, financial condition, or results of operations as of June 30, 2023.
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15. SEGMENT FINANCIAL INFORMATION
Our five reportable segments are office properties, retail properties, residential properties, industrial properties, and investments in real estate debt and securities. We have determined that investments in real estate debt and securities is a reportable segment, and we expect that the segment will continue to be of significance. As such, we have broken out investments in real estate debt and securities as a reportable segment in the tables below for all current and prior periods presented. Factors used to determine our reportable segments include the physical and economic characteristics of our properties and/or investments and the related operating activities. Our chief operating decision makers rely on net operating income, among other factors, to make decisions about allocating resources and assessing segment performance. Net operating income is the key performance metric that captures the unique operating characteristics of each segment. Net investment in real estate properties, investments in real estate debt and securities, restricted cash, tenant receivables, straight-line rent receivables and other assets directly assignable to a property or investment are allocated to the segment groupings. Corporate items that are not directly assignable to a property, such as investments in unconsolidated joint venture partnerships and DST Program Loans, are not allocated to segment groupings, but are reflected as reconciling items.
The following table reflects our total consolidated assets by business segment as of June 30, 2023 and December 31, 2022:
The following table is a reconciliation of our reported net income (loss) attributable to common stockholders to our net operating income for the three and six months ended June 30, 2023 and 2022:
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The following table sets forth consolidated financial results by segment for the three and six months ended June 30, 2023 and 2022:
We consider net operating income to be an appropriate supplemental performance measure and believe net operating income provides useful information to our investors regarding our financial condition and results of operations because net operating income reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the properties, such as real estate-related depreciation and amortization, general and administrative expenses, advisory fees, impairment charges, interest expense, gains on sale of properties, other income and expense, gains and losses on the extinguishment of debt and noncontrolling interests. However, net operating income should not be viewed as an alternative measure of our financial performance since it excludes such items, which could materially impact our results of operations. Further, our net operating income may not be comparable to that of other real estate companies, as they may use different methodologies for calculating net operating income. Therefore, we believe net income, as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References to the terms “we,” “our” or “us” refer to Ares Real Estate Income Trust Inc. and its consolidated subsidiaries. The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Such forward-looking statements relate to, without limitation, our future capital expenditures, distributions, acquisitions and dispositions (including the amount and nature thereof), other developments and trends of the real estate industry, business strategies and the expansion and growth of our operations. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements are subject to a number of assumptions, risks and uncertainties which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements are generally identifiable by the use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “project,” “continue,” or the negative of these words, or other similar words or terms. Readers are cautioned not to place undue reliance on these forward-looking statements.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
| ● | the impact of macroeconomic trends, such as the unemployment rate, availability of credit, impact of inflation, rising interest rates and the conflict in Ukraine, which may have a negative effect on the following, among other things: |
| ● | the fundamentals of our business, including overall market occupancy, space utilization for our tenants, who we refer to as customers from time-to-time herein, and rental rates; |
| ● | the financial condition of our customers, some of which are retail, financial, legal and other professional firms, our lenders, and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of breach or default by these parties; |
| ● | customers’ ability to pay rent on their leases or our ability to re-lease space that is or becomes vacant; and |
| ● | the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis; |
| ● | general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on customers’ financial condition and competition from other developers, owners and operators of real estate); |
| ● | our ability to effectively raise and deploy proceeds from our ongoing public offerings; |
| ● | risks associated with the demand for liquidity under our share redemption program and our ability to meet such demand; |
| ● | risks associated with the availability and terms of debt and equity financing and the use of debt to fund acquisitions and developments, including the risk associated with interest rates impacting the cost and/or availability of financing; |
| ● | the business opportunities that may be presented to and pursued by us, changes in laws or regulations (including changes to laws governing the taxation of real estate investment trusts (“REITs”)); |
| ● | conflicts of interest arising out of our relationships with the Sponsor, the Advisor and their affiliates; |
| ● | changes in accounting principles, policies and guidelines applicable to REITs; |
| ● | environmental, regulatory and/or safety requirements; and |
| ● | the availability and cost of comprehensive insurance, including coverage for terrorist acts. |
For further discussion of these and other factors, see Part I, Item 1A, “Risk Factors” in our 2022 Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.
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OVERVIEW
General
Ares Real Estate Income Trust Inc. is a NAV-based perpetual life REIT that was formed on April 11, 2005, as a Maryland corporation. We are primarily focused on investing in and operating a diverse portfolio of real property. As of June 30, 2023, our consolidated real property portfolio consisted of 92 properties, totaling approximately 18.7 million square feet located in 33 markets throughout the U.S. We also owned 161 properties through our unconsolidated joint venture partnerships as of June 30, 2023. Unless otherwise noted, these unconsolidated properties are excluded from the presentation of our portfolio data herein.
We have operated and elected to be treated as a REIT for U.S. federal income tax purposes, commencing with the taxable year ended December 31, 2006, and we intend to continue to operate in accordance with the requirements for qualification as a REIT. We utilize an UPREIT organizational structure to hold all or substantially all of our assets through the Operating Partnership.
As a NAV-based perpetual life REIT, we intend to conduct ongoing public primary offerings of our common stock on a perpetual basis. We also intend to conduct an ongoing distribution reinvestment plan offering for our stockholders to reinvest distributions in our shares. From time to time, we intend to file new registration statements on Form S-11 with the SEC to register additional shares of common stock so that we may continuously offer shares of common stock pursuant to Rule 415 under the Securities Act. During the six months ended June 30, 2023, we raised gross proceeds of approximately $83.8 million from the sale of approximately 9.5 million shares of our common stock in our ongoing public offerings, including proceeds from our distribution reinvestment plan of approximately $16.0 million. See “Note 8 to the Condensed Consolidated Financial Statements” for more information about our public offerings.
Additionally, we have a program to raise capital through private placement offerings by selling DST Interests. These private placement offerings are exempt from registration requirements pursuant to Section 4(a)(2) of the Securities Act. We anticipate that these interests may serve as replacement properties for investors seeking to complete like-kind exchange transactions under Section 1031 of the Code. Similar to our prior private placement offerings, we expect that the DST Program will give us the opportunity to expand and diversify our capital raise strategies by offering what we believe to be an attractive and unique investment product for investors that may be seeking replacement properties to complete like-kind exchange transactions under Section 1031 of the Code. We also offer DST Program Loans to finance no more than 50% of the purchase price of the DST Interests to certain purchasers of the interests in the Delaware statutory trusts. During the six months ended June 30, 2023, we sold $193.5 million of gross interests related to the DST Program, $27.3 million of which were financed by DST Program Loans. See “Note 6 to the Condensed Consolidated Financial Statements” for additional detail regarding the DST Program.
We currently operate in four reportable property segments: office, retail, residential and industrial. The following table summarizes our real property portfolio by property segment as of June 30, 2023:
| (1) | Reflects the number of unique markets by property segment and in total. As such, the total number of markets does not equal the sum of the number of markets by property segment as certain property segments are located in the same market. |
| (2) | Amount calculated as total annualized base rent, which includes the impact of any contractual tenant concessions (cash basis) per the terms of the lease, divided by total lease square footage as of June 30, 2023. |
We currently focus our investment activities primarily across the major U.S. property sectors (industrial, residential (which includes and/or may include multi-family and other types of rental housing such as manufactured, student and single-family rental housing), office (which includes and/or may include medical office and life science laboratories) and retail). To a lesser extent, we strategically invest in and/or intend to invest in geographies outside of the U.S., which may include Canada, the United Kingdom, Europe and other
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foreign jurisdictions, and in other sectors such as triple net lease, real estate debt (which may include mortgages and subordinated interests), real estate-related securities, properties in sectors adjacent to our primary investment sectors and/or infrastructure, to create a diversified blend of current income and long-term value appreciation. Our near-term investment strategy is likely to prioritize new investments in the industrial and residential sectors due to relatively attractive fundamental conditions. We also intend to continue to hold an allocation of properties in the office and retail sectors, the latter of which is largely grocery-anchored.
Net Asset Value
Our board of directors, including a majority of our independent directors, has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. With the approval of our board of directors, including a majority of our independent directors, we have engaged Altus Group U.S. Inc., a third-party valuation firm, to serve as our independent valuation advisor (“Altus Group” or the “Independent Valuation Advisor”) with respect to helping us administer the valuation and review process for the real properties in our portfolio, providing monthly real property appraisals, reviewing annual third-party real property appraisals, providing monthly valuations of our debt-related assets (excluding DST Program Loans), reviewing the internal valuations of DST Program Loans and debt-related liabilities performed by our Advisor, providing quarterly valuations of our properties subject to master lease obligations associated with the DST Program, and assisting in the development and review of our valuation procedures. As part of this process, our Advisor reviews the estimates of the values of our real property portfolio, real estate-related assets, and other assets and liabilities within our portfolio for consistency with our valuation guidelines and the overall reasonableness of the valuation conclusions, and informs our board of directors of its conclusions. Although third-party appraisal firms, the Independent Valuation Advisor, or other pricing sources may consider any comments received from us or our Advisor or other valuation sources for their individual valuations, the final estimated fair values of our real properties are determined by the Independent Valuation Advisor and the final estimates of fair values of our real estate-related assets, our other assets, and our liabilities are determined by the applicable pricing source (which may, in certain instances be our Advisor or an affiliate of Ares), subject to the oversight of our board of directors. With respect to the valuation of our real properties, the Independent Valuation Advisor provides our board of directors with periodic valuation reports and is available to meet with our board of directors to review valuation information, as well as our valuation guidelines and the operation and results of the valuation and review process generally. Excluding real properties that are bought or sold during a given calendar year, unconsolidated real properties held through joint ventures or partnerships are valued by a third-party appraiser at least once per calendar year. For valuations during interim periods, either our Advisor will determine the estimated fair value of the real properties owned by unconsolidated affiliates or we will utilize interim valuations determined pursuant to valuation policies and procedures for such joint ventures or partnerships. All parties engaged by us in connection with our valuation procedures, including the Independent Valuation Advisor, ALPS Fund Services Inc. (“ALPS”), and our Advisor, are subject to the oversight of our board of directors. Our board of directors has the right to engage additional valuation firms and pricing sources to review the valuation process or valuations, if deemed appropriate. At least once each calendar year our board of directors, including a majority of our independent directors, reviews the appropriateness of our valuation procedures with input from the Independent Valuation Advisor. From time to time our board of directors, including a majority of our independent directors, may adopt changes to the valuation procedures if it: (1) determines that such changes are likely to result in a more accurate reflection of NAV or a more efficient or less costly procedure for the determination of NAV without having a material adverse effect on the accuracy of such determination; or (2) otherwise reasonably believes a change is appropriate for the determination of NAV. We will publicly announce material changes to our valuation procedures. See Exhibit 4.4 of this Quarterly Report on Form 10-Q for a more detailed description of our valuation procedures, including important disclosure regarding real property valuations provided by the Independent Valuation Advisor.
Our valuation procedures, which address specifically each category of our assets and liabilities and are applied separately from the preparation of our financial statements in accordance with GAAP, involve adjustments from historical cost. There are certain factors which cause NAV to be different from total equity or stockholders’ equity on a GAAP basis. Most significantly, the valuation of our real assets, which is the largest component of our NAV calculation, is provided to us by the Independent Valuation Advisor. For GAAP purposes, these assets are generally recorded at depreciated or amortized cost. Another example that will cause our NAV to differ from our GAAP total equity or stockholders’ equity is the straight-lining of rent, which results in a receivable for GAAP purposes that is not included in the determination of our NAV. The fair values of our assets and certain liabilities are determined using widely accepted methodologies and, as appropriate, the GAAP principles within the FASB Accounting Standards Codification under Topic 820, Fair Value Measurements and Disclosures and are used by ALPS in calculating our NAV per share. However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. We did not develop our valuation procedures with the intention of complying with fair value concepts under GAAP and, therefore, there could be differences between our fair values and the fair values derived from the principal market or most advantageous market concepts of establishing
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fair value under GAAP. The aggregate real property valuation of $4.56 billion compares to a GAAP basis of real properties (net of intangible lease liabilities and before accumulated amortization and depreciation) of $4.15 billion, representing a difference of approximately $403.9 million, or 9.7%.
As used below, “Fund Interests” means our outstanding shares of common stock, along with OP Units, which may be or were held directly or indirectly by the Advisor, the Former Sponsor, members or affiliates of the Former Sponsor, and third parties, and “Aggregate Fund NAV” means the NAV of all the Fund Interests.
The following table sets forth the components of Aggregate Fund NAV as of June 30, 2023 and December 31, 2022:
The following table sets forth the NAV per Fund Interest as of June 30, 2023:
Under GAAP, we record liabilities for ongoing distribution fees that (i) we currently owe the Dealer Manager under the terms of our dealer manager agreement and (ii) we estimate we may pay to the Dealer Manager in future periods for our Fund Interests. As of June 30, 2023, we estimated approximately $63.3 million of ongoing distribution fees were potentially payable to the Dealer Manager. We do not deduct the liability for estimated future distribution fees in our calculation of NAV since we intend for our NAV to reflect our estimated value on the date that we determine our NAV. Accordingly, our estimated NAV at any given time does not include consideration of any estimated future distribution fees that may become payable after such date.
Financing obligations associated with our DST Program, as reflected in our NAV table above, represent outstanding proceeds raised from our private placements under the DST Program due to the fact that we have an option (which may or may not be exercised) to purchase the interests in the Delaware statutory trusts and thereby acquire the real property owned by the trusts. We may acquire these properties using OP Units, cash, or a combination of both. See “Note 6 to the Condensed Consolidated Financial Statements” for additional details regarding our DST Program. We may use proceeds raised from our DST Program for the repayment of debt, acquisition of properties and other investments, distributions to our stockholders, payments under our debt obligations and master
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lease agreements related to properties in our DST Program, redemption payments, capital expenditures and other general corporate purposes. We pay our Advisor an annual, fixed component of our advisory fee of 1.10% of the consideration received for selling interests in DST Properties to third-party investors, net of upfront fees and expense reimbursements payable out of gross proceeds from the sale of such interests and DST Interests financed through DST Program Loans.
We include no discounts to our NAV for the illiquid nature of our shares, including the limitations on our stockholders’ ability to redeem shares under our share redemption program and our ability to modify or suspend our share redemption program at any time. Our NAV generally does not reflect the potential impact of exit costs (e.g. selling costs and commissions related to the sale of a property) that would likely be incurred if our assets and liabilities were liquidated or sold today. While we may use market pricing concepts to value individual components of our NAV, our per share NAV is not derived from the market pricing information of open-end real estate funds listed on stock exchanges.
Our NAV is not a representation, warranty or guarantee that: (i) we would fully realize our NAV upon a sale of our assets; (ii) shares of our common stock would trade at our per share NAV on a national securities exchange; and (iii) a stockholder would be able to realize the per share NAV if such stockholder attempted to sell his or her shares to a third party.
The valuations of our real properties as of June 30, 2023, excluding certain newly acquired properties that are currently held at cost which we believe reflects the fair value of such properties, were provided by the Independent Valuation Advisor in accordance with our valuation procedures. Certain key assumptions that were used by the Independent Valuation Advisor in the discounted cash flow analysis are set forth in the following table based on weighted-averages by property type.
A change in the exit capitalization and discount rates used would impact the calculation of the value of our real property. For example, assuming all other factors remain constant, the changes listed below would result in the following effects on the value of our real properties, excluding certain newly acquired properties that are currently held at cost which we believe reflects the fair value of such properties:
From September 30, 2017 through November 30, 2019, we valued our debt-related investments and real estate-related liabilities generally in accordance with fair value standards under GAAP. Beginning with our valuation for December 31, 2019, our property-level mortgages and corporate-level credit facilities that are intended to be held to maturity (which for fixed rate debt not subject to interest rate hedges may be the date near maturity at which time the debt will be eligible for prepayment at par for purposes herein), including those subject to interest rate hedges, were valued at par (i.e. at their respective outstanding balances). In addition, because we utilize interest rate hedges to stabilize interest payments (i.e. to fix all-in interest rates through interest rate swaps or to limit interest rate exposure through interest rate caps) on individual loans, each loan and associated interest rate hedge is treated as one financial instrument which is valued at par if intended to be held to maturity. This policy of valuing at par applies regardless of whether any given interest rate hedge is considered as an asset or liability for GAAP purposes. Notwithstanding, if we acquire an investment and assume associated in-place debt from the seller that is above-or below-market, then consistent with how we recognize assumed debt for GAAP purposes when acquiring an asset with pre-existing debt in place, the liabilities used in the determination of our NAV will include the market value of such debt based on market value as of the closing date. The associated premium or discount on such debt as of closing that is reflected in our liabilities will then be amortized through loan maturity. Per our valuation policy, the corresponding investment is valued on an unlevered basis for purposes of determining NAV. Accordingly, all else equal, we would not recognize an immediate gain or loss to our NAV upon acquisition of an investment whereby we assume associated pre-existing
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debt that is above- or below-market. As of June 30, 2023, we classified all of our debt as intended to be held to maturity, and our liabilities included mark-to-market adjustments for pre-existing debt that we assumed upon acquisition. We currently estimate the fair value of our debt (inclusive of associated interest rate hedges) that was intended to be held to maturity as of June 30, 2023 was $75.3 million lower than the carrying value used for purposes of calculating our NAV (as described above) for such debt in aggregate; meaning that if we used the fair value of our debt rather than the carrying value used for purposes of calculating our NAV (and treated the associated hedge as part of the same financial instrument), our NAV would have been higher by approximately $75.3 million, or $0.28 per share, not taking into account all of the other items that impact our monthly NAV, as of June 30, 2023.
Reconciliation of Stockholders’ Equity and Noncontrolling Interests to NAV
The following table reconciles stockholders’ equity and noncontrolling interests per our condensed consolidated balance sheet to our NAV as of June 30, 2023:
(in thousands) | As of June 30, 2023 | ||
Total stockholders' equity |
| $ | 711,613 |
Noncontrolling interests | 459,231 | ||
Total equity under GAAP | 1,170,844 | ||
Adjustments: | |||
Accrued distribution fee (1) | 63,261 | ||
Redeemable noncontrolling interests (2) | 17,282 | ||
Unrealized net real estate, financing obligations, debt and interest rate hedge appreciation (depreciation) (3) | 390,555 | ||
Unrealized gain (loss) on investments in unconsolidated joint venture partnerships (4) | 24,033 | ||
Accumulated depreciation and amortization (5) | 597,108 | ||
Other adjustments (6) | 3,304 | ||
Aggregate Fund NAV | $ | 2,266,387 | |
| (1) | Accrued distribution fee represents the accrual for the full cost of the distribution fee for Class T, Class S, and Class D shares and OP Units. Under GAAP, we accrued the full cost of the distribution fee payable over the life of each share (assuming such share remains outstanding the length of time required to pay the maximum distribution fee) as an offering cost at the time we sold the Class T, Class S, and Class D shares. Similarly, we accrued a liability for future distribution fees we expect will be paid for our estimate of how long Class T, Class S, and Class D OP Units will be outstanding, also as an offering cost. For purposes of calculating the NAV, we recognize the distribution fee as a reduction of NAV on a monthly basis when such fee is paid and do not deduct the liability for estimated future distribution fees that may become payable after the date as of which our NAV is calculated. |
| (2) | Redeemable noncontrolling interests are related to our OP Units, and are included in our determination of NAV but not included in equity under GAAP. |
| (3) | Our real estate and real estate-related investments are presented at historical cost in our condensed consolidated financial statements. Additionally, our mortgage notes, term loans, line of credit and financing obligations are presented at their carrying value in our condensed consolidated financial statements. As such, any increases or decreases in the fair market value of our real estate, real estate-related investments, debt instruments or financing obligations are not included in our GAAP results. For purposes of determining our NAV, our real estate, real estate-related investments, financing obligations and certain of our debt are recorded at fair value. Notwithstanding, our property-level mortgages and corporate-level credit facilities that are intended to be held to maturity, including those subject to interest rates hedges, are valued at par (i.e. at their respective outstanding balances). |
| (4) | Our investments in unconsolidated joint venture partnerships are presented at historical cost in our condensed consolidated financial statements. As such, any increases or decreases in the fair market value of the underlying investments or underlying debt instruments are not included in our GAAP results. For purposes of determining our NAV, the investments in the underlying real estate and certain of the underlying debt are recorded at fair value and reflected in our NAV at our proportional ownership interest. |
| (5) | We depreciate our investments in real estate and amortize certain other assets and liabilities in accordance with GAAP. Such depreciation and amortization is not recorded for purposes of determining our NAV. |
| (6) | Includes (i) straight-line rent receivables, which are recorded in accordance with GAAP but not recorded for purposes of determining our NAV, and (ii) other minor adjustments. |
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Performance
Our NAV decreased from $8.82 per share as of December 31, 2022 to $8.39 per share as of June 30, 2023. The decrease in NAV was primarily driven by expansion in the capital market assumptions that are a major factor used in the valuation of our real estate portfolio. This decrease was partially offset by strong leasing and above-average market rent growth in our industrial and residential properties and the disposition of one partial retail property for net proceeds of approximately $53.7 million at a sale price in excess of carrying value.
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Effective December 31, 2019, our board of directors approved amendments to our valuation procedures which revised the way we value property-level mortgages, corporate-level credit facilities and associated interest rate hedges when loans, including associated interest rate hedges, are intended to be held to maturity, effectively eliminating all mark-to-market adjustments for such loans and hedges from the calculation of our NAV. The following table summarizes the impact of interest rate movements on our share class returns assuming we continued to include the mark-to-market adjustments for all borrowing-related interest rate hedge and debt instruments beginning with the December 31, 2019 NAV:
| (1) | Performance is measured by total return, which includes income and appreciation (i.e., distributions and changes in NAV) and is a compound rate of return that assumes reinvestment of all distributions for the respective time period, and excludes upfront selling commissions and dealer manager fees paid by investors, except for returns noted “with upfront selling commissions and dealer manager fees” (“Total Return”). Past performance is not a guarantee of future results. Current performance may be higher or lower than the performance data quoted. |
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| (2) | NAV inception was September 30, 2012, which is when we first sold shares of our common stock after converting to an NAV-based REIT on July 12, 2012. Investors in our fixed price offerings prior to NAV inception on September 30, 2012 are likely to have a lower return. |
| (3) | The Total Returns presented are based on actual NAVs at which stockholders transacted, calculated pursuant to our valuation procedures. From NAV inception to November 30, 2019, these NAVs reflected mark-to-market adjustments on our borrowing-related interest rate hedge positions; and from September 1, 2017 to November 30, 2019, these NAVs also reflected mark-to-market adjustments on our borrowing-related debt instruments. Prior to September 1, 2017, our valuation policies dictated marking borrowing-related debt instruments to par except in certain circumstances; therefore, we did not formally track mark-to-market adjustments on our borrowing-related debt instruments during such time. |
| (4) | The Adjusted Total Returns presented are based on adjusted NAVs calculated as if we had continued to mark our hedge and debt instruments to market following a policy change to largely exclude borrowing-related interest rate hedge and debt marks to market from our NAV calculations (except in certain circumstances pursuant to our valuation procedures), beginning with our NAV calculated as of December 31, 2019 NAV. Therefore, the NAVs used in the calculation are identical to those presented per Note (3) above from NAV inception through November 30, 2019. The adjusted NAVs include the incremental impacts to advisory fees and performance fees; however, the adjusted NAVs are not assumed to have impacted any share purchase or redemption. For calculation purposes, transactions were assumed to occur at the adjusted NAVs. |
Trends Affecting Our Business
Our results of operations are affected by a variety of factors, including conditions in both the U.S. and global financial markets and the economic and political environments.
Global markets rallied during the first half of 2023, driven by normalization of the macroeconomic environment. While inflationary pressures have shown signs of moderation, the commercial real estate markets continued to be impacted by the macroeconomic environment, most notably, the Federal Reserve’s tightening monetary policy, associated borrowing cost increases and uncertainty with respect to small and regional U.S. banking demand to finance commercial real estate properties. Periods of excessive or prolonged inflation and rising interest rates may negatively impact our customers’ businesses, resulting in increased vacancy, concessions or bad debt expense, which may adversely and materially affect our net operating income and NAV.
We believe some of these market trends may be offset by the continued strong fundamentals of real estate. We believe our portfolio is well-positioned in this market environment. While we saw capitalization rates and yields widening modestly this past quarter which resulted in modest valuation declines, real estate market fundamentals remain favorable, supported by strong rent growth, low vacancy rates and demand generally outpacing supply in certain sectors like multifamily and industrial. However, there is no guarantee that our outlook will remain positive for the long-term, especially if leasing fundamentals weaken in the future.
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RESULTS OF OPERATIONS
Summary of 2023 Activities
During the six months ended June 30, 2023, we completed the following activities:
| ● | We acquired two industrial properties for an aggregate contractual purchase price of approximately $50.8 million. We invested $7.9 million in our unconsolidated joint venture partnerships, which net acquired an additional five properties. |
| ● | We sold one partial retail property for net proceeds of approximately $53.7 million and recorded a net gain on sale of approximately $36.9 million related to the sale of this property. |
| ● | We leased approximately 2.3 million square feet of our commercial properties, which included 0.3 million square feet of new leases and 2.0 million square feet of renewals. During the first six months of 2023, rent growth on comparable commercial leases executed during the year averaged 22.5% when calculated using cash basis rental rates and 32.3% when calculated using GAAP basis rental rates. For our residential properties, rent growth on new and renewal leases executed during the year averaged 5.4%. As of June 30, 2023, rents across our industrial properties and residential properties, our two largest property segments, are estimated to be 21.9% and 7.2% below market (on a weighted-average basis), respectively, providing the opportunity for meaningful net operating income growth. |
| ● | We increased our leverage ratio from 31.8% as of December 31, 2022, to 32.7% as of June 30, 2023. Our leverage ratio for reporting purposes is calculated as the outstanding principal balance of our borrowings less cash and cash equivalents divided by the fair value of our real property, net investments in unconsolidated joint venture partnerships, investments in real estate-related securities and debt-related investments not associated with the DST Program (determined in accordance with our valuation procedures). |
| ● | We raised gross proceeds of $277.3 million from the sale of our common stock and DST Interests. This includes $83.8 million from the sale of 9.5 million shares of our common stock in our ongoing public offerings, including proceeds from our distribution reinvestment plan of approximately $16.0 million and $193.5 million of gross capital through private placement offerings by selling DST Interests, $27.3 million of which were financed by DST Program Loans. |
| ● | We redeemed 10.7 million shares of common stock at a weighted-average purchase price of $8.70 per share for an aggregate amount of $93.3 million. |
| ● | We entered into three interest rate cap agreements with a notional amount of $300.0 million that became effective in February 2023 and June 2023. |
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Results for the Three and Six Months Ended June 30, 2023 Compared to Prior Periods
The following table sets forth information regarding our consolidated results of operations for the three and six months ended June 30, 2023, as compared to the three months ended March 31, 2023 and as compared to the six months ended June 30, 2022:
| For the Three Months Ended |
| Change |
|
| For the Six Months Ended |
| Change | ||||||||||||||||
($ in thousands, except per share data) |
| June 30, 2023 |
| March 31, 2023 |
| $ |
| % |
|
| June 30, 2023 |
| June 30, 2022 |
| $ |
| % | |||||||
Revenues: | ||||||||||||||||||||||||
Rental revenues | $ | 77,204 | $ | 77,960 | $ | (756) | (1.0) | % | $ | 155,164 | $ | 135,999 | $ | 19,165 | 14.1 | % | ||||||||
Debt-related income | 7,189 | 5,761 | 1,428 | 24.8 | 12,950 | 4,314 | 8,636 | NM | ||||||||||||||||
Total revenues |
| 84,393 |
| 83,721 |
| 672 | 0.8 |
| 168,114 |
| 140,313 |
| 27,801 | 19.8 | ||||||||||
Operating expenses: |
|
|
|
|
| |||||||||||||||||||
Rental expenses |
| 28,839 |
| 28,300 |
| 539 | 1.9 |
| 57,139 |
| 46,210 |
| 10,929 | 23.7 | ||||||||||
Real estate-related depreciation and amortization |
| 33,858 |
| 33,197 |
| 661 | 2.0 |
| 67,055 |
| 64,354 |
| 2,701 | 4.2 | ||||||||||
General and administrative expenses |
| 2,973 |
| 3,044 | (71) | (2.3) |
| 6,017 |
| 4,631 | 1,386 | 29.9 | ||||||||||||
Advisory fees |
| 9,623 |
| 9,538 | 85 | 0.9 |
| 19,161 |
| 15,370 | 3,791 | 24.7 | ||||||||||||
Performance participation allocation | — | — | — | — | — | 18,379 | (18,379) | (100.0) | ||||||||||||||||
Acquisition costs and reimbursements |
| 1,849 |
| 1,169 | 680 | 58.2 |
| 3,018 |
| 2,722 | 296 | 10.9 | ||||||||||||
Impairment loss on debt-related investment held for sale | 1,260 | 2,520 | (1,260) | (50.0) | 3,780 | — | 3,780 | NM | ||||||||||||||||
Total operating expenses |
| 78,402 |
| 77,768 | 634 | 0.8 |
| 156,170 |
| 151,666 | 4,504 | 3.0 | ||||||||||||
Other (income) expenses: | ||||||||||||||||||||||||
Equity in loss (income) from unconsolidated joint venture partnerships | 203 | 2,446 | (2,243) | (91.7) | 2,649 | (708) | 3,357 | NM | ||||||||||||||||
Interest expense |
| 37,882 |
| 37,545 | 337 | 0.9 |
| 75,427 |
| 58,184 | 17,243 | 29.6 | ||||||||||||
Gain on sale of real estate property | — | (36,884) | 36,884 | 100.0 | (36,884) | (83,524) | 46,640 | 55.8 | ||||||||||||||||
Loss on extinguishment of debt and financing commitments, net | — | 700 | (700) | (100.0) | 700 | — | 700 | NM | ||||||||||||||||
(Gain) loss on derivative instruments | (192) | 103 | (295) | NM | (89) | (2,532) | 2,443 | 96.5 | ||||||||||||||||
Provision for current expected credit losses | (1,632) | 5,630 | (7,262) | NM | 3,998 | — | 3,998 | NM | ||||||||||||||||
Other income | (1,016) | (1,016) | — | — | (2,032) | (1,000) | (1,032) | NM | ||||||||||||||||
Total other expenses (income) |
| 35,245 |
| 8,524 | 26,721 | NM |
| 43,769 |
| (29,580) | 73,349 | NM | ||||||||||||
Net (loss) income |
| (29,254) |
| (2,571) | (26,683) | NM |
| (31,825) |
| 18,227 | (50,052) | NM | ||||||||||||
Net loss (income) attributable to redeemable noncontrolling interests |
| 226 |
| 18 | 208 | NM |
| 244 |
| (186) | 430 | NM | ||||||||||||
Net loss (income) attributable to noncontrolling interests |
| 6,278 |
| 549 | 5,729 | NM |
| 6,827 |
| (2,618) | 9,445 | NM | ||||||||||||
Net (loss) income attributable to common stockholders | $ | (22,750) | $ | (2,004) | (20,746) | NM | % | $ | (24,754) | $ | 15,423 | $ | (40,177) | NM | % | |||||||||
Weighted-average shares outstanding—basic |
| 206,214 |
| 206,774 | (560) | (0.3) | % | 206,493 | 184,878 | 21,615 | 11.7 | % | ||||||||||||
Weighted-average shares outstanding—diluted | 264,963 | 263,026 | 1,937 | 0.7 | % | 263,975 | 217,806 | 46,169 | 21.2 | % | ||||||||||||||
Net (loss) income attributable to common stockholders per common share—basic and diluted | $ | (0.11) | $ | (0.01) | (0.10) | NM | % | $ | (0.12) | $ | 0.08 | $ | (0.20) | NM | % | |||||||||
NM = Not meaningful
Rental Revenues. Rental revenues are comprised of rental income, straight-line rent, and amortization of above- and below-market lease assets and liabilities. Total rental revenues decreased by $0.8 million for the three months ended June 30, 2023 as compared to the three months ended March 31, 2023, primarily due to lease expirations and reduced recovery revenue at certain properties during the second quarter of 2023. Total rental revenues increased by $19.2 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to the increase in non-same store revenues resulting from significant net growth in our portfolio, partially offset by reduced occupancy at our Bala Pointe property. See “Same Store Portfolio Results of Operations” below for further details of the same store revenues.
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The following table presents the components of our consolidated rental revenues:
Debt-Related Income. Debt-related income is comprised of interest income and amortization related to our debt-related investments and debt securities. Total debt-related income increased by $1.4 million and $8.6 million for the three and six months ended June 30, 2023 as compared to the three months ended March 31, 2023 and the six months ended June 30, 2022, respectively, primarily due to the growth of our investments in real estate debt and securities.
Rental Expenses. Rental expenses include certain property operating expenses typically reimbursed by our customers, such as real estate taxes, property insurance, property management fees, repair and maintenance and include certain non-recoverable expenses, such as consulting services and roof repairs. Total rental expenses for the three and six months ended June 30, 2023 increased by $0.5 and $10.9 million, as compared to the three months ended March 31, 2023 and the six months ended June 30, 2022, respectively, primarily due to (i) an increase in non-same store rental expenses as a result of our acquisition activity since January 1, 2022, which was partially offset by our disposition activity since January 1, 2022; and (ii) increased operating expenses across our same store residential properties, in aggregate. See “Same Store Portfolio Results of Operations” below for further details of the same store expenses.
The following table presents the various components of our rental expenses:
All Remaining Income and Expenses. In aggregate, the remaining income and expenses increased by $26.8 million for the three months ended June 30, 2023, as compared to the three months ended March 31, 2023, primarily due to the following:
| ● | a decrease in gain on sale of real estate property of $36.9 million related to the sale of one partial retail property. |
Partially offset by:
| ● | a decrease in provision for current expected credit loss of $7.3 million related to our debt-related investments. |
In aggregate, the remaining income and expenses increased $66.9 million for the six months ended June 30, 2023, as compared to the same period in 2022, primarily due to the following:
| ● | a decrease in gain on sale of real estate property of $46.6 million driven by lower disposition activity in 2023; and |
| ● | an increase in interest expense of $17.2 million driven primarily by higher interest expense on financing obligations associated with an increase in the sale of interests related to our DST Program and higher interest expense on certain variable interest rate debt. |
Partially offset by:
| ● | a decrease in performance participation allocation of $18.4 million as the requisite performance hurdle was met in 2022 and performance participation allocation expense was then recognized, while the performance hurdle was not met in 2023 and no performance participation allocation expense was recognized. |
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Same Store Portfolio Results of Operations
Net operating income (“NOI”) is a supplemental non-GAAP measure of our property operating results. We define NOI for our properties as operating revenues less operating expenses. While we believe our net income (loss), as defined by GAAP, to be the most appropriate measure to evaluate our overall performance, we consider NOI to be an appropriate supplemental performance measure. We believe NOI provides useful information to our investors regarding our results of operations because NOI reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of properties, such as real estate-related depreciation and amortization, general and administrative expenses, advisory fees, impairment charges, interest expense, gains on sale of properties, other income and expense, gains and losses on the extinguishment of debt and noncontrolling interests. However, NOI should not be viewed as an alternative measure of our financial performance since it excludes such items, which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI, therefore, our investors should consider net income (loss) as the primary indicator our overall financial performance.
We evaluate the performance of consolidated operating properties we own and manage using a same store analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of any material changes in the composition of the aggregate portfolio on performance measures. We have defined the same store portfolio to include consolidated operating properties owned for the entirety of both the current and prior reporting periods for which the operations had been stabilized. Unconsolidated properties are excluded from the same store portfolio because we account for our interest in our joint venture partnership using the equity method of accounting; therefore, our proportionate share of income and loss is recognized in income (loss) of our unconsolidated joint venture partnership on the condensed consolidated statements of operations. Other operating properties not meeting the same store criteria are reflected in the non-same store portfolio. Our same store analysis may not be comparable to that of other real estate companies and should not be considered to be more relevant or accurate in evaluating our operating performance than current GAAP methodology.
The same store operating portfolio for the three months ended June 30, 2023 as compared to the three months ended March 31, 2023 presented below includes 90 properties totaling 18.4 million square feet owned as of January 1, 2023, which represented 98.4% of total rentable square feet as of June 30, 2023. The same store operating portfolio for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 presented below includes 60 properties totaling approximately 12.6 million square feet owned as of January 1, 2022, which represented 67.5% of total rentable square feet as of June 30, 2023.
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The following table reconciles GAAP net income (loss) to same store portfolio NOI for the three and six months ended June 30, 2023 as compared to the three and six months ended March 31, 2023 and June 30, 2022:
Our real property markets are aggregated into four reportable property segments: office, retail, residential and industrial. Our property segments are based on our internal reporting of operating results used to assess performance based on the type of our properties. These property segments are comprised of the markets by which management and its operating teams conduct and monitor business. See “Note 15 to the Condensed Consolidated Financial Statements” for further information on our segments. Management considers rental revenues and NOI aggregated by property segment to be an appropriate way to analyze performance.
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The following table includes a breakout of results for our same store portfolio by property segment for rental revenues, rental expenses and NOI for the three and six months ended June 30, 2023, as compared to the three and six months ended March 31, 2023 and June 30, 2022:
Office Segment. For the three months ended June 30, 2023, our office segment same store NOI decreased by $0.2 million as compared to the three months ended March 31, 2023, primarily due to the lease expiration of a tenant at our Eden Prairie property during the second quarter of 2023. For the six months ended June 30, 2023, our office segment same store NOI decreased by $2.3 million as compared to the six months ended June 30, 2022, primarily due to decreased occupancy at our Bala Pointe property.
Retail Segment. For the three months ended June 30, 2023, our retail segment same store NOI decreased by $0.2 million as compared to the three months ended March 31, 2023, primarily due to increased bad debt expense at certain properties. For the six months ended June 30, 2023, our retail segment same store NOI increased by $0.9 million as compared to the six months ended June 30, 2022, primarily due to decreased bad debt expense at certain properties and increased occupancy at our Saugus property.
Residential Segment. For the three months ended June 30, 2023, our residential segment same store NOI decreased by $0.9 million as compared to the three months ended March 31, 2023, primarily due to increased repairs and maintenance and insurance operating expenses at certain of our residential properties. For the six months ended June 30, 2023, our residential segment same store NOI increased by $0.6 million, as compared to the six months ended June 30, 2022, primarily due to increased market rents, reduced vacancy and loss to lease, partially offset by increased operating expenses at certain of our residential properties.
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Industrial Segment. For the three months ended June 30, 2023, our industrial segment same store NOI remained consistent as compared to the three months ended March 31, 2023. For the six months ended June 30, 2023, our industrial segment same store NOI increased by $1.8 million as compared to the six months ended June 30, 2022, primarily due to increased occupancy at certain of our industrial properties.
ADDITIONAL MEASURES OF PERFORMANCE
Funds From Operations (“FFO”) and Adjusted Funds From Operations (“AFFO”)
We believe that FFO and AFFO, in addition to net income (loss) and cash flows from operating activities as defined by GAAP, are useful supplemental performance measures that our management uses to evaluate our consolidated operating performance. However, these supplemental, non-GAAP measures should not be considered as alternatives to net income (loss) or to cash flows from operating activities as indications of our performance and are not intended to be used as liquidity measures indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity and results of operations. In addition, other REITs may define FFO, AFFO and similar measures differently and choose to treat certain accounting line items in a manner different from us due to specific differences in investment and operating strategy or for other reasons.
FFO. As defined by the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is a non-GAAP measure that excludes certain items such as real estate-related depreciation and amortization. We believe FFO is a meaningful supplemental measure of our operating performance that is useful to investors because depreciation and amortization in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. By excluding gains or losses on the sale of assets, we believe FFO provides a helpful additional measure of our consolidated operating performance on a comparative basis. We use FFO as an indication of our consolidated operating performance and as a guide to making decisions about future investments.
AFFO. AFFO further adjusts FFO to reflect the performance of our portfolio by adjusting for items we believe are not directly attributable to our operations. Our adjustments to FFO to arrive at AFFO include removing the impact of (i) our performance participation allocation, (ii) unrealized (gain) loss from changes in fair value of financial instruments and (iii) financing obligation liability appreciation (depreciation).
Although some REITs may present certain performance measures differently, we believe FFO and AFFO generally facilitate a comparison to other REITs that have similar operating characteristics to us. We believe investors are best served if the information that is made available to them allows them to align their analyses and evaluation with the same performance metrics used by management in planning and executing our business strategy. Neither the SEC, NAREIT, nor any regulatory body has passed judgment on the acceptability of the adjustments used to calculate AFFO. In the future, the SEC, NAREIT, or a regulatory body may decide to standardize the allowable adjustments across the non-traded REIT industry at which point we may adjust our calculations and characterizations of AFFO.
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The following unaudited table presents a reconciliation of GAAP net income (loss) to NAREIT FFO and AFFO:
| (1) | Unrealized (gain) loss on financial instruments primarily relates to mark-to-market changes on our derivatives not designated as cash flow hedges, impairment loss on our debt-related investments and changes to our provision for current expected credit losses. |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary sources of capital for meeting our cash requirements include debt financings, cash generated from operating activities, net proceeds from our public and private offerings and asset sales. Our principal uses of funds are distributions to our stockholders, payments under our debt obligations and payments pursuant to the master lease agreements related to properties in our DST Program, redemption payments, acquisition of properties and other investments and capital expenditures. Over time, we intend to fund a majority of our cash needs, including the repayment of debt and capital expenditures, from operating cash flows and refinancings. As of June 30, 2023, we had approximately $2.1 million of borrowings, including scheduled amortization payments, and $55.7 million of future minimum lease payments related to the properties in our DST Program coming due in the next 12 months. We expect to be able to repay our principal and interest obligations over the next 12 months and beyond through operating cash flows, refinancings, borrowings under our line of credit, proceeds from capital raise and/or disposition proceeds. Additionally, given the increase in market volatility, increased interest rates, high inflation and the potential recessionary environment, we may experience a decreased pace of net proceeds raised from our public offering, reducing our ability to purchase assets, which may similarly delay the returns generated from our investments and affect our NAV.
Our Advisor, subject to the oversight of our board of directors and, under certain circumstances, the investment committee or other committees established by our board of directors, will evaluate potential acquisitions or dispositions and will engage in negotiations with buyers, sellers and lenders on our behalf. Pending investment in property, debt, or other investments, we may decide to temporarily invest any unused proceeds from our public offerings in certain investments that are expected to yield lower returns than those earned on real estate assets. These lower returns may affect our NAV and our ability to make distributions to our stockholders. Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from our public and private offerings, proceeds from the sale of assets and undistributed funds from operations.
As of June 30, 2023, our financial position was strong with 32.7% leverage, calculated as outstanding principal balance of our borrowings less cash and cash equivalents divided by the fair value of our real property, net investments in our unconsolidated joint venture partnerships, investments in real estate-related securities and debt-related investments not associated with the DST Program (determined in accordance with our valuation procedures). In addition, our consolidated portfolio was 93.7% occupied (94.7% leased)
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as of June 30, 2023 and is diversified across 92 properties totaling 18.7 million square feet across 33 geographic markets. Our properties contain a diverse roster of 408 commercial customers, large and small, and has an allocation based on fair value of real properties as determined by our NAV calculation of 36.5% residential, 35.9% industrial, 15.1% retail which is primarily grocery-anchored, and 12.5% office.
We believe that our cash on-hand, anticipated net offering proceeds, proceeds from our line of credit, and other financing and disposition activities should be sufficient to meet our anticipated future acquisition, operating, debt service, distribution and redemption requirements.
Cash Flows. The following table summarizes our cash flows for the following periods:
Net cash provided by operating activities decreased by approximately $50.7 million for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to changes in operating assets and liabilities of $15.7 million as compared to the prior period and the $23.7 million settlement of the 2022 performance participation allocation in cash in January 2023.
Net cash used in investing activities decreased by approximately $883.5 million for the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a decrease in real estate property acquisition activity of $1.1 billion and a decrease in investment activity in unconsolidated joint venture partnerships of $40.0 million. This driver was partially offset by a decrease in proceeds from disposition of real estate property of $198.1 million and an increase in purchases of available-for-sale debt securities of $71.1 million.
Net cash provided by financing activities decreased by approximately $842.9 million for the six months ended June 30, 2023, compared to the same period in 2022, primarily due to a decrease in net offering activity from our DST Program and public offering of $396.4 million, a decrease in net borrowing activity of $355.0 million and an increase in redemption activity of $77.5 million.
Capital Resources and Uses of Liquidity
In addition to our cash and cash equivalents balances available, our capital resources and uses of liquidity are as follows:
Line of Credit and Term Loans. As of June 30, 2023, we had an aggregate of $1.7 billion of commitments under our unsecured credit agreement, including $900.0 million under our line of credit and $800.0 million under our two term loans. As of that date, we had: (i) $352.0 million outstanding under our line of credit; and (ii) $800.0 million outstanding under our term loans. The weighted-average effective interest rate across all of our unsecured borrowings is 4.21%, which includes the effect of the interest rate swap and/or cap agreements related to $950.0 million in borrowings under our line of credit and our term loans.
As of June 30, 2023, the unused and available portions under our line of credit were $548.0 million and $547.9 million, respectively. Our $900.0 million line of credit matures in November 2025, and may be extended pursuant to two six-month extension options, subject to certain conditions, including the payment of extension fees. One $400.0 million term loan matures in November 2026, with no extension option available. Our other $400.0 million term loan matures in January 2027, with no extension option available. Our line of credit borrowings are available for general corporate purposes, including but not limited to the refinancing of other debt, payment of redemptions, acquisition and operation of permitted investments. Refer to “Note 5 to the Condensed Consolidated Financial Statements” for additional information regarding our line of credit and term loans.
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate as its
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preferred alternative rate for LIBOR in derivatives and other financial contracts. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
LIBOR has been phased out and ceased publication after June 2023. As of June 30, 2023, one of our mortgage notes had an initial or extended maturity date beyond June 2023 with exposure to LIBOR. Effective July 1, 2023, we have converted the interest rate of this mortgage note to Term SOFR and our consolidated debt no longer has exposure to LIBOR.
Mortgage Notes. As of June 30, 2023, we had property-level borrowings of approximately $517.5 million outstanding with a weighted-average remaining term of approximately 4.0 years. These borrowings are secured by mortgages or deeds of trust and related assignments and security interests in the collateralized properties, and had a weighted-average interest rate of 3.88%. Refer to “Note 5 to the Condensed Consolidated Financial Statements” for additional information regarding the mortgage notes.
Debt Covenants. Our line of credit, term loan and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, our line of credit and term loan agreements contain certain corporate level financial covenants, including leverage ratio, fixed charge coverage ratio and tangible net worth thresholds. These covenants may limit our ability to incur additional debt, or to pay distributions. We were in compliance with our debt covenants as of June 30, 2023.
Leverage. We use financial leverage to provide additional funds to support our investment activities. We may finance a portion of the purchase price of any real estate asset that we acquire with borrowings on short or long-term basis from banks, life insurance companies and other lenders. We calculate our leverage for reporting purposes as the outstanding principal balance of our borrowings less cash and cash equivalents divided by the fair value of our real property, net investment in our unconsolidated joint venture partnerships and debt-related investments not associated with the DST Program (determined in accordance with our valuation procedures). We had leverage of 32.7% as of June 30, 2023. Our current leverage target is between 40-60%. Although we will generally work to maintain our targeted leverage ratio, there are no assurances that we will maintain the targeted range disclosed above or achieve any other leverage ratio that we may target in the future. Due to the increase in interest rates in 2022, increased market volatility and the potential of a global recession in the near-term, the cost of financing or refinancing our purchase of assets may affect returns generated by our investments. Additionally, these factors may cause our borrowing capacity to be reduced, which could similarly delay or reduce benefits to our stockholders.
Future Minimum Lease Payments Related to the DST Program. As of June 30, 2023, we had $1.1 billion of future minimum lease payments related to the DST Program. The underlying interests of each property that is sold to investors pursuant to the DST Program are leased back by an indirect wholly-owned subsidiary of the Operating Partnership on a long-term basis of up to 29 years.
Offering Proceeds. For the six months ended June 30, 2023, the amount of aggregate gross proceeds raised from our public offerings (including shares issued pursuant to the distribution reinvestment plan) was $83.8 million ($79.9 million net of direct selling costs).
Distributions. To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without regard to the deduction for distributions paid and by excluding net capital gains. The payment of distributions is determined by our board of directors and may be adjusted at its discretion at any time. Distribution levels are set by our board of directors at a level it believes to be appropriate and sustainable based upon a review of a variety of factors including the current and anticipated market conditions, current and anticipated future performance and make-up of our investments, our overall financial projections and expected future cash needs. We intend to continue to make distributions on a monthly basis.
On June 14, 2023, our board of directors authorized an increase to the amount of monthly gross distributions for each class of our common stock, such that distributions in the amount of $0.03333 per share will be paid to stockholders of record on July 31, 2023, August 31, 2023 and September 29, 2023. The new monthly gross distribution per share reflects an increase to the amount of the previous monthly gross distribution of $0.03125 per share that has been paid since January 31, 2018. The distributions on Class T shares, Class S shares and Class D shares of our common stock will be reduced by the respective distribution fees that are payable with respect to Class T shares, Class S shares and Class D shares. The distributions will be paid on or about the last business day of each respective month to stockholders of record as of the close of business on the last business day of each respective month. There can be no assurances that this new distribution rate will be maintained in future periods.
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The following table outlines sources used, as determined on a GAAP basis, to pay total gross distributions (which are paid in cash or reinvested in shares of our common stock through our distribution reinvestment plan) for the periods indicated below:
For the Six Months Ended June 30, 2023 | For the Six Months Ended June 30, 2022 | |||||||||||
($ in thousands) | Amount | Percentage | Amount | Percentage | ||||||||
Distributions | ||||||||||||
Paid in cash (1) | $ | 33,513 | 67.7 | % | $ | 26,600 | 65.1 | % | ||||
Reinvested in shares | 15,983 | 32.3 | 14,238 | 34.9 | ||||||||
Total (2) | $ | 49,496 | 100.0 | % | $ | 40,838 | 100.0 | % | ||||
Sources of Distributions |
|
|
|
|
|
| ||||||
Cash flows from operating activities | $ | — | — | % | $ | 26,600 | 65.1 | % | ||||
Borrowings |
| 33,513 | 67.7 |
| — | — | ||||||
DRIP (3) |
| 15,983 | 32.3 |
| 14,238 | 34.9 | ||||||
Total (2) | $ | 49,496 | 100.0 | % | $ | 40,838 | 100.0 | % | ||||
| (1) | Includes other cash distributions consisting of: (i) distributions paid to noncontrolling interest holders; and (ii) ongoing distribution fees paid to the Dealer Manager with respect to Class T, Class S and Class D shares and OP Units. |
| (2) | Includes distributions paid to holders of OP Units for redeemable noncontrolling interests. |
| (3) | Stockholders may elect to have their distributions reinvested in shares of our common stock through our distribution reinvestment plan. |
For the three months ended June 30, 2023 and 2022, our FFO was $5.9 million, or 23.7% of our total distributions, and $0.8 million, or 3.9% of our total distributions, respectively. For the six months ended June 30, 2023 and 2022, our FFO was $2.7 million, or 5.4% of our total distributions, and $1.2 million, or 3.0% of our total distributions, respectively. FFO is a non-GAAP operating metric and should not be used as a liquidity measure. However, management believes the relationship between FFO and distributions may be meaningful for investors to better understand the sustainability of our operating performance compared to distributions made. Refer to “Additional Measures of Performance” above for the definition of FFO, as well as a detailed reconciliation of our GAAP net income (loss) to FFO.
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Redemptions. Below is a summary of redemptions and repurchases pursuant to our share redemption program for the six months ended June 30, 2023 and 2022. All eligible redemption requests were fulfilled for the periods presented. Eligible redemption requests are requests submitted in good order by the request submission deadline set forth in the share redemption program. Our board of directors may modify or suspend our current share redemption programs if it deems such action to be in the best interest of our stockholders. Refer to Part II, Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds—Share Redemption Program” for detail regarding our share redemption program.
For the six months ended June 30, 2023 and 2022, we received and redeemed 100% of eligible redemption requests for an aggregate amount of approximately $93.3 million and $28.5 million, respectively, which we redeemed using cash flows from operating activities in excess of our distributions paid in cash, cash on hand, proceeds from our public offerings, proceeds from the disposition of properties, and borrowings under our line of credit. We generally repay funds borrowed from our line of credit from a variety of sources including: cash flows from operating activities in excess of our distributions; proceeds from our public offerings; proceeds from the disposition of properties and other longer-term borrowings.
For the purposes of the share redemption program, redemption requests received in a month are included on the last day of such month because that is the last day the shareholders have rights in the Company. We record these redemptions in our financial statements as having occurred on the first day of the next month following receipt of the redemption request because shares redeemed in a given month are considered outstanding through the last day of the month.
CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our unaudited condensed consolidated 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 at the dates of the condensed consolidated 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 condensed consolidated 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. For a detailed description of our critical accounting estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K. As of June 30, 2023, our critical accounting estimates have not changed from those described in our 2022 Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have been and may continue to be exposed to the impact of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows, and optimize overall borrowing costs. To achieve these objectives, we often plan to borrow on a fixed interest rate basis for longer-term debt and utilize interest rate swap and cap agreements on certain variable interest rate debt in order to limit the effects of changes in interest rates on our results of operations. As of June 30, 2023, our debt outstanding consisted of borrowings under our line of credit, term loans and mortgage notes.
Fixed Interest Rate Debt. As of June 30, 2023, our fixed interest rate debt consisted of $309.9 million under our mortgage notes and $650.0 million of borrowings under our term loans that were effectively fixed through the use of interest rate swaps. In total, our fixed interest rate debt represented 57.5% of our total consolidated debt as of June 30, 2023. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed interest rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes could affect the fair value of our fixed interest rate debt. As of June 30, 2023, the fair value and the carrying value of our consolidated fixed interest rate debt, excluding the values of any associated hedges, was $925.6 million and $959.9 million, respectively. The fair value estimate of this debt was estimated 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 on June 30, 2023. Given we generally expect to hold our fixed interest rate debt instruments to maturity or when they otherwise open up for prepayment at par, and the amounts due under such debt instruments should be limited to the outstanding principal balance and any accrued and unpaid interest at such time, we do not expect that the resulting change in fair value of our fixed interest rate debt instruments due to market fluctuations in interest rates, would have a significant impact on our operating cash flows.
Variable Interest Rate Debt. As of June 30, 2023, our consolidated variable interest rate debt consisted of $352.0 million of borrowings under our line of credit, $150.0 million of borrowings under our term loans and $207.6 million under our mortgage notes, which represented 42.5% of our total consolidated debt. Interest rate changes on the variable portion of our consolidated variable-rate debt could impact our future earnings and cash flows, but would not necessarily affect the fair value of such debt. As of June 30, 2023, we were exposed to market risks related to fluctuations in interest rates on $709.6 million of consolidated borrowings; however, $507.6 million of these borrowings are capped through the use of five interest rate cap agreements. A hypothetical 25 basis points increase in the all-in rate on the outstanding balance of our consolidated variable interest rate debt as of June 30, 2023, would increase our annual interest expense by approximately $0.5 million, including the effects of our interest rate cap agreements.
Derivative Instruments. As of June 30, 2023, we had 17 outstanding and effective derivative instruments, with a total notional amount of $1.2 billion. These derivative instruments were comprised of interest rate swaps and interest rate caps that were designed to mitigate the risk of future interest rate increases by either providing a fixed interest rate or capping the variable interest rate for a limited, pre-determined period of time. See “Note 5 to the Condensed Consolidated Financial Statements” for further detail on our derivative instruments. We are exposed to credit risk of the counterparty to our interest rate cap and swap agreements in the event of non-performance under the terms of the agreements. If we were not able to replace these caps or swaps in the event of non-performance by the counterparty, we would be subject to variability of the interest rate on the amount outstanding under our debt that is fixed or capped through the use of the swaps or caps, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the direction of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2023. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, 2023, our disclosure controls and procedures were effective.
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Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K, which could materially affect our business, financial condition and/or future results. The risks described in our 2022 Form 10-K, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
There have been no material changes to the risk factors disclosed in our 2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Redemption Program
While stockholders may request on a monthly basis that we redeem all or any portion of their shares pursuant to our share redemption program, we are not obligated to redeem any shares and may choose to redeem only some, or even none, of the shares that have been requested to be redeemed in any particular month, in our discretion. In addition, our ability to fulfill redemption requests is subject to a number of limitations. As a result, share redemptions may not be available each month. Under our share redemption program, to the extent we choose to redeem shares in any particular month, we will only redeem shares as of the last calendar day of that month (each such date, a “Redemption Date”). Shares redeemed on the Redemption Date remain outstanding on the Redemption Date and are no longer outstanding on the day following the Redemption Date. Redemptions will be made at the transaction price in effect on the Redemption Date, except that shares that have not been outstanding for at least one year will be redeemed at 95% of the transaction price (an “Early Redemption Deduction”). The Early Redemption Deduction may be waived in certain circumstances including: (i) in the case of redemption requests arising from the death or qualified disability of the holder; (ii) in the event that a stockholder’s shares are redeemed because the stockholder has failed to maintain the $2,000 minimum account balance or (iii) with respect to shares purchased through our distribution reinvestment plan. To have his or her shares redeemed, a stockholder’s redemption request and required documentation must be received in good order by 4:00 p.m. (Eastern time) on the second to last business day of the applicable month. Settlements of share redemptions will be made within three business days of the Redemption Date. An investor may withdraw its redemption request by notifying the transfer agent before 4:00 p.m. (Eastern time) on the last business day of the applicable month.
The total amount of aggregate redemptions of Class T, Class S, Class D, Class I and Class E shares (based on the price at which the shares are redeemed) will be limited during each calendar month to 2% of the aggregate NAV of all classes as of the last calendar day of the previous quarter and in each calendar quarter will be limited to 5% of the aggregate NAV of all classes of shares as of the last calendar day of the previous calendar quarter; provided, however, that every month and quarter each class of our common stock will be allocated capacity within such aggregate limit to allow stockholders in such class to either (a) redeem shares (based on the price at which the shares are redeemed) equal to at least 2% of the aggregate NAV of such share class as of the last calendar day of the previous quarter, or, if more limiting, (b) redeem shares (based on the price at which the shares are redeemed) over the course of a given quarter equal to at least 5% of the aggregate NAV of such share class as of the last calendar day of the previous quarter (collectively referred to herein as the “2% and 5% limits”), which in the second and third months of a quarter could be less than 2% of the NAV of such share class. In the event that we determine to redeem some but not all of the shares submitted for redemption during any month, shares redeemed at the end of the month will be redeemed on a pro rata basis. Even if the class-specific allocations are exceeded for a class, the program may offer such class additional capacity under the aggregate program limits. Redemptions and pro rata treatment, if necessary, will first be applied within the class-specific allocated capacity and then applied on an aggregate basis to the extent there is remaining capacity. All unsatisfied redemption requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share redemption program, as applicable.
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For both the aggregate and class-specific allocations described above, (i) provided that the share redemption program has been operating and not suspended for the first month of a given quarter and that all properly submitted redemption requests were satisfied, any unused capacity for that month will carry over to the second month and (ii) provided that the share redemption program has been operating and not suspended for the first two months of a given quarter and that all properly submitted redemption requests were satisfied, any unused capacity for those two months will carry over to the third month. In no event will such carry-over capacity permit the redemption of shares with aggregate value (based on the redemption price per share for the month the redemption is effected) in excess of 5% of the combined NAV of all classes of shares as of the last calendar day of the previous calendar quarter (provided that for these purposes redemptions may be measured on a net basis as described in the paragraph below).
We currently measure the foregoing redemption allocations and limitations based on net redemptions during a month or quarter, as applicable. The term “net redemptions” means, during the applicable period, the excess of our share redemptions (capital outflows) over the proceeds from the sale of our shares (capital inflows). For purposes of measuring our redemption capacity pursuant to our share redemption program, proceeds from new subscriptions in a month are included in capital inflows on the first day of the next month because that is the first day on which such shareholders have rights in the Company. Also for purposes of measuring our redemption capacity pursuant to our share redemption program, redemption requests received in a month are included in capital outflows on the last day of such month because that is the last day shareholders have rights in the Company. We record these redemptions in our financial statements as having occurred on the first day of the next month following receipt of the redemption request because shares redeemed in a given month are outstanding through the last day of the month. Net redemptions for the class-specific allocations will be based only on the capital inflows and outflows of that class, while net redemptions for the overall program limits would be based on capital inflows and outflows of all classes. Thus, for any given calendar quarter, the maximum amount of redemptions during that quarter will be equal to (i) 5% of the combined NAV of all classes of shares as of the last calendar day of the previous calendar quarter, plus (ii) proceeds from sales of new shares in this offering (including purchases pursuant to our distribution reinvestment plan) and the Class E distribution reinvestment plan offering since the beginning of the current calendar quarter. The same would apply for a given month, except that redemptions in a month would be subject to the 2% limit described above (subject to potential carry-over capacity), and netting would be measured on a monthly basis. With respect to future periods, our board of directors may choose whether the allocations and limitations will be applied to “gross redemptions,” i.e., without netting against capital inflows, rather than to net redemptions. If redemptions for a given month or quarter are measured on a gross basis rather than on a net basis, the redemption limitations could limit the amount of shares redeemed in a given month or quarter despite our receiving a net capital inflow for that month or quarter. In order for our board of directors to change the application of the allocations and limitations from net redemptions to gross redemptions or vice versa, we will provide notice to stockholders in a prospectus supplement or special or periodic report filed by us, as well as in a press release or on our website, at least 10 days before the first business day of the quarter for which the new test will apply. The determination to measure redemptions on a gross basis, or vice versa, will only be made for an entire quarter, and not particular months within a quarter.
Although the vast majority of our assets consist of properties that cannot generally be readily liquidated on short notice without impacting our ability to realize full value upon their disposition, we intend to maintain a number of sources of liquidity including (i) cash equivalents (e.g. money market funds), other short-term investments, U.S. government securities, agency securities and liquid real estate-related securities and (ii) one or more borrowing facilities. We may fund redemptions from any available source of funds, including operating cash flows, borrowings, proceeds from this offering and/or sales of our assets.
Should redemption requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than redeeming our shares is in the best interests of the company as a whole, then we may choose to redeem fewer shares than have been requested to be redeemed, or none at all. Further, our board of directors may modify or suspend our share redemption program if it deems such action to be in our best interest and the best interest of our stockholders. If the transaction price for the applicable month is not made available by the tenth business day prior to the last business day of the month (or is changed after such date), then no redemption requests will be accepted for such month and stockholders who wish to have their shares redeemed the following month must resubmit their redemption requests. The above description of the share redemption program is a summary of certain of the terms of the share redemption program. Please see the full text of the share redemption program, which is incorporated by reference as Exhibit 4.2 to this Quarterly Report on Form 10-Q, for all the terms and conditions.
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The table below summarizes the redemption activity for the three months ended June 30, 2023, for which all eligible redemption requests were redeemed in full:
|
|
| Total Number of Shares |
| Maximum Number of | ||||
Redeemed as Part of | Shares That May Yet Be | ||||||||
Total Number of | Average Price | Publicly Announced | Redeemed Pursuant | ||||||
(shares in thousands) | Shares Redeemed | Paid Per Share (1) | Plans or Programs | to the Program (2) | |||||
For the Month Ended: |
|
|
|
|
|
|
|
| |
April 30, 2023 |
| 1,959 | $ | 8.70 |
| 1,959 | — | ||
May 31, 2023 |
| 1,981 |
| 8.63 |
| 1,981 |
| — | |
June 30, 2023 (3) |
| 2,760 |
| 8.60 |
| 2,760 |
| — | |
Total |
| 6,700 | $ | 8.64 |
| 6,700 |
| — | |
| (1) | Amount represents the average price paid to investors upon redemption. |
| (2) | We limit the number of shares that may be redeemed under the share redemption program as described above. |
| (3) | Redemption requests accepted in June 2023 are considered redeemed on July 1, 2023 for accounting purposes and, as a result, are not included in the table above. This differs from how we treat capital outflows for purposes of the limitations of our share redemption program. For purposes of measuring our redemption capacity pursuant to our share redemption program, redemption requests received in a month are included in capital outflows on the last day of such month because that is the last day shareholders have rights in the Company and we redeemed $72.8 million of shares of common stock for the three months ended June 30, 2023. |
ITEM 5. OTHER INFORMATION
Distribution Reinvestment Plan Suitability Requirement
Pursuant to the terms of our distribution reinvestment plan (“DRP”), participants in the DRP must promptly notify us if at any time they fail to meet the current suitability requirements for making an investment in us.
The current suitability standards require that Class E stockholders participating in the DRP other than investors in Arizona, California, Ohio and Oregon have either:
| ● | a net worth (exclusive of home, home furnishings and automobiles) of $150,000 or more; or |
| ● | a net worth (exclusive of home, home furnishings and automobiles) of at least $45,000 and had during the last tax year, or estimate that such investor will have during the current tax year, a minimum of $45,000 annual gross income. |
The current suitability standards require that Class E stockholders participating in the DRP in Arizona, California, Ohio and Oregon have either:
| ● | a net worth (exclusive of home, home furnishings and automobiles) of $250,000 or more; or |
| ● | a net worth (exclusive of home, home furnishings and automobiles) of at least $70,000 and had during the last tax year, or estimate that such investor will have during the current tax year, a minimum of $70,000 annual gross income. |
In addition, Class E stockholders participating in the DRP in Ohio and Oregon must have a net worth of at least 10 times their investment in us and any of our affiliates. The current suitability standards for Class T, Class S, Class D and Class I stockholders participating in the DRP are listed in the section entitled “Suitability Standards” in our current Class T, Class S, Class D and Class I public offering prospectus on file at www.sec.gov and on our website at areswmsresources.com/investment-solutions/AREIT.
Stockholders can notify us of any changes to their ability to meet the suitability requirements or change their DRP election by contacting us at Ares Real Estate Income Trust Inc., Investor Relations, One Tabor Center, 1200 Seventeenth Street, Suite 2900, Denver, Colorado 80202, Telephone: (303) 228-2200.
Rule 10b5-1 Trading Plans
During the three months ended June 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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ITEM 6. EXHIBITS
Exhibit |
| Description |
|---|---|---|
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
3.7 | ||
3.8 | ||
3.9 | ||
3.10 | ||
3.11 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
10.1* | Second Amended and Restated Advisory Agreement (2023), effective as of June 3, 2023. | |
10.2* | ||
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Exhibit |
| Description |
|---|---|---|
10.3* | ||
10.4* | ||
10.5* | ||
31.1* | ||
31.2* | ||
32.1* | ||
99.1* | ||
101 | The following materials from Ares Real Estate Income Trust Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, filed on August 11, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed or furnished herewith. |
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Exhibit 10.1
SECOND AMENDED AND RESTATED ADVISORY AGREEMENT (2023)
among
ARES REAL ESTATE INCOME TRUST INC.,
AREIT OPERATING PARTNERSHIP LP
and
ARES COMMERCIAL REAL ESTATE MANAGEMENT LLC
TABLE OF CONTENTS
i
ii
SECOND AMENDED AND RESTATED ADVISORY AGREEMENT (2023)
THIS SECOND AMENDED AND RESTATED ADVISORY AGREEMENT (2023) (this “Agreement”), dated and effective as of June 3, 2023, is among Ares Real Estate Income Trust Inc., a Maryland corporation (the “Company”), AREIT Operating Partnership LP, a Delaware limited partnership (the “Operating Partnership”), and Ares Commercial Real Estate Management LLC, a Delaware limited liability company (the “Advisor”).
W I T N E S S E T H
WHEREAS, the Company has qualified as a REIT (as defined below), and invests its funds in investments permitted by the terms of Sections 856 through 860 of the Code (as defined below);
WHEREAS, the Company is the general partner of the Operating Partnership and conducts all its business and makes all investments in Real Properties, Real Estate Related Securities, and Debt Investments through the Operating Partnership;
WHEREAS, the Company and the Operating Partnership desire to avail themselves of the experience, sources of information, advice, assistance and certain facilities of 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 all as provided herein;
WHEREAS, the Advisor is willing to undertake to render such services, subject to the supervision of the Board of Directors, on the terms and conditions hereinafter set forth;
WHEREAS, the Company, the Operating Partnership and the Advisor entered into that certain Amended and Restated Advisory Agreement (2023), dated as of April 30, 2023 (the “Prior Agreement”);
WHEREAS, the parties hereto now wish to amend and restated the Prior Agreement in its entirety.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements contained herein, the parties hereto agree as follows:
Acquisition Expenses. Any and all expenses, exclusive of Acquisition Fees, incurred by the Company, the Operating Partnership, the Advisor, or any of their Affiliates in connection with the selection, acquisition or development of any Real Property, Real Estate Related Security or Debt Investment, whether or not acquired, including, without limitation, legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance premiums, and the costs of performing due diligence.
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Acquisition Fees. Any and all fees and commissions, exclusive of Acquisition Expenses, paid by any Person to any other Person (including any fees or commissions paid by or to any Affiliate of the Company, the Operating Partnership or the Advisor) in connection with making or investing in Debt Investments or the purchase, development or construction of a Real Property, including real estate commissions, selection fees, development fees, construction fees, nonrecurring management fees, loan fees, points or any other fees of a similar nature. Excluded shall be development fees and construction fees paid to any Person not affiliated with the Sponsor in connection with the actual development and construction of a project.
Advisor. Ares Commercial Real Estate Management LLC, a Delaware limited liability company, any successor advisor to the Company, the Operating Partnership or any person or entity to which Ares Commercial Real Estate Management LLC or any successor advisor subcontracts substantially all of its functions. Notwithstanding the forgoing, a Person hired or retained by Ares Commercial Real Estate Management LLC to perform property and securities management and related services for the Company or the Operating Partnership that is not hired or retained to perform substantially all of the functions of Ares Commercial Real Estate Management LLC with respect to the Company or the Operating Partnership as a whole shall not be deemed to be an Advisor.
Advisory Fee. The fee payable to the Advisor pursuant to Section 9(b).
Affiliate or Affiliated. With respect to any Person, (i) any Person directly or indirectly owning, controlling or holding, with the power to vote, ten percent (10%) or more of the outstanding voting securities of such other Person; (ii) any Person ten percent (10%) or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with the power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by or under common control with such other Person; (iv) any executive officer, director, trustee or general partner of such other Person; and (v) any legal entity for which such Person acts as an executive officer, director, trustee or general partner.
Annual Total Return Amount. The overall investment return, expressed as a dollar amount per OP Unit, which shall be equal to the sum of (1) the Weighted-Average Distributions per OP Unit over the applicable period, and (2) the Ending VPU, adjusted to remove the negative impact on the overall investment return from the payment or the obligation to pay, or distribute, as applicable, the Performance Component and Class-Specific Fees, less the Beginning VPU.
Articles of Incorporation. The Articles of Incorporation of the Company, as amended from time to time.
Average Invested Assets. For a specified period, the average of the aggregate book value of the assets of the Company invested, directly or indirectly, in Real Estate Related Securities, Debt Investments and Real Properties, before deducting depreciation, bad debts or other non-cash reserves, computed by taking the average of such values at the end of each month during such period.
Beginning VPU. The VPU determined as of the end of the most recent month prior to the commencement of the applicable period.
2
Board of Directors or Board. The persons holding such office, as of any particular time, under the Articles of Incorporation of the Company, whether they be the Directors named therein or additional or successor Directors.
Bylaws. The bylaws of the Company, as the same are in effect from time to time.
Cause. With respect to the termination of this Agreement, fraud, criminal conduct, willful misconduct or willful or negligent breach of fiduciary duty by the Advisor, or an uncured material breach of this Agreement by the Advisor.
Class E Unit. An OP Unit entitling the holder thereof to the rights of a holder of Class E Units as provided in the Operating Partnership Agreement.
Class-Specific Fees. Any Distribution Fee expenses accrued or allocated directly or indirectly to a particular class of OP Units or Shares.
Code. 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.
Commercial Real Property. A Real Property other than a Multifamily Real Property.
Company. Company shall have the meaning set forth in the preamble of this Agreement.
Company Property. Any and all property, real, personal or otherwise, tangible or intangible, which is transferred or conveyed to the Company (including all rents, income, profits and gains therefrom), and which is owned or held by, or for the account of, the Company.
Debt Investments. The debt related investments, or such investments the Board of Directors and the Advisor mutually designate as debt related investments, which are owned from time to time by the Company or the Operating Partnership; such debt related investments include, but are not limited to, mortgage loans, B-notes, mezzanine debt, participating debt (including with equity-like features), non-traded preferred equity, convertible debt, hybrid instruments, equity instruments and other related investments.
Director. A member of the Board of Directors of the Company.
Disposition Expenses. Any and all expenses incurred by the Company, the Operating Partnership, the Advisor, or any of their Affiliates in connection with the disposition of any Real Property, Real Estate Related Security or Debt Investment, whether or not finally sold, including, without limitation, legal fees and expenses, travel and communications expenses and accounting fees and expenses.
Distribution Fees. Any ongoing distribution fees, dealer manager fees or similar fees (as distinguished from up-front or one-time selling commissions and dealer manager fees) payable pursuant to the then-current dealer manager agreement between the Company and Ares Wealth Management Solutions, LLC.
3
Distributions. 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.
DST Properties. Real properties that meet the following criteria: (i) tenancy-in-common or Delaware statutory trust beneficial interests in such properties have been sold by the Company or any Affiliate to third party investors and (ii) such properties are being leased by the Company or any Affiliate from the tenancy-in-common or Delaware statutory trust third party investors.
DST Property Consideration. The consideration received by the Company or any Affiliate for selling tenancy-in-common or Delaware statutory trust beneficial interests in DST Properties to third party investors, net of DST Up Front Fees.
DST Up Front Fees. Up front fees and expense reimbursements payable out of gross sale proceeds from the sale of tenancy-in-common or Delaware statutory trust beneficial interests in DST Properties, including but not limited to sales commissions, dealer manager fees and non-accountable expense allowances.
Ending VPU. The VPU as of the end of the last month in the applicable period.
Equity Shares. Transferable shares of beneficial interest of the Company of any class or series, including common shares or preferred shares.
Excess Amount. Excess Amount has the meaning set forth in Section 12.
Expense Year. Expense Year has the meaning set forth in Section 12.
Fixed Component. The non-variable component of the Advisory Fee as described in Section 9.
GAAP. Generally accepted accounting principles as in effect in the United States of America from time to time.
Good Reason. With respect to the termination of this Agreement, (i) any failure to obtain a satisfactory agreement from any successor to the Company and/or the Operating Partnership to assume and agree to perform the Company's and/or the Operating Partnership's obligations under this Agreement; or (ii) any uncured material breach of this Agreement of any nature whatsoever by the Company and/or the Operating Partnership.
Gross Proceeds. The aggregate purchase price of all Shares sold for the account of the Company through all Offerings, without deduction for Organizational and Offering Expenses.
Hurdle Amount. For the applicable period, an amount that when annualized would equal 5.0% of the Beginning VPU.
Independent Director. Independent Director shall have the meaning set forth in the Articles of Incorporation.
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Independent Expert. A person or entity with no material current or prior business or personal relationship with the Advisor or the Directors and 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.
Independent Valuation Advisor. A firm that is (i) engaged to a substantial degree in the business of conducting valuations on commercial real estate properties, (ii) not affiliated with the Advisor and (iii) engaged by the Company with the approval of the Board to appraise the Real Properties or other assets or liabilities pursuant to the Valuation Procedures.
Joint Ventures. The joint venture or partnership arrangements (other than with AREIT Operating Partnership LP) in which the Company or any of its subsidiaries is a co-venturer or general partner which are established to acquire Real Properties.
Listing. The listing of the Shares on a national securities exchange or the receipt by the Company's stockholders of securities that are listed on a national securities exchange in exchange for the Company's common stock. Upon such Listing, the Shares shall be deemed Listed.
Loss Carryforward Amount. Loss Carryforward Amount equaled zero as of September 1, 2017 and cumulatively increases from then by the absolute value of any negative Annual Total Return Amount and decrease by any positive Annual Total Return Amount, provided that the Loss Carryforward Amount shall at no time be less than zero. The effect of the Loss Carryforward Amount is that the recoupment of past Annual Total Return Amount losses will offset the positive Annual Total Return Amount for purposes of the calculation of the Performance Component.
Multifamily Real Property. A property that primarily includes residential apartment units for rent. Such properties may include commercial spaces and tenants. However, the majority of the revenue generated by the property is derived from residential rental income.
NASAA REIT Guidelines. The Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association on May 7, 2007, as may be amended from time to time.
NAV. Net asset value, calculated pursuant to the Valuation Procedures.
NAV Calculations. The calculations used to determine the NAV of the Company, the Shares, the Operating Partnership and the OP Units, all as provided in the Valuation Procedures.
Net Income. For any period, the Company's total revenues applicable to such period, less the total expenses applicable to such period other than additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of the Company's assets.
Offering. A public offering of Shares pursuant to a Prospectus.
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Operating Partnership. Operating Partnership has the meaning set forth in the preamble of this Agreement.
Operating Partnership Agreement. The Operating Partnership’s limited partnership agreement among the Company, as general partner, and the limited partners thereto.
Operating Partnership NAV. The NAV of the Operating Partnership, calculated pursuant to the Valuation Procedures.
OP Unit. A unit of limited partnership interest in the Operating Partnership, other than Special Partnership Units.
Organizational and Offering Expenses. Any and all cumulative costs and expenses incurred by and to be paid from the assets of the Company, including amounts reimbursable to the Advisor and its Affiliates pursuant and subject to Section 10(a)(i) hereof, in connection with the formation, qualification and registration of all of the Company’s Offerings and the subsequent marketing and distribution of Shares, including, without limitation, the following: total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), any expense allowance granted by the Company to the underwriter (which may include a dealer manager) or any reimbursement of expenses of the underwriter by the Company, expenses for printing, engraving, mailing and distributing costs, salaries of employees while engaged in sales activity, telephone and other telecommunications costs, all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, fees, expenses and taxes related to the filing, registration and qualification of the sale of the Shares under federal and state laws, including accountants' and attorneys' fees.
Performance Component. The variable component of the Advisory Fee as described in Section 9.
Person. An individual, corporation, partnership, trust, joint venture, limited liability company or other entity.
Private Organizational and Offering Expenses. Any and all cumulative costs and expenses incurred by and to be paid from the assets of the Company or any of its subsidiaries, including amounts reimbursable to the Advisor and its Affiliates pursuant and subject to Section 10(a)(ii) hereof, in connection with the formation and qualification of any private offerings of any securities conducted by the Company or any of its subsidiaries and the subsequent marketing and distribution of such securities, including, without limitation, the following: total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), any expense allowance granted by the Company or its subsidiaries to the underwriter (which may include a dealer manager) or any reimbursement of expenses of the underwriter by the Company or its subsidiaries, expenses for printing, engraving, mailing and distributing costs, salaries of employees while engaged in sales activity, telephone and other telecommunications costs, all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), charges of transfer agents, registrars, trustees, escrow holders,
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depositories, experts, fees, expenses and taxes related to the qualification of the sale of the securities under federal and state laws, including accountants' and attorneys' fees.
Product Specialist. Affiliates of the Advisor approved to provide services to the Company, the Operating Partnership or any of their subsidiaries pursuant to Section 9(d) of this Agreement.
Product Specialist Agreement. An agreement between the Company, the Operating Partnership or one of their subsidiaries with a Product Specialist with respect to services provided by a Product Specialist pursuant to Section 9(d) of this Agreement.
Property Accounting Services. Property Accounting Services are related to accounting for real property operations and generally acknowledged as “property accounting” by the real estate industry. Such services generally include maintaining the books and records of the property in accordance with GAAP and company policies, procedures, and internal controls, in a timely manner, and the processing of property-related cash receipts and disbursements. Examples of such property accounting services include, but are not limited to, lease administration, monthly tenant billing and collections, rental revenue accounting, accounting for doubtful accounts, preparing rental expense recovery estimates and reconciliations, recording rental expenses, processing rental expense invoices and tenant reimbursement payments, accounting and budgeting for capital improvement projects, preparing and reviewing operating budgets, assisting in reporting and cash management for loan compliance purposes, and preparing account reconciliations and operating reports. Property accounting services do not include corporate-level accounting services that include, but are not limited to, consolidation, accounting and reporting analysis, and quality control reviews of accounting and reporting of third-party property accountants to ensure the accuracy, timeliness, and consistency of property accounting results.
Prospectus. “Prospectus” has the meaning set forth in Section 2(10) of the Securities Act, including a preliminary Prospectus, an offering circular as described in Rule 256 of the General Rules and Regulations under the Securities Act or, in the case of an intrastate offering, any document by whatever name known, utilized for the purpose of offering and selling securities to the public.
Real Estate Related Securities. The real estate related securities investments, or such investments the Board of Directors and the Advisor mutually designate as Real Estate Related Securities to the extent such investments could be classified as either Real Estate Related Securities or Real Property, which are owned from time to time by the Company or the Operating Partnership.
Real Property. (i) Land, including the buildings located thereon, or (ii) land only, or (iii) the buildings only, which are owned from time to time by the Company or the Operating Partnership, either directly or through subsidiaries, joint venture arrangements or other partnerships, or (iv) such investments the Board of Directors and the Advisor mutually designate as Real Property to the extent such investments could be classified as either Real Property, Real Estate Related Securities, or Debt Investments. DST Properties shall also be deemed Real Property for the purposes of this definition.
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REIT. A “real estate investment trust” under Sections 856 through 860 of the Code or as may be amended.
Sale or Sales. Any transaction or series of transactions whereby: (A) the Company or the Operating Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys, or relinquishes its ownership of any Real Property or portion thereof, including the lease of any Real Property consisting of a building only, and including any event with respect to any Real Property which gives rise to a significant amount of insurance proceeds or condemnation awards; (B) the Company or the Operating Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys, or relinquishes its ownership of all or substantially all of the interest of the Company or the Operating Partnership in any Joint Venture in which it is a co-venturer or partner; (C) any Joint Venture directly or indirectly (except as described in other subsections of this definition) in which the Company or the Operating Partnership as a co-venturer or partner sells, grants, transfers, conveys, or relinquishes its ownership of any Real Property or portion thereof, including any event with respect to any Real Property which gives rise to insurance claims or condemnation awards; or (D) the Company or the Operating Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, conveys or relinquishes its interest in any mortgage or portion thereof (including with respect to any mortgage, all payments thereunder or in satisfaction thereof other than regularly scheduled interest payments) of amounts owed pursuant to such mortgage and any event which gives rise to a significant amount of insurance proceeds or similar awards; or (E) the Company or the Operating Partnership directly or indirectly (except as described in other subsections of this definition) sells, grants, transfers, conveys, or relinquishes its ownership of any other asset not previously described in this definition or any portion thereof.
Securities. Any Equity Shares, any other stock, shares or other evidences of equity or beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing.
Securities Act. The Securities Act of 1933, as amended.
Shares. The shares of all classes of the common stock of the Company.
Special OP Unitholders. The holders of Special Partnership Units (as defined in the Operating Partnership Agreement) in the Operating Partnership.
Special Partnership Units. Units of limited partnership interest in the Operating Partnership designated as Special Partnership Units in the in the Operating Partnership Agreement.
Sponsor. Any Person which (i) is directly or indirectly instrumental in organizing, wholly or in part, the Company, (ii) will control, manage or participate in the management of the Company, and any Affiliate of any such Person, (iii) takes the initiative, directly or indirectly, in
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founding or organizing the Company, either alone or in conjunction with one or more other Persons, (iv) receives a material participation in the Company in connection with the founding or organizing of the business of the Company, in consideration of services or property, or both services and property, (v) has a substantial number of relationships and contacts with the Company, (vi) possesses significant rights to control Real Properties, (vii) receives fees for providing services to the Company which are paid on a basis that is not customary in the industry, or (viii) provides goods or services to the Company on a basis which was not negotiated at arm's-length with the Company. “Sponsor” does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services.
Stockholders. The registered holders of the Company's Shares.
Termination Date. The date of termination of this Agreement, including by non-renewal.
Termination Event. The termination or nonrenewal of this Agreement (i) in connection with a merger, sale of assets or transaction involving the Company pursuant to which a majority of the Directors then in office are replaced or removed, (ii) by the Advisor for Good Reason or (iii) by the Company and the Operating Partnership other than for Cause.
Total Operating Expenses. All costs and expenses paid or incurred by the Company, as determined under GAAP, that are in any way related to the operation of the Company or to corporate business, including the Advisory Fee, but excluding (i) the expenses of raising capital such as Organizational 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, (ii) interest payments, (iii) taxes, (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves, (v) incentive fees paid in compliance with the NASAA REIT Guidelines; (vi) Acquisition Fees and Acquisition Expenses, (vii) real estate commissions on the Sale of Real Property, and (viii) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, mortgage loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property). The definition of “Total Operating Expenses” set forth above is intended to encompass only those expenses which are required to be treated as Total Operating Expenses under the NASAA REIT Guidelines. As a result, and notwithstanding the definition set forth above, any expense of the Company which is not part of Total Operating Expenses under the NASAA REIT Guidelines shall not be treated as part of Total Operating Expenses for purposes hereof.
2%/25% Guidelines. For any year in which the Company qualifies as a REIT, the requirement pursuant to the NASAA REIT 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.
Unitholders. The holders of OP Units.
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Valuation Procedures. The valuation procedures adopted by the Board, as amended from time to time.
VPU. Average value per unit, which on any given date shall be equal to (i) the Operating Partnership NAV on such date, divided by (ii) the aggregate number of OP Units of all classes outstanding on such date.
Weighted-Average Distributions per OP Unit. For a particular period of time, an amount equal to the ratio of (i) the aggregate distributions paid or accrued in respect of all OP Units during the applicable period, divided by (ii) the weighted-average number of OP Units of all classes outstanding during the applicable period, calculated in accordance with GAAP applied on a consistent basis.
| (a) | Fee-related Services. |
| (1) | participate in formulating an investment strategy and asset allocation framework consistent with achieving our investment objectives; |
| (2) | monitor the operating performance of the investments of the Company and/or the Operating Partnership; |
| (3) | oversee the leasing activities of the Company’s portfolio including but not limited to negotiations with prospective and existing tenants and leasing arrangements with Affiliated and non-Affiliated leasing brokers; |
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| (4) | oversee Affiliated and non-Affiliated property managers who perform property management services for the Company or the Operating Partnership; and |
| (5) | oversee and negotiate service contracts for the Company’s Real Properties. |
| (ii) | Property Accounting Services. The Advisor may provide Property Accounting Services for any Real Property owned by the Company or Real Property in which the Company otherwise has an interest, such as through a joint venture. The Advisor shall provide such Property Accounting Services in consideration for the fee described in Section 9(c). |
| (b) | Non Fee-Related Services. Other than services provided by Product Specialists, which shall be subject to the terms of the Product Special Agreements, the following services shall be provided by the Advisor or one of its Affiliates without consideration in the form of a separate fee, subject to reimbursement for expenses as provided in Section 10 and Section 12, or as otherwise provided under this Agreement: |
| (i) | Organizational and Offering Services. |
| (2) | assist the Company in complying with all federal, state and local regulatory requirements applicable to the Company and its subsidiaries in respect of any private placements of any securities, including but not limited to tenancy-in-common or Delaware statutory trust beneficial interests in DST Properties, including preparing or causing to be prepared private placement memoranda and all supplements thereto; provided, however, that in all private placement memoranda, supplements thereto and any other offering materials, the statements therein shall be made by solely the Company and not by the Advisor or any of its other Affiliates. |
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| (ii) | Acquisition and Disposition Services. |
| (1) | present to the Company and the Operating Partnership potential investment opportunities; |
| (2) | serve as the Company's and the Operating Partnership's investment and financial advisor and, as reasonably appropriate under the circumstances, provide research and economic and statistical data in connection with the Company's assets and investment policies; |
| (3) | subject to any required Board or Board committee approval, (i) locate, analyze and select potential investments, (ii) structure and negotiate the terms and conditions of transactions pursuant to which investments will be made; (iii) oversee and coordinate the making of investments by the Company and the Operating Partnership in compliance with the investment objectives and policies of the Company; and (iv) arrange, oversee and coordinate the financing and refinancing and the making of other changes in the asset or capital structure of investments; |
| (4) | perform due diligence on prospective investments; |
| (5) | upon request provide the Directors with periodic reports regarding prospective investments; |
| (6) | obtain the prior approval of the Board, any particular Directors specified by the Board or any committee of the Board, as the case may be, for any and all investments in Real Properties; |
| (8) | oversee and coordinate the disposition of Real Properties, Real Estate Related Securities or Debt Investments within the discretionary limits and authority as granted by the Board, or if no such discretionary limits have been established, with the prior approval of the Board, any particular Directors specified by the Board or any committee of the Board, as the case may be; and |
| (9) | negotiate with and engage selling brokers as necessary to dispose of Real Properties. |
| (iii) | Financing Services. |
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| (iv) | Accounting and Administrative Services. |
| (2) | provide the Company and the Operating Partnership with, or arrange for the provision to the Company and the Operating Partnership of, all necessary cash management services; |
| (3) | 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; |
| (4) | implement and coordinate the processes with respect to the NAV Calculations, and in connection therewith, obtain appraisals performed by an Independent Valuation Advisor concerning the value of the Real Properties; |
| (5) | supervise one or more Independent Valuation Advisors and, if and when necessary, recommend to the Board its replacement; and |
| (6) | deliver to or maintain on behalf of the Company copies of all appraisals obtained in connection with the investments in Real Properties and all valuations of Real Estate Related Securities or Debt Investments as may be required to be obtained by the Board; |
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| (7) | in consultation with legal counsel, advise the Company regarding the maintenance of the Company’s exemption from the Investment Company Act of 1940, as amended, and monitor compliance with the requirements for maintaining an exemption from such act; |
| (8) | in consultation with legal counsel and other tax advisers, advise the Company regarding the maintenance of the Company’s status as a REIT and monitor compliance with the various REIT qualification tests and other rules set out in the Code and the regulations promulgated thereunder; |
| (9) | in consultation with legal counsel and other tax advisers, take all necessary actions to enable the Company and the Operating Partnership to make required tax filings and reports, including soliciting Stockholders for required information to the extent provided by the REIT provisions of the Code; and |
| (10) | oversee and resolve all claims, disputes or controversies (including all litigation, arbitration, settlement or other proceedings or negotiations) in which the Company and the Operating Partnership may be involved or to which the Company and the Operating Partnership may be subject, arising out of the Company’s or the Operating Partnership’s day-to-day operations, subject to such limitations or parameters as may be imposed from time to time by the Board. |
| (v) | Stockholder Services. |
| (1) | in consultation with legal counsel, communicate on the Company’s or the Operating Partnership’s behalf with the respective holders of any of the Company’s or the Operating Partnership’s securities as required to satisfy the reporting and other requirements of any regulatory bodies or agencies and to maintain effective relations with such holders; and |
| (2) | oversee the performance of the transfer agent and registrar. |
| (vi) | Other Services. |
| (1) | oversee the development, construction and improvement, including tenant improvements, of Real Properties (including DST Properties) by third parties on behalf of the Company; |
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| (3) | oversee and coordinate the making of any private placement of OP Units, tenancy-in-common or other interests in Real Properties as may be approved by the Board; |
| (4) | provide internal legal services, either directly to the Company or as oversight of the Company’s outside counsel, which internal legal services shall be deemed separate and not included in any of the services set forth in Section 3(a) above; |
| (5) | investigate, select, and, on behalf of the Company and the Operating Partnership, oversee and coordinate the engagement of and business with such Persons as the Advisor deems necessary to the proper performance of its obligations hereunder (whether for a fee or not), including but not limited to consultants, accountants, correspondents, lenders, technical advisors, attorneys, brokers, underwriters, corporate fiduciaries, escrow agents, depositaries, custodians, agents for collection, insurers, insurance agents, banks, builders, developers, property owners, real estate management companies, real estate operating companies, securities investment advisors, mortgagors, and any and all agents for any of the foregoing, including Affiliates of the Advisor, and Persons acting in any other capacity deemed by the Advisor necessary or desirable for the performance of any of the foregoing services, including but not limited to entering into contracts in the name of the Company and the Operating Partnership with any of the foregoing; |
| (7) | from time to time, or at any time reasonably requested by the Directors, make reports to the Directors of its performance of services to the Company and the Operating Partnership under this Agreement, including reports with respect to potential conflicts of interest involving the Advisor or any of its affiliates; and |
| (8) | do all other things reasonably necessary to assure its ability to render the services described in this Agreement. |
Notwithstanding the foregoing, the Advisor may delegate any of the foregoing duties to any Person so long as the Advisor or any Affiliate remains responsible for the performance of the duties set forth in this Section 3.
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The prior approval of a majority of the Independent Directors not otherwise interested in the transaction and a majority of the Directors not otherwise interested in the transaction will be required for each transaction to which the Advisor or its Affiliates is a party. The Directors may, at any time upon the giving of written notice to the Advisor, modify or revoke the authority set forth in this Section 4. If and to the extent the Directors so modify or revoke the authority contained herein, the Advisor shall henceforth submit to the Directors for prior approval such proposed transactions involving investments in Real Property, Real Estate Related Securities, or Debt Investments as thereafter require prior approval, 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.
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| with the performance of such services, which third-party costs shall be separately reimbursed and are not included in the services provided by the Advisor and its Affiliates. |
| (b) | Advisory Fee. The Advisor shall receive the Advisory Fee as compensation for asset management services rendered pursuant to Section 3(a)(i) hereof as follows. |
| (i) | The Advisory Fee will be comprised of two separate components: (1) a fixed component in an amount equal to, for each month during the term of this Agreement, 1/12th of 1.10% of the sum of (a) the product of (x) the applicable monthly Operating Partnership NAV per OP Unit, before giving effect to any monthly accruals for the Advisory Fee, Distribution Fees or any distributions accrued in respect of OP Units during the applicable month, and (y) the weighted average number of OP Units outstanding during the applicable month; and (b) aggregate DST Property Consideration for all DST Properties (the “Fixed Component”); and (2) a performance component (the “Performance Component”) that is calculated as described in Section 9(b)(ii) below. Provided that this Agreement has not been terminated, the Performance Component shall be paid to the Special OP Unitholders as a performance participation interest with respect to the Special Partnership Units in the form of an allocation and distribution from the Operating Partnership pursuant to the Operating Partnership Agreement. At the election of the Special OP Unitholders, with respect to each calendar year, all or a portion of the Performance Component shall be paid instead to the Advisor as a fee as set forth in this Paragraph 9(b). If the Special OP Unitholders do not elect on or before the first day of a calendar year to have all or a portion of the Performance Component paid as a fee in cash to the Advisor, then the Performance Component with respect to such calendar year shall be paid as a distribution on the performance participation interest to the Special OP Unitholders, as the holder of the Special Partnership Units. |
| (ii) | The Special OP Unitholders or the Advisor, as applicable, will earn a Performance Component with respect to each calendar year (or partial calendar year) in which this Agreement is in effect in an amount equal to: |
| (A) | The lesser of (1) the amount equal to 12.5% of (a) the Annual Total Return Amount less (b) the Loss Carryforward Amount, and (2) the amount equal to (x) the Annual Total Return Amount, less (y) the Loss Carryforward Amount, less (z) the Hurdle Amount; |
multiplied by:
| (B) | The weighted-average number of OP Units outstanding during the applicable year, calculated in accordance with GAAP as applied on a consistent basis, |
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| (C) | Provided that the Performance Component shall at no time be less than zero. |
Except as described in the definition of Loss Carryforward Amount in this Agreement, any amount by which the Annual Total Return Amount falls below the Hurdle Amount will not be carried forward to subsequent periods. If the Performance Component is payable or distributable pursuant to this Section 9(b)(ii), the Special OP Unitholders or the Advisor, as applicable, will be entitled to such payment or distribution, as applicable, even in the event that the total percentage return to Unitholders over any longer or shorter period, or the total percentage return to any particular Unitholder over the same, longer or shorter period, has been less than the Annual Total Return Amount used to calculate the Hurdle Amount. The Special OP Unitholders or the Advisor, as applicable, shall not be obligated to return any portion of any Advisory Fee paid based on the Company’s or the Operating Partnership’s subsequent performance.
| (iv) | Notwithstanding anything to the contrary in this Section 9(b), upon the triggering of a Pro-Rata Period as defined in the Company’s Second Amended and Restated Share Redemption Program, effective as of December 10, 2018 (as it may be amended from time to time, the “SRP”), payment or distribution of the Performance Component shall be deferred until all share redemption requests under the SRP are satisfied. |
| (v) | In the event the Operating Partnership commences a liquidation of its Investments during any calendar year, the Special OP Unitholders or the Advisor, as applicable, will be paid the Advisory Fee from the proceeds of the liquidation and the Performance Component will be calculated at the |
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| end of the liquidation period prior to the distribution of the liquidation proceeds to the Unitholders. The calculation of the Performance Component for any partial year shall be calculated consistent with the applicable provisions of Section 9(b)(iii) above. |
| (vi) | The measurement of the change in VPU for the purpose of calculating the Annual Total Return Amount is subject to adjustment by the Board to account for any dividend, split, recapitalization or any other similar change in the Operating Partnership’s capital structure or any distributions that the Board deems to be a return of capital if such changes are not already reflected in the Operating Partnership’s net assets. |
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| property, title and/or other types of insurance, management consulting and other similar operational matters. Any fees or reimbursements paid to the Advisor’s Affiliates for any such services will not reduce the Advisory Fee or any reimbursements that may otherwise be owed to the Advisor. Any such arrangements will be at market rates or reimbursement of costs incurred by the Affiliate in providing the services, provided, however, that any fee approved by the Independent Directors at the entering of such Product Specialist Agreement shall be deemed to be at market rates. |
| (f) | Payment in Shares or OP Units. The fees due under this Section 9 shall be paid in cash; provided, however, that in lieu of cash, the Advisor may elect to receive the payment of the fees due under this Section 9 in any class of Shares or OP Units. Any such Shares or OP Units will be valued at the NAV per share applicable to such Shares or OP Units on the issue date. Such shares shall not be subject to any early redemption deduction under the Company’s share redemption program. |
| (g) | Fee Waiver. If as of the end of the last month of the applicable period the NAV of a Class E Series 1 Unit is less than $10.00 per unit, the Advisor will waive its fees earned under this Agreement in an amount equal to the product of (a) the Performance Component for the applicable period, and (b) the weighted-average Class E Series 1 Units outstanding over the applicable period divided by the weighted-average OP Units outstanding over the same period. In this manner, the holders of each class of OP Units will benefit from this waiver pro rata in accordance with their particular class’s portion of Operating Partnership NAV. |
| (i) | Organizational and Offering Expenses paid or incurred by the Advisor or any of its Affiliates; provided that after an Offering terminates, the Advisor shall reimburse the Company to the extent the Organizational and Offering Expenses with respect to such Offering that are borne by the Company exceed 15.0% of the Gross Proceeds raised in the completed Offering; the Advisor shall be responsible for the payment of all the |
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| Company's Organizational and Offering Expenses in excess of the maximum amount permitted; |
| (ii) | Private Organizational and Offering Expenses paid or incurred by the Advisor or any of its Affiliates, except to the extent the Advisor or its Affiliates have agreed to receive a fee in lieu of reimbursement of such expenses therewith; |
| (iii) | Acquisition Expenses incurred in connection with the selection and acquisition of Real Properties; |
| (iv) | Disposition Expenses incurred in connection with the disposition of Real Properties, Real Estate Related Securities and Debt Investments; |
| (v) | the actual cost of goods and services used by the Company and obtained from Persons not affiliated with the Advisor, other than Acquisition Expenses, including brokerage fees paid in connection with the purchase and sale of Real Estate Related Securities or Debt Investments; |
| (vi) | interest and other costs for borrowed money, including discounts, points and other similar fees; |
| (vii) | taxes and assessments on income of the Company or Real Properties; |
| (viii) | costs associated with insurance required in connection with the business of the Company or by the Directors; |
| (ix) | expenses incurred in connection with financing transactions, including the financing or refinancing of Company properties; |
| (x) | expenses of managing and operating Real Properties owned by the Company, or Real Property in which the Company otherwise has an interest, such as through a joint venture, including, but not limited to, expenses related to Property Accounting Services provided by third parties, the expenses of which shall be paid by the direct or indirect subsidiary of the Company which owns the Real Property; |
| (xi) | all expenses in connection with payments to the Directors and meetings of the Directors and Stockholders; |
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| reimbursement shall be made for such costs in connection with the services under Section 3(a), for services provided by an Affiliate of the Adviser for which the Company pays a separate fee pursuant to a separate agreement, or for compensation of the Company’s named executive officers unless the named executive officer provides services as described in Section 3(b)(v); |
| (xiii) | expenses associated with a Listing, if applicable, or with the issuance and distribution of Securities, such as selling commissions and fees, advertising expenses, taxes, legal and accounting fees, listing and registration fees; |
| (xiv) | expenses connected with payments of Distributions in cash or otherwise made or caused to be made by the Company to the Stockholders; |
| (xv) | expenses of organizing, redomesticating, merging, liquidating or dissolving the Company or of amending the Articles of Incorporation or the Bylaws; |
| (xvi) | expenses of 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; |
| (xvii) | internal and external 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 Independent Directors or any committee of the Board; |
| (xviii) | all other costs incurred by the Advisor or its Affiliates in performing its duties hereunder. |
| (c) | In lieu of cash, the Advisor may elect to receive the reimbursement of any of its expenses in any class of Shares. Any such Shares will be valued at the NAV per share applicable to such Shares on the issue date and will not be eligible for redemption by the Advisor until six months from the issue date. |
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compensated at such rates and in such amounts as are agreed by the Advisor and the Independent Directors of the Company, subject to the limitations contained in the Articles of Incorporation, and shall not be deemed to be services pursuant to the terms of this Agreement.
| 13. | OTHER ACTIVITIES OF THE ADVISOR. |
| (a) | Nothing herein contained shall prevent the Advisor or any of its Affiliates from engaging in or earning fees from 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 member, manager, director, officer, employee, or stockholder of the Advisor or its Affiliates to engage in or earn fees from any other business or to render services of any kind to any other partnership, corporation, firm, individual, trust or association and earn fees for rendering such services. 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, and earn fees for rendering such advice and service. Specifically, it is contemplated that the Company may enter into joint ventures or other similar co-investment arrangements with certain Persons, and pursuant to the agreements governing such joint ventures or arrangements, the Advisor may be engaged (directly or |
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| indirectly) to provide advice and service to such Persons, in which case the Advisor will earn fees for rendering such advice and service. The parties to this Agreement hereby acknowledge that the Advisor may provide advice and render services to Persons that will compete with the Company for investments. |
| (b) | The Advisor shall report to the Directors the existence of any condition or circumstance, existing or anticipated, of which it has knowledge, which 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 partnership, corporation, limited liability company, firm, individual, trust or association. The Advisor or its Affiliates shall promptly disclose to the Directors knowledge of such condition or circumstance. If the Advisor, its members, managers, directors, employees or Affiliates thereof have sponsored other investment programs with similar investment objectives which have investment funds available at the same time as the Company, it shall be the duty of the Directors (including the Independent Directors) to ensure that the Advisor and its Affiliates follow an allocation method that is reasonable and fairly applied. The Advisor shall provide the information necessary for the Directors to make this determination. |
| (c) | The Advisor shall be required to use commercially reasonable efforts to present a continuing and suitable investment program to the Company which is consistent with the investment policies and objectives of the Company, but neither 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 a 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 in the Prospectus (as such procedures may be amended from time to time) shall govern the allocation of the opportunity among the Company and Affiliates of the Advisor. |
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the consent of the Advisor, except in the case of an assignment by the Company or the Operating Partnership to a corporation, limited partnership or other organization which is a successor to all of the assets, rights and obligations of the Company or the Operating Partnership, in which case such successor organization shall be bound hereunder and by the terms of said assignment in the same manner as the Company and the Operating Partnership are bound by this Agreement. For the avoidance of doubt, this Agreement may not be assigned (as such term is defined in Section 205(a)(2) of the Advisers Act) or novated by the Advisor by operation of law or otherwise without consent as required under the Advisers Act; provided, that the Advisor may assign, subcontract, delegate or otherwise transfer any of its rights and obligations hereunder to any of its Affiliates.
| (b) | The Advisor shall promptly upon termination: |
| (i) | pay over to the Company and the Operating Partnership all money collected and held for the account of the Company and the Operating Partnership pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; |
| (ii) | deliver to the Directors 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 Directors; |
| (iii) | deliver to the Directors all assets, including Real Properties, Real Estate Related Securities and Debt Investments, and documents of the Company and the Operating Partnership then in the custody of the Advisor; and |
| (iv) | cooperate with the Company and the Operating Partnership to provide an orderly management transition. |
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| (a) | The Advisor has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Company and the Operating Partnership; |
| (b) | The Advisor was acting on behalf of or performing services for the Company and the Operating Partnership; |
| (c) | Such liability or loss was not the result of negligence or misconduct by the Advisor; and |
| (d) | Such indemnification or agreement to hold harmless is recoverable only out of the Company's net assets and not from Stockholders. |
Notwithstanding the foregoing, the Advisor and its Affiliates, including their respective officers, directors, partners and employees, shall not be indemnified by the Company and the Operating Partnership for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by the Advisor and its Affiliates, including their respective officers, directors, partners and employees, unless one or more of the following conditions are met:
| (a) | There has been a successful adjudication on the merits of each count involving alleged securities law violations as to the Advisor; |
| (b) | Such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the Advisor; or |
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| securities of the Company and the Operating Partnership were offered or sold as to indemnification for violation of securities laws. |
In addition, the advancement of the Company's or the Operating Partnership's funds to the Advisor and its Affiliates, including their respective officers, directors, partners and employees, for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are satisfied:
| (d) | The legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Company or the Operating Partnership; |
| (e) | The legal action is initiated by a third party who is not a shareholder or the legal action is initiated by a shareholder acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement; and |
To the Directors and to the Company:
Ares Real Estate Income Trust Inc.
One Tabor Center
1200 Seventeenth Street, Suite 2900
Denver, CO 80202
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To the Operating Partnership:
AREIT Operating Partnership LP
One Tabor Center
1200 Seventeenth Street, Suite 2900
Denver, CO 80202
To the Advisor:
Ares Commercial Real Estate Management LLC
2000 Avenue of the Stars, 12th Floor
Los Angeles, CA 90067
Attention: Naseem Sagati Aghili
Email: nsagati@aresmgmt.com
Any party may at any time give notice in writing to the other parties of a change in its address for the purposes of this Section 20.
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IN WITNESS WHEREOF, the parties hereto have executed this Second Amended and Restated Advisory Agreement (2023) as of June 3, 2023.
ARES REAL ESTATE INCOME TRUST INC., a Maryland corporation
AREIT OPERATING PARTNERSHIP LP, a Delaware limited partnership
By: Ares Real Estate Income Trust Inc., its General Partner
By: /s/ Lainie P. Minnick
Name: Lainie P. Minnick
Title:Managing Director, Chief Financial Officer and Treasurer
ARES COMMERCIAL REAL ESTATE MANAGEMENT LLC, a Delaware limited liability company
Exhibit 10.2
twelfth AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT
OF
AREIT Operating Partnership LP
A DELAWARE LIMITED PARTNERSHIP
JUNE 3, 2023
TABLE OF CONTENTS
i
TABLE OF CONTENTS
(continued)
ii
TABLE OF CONTENTS
(continued)
EXHIBITS
EXHIBIT A - Partners, Capital Contributions and Percentage Interests or Special Percentage Interests
EXHIBIT B - Notice of Exercise of Redemption Right
iii
twelfth Amended and Restated LIMITED PARTNERSHIP AGREEMENT
OF
AREIT Operating Partnership LP
This Twelfth Amended and Restated Limited Partnership Agreement (this “Agreement”) is entered into as of June 3, 2023, between Ares Real Estate Income Trust Inc., a Maryland corporation (f/k/a Black Creek Diversified Property Fund Inc.) (the “General Partner”) and the Limited Partners set forth on Exhibit A attached hereto.
RECITALS:
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants between the parties hereto, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Prior Agreement shall be and hereby is amended and restated in its entirety as follows:
“ACT” means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time.
“ADDITIONAL FUNDS” has the meaning set forth in Section 4.4.
“ADDITIONAL SECURITIES” means any additional REIT Shares (other than REIT Shares issued in connection with a redemption pursuant to Section 8.5 or REIT Shares issued pursuant to a dividend reinvestment plan of the General Partner) or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase REIT Shares, as set forth in Section 4.3(a)(ii).
“ADMINISTRATIVE EXPENSES” means (i) all administrative and operating costs and expenses incurred by the Partnership, (ii) those administrative costs and expenses of the General Partner, including any salaries or other payments to directors, officers or employees of the General
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Partner, and any accounting and legal expenses of the General Partner, which expenses, the Partners have agreed, are expenses of the Partnership and not the General Partner, and (iii) to the extent not included in clause (ii) above, REIT Expenses; provided, however, that Administrative Expenses shall not include any administrative costs and expenses incurred by the General Partner that are attributable to Properties or partnership interests in a Subsidiary Partnership that are owned by the General Partner directly.
“ADVISOR” or “ADVISORS” means the Person or Persons, if any, appointed, employed or contracted with by the General Partner and responsible for directing or performing the day-to-day business affairs of the General Partner, including any Person to whom the Advisor subcontracts substantially all of such functions.
“ADVISORY AGREEMENT” means the agreement between the General Partner and the Advisor pursuant to which the Advisor will direct or perform the day-to-day business affairs of the General Partner.
“AFFILIATE” means, with respect to any Person, (i) any Person directly or indirectly, owning, controlling or holding with the power to vote 10% of more of the outstanding voting securities of such other Person; (ii) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with the power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by or under common control with such other Person; (iv) any executive officer, director, trustee or general partner of such other Person; and (v) any legal entity for which such Person acts an executive officer, director, trustee or general partner.
“AFFIRMATION DATE” has the meaning provided in Section 8.5(a).
“AGGREGATE SHARE OWNERSHIP LIMIT” shall have the meaning set forth in the Articles of Incorporation.
“AGREED VALUE” means the fair market value of a Partner’s non-cash Capital Contribution as of the date of contribution as agreed to by such Partner and the General Partner. The names and addresses of the Partners, number and Class or Series of Partnership Units or Special Partnership Units issued to each Partner, and the Agreed Value of non-cash Capital Contributions as of the date of contribution are set forth on Exhibit A.
“AGREEMENT” means this Twelfth Amended and Restated Limited Partnership Agreement, as amended, modified supplemented or restated from time to time, as the context requires.
“ANNUAL TOTAL RETURN AMOUNT” means the overall investment return, expressed as a dollar amount per Partnership Unit, which shall be equal to the sum of (1) the Weighted-Average Distributions per Partnership Unit over the applicable period, and (2) the Ending VPU, adjusted to remove the negative impact on the overall investment return from the payment or the obligation to pay, or distribute, as applicable, the Performance Allocation and Class-Specific Fees, less the Beginning VPU.
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“APPLICABLE PERCENTAGE” has the meaning provided in Section 8.5(b).
“ARTICLES OF INCORPORATION” means the Articles of Restatement of the General Partner filed with the Maryland State Department of Assessments and Taxation on March 20, 2012, as further amended or supplemented from time to time.
“BEGINNING VPU” means the VPU determined as of the end of the most recent month prior to the commencement of the applicable period.
“CAPITAL ACCOUNT” has the meaning provided in Section 4.5.
“CAPITAL CONTRIBUTION” means the total amount of cash, cash equivalents, and the Agreed Value of any Property or other asset (other than cash or cash equivalents) contributed or agreed to be contributed, as the context requires, to the Partnership by each Partner pursuant to the terms of this Agreement. Any reference to the Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Partnership Interest of such Partner.
“CARRYING VALUE” means, with respect to any asset of the Partnership, the asset’s adjusted net basis for federal income tax purposes or, in the case of any asset contributed to the Partnership, the fair market value of such asset at the time of contribution, reduced by any amounts attributable to the inclusion of liabilities in basis pursuant to Section 752 of the Code, except that the Carrying Values of all assets may, at the discretion of the General Partner, be adjusted to equal their respective fair market values (as determined by the General Partner), in accordance with the rules set forth in Regulations Section 1.704-1(b)(2)(iv)(f), as provided for in Section 4.5. In the case of any asset of the Partnership that has a Carrying Value that differs from its adjusted tax basis, the Carrying Value shall be adjusted by the amount of depreciation, depletion and amortization calculated for purposes of the definition of Profit and Loss rather than the amount of depreciation, depletion and amortization determined for federal income tax purposes.
“CASH AMOUNT” means an amount of cash per Partnership Unit equal to the applicable Redemption Price determined by the General Partner.
“CERTIFICATE” means any instrument or document that is required under the laws of the State of Delaware, or any other jurisdiction in which the Partnership conducts business, to be signed and sworn to by the Partners of the Partnership (either by themselves or pursuant to the power-of-attorney granted to the General Partner in Section 8.2) and filed for recording in the appropriate public offices within the State of Delaware or such other jurisdiction to perfect or maintain the Partnership as a limited partnership, to effect the admission, withdrawal, or substitution of any Partner of the Partnership, or to protect the limited liability of the Limited Partners as limited partners under the laws of the State of Delaware or such other jurisdiction.
“CLASS” means a class of REIT Shares or Partnership Units, as the context may require.
“CLASS E REIT SHARES” means the Class of REIT Shares designated as “Class E Common Shares” under the General Partner’s charter.
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“CLASS E UNIT” means a Partnership Unit entitling the holder thereof to the rights of a holder of a Class E Unit as provided in this Agreement, and shall be either Series 1 Class E Units or Series 2 Class E Units.
“CLASS D REIT SHARES” means the Class of REIT Shares designated as “Class D Common Shares” under the General Partner’s charter.
“CLASS D UNIT” means a Partnership Unit entitling the holder thereof to the rights of a holder of a Class D Unit as provided in this Agreement.
“CLASS I REIT SHARES” means the Class of REIT Shares designated as “Class I Common Shares” under the General Partner’s charter.
“CLASS I UNIT” means a Partnership Unit entitling the holder thereof to the rights of a holder of a Class I Unit as provided in this Agreement.
“CLASS S REIT SHARES” means the Class of REIT Shares designated as “Class S Common Shares” under the General Partner’s charter.
“CLASS S UNIT” means a Partnership Unit entitling the holder thereof to the rights of a holder of a Class S Unit as provided in this Agreement, and shall be either Series 1 Class S Units or Series 2 Class S Units.
“CLASS-SPECIFIC FEES” means any Distribution Fee expenses accrued or allocated directly or indirectly to a particular Class or Series of Partnership Units or REIT Shares.
“CLASS T REIT SHARES” means the Class of REIT Shares designated as “Class T Common Shares” under the General Partner’s charter.
“CLASS T UNIT” means a Partnership Unit entitling the holder thereof to the rights of a holder of a Class T Unit as provided in this Agreement, and shall be either Series 1 Class T Units or Series 2 Class T Units.
“CODE” means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular provision of the Code shall mean that provision in the Code at the date hereof and any successor provision of the Code.
“COMMISSION” means the U.S. Securities and Exchange Commission.
“COMMON SHARE OWNERSHIP LIMIT” shall have the meaning set forth in the Articles of Incorporation.
“CONVERSION FACTOR” means 1.0, provided that in the event that the General Partner (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on
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the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on such date and, provided further, that in the event that an entity other than an Affiliate of the General Partner shall become General Partner pursuant to any merger, consolidation or combination of the General Partner with or into another entity (the “Successor Entity”), the Conversion Factor shall be adjusted by multiplying the Conversion Factor by the number of shares of the Successor Entity into which one REIT Share is converted pursuant to such merger, consolidation or combination, determined as of the date of such merger, consolidation or combination. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event; provided, however, that if the General Partner receives a Notice of Redemption after the record date, but prior to the effective date of such dividend, distribution, subdivision or combination, the Conversion Factor shall be determined as if the General Partner had received the Notice of Redemption immediately prior to the record date for such dividend, distribution, subdivision or combination. A separate Conversion Factor shall be determined for each Class or Series of Partnership Units (other than Series 2 Class S Units) by taking into account only the outstanding REIT Shares having the same Class designation as the applicable Class of Partnership Units. The Conversion Factor for Series 2 Class S Units shall equal the Conversion Factor for Series 1 Class S Units, multiplied by the Net Asset Value Per Unit for Series 2 Class S Units and divided by the Net Asset Value Per Unit for Series 1 Class S Units.
“DEALER MANAGER” means Ares Wealth Management Solutions, LLC or such other Person or entity selected by the board of directors of the General Partner to act as the dealer manager for the Offering.
“DIRECTOR” shall have the meaning set forth in the Articles of Incorporation.
“DISTRIBUTION FEES” means any ongoing distribution fees, dealer manager fees or similar fees (as distinguished from up-front or one-time selling commissions and dealer manager fees) payable pursuant to any dealer manager agreement between the General Partner and the Dealer Manager with respect to outstanding REIT Shares or Partnership Units.
“ENDING VPU” means the VPU as of the end of the last month in the applicable period.
“EVENT OF BANKRUPTCY” as to any Person means the filing of a petition for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978 or similar provision of law of any jurisdiction (except if such petition is contested by such Person and has been dismissed within 90 days); insolvency or bankruptcy of such Person as finally determined by a court proceeding; filing by such Person of a petition or application to accomplish the same or for the appointment of a receiver or a trustee for such Person or a substantial part of his assets; commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement, insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by another, provided that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within 90 days.
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“EXCEPTED HOLDER LIMIT” shall have the meaning set forth in the Articles of Incorporation.
“FMV Option” means a fair market value purchase option giving the Partnership the right, but not the obligation, to acquire Interests from holders thereof at a later time in exchange for Series 2 Class T Units.
“GAAP” means generally accepted accounting principles as in effect in the United States of America from time to time.
“GENERAL PARTNER” means Ares Real Estate Income Trust Inc., a Maryland corporation, and any Person who becomes a substitute or additional General Partner as provided herein, and any of their successors as General Partner, in such Person’s capacity as a General Partner of the Partnership.
“GENERAL PARTNERSHIP INTEREST” means a Partnership Interest held by the General Partner.
“GENERAL PARTNER LOAN” has the meaning provided in Section 5.2(d).
“HURDLE AMOUNT” means for the applicable period, an amount that when annualized would equal 5.0% of the Beginning VPU.
“INDEMNITEE” means (i) any Person made a party to a proceeding by reason of its status as the General Partner or a director, officer or employee of the General Partner or the Partnership, and (ii) such other Persons (including Affiliates of the General Partner or the Partnership) as the General Partner may designate from time to time, in its sole and absolute discretion.
“INDEPENDENT DIRECTORS” shall have the meaning set forth in the Articles of Incorporation.
“INTERESTS” means beneficial interests in specific Delaware statutory trusts offered in Private Placements.
“INVESTOR SERVICING FEE” means a fee paid to the dealer manager of the Private Placements equal to 0.85% per annum of the Net Asset Value Per Unit of each Resulting Series 2 Class T Unit (calculated monthly in accordance with the Valuation Procedures and in this Agreement, as they may be amended from time to time) which will be allocated to the holders of Class T Units through a reduction in their distributions.
“JOINT VENTURE” means any joint venture or general partnership arrangement in which the Partnership is a co-venturer or general partner which are established to acquire Real Property.
“LIMITED PARTNER” means any Person named as a Limited Partner on Exhibit A, including the Special OP Unitholders, Profit Interest Partners, and any Person who becomes a Substitute Limited Partner, in such Person’s capacity as a Limited Partner in the Partnership.
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“LIMITED PARTNERSHIP INTEREST” means the ownership interest of a Limited Partner in the Partnership at any particular time, including the right of such Limited Partner to any and all benefits to which such Limited Partner may be entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of this Agreement and of such Act.
“LISTING” means the listing of the shares of the General Partner’s stock, previously issued by the General Partner pursuant to an effective registration statement and such shares currently registered with the Commission pursuant to an effective registration statement, on a national securities exchange or the receipt by holders of shares of the General Partner’s stock of securities that are listed on a national securities exchange in exchange for shares of the General Partner’s stock. Upon such Listing, the shares shall be deemed “LISTED”.
“LOSS” has the meaning provided in Section 5.1(g).
“LOSS CARRYFORWARD AMOUNT” means an amount that equaled zero as of September 1, 2017 and cumulatively increases from then by the absolute value of any negative Annual Total Return Amount and decrease by any positive Annual Total Return Amount, provided that the Loss Carryforward Amount shall at no time be less than zero. The effect of the Loss Carryforward Amount is that the recoupment of past Annual Total Return Amount losses will offset the positive Annual Total Return Amount for purposes of the calculation of the Performance Allocation.
“MINIMUM LIMITED PARTNERSHIP INTEREST” means the lesser of (i) 1% or (ii) if the total Capital Contributions to the Partnership exceeds $50 million, 1% divided by the ratio of the total Capital Contributions to the Partnership to $50 million; provided, however, that the Minimum Limited Partnership Interest shall not be less than 0.2% at any time.
“MORTGAGES” means, in connection with any mortgage financing provided, invested in, participated in or purchased by the Partnership, all of the notes, deeds of trust, mortgages, security interests or other evidences of indebtedness or obligations, which are secured by or, collateralized by, or applicable to any Real Property owned by the borrowers under such notes, deeds of trust, mortgages, security interests or other evidences of indebtedness or obligations.
“MULTPLE CLASS PLAN” means a written plan adopted by the Board of Directors of the General Partner, as such plan may be amended from time to time, that sets forth the method by which distributions among classes of REIT Shares shall be determined relative to each other, and may set forth other terms of classes of REIT Shares relative to each other.
“NAV” means net asset value, calculated pursuant to the Valuation Procedures and in this Agreement.
“NAV CALCULATIONS” means the calculations used to determine the NAV of the General Partner, the REIT Shares, the Partnership and the Partnership Units, all as provided in the Valuation Procedures and in this Agreement.
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“NET ASSET VALUE PER UNIT” means, for each Class or Series of Partnership Unit, the net asset value per unit of such Class or Series of Partnership Unit most recently determined in accordance with the Valuation Procedures and in this Agreement.
“NET ASSET VALUE PER REIT SHARE” means, for each Class of REIT Shares, the net asset value per share of such Class of REIT Shares most recently determined in accordance with the Valuation Procedures and in this Agreement.
“NOTICE OF REDEMPTION” means the Notice of Exercise of Redemption Right substantially in the form attached as Exhibit B.
“OFFER” has the meaning set forth in Section 7.1(c).
“OFFERING” means the an offer and sale of REIT Shares to the public.
“OP UNITHOLDERS” means all holders of Partnership Interests other than the Special OP Unitholders and Profit Interest Partners.
“PARTNER” means any General Partner or Limited Partner.
“PARTNER NONRECOURSE DEBT MINIMUM GAIN” has the meaning set forth in Regulations Section 1.704-2(i). A Partner’s share of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(i)(5).
“PARTNERSHIP” means AREIT Operating Partnership LP, a Delaware limited partnership.
“PARTNERSHIP INTEREST” means an ownership interest in the Partnership held by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement.
“PARTNERSHIP LOAN” has the meaning provided in Section 5.2(d) hereof.
“PARTNERSHIP MINIMUM GAIN” has the meaning set forth in Regulations Section 1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of Partnership Minimum Gain is determined by first computing, for each Partnership nonrecourse liability, any gain the Partnership would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability, and then aggregating the separately computed gains. A Partner’s share of Partnership Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(g)(1).
“PARTNERSHIP NAV” means the NAV of the Partnership, calculated pursuant to the Valuation Procedures and in this Agreement.
“PARTNERSHIP RECORD DATE” means the record date established by the General Partner for the distribution of cash pursuant to Section 5.2, which record date shall be the same as
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the record date established by the General Partner for a distribution to its shareholders of some or all of its portion of such distribution.
“PARTNERSHIP UNIT” means a fractional, undivided share of the Partnership Interests of all Partners issued hereunder, including Class T Units, Class S Units, Class E Units, Class I Units and Class D Units, but excluding the Partnership Interests represented by Special Partnership Units and Profit Interests. The allocation of Partnership Units of each Class and Series among the Partners shall be as set forth on Exhibit A, as such Exhibit may be amended from time to time.
“PERCENTAGE INTEREST” means the percentage ownership interest in the Partnership of each Partner, as determined by dividing the Partnership Units owned by a Partner by the total number of Partnership Units then outstanding. The Percentage Interest of each Partner shall be as set forth on Exhibit A, as such Exhibit may be amended from time to time.
“PERFORMANCE ALLOCATION” shall have the meaning set forth in Section 5.2(c).
“PERSON” means any individual, partnership, limited liability company, corporation, joint venture, trust or other entity.
“PRIVATE PLACEMENT” means a private placement of Interests with respect to which the Partnership will be given a FMV Option.
“PROFIT” has the meaning provided in Section 5.1(g) hereof.
“PROFIT INTEREST PARTNERS” means the holders of Profit Interests; provided, that, if such holders of Profit Interests own Partnership Units, then such holders shall be OP Unitholders and not Profit Interest Partners with respect to such Partnership Units.
“PROFIT INTEREST” means a series of Partnership Interests designated by the General Partner as a Profit Interest. The Profit Interests outstanding are set forth on Exhibit A, as such Exhibit may be amended from time to time.
“PROPERTY” means any Real Property, Real Estate Securities or other investment in which the Partnership holds an ownership interest.
“REAL ESTATE SECURITIES” means the real estate related securities, or such investments the General Partner and the Advisor mutually designate as Real Estate Securities to the extent such investments could be classified as either Real Estate Securities or Real Property, typically consisting of (i) securities of other real estate investment trusts or real estate companies, (ii) shares of open-end and/or closed-end real estate funds, and (iii) mortgages or interests in pools of mortgages secured by real estate, which are acquired by the Partnership, either directly or through joint venture arrangements or other partnerships.
“REAL PROPERTY” means (i) the real properties, including the buildings located thereon, or (ii) the real properties only, or (iii) the buildings only, which are acquired by the Partnership, either directly or through joint venture arrangements or other partnerships, or (iv) such investments the General Partner and the Advisor mutually designate as Real Property to the extent such investments could be classified as either Real Property or Real Estate Securities.
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“REDEMPTION PRICE” means the Value of the REIT Shares Amount as of the end of the Specified Redemption Date.
“REDEMPTION RIGHT” has the meaning provided in Section 8.5(a).
“REDEMPTION SHARES” has the meaning provided in Section 8.6(a).
“REGULATIONS” means the Federal income tax regulations promulgated under the Code, as amended and as hereafter amended from time to time. Reference to any particular provision of the Regulations shall mean that provision of the Regulations on the date hereof and any successor provision of the Regulations.
“REGULATORY ALLOCATIONS” has the meaning set forth in Section 5.1(f).
“REIT” means a real estate investment trust under Sections 856 through 860 of the Code.
“REIT EXPENSES” means (i) costs and expenses relating to the formation and continuity of existence and operation of the General Partner and any Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be included within the definition of General Partner), including taxes, fees and assessments associated therewith, any and all costs, expenses or fees payable to any director, officer, or employee of the General Partner, (ii) costs and expenses relating to any public offering and registration of securities by the General Partner and all statements, reports, fees and expenses incidental thereto, including, without limitation, underwriting discounts and selling commissions applicable to any such offering of securities, and any costs and expenses associated with any claims made by any holders of such securities or any underwriters or placement agents thereof, (iii) costs and expenses associated with any repurchase of any securities by the General Partner, (iv) costs and expenses associated with the preparation and filing of any periodic or other reports and communications by the General Partner under federal, state or local laws or regulations, including filings with the Commission, (v) costs and expenses associated with compliance by the General Partner with laws, rules and regulations promulgated by any regulatory body, including the Commission and any securities exchange, (vi) costs and expenses associated with any 401(k) plan, incentive plan, bonus plan or other plan providing for compensation for the employees of the General Partner, (vii) costs and expenses incurred by the General Partner relating to any issuing or redemption of Partnership Interests, and (viii) all other operating or administrative costs of the General Partner incurred in the ordinary course of its business on behalf of or in connection with the Partnership.
“REIT SHARE” means a share of common stock in the General Partner (or successor entity, as the case may be), including Class T REIT Shares, Class S REIT Shares, Class E REIT Shares, Class I REIT Shares and Class D REIT Shares.
“REIT SHARES AMOUNT” means, with respect to any Class or Series of Tendered Units, a number of REIT Shares of such Class equal to the product of the number of Partnership Units of such Class or Series offered for exchange by a Tendering Party, multiplied by the Conversion Factor for such Class or Series of Partnership Units as adjusted to and including the Specified Redemption Date; provided that in the event the General Partner issues to all holders of REIT Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders
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to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the “rights”), and the rights have not expired at the Specified Redemption Date, then the REIT Shares Amount shall also include the rights issuable to a holder of the REIT Shares Amount of REIT Shares on the record date fixed for purposes of determining the holders of REIT Shares entitled to rights.
“RELATED PARTY” means, with respect to any Person, any other Person whose ownership of shares of the General Partner’s capital stock would be attributed to the first such Person under Code Section 544 (as modified by Code Section 856(h)(1)(B)).
“RESULTING SERIES 2 CLASS T UNITS” means, with respect to any Interests, the Series 2 Class T Units issued by the Partnership in connection with its exercise of the FMV Option and acquisition of the Interests.
“SAFE HARBOR” means, the election described in the Safe Harbor Regulation, pursuant to which a partnership and all of its partners may elect to treat the fair market value of a partnership interest that is transferred in connection with the performance of services as being equal to the liquidation value of that interest.
“SAFE HARBOR ELECTION” means the election by a partnership and its partners to apply the Safe Harbor, as described in the Safe Harbor Regulation and Internal Revenue Service Notice 2005-43, issued on May 19, 2005.
“SAFE HARBOR REGULATION” means Proposed Treasury Regulations Section 1.83-3(l) issued on May 19, 2005.
“SECURITIES ACT” means the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder.
“SERIES” means a series of a Class of Partnership Units, as the context may require.
“SERIES 1 CLASS E UNITS” means Class E Units with the rights, privileges and obligations set forth for in this Agreement with respect to Series 1 Class E Units.
“SERIES 1 CLASS S UNITS” means Class S Units with the rights, privileges and obligations set forth for in this Agreement with respect to Series 1 Class S Units.
“SERIES 1 CLASS T UNITS” means Class T Units with the rights, privileges and obligations set forth for in this Agreement with respect to Series 1 Class T Units.
“SERIES 2 CLASS E UNITS” means Class E Units with the rights, privileges and obligations set forth for in this Agreement with respect to Series 2 Class E Units.
“SERIES 2 CLASS S UNITS” means Class S Units with the rights, privileges and obligations set forth for in this Agreement with respect to Series 2 Class S Units.
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“SERIES 2 CLASS T UNITS” means Class T Units with the rights, privileges and obligations set forth for in this Agreement with respect to Series 2 Class T Units.
“SERVICE” means the United States Internal Revenue Service.
“SPECIAL OP UNITHOLDERS” means the holders of Special Partnership Units; provided, that, if such holders of Special Partnership Units own Partnership Units, then such holders shall be OP Unitholders and not Special OP Unitholders with respect to such Partnership Units.
“SPECIAL PARTNERSHIP UNIT” means a unit of a series of Partnership Interests, designated as Special Partnership Units. The number of Special Partnership Units outstanding and the Special Percentage Interests in the Partnership represented by such Special Partnership Units are set forth on Exhibit A, as such Exhibit may be amended from time to time. For the avoidance of doubt, the Special Partnership Units are separate and distinct from the Special OP Units described in Section 9.8 of the General Partner’s Articles of Incorporation, which were redeemed by the Partnership effective July 12, 2012.
“SPECIAL PERCENTAGE INTEREST” shall mean the percentage ownership interest in the Special Partnership Units of each Special OP Unitholder, as determined by dividing the Special Partnership Units owned by each Special OP Unitholder by the total number of Special Partnership Units then outstanding. The Special Percentage Interest of each Partner shall be as set forth on Exhibit A, as such Exhibit may be amended from time to time.
“SPECIFIED REDEMPTION DATE” means, if the Affirmation Date is at least three business days before the end of a month, the last business day of such month, and otherwise the last business day of the month following the month in which the Affirmation Date occurred.
“SPONSOR PARTIES” has the meaning provided in Section 8.5(a) hereof.
“SUBSIDIARY” means, with respect to any Person, any corporation or other entity of which the general partner is such Person or of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person.
“SUBSIDIARY PARTNERSHIP” means any partnership of which the partnership interests therein are owned by the General Partner or a direct or indirect subsidiary of the General Partner.
“SUBSTITUTE LIMITED PARTNER” means any Person admitted to the Partnership as a Limited Partner pursuant to Section 9.3.
“SUCCESSOR ENTITY” has the meaning provided in the definition of “Conversion Factor” contained herein.
“SURVIVOR” has the meaning set forth in Section 7.1(d).
“TAX MATTERS PARTNER” has the meaning described in Section 10.5(a).
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“TERMINATION EVENT” means the termination or nonrenewal of the Advisory Agreement (i) in connection with a merger, sale of assets or transaction involving the General Partner pursuant to which a majority of the directors of the General Partner then in office are replaced or removed, (ii) by the Advisor for “good reason” (as defined in the Advisory Agreement) or (iii) by the General Partner other than for “cause” (as defined in the Advisory Agreement).
“TENDERED UNITS” has the meaning provided in Section 8.5(a).
“TENDERING PARTY” has the meaning provided in Section 8.5(a).
“TOTAL EQUITY AMOUNT” means the cash purchase price of Interests in a Private Placement less the amount of any loan from the Partnership or any of its affiliates to finance a portion of such purchase price.
“TRANSACTION” has the meaning set forth in Section 7.1(c).
“TRANSFER” has the meaning set forth in Section 9.2(a).
“VALUATION PROCEDURES” means written valuation procedures adopted by the Board of Directors of the General Partner, as such procedures may be amended from time to time, that set forth the method by which the net asset value per each Class of REIT Share and Class or Series of Partnership Unit shall be calculated. Pursuant to such Valuation Procedures, certain Classes or Series of Partnership Units are each economically equivalent to a corresponding class of REIT Shares. Pursuant to this Agreement, those are as follows:
| ● | Series 1 Class E Units and Series 2 Class E Units are economically equivalent to Class E REIT Shares. |
| ● | Series 1 Class S Units are economically equivalent to Class S REIT Shares. |
| ● | Series 1 Class T Units and Series 2 Class T Units are economically equivalent to Class T REIT Shares. |
| ● | Class D Units are economically equivalent to Class D REIT Shares. |
| ● | Class I Units are economically equivalent to Class I REIT Shares. |
Series 2 Class S Units, however, are not economically equivalent to any Class of REIT Shares. Accordingly, the Net Asset Value Per Unit of Series 2 Class S Units shall, upon their initial issuance, be set at the Net Asset Value Per Unit of Series 1 Class S Units, and thereafter adjusted as described in the Valuation Procedures as if they were a separate Class of REIT Shares, taking into account their specific economic terms (specifically, their specific dividends and ongoing Distribution Fees) set forth herein.
“VALUE” means, for each Class of REIT Shares, the fair market value per share of that Class of REIT Shares which will equal: (i) if REIT Shares of that Class are Listed, the average closing price per share for the previous thirty business days, or (ii) if REIT Shares of that Class are not Listed, the Net Asset Value Per REIT Share for REIT Shares of that Class.
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“VPU” means average value per Partnership Unit, which on any given date shall be equal to (i) the Partnership NAV on such date, divided by (ii) the aggregate number of Partnership Units of all Classes and Series outstanding on such date.
“WEIGHTED-AVERAGE DISTRIBUTIONS PER PARTNERSHIP UNIT” shall mean, for a particular period of time, an amount equal to the ratio of (i) the aggregate distributions paid or accrued in respect of all Partnership Units during the applicable period, divided by (ii) the weighted-average number of Partnership Units of all Classes and Series outstanding during the applicable period, calculated in accordance with GAAP applied on a consistent basis.
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This certificate is not negotiable. The Partnership Units, Special Partnership Units and Profit Interests represented by this certificate are governed by and transferable only in accordance with the provisions of the Limited Partnership Agreement of AREIT Operating Partnership LP, as amended from time to time.
The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act, provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to qualify as a REIT, unless the General Partner otherwise ceases to qualify as a REIT, and in a manner such that the General Partner will not be subject to any taxes under Section 857 or 4981 of the Code, (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing and (iii) to do anything necessary or incidental to the foregoing. In connection with the foregoing, and without limiting the General Partner’s right in its sole and absolute discretion to qualify or cease qualifying as a REIT, the Partners acknowledge that the General Partner intends to qualify as a REIT for federal income tax purposes and upon such qualification the avoidance of income and excise taxes on the General Partner inures to the benefit of all the Partners and not solely to the General Partner. Notwithstanding the foregoing, the Limited Partners agree that the General Partner may terminate its status as a REIT under the Code at any time to the full extent permitted under the Articles of Incorporation. The General Partner on behalf of the Partnership shall also be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Code.
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Immediately following the time (if any) that the aggregate Investor Servicing Fees paid with respect to Resulting Series 2 Class T Units related to a single purchase of Interests in a Private Placement equals or exceeds such percentage as set forth in any applicable agreement between the Dealer Manager and a participating broker-dealer, provided that the Dealer Manager advises the General Partner’s transfer agent of the such percentage in writing) of the Total Equity Amount, all such Resulting Series 2 Class T Units (or fraction thereof) shall automatically convert to a number of Class I Units equal to the product of (a) the number of such Resulting Series 2 Class T Units and (b) the Value of Class T Units divided by the Value of Class I Units.
The General Partner is hereby authorized to designate and cause the Partnership to issue Profit Interests in multiple Series via award letters with the rights and obligations of such Profit Interests set forth in such award letters or an exhibit thereto.
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Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units for less than fair market value, so long as the General Partner concludes in good faith that such issuance is in the best interests of the General Partner and the Partnership.
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(i)the lesser of (A) the amount equal to 12.5% of (1) the Annual Total Return Amount less (2) the Loss Carryforward Amount, and (B) the amount equal to (x) the Annual Total Return Amount, less (y) the Loss Carryforward Amount, less (z) the Hurdle Amount;
multiplied by:
(ii)the weighted-average number of Partnership Units outstanding during the applicable year, calculated in accordance with GAAP as applied on a consistent basis;
(iii) provided, that the Performance Allocation shall at no time be less than zero.
Except as described in the definition of Loss Carryforward Amount in this Agreement, any amount by which the Annual Total Return Amount falls below the Hurdle Amount will not be carried forward to subsequent periods. If the Performance Allocation is distributable pursuant to this Section 5.2(c), the Special OP Unitholders shall be entitled to such distribution even in the event that the total percentage return to OP Unitholders over any longer or shorter period, or the total percentage return to any particular OP Unitholder over the same, longer or shorter period, has been less than the Annual Total Return Amount used to calculate the Hurdle Amount. The Special OP Unitholders shall not be obligated to return any portion of any Performance Allocation paid based on the General Partner’s or the Partnership’s subsequent performance.
The Performance Allocation with respect to any calendar year is generally distributable after the completion of the NAV Calculations for December of such year. The Performance Allocation shall be distributable for each calendar year in which the Advisory Agreement is in effect, even if the Advisory Agreement is in effect for a partial calendar year. If the Performance Allocation is distributable with respect to any partial calendar year, the Performance Allocation shall be calculated based on the annualized total return amount determined using the total return achieved for the period of such partial calendar year. In the event the Advisory Agreement is terminated or its term expires without renewal, the partial period Performance Allocation shall be calculated and due and distributable upon the date of such termination or non-renewal. In such event, for purposes of determining the Annual Total Return Amount, the change in VPU shall be determined based on a good faith estimate of what the NAV Calculations would be as of that date. Notwithstanding anything to the contrary in this paragraph, upon the triggering of a Pro-Rata Period as defined in the General Partner’s Second Amended and Restated Share Redemption Program, effective as of December 10, 2018 (as it may be amended from time to time, the “SRP”), distribution of the Performance Allocation shall be deferred until all REIT Share redemption requests under the SRP are satisfied.
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In the event the Partnership commences a liquidation of its Assets during any calendar year, the Special OP Unitholders shall be distributed the Performance Allocation from the proceeds of the liquidation and the Performance Allocation shall be calculated at the end of the liquidation period prior to the distribution of the liquidation proceeds to the OP Unitholders. The calculation of the Performance Allocation for any partial year shall be calculated consistent with the applicable provisions of this Section 5.2(c).
At the election of the Special OP Unitholders, with respect to each calendar year, all or a portion of the Performance Allocation shall be paid instead to the Advisor as a fee as set forth in the Advisory Agreement. If the Special OP Unitholders do not elect on or before the first day of a calendar year to have all or a portion of the Performance Allocation paid as a fee to the Advisor, then the Performance Allocation with respect to such calendar year shall be distributable to the Special OP Unitholders as set forth in this Section 5.2(c); provided, however, that the Performance Component shall be paid to the Advisor as a fee as set forth in the Advisory Agreement with respect to the calendar year 2018.
The Performance Allocation may be payable in cash or as a distribution of Class I Units or any combination thereof at the election of the Special OP Unitholders. If the Special OP Unitholders elect to receive such distributions in Class I Units, the Special OP Unitholders will receive the number of Class I Units that results from dividing an amount equal to the value of the Performance Allocation by the NAV per Class I Unit at the time of such distribution. If the Special OP Unitholders elect to receive such distributions in Class I Units, the Special OP Unitholders may request the Partnership to redeem such Class I Units from the Special OP Unitholders at any time thereafter pursuant to Section 8.5.
The measurement of the change in VPU for the purpose of calculating the Annual Total Return Amount is subject to adjustment by the Board of Directors of the General Partner to account for any dividend, split, recapitalization or any other similar change in the Partnership’s capital structure or any distributions that the Board of Directors of the General Partner deems to be a return of capital if such changes are not already reflected in the Partnership’s net assets.
If as of the end of the last month of the applicable period the NAV of a Series 1 Class E Unit is less than $10.00 per unit, the Special OP Unitholders will waive that portion of the Performance Allocation otherwise distributable to them in an amount equal to the product of (a) the Performance Allocation for the applicable period, and (b) the weighted-average number of Series 1 Class E Units outstanding over the applicable period divided by the weighted-average number of Partnership Units outstanding over the same period. In this manner, the holders of each class of Partnership Units will benefit from this waiver pro rata in accordance with their particular class’s portion of Partnership NAV.
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Any amounts treated as a Partnership Loan or a General Partner Loan pursuant to this Section 5.2(c) shall bear interest at the lesser of (i) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in The Wall Street Journal, or (ii) the maximum lawful rate of interest on such obligation, such interest to accrue from the date the Partnership or the General Partner, as applicable, is deemed to extend the loan until such loan is repaid in full.
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Notwithstanding any other provision of this Agreement, the amount by which the value, as determined in good faith by the General Partner, of any property other than cash to be distributed in kind to the Partners exceeds or is less than the Carrying Value of such property shall, to the extent not otherwise recognized by the Partnership, be taken into account in computing Profit and Loss of the Partnership for purposes of crediting or charging the Capital Accounts of, and distributing proceeds to, the Partners, pursuant to this Agreement. To the extent deemed advisable by the General Partner, appropriate arrangements (including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations.
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In respect of any transaction described in the preceding paragraph, the General Partner is required to use its commercially reasonable efforts to structure such transaction to avoid causing the Limited Partners to recognize a gain for federal income tax purposes by virtue of the occurrence of or their participation in such transaction, provided such efforts are consistent with the exercise of the Board of Directors’ fiduciary duties to the shareholders of the General Partner under applicable law.
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Notwithstanding the foregoing, the Special OP Unitholders, the Advisor and any Person to whom the Special OP Unitholders or the Advisor transfers Partnership Units or Special Partnership Units (collectively with the Special OP Unitholders and the Advisor, the “Sponsor Parties”) shall have the right to require the Partnership to redeem all or a portion of their Partnership Units pursuant to this Section 8.5 at any time irrespective of the period the Partnership Units have been held by such Limited Partner; provided, however, that in the event the Sponsor Parties hold Partnership Units paid or distributed with respect to the Performance Allocation or Performance Component (as defined in the Advisory Agreement) from any prior calendar year (which, for the avoidance of doubt, does not include any Partnership Units awarded in the then-current year for the prior year’s performance, if any) and requests the Partnership to redeem all or a portion of such Partnership Units (the “Partnership Unit Balance”) the Partnership will be required to redeem such Partnership Unit Balance only if the General Partner, based on reasonable projections, (i) has determined that, after redeeming such Partnership Unit Balance, the General Partner expects to have liquidity (from any available source, but taking into account current and future funding commitments, as well as leverage considerations) equal to or in excess of the NAV of the maximum amount of REIT Shares which can be redeemed under the then-current SRP for at least the next ninety days (the “Minimum Liquidity Requirement”) and (ii) at the time of the redemption request, 100% of all properly submitted redemption requests in the SRP as of the most recent quarter end and the most recent month end (the “Redemption Period”) have been honored (collectively, with the Minimum Liquidity Requirement, the “Redemption Requirements”). In the event that the General Partner deems that the Redemption Requirements have not been met, then the Sponsor Parties may only redeem their respective Partnership Unit Balances up to the lesser of (A) a percentage of their respective Partnership Unit Balances equal to the lowest of the pro rata percentages of REIT Shares redeemed under the SRP within the Redemption Period, or (B) an amount that causes the Minimum Liquidity Requirement to still be met. If the General Partner deems that the Redemption Requirements have not been met and there was no pro rata redemption under the SRP during the Redemption Period, the Sponsor Parties may only redeem an amount that causes the Minimum Liquidity Requirement to still be met. The above Partnership Unit redemption restriction shall not apply in the event that the General Partner terminates the Advisory Agreement. The Partnership shall redeem any Partnership Units of the Sponsor Parties for the Cash Amount unless the board of directors of the General Partner determines that any such redemption for cash would be prohibited by applicable law or this Agreement, in which case such Partnership Units will be redeemed for an amount of REIT Shares having the same Class designation as the Tendered Units with an aggregate NAV equivalent to the aggregate NAV of such Partnership Units. Redemption requests from multiple Sponsor Parties, if applicable, will be honored on a pro rata basis, if redemptions are limited pursuant to the foregoing.
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No Limited Partner, other than the Sponsor Parties, may deliver more than two Notices of Redemption during each calendar year. A Limited Partner, other than the Sponsor Parties, may not exercise the Redemption Right for less than 1,000 Partnership Units or, if such Limited Partner holds less than 1,000 Partnership Units, all of the Partnership Units held by such Partner. The Tendering Party shall have no right, with respect to any Partnership Units so redeemed, to receive any distribution paid with respect to such Partnership Units if the record date for such distribution is on or after the Specified Redemption Date.
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The General Partner’s consent shall be required for any amendment to this Agreement. The General Partner, without the consent of the Limited Partners, may amend this Agreement in any respect or merge or consolidate the Partnership with or into any other partnership or business entity (as defined in Section 17-211 of the Act) in a transaction pursuant to Section 7.1(c), (d) or (e) hereof; provided, however, that (1) the following amendments described in Section 11(a), 11(b), 11(c) and 11(d), and any other merger or consolidation of the Partnership, shall require the consent of Limited Partners holding more than 50% of the Percentage Interests of the Limited Partners and (2) the following amendments described in Section 11(e) shall require the consent of Special OP Unitholders holding more than 50% of the Percentage Interests of the Special OP Unitholders:
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IN WITNESS WHEREOF, the parties hereto have hereunder affixed their signatures to this Twelfth Amended and Restated Limited Partnership Agreement, all as of the date first set forth above.
| | GENERAL PARTNER: ARES REAL ESTATE INCOME TRUST INC., a Maryland corporation By:/s/ Lainie P. Minnick Name: Lainie P. Minnick Title: Chief Financial Officer |
| | LIMITED PARTNERS: ARES REAL ESTATE INCOME TRUST INC., a Maryland corporation, attorney-in-fact for all Limited Partners other than the Special OP Unitholder By:/s/ Lainie P. Minnick Name: Lainie P. Minnick Title: Chief Financial Officer AREIT INCENTIVE FEE LP, a Delaware limited liability company, as sole Special OP Unitholder By: AREIT INCENTIVE FEE GP LLC, its General Partner By: ARES COMMERCIAL REAL ESTATE MANAGEMENT LLC, its sole member By:/s/ Anton Feingold Name: Anton Feingold Title: Authorized Signatory |
| | |
EXHIBIT A
A-1
EXHIBIT B
B-1
Exhibit 10.3
[ ], 202[_]
Timberline Holdco LLC
c/o Timberline Real Estate Ventures, LLC
2 School Street
Rye, NY 10580
Attn: Andrew N. Stark
RE: AREIT Operating Partnership LP Profit Interest Letter Agreement
Dear [__]:
AREIT Operating Partnership LP (“AREIT OP”) is pleased to provide Timberline Holdco LLC (the “JV Profit Interest Partner”), with this letter agreement (the “Letter Agreement”) to admit the JV Profit Interest Partner as a limited partner in AREIT OP and grant a performance participation interest in [tranche name] more particularly described on Exhibit A (the “[Tranche Name] Profit Interest”) to JV Profit Interest Partner, under the terms set forth in Exhibit A, in consideration of services rendered and to be rendered by the JV Profit Interest Partner.
AREIT OPERATING PARTNERSHIP LP By: Ares Real Estate Income Trust, Inc., its General Partner | |
| By: |
| TIMBERLINE HOLDCO LLC By: [ ] |
| By: |
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Exhibit A
Exhibit B
Exhibit 10.4
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED PURSUANT TO ITEM 601(B)(10) OF REGULATION S-K BECAUSE THE INFORMATION IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL AND, WHERE APPLICABLE, HAVE BEEN MARKED WITH “[REDACTED]” TO INDICATE WHERE REDACTIONS HAVE BEEN MADE.
FORM OF PROPERTY
MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of the [___] day of [__________], 20__ (the “Effective Date”) is made and entered into by and between [___________________], [_______________________] (“Owner”) and B.Hom Student Living LLC, a Delaware limited liability company (“Manager”).
WITNESSETH:
WHEREAS, Owner owns that certain real property commonly referred to as “[__________]”, containing a [____] unit, [______] bed student housing community, as further identified and described in Schedule A, attached hereto (the “Property”);
WHEREAS, Manager is in the business of managing and operating properties similar to the Property and Manager shall manage, coordinate, and supervise the ordinary and usual business and affairs pertaining to the operation, maintenance, leasing, licensing, and management of the Property in accordance with the terms of this Agreement; and
WHEREAS, Owner desires to engage Manager as an independent contractor to manage and operate the Property as contemplated under the LLC Agreement (as hereinafter defined) and Manager desires to accept such appointment upon the terms, covenants, conditions and provisions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, Owner and Manager mutually agree as follows:
ARTICLE 1
APPOINTMENT OF MANAGER
1.01 | Appointment of Manager. Owner appoints Manager to be the sole and exclusive property manager for the Property upon the terms and conditions set forth in this Agreement. Manager accepts such appointment on the terms and conditions set forth herein. |
1.02 | Independent Contractor Status. Manager is not the general agent of Owner, but, is instead engaged in the business of managing properties as an independent contractor, and in that capacity, is serving as the property manager for the Property. No provision hereof shall be construed to constitute Manager or any of its officers or employees as an employee or employees of Owner, nor shall any provision of this Agreement be construed as creating a partnership or joint venture between Manager and Owner. Neither Owner nor Manager shall have the power to bind the other party except pursuant to the terms of this Agreement. This Agreement is not intended to provide or create any agency relationship between Owner and Manager, and Manager shall have no right or authority, express or implied, to commit or otherwise obligate Owner in any manner whatsoever, except as expressly provided herein, and Manager agrees that it shall not hold itself out as having authority to act on behalf of Owner in any manner, except as expressly provided herein. Notwithstanding the foregoing, but subject to Section 5.05 below, Manager shall not be liable for any monetary obligation or expenditure incurred on behalf of the Property or Owner within the scope of Manager’s authority pursuant to this Agreement. |
1.03 | Restrictions on Manager’s Authority. |
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Manager acknowledges that this Agreement is an “[ ] Affiliate Agreement” within the meaning of the LLC Agreement, and Ares [and ] ha[s][ve] certain rights with respect to the Property and this Agreement as specified therein, including, without limitation, the right to terminate this Agreement pursuant to [Section 6.12] of the LLC Agreement. [Manager further acknowledges that intends to qualify as a “real estate operating company” within the meaning of the Plan Asset Regulation (as defined in the LLC Agreement), has additional rights with respect to the Property as provided in [Section 1.10] of the LLC Agreement, and agrees that Manager shall not take any action that undermines or abrogates Ares’ or [ ]’s rights under this Agreement or the LLC Agreement.]
ARTICLE 2
TERM OF AGREEMENT
2.01 | Term of Agreement. This Agreement shall commence upon the Effective Date and shall continue until the last day of the calendar month following the two-year anniversary of the Effective Date, unless sooner terminated pursuant to the terms of this Agreement. Upon expiration of the original term, this Agreement will automatically renew on a month-to-month basis until terminated as provided in Article 7. |
ARTICLE 3
MANAGER’S DUTIES AND RESPONSIBILITIES
3.01 | General Scope. Subject to the provisions of this Agreement and at the direction of Owner, Manager shall manage, coordinate, and supervise the ordinary and usual business and affairs pertaining to the operation, maintenance, repair, leasing, licensing, and management of the Property in a diligent and professional manner in accordance with recognized standards of the property management industry and consistent with those customarily performed by professional property managers of properties of similar size, type and quality in the market where the Property is located and taking into account the type of tenants at the Property and, in all cases, subject to and in accordance with: (a) the budgets, policies and limitations imposed by Owner; and (b) applicable law and rulings and orders of governmental authorities having jurisdiction over the Property (the “Performance Standard”). Unless otherwise specifically provided in this Agreement, all services and actions that Manager is required or permitted to perform or take, or cause to be performed or taken, under this Agreement in connection with management of the Property shall be performed or taken, as the case may be, on behalf of Owner and, except as specifically otherwise provided for herein, at Owner’s sole cost, expense, and risk. |
3.02 | Proposed Management Plans. Owner hereby approves the management plan and operating budget for the promotion, operation, and repair and maintenance of the Property for Owner’s current calendar year and the student occupancy year attached hereto as Schedule C as the initial Approved Management Plan and initial Approved Operating Budget (each as hereinafter defined). Subsequent proposed management plans and operating budgets for the immediately succeeding calendar year and the student occupancy year shall be submitted to Owner at least sixty (60) days prior to the beginning of the next student occupancy year. Each proposed management plan and operating budget shall include: (i) the proposed leasing parameters for the Property for the ensuing calendar year and the student occupancy year as well as a copy of the standard form of the lease to be used at the Property; and (ii) an amount to be added to, or expended from, separate Reserves (as defined in the LLC Agreement) for (A) payment of real estate taxes, (B) insurance, (C) capital improvements, and (D) other Reserves (including those required pursuant to the terms of any Financing Documents (as defined in the LLC Agreement)), in an amount with respect to each such Reserve equal to the greater of: (1) the amount required to be added to such Reserve during such year by any Lender (as defined in the LLC Agreement), and (2) the amount that Owner approves under the circumstances. In addition, no such proposal shall be inconsistent with the Approved Budget and Business Plan (as defined in the LLC Agreement) that was approved by Ares pursuant to [Section 6.2] of the LLC Agreement. Within thirty (30) days after a proposed management plan and operating budget is submitted to Owner, Owner shall notify Manager in writing: (y) that it approves the proposed management plan and operating budget; or (z) of the revisions Owner believes should be made to such proposed management plan and operating budget for such fiscal year. Manager shall revise the proposed management plan and operating budget to reflect all revisions proposed by Owner. If Owner fails to respond within such thirty (30) day period, Owner shall be deemed to NOT have approved the proposed management plan and operating budget. The proposed management plan and operating budget once revised by Manager (if applicable) and approved by Owner shall be referred to herein as the “Approved Management Plan” and the “Approved Operating Budget.” If the proposed management plan and operating budget for any calendar year and student occupancy year shall not be approved by Owner, Manager shall operate the Property |
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pursuant to the proposed management plan and operating budget for such year with respect to those portions approved by Owner and, with respect to those portions not approved by Owner, in accordance with the prior year’s Approved Management Plan and Approved Operating Budget (except for any expenditures that are not Necessary Expenditures (as defined in the LLC Agreement), which non-Necessary Expenditures shall be deemed removed from such prior year’s Approved Management Plan and Approved Operating Budget) and the salary and benefit expense reflected in the prior year’s Approved Management Plan and Approved Operating Budget shall be increased by the lesser of (I) 3.0% and (II) the most recent Cost of Living Adjustment published by the Social Security Administration.
3.03 | Approved Marketing Plan. Manager shall establish leasing plans, rental rates and implement marketing strategies, in each case, with the prior approval of Owner. Manager shall supervise the preparation of all advertising layouts, brochures, campaigns, and, to the extent applicable, model student living units, and submit campaign concepts and advertising templates to Owner for its prior approval. Advertising and promotional materials shall be prepared in full compliance with federal, state, and municipal fair housing laws. |
3.05 | Security Deposits. Manager shall collect and refund security deposits in accordance with the terms of each lease and as may be required by applicable law. If required by statute, Manager will deposit security deposits into a separate interest-bearing account at CIBC or at such other bank as Manager shall propose and Owner shall approve and pay tenants the interest earned on such deposit; otherwise, Manager will deposit security deposits into the Operating Account (as hereinafter defined). To the extent permitted by a tenant’s lease and applicable law, when Manager deems reasonably appropriate, Manager may offset tenant charges with forfeited security deposit amounts and disburse any surplus security deposits from the Operating Account. |
3.06 | Collection of Rents and Enforcement of Leases. Manager shall exercise efforts in accordance with the Performance Standard to promptly collect all rents and other charges for services provided in connection with the use of the Property. When reasonably necessary, but in all events subject to the approval rights of Owner in Section 3.04 above, Manager is authorized to institute the following actions, acting in accordance with the Performance Standard: (a) sign and serve such notices to residential tenants as are deemed necessary or reasonably appropriate by Manager to ensure a residential tenant’s performance of its obligations under its lease; (b) institute and prosecute actions and evict tenants of residential leases; (c) recover rents and other sums due by legal proceedings; and (d) execute agreements or official documents in the name of Owner to settle, compromise, and release such actions or suits, or re-institute such tenancies; provided, however, Manager shall not commence, defend or settle any actions or proceedings involving in excess of $50,000 without Owner’s prior written consent. Attorney’s fees, filing fees, court costs, and other necessary expenses incurred in connection with such actions and not recovered from residents shall be paid out of the Operating Account to the extent set forth in the Approved Operating Budget. Manager may select the attorney of its choice to handle such actions, |
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proceedings and litigation. Manager shall not collect any rents for more than one month in advance (plus security deposits) without the prior consent of Owner and Owner’s mortgage lender.
3.07 | Approved Operating Expenditures. Notwithstanding anything to the contrary contained herein, Manager shall not, without the prior written approval of Owner, make any expenditure, whether from the Operating Account or otherwise, or incur any obligation on behalf of Owner, except for: (i) expenditures or obligations approved by Owner; (ii) expenditures made and obligations incurred directly pursuant to the then-current Approved Operating Budget (as the same may be adjusted by the Permitted Variance (as defined below)); and (iii) expenditures that are immediately necessary in the reasonable judgment of Manager to avoid any imminent or existing danger, or threat of imminent danger, of material injury to person or material harm to property (including the Property) and such immediacy makes it impracticable to obtain prior Approval from Owner (“Emergency Expenditures”). Manager will promptly notify Owner, but in no event later than twenty-four (24) hours from the time Manager learns of such emergency, of any such emergency or Emergency Expenditure. Except for Emergency Expenditures, Manager shall ensure that the actual costs of maintaining and operating the Property do not exceed the Approved Operating Budget and any year-to-date budget variances will be explained to Owner each month as part of the monthly reports set forth on Schedule D. “Permitted Variance” means, with respect to any line item in any Approved Operating Budget, an increase not to exceed the lesser of: (a) three percent (3%) of the amount shown in such line item (unless such variance in excess of 3% is equal to or less than $1,000, in which case approval shall not be required); and (b) $10,000 of the amount shown in such line item, and such increase, when aggregated with all prior and any then-anticipated increases in such year, does not exceed $50,000 of the total expenses set forth in the Approved Operating Budget. |
3.08 | Approved Capital Expenditures. Notwithstanding anything to the contrary contained herein, any capital expenditure over $15,000 shall be awarded on the basis of competitive bidding, solicited in the following manner: (a) a minimum of two (2) written bids shall be obtained for each purchase where possible and practical to obtain such bids; (b) each bid will be solicited in a form so that uniformity will exist in the bid quotes; (c) Manager shall provide Owner with all bid responses accompanied by manager’s recommendations as to the most acceptable bid; and (d) Owner shall be free to accept or reject any and all bids. Owner shall communicate to Manager its acceptance or rejection of bids in writing. Owner shall be responsible for capital expenses and may pay same from its own resources or may authorize payment by Manager out of available funds in the Operating Account. |
3.09 | Start-Up Expenditures. It is understood and agreed that certain initial start-up expenses and costs will be incurred to evaluate the Property and its submarket; to recruit, interview, hire and train staff; to create and print brochures and marketing materials; and to equip and furnish the leasing office and other areas of the Property. Provided that the foregoing is expressly contemplated by the Approved Operating Budget, Manager may incur such reasonable start-up expenses and costs on behalf of the Property. |
3.10 | Intentionally Omitted. |
3.11 | Public Utility and Service Contracts. Manager shall negotiate and, with Owner’s prior approval, execute, in its capacity as Owner’s agent, contracts for water, electricity, gas, telephone, trash removal, vermin or pest extermination, and any other services which are necessary to properly maintain the Property as contemplated by the Approved Management Plan and Approved Operating Budget. All required utility deposits or surety bonds will be the responsibility of the Owner and each such contract shall be in the name and expense of, and executed by, the Owner. Without the consent of Owner or as otherwise permitted in this Section 3.11, Manager: (a) other than as expressly provided in this Section 3.11, shall not enter into any contract or modify, in any material respect, the provisions of any contract; and (b) shall not take any action, or omit to take any action or give any notice, the taking, omission or giving of which would (where the following would have an adverse effect on Owner and/or the Property): (x) result in the reduction, release or discharge of any other party to any contract from its obligations thereunder; (y) consent to any other party to any contract to assign or otherwise transfer its rights or obligations thereunder; or (z) result in an expenditure in excess of the budgeted amount therefor. Manager will observe, enforce, and inspect the performance under all contracts and agreements affecting the Property, including without limitation, the inspection and observation of all servicing, cleaning, decorating or routine maintenance work at the Property during the progress thereof and will approve or disapprove (as appropriate) all bills submitted for payment therefor. In connection with the foregoing, Manager shall obtain all necessary receipts, releases, waivers, discharges and assurances and shall use efforts in accordance with the Performance Standard to keep the Property free from mechanics’ and materialmen’s liens and other claims, all of which documentation shall be in such format as is required by Owner. Manager may not contract with any Affiliate of Manager for the performance of services |
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for the Property without the prior approval of Owner, which approval may be granted or withheld in Owner’s sole discretion; provided, however, Owner hereby consents to Manager contracting with its affiliate BH Management Services, LLC, at no additional fee, cost or expense to Owner; (i) to fulfill, or assist in the fulfillment of, certain obligations of Manager hereunder; and (ii) if Owner engages Manager in writing to provide construction supervision services, to fulfill, or assist in the fulfillment of such construction supervision services as detailed in such writing. Notwithstanding the foregoing, Manager shall be permitted to negotiate and execute, in its capacity as Owner’s agent, contracts or agreements which have: (A) a term of one year or less; or (B) are terminable by Owner without cause, and without termination fee or penalty, on no more than thirty (30) days’ notice, and, in the case of (A) or (B), shall be included in the then-current Approved Operating Budget and Approved Management Plan; provided, however, Manager shall not, without the prior approval of Owner, enter into any contract on behalf of Owner for the provision of materials or services that provides for an aggregate annual payment in excess of $15,000.
3.12 | Manager’s On-Site Employees. As the employer of all Property personnel, Manager has responsibility to and shall comply with all applicable labor and employment laws, including hiring, pay practices, disciplinary actions, and terminations. Manager has developed company-wide employment policies and practices that will be applied to all its employees in the administration of this duty. All on-site personnel shall be employees of Manager (or Manager’s agent) and Owner has no right to supervise or control the operations of employees or agents; provided, however, (a) Ares shall have the right to interview candidates for the positions of property manager, head of leasing/marketing and maintenance manager/superintendent for the Property and advise Manager of any candidate that Ares does not approve for hire into such position and, unless Manager reasonably determines such advice is based on factors which may impose liability on Manager for improper employment decisions, Manager shall decline to hire such candidate, (b) if Ares determines that any contractor, subcontractor or other person or entity under contract with Manager has engaged in actions detrimental to the Property or tenants of the Property, Manager shall remove such person or entity from the Property and shall not assign such person or entity to any other property owned by Owner or any of its affiliates without the prior written consent of Ares and (c) if Ares desires to have any employee of Manager removed from the Property, Ares shall notify Manager and request Manager investigate, if appropriate, and take such disciplinary action as Manager deems appropriate in its reasonable discretion; it being agreed, however, if Ares, after consultation with Manager, determines that any employee of Manager should be terminated or removed for cause, Manager shall remove such person from the Property and shall not assign such person or entity to any other property owned by Owner or any of its affiliates without the prior written consent of Ares. Owner acknowledges all wages will be paid by Manager and agrees not to pay any additional wages to any Manager employee outside of Manager’s payroll system. Manager will take Owner’s requests, opinions and preferences into account when making personnel decisions. The parties agree to work in good faith to resolve any disputes regarding personnel. Manager shall screen, test, investigate, interview, hire, supervise, discharge, and pay all personnel necessary to maintain and operate the Property, subject to this Agreement and the Approved Operating Budget. Subject to Ares’ approval rights under this Section 3.12, Manager may fill open positions at the Property with its temporary floating employee team while recruiting for a permanent replacement(s). Cost to the Property will include an allocation of salary and benefit load for any such employees while at the Property and any associated incurred travel costs that are approved by Ares. Manager will be timely reimbursed by the Property for all costs related to personnel who are necessary to operate and maintain the Property to the extent expressly permitted pursuant to this Agreement and/or the Approved Operating Budget. All other labor/Human Resource costs associated to onsite employees are an expense of the Property, including, but not limited to: HRIS monthly fees, Taleo, Salary Surveys, recruiting and advertising tools, and background/drug screening. |
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3.13 | Debt Service and Tax Payments. If requested by Owner, and sufficient funds are available in the Operating Account to satisfy the same, Manager will apply any such operating funds to pay the debt service and taxes due pursuant to any federal, state, county, or municipal authority, or other similar body having appropriate jurisdiction. Manager shall not take any action under this Section 3.13 so long as Owner is contesting, or has notified Manager of its intention to contest, any such order or requirement. Owner will supply all information necessary for Manager to comply promptly with these requirements. Manager shall also require all tenants of the Property to pay any applicable federal, state and local taxes, including any sales, excise or use taxes, assessed on any goods or services purchased, rented, leased or otherwise utilized by the tenants at such rates as may be determined by federal, state or local authorities from time to time. Manager, on behalf of Owner, shall collect and remit such taxes to the relevant authority pursuant to federal, state and local taxation laws. Owner shall provide such information, as needed, to register Manager with any federal, state or local authority for purposes of collecting and remitting applicable sales, excise and use taxes on behalf of Owner. |
3.14 | Compliance with Building Regulations and other Requirements. Subject to the terms of this Agreement, Manager does not assume and is given no responsibility for compliance of any building on the Property, or any equipment therein, with the requirements of any building codes or with any statute, ordinance, law, or regulation of any governmental body or of any public authority or official thereof having jurisdiction, (collectively, the “Building Codes”), except to notify Owner promptly or forward to Owner promptly any complaints, warnings, notices or summonses received by it relating to such matters. Notwithstanding the foregoing, Manager will, using efforts in accordance with the Performance Standard, ensure Building Codes, regulations, licensing, and inspections required by law are followed when overseeing repairs and maintenance and otherwise performing its duties and obligations hereunder. In addition, Manager shall perform its obligations hereunder in a manner which shall comply with and shall use efforts in accordance with the Performance Standard to cause the Property or any portion of the Property to comply in all respects with and shall abide by all applicable statutes, laws, rules, regulations, requirements, orders, notices, determinations, and ordinances of any federal, state, or local government and appropriate departments, commissions, or boards with jurisdiction over the Property, as well as with the requirements of any insurance companies covering any of the risks against which the Property is insured and with the rules, regulations and requirements of the applicable board of fire underwriters or other similar insurance body, and further with the requirements of any Financing Documents, that may now or hereafter cover all or any part of the Property or any interest of Owner therein (collectively, “Requirements”). In complying with any Financing Document, Manager will take all appropriate steps including, but not limited to, preparation of draw requests, preparation of compliance reports required by lender(s), and preparation of financial statements. |
3.15 | Environmental Risk Management. Notwithstanding anything to the contrary contained herein, but subject to the further provisions of this Section 3.15, Owner acknowledges and understands that Manager is not responsible to: (1) evaluate the presence or absence of hazardous or toxic substances, mold, waste, materials, electromagnetic field, radon, or radioactive materials upon, within, above, or beneath the Property; (2) maintain or evaluate compliance with environmental, hazardous or solid materials or waste laws, rules and regulations; or (3) conduct or ensure clean-up or remediation of hazardous materials spills or contamination. |
| a. | Accordingly, Manager’s obligations to Owner with respect to the presence of hazardous or toxic substances, mold, waste (including solid waste), gas, liquid, materials, electromagnetic fields, radon, lead, asbestos, radioactive materials, or other environmental concerns upon, within, above, or beneath the Property (hereinafter collectively “Hazardous Materials”), and/or with the compliance and enforcement of federal, state, and local laws, rules, regulations, directives, ordinances, and requirements relating to Hazardous Materials (hereinafter collectively “Hazardous Materials Laws”) shall be subject to, conditioned upon, and limited by the following: |
| i. | To the extent desired by Owner, Manager shall, at Owner’s sole discretion and expense, obtain from an independent environmental consultant retained by Owner, an environmental assessment report on the Property, and shall have such assessment report periodically updated by such environmental consultant based upon the consultant’s inspections of the Property, including tenant spaces. |
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| ii. | In no event will Manager make an independent determination as to the presence or absence of Hazardous Materials, or whether the Property or any particular tenant space is in violation or compliance with any Hazardous Materials Laws; provided, however, in the event Manager observes or otherwise becomes aware of any tenants, or any other persons, using, dumping, releasing, or discharging Hazardous Materials at the Property, Manager shall promptly notify Owner. Manager may seek, on Owner’s behalf and at Owner’s expense, to enforce a tenant’s compliance with any Hazardous Materials Laws in accordance with the environmental consultant’s recommendations contained in the environmental assessment report. Manager shall not, and shall have no obligation to, determine whether or not Owner, any tenants, the Property, or any proportion thereof is in compliance with Hazardous Materials Laws. |
| iii. | Manager shall be responsible for any Hazardous Materials which it or its employees and/or agents use or introduce to the Property, including storage, containment, removal, or remediation as required by applicable law. To the extent Hazardous Materials (such as cleaning supplies or fuel) are required by Manager in the discharge of its duties under this Agreement, Manager shall use and store quantities of such Hazardous Materials as are permitted under applicable law and any Financing Documents, and shall store, use and dispose of such Hazardous Materials in accordance with applicable laws and any Financing Documents. |
| iv. | Manager shall have absolutely no responsibility or obligation with respect to the abatement, clean-up or remediation of any spill of or contamination from any Hazardous Materials upon, beneath, or within all, or any portion, of the Property (other than Hazardous Materials introduced, used or stored by Manager or its employees and/or agents), and the entire responsibility for such clean-up, abatement, or remediation shall lie with Owner and Owner’s environmental consultant. However, Manager shall cooperate with Owner in coordinating and supervising any abatement, clean-up, monitoring or remedial action on the Property site. Owner agrees that, with respect to any abatement, clean-up, or remedial action, Owner shall employ a licensed environmental clean-up company to undertake such clean-up and remediation, and Owner’s or it’s Lender’s environmental consultant, as the case may be, shall oversee the entire abatement, clean-up and remediation process and the obtaining of any required governmental approvals. If the clean-up or remediation is the responsibility of any tenant of the Property and/or Owner’s environmental consultant, Manager shall, on Owner’s behalf, require the tenant to utilize qualified and licensed environmental clean-up companies and that the clean-up and remediation is conducted to Owner’s satisfaction and in accordance with all Hazardous Materials Laws, governmental laws and approvals of which Manager is aware. |
| b. | Owner has provided Manager a copy of its most current Phase I survey covering the Property (which was conducted within the prior three (3) year period) and has implemented or will implement within thirty (30) days of the Effective Date an operations and maintenance program consistent with market standards. |
3.16 | Disclaimer of Certain Liabilities. So long as Manager is performing its duties and obligations hereunder in accordance with the terms of this Agreement and the Performance Standard, and subject to the provisions of Section 6.06(b) below, Manager assumes no liability for (a) any acts or omissions of Owner, or any previous owners or managers of the Property, or any previous agents of any of these, (b) any failure of, or default by, any tenant in the payment of any rent or other charges due Owner or in the performance of any obligations owed by any tenant to Owner pursuant to any lease, student housing or student services, or otherwise, (c) misconduct, negligence, acts or omissions of any consultant or independent contractor retained by Manager with respect to the Property, (d) the provision of security services or devices, (e) violations of environmental regulations or other building regulations by anyone other than Manager or its affiliates, (f) vendor or tenant claims for acts or omissions of Manager within the scope of its agency and (g) subject to the termination right set forth in Section 7.01(p) below, the financial performance of the Property. |
3.17 | No Requirement to Advance Funds. In no event shall Manager be required to advance any monies on behalf of Owner, lend its credit to the Property, or incur any liability in Manager’s own name. |
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3.18 | Representations. Owner represents that, as of the Effective Date, it is the owner of the Property and legally entitled to designate and engage Manager in accordance with this Agreement. Manager represents and warrants that it has full power and authority to enter this Agreement and that it is fully qualified and licensed, to the extent required by law, to manage real estate and perform all obligations assumed by Manager hereunder. Manager agrees to comply with all such laws now or hereafter in effect. Manager also represents and warrants that it does not hold “plan assets” within the meaning of the Plan Asset Regulation (as defined in the LLC Agreement). |
3.19 | Complaints. Manager shall handle all complaints and requests from tenants, concessionaires, licensees or other third parties and shall record each in a systematic fashion in order to show the action taken. |
3.20 | Accidents and Claims. Manager shall notify Owner promptly after Manager receives notice or knowledge of any personal injury or property damage occurring at the Property; and forward to Owner any summons, subpoena, or other legal document served upon Manager relating to actual or alleged potential liability of Owner. Manager shall promptly after any such occurrence investigate and shall make a full, written report to Owner as to (a) all accidents or claims for damages for injury to person or property occurring at the Property or arising out of the ownership, operation and maintenance of the Property, and (b) all damage to or destruction of the Property, including the estimated costs of repair, and Manager shall prepare for approval by Owner all reports required by any insurance company in connection with any such accident, claim, damage or destruction. Manager shall cooperate with Owner with respect to any claim that may arise under any insurance policy. Manager shall take no action (such as admission of liability) that might operate to bar Owner from obtaining any protection afforded by any policy, or that might prejudice Owner and its or their defense to any claim based on such loss, damage or injury. |
3.22Normal Maintenance. Manager shall, at the expense of Owner in accordance with the Approved Operating Budget and Approved Management Plan, maintain or cause the Property to be maintained in good order, repair, and condition to the end that the Property shall be maintained in a condition similar to Class A student housing properties within the [ ] campus. Without limiting the generality of the foregoing, such maintenance shall include exterior grounds and landscaping services, routine repairs to improvements, cleaning and janitorial services to the extent required by a tenant lease, maintenance of mechanical systems and equipment and such other normal maintenance and minor alteration and repair work as may be advisable or necessary. In the event the Approved Operating Budget and Approved Management Plan do not provide sufficient funds to maintain the Property as required by this Section 3.22 and if Owner disapproves or fails to approve a written request by Manager for additional funds necessary for such compliance, then Manager will be deemed in compliance with this Section 3.22 so long as it uses efforts in accordance with the Performance Standard to perform the required tasks within the Approved Operating Budget and Approved Management Plan.
3.23 | Inspections. Manager shall provide regular and systematic inspections of the Property, including, without limitation, the grounds, and parking areas in order to comply with all Requirements and assure proper maintenance of the Property. Manager shall promptly notify Owner in writing of the violation and shall obtain Owner’s prior written approval before authorizing any expenditure to correct a violation of any Requirement. Owner shall have the right to contest any alleged violation of any Requirement. |
3.24. | Permits and Authorizations. Manager shall obtain and keep in full force and effect all licenses, permits, consents and authorizations that may be necessary for the maintenance, operation, management, promotion, repair, servicing, occupancy or leasing of the Property or for the proper performance by Manager of its duties and obligations under this Agreement (including, without limitation, a real estate broker’s license, if required by applicable law, regulation or statute to fulfill Manager’s obligations hereunder) or as may be required under any lease covering any portion of the Property. The cost of keeping in full force and effect all necessary licenses, permits, consents and authorizations for the benefit of the Property shall be at Owner’s expense, except that the cost of obtaining and keeping in full force and effect those licenses necessary for the proper performance by Manager and its employees of its duties or their duties under this Agreement shall be at Manager’s expense and Manager shall be solely responsible for late fees or other charges resulting from Manager’s failure to timely comply with its obligations hereunder. All licenses, permits, consents and authorizations shall be in the name of Owner, or its designee if required by Owner (except that the licenses which are |
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Manager’s expense, pursuant to the foregoing, shall be in Manager’s name). Manager shall obtain any other licenses, permits, consents or authorizations as, if and when the same may be requested to be obtained by Owner, at Owner’s cost and expense.
ARTICLE 4
BANKING AND FINANCIAL RECORDS
4.01 | Account Agency Agreement and Operating Account. Concurrent with the commencement of this Agreement, Owner and Manager shall enter into the Account Agency Agreement, attached as Schedule B. Manager is responsible for providing effective internal controls and efficiencies, and to accomplish this Manager has developed certain cash and online banking policies and procedures with its platform bank, CIBC Bank USA. Owner will maintain a separate operating account at the Manager’s platform bank and will name it in the Account Agency Agreement. Manager shall not change platform banks without the prior written approval of Owner. It is understood that the bank account contemplated and authorized by the Account Agency Agreement shall be a non–interest-bearing checking account. Owner shall not allow Operating Account to have a balance under $25,000 (the “Minimum Balance”) at any time during the term of this Agreement. |
4.02 | Financial Recordkeeping. Manager shall maintain, at Manager’s premises, in a manner customary and consistent with generally accepted accounting principles, complete and accurate accounting records based on the Owner’s fiscal year-end, including, without limitation, books and journals and orderly files, containing rental records, insurance policies, copies of all leases, contracts and other agreements, correspondence, receipts, bills and vouchers, records of all monies received and disbursed in connection with the management of the Property and all other documents and papers pertaining directly to the Property or its operation. |
4.03 Financial Reports. Manager shall furnish as listed on Schedule D monthly and/or quarterly reports of collections, disbursements, and other accounting matters, and any other reports reasonably requested from time to time by Owner. These reports will be delivered to Owner[ and ] in electronic pdf format, as well as excel format, not later than the 15th of the following month. To support the monthly financial reports, Manager shall maintain at Manager’s premises copies of the following: (a) bank statements, bank deposit slips, and canceled checks; (b) comprehensive bank reconciliations; (c) detailed cash receipts records; (d) summaries of adjusting journal entries; and (e) supporting documentation for payroll, payroll taxes, and employee benefits.
4.04Owner’s Right to Audit. Owner[ and ] reserve[s] the right to conduct examination of the books and records maintained by Manager for Owner, and to perform any and all audit tests relating to Manager’s activities, either at the Property, or at the office of Manager; provided such examination and tests are related to those activities performed by Manager for Owner and are conducted during normal business hours. Such audits shall exclude the pricing or contracting information relating to third party vendors utilized by Manager. Owner[ or , as applicable,] shall give Manager not less than two (2) Business Days’ (as defined in the LLC Agreement) written notice of any such audit or examination. Any and all such audits conducted [either] by Owner’s[ or ‘s] employees or appointees will be at the sole expense of Owner[ or , as applicable], unless an error of greater than three percent (3%) of total Gross Income (if understated) or total expenses (if overstated) for the year in question is discovered, in which case Manager shall pay the costs of the audit. Manager shall also arrange for Owner[ or ] (or [its][their] representatives) to enter any part of the Property during normal business hours and upon reasonable advance notice, subject to the terms of any applicable lease, for the purpose of examining or inspecting the Property or for any other purpose.
4.05 | Disbursement of Deposits. If requested by Owner, Manager shall remit to Owner with the monthly financial report all unexpended operating funds except for a reserve for contingencies, as provided in Section 5.01 below, which shall remain in the Operating Account. |
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ARTICLE 5
OWNER’S DUTIES AND RESPONSIBILITIES
5.01 | Initial Deposit and Contingency Reserves. Immediately upon commencement of this Agreement, Owner shall remit to Manager the sum of $2,000 to be deposited in the Operating Account as an initial deposit representing the estimated disbursements to be made in the first month following the commencement of this Agreement, including all estimated payroll and related costs. Furthermore, Owner authorizes Manager to maintain a contingency reserve of $5,000 (the “Contingency Reserve”) at all times in the Operating Account to enable Manager to pay obligations of Owner under this Agreement as they become due. The $5,000 reserve will be part of the Minimum Balance referred to in Section 4.01. |
5.02 | Insufficient Operating Funds. If, as a result of Owner approved Management Plans, a cash flow deficit is reasonably anticipated in the next budgeted month of operations, Owner agrees to deposit into the Operating Account, prior to the commencement of the next budgeted month, sufficient funds to cover the anticipated deficiency and fully fund the Contingency Reserve. In the event that funds in the Operating Account become insufficient to cover all Operating Expenditures and the Contingency Reserve, Owner agrees to, within twelve (12) Business Days of written notice from Manager describing the items for which payment is due, deposit into the Operating Agreement sufficient funds to cover the deficiency and the Contingency Reserve. |
5.03 | Manager’s Compensation. Owner agrees to pay Manager, as compensation for services rendered by Manager in accordance with the terms of this Agreement, the compensation specified in the attached Schedule E. Manager, on behalf of Owner, may pay such compensation to itself at the end of each calendar month from the Operating Account, provided that the amount of each such withdrawal is verified in Manager’s monthly reports to Owner. |
5.04 | Manager’s Costs to be Reimbursed. Owner agrees to reimburse Manager for all reasonable out-of-pocket costs incurred in managing and leasing the Property (other than Manager’s Expenses), to the extent the same are expressly permitted to be incurred in accordance with the terms of this Agreement, including but not limited to those as specified in the attached Schedule F. Manager, on behalf of Owner, may pay such reimbursement to itself at the end of each calendar month as expenses are incurred, from the Operating Account, provided that the amount of each such withdrawal is verified in Manager’s monthly reports to Owner. |
5.05 | Manager’s Expenses. Manager shall be responsible for, and Owner shall not pay or be required to reimburse Manager for any of the following (collectively, “Manager’s Expenses”) unless approved in writing by Owner: |
| a. | Manager’s home office general and administrative expenses, including, but not limited to |
| i. | Salaries and compensation of supervisory personnel other than onsite supervisory personnel, including the Community Manager and other supervisors employed to provide services to the Property. |
| ii. | Salaries and compensation of Manager’s personnel required to substitute for on-site personnel while the on-site employees are on scheduled paid time off not exceeding two weeks. |
| iii. | Home office routine costs such as telephone, postage, overnight mail, and office supplies. |
| iv. | To the extent not set forth in the Approved Operating Budget, costs to set up any on-site management office, if applicable (these costs include, but are not limited to: fax machines, copiers, telephone system, filing systems furniture, computer, etc.). |
| v. | To the extent not set forth in the Approved Operating Budget, costs of Manager’s accounting personnel and accounting related costs, including the initial cost of accounting software but not including annual software fees attributable to the Property. |
| vi. | Cost of Manager’s insurance pursuant to Article 6 above. |
| vii. | Travel, meals, and entertainment costs of Manager’s employees. |
| viii. | Cost of on-site employees’ dues and membership fees to professional organizations. |
| b. | The cost of worker’s compensation insurance and employer’s liability insurance for Manager’s home office employees. |
| c. | Cost of resident rent bills, vendor checks, envelopes and other materials supplied by the Manager as required for operation of the Property. |
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| d. | Direct expenses of the Manager such as photocopying and long-distance phone charges properly logged; provided, that this provision shall not prohibit employees of Manager from incurring expenses related to photocopying directly attributable to Property business. |
5.06 | Representations. Owner represents and warrants that it has the requisite power and authority to enter this Agreement. |
ARTICLE 6
INSURANCE AND INDEMNIFICATION
| (a) | Property damage insurance, or builder’s risk insurance, where applicable, to cover physical loss or damage to the Property on an “all risk” (aka) “Special form” basis, including fire and extended coverage perils, and including vandalism and malicious mischief, on a replacement cost basis. Manager shall use commercially reasonable efforts to comply with all the warranties, terms, and conditions of such insurance of which it has been specifically advised. Manager shall promptly notify Owner and insurance brokers specified in writing to Manager by Owner within twenty-four (24) hours after Manager receives notice of any loss or damage to the Property. |
| (b) | The following additional insurance coverage shall also be obtained if applicable by Owner: |
Type of Coverage | Amounts/Limits |
Commercial General Liability Insurance (“CGL”) (Occurrence Form) | $1,000,000 per occurrence $2,000,000 aggregate subject to an overall master policy aggregate limit, including contractual liability coverage, bodily injury, property damage, personal injury, advertising injury, products and completed operations. |
Umbrella Liability Insurance (above Employer’s Liability, CGL, and Automobile Insurance) | $10,000,000 per occurrence and aggregate |
Business Interruption Insurance | Twelve (12) months of projected gross revenues from the Property, or such other amounts as may be required by the Financing Documents |
All insurance required in clauses (i) and (ii) above shall be issued by insurers as deemed appropriate by Owner and be in force as of the Effective Date. All such policies shall be at Owner’s sole cost. The CGL and Umbrella Liability Insurance shall include Owner as Named Insured, Manager as an insured, however coverage will not extend to gross negligence, willful misconduct or acts outside the scope of Manager’s duties, and Lenders as Additional Insured, mortgagee or loss payees. In addition, all insurance required by (i) and (ii) above shall, to the extent permitted by law, include a waiver of subrogation in favor of Manager, while Manager is acting within the scope of duties and so long as Manager is not grossly negligent or Manager has not committed willful misconduct. In cases where Owner and Manager maintain insurance policies that duplicate coverage, Owner’s General Liability and Excess insurance policies shall be primary and non-contributory, except for claims of gross negligence, willful misconduct or acts taken in violation of this Agreement. Notwithstanding the foregoing, all insurance obtained by Owner shall be not less than the types of coverage and minimum standards required under the Financing Documents.
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| 6.02 | Manager’s Insurance. Manager agrees that the minimum insurance coverage set forth below shall be maintained by Manager, without reimbursement from Owner except as set forth in the Approved Operating Budget: |
| (a) | Commercial General Liability Insurance and Umbrella Liability insurance, written on an occurrence basis, including contractual liability coverage, with limits of not less than Twenty Million Dollars ($20,000,000) combined per occurrence and in the annual aggregate for bodily injury, property damage, advertising injury personal injury liability, with a completed operation and independent contractors’ endorsement. These policies will not contribute with insurance for defense or indemnity provided by the policy described above to the extent Manager is working within scope of his duties. Should any self-insured retention (SIR) or deductible be incorporated within the policy of insurance, the responsibility to fund such financial obligations shall rest entirely with Manager and such SIR/deductible shall be deemed covered in accordance with the Commercial General Liability form required; Manager’s policies are primary and non-contributory for any and all acts of gross negligence, willful misconduct or acts outside of Manager’s scope of duties. As respects Manager’s general liability, Manager will indemnify Owner for losses of gross negligence, willful misconduct and acts outside the scope of this Agreement with a combination of insurance with any self-insured retention or deductible applicable to such insurance to be the responsibility of Manager. |
| (b) | Automobile Liability Insurance covering both owned and non-owned vehicles, with limits of not less than One Million Dollars ($1,000,000) combined single limit for bodily injury and property damage, including uninsured motorist coverage as required by statute and naming Owner as an additional insured (provided that any additional cost charged by the carrier to so name Owner shall be reimbursed to Manager in the Approved Operating Budget). |
| (c) | Workers’ Compensation Insurance, as required by the jurisdiction in which the Property is located, covering all Manager’s employees and Employers Liability Insurance with limits of not less than One Million Dollars ($1,000,000) for bodily injury by accident; One Million Dollars ($1,000,000) for bodily injury by disease per employee; and One Million Dollars ($1,000,000) bodily injury by disease policy limit. |
| (d) | Crime insurance including third party coverage in an amount of not less than Two Million Dollars ($2,000,000), and Social Engineering sub-limit of not less than Two Hundred Fifty Thousand ($250,000) Such insurance shall cover all employees that (in each case) have access to space at the Property or to receipts, books, rents or checking accounts connected with the Property, including, but not limited to, the on-premises personnel and any secretary or bookkeeper maintaining, handling or receiving financial records or receipts. Owner shall be a loss payee on this policy. This policy shall cover theft by Manager’s employees. |
| (e) | Real estate errors and omission insurance in an amount equal to not less than One Million Dollars ($1,000,000) Such insurance shall be carried for the term of this Agreement and for two (2) years after the termination of this Agreement. Owner agrees to pay Manager at the time of the termination of this Agreement for the cost of this insurance for the two (2) year period after the termination of this Agreement. |
| (f) | Employment Practices Liability insurance in an amount equal to not less than One Million Dollars ($1,000,000) each claim and, in the aggregate, covering both first and third party claims for employees and naming Owner as additional insured. If the insurer is unable or unwilling to add Owner as an additional insured, a separate policy will be required for this Agreement naming the Owner and Manager as Co-Insureds. |
| (g) | Cyber insurance in an amount not less than $1,000,000 per claim and annual aggregate, for Data Security and Privacy (including coverage for unauthorized access and use, failure of security, breach of confidential information, of privacy perils, as well as breach mitigation costs and regulatory coverage). |
Insurance required of Manager shall be secured from insurance companies licensed to do business in the State of [ ] and having a minimum AM Best rating of A, VIII. Manager shall obtain certificates of insurance on or before the date of this Agreement. All such policies, with the exception of the Worker’s Compensation Insurance, shall include Manager as named insureds, and shall provide that Owner with respect to all such policies are additional insureds with respect to liability arising out of acts or omissions of Manager. Upon request, Manager shall furnish Owner, a certificate of insurance, or other proof, evidencing the required insurance coverages provided for above, which certificates (to the extent permitted under such policies) shall evidence that the carrier will endeavor to give Owner at least thirty (30) days’ prior written notice of cancellation or material change in coverage (provided however only ten (10) days’ notice will be
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required for cancellation due to non-payment of premium). A copy of the additional insured endorsements shall be attached to the certificate of insurance. In addition, all required insurance shall, to the extent permitted by law, include a waiver of subrogation, indemnity and hold harmless in favor of Owner and each of the Lenders.
Manager must notify ownership of any structural additions or repairs to the Property, as an Owners Interest Policy (OIP) may be required to be added to the Owners’ policies. Failure to notice may have an adverse effect on ownership insurance policies.
| 6.03 | Third Party Contractor Insurance. Manager shall require that each contractor and sub-contractor retained by Manager to perform work at the Property maintains insurance against risk of physical damage to personal property belonging to the contractor in amounts sufficient to replace such personal property in the event of loss, and insurance coverage in the following amounts: |
Type of Coverage | Amounts/Limits |
Workers’ Compensation | As required by law |
Commercial General Liability (Occurrence Form) | $1,000,000 per occurrence and $2,000,000 aggregate per project Including broad form contractual liability coverage, independent contractors, bodily injury, property damage, personal injury, advertising injury, products and completed operations. |
Comprehensive Auto Liability | $1,000,000 Combined Single Limit for bodily injury and property damage for any owned or non-owned autos |
Uninsured Motorists | As required by statute |
Umbrella Liability Insurance (above CGL, and Automobile Insurance) | $4,000,000 per occurrence and aggregate |
Professional Liability | If the contractor or sub-contractor in question is providing professional services with respect to the Property, such contractor or sub-contractor shall maintain professional liability insurance in the amount of $1,000,000 per claim and annual aggregate, with an extended period of indemnity covering the exposures for the professional services rendered. Coverage shall be maintained in effect during the period of this agreement and for not less than two (2) years after termination of the contractual arrangement. |
Contractors Pollution Liability | If contractors performing any pollution abatement at the Property, such contractor or sub-contractor shall maintain Contractors Pollution Liability with a limit no less than $1,000,000 per claim or occurrence and $2,000,000 annual aggregate. If Contractor maintains higher limits than the minimums shown above, the Owner requires and shall be entitled to coverage for the higher limits maintained. |
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Insurance required of contractors and sub-contractors shall be secured from insurance companies licensed to do business in the State of [ ] and having a minimum AM Best rating of A, VIII. Manager shall obtain certificates of insurance, prior to permitting any contractor and subcontractor to enter upon the Property, or any part thereof, to commence work at the Property and keep on file such certificates of insurance or other evidence of compliance with these requirements. All such policies, with the exception of the Worker’s Compensation Insurance, shall provide that Manager and Owner are additional insureds with respect to liability arising out of the ongoing and completed operations of the contractor and sub-contractor. A copy of the additional insured endorsements shall be attached to the certificate of insurance. In addition, all required insurance shall, to the extent permitted by law, include a waiver of subrogation, in favor of Owner and Manager.
| 6.04 | Waiver of Subrogation. Owner and Manager each release and waive any right of recovery against the other (and against the other’s respective officers, directors, shareholders, partners, members, employees, subsidiaries, agents, affiliates, trustees, beneficiaries, licensees, successors and assigns), for any bodily injury, property damage, or loss covered by any policy of insurance required by this Agreement, or which would have been covered had the party carried the insurance it was required to carry by this Agreement, or within any SIR or deductible in such policy. No insurance policy required by this Agreement shall prohibit such release and waiver. In addition, the insurance policies required of Owner and Manager by this Agreement shall contain a waiver of claims against the other by the insurer, whether by subrogation or otherwise (and against the other’s respective officers, directors, shareholders, partners, members, employees, subsidiaries, agents, trustees, beneficiaries, licensees, successors, and assigns). If any insurance policy required by this Agreement provides that a waiver of subrogation may only be granted by endorsement, Owner or Manager, as the case may be, shall secure an endorsement providing the waiver of subrogation. |
Resident Liability Insurance Program. Manager will administer a Resident Legal Liability Insurance Program designed to protect the Property from certain losses caused by resident negligence in the event such resident does not provide proof of obtaining the minimum required insurance coverage as outlined within the resident’s respective lease. For the duration of their respective leases, all residents will be required to maintain and provide the following minimum required insurance coverage through either the Manager’s program or a third-party insurance provider: |
-$100,000 Limit of Liability for Renter’s legal liability for damage to the Property for no less than the following causes of loss: fire, smoke, explosion, water damage resulting from a backup of sewer or sump to the Property.
Manager shall use commercially reasonable efforts to determine if renters’ insurance policies lapse or are otherwise canceled by a resident; however, Manager shall not be liable in the event a resident provided proof of valid insurance coverage which later was canceled, expired or lapsed due to nonpayment or other reason. Residents who fail to submit proof of the above-outlined insurance coverage from a third-party insurance provider will be force-placed into the program administered by Manager; provided, however, that if the resident’s lease was executed prior to Manager assuming property management responsibilities hereunder, the lease may not permit Manager to force place the resident onto the resident liability insurance program, in which case Manager will not be able to implement the program until lease renewal. The program does not provide insurance coverage in the event of loss to the resident’s personal items nor any damages to third parties.
6.06 Indemnification.
| a. | Owner shall indemnify, defend and hold harmless Manager, its agents, employees, members, directors, officers, stockholders and trustees from and against all claims, liabilities, losses, damages, and/or expenses incurred by or otherwise asserted against any of the foregoing arising out of Manager’s performance under this Agreement; provided, such indemnification shall not apply (i) if and to the extent Manager and the matter is fully indemnified by Owner’s insurance; (ii) to any matter for which Manager has agreed to indemnify Owner under this Agreement; or (iii) to the extent Manager shall have failed to maintain the insurance required to be maintained by Manager under this Agreement and such bond or insurance would have defended and paid for such matter. Owner, at its own cost and expense, shall defend any action or proceeding against Manager arising therefrom. |
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| c. | The obligations of the parties under Section 6.06 are subject to the following conditions: (i) the party to be indemnified shall deliver a notice to the indemnifying party with respect to the matter promptly after the party to be indemnified becomes actually (and not constructively) aware of the same; and (ii) the party to be indemnified shall not take any actions, including any admission of liability, which would bar the indemnifying party from enforcing any applicable coverage under policies of insurance or prejudice any defense and related legal proceedings or otherwise prevent such indemnifying party from defending itself with respect to the matter. |
| d. | The terms of this Section 6.06 shall survive the expiration or earlier termination of this Agreement whether with or without cause. |
ARTICLE 7
TERMINATION
7.01 | Termination. Notwithstanding the provisions of Article 2 above, this Agreement may also be terminated as follows: |
a. | automatically, in the event Owner sells or otherwise disposes of all or substantially all the Property; or |
b. | by Manager, in the event Owner defaults in the performance of any of its obligations under this Agreement and fails to cure such default within fifteen (15) days after its receipt from Manager of a notice of default (specifying in reasonable detail the nature of the default complained of); provided, however, that if such default cannot reasonably be cured within such fifteen (15) days, then such additional period as shall be reasonable, provided that (i) on or prior to the expiration of such fifteen (15) day period, Owner shall have delivered written notice to Manager setting forth, in reasonable detail, the steps Owner has taken to cure such default prior to the date of such written notice from Owner and the steps Owner intends to take in order to cure such default within the remaining time period within which to cure such default, and (ii) Owner has commenced to cure such default within such fifteen (15) day period and thereafter has proceeded to prosecute such cure with due diligence and such cure is completed within sixty (60) days after Owner’s receipt of the notice of default; or |
c.by Owner, in the event Manager defaults in the performance of any of its obligations under this Agreement (other than defaults covered by the other applicable clauses of this Section 7.01) and fails to cure such default within fifteen (15) days after its receipt from Owner[ or ] of a notice of default (specifying in reasonable detail the nature of the default complained of); provided, however, that if such default cannot reasonably be cured within such fifteen (15) days, then such additional period as shall be reasonable, provided that (i) on or prior to the expiration of such fifteen (15) day period, Manager shall have delivered written notice to Owner setting forth, in reasonable detail, the steps Manager has taken to cure such default prior to the date of such written notice from Manager and the steps Manager intends to take in order to cure such default within the remaining time period within which to cure such default, and (ii) Manager has commenced to cure such default within such fifteen (15) day period and thereafter has proceeded to prosecute such cure with due diligence and such cure is completed within sixty (60) days after Manager’s receipt of the notice of default; or
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d. | by either Owner or Manager, if a petition for bankruptcy, reorganization or arrangement is filed by the other party, or if any such petition shall be filed against the other party and is not dismissed within sixty (60) days of the date of such filing, or in the event the other party shall make an assignment for the benefit of creditors, or take advantage of any insolvency statute or similar law, in any such event, termination to become effective upon written notice to the other party; or |
e. | by either Owner or Manager, upon fifteen (15) days written notice, if all or substantially all the Property is destroyed by a casualty or taken by means of eminent domain or condemnation; or |
f. | by Owner, upon not less than thirty (30) days prior written notice to Manager; |
g. | by Manager, upon not less than thirty (30) days prior written notice to Owner; |
i. | by Owner, upon notice to Manager, if Manager shall assign this Agreement or delegate its duties hereunder without the consent of Owner; |
j. | by Owner, if any material license or qualification held by Manager and necessary for the performance of its duties or services hereunder shall be terminated or suspended, and such termination or suspension, as the case may be, is not reversed within thirty (30) days following notice thereof by the applicable licensing authority or Owner; |
k. | by Owner, upon notice to Manager, if there shall be a dissolution or termination of the corporate existence of Manager by merger, consolidation or otherwise; |
l. | by Owner, upon notice to Manager, if Sponsor is in “Material Default” under the LLC Agreement and Ares elects to terminate this Agreement; |
m. | by Owner, upon notice to Manager if Sponsor is removed as [Administrative][Operating] Member pursuant to [Section 6.7] of the LLC Agreement and Ares elects to terminate this Agreement; |
n. | by Owner, upon notice to Manager, if Manager (or any of its Affiliates) defaults under any other agreement between Owner (or any of its Affiliates) and Manager (or any of its Affiliates), and such default continues beyond any applicable notice and cure period set forth in such other agreement; |
o. | by Owner, upon notice to Manager, if Sponsor defaults under Section 8.20 below; or |
p. | by Owner, upon notice to Manager, if Manager shall fail to maintain the Operating Threshold for any student occupancy year. For purposes hereof, the “Operating Threshold” means that (i) the Gross Income for any student occupancy year equals or exceeds ninety-five percent (95%) of the Approved Operating Budget for such year and (ii) the annual net operating income for any student occupancy year is within five percent (5%) of the Approved Operating Budget for such year, excluding any non-controllable expenses, acts of God, weather related events, governmental actions, union actions, major mechanical equipment failure, insurance claims or other incidents beyond the control of Manager. For purposes hereof, net operating income shall mean verifiable recurring rental and reimbursement income calculated on a trailing-12 month period from in-place leases (excluding leases with a tenant/guarantor in bankruptcy, retail tenants that are dark (which term is not meant to include tenants that are not in occupancy or not in full occupancy due to a public health situation or due to safety or health concerns or due to government regulations or recommendations), tenants in default beyond applicable notice and cure periods, or leases that expire within 6 months), and any other recurring income (excluding interest income) from the operation of the Property, and further adjusted to assume a vacancy factor equal to the greater of actual (to be calculated to include any leases excluded as per above) and 5.0%, less trailing-12 operating expenses, adjusted for projected increases, assuming base property management fees equal to the greater of actual and up to 2.5% of annual revenues. |
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Notwithstanding anything herein to the contrary, if this Agreement is terminable by Owner pursuant to clauses (c), (d), or (h) through (p) above, then Ares, on behalf of Owner, shall have the right to terminate this Agreement by written notice to Manager and to exercise any and all other rights and remedies available under this Agreement and at law or in equity.
7.02 | Termination Compensation. If Owner terminates this Agreement before the first anniversary of the Effective Date for any reason other than pursuant to Sections 7.01(c), 7.01(d), 7.01(e) or 7.01(h) through 7.01(o) above, Owner shall be obligated to pay Manager as liquidated damages an amount equal to the management fee earned by Manager, as determined under Section 5.03 above, for the calendar month immediately preceding the month in which the notice of termination is given to Manager or Owner, multiplied by the number of months and/or portions thereof remaining from the termination date until the first anniversary of the Effective Date. Such damages, plus any amounts accruing to Manager prior to such termination, shall be due and payable upon termination of this Agreement, subject to the right of Ares to offset any Finally Determined Damages (as defined in the LLC Agreement) against any amounts owed to Manager hereunder. To the extent that funds are available, such sums shall be payable from the Operating Account. Any amount due in excess of the funds available from the Operating Account shall be paid by Owner to Manager within twelve (12) Business Days following demand. Upon any termination of this Agreement pursuant to Sections 7.01(c), 7.01(d), 7.01(e) or 7.01(h) through 7.01(o) above, Owner shall pay to Manager within thirty (30) days of the date of termination all amounts due to Manager prior to the date on which the default giving rise to the termination occurred; provided, however, to the extent Manager has received any portion of the Management Fee which as of the date on which such default occurred was unearned by Manager, Manager shall reimburse Owner for the amount of such unearned Management Fee. |
7.03 | Owner Responsible for Payments. Owner will be responsible for the direct handling and payment of invoices received after notice of termination, provided that to the extent of available operating funds in the Operating Account, Manager may continue to pay obligations incurred by the Property through the termination date subject to and in accordance with the terms of this Agreement. Upon notice of termination, Manager will submit to Owner an estimate of the additional funds required to pay all obligations incurred by the Property through the termination date. Manager will not be obligated to advance Manager’s funds for payment of obligations incurred on behalf of the Owner in accordance with the terms of this Agreement. |
7.04 | Close-out Management Fee. If Owner requires Manager to perform any Close-Out Management Services after the termination of this Agreement, Manager will be paid a monthly close-out management fee equal to $[REDACTED] per month while Manager is performing such services. For purposes of this Section 7.04, “Close-Out Management Services” shall mean the following services: entering invoices and preparing checks, recording post-closing entries and preparing financial statements, reconciling bank accounts and consulting with tax preparers and auditors. |
7.05 | Final Accounting. Within sixty (60) days after termination, Manager shall deliver to Owner: (a) a final accounting, reflecting the balance of income and expenses on the Property as of the date of termination; (b) all keys or access cards, records, contracts, leases, receipts, or deposits, unpaid bills, and other papers or documents which pertain to the Property, excluding data housed on Manager owned or licensed servers, including Manager’s emails, memoranda, correspondence and employee records; (c) all keys or access cards; and (d) all remaining funds held by Manager with respect to the Property and/or in any bank account (including, without limitation, the Operating Account) and any and all monies due Owner which are received by Manager after termination. Upon termination of this Agreement, Manager shall assign all licenses, permits and other agreements, if any, to Owner which Manager has entered into or obtained solely for the benefit of Owner or the Property, and Manager shall forthwith surrender and deliver to Owner any space in the Property occupied by Manager. In addition, Manager shall furnish all such information and take all such action as Owner shall reasonably require in order to effectuate an orderly and systematic termination of Manager’s duties and activities under this Agreement. Manager hereby grants a power of attorney to Owner to endorse any checks payable to Manager but with respect to a receivable of the Property and hereby assigns to Owner effective upon the date of such termination any and all rights Manager may have in and to the Property records. |
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7.06 | Manager’s Retention of Copies. Manager shall be entitled to retain copies of all documents referred to in Section 7.05(b). |
7.07 | Survival of Obligations. All obligations of the parties hereunder, as to which performance is contemplated to occur after termination, shall survive termination of this Agreement. Without limiting the generality of the foregoing, all representations and warranties of the parties contained herein, and the indemnification obligations of Owner and Manager hereunder shall survive the termination of this Agreement. |
ARTICLE 8
NOTICES, ETC.
8.01 | Notices. All notices, demands, requests, or other communications (collectively, “Notices”) provided for in this Agreement shall be in writing and delivered: (i) by email (provided the recipient(s) thereof confirms receipt by reply e-mail or, if there is no reply e-mail, with the original to be sent the same day by a nationally recognized overnight courier service for next Business Day delivery); or (ii) by a nationally recognized overnight courier service for next Business Day delivery, to Owner or Manager at the address set forth below following the signature blocks for this Agreement, or at such other address as they individually may specify thereafter in writing. Each Notice which shall be sent by nationally recognized overnight courier service in the manner described shall be deemed sufficiently given, served, sent, received, or delivered for all purposes on the day the Notice is delivered to the addressee (with the return receipt, the delivery receipt, or the affidavit of messenger being deemed conclusive (but not exclusive) evidence of such delivery), provided that such day is a Business Day (if such day is not a Business Day, such Notice shall be deemed given and received on the first Business Day following such day), or if delivery is refused, then on the day that delivery of the Notice is refused by the addressee upon presentation, provided that such day is a Business Day (if such day is not a Business Day, such Notice shall be deemed given and received on the first Business Day following such day). Each Notice which shall be emailed in the manner described above shall be deemed sufficiently given, served, sent, received, or delivered for all purposes on the date of such email provided that (a) such email is transmitted (y) prior to 5:00 P.M. (New York time) on a Business Day (if such email is transmitted on a day that is not a Business Day or such email is received after 5:00 P.M. (New York time) on a Business Day, such Notice shall be deemed given and received on the first Business Day following such day) and (b) if required by this Section 8.01, a copy of such notice is sent by nationally recognized overnight courier service, as provided above. |
8.02 | Consents and Approvals. All consents and approvals required hereunder shall be in writing, signed by the party charged with the obligation, right, or privilege of granting such consent, approval, or notice, provided that no prior written consent or approval of Owner or its representative shall be required for any Emergency Expenditures pursuant to Section 3.07. |
8.03 | Confidentiality. Except as otherwise required by any law or court order, or as authorized or permitted by Owner and Manager, Owner and Manager shall not disclose or permit the disclosure of the terms and contents of this Agreement to anyone other than their respective directors, officers, employees, affiliates, partners, members, shareholders, brokers, agents or other representatives, including, without limitation, attorneys, accountants, contractors, consultants, engineers, lenders and financial advisors. The provisions of this Section 8.03 shall survive the expiration and termination of this Agreement for one (1) year. |
8.04 | No Assignment. This Agreement may not be assigned by Manager or Owner without the prior written consent of the other party. Any purported assignment in violation of this Section 8.04 is void ab initio. A majority equity transfer in Owner or Manager shall constitute an assignment for purposes of this section. Subject to the provisions hereof, all the covenants, conditions, and obligations contained in this Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Owner and the Manager to the same extent as if each successor and assignee were in each case named as a party to this Agreement. Notwithstanding anything to the contrary contained herein, Owner shall have the right to collaterally assign this Agreement to any lender providing financing for the Property and Manager shall cooperate with Owner in connection therewith. |
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8.05 | Pronouns. All nouns and pronouns shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. |
8.06 | Amendments. Except as otherwise herein provided, any and all amendments, additions, or deletions to this Agreement shall be null and void unless approved by the parties in writing. |
8.07 | Complete Agreement. This Agreement together with all schedules attached hereto and made part hereof, supersedes and takes the place of any and all previous agreements entered into between the parties relating to the property management of the Property. |
8.08 | Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State in which the Property is located. |
8.09 Severability. If any one or more of the provisions of this Agreement, or the applicability of any such provision to a specific situation is held invalid or unenforceable, such provision shall be modified to the minimum extent necessary to make it or its application valid or enforceable, and the validity and enforceability of all other provisions of this Agreement and all other applications of such provisions shall not be affected thereby.
8.10 | OFAC. Owner and Manager each represent and warrant to the other (for themselves, only) that each is currently in compliance with, and shall at all times during the term of this Agreement (including any extension thereof) remain in compliance with, the regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental actions relating thereto. |
8.11 | Headings. All headings and subheadings used in this Agreement and in the accompanying schedules are solely for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement. |
8.12 | Estoppel Certificates. Each party hereto shall, from time to time, upon not less than fifteen (15) days’ notice from the other party, execute and deliver to the other party a certificate stating that this Agreement is unmodified and in full force and effect, or, if modified, that this Agreement is in full force and effect as modified, and stating the modifications and stating whether or not, to the best of the certifying party’s knowledge, the other party is in default in any respect under this Agreement, and, if in default, specifying the nature and character of such default. |
8.13 | No Waiver. No waiver by either party of any default of any other party or of any event, circumstance or condition permitting a party to terminate this Agreement shall constitute a waiver of any other default of the other party or of any other event, circumstance or condition, permitting such termination, whether of the same or of any other nature or type and whether preceding, concurrent or succeeding; and no failure on the part of either party to exercise any right it may have by the terms hereof or by law upon the default of the other party and no delay in the exercise of such right shall prevent the exercise thereof by the non-defaulting party at any time when the other party may continue to be so in default, and no such failure or delay and no waiver of default shall operate as a waiver of any other default, or as a modification in any respect of the provisions of this Agreement. The subsequent acceptance of any payment or performance pursuant to this Agreement shall not constitute a waiver of any preceding default by a defaulting party or of any preceding event, circumstance or condition permitting termination hereunder, other than default in the payment of the particular payment or the performance of the particular matter so accepted, regardless of the non-defaulting party’s knowledge of the preceding default or the preceding event, circumstance or condition, at the time of accepting such payment or performance, nor shall the non-defaulting party’s acceptance of such payment or performance after termination constitute a reinstatement, extension or renewal of this Agreement or revocation of any notice or other act by the non-defaulting party. |
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8.14 | Attorneys’ Fees. Should any action or proceeding be commenced between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any Person (as defined in the LLC Agreement) in relation thereto, the party or parties prevailing in such action or proceeding shall be entitled, in addition to such other relief as may be granted, to an award of all actual, reasonable attorneys’ fees and costs incurred in such action or proceeding, without regard to any schedule or rule of court purporting to restrict such an award, including, without limitation, actual, reasonable attorneys’ fees, costs and expenses incurred in connection with (a) enforcing, perfecting and executing such judgment, (b) post-judgment motions; (c) contempt proceedings; (d) garnishment, levee, and debtor and third-party examinations; (e) discovery; and (f) bankruptcy litigation. |
8.15 | Equitable Remedies. Each party hereto shall, in addition to all other rights provided herein or as may be provided by law, and subject to the limitations set forth herein, be entitled to all equitable remedies including those of specific performance and injunction, to enforce such party’s rights hereunder. |
8.16 | Remedies Cumulative. Each right, power, and remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise, and the exercise or beginning of the exercise or the forbearance of exercise by any party of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by such party of any or all of such other rights, powers or remedies. |
8.17 | Limitation of Liability. Notwithstanding anything to the contrary, if Manager shall recover any judgment against Owner in connection with this Agreement, Manager shall look solely to Owner for the collection or enforcement of any such judgment, and no other assets of Owner shall be subject to levy, execution or other process for the satisfaction or enforcement of such judgment. |
8.18 | WAIVER OF JURY TRIAL. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LEGAL REQUIREMENTS, ANY RIGHT THAT EITHER PARTY OR THEIR HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS OR ASSIGNS MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH, OR IN RESPECT OF ANY COURSE OF CONDUCT, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH OF THE PARTIES TO ENTER INTO THIS AGREEMENT. |
8.19 | Counterparts. This Agreement may be executed in any number of counterparts, including counterparts transmitted by e-mail, any one of which shall constitute an original of this Agreement. When counterparts or e-mail copies have been executed by all parties, they shall have the same effect as if the signatures to each counterpart or copy were upon the same documents and copies of such documents shall be deemed valid as originals. The parties agree that all such signatures may be transferred to a single document upon the request of any party. This Agreement shall not be binding unless and until it shall be fully executed and delivered by all parties hereto. |
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hereby consent to the granting by any court of competent jurisdiction of an injunction or other equitable relief, without the necessity of posting a bond, cash or otherwise, and without the necessity of actual monetary loss being proved or Owner’s establishing the inadequacy of any remedy at law, and order that the breach or threatened breach of such provisions may be effectively restrained. The provisions of this Section 8.20 shall expressly survive the expiration or earlier termination of this Agreement.
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IN WITNESS WHEREOF the parties have executed this Agreement on the day and year first above written.
OWNER:MANAGER:
[________________________],B.HOM STUDENT LIVING LLC
a [________________________________]
By: _____________________________________ Name: _____________________________________ | By: _____________________________________ Name: _____________________________________ |
Title: ______________________________________ | Title: ______________________________________ |
OWNER’S ADDRESSMANAGER’S ADDRESS
[_______________] 400 Locust Street, Suite 790
[_________________] Des Moines, Iowa 50309
[__________________] Attn: Legal Department
Attn: [_______________] Email: legal@bhmanagment.com
and:
With a copy to:
SCHEDULE A
SCHEDULE C
SCHEDULE D
SCHEDULE E
SCHEDULE F
Exhibit 10.5
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED PURSUANT TO ITEM 601(B)(10) OF REGULATION S-K BECAUSE THE INFORMATION IS BOTH NOT MATERIAL AND IS THE TYPE THAT THE REGISTRANT TREATS AS PRIVATE OR CONFIDENTIAL AND, WHERE APPLICABLE, HAVE BEEN MARKED WITH “[REDACTED]” TO INDICATE WHERE REDACTIONS HAVE BEEN MADE.
FORM OF
MANAGEMENT SERVICES AGREEMENT
THIS AGREEMENT, dated as of the [___] day of [__________], 20__ (the “Effective Date”) is made and entered into by and between [___________________], [_______________________] (“Owner”) and TREV OPCO LLC, a Delaware limited liability company (“Service Provider”).
WITNESSETH:
WHEREAS, Owner owns one hundred percent (100%) of the interests in [_____], a [______] (“PropCo”);
WHEREAS, PropCo owns that certain real property commonly referred to as “[__________]”, containing a [____] unit, [______] bed student housing community, as further identified and described in Schedule A, attached hereto (the “Property”);
WHEREAS, Service Provider is in the business of providing the Services (as defined below);
WHEREAS, Owner desires to engage Service Provider as an independent contractor to provide the Services with respect to Owner, PropCo and the Property, as applicable, and Service Provider desires to accept such appointment upon the terms, covenants, conditions and provisions of this Agreement; and
WHEREAS, Owner is governed by that certain [Limited Liability Company Agreement of Owner], dated as of the date hereof, by and among Service Provider [,][and] [_____] (“Ares”) [and [_____] (“T-Holdco”)] (as it may be amended, restated or supplemented from time to time, the “LLC Agreement”; capitalized terms used but not otherwise defined in this Agreement shall have the meanings given such terms in the LLC Agreement).
NOW, THEREFORE, in consideration of the mutual covenants herein contained, Owner and Service Provider mutually agree as follows:
ARTICLE 1
APPOINTMENT OF SERVICE PROVIDER
1.01 | Appointment of Service Provider. Owner appoints Service Provider to provide the Services (as hereinafter defined) for Owner, PropCo and the Property, as applicable, upon the terms and conditions set forth in this Agreement. Service Provider accepts such appointment on the terms and conditions set forth herein. |
1.02 | Independent Contractor Status. Service Provider is not the general agent of Owner or PropCo, but, is instead engaged in the business of providing the Services as an independent contractor, and in that capacity, is providing the Services for the Property. No provision hereof shall be construed to constitute Service Provider or any of its officers or employees as an employee or employees of Owner or PropCo, nor shall any provision of this Agreement be construed as creating a partnership or joint venture between Service Provider and Owner or PropCo. Neither Owner nor PropCo shall have the power to bind Service Provider, and Service Provider shall not have the power to bind Owner or PropCo, in each case, except pursuant to the terms of this Agreement. This Agreement is not intended to provide or create any agency relationship between Owner or PropCo, on the one hand, and Service Provider, on the other hand, and Service Provider shall have no right or authority, express or implied, to commit or otherwise obligate Owner or PropCo in any manner whatsoever, except as expressly provided herein, and Service Provider agrees that it shall not hold itself out as having authority to act on behalf of Owner or PropCo in any manner, except as expressly provided herein. Notwithstanding the foregoing, but subject to Section 4.02 below, Service Provider shall not be liable for any monetary obligation or expenditure incurred on behalf of the Property or Owner or PropCo within the scope of Service Provider’s authority pursuant to this Agreement. |
1.03 | Restrictions on Service Provider’s Authority. |
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| Agreement to take such action, make such expenditure, decision, commitment or agreement or grant such consent without the written approval of Ares or all of the members of Owner, as applicable. |
[Service Provider acknowledges that this Agreement is an “Administrative Member Affiliate Agreement” within the meaning of the LLC Agreement, and Ares and Investments Pooling (as defined therein) have certain rights with respect to the Property and this Agreement as specified therein, including, without limitation, the right to terminate this Agreement pursuant to [Section 6.12] of the LLC Agreement. Service Provider further acknowledges that Investments Pooling intends to qualify as a “real estate operating company” within the meaning of the Plan Asset Regulation (as defined in the LLC Agreement), has additional rights with respect to the Property as provided in [Section 1.10] of the LLC Agreement, and agrees that Service Provider shall not take any action that undermines or abrogates Ares’ or Investments Pooling’s rights under this Agreement or the LLC Agreement.]
ARTICLE 2
TERM OF AGREEMENT
2.01 | Term of Agreement. This Agreement shall commence upon the Effective Date and shall continue until terminated as provided in Article 6. |
ARTICLE 3
SERVICE PROVIDER’S DUTIES AND RESPONSIBILITIES
3.01 | Services. Subject to the provisions of this Agreement and the LLC Agreement and at the direction of Owner, Service Provider shall perform the Services at all times in the best interest of Owner and shall act with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims notwithstanding any other duty existing at law or in equity and, in all cases, subject to and in accordance with: (a) the Approved Budget and Business Plan (as defined below); and (b) applicable law and rulings and orders of governmental authorities having jurisdiction over Owner, PropCo and the Property (the “Performance Standard”); provided, however, the Service Provider shall have no responsibility for any losses, claims or liabilities resulting from (i) any action or omission taken at the direction of or with the approval of Owner or Ares, or (ii) failing to take any action hereunder which such action requires the approval of Owner or Ares if Owner or Ares, as applicable, fail to timely grant such approval. Subject to the terms and provisions of this Agreement, Service Provider shall, with the Approval and direction of Owner and/or Ares (to the extent such Approval and/or direction is required under the LLC Agreement) (collectively, the “Services”): |
(a)use efforts consistent with the Performance Standard, subject to the availability of Owner’s funds, to do any and all acts and things necessary, proper, convenient or advisable to effectuate the purposes of Owner and to direct Owner in accordance with the terms of the LLC agreement and this Agreement;
(b)use efforts consistent with the Performance Standard to cause Owner to cause the PropCo to enter into any lease or other arrangement, the economic terms of which are consistent with or more favorable to Owner and PropCo than those contained in the Approved Budget and Business Plan;
(c)use efforts consistent with the Performance Standard, subject to the availability of Owner’s funds, to cause Owner to cause PropCo to perform all of its obligations under all leases affecting the Property;
(d)to the extent the Property Manager is an Affiliate of Service Provider, cause the Property Manager to perform all of its obligations under the Management Agreement, and to the extent the Property Manager is an unaffiliated third party, use efforts consistent with the Performance Standard, to cause the Property Manager to perform all of its obligations under the Management Agreement;
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(e)use efforts consistent with the Performance Standard to appropriately supervise third-party consultants, service providers, contractors and vendors (including, without limitation, any general contractor and any architect) engaged to assist with the management, maintenance, improvement and operation of the Property[, including, without limitation, the Renovation Consultant];
(f)subject to the availability of Owner’s funds, implement all decisions of and actions Approved by Ares and all Major Acts Approved by the Members in accordance with this Agreement and the LLC Agreement;
(g)subject to the prior Approval of Ares in each instance, and subject to the availability of Owner’s funds, cause Owner and/or PropCo to execute and deliver such documents, agreements and instruments, as Service Provider shall Approve as reasonable and necessary to accomplish the purposes of Owner, and Owner acknowledges that such execution by Service Provider shall be sufficient to bind, and shall be binding upon, Owner for all purposes and third parties shall be entitled to rely on the authority of Service Provider to take any such action on behalf of Owner;
(h)use efforts consistent with the Performance Standard, subject to the availability of Owner’s funds, perform the day-to-day investment and administrative operations of Owner, including the preparation, filing and distribution of all reports, budgets, business plans, certifications, materials necessary for Owner’s accountants to prepare tax returns, and other communications required by law, the LLC Agreement or any other agreement entered into by Owner or PropCo and such bookkeeping, recordkeeping and clerical services to Owner and PropCo as Owner may require in connection with the foregoing;
(i)prepare and submit the Proposed Budget and Business Plan for review and approval by Owner and Ares as further set forth in Section 3.[__] below[;][.]
[(j)use efforts consistent with the Performance Standard, subject to the availability of Owner’s funds, to cause (A) the General Contractor to perform all of its obligations under the Construction Contract, (B) Project Architect to perform all of its obligations under the Project Architect Agreement, and (C) all other contractors, service providers, consultants, and vendors to perform all of their obligations with respect to the Renovation Work; and
(k)use efforts consistent with the Performance Standard, subject to the availability of Owner’s funds, to perform those certain responsibilities with respect to the Renovation Work as set forth on [Schedule B] attached hereto.]
Unless otherwise specifically provided in this Agreement, all services and actions that Service Provider is required or permitted to perform or take, or cause to be performed or taken, under this Agreement shall be performed or taken, as the case may be, on behalf of Owner and, except as specifically otherwise provided for herein, at Owner’s sole cost, expense, and risk. For the avoidance of doubt, Service Provider shall not be required to advance its own funds on behalf of Owner to fulfill any obligation under this Agreement.
3.02 | Annual Budget and Business Plan. |
(a)Service Provider shall prepare or cause to be prepared a proposed annual budget and business plan for the Property, PropCo and Owner relating to the operation, management, leasing, development, renovation and sale of the Property and the operation of Owner and PropCo for each Fiscal Year of Owner, PropCo and the Property (each such proposed budget and business plan being referred to herein as the “Proposed Budget and Business Plan”). Each Proposed Budget and Business Plan shall include the proposed leasing parameters for the Property for the ensuing Fiscal Year as well as a copy of the standard form of the lease to be used at the Property. Each Proposed Budget and Business Plan shall be delivered to Ares for its review and Approval not later than August 1 of the Fiscal Year preceding the Fiscal Year to which such Proposed Budget and Business Plan relates. In addition to the proposed leasing parameters, each Proposed Budget and Business Plan shall contain an amount to be added to, or expended from, separate Reserves for (A) payment of real estate taxes, (B) insurance, (C) capital improvements, and (D) other Reserves (including those required pursuant to the terms of any Financing Documents), in an amount with respect to each such Reserve equal to the greater of (1) the amount required to be added to such Reserve during such year by any Lender, and (2) the amount that Ares Approves under the circumstances.
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(b)Within thirty (30) days after a Proposed Budget and Business Plan is submitted to the Members, Ares shall notify Service Provider in writing (A) that it Approves the Proposed Budget and Business Plan or (B) of the revisions Ares believes should be made to such Proposed Budget and Business Plan for such Fiscal Year. Service Provider shall revise the Proposed Budget and Business Plan to reflect all revisions proposed by Ares. If Ares fails to respond within such thirty (30) day period, Ares shall be deemed to NOT have Approved the Proposed Budget and Business Plan. The Proposed Budget and Business Plan once revised by Service Provider (if applicable) and Approved by Ares and Approved by Owner shall be referred to herein as the “Approved Budget and Business Plan.” If the Proposed Budget and Business Plan for any Fiscal Year shall not be Approved by Ares, Owner shall operate the Property pursuant to the Proposed Budget and Business Plan for such year with respect to those portions Approved by Ares and Owner and, with respect to those portions not Approved by Ares, in accordance with the prior year’s Approved Budget and Business Plan (except for any expenditures that are not Necessary Expenditures, which non-Necessary Expenditures shall be deemed removed from such prior year’s Approved Budget and Business Plan).
(c)Notwithstanding anything to the contrary contained herein, Service Provider shall not make any expenditure of Owner funds, or commit to make any such expenditure, except as expressly provided for and in accordance with [the Renovation Work Budget or] an Approved Budget and Business Plan.
3.03 | Meetings. Service Provider covenants to meet with Owner and Ares [(and, at Ares’ request, the Renovation Consultant)] every two (2) weeks (and otherwise, as reasonably requested by Ares) so as to review and consult with Ares [and/or the Renovation Consultant, as applicable,] with respect to any and all matters concerning Owner and the Property which Ares [and/or the Renovation Consultant, as applicable,] may reasonably desire to discuss (it being agreed that, at the request of Ares or Service Provider, such meeting will take place by phone or video conference). Ares [and/or the Renovation Consultant] may request to schedule regular onsite visits to and inspections of the Property and to schedule and attend construction review meetings with Owner upon reasonable advance notice to Service Provider. |
ARTICLE 4
OWNER’S DUTIES AND RESPONSIBILITIES
4.01 | Service Provider’s Compensation. Owner agrees to pay Service Provider, as compensation for services rendered by Service Provider in accordance with the terms of this Agreement, the compensation specified in the attached Schedule C (collectively, the “Fees”). |
4.02 | Service Provider’s Costs to be Reimbursed. Subject to Owner’s obligation to pay the Fees in accordance with Section 4.01, Service Provider will assume and pay all of its own employee expenses (including compensation and employee benefits) and all of its own overhead expenses (including rent, utilities, insurance, accounting and management software, office supplies and office equipment) in connection with the services to be provided by it hereunder except for any expense line item contemplated to be reimbursed to Service Provider in accordance with an Approved Budget and Business Plan; provided, however, that Service Provider shall not be required to pay expenses constituting Owner or PropCo expenses and if Service Provider pays any expenses constituting Owner or PropCo expenses, then, to the extent Service Provider is not reimbursed therefor under the LLC Agreement, Owner or PropCo, as applicable, shall promptly reimburse Service Provider for any such payments. For the avoidance of doubt, Service Provider shall have the right to retain a third party consultant or service provider approved by Owner to assist with any REIT compliance services delegated to Service Provider pursuant to Section 7.01 and to be reimbursed by Owner for the out-of-pocket costs for such third party consultant or service provider. |
ARTICLE 5
INDEMNIFICATION
5.01 Indemnification.
| a. | Owner shall indemnify, defend and hold harmless Service Provider, its agents, employees, members, directors, officers, stockholders and trustees from and against all claims, liabilities, losses, damages, and/or expenses (“Claims”) incurred by or otherwise asserted against any of the foregoing arising out of Service Provider’s performance under this Agreement; provided, such indemnification shall not apply |
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| c. | The obligations of the parties under Section 5.01 are subject to the following conditions: (i) the party to be indemnified shall deliver a notice to the indemnifying party with respect to the matter promptly after the party to be indemnified becomes actually (and not constructively) aware of the same; and (ii) the party to be indemnified shall not take any actions, including any admission of liability, which would bar the indemnifying party from enforcing any applicable coverage under policies of insurance or prejudice any defense and related legal proceedings or otherwise prevent such indemnifying party from defending itself with respect to the matter. |
| d. | The terms of this Section 5.01 shall survive the expiration or earlier termination of this Agreement whether with or without cause. |
5.02 Insurance. During the term of this Agreement or for such longer periods of times as may be required under this Section 5.02 or in Schedule D, Service Provider shall procure and maintain the minimum insurance requirements set forth on Schedule D attached hereto (with such insurance companies, in such form, and with such endorsements, waivers, and deductibles, in each case, as reasonably designated or approved by Owner) naming Owner, PropCo and the Members, as applicable, as additional insureds thereunder. Such insurance shall be, except as otherwise provided on Schedule D attached hereto, at Service Provider’s sole cost and expense, including the payment of any deductible or self-insured retention payable in connection therewith, provided that any of the required insurance coverage set forth on Schedule D may be covered by a blanket insurance policy, at the Service Provider’s discretion. Without limiting the generality of the foregoing, Owner shall have the right, in the exercise of its sole and absolute discretion, to cause any of the required insurance coverage set forth on Schedule D, to the extent such insurance coverage is to be obtained or maintained at the sole cost of Owner (or PropCo), to be effected under a blanket insurance policy maintained by any Affiliate of Ares. Notwithstanding anything to the contrary contained herein, Ares has approved the insurance coverage obtained and maintained by Service Provider as of the Effective Date with respect to this Section 5.02.
5.03 Wavier of Claims and Subrogation. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, EACH PARTY WAIVES ALL CLAIMS AGAINST THE OTHER PARTY, AND THE AFFILIATES, PARTNERS, MEMBERS, OFFICERS, EMPLOYEES, SHAREHOLDERS AND AGENTS OF SUCH OTHER PARTY, FOR ALL LOSSES, DAMAGES, LIABILITIES, COSTS AND EXPENSES INCLUDING ANY APPLICABLE DEDUCTIBLE OR RETENTION ON ACCOUNT OF FIRE, ACCIDENT OR OTHER CASUALTY, THE CAUSE OF WHICH IS INSURED AGAINST OR WHICH IS INSURABLE UNDER A STANDARD "ALL RISK" OR SPECIAL FORM PROPERTY
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INSURANCE POLICY AVAILABLE IN THE STATE IN WHICH THE PROJECT IS LOCATED, REGARDLESS OF CAUSE OR ORIGIN, INCLUDING THE NEGLIGENCE OF ANY OTHER PARTY HERETO, ITS AFFILIATES, PARTNERS, MEMBERS, OFFICERS, EMPLOYEES, SHAREHOLDERS AND AGENTS. EACH PARTY SHALL REQUIRE THAT ITS PROPERTY INSURANCE POLICIES MAINTAINED WITH RESPECT TO THE PROJECT, OR PROPERTY USED IN CONNECTION WITH THE PROJECT, SHALL CONTAIN WAIVERS OF SUBROGATION RIGHTS AGAINST THE OTHER PARTY AND ITS AFFILIATES, PARTNERS, MEMBERS, OFFICERS, EMPLOYEES, SHAREHOLDERS AND AGENTS.
ARTICLE 6
TERMINATION
6.01 | Termination. Notwithstanding the provisions of Article 2 above, this Agreement may also be terminated as follows: |
a. | automatically, in the event Owner sells or otherwise disposes of all or substantially all the Property or its interests in PropCo; or |
b. | by Owner, from and after the delivery of a Removal Notice, regardless of whether Service Provider shall dispute (pursuant to the LLC Agreement) the existence of a Material Default and, notwithstanding anything to the contrary contained in this Agreement; or |
Notwithstanding anything herein to the contrary, if this Agreement is terminable by Owner pursuant to clauses (b) or (c) above, then Ares, on behalf of Owner, shall have the right to terminate this Agreement by written notice to Service Provider and to exercise any and all other rights and remedies available under this Agreement and at law or in equity.
6.02 | Termination Compensation. Upon any termination of this Agreement pursuant to Section 6.02, Owner shall pay to Service Provider within thirty (30) days of the date of termination all amounts accrued and unpaid to Service Provider through the applicable date of termination; provided, however, to the extent Service Provider has received any portion of the Fees which as of the date on which such termination occurred was unearned by Service Provider, Service Provider shall reimburse Owner for the amount of such unearned Fees. |
6.03 | Delivery Upon Termination. Upon termination of this Agreement for any reason, the Service Provider shall at Owner’s reasonable cost and expense (i) deliver to Owner or such Person as Owner shall specify, all monies, deposits and other assets of Owner and/or PropCo in the possession or control of Service Provider and all records, contracts, leases, receipts for deposits, unpaid bills and other papers or documents that pertain to the business of Owner and/or PropCo in the possession or control of Service Provider, all of which shall be delivered immediately upon such termination, and (ii) otherwise cooperate with Owner and its officers, directors, shareholders and agents to ensure a smooth transition of the Services to a successor service provider. |
6.04 | Survival of Obligations. All obligations of the parties hereunder, which per their express terms survive termination of this Agreement, shall survive termination of this Agreement. Without limiting the generality of the foregoing, all representations and warranties of the parties contained herein shall survive the termination of this Agreement for a period of one (1) year after such termination date, and the indemnification obligations of Owner and Service Provider hereunder shall survive the termination of this Agreement. |
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ARTICLE 7
COMPLIANCE
7.01 | REIT Compliance. |
| a. | Owner shall have the right to delegate such additional services to Service Provider (the “REIT Services”) in furtherance of ensuring that the nature of the Property and gross revenues would permit Ares REIT, and the PropCo that has made a REIT Election, to qualify for and maintain its status as a REIT under the Code including, without limitation, through the satisfaction of the following requirements: (i) at least seventy-five percent (75%) of the assets of the Owner and the PropCo at the close of any calendar quarter qualify as “real estate assets” for purposes of Section 856(c)(4)(A) of the Code, (ii) no more than twenty-five percent (25%) of the assets of the Owner and the PropCo at the close of any calendar quarter will consist of assets described in Section 856(c)(4)(B) of the Code, (iii) no asset of the Owner or the PropCo at the close of any calendar quarter will violate or exceed the limitations described in Section 856(c)(4)(B)(iv)(I), (II) or (III) of the Code (determined as if the Owner and the PropCo were a REIT), (iv) at least seventy-five percent (75%) of the gross income of the Owner and the PropCo in any calendar year will qualify as income described in Section 856(c)(3) of the Code and at least ninety-five percent (95%) of the gross income in any calendar year will qualify as income described in Section 856(c)(2) of the Code, (v) no portion of the gross revenues or net income of the Owner and the PropCo in any calendar year will constitute income from a “prohibited transaction” as defined in Section 857(b)(6)(B)(iii) of the Code, (vi) no amount of the Owner’s or the PropCo’s assets will be described in Section 1221(a)(1) of the Code (other than “foreclosure property” as defined in Section 856(e) of the Code), (vii) no more than twenty percent (20%) of the assets of the Owner shall consist of interests in any “taxable REIT subsidiary” of the Ares REIT (or the Owner or the PropCo if any of the foregoing is taxed as a REIT); and (viii) no more than twenty-five percent (25%) of the value of the assets of the Owner and the PropCo shall consist of “nonqualified publicly offered REIT debt instruments” within the meaning of Code Section 856(c)(4)(B)(iii). Owner shall describe such REIT Services in reasonable detail in writing for Service Provider to perform and Service Provider agrees to use efforts consistent with the Performance Standard to perform such REIT Services (or to cause a third party consultant or service provider approved by Owner in accordance with Section 4.02), as delegated and described by Owner. |
| b. | Without limiting the generality of the foregoing, the Service Provider hereby agrees that the Owner and each of the future operations of the subsidiaries of the Owner (including the PropCo) shall be managed and conducted in compliance with the guidelines set forth on Exhibit D of the LLC Agreement and made a part hereof and any other REIT Services guidelines that may be provided by Ares to the Manager in writing from time to time and which in Ares's reasonable judgment are necessary or desirable to assure compliance with the foregoing provisions of this Section 7.01. |
| c. | The Service Provider shall cooperate in all reasonable respects with respect to (i) structuring the acquisition and operation of the Property, (ii) changing the structure of the ownership or operation of the Property, in a manner that would allow the Owner if it made an election under Section 856 of the Code to qualify as a REIT and not incur any amount of tax pursuant to Section 857 or 4981 of the Code, (iii) in the discretion of and upon request by Ares, structuring the acquisition, operation or ownership of the Property in a manner that would allow Ares to invest in all or a part of the Property, through one or more taxable REIT subsidiaries (as defined in Section 856(l) of the Code), and (iv) solely at the election of the Ares (or its owners), conducting any permitted sale of the Owner and/or Property (A) as a sale of the membership interests in the Owner or (B) as a sale of all of the membership interests in the PropCo that has made the REIT Election for the taxable year prior to such sale, or earlier; provided, however, in all instances, any actions or matters so undertaken by the Owner or with respect to any of the Property shall be structured after giving consideration to the burden and/or tax consequences thereof to the other Members. In all events, the buyer of Owner or the Propco that has made the REIT Election shall covenant in the applicable purchase and sale agreement to maintain the status of any acquired REIT as a REIT until at least the beginning of the tax year following the tax year that such sale closes. |
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| d. | The foregoing provisions are intended to ensure that the assets, income and operations of the Owner or the PropCo are such that they will satisfy the various provisions of the Code that restrict the assets, income and operations of REITs and thereby ensure that the REIT status of the Ares REIT will not be jeopardized by its direct and indirect ownership of an interest in the Owner. In the event that any additional duties, obligations, requirements, limitations, or parameters with respect to the assets, income, or operations of REITs are (i) imposed by any new provisions of the Code or Treasury Regulations, any amendments to the Code or Treasury Regulations or by any judicial precedent or any notice, ruling or release of the Treasury Department or the Internal Revenue Service, or (ii) deemed necessary or desirable in the sole but reasonable discretion of Ares, Ares may unilaterally amend the provisions of this Section 7.01 to the extent required to ensure that the assets, income or operations of the Owner will not jeopardize the REIT status of the Ares REIT. Ares shall pay the costs of incurred with respect to such amendment. |
ARTICLE 8
NOTICES, ETC.
8.01 | Notices. All notices, demands, requests, or other communications (collectively, “Notices”) provided for in this Agreement shall be in writing and delivered: (i) by email (provided the recipient(s) thereof confirms receipt by reply e-mail or, if there is no reply e-mail, with the original to be sent the same day by a nationally recognized overnight courier service for next Business Day delivery); or (ii) by a nationally recognized overnight courier service for next Business Day delivery, to Owner or Service Provider at the address set forth below following the signature blocks for this Agreement, or at such other address as they individually may specify thereafter in writing. Each Notice which shall be sent by nationally recognized overnight courier service in the manner described shall be deemed sufficiently given, served, sent, received, or delivered for all purposes on the day the Notice is delivered to the addressee (with the return receipt, the delivery receipt, or the affidavit of messenger being deemed conclusive (but not exclusive) evidence of such delivery), provided that such day is a Business Day (if such day is not a Business Day, such Notice shall be deemed given and received on the first Business Day following such day), or if delivery is refused, then on the day that delivery of the Notice is refused by the addressee upon presentation, provided that such day is a Business Day (if such day is not a Business Day, such Notice shall be deemed given and received on the first Business Day following such day). Each Notice which shall be emailed in the manner described above shall be deemed sufficiently given, served, sent, received, or delivered for all purposes on the date of such email provided that (a) such email is transmitted (y) prior to 5:00 P.M. (New York time) on a Business Day (if such email is transmitted on a day that is not a Business Day or such email is received after 5:00 P.M. (New York time) on a Business Day, such Notice shall be deemed given and received on the first Business Day following such day) and (b) if required by this Section 8.01, a copy of such notice is sent by nationally recognized overnight courier service, as provided above. |
8.02 | Consents and Approvals. All consents and approvals required hereunder shall be in writing, signed by the party charged with the obligation, right, or privilege of granting such consent, approval, or notice. |
8.03 | Confidentiality. Section 12.2 of the LLC Agreement is hereby incorporated by reference as if fully set forth herein, mutatis mutandis. |
8.04 | No Assignment. This Agreement may not be assigned by Service Provider or Owner without the prior written consent of the other party. Any purported assignment in violation of this Section 8.04 is void ab initio. A majority equity transfer in Owner or Service Provider shall constitute an assignment for purposes of this section. Subject to the provisions hereof, all the covenants, conditions, and obligations contained in this Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Owner and the Service Provider to the same extent as if each successor and assignee were in each case named as a party to this Agreement. Notwithstanding anything to the contrary |
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contained herein, Owner shall have the right to collaterally assign this Agreement to any lender providing financing for the Property and Service Provider shall cooperate with Owner in connection therewith.
8.05 | Pronouns. All nouns and pronouns shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. |
8.06 | Amendments. Except as otherwise herein provided, any and all amendments, additions, or deletions to this Agreement shall be null and void unless approved by the parties in writing. |
8.07 | Complete Agreement. This Agreement together with all schedules attached hereto and made part hereof, supersedes and takes the place of any and all previous agreements entered into between the parties relating to the management of the Property. |
8.08 | Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State in which the Property is located. |
8.09 Severability. If any one or more of the provisions of this Agreement, or the applicability of any such provision to a specific situation is held invalid or unenforceable, such provision shall be modified to the minimum extent necessary to make it or its application valid or enforceable, and the validity and enforceability of all other provisions of this Agreement and all other applications of such provisions shall not be affected thereby.
8.10 | OFAC. Owner and Service Provider each represent and warrant to the other (for themselves, only) that each is currently in compliance with, and shall at all times during the term of this Agreement (including any extension thereof) remain in compliance with, the regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) and any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental actions relating thereto. |
8.11 | Headings. All headings and subheadings used in this Agreement and in the accompanying schedules are solely for convenience and ease of reference and are not to be considered in the construction or interpretation of any provision of this Agreement. |
8.12 | Estoppel Certificates. Each party hereto shall, from time to time, upon not less than fifteen (15) days’ notice from the other party, execute and deliver to the other party a certificate stating that this Agreement is unmodified and in full force and effect, or, if modified, that this Agreement is in full force and effect as modified, and stating the modifications and stating whether or not, to the best of the certifying party’s knowledge, the other party is in default in any respect under this Agreement, and, if in default, specifying the nature and character of such default. |
8.13 | No Waiver. No waiver by either party of any default of any other party or of any event, circumstance or condition permitting a party to terminate this Agreement shall constitute a waiver of any other default of the other party or of any other event, circumstance or condition, permitting such termination, whether of the same or of any other nature or type and whether preceding, concurrent or succeeding; and no failure on the part of either party to exercise any right it may have by the terms hereof or by law upon the default of the other party and no delay in the exercise of such right shall prevent the exercise thereof by the non-defaulting party at any time when the other party may continue to be so in default, and no such failure or delay and no waiver of default shall operate as a waiver of any other default, or as a modification in any respect of the provisions of this Agreement. The subsequent acceptance of any payment or performance pursuant to this Agreement shall not constitute a waiver of any preceding default by a defaulting party or of any preceding event, circumstance or condition permitting termination hereunder, other than default in the payment of the particular payment or the performance of the particular matter so accepted, regardless of the non-defaulting party’s knowledge of the preceding default or the preceding event, circumstance or condition, at the time of accepting such payment or performance, nor shall the non-defaulting party’s acceptance of such payment or performance after termination constitute a reinstatement, extension or renewal of this Agreement or revocation of any notice or other act by the non-defaulting party. |
8.14 | Attorneys’ Fees. Should any action or proceeding be commenced between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any Person (as defined in the LLC Agreement) |
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in relation thereto, the party or parties prevailing in such action or proceeding shall be entitled, in addition to such other relief as may be granted, to an award of all actual, reasonable attorneys’ fees and costs incurred in such action or proceeding, without regard to any schedule or rule of court purporting to restrict such an award, including, without limitation, actual, reasonable attorneys’ fees, costs and expenses incurred in connection with (a) enforcing, perfecting and executing such judgment, (b) post-judgment motions; (c) contempt proceedings; (d) garnishment, levee, and debtor and third-party examinations; (e) discovery; and (f) bankruptcy litigation.
8.15 | Equitable Remedies. Each party hereto shall, in addition to all other rights provided herein or as may be provided by law, and subject to the limitations set forth herein, be entitled to all equitable remedies including those of specific performance and injunction, to enforce such party’s rights hereunder. |
8.16 | Remedies Cumulative. Each right, power, and remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power, or remedy provided for herein or now or hereafter existing at law, in equity, by statute or otherwise, and the exercise or beginning of the exercise or the forbearance of exercise by any party of any one or more of such rights, powers, or remedies shall not preclude the simultaneous or later exercise by such party of any or all of such other rights, powers or remedies. |
8.18 | WAIVER OF JURY TRIAL. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE, TO THE MAXIMUM EXTENT PERMITTED BY LEGAL REQUIREMENTS, ANY RIGHT THAT EITHER PARTY OR THEIR HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS OR ASSIGNS MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH, OR IN RESPECT OF ANY COURSE OF CONDUCT, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH OF THE PARTIES TO ENTER INTO THIS AGREEMENT. |
8.19 | Counterparts. This Agreement may be executed in any number of counterparts, including counterparts transmitted by e-mail, any one of which shall constitute an original of this Agreement. When counterparts or e-mail copies have been executed by all parties, they shall have the same effect as if the signatures to each counterpart or copy were upon the same documents and copies of such documents shall be deemed valid as originals. The parties agree that all such signatures may be transferred to a single document upon the request of any party. This Agreement shall not be binding unless and until it shall be fully executed and delivered by all parties hereto. |
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF the parties have executed this Agreement on the day and year first above written.
OWNER:SERVICE PROVIDER:
[________________________],TREV OPCO LLC
By: _____________________________________ Name: _____________________________________ | By: _____________________________________ Name: _____________________________________ |
Title: ______________________________________ | Title: ______________________________________ |
OWNER’S ADDRESSSERVICE PROVIDER’S ADDRESS
[_______________] [_______________]
[_________________] [_______________]
[__________________] [_______________]
Attn: [_______________] Attn: [_______________]
Email: [________________]Email: [_______________]
and:
With a copy to:
SCHEDULE A
SCHEDULE B
SCHEDULE C
SCHEDULE D
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey W. Taylor, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ares Real Estate Income Trust Inc. (the “registrant”);
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.
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Lainie P. Minnick, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ares Real Estate Income Trust Inc. (the “registrant”);
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.
Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Certification of Principal Executive Officer
In connection with the Quarterly Report on Form 10-Q of Ares Real Estate Income Trust Inc. (the “Company”) for the period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey W. Taylor, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(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 Company.
Certification of Principal Financial Officer
In connection with the Quarterly Report on Form 10-Q of Ares Real Estate Income Trust Inc. (the “Company”) for the period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lainie P. Minnick, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(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 Company.
Exhibit 99.1
CONSENT OF INDEPENDENT VALUATION FIRM
We hereby consent to the reference to our name and the description of our role in the valuation process described in the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations—Net Asset Value” in Part I, Item 2 of the Quarterly Report on Form 10-Q for the period ended June 30, 2023 of Ares Real Estate Income Trust Inc., being incorporated by reference in (i) the Registration Statement on Form S-3 (No. 333-230311) of Ares Real Estate Income Trust Inc., and the related prospectus, and (ii) the Registration Statement on Form S-8 (No. 333-194237) of Ares Real Estate Income Trust Inc. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933.
August 11, 2023