BlackRock Granite Property Fund, Inc.

Transcription

1 BlackRock Granite Property Fund, Inc. Consolidated Financial Statements for the Six Months Ended June 30, 2012 (unaudited) and the Year Ended December 31, 2011

2 Table of Contents Page Consolidated Financial Statements for the six months ended June 30, 2012 (unaudited) and the year ended December 31, 2011 Consolidated Statements of Assets and Liabilities 1 Consolidated Statements of Operations 2 Consolidated Statements of Changes in Net Assets 3 Consolidated Statements of Cash Flows 4 Schedule of Real Estate Investments

3 Consolidated Statements of Assets and Liabilities Assets: June 30, 2012 December 31, 2011 Investments in real estate at estimated fair value (Cost - $2,008,025,282 and $2,119,543,112) $ 1,679,490,000 $ 1,741,120,000 Investments in real estate partnerships at estimated fair value (Cost - $791,872,459 and $861,222,777) 612,746, ,285,740 Investments in mortgages and loans receivable at estimated fair value (Cost - $68,383,109 and $43,118,111) 68,383,109 36,956,237 Total real estate investments 2,360,619,434 2,383,361,977 Cash and cash equivalents 19,333,268 69,664,739 Restricted cash 1,485,623 1,497,153 Prepaid and other assets 18,261,429 21,759,082 Total assets 2,399,699,754 2,476,282,951 Liabilities: Credit facilities 175,000, ,000,000 Mortgage loans payable at estimated fair value 265,974, ,770,893 Accounts payable and accrued expenses 23,448,637 28,421,149 Management and other advisory fees payable 8,862,458 4,501,674 Dividends and redemptions payable 117,328,296 92,467,394 Forward commitments liability at estimated fair value - 8,498,000 Other liabilities 7,697,777 8,512,608 Total liabilities 598,311, ,171,718 Net assets $ 1,801,387,766 $ 1,883,111,233 Shares issued and outstanding: Preferred stock Common stock 26, , Net asset value per share: Preferred stock $ 1, $ 1, Common stock $ 69, $ 67,

4 Consolidated Statements of Operations For the Quarter Ended For the Six Months Ended June 30, 2012 June 30, 2012 Investment income: Rental revenues from investments in real estate $ 38,882,121 $ 78,637,822 Income from investments in real estate partnerships 7,888,165 15,342,736 Income from investments in mortgages and loans receivable 875,053 1,551,940 Interest income 18,334 43,480 Total investment income 47,663,673 95,575,978 Investment expenses: Real estate operating expenses 8,628,677 17,515,413 Real estate taxes 6,694,529 13,553,160 Interest expense 4,467,028 9,089,641 Fund level operating expenses 1,742,635 3,259,580 Total investment expenses 21,532,869 43,417,794 Investment income before asset management fees 26,130,804 52,158,184 Asset management fees (4,385,627) (8,832,563) Net investment income 21,745,177 43,325,621 Net realized loss on real estate investments sold (57,755,099) (95,884,375) Reversal of previously recognized net unrealized loss on real estate investments sold 61,452,936 96,586,993 Change in net unrealized gain on real estate investments held, mortgages and loans receivable and forward commitments 16,234,186 44,771,612 Change in net unrealized loss on mortgage loans and notes payable and derivative instruments (1,709,890) (1,401,833) Net realized and unrealized gain 18,222,133 44,072,397 Net increase in net assets resulting from operations $ 39,967,310 $ 87,398,018 2

5 Consolidated Statements of Changes in Net Assets For the For the Six Months Ended Year Ended June 30, 2012 December 31, 2011 Net assets, beginning of period $ 1,883,111,233 $ 1,672,997,515 Net increase in net assets resulting from operations 87,398, ,672,543 Capital transactions Issuance of common stock 35,545, ,238,673 Redemption of common stock (170,000,000) (205,000,000) Dividends (34,667,440) (67,797,498) Net decrease in net assets resulting from capital transactions (169,121,485) (73,558,825) Total (decrease) increase in net assets (81,723,467) 210,113,718 Net assets, end of period $ 1,801,387,766 $ 1,883,111,233 3

6 Consolidated Statements of Cash Flows Cash flow from operating activities: For the For the Quarter Ended Six Months Ended June 30, 2012 June 30, 2012 Net increase in net assets resulting from operations $ 39,967,310 $ 87,398,018 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Net realized loss on real estate investments sold 57,755,098 95,884,374 Reversal of previously recognized net unrealized loss on real estate investments sold (61,452,936) (96,586,993) Change in net unrealized gain on real estate investments held, mortgage and loans receivable, - and forward commitments (16,234,186) (44,771,613) Change in net unrealized (gain) / loss on mortgage loans payable and derivative instruments 1,709,890 1,401,834 Provision for bad debt 388, ,570 Changes in operating assets and liabilities: - Restricted cash 64,146 11,530 Prepaid expenses and other assets (197,702) 2,677,068 Accounts payable and accrued expenses 557,467 (2,277,999) Management and other advisory fees payable 2,142,955 4,360,784 Other liabilities (50,440) (349,831) Net cash flows from operations before cash flows associated with real estate investments 24,650,496 48,313,742 Real estate improvements (4,270,944) (8,751,765) Net proceeds from sales of real estate investments 25,337,448 81,162,532 Increase in investments in mortgages and loans receivable (31,687,774) (32,367,562) Investments in real estate partnerships (9,025,527) (12,969,586) Return of capital and net gain distributions from real estate partnerships 2,637,562 22,388,950 Distributions from investments in real estate partnerships sold 7,644,707 7,644,707 Net cash flows associated with real estate investments (9,364,528) 57,107,276 Net cash provided by operating activities 15,285, ,421,018 Cash flow used in financing activities: Proceeds from credit facilities and mortgage loans payable 61,047,285 61,096,870 Principal repayments on credit facilities and mortgage loans payable (11,882,789) (72,586,486) Financing costs - (2,291) Issuance of common stock 175,000 17,420,000 Dividends paid (8,619,749) (16,680,582) Redemptions of common stock (70,000,000) (145,000,000) Net cash used in financing activities (29,280,253) (155,752,489) Net decrease in cash and cash equivalents (13,994,285) (50,331,471) Cash and cash equivalents, beginning of period 33,327,553 69,664,739 Cash and cash equivalents, end of period $ 19,333,268 $ 19,333,268 Supplemental disclosure of cash flow information: Interest paid during the period $ 3,646,920 $ 7,496,806 Supplemental disclosure of non-cash operating and financing activities: Investment in real estate partnership - preferred equity converted to mortgage and loan receivable, at cost $ - $ 808,514 Accrued capital expenditures $ 2,544,021 $ 2,544,021 Accrued redemptions $ 100,000,000 $ 100,000,000 Accrued dividends $ 17,328,296 $ 17,328,296 Dividend reinvestments $ 8,719,394 $ 18,125,955 4

7 Schedule of Real Estate Investments Name Investments in real estate: Location Stated Ownership % Cost June 30, 2012 December 31, 2011 Estimated Fair Value % of Net Assets Cost Estimated Fair Value Retail: Polo Club Shoppes Boca Raton, FL 100% $ 22,970,997 $ 28,300,000 $ 22,852,307 $ 28,000,000 Lynnwood Center Lynnwood, WA 100% 31,239,108 34,500,000 31,197,935 34,900,000 Southland Power Center Aurora, CO 100% 54,902,105 29,900,000 54,893,849 32,100,000 McDowell Mountain Marketplace North Scottsdale, AZ 100% 23,176,578 14,300,000 23,167,128 14,200,000 La Costa Towne Center (1) Carlsbad, CA 100% ,065,562 24,000,000 Canyon Lakes Plaza Las Vegas, NV 100% 19,838,221 11,500,000 19,822,989 11,200,000 Long Beach Promenade Long Beach, CA 100% 20,494,271 24,000,000 20,481,175 23,400,000 Fallbrook Mercantile Center Fallbrook, CA 100% 18,059,193 15,100,000 18,056,951 15,700,000 Amerige Heights Town Center Fullerton, CA 100% 48,168,367 44,100,000 48,090,886 41,800,000 Village West Center Hemet, CA 100% 39,020,987 31,100,000 38,901,428 30,400, Fifth Avenue South Naples, FL 100% 11,273,454 6,200,000 11,312,181 6,300, Fifth Avenue South Naples, FL 100% 11,474,204 6,600,000 11,436,867 6,600, Fifth Avenue South Naples, FL 100% 13,129,183 8,500,000 13,126,266 8,700, Fifth Avenue South Naples, FL 100% 12,119,439 6,600,000 12,113,876 6,500, Fifth Avenue South Naples, FL 100% 11,909,814 10,500,000 11,897,589 10,300, Fifth Avenue South Naples, FL 100% 5,864,375 3,900,000 5,863,865 3,750,000 Southgate Market Chicago, IL 100% 107,063, ,000, ,838,761 98,500,000 Southlands Town Center Aurora, CO 100% 166,184,012 72,600, ,768,388 78,100,000 Total retail 616,888, ,700, % 655,888, ,450, % Office: 1899 L Street Washington, DC 100% 60,244,969 71,200,000 60,000,650 70,700,000 Tower Burbank Burbank, CA 100% 172,991, ,000, ,014, ,000,000 Rio Vista Tower III San Diego, CA 100% 28,641,144 23,400,000 28,628,733 22,700,000 Glades Twin Plaza Boca Raton, FL 100% 30,124,196 18,600,000 30,091,260 20,200,000 Pacifica Court Irvine, CA 100% 44,139,639 24,300,000 43,924,142 24,900, Fifth Avenue South Naples, FL 100% 7,756,282 5,800,000 7,851,932 5,800,000 Market Place I & II Seattle, WA 100% 89,667,761 61,500,000 89,219,305 54,600,000 Meridian Commercial Boca Raton, FL 100% 32,841,696 24,900,000 32,834,096 24,900,000 Sage Plaza Houston, TX 100% 112,513, ,000, ,565, ,000,000 Tustin Centre Santa Ana, CA 100% 92,104,967 66,500,000 92,065,747 66,400,000 Total office 671,025, ,200, % 668,195, ,200, % % of Net Assets 5

8 Schedule of Real Estate Investments June 30, 2012 December 31, 2011 Name Investments in real estate: Location Stated Ownership % Cost Estimated Fair Value % of Net Assets Cost Estimated Fair Value % of Net Assets Industrial: Anaheim Anaheim, CA 100% $ 25,337,578 $ 44,600,000 $ 24,628,570 $ 40,900,000 Christy Street Fremont, CA 100% 21,039,796 26,600,000 20,816,826 25,900,000 Victoria Tower (2) Rancho Dominguez, CA 100% ,742,628 9,490, Francisco Street Los Angeles, CA 100% 27,280,928 26,100,000 27,277,928 25,600,000 Sierra Business Park Fontana, CA 100% 56,304,240 56,800,000 56,303,951 55,300,000 Half Acre Cranbury, NJ 100% 13,394,416 5,720,000 13,394,416 6,200,000 Lakewood Corporate Center Lakewood, WA 100% 14,701,094 11,400,000 14,684,057 11,300, Starke Road Carlstadt, NJ 100% 13,901,035 9,000,000 13,901,035 9,000,000 Mountain West Commerce Center (3) Phoenix, AZ 100% ,152,114 19,300, Bonelli Street (2) City of Industry, CA 100% ,677,227 9,170,000 Underwood Distribution II La Porte, TX 100% 31,151,909 30,800,000 30,601,593 30,200,000 Fontana Industrial (4) Fontana, CA 100% ,992,043 13,300,000 Three Piper Ranch San Diego, CA 100% 33,468,129 21,900,000 33,443,129 24,000, Porter Road La Porte, TX 100% 14,203,349 13,400,000 14,183,425 13,400, Porter Road La Porte, TX 100% 8,773,879 8,900,000 8,772,773 8,610, Old Underwood Road La Porte, TX 100% 52,907,659 46,700,000 52,877,328 46,600, Porter Road La Porte, TX 100% 9,009,049 12,540,000 9,009,049 12,540,000 Docks Corner South Brunswick, NJ 100% 48,510,632 35,000,000 48,497,856 33,000,000 Auburn Park 44 Auburn, WA 100% 18,167,079 15,700,000 18,167,079 14,900,000 Total industrial 388,150, ,160, % 461,123, ,710, % Residential: 85 East End Avenue New York, NY 100% 94,971, ,600,000 94,351, ,900,000 Helix Apartments Seattle, WA 100% 21,246,945 21,600,000 21,256,622 18,900,000 Ellipse Apartments Seattle, WA 100% 18,492,882 19,100,000 18,485,401 16,800,000 Library Gardens Berkeley, CA 100% 76,084,918 59,000,000 76,043,920 58,000, Fifth Avenue South Naples, FL 100% 3,513,632 1,800,000 3,513,632 1,800,000 Tenafly Apartment (5) Tenafly, NJ 100% 13,260,279 8,700,000 16,459,127 9,600,000 Worthing Place Delray Beach, FL 100% 77,540,724 72,500,000 77,376,132 72,000,000 Total residential 305,110, ,300, % 307,486, ,000, % 6

9 Schedule of Real Estate Investments June 30, 2012 December 31, 2011 Name Investments in real estate: Location Stated Ownership % Cost Estimated Fair Value % of Net Assets Cost Estimated Fair Value % of Net Assets Land: 405 Fifth Avenue South Naples, FL 100% $ 5,529,554 $ 2,400,000 $ 5,529,554 $ 2,400,000 Half Acre II Newark, NJ 100% 6,177,672 2,350,000 6,177,672 2,010, Porter Road La Porte, TX 100% 1,478,534 1,500,000 1,478,534 1,500,000 Patterson Industrial Riverside, CA 100% 3,329,034 1,580,000 3,329,033 1,550, Market Street Denver, CO 100% 10,335,256 8,300,000 10,335,256 8,300,000 Total land 26,850,050 16,130, % 26,850,049 15,760, % Total investments in real estate $ 2,008,025,282 $ 1,679,490, % $ 2,119,543,112 $ 1,741,120, % Investments in real estate partnerships: Retail: Bradlick Shopping Center Annandale, VA 80.00% $ 10,950,164 $ 25,581,682 $ 10,778,164 $ 24,167,119 Starwood Portfolio Various 85.00% 50,596,789 56,977,415 50,596,789 56,343,753 Westfork Plaza Pembrook Pines, FL 96.00% 58,275,551 48,454,778 57,864,551 47,272,251 Brentwood Los Angeles, CA 79.89% 10,699,115 11,573,026 10,497,159 11,394,737 Studio City Place Studio City, CA 79.89% 34,972,029 27,603,208 34,892,139 27,181,171 Courthouse Plaza Fairfax City, VA 79.89% 17,639,001 16,137,403 17,562,534 15,848,315 Plaza Del Paraiso Pembrook Pines, FL 96.00% 17,703,850 11,694,762 17,613,850 11,638,792 Courthouse Plaza II Fairfax City, VA 79.89% 5,496,066 2,250,221 5,496,066 2,339,263 Total retail 206,332, ,272, % 205,301, ,185, % Office: Biltmore Commerce Center Phoenix, AZ 95.00% 61,222,331 34,395,541 60,355,238 33,169, Third Avenue New York, NY 99.37% 204,498, ,615, ,929, ,073,592 Corporate Kierland Phoenix, AZ 95.00% 32,485,763 15,705,802 32,375,763 15,580, Sixth Avenue (6) New York, NY 90.00% 27,922,867 34,375,367 26,760,507 27,737,422 Total office 326,129, ,092, % 321,420, ,561, % Industrial/warehouse: 7000 NW 32nd Street Miami, FL 84.00% 19,907,538 11,726,713 19,907,538 11,258, Cottontail Franklin Township, NJ 95.00% 9,374,424 3,984,849 9,232,880 3,679,322 West Corona Industrial Corona, CA 95.00% 16,463,569 7,541,237 16,413,569 6,795,883 Total industrial/warehouse 45,745,531 23,252, % 45,553,987 21,733, % 7

10 Schedule of Real Estate Investments June 30, 2012 December 31, 2011 Name Investments in real estate partnerships: Location Stated Ownership % Cost Estimated Fair Value % of Net Assets Cost Estimated Fair Value % of Net Assets Residential: Mariner s Key Lake Park, FL 80.00% $ 74,608,247 $ 37,266,431 $ 74,605,302 $ 37,276,869 Reserve at Deerwood Jacksonville, FL 90.00% 6,918,252 4,248,587 6,785,952 3,666,322 Water Place Apartments (3) Tamarac, FL 90.00% ,605,496 8,671,402 Woodlane Timberlane Upland, CA 97.50% 15,223,830 10,377,434 15,223,830 9,307,769 Northern Bronx Portfolio (1) New York, NY 90.00% ,170,171 17,098,307 Hidden Willows San Jose, CA 95.00% 12,433,277 9,007,738 12,127,192 7,553,292 Eitel Apartments Minneapolis, MN 90.00% 5,743,572 14,535,596 5,743,572 13,424,011 Reserve at 4S Ranch San Diego, CA 90.00% 45,778,226 56,447,899 44,721,766 55,003,039 The Crossings at Anaheim Anaheim, CA 90.00% 49,327,090 36,377,339 49,327,090 35,645,948 Total residential 210,032, ,261, % 248,310, ,646, % Predevelopment, Land and Preferred Equity: Westgate Square II Sunrise, FL 98.00% 3,212,508 1,447,696 3,212,510 1,449,199 Cabi Preferred Equity (7) Various 2.13% 420, ,000 37,423,911 1,709,770 Total predevelopment, land and preferred equity 3,632,508 1,867, % 40,636,421 3,158, % Total investments in real estate partnerships $ 791,872,459 $ 612,746, % $ 861,222,777 $ 605,285, % Investments in mortgages and loans receivable: 641 Sixth Avenue (6) New York, NY $ 37,383,109 $ 37,383,109 $ 36,824,061 $ 36,824,061 Woodlane Timberlane (8) Upland, CA 31,000,000 31,000, Cabi Mezzanine Loan (7) Various - - 6,294, ,176 Total investments in mortgages and loans receivable $ 68,383,109 $ 68,383, % $ 43,118,111 $ 36,956, % Total real estate investments $ 2,868,280,850 $ 2,360,619, % $ 3,023,884,000 $ 2,383,361, % Notes: (1) Sold in February (2) Sold in March (3) Sold in April (4) Sold in January (5) 6 condominium units were sold in (6) Preferred equity and accrued preferred return converted to notes receivable in October (7) Sold in May (8) Mortgage loan to Partnership funded in June Partnership paid off the existing loan with these proceeds. 8

11 1. Organization (the Fund ) was incorporated on May 16, 2006, under the laws of the State of Maryland. The accompanying consolidated financial statements reflect the operations and financial position of the Fund and also include the assets, liabilities and results of operations of its wholly owned subsidiaries BlackRock Granite Property Fund, LLC (the Company ), BlackRock Granite Property Fund, LP (the Operating Partnership ), and Granite TRS Holdings, LLC. The Fund is structured as and intends to meet the qualification requirements of a real estate investment trust ( REIT ) for U.S. Federal income tax purposes. The Fund s principal business activities are to invest in real estate for current income or capital appreciation or both. The Operating Partnership serves as the vehicle for the consolidation of ownership and control of the Fund s assets and operations. The Company is the sole general partner of the Operating Partnership. At June 30, 2012 and December 31, 2011, the Company owned.1% of the Operating Partnership and the Fund owned the 99.9% limited partnership interest. The Fund consists of two classes of common stock, Class A and Class B. Shareholders receive a combination of Class A and B stock based on the aggregate amount invested. Shareholders purchasing up to $10 million of common stock receive 100% Class A. Shareholders purchasing between $10 million and $25 million of common stock receive Class A for the first $10 million; then 90.91% of Class A and 9.09% of Class B for the remainder. Shareholders purchasing between $25 and $50 million of common stock receive Class A for the first $10 million; 90.91% of Class A and 9.09% of Class B for the amounts between $10 and $25 million; and 77.27% of Class A and 22.73% of Class B for amounts above $25 million. Shareholders purchasing $50 million or greater of common stock receive Class A for the first $10 million; 90.91% of Class A and 9.09% of Class B for the amounts between $10 and $25 million; 77.27% of Class A and 22.73% of Class B for amounts between $25 and $50 million; and 72.73% of Class A and 27.27% of Class B for amounts above $50 million. Effective July 1, 2012, the Fund created a new allocation among Class A common stock and Class B common stock for any investor who acquired or committed to acquire (net of redemptions) more than $100 million of shares of the Fund (the New Allocation ). The New Allocation of shares is 54.55% of Class A and 45.45% of Class B for any amount committed to the Fund above $100 million. In connection with the New Allocation, the Fund approved the exchange of shares for four investors who met these requirements. Prior to the payment of regular common dividends, separate cumulative special class dividends shall be payable as follows: (i) First, to holders of any preferred stock, a cumulative preferential cash dividend at the rate of 12.5% of the total $1, liquidation preference per annum plus all accumulated and unpaid dividends thereon; and (ii) Second, to the holders of the Class B common stock, a special dividend in an amount equal to 0.275% times the weighted net asset value deemed allocable to the Class B common stock over such quarter. In accordance with the Fund s dividend reinvestment plan, any amounts reinvested by Class A or Class B shareholders provide common stock in the ratio of 72.73% of Class A and 27.27% of Class B. The Class B stock is also available for purchase by certain individuals or entities associated with, or sponsored by, the Fund, BlackRock, Inc. and BlackRock Realty Advisors, Inc. ( BlackRock Realty ) (together BlackRock ) or any of their respective affiliates. At June 30, 2012 and December 31, 2011, BlackRock owned 1.14% and.93% of the Fund, respectively. The Fund has an investment advisory agreement with BlackRock Realty ( Investment Manager or Management ), to provide investment advisory, portfolio management and property management services pursuant to the investment advisory agreement (the Investment Management Agreement ). 9

12 1. Organization, continued Subscriptions - Investors enter into subscription agreements for specified capital commitments. The Fund currently makes demands on investors who subscribe for shares for their full capital contribution at the end of the quarter during which such investors subscribe for shares. The Fund may discontinue this practice at any time and make calls for capital under capital commitments from time to time as necessary. When and if the Fund makes demands for capital contributions from shareholders, they will be made proportionately based on their respective unfunded capital commitments. At June 30, 2012 and December 31, 2011 the Fund had unfunded commitments of $22,500,000 and $17,245,000, respectively. Dividends Upon approval by the Board of Directors of the Fund (the Board ), regular common dividends and separate cumulative special class dividends will be paid in accordance with the Fund s Articles of Incorporation. Redemptions Shareholders may request that the Fund redeem all or any portion of their shares on a quarterly basis by giving written notice at least sixty days prior to the end of the quarter for which the request is to be effective. The Fund may redeem, or decline to redeem, all or any portion of the shares held by any investor, with Board approval. Shares will be redeemed at the per share net asset value of the Fund as of the effective date of each redemption, which is the last business day of the quarter in which the redemption occurred. The Fund will endeavor to honor approved redemption requests within twenty days after the end of the applicable quarter. Upon liquidation of the Fund, subsequent to the redemption of preferred stock, the net assets attributable to all classes of the common stock shall be distributed pro rata amongst the common shareholders in proportion to the number of shares of common stock, regardless of class held by each. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been presented in conformity with U.S. Generally Accepted Accounting Principles ( GAAP ) for investment companies, as generally applied by real estate investment entities. The accompanying consolidated financial statements include the accounts of the Fund, the Company, the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership; including those elected to be taxable REIT subsidiaries ( TRS ). All intercompany balances and transactions have been eliminated in consolidation. Events or transactions occurring after the period end through the date that the financial statements were available to be issued, July 31, 2012, have been evaluated and disclosed in the notes to the consolidated financial statements. Management s Use of Estimates in Financial Statements The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The real estate and capital markets are cyclical in nature. The estimated fair value of investments in real estate and related investments and debt obligations of the Fund are affected by, among other things, the availability of capital, occupancy rates, rental rates, interest rates, inflation rates, and credit worthiness. As a result, determining real estate investment values involves many assumptions. Amounts ultimately realized, upon sale of each investment or transfer of debt obligation, may vary from the estimated fair values presented. 10

13 2. Summary of Significant Accounting Policies, continued Fair Value Option for Financial Assets and Financial Liabilities GAAP permits entities to choose to measure eligible financial instruments at fair value. The decision to elect the fair value option ( FVO ) is determined on an instrument-by-instrument basis, applied to an entire instrument, and is irrevocable. Assets and liabilities measured at fair value pursuant to the FVO are reported separately in the consolidated statements of assets and liabilities from those instruments measured using another measurement attribute. The unrealized gain or loss on items for which the FVO is elected are reported in earnings. The change in unrealized gain or loss is the amount by which the estimated fair value of the instrument exceeds or is less than the previous period estimated fair value. Upfront costs and fees related to items for which the FVO is elected are recognized in earnings as incurred and not deferred. The Fund has elected the FVO for all of its mortgage loans payable to better align the measurement attributes of both the assets and liabilities while providing investors with a more meaningful indication of the fair value of the Fund s net asset value. Investments in real estate, real estate partnerships, and mortgages and loans receivable are reported at fair value in accordance with GAAP for investment companies. Fair Value Measurements GAAP requires certain disclosures about assets and liabilities that are measured at fair value and also establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring these items at fair value. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the items. Assets and liabilities for which fair value can be measured from readily available actively quoted prices (unadjusted) generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories: Level I Quoted prices (unadjusted) are available in active markets for identical items as of the reporting date. Level II Pricing inputs are other than quoted prices (unadjusted) in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Level III Pricing inputs are unobservable for the item and include situations where there is little, if any, market activity for the item. The inputs into the determination of fair value require significant management judgment or estimation. In certain cases the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an items level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Fund s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the items. Should the fair value measurement be based upon an executed sales contract with a non-refundable deposit, the item will be classified as Level II as this is a recent transaction indicative of fair value. For the six months ended June 30, 2012 and the year ended December 31, 2011, the fair value of transfers in or out of Level III were reported at the end of the period in which the transfer occurred. 11

14 2. Summary of Significant Accounting Policies, continued For the six months ended June 30, 2012 and the year ended December 31, 2011, the fair value of transfers in or out of Level III were reported at the end of the period in which the transfer occurred. See Note 3 Fair Value Measurements for the Fund s valuation policies and related disclosures. Investments in Real Estate and Real Estate Partnerships Investments in real estate and real estate partnerships are stated at estimated fair value. Investments in real estate consist of real property acquired through direct ownership or investments in real estate partnerships. The assets, liabilities and operations of wholly owned properties are consolidated. Investments in real estate partnerships are reported net and are initially recorded at the original investment amount and subsequently adjusted for changes in estimated fair value, additional capital contributions and capital distributions received. Development costs, major renovations and improvements are capitalized as a component of cost. The cost of routine repairs and maintenance and general and administrative costs are charged to expense as incurred. Development costs include pre-acquisition costs, and project costs including interest, real estate taxes and insurance costs which are directly identifiable with projects under development and not ready for their intended use. Previously capitalized costs are expensed at the time when a project is no longer being pursued. As investments in real estate are stated at estimated fair value, depreciation is not recorded in the accompanying consolidated financial statements. See Note 3 Fair Value Measurements for the Fund s valuation policies and related disclosures. Forward Commitments Liability to Acquire Real Estate Investments Certain purchases of real estate or investments in real estate partnerships are contingent on a developer building the real estate according to plans and specifications outlined in the contract, the property achieving a certain level of leasing and/or the passage of time. The acquisition of these assets is not recorded until the Fund acquires title to the property or funds its contribution to the real estate partnership. Management evaluates the terms of the contracts to determine whether the Fund will be obligated to acquire the asset or fund its contribution to the real estate partnership pursuant to the contract terms either because the conditions to close have been met, or substantially met, at the reporting date. Management also evaluates the estimated fair value of the underlying real estate at the contract strike date and compares it to the committed amount to determine if any fair value adjustment should be recorded as an unrealized loss in the accompanying consolidated financial statements at the reporting date. Subsequent to any initial recognition and measurement, the estimated fair value is re-evaluated and adjusted based on the estimated fair values determined each reporting period. Such adjustments would not be recorded to the extent that the estimated fair value exceeds the strike price. Upon acquiring the asset, the acquisition is recorded at its actual cost and previously recognized unrealized gains or losses are reversed and included in reversal of previously recognized net unrealized loss in the accompanying consolidated statements of operations. Subsequent to the acquisition date, the asset is subject to the Fund s valuation policies for investments in real estate. 12

15 2. Summary of Significant Accounting Policies, continued Investments in Mortgages and Loans Receivable Investments in mortgages and loans receivable are carried at estimated fair value. Interest income earned on mortgages and loans receivable is accrued based on the contractual terms of the loans unless it is deemed to be uncollectible, at which time it is recognized on a cash basis when received. As of June 30, 2012 and December 31, 2011, accrued interest on mortgages and loans receivable was $1,555,781 and $261,105, respectively. The Fund did not record any reserves for bad debt allowance in 2012 or See Note 3 Fair Value Measurements for the Fund s valuation policies and related disclosures. Cash and Cash Equivalents Cash and cash equivalents include cash and highly liquid short-term investments with original maturities, when purchased, of 90 days or less. Primarily, cash equivalents include money market accounts with financial institutions. The combined account balances at each institution periodically exceed the Federal Depository Insurance Corporation ( FDIC ) insurance coverage, and as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. The Fund believes that the risk is not significant, because the Fund does not anticipate the financial institutions nonperformance. Restricted Cash The Fund s restricted cash is comprised of tenant security deposits and property impound accounts. Reserves for Tenant Receivables Tenant receivables are included in prepaid and other assets in the accompanying consolidated statements of assets and liabilities. The Fund provides for doubtful accounts against the portion of tenant receivables which is estimated to be uncollectible. Such allowances are reviewed periodically based upon the Fund s recovery experience. For the six months ended June 30, 2012 and the year ended December 31, 2011, the provisions are $566,570 and $347,265, respectively. As of June 30, 2012 and December 31, 2011, tenant receivables were $9,035,049 and $10,658,767, respectively, of which $5,141,179 and $4,898,798 was reserved as bad debt allowance, respectively. Mortgage Loans Payable Mortgage loans payable are stated at estimated fair value. See Note 3 Fair Value Measurements for the Fund s valuation policies and related disclosures. Fair Value of Financial Instruments As of June 30, 2012 and December 31, 2011, the Fund has determined the carrying value of the cash and cash equivalents, restricted cash, prepaid and other assets, credit facilities, accounts payable and accrued expenses, management and other advisory fees payable, dividends and redemptions payable and other liabilities approximate the estimated fair value of these instruments due to the short term nature of such instruments. Common Dividends Dividends are accrued at the time of Board approval. For the six months ended June 30, 2012 and the year ended December 31, 2011, regular common dividends in the amounts of $32,953,590 and $64,369,628, respectively, were approved. The Board also approved special common dividends in the amounts of $1,706,037 and $3,412,245 for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. As of June 30, 2012 and December 31, 2011, $17,328,296 and $17,467,394 of these dividends remained unpaid, respectively, and are reflected in dividends and redemptions payable in the accompanying consolidated statements of assets and liabilities. 13

16 2. Summary of Significant Accounting Policies, continued Preferred Dividends Prior to the payment of common dividends, separate cumulative special class dividends shall be paid in accordance with the Fund s Articles of Incorporation. Holders of preferred stock will receive a 12.5% annual preferential dividend payable in June and December in respect to any outstanding preferred shares. The Board approved preferred dividends in the amount of $7,813 and $15,625 for the six months ended June 30, 2012 and the year ended December 31, Such amounts were paid in 2012 and 2011, respectively. Redemptions Redemptions are accrued at the time of Board approval. As of June 30, 2012, the Fund had outstanding redemption requests approximating $158 million, net of redemptions in the amount of $100 million which were approved by the Board in June 2012 and will be paid in July The outstanding redemption requests include investors which submitted requests within the sixty day period prior to the end of the quarter. The approved redemptions were accrued and are included in dividends and redemptions payable in the accompanying consolidated statements of assets and liabilities. Any payout of redemptions will be based on the requesting investor s proportionate share of units to the total units of all investors then requesting redemptions. Revenue and Expense Recognition Rental revenue is recognized on an accrual basis in accordance with the terms of the underlying lease agreements. Certain lease agreements provide for tenant reimbursements of certain operating expenses, other reimbursable costs or percentage rents which are recorded on an accrual basis and recognized in the period in which the revenue is earned. Operating expenses are recognized on an accrual basis as incurred. Income from Investments in Real Estate Partnerships The Fund s share of income generated from the underlying real estate partnerships is treated as income to the extent of cumulative operating earnings distributions received, and is measured on a partnership by partnership basis. Distributions received in excess of operating earnings are recorded as return of capital. Undistributed net income is a component of unrealized gain (loss) on the underlying investment. Unrealized Gain (Loss) on Real Estate Investments and Mortgage Loans Payable Unrealized gain (loss) on real estate investments for the current period is the amount by which the estimated fair value of the underlying investment is above or below the estimated fair value at the end of the prior reporting period plus costs capitalized in the current period. Unrealized gain (loss) on mortgage loans payable is the amount by which the estimated fair value of the underlying mortgage loan payable is above or below its estimated fair value at the end of the prior reporting period adjusted for current period principal activity. Realized Gain (Loss) Realized gain (loss) on real estate investments is recognized when assets are sold or mortgages and loans receivable are forgiven. Reversal of Previously Recognized Unrealized Gain (Loss) on Real Estate Investments Sold Upon the sale of a real estate investment previously recognized unrealized gain (loss) is reversed. Federal Income Taxes As a REIT, the Fund generally will not be subject to federal income tax on taxable income that it distributes to its shareholders. The Fund believes that it is organized and operates in such a manner as to qualify for treatment as a REIT and intends to continue to operate in the foreseeable future in such a manner that the Fund will remain qualified as a REIT for federal income tax purposes. Except as noted in the next paragraph, there are no provisions for federal income taxes, uncertain tax positions, or unrecognized tax benefits recorded in the accompanying consolidated financial statements in connection with the tax positions taken by the Fund. The Fund s federal tax return is subject to examination by the Internal Revenue Service for a period of three years. 14

17 2. Summary of Significant Accounting Policies, continued The Fund owns certain real estate investments within taxable REIT subsidiaries (TRS) which are subject to federal and state taxes. As a result, the values and the unrealized gain on the properties held within a TRS are reduced by a reserve for taxes based on the current unrealized gains and taxes paid on the current realized gains. For the six months ended June 30, 2012 and the year ended December 31, 2011, the TRS did not have realized or cumulative unrealized gains, therefore it did not record any tax reserves or pay any tax. Derivative Instruments The Fund is exposed to interest rate risk due to the movements in the underlying variable interest rates of its mortgage loans payable and credit facilities. The Fund uses cash flow hedges including interest rate caps and swaps to reduce the effect of interest rate fluctuations on the Fund s cash flows. The Fund s derivative instruments are stated at estimated fair value. Derivative instruments valued as assets and liabilities are included in prepaid and other assets and other liabilities, respectively, in the accompanying consolidated statements of assets and liabilities. Changes in the estimated fair value of the Fund s derivative instruments are included in the change in net unrealized loss on mortgage loans payable and derivative instruments in the accompanying consolidated statements of operations. See Note 3 Fair Value Measurements for the Fund s policy for determining the estimated fair value of its derivative instruments and additional information about the Fund s derivative instruments. Concentration of Credit Risk Financial instruments which potentially subject the Fund to a concentration of credit risk consist of cash and cash equivalents, restricted cash, tenant accounts receivable, mortgage and loans receivable, credit facilities, and mortgage loans payable which have future funding commitments from the lender and derivative instruments. The Fund is also exposed to counterparty risk with respect to its investments in mortgages and loans receivable, tenant receivables, credit facilities, and mortgage loans payable which have future funding commitments from the lender and derivative instruments in the event the counterparty is unable to fulfill its obligations. Recent Accounting Pronouncements In May 2011, the Financial Accounting Standards Board issued amended guidance to improve disclosure about fair value measurements which will require expanded disclosures for fair value measurements categorized as Level III. Under such requirements, non-public entities will be required to disclose quantitative information about the unobservable inputs and assumptions used in Level III fair value measurements, as well as a description of the valuation policies and procedures in place. For non-public entities, the amended guidance is effective for annual periods beginning after December 15, Management is evaluating the impact of this guidance on the Fund s financial statements and disclosures. 15

18 3. Fair Value Measurements The following table summarizes the Fund s investments and obligations that are reported at estimated fair value by the hierarchy levels as of June 30, 2012 and December 31, 2011: June 30, 2012 Total Level I Level II Level III Assets Investments in real estate (1) $ 1,679,490,000 $ - $ 102,500,000 $ 1,576,990,000 Investments in real estate partnerships (1) 612,746, ,746,325 Investments in mortgages and loans receivable 68,383, ,383,109 Interest rate caps (2) 31,000-31,000 - Total assets at estimated fair value $ 2,360,650,434 $ - $ 102,531,000 $ 2,258,119,434 Liabilities Mortgage loans payable $ (265,974,820) $ - $ - $ (265,974,820) Interest rate swaps (3) (1,822,000) - (1,822,000) - Total liabilities at estimated fair value $ (267,796,820) $ - $ (1,822,000) $ (265,974,820) December 31, 2011 Total Level I Level II Level III Assets Investments in real estate (1) $ 1,741,120,000 $ - $ - $ 1,741,120,000 Investments in real estate partnerships (1) 605,285,740-17,098, ,187,433 Investments in mortgages and loans receivable 36,956, ,956,237 Interest rate caps (2) 202, ,000 - Total assets at estimated fair value $ 2,383,563,977 $ - $ 17,300,307 $ 2,366,263,670 Liabilities Mortgage loans payable $ (265,770,893) $ - $ - $ (265,770,893) Forward commitments liability (8,498,000) - - (8,498,000) Interest rate swaps (3) (2,287,000) - (2,287,000) - Total liabilities at estimated fair value $ (276,555,893) $ - $ (2,287,000) $ (274,268,893) (1) If an investment is under contract to be sold with a non-refundable deposit, the investment will be classified as Level II. (2) Included in prepaid and other assets in the accompanying consolidated statements of assets and liabilities. (3) Included in other liabilities in the accompanying consolidated statements of assets and liabilities. 16

19 3. Fair Value Measurements, continued The changes in assets and (liabilities) measured at estimated fair value for which the Fund has used Level III inputs to determine fair value for the six months ended June 30, 2012 and the year ended December 31, 2011 are as follows: Assets Liabilities Investments in Real Estate at Estimated Fair Value Investments in Real Estate Partnerships at Estimated Fair Value Investments in Mortgages and Loans Receivable at Estimated Fair Value Mortgage Loans Forward Commitment Payable at Estimated Liability at Estimated Fair Value Fair Value Balance as of December 31, Level III $ 1,776,280,000 $ 589,000,753 $ 8,850,233 $ (368,102,630) $ (26,238,000) Cost (Par) Conversion of investment in real estate partnership to investment in real estate 91,162,006 (73,535,711) - (14,530,688) - Additions to real estate improvements 26,369, Investments in real estate partnerships - 75,346, Return of capital and net gain distributions from real estate partnerships - (24,403,965) (5,426,677) - - Sales and write off, at cost (289,857,823) (10,381,137) (24,573,323) - - Portion of Cabi Mezzanie Loan converted to preferred equity, at cost - 3,858,100 (3,858,100) - - Conversion of investment in real estate partnership to mortgage and loan receivable - (36,824,061) 36,824, Proceeds from mortgages payable (16,810,988) - Principal repayments on mortgage loans payable ,200,548 - Increase (decrease) in cost / (Increase) decrease in par (172,326,429) (65,940,450) 2,965, ,858,872 - Unrealized gain (loss) Reversal of previously recognized unrealized loss 79,812,174 10,381,137 26,619,750-20,340,000 Conversion of investment in real estate partnership to investment in real estate (30,001,183) 28,583, Unrealized loss recognized on portion of Cabi Mezzanine Loan converted to preferred equity - (1,341,076) 1,341, Changes in unrealized gain (loss) related to assets and liabilities still held at the end of the period 87,355,438 44,601,390 (2,820,783) (1,527,135) (2,600,000) Net change in unrealized gain (loss) 137,166,429 82,225,437 25,140,043 (1,527,135) 17,740,000 Transfer out to Level II: Cost / par - (28,170,171) Unrealized (gain) loss - assets - 11,071, Net amounts transferred - (17,098,307) Balance as of December 31, Level III $ 1,741,120,000 $ 588,187,433 $ 36,956,237 $ (265,770,893) $ (8,498,000) Included in the accompanying consolidated statements of operations for the year ended December 31, 2011: Changes in unrealized gain (loss) related to assets and liabilities still held $ 87,355,438 $ 44,087,734 $ (2,820,783) $ (1,527,135) $ (2,600,000) Realized losses related to assets sold $ (36,015,460) $ (10,381,139) $ (24,573,323) $ - $ - 17

20 3. Fair Value Measurements, continued Assets Liabilities Investments in Real Estate at Estimated Fair Value Investments in Real Estate Partnerships at Estimated Fair Value Investments in Mortgages and Loans Receivable at Estimated Fair Value Mortgage Loans Payable at Estimated Fair Value Forward Commitment Liability at Estimated Fair Value Balance as of December 31, Level III $ 1,741,120,000 $ 588,187,433 $ 36,956,237 $ (265,770,893) $ (8,498,000) Cost (Par) Additions to real estate improvements 6,057, Investments in real estate partnerships - 12,969, Return of capital and net gain distributions from real estate partnerships - (6,704,361) Sales and write off, at cost (117,575,079) (48,253,886) (6,294,050) - - Increase in mortgage loans receivable ,367, Conversion of investment in real estate partnership to mortgage and loan receivable - 808,514 (808,514) - - Proceeds from mortgages payable (96,870) - Principal repayments on mortgage loans payable ,586,486 - Increase (decrease) in cost / (Increase) decrease in par (111,517,830) (41,180,146) 25,264,998 1,489,616 - Unrealized gain (loss) Reversal of previously recognized unrealized loss 40,702,652 38,650,604 6,161, Changes in unrealized gain (loss) related to assets and liabilities still held at the end of the period 9,185,178 27,088,434 - (1,693,543) 8,498,000 Net change in unrealized gain (loss) 49,887,830 65,739,038 6,161,874 (1,693,543) 8,498,000 Transfer out to Level II: Cost / par (221,086,118) Unrealized (gain) loss - assets 118,586, Net amounts transferred (102,500,000) Balance as of June 30, Level III $ 1,576,990,000 $ 612,746,325 $ 68,383,109 $ (265,974,820) $ - Included in the accompanying consolidated statements of operations for the three months ended June 30, 2012: Changes in unrealized gain (loss) related to assets and liabilities still held $ 9,185,178 $ 27,088,434 $ - $ (1,693,543) $ 8,498,000 Realized losses related to assets sold $ (36,412,546) $ (40,019,138) $ (6,294,050) $ - $ - 18

21 3. Fair Value Measurements, continued The following is a reconciliation of the net realized and unrealized gains (losses) for Level II and III assets and liabilities for the six months ended June 30, 2012 and the year ended December 31, 2011: Net realized loss on real estate investments sold Level III: Level II: Investments in real estate $ (36,412,546) $ (36,015,460) Investments in real estate partnerships (40,019,138) (10,381,139) Investments in mortgages and notes receivable (6,294,050) (24,573,323) (82,725,734) (70,969,922) Investments in real estate partnerships (13,158,641) (18,865,900) Total - consolidated statements of operations $ (95,884,375) $ (89,835,822) Reversal of previously recognized net unrealized loss on real estate investments sold Level III: Level II: Investments in real estate $ 40,702,652 $ 79,812,174 Investments in real estate partnerships 38,650,604 10,381,137 Investments in mortgages and notes receivable 6,161,874 26,619,750 85,515, ,813,061 Investments in real estate partnerships 11,071,863 39,101,935 Total - consolidated statements of operations $ 96,586,993 $ 155,914,996 Change in net unrealized gain on real estate investments held, mortgages and loans receievable and forward commitments Level III: Level II: Investments in real estate $ 9,185,178 $ 87,355,438 Investments in real estate partnerships 27,088,434 44,087,734 Investments in mortgages and notes receivable - (2,820,783) Forward commitment liability 8,498,000 (2,600,000) 44,771, ,022,389 Investments in real estate - - Investments in real estate partnerships - 513,657 Investments in mortgages and notes receivable - - Total - consolidated statements of operations $ 44,771,612 $ 126,536,046 Change in net unrealized gain on mortgage loans and notes payable and derivative instruments: Level III: Mortgages payable $ (1,693,542) $ (1,527,135) Level II: Derivative instruments 294,000 (601,000) Total - consolidated statements of operations (1,399,542) (2,128,135) Loan fees expensed as incurred because of the FVO election (2,291) (481,148) Total - consolidated statements of operations $ (1,401,833) $ (2,609,283) 19