TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1. Consolidated Financial Statements of. Timbercreek U.S. Multi-Residential Opportunity Fund #1

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1 TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 Consolidated Financial Statements of Timbercreek U.S. Multi-Residential Opportunity Fund #1

2 TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 Independent Auditors' Report To the Unitholders of Timbercreek U.S. Multi-Residential Opportunity Fund #1: We have audited the accompanying consolidated financial statements of Timbercreek U.S. Multi-Residential Opportunity Fund #1, which comprise the consolidated statements of financial position as at 2016 and 2015, the consolidated statements of loss and comprehensive loss, changes in net liabilities and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Timbercreek U.S. Multi-Residential Opportunity Fund #1 as at 2016 and 2015, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without qualifying our opinion, we draw attention to note 1 to the financial statements. Subsequent to 2016, the Fund completed the sale of the remaining two investment properties and distributed the net proceeds to the Unitholders. As a result, the Fund has commenced the process of winding up the Fund. Chartered Professional Accountants, Licensed Public Accountants April 19, 2017 Toronto, Canada TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 1

3 TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of U.S. dollars) Note ASSETS Cash and cash equivalents $ 15,714 $ 3,430 Other assets ,907 Income tax receivable Deferred tax asset Assets held for sale 5 44,262 - Total current assets 61,622 6,317 Investment properties 4-192,730 Total noncurrent assets - 192,730 Total assets $ 61,622 $ 199,047 LIABILITIES Accounts payable and accrued liabilities $ 790 $ 2,708 Tenant rental deposits and prepaid rents Distributions payable 8,780 1,773 Mortgages payable current portion 7 11,964 1,380 Current tax liability 2,339 - Carried interest fee liability 13(c) 10,848 13,681 Liabilities related to assets held for sale 5 13,309 - Total current liabilities 48,030 6,405 Mortgages payable long-term 7-102,602 Deferred tax liability / (asset) 12-9,883 Total non-current liabilities excluding net liabilities attributable to Unitholders and U.S. Holding LP - 126,166 Net liabilities attributable to Unitholders 8 12,548 57,754 Net liabilities attributable to U.S. Holding LP 9 1,044 8,722 Total net liabilities attributable to Unitholders and U.S. Holding LP 13,592 66,476 Total liabilities including net liabilities attributable to Unitholders and U.S. Holding LP $ 61,622 $ 199,047 See accompanying notes to the consolidated financial statements. Approved by the Board of Directors of Timbercreek U.S. Multi-Residential Opportunity Fund GP #1 Inc., as general partner of Timbercreek U.S. Multi-Residential Opportunity Fund #1: Ugo Bizzarri Director Gigi Wong Director TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 2

4 TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (In thousands of U.S. dollars) Note Revenue from rental operations 11 $ 15,475 $ 23,974 Rental expenses: Property operating expenses 5,542 8,121 Realty taxes 1,573 2,242 Property management fees Total rental expenses 7,723 11,314 Net rental income 7,752 12,660 General and administrative expenses Asset management fees Fair value adjustment of investment properties 4 1,740 (14,307) Costs associated with dispositions of investment properties 1, Foreign exchange (gain)/loss 2,496 (8,713) Net finance costs: Mortgage discharge costs, net 4,563 - Interest expense 3,264 4,791 Fair value adjustment of interest rate swaps 7 (267) 99 Distributions to Unitholders and U.S. Holding LP 13(c) 51,154 24,066 Trailer fees related to Class A units 13(b) Amortization of mortgages payable financing costs Amortization of unit offering costs Total finance costs 59,649 30,099 Increase/(decrease) for carried interest fee 13(c) (2,833) 3,709 Income tax expense ,981 Net loss and comprehensive loss $ (56,066) $ (4,934) Net loss and comprehensive loss attributable to: Unitholders $ (48,365) $ (3,269) U.S. Holding LP (7,701) (1,665) Net loss and comprehensive loss $ (56,066) $ (4,934) See accompanying notes to the consolidated financial statements. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 3

5 TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES (In thousands of U.S. dollars) 2016 General Partner Class A Unitholders Class B Unitholders Class C Unitholders U.S. Holding LP Net liabilities, beginning of year $ $ 30,277 $ 607 $ 26,870 $ 8,722 $ 66,476 Foreign currency translation 1, ,155 2,599 Decrease in net assets from operations (26,458) (521) (21,386) (7,701) (56,066) Amortization of unit offering costs Net liabilities, end of year $ $ 5,704 $ 119 $ 6,725 $ 1,044 $ 13,592 Total 2015 General Partner Class A Unitholders Class B Unitholders Class C Unitholders U.S. Holding LP Net liabilities, beginning of year $ 8 $ 36,658 $ 730 $ 31,655 $ 10,355 $ 79,406 Foreign currency translation (4,754) (93) (3,876) (8,723) Increase in net assets from operations (8) (2,203) (37) (1,021) (1,665) (4,934) Amortization of unit offering costs Net liabilities, end of year $ $ 30,277 $ 607 $ 26,870 $ 8,722 $ 66,476 Total See accompanying notes to the consolidated financial statements. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 4

6 TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) Cash provided by/(used in): OPERATING ACTIVITIES Net loss and comprehensive loss $ (56,066) $ (4,934) Finance costs 60,167 30,099 Foreign exchange gain 2,496 (8,713) Fair value adjustment of investment properties 2,093 (13,840) Income tax expense 832 4,981 Income taxes paid (8,312) (5,071) Costs associated with disposition of investment properties 1, Change in working capital: Increase in tenant and other receivables (108) (659) Decrease in prepaid expenses and other assets (Increase)/decrease in holdbacks in escrow 562 (423) Increase in due from the Manager _ (33) Decrease in due from the Initial Operator _ 30 Increase/(decrease) in accounts payable and accrued liabilities (383) 849 Decrease in tenant deposits and prepaid rent (319) (58) Increase/(decrease) in provision for carried interest fees (2,833) 3,709 FINANCING ACTIVITIES (504) 7,000 Mortgage financing _ 784 Mortgage repayments (869) (1,413) Mortgages discharged (53,171) _ Finance costs paid (10,741) (5,526) Distributions to Unitholders and U.S. Holding LP (44,147) (26,240) INVESTING ACTIVITIES (108,928) (32,395) Proceeds on dispositions of investment properties 123,059 24,739 Capital expenditures to investment properties (1,343) (1,467) 121,716 23,272 Increase (decrease) in cash and cash equivalents 12,284 (2,123) Cash and cash equivalents, beginning of year 3,430 5,553 Cash and cash equivalents, end of year $ 15,714 $ 3,430 See accompanying notes to the consolidated financial statements. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 5

7 1. ORGANIZATION Timbercreek U.S. Multi-Residential Opportunity Fund #1 (the Fund ) is a limited partnership formed on August 30, 2012 and governed by the laws of the Province of Ontario. The Fund has been established for the purpose of (i) indirectly acquiring multi-residential investment properties located throughout the southeastern United States that are mispriced and/or undermanaged in the view of Timbercreek Asset Management Inc. (the Manager ); and (ii) enhancing the value of the investment properties through active management and a stabilization and improvement program, with the goal of ultimately disposing of the investment properties to generate significant gains. The registered office of the Fund is located at 25 Price Street, Toronto, Ontario M4W 1Z1. The Manager provides strategic, advisory, asset management and other services necessary to manage the day-to-day operations of the Fund and the properties. The Manager entered into an operating agreement with Elco Apartment Residential Holdings, LLC (the Initial Operator ) to identify multi-residential property investment opportunities, and ultimately properly manage, reposition and redevelop the investment properties. Effective January 20, 2016, the Manager replaced the Initial Operator by entering into residential property management agreement with BH Management Services, LLC (the Property Manager ) to manage day to day operations of all the investment properties. As at 2016, the Fund indirectly owns 88.5% ( %) of the equity of Timbercreek U.S. Multi-Residential Operating LP ( Operating LP ), a limited partnership formed pursuant to and governed by the laws of Delaware. The remaining interest in Operating LP is held by Timbercreek U.S. Multi-Residential (U.S.) Holding L.P. ( U.S. Holding LP ), a controlling interest of which is held by an affiliated entity of the Initial Operator. The assets of the Fund are indirectly held by the Operating LP, which carries out the business of the Fund. Timbercreek U.S. Multi-Residential Opportunity Fund #1 G.P. Inc. is the general partner of the Fund (the General Partner ). The General Partner is a wholly-owned subsidiary of the Manager. The net income of the Fund is allocated as 0.01% to the General Partner and 99.99% to the limited partners. The term of the Fund was four years beginning on October 25, 2012, being the closing date of the Fund s initial public offering, subject to a single one-year extension at the discretion of the General Partner (the Term ) or to earlier termination upon the sale of the Fund s final investment property. On August 17, 2016, the General Partner extended the term of the Fund by one year in order to dispose of the remaining investment properties and effectively wind-up the Fund. Subsequent to 2016, the Fund completed the sale of the remaining two investment properties and distributed $10,186 from the net proceeds to the Unitholders and the General Partner. As a result, the Fund has commenced the process of winding up the fund, which includes filing of final tax returns and dissolution of the subsidiaries. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 6

8 2. BASIS OF PRESENTATION (a) Statement of compliance The consolidated financial statements of the Fund have been prepared in accordance with International Financial Reporting Standards ("IFRS") and were authorized for issue by the General Partner on April 19, (b) Basis of measurement These consolidated financial statements have been prepared on a historical cost basis, except for investment properties and the interest rate swap contracts, which have been measured at fair value. The preparation of these consolidated financial statements requires the use of certain critical accounting estimates. It also requires the Manager to exercise judgment in the process of applying the Fund's accounting policies. Areas involving a high degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 3(j). (c) Functional and presentation currency The functional and presentation currency of the Fund is U.S. dollars. Transactions in currencies other than the U.S. dollar are translated at the exchange rate on the transaction date. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into U.S. dollars at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in U.S. dollars at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in U.S. dollars translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into U.S. dollars at the exchange rate on the date that the fair value was determined. Foreign currency differences arising on translation are recognized in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. 3. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of consolidation These consolidated financial statements include the accounts of the Fund and its controlled subsidiaries. The Fund controls an entity when it is exposed to or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of its subsidiaries included in these consolidated financial statements are from the date that control commences until the date that control ceases. (b) Investment properties The Fund accounts for real estate classified as investment property using the fair value method. A property is determined to be an investment property when it is principally held to earn rental income, capital appreciation or both. Investment properties are initially measured at cost, including transaction TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 7

9 costs associated with acquiring the property where such acquisitions are determined to be an asset acquisition. Subsequent to initial recognition, investment properties are carried at fair value at each reporting date with any gains or losses arising from changes in fair value recognized in the consolidated statement of income and comprehensive income during the period in which they arise. The fair value of investment properties reflects, among other things, rental income from current leases and assumptions about rental income, appropriate discount rates, capitalization rates and estimates of future rental income, operating expenses and capital expenditures. Subsequent capital expenditures are charged to investment properties only when it is probable that future economic benefits of the expenditure will flow to the Fund and the cost can be measured reliably. Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying amount and are recognized in the consolidated statements of income and comprehensive income in the year of disposal. (c) Revenue recognition The Fund has retained substantially all of the risks and benefits of ownership of its investment properties and therefore accounts for its leases with tenants as operating leases. Revenue from investment properties includes all rental income earned from the properties, including residential tenant rental income, parking income, laundry income, cable and antenna income and all other miscellaneous income paid by the tenants under the terms of their existing leases. Revenue recognition under a lease commences when a tenant has a right to use the leased unit and is recognized pursuant to the terms of the lease agreement. (d) Finance costs Finance costs consist of interest on mortgages payable, amortization of financing costs relating to placement of mortgages payable, amortization of offering costs relating to the units, distributions to the Unitholders and U.S. Holding LP, fair value changes on interest rate swaps and trailer fees related to Class A units. (e) Financial instruments Financial instruments are classified as one of the following: (i) fair value through profit and loss ( FVTPL ), (ii) loans and receivables, (iii) held-to-maturity, (iv) available-for-sale, or (v) other liabilities. Financial instruments are recognized initially at fair value plus, in the case of financial instruments not classified as FVTPL, any incremental direct transaction costs. Financial assets and liabilities classified as FVTPL are subsequently measured at fair value with gains and losses recognized in profit and loss. Financial instruments classified as held-to-maturity, loans and receivables or other liabilities are subsequently measured at amortized cost. Available-for-sale financial instruments are subsequently measured at fair value and any unrealized gains and losses are recognized through other comprehensive income. The classification of financial instruments is outlined in note 16. The Fund classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument. The Fund has no held-fortrading, available-for-sale or held-to-maturity investments. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 8

10 Transaction costs relating to financial instruments measured at amortized cost are amortized using the effective interest rate method over the anticipated life of the related instrument. (f) Cash and cash equivalents The Fund considers highly liquid investments with an original maturity of three months or less that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value to be cash equivalents. (g) Fair value of derivatives The Fund s derivatives consist of two interest rate swap contracts used to economically hedge exposure to variable cash flows associated with interest payments on two of the Fund s mortgages. Management estimates the fair value of this derivative as the present value of expected future cash flows to be received or paid, based on available market data, which includes market yields and counterparty credit spreads. (h) Assets held for sale The Fund s assets and liabilities are classified as held for sale when their carrying amount is to be recovered through a sale transaction and the sale is considered highly probable. Investment properties held for sale continue to be accounted for using the fair value method. (i) Income taxes The Fund is organized as a partnership for Canadian tax purposes and therefore the taxable income for Canadian tax purposes is subject to tax payable by the Unitholder. The Fund has a subsidiary that is considered to be a corporation for U.S. tax purposes. Therefore, this subsidiary is subject to U.S. tax on its taxable income. Taxes paid by the subsidiary are allocated to the Unitholders and may be available as a credit against the Canadian taxes otherwise payable. Accordingly, the Fund provides for income tax with respect to its taxable subsidiary. Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates and laws enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for: temporary differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; temporary differences on the initial recognition of assets or liabilities in a transaction that are not a business combination and that affects neither accounting nor taxable profits; and taxable temporary differences arising on the initial recognition of goodwill. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 9

11 Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. In determining the amount of current and deferred tax, the Fund takes into account the impact of uncertain tax provisions and whether additional taxes and interest may be due. The Fund believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax laws and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Fund to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable (which the Fund has defined as more likely than not) that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. (j) Critical judgments and estimates In the preparation of these consolidated financial statements, the Manager has made judgments, estimates and assumptions that affect the application of the Fund s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In making estimates and judgments, the Manager relies on external information and observable conditions where possible, supplemented by internal analysis as required. There are no known trends, commitments, events or uncertainties that management believes will materially affect the methodology or assumptions utilized in making those estimates and judgments in these consolidated financial statements. The significant estimates and judgments used in determining the recorded amounts for assets and liabilities in the consolidated financial statements include the following: (i) Measurement of fair values The Fund s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or liability, the Fund uses market observable data wherever possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: Level 1: Level 2: Quoted prices (unadjusted) in active markets for identical assets or liabilities; Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); or TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 10

12 Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The Manager reviews significant unobservable inputs and valuation adjustments. If third party information, such as appraisals, is used to measure fair values, the Manager will assess the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified. Information about the assumptions made in measuring fair value is included in the following notes: Note 4 investment properties; Note 7 interest rate swap contract; and Note 16 financial instruments and fair value measurement. (ii) Provision for carried interest fee The provision for the carried interest fee is calculated based on the fair value of the investment properties and the General Partner s estimated cash surplus distribution in accordance with note 13(c) as at (k) Future changes in accounting policies A number of new standards, amendments to standards and interpretations are effective in future periods and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Company are set out below. The Company does not plan to adopt these standards early. (i) Annual improvements to IFRS ( ) Cycle On December 8, 2016 the IASB issued narrow-scope amendments to IFRS 12 Disclosures of Interests in Other Entities ( IFRS 12 ) as part of its annual improvements process. A clarification was made that IFRS 12 also applies to interests that are classified as held for sale, held for distribution, or discontinued operations, effective retrospectively for annual periods beginning on or after January 1, The Company intends to adopt these amendments in its financial statements for the annual period beginning on January 1, The Company does not expect the amendments to have a material impact on the financial statements. (ii) Disclosure Initiative (Amendments to IAS 7) On January 7, 2016 the IASB issued Disclosure Initiative (Amendments to IAS 7). The amendments apply prospectively for annual periods beginning on or after January 1, Earlier application is permitted. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. The Company will adopt the amendments to IAS 7 in its financial statements for the annual period beginning on January 1, The Company does not expect the amendments to have a material impact on the financial statements. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 11

13 4. INVESTMENT PROPERTIES Balance, beginning of period $ 192,730 $ 139,500 Capital expenditures 1,343 1,276 Fair value adjustment (2,093) 15,154 Disposition of investment properties (note 5) (147,980) - Transfer from/(to) assets held for sale (44,000) 36,800 $ - $ 192,730 The investment properties are pledged as security for the mortgages payable. As at 2016, the Fund has classified its remaining two investment properties, Chelsea Commons and Alexander Pointe, as held for sale upon entering into purchase and sale agreements for the sale of these investment properties on November 28, 2016 and December 6, 2016, respectively. Upon reclassification of the investment properties to assets held for sale, the carrying values were adjusted to the selling prices in the purchase and sale agreements. The fair value measurement has been categorized as a level 3 fair value based on the inputs to the valuation technique used. The following table shows the valuation technique used in measuring the fair value of the investment properties: Valuation Technique Direct Capitalization Method: The valuation model is based on the conversion of stabilized net operating income generated from the property to a market value. The stabilized net operating income is capitalized with an overall rate that reflects the investment characteristics offered by the asset (quality of building, amenities, location, etc.). Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase/(decrease) if: - Overall capitalization rates were lower/(higher) - Occupancy rates were higher/(lower) - Market rental rates were higher/(lower) The key valuation assumptions used in establishing the fair value of the investment properties, including investment properties transferred to assets held for sale as at 2015, are set out in the following table: TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 12

14 2015 Capitalization rates: Range 5.50% to 6.50% Weighted average 5.84% Occupancy rate 94% Market rental rates per unit weighted average per month (in dollars) $ ASSETS AND RELATED LIABILITIES HELD FOR SALE Prepaid expenses and other assets $ 133 $ - Holdbacks in escrow Investment properties 44,000 - Assets held for sale 44,262 - Accounts payable and accrued liabilities Tenant rental deposits and prepaid rents Mortgages payable 12,852 - Liabilities related to assets held for sale 13,309 - Net assets held for sale $ 30,953 $ - (a) On July 18, 2016, the Fund completed the sale of Granite Park for a total selling price of $38,000. The transaction was settled through the assumption of mortgage of $23,354 and cash of $14,646 before working capital adjustments. (b) On August 15, 2016, the Fund completed the sale of Eagle Landing for a selling price of $45,500 which was settled in cash. On closing, the Fund used the proceeds to defease the first mortgage of $21,728 inclusive of defeasance costs of $2,769, and prepaid the second mortgage of $5,872, including prepayment penalties of $656. In addition, on closing the Fund derecognized the mark-to-market adjustment of mortgage of $831 and is offset by the mortgage discharge costs on the consolidated statement of loss and comprehensive loss. (c) On August 15, 2016, the Fund completed the sale of Watercrest for a selling price of $38,280 which was settled in cash. On closing, the Fund used the proceeds from sale to defease the first mortgage of $19,404 inclusive of defeasance costs of $2,474 and prepaid the second mortgage of $3,822, including prepayment penalties of $427. In addition, on closing the Fund derecognized the mark to market adjustment of debt of $931 and is offset by the mortgage discharge costs on the consolidated statement of loss and comprehensive loss. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 13

15 (d) On November 30, 2016, the Fund completed the sale of Lake Ellenor for a selling price of $26,200 which was settled in cash. On closing, the Fund used the proceeds to repay the mortgage of $13,859. (e) On November 28, 2016, the Fund entered into a purchase and sale agreement for the sale of Chelsea Commons for a total selling price of $23,600. The transaction was settled through the assumption of mortgage of $12,832 and cash of $10,768 before working capital adjustments. The Fund closed on the disposition on January 31, (f) On December 6, 2016, the Fund entered into a purchase and sale agreement for the sale of Alexander Pointe for a total selling price of $20,400. On closing, the Fund used the proceeds to repay the mortgage of $11,964 and discharged the interest rate swap contract. The Fund closed on the disposition on February 15, OTHER ASSETS Tenant and other receivables $ 730 $ 760 Prepaid expenses and other assets 456 Holdbacks in escrow (a) 691 $ 730 $ 1,907 (a) Holdbacks in escrow consist of cash on deposit requested by the lenders to be retained in escrow to pay for planned capital expenditures relating to the investment properties. These funds are released by the lender to pay the respective obligations as they become due. 7. MORTGAGES PAYABLE Minimum future principal repayments $ 11,964 $ 102,211 Mark-to-market adjustment 1,991 Unamortized financing costs (220) Total mortgages payable $ 11,964 $ 103,982 Less: current portion 11,964 1,380 $ $ 102,602 Mortgage payable at a variable interest rate bears interest at one-month LIBOR plus 1.70%, which at 2016 is 2.36% ( %), and matures in Mortgage payable, included in liabilities held for sale, at a fixed interest rate bears interest at 3.79% at 2016 ( 2015 ranging between 3.79% and 5.78%), with a weighted average rate of 3.79% at 2016 (December 31, %), and matures in Collectively, the weighted average interest rate on mortgages payable is 3.10% ( %). TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 14

16 The Fund entered into two interest rate swap agreements during 2014 with a notional amount of $13,975 and $12,000 maturing on November 26, 2020 and December 10, 2020, respectively, which economically fixes the interest rate on two of the Fund s mortgages at 4.14% and 4.27%. On November 30, 2016, one interest rate swap was discharged upon disposition of the underlying investment property. The fair value of the remaining swap at 2016 is a liability of $421 ( 2015 $1,208) and the fair value of $421 is included in the accounts payable and accrued liabilities in the statement of financial position. Mortgages payable are secured by the investment properties and are guaranteed by the Initial Operator and/or the Initial Operator s key principal. 8. UNITHOLDERS LIABILITIES The Fund is authorized to issue an unlimited number of Class A Units, Class B Units and Class C Units (collectively, the Units and the holders of such Units being Unitholders ), all of which rank equally with respect to distributions, except as set out below. Each Unit entitles the holder to the same rights and obligations as all other Unitholders and no Unitholder is entitled to any privilege, priority or preference in relation to any other holder of Units, subject to the proportionate entitlement of the holders of Class A Units, Class B Units and Class C Units to participate in distributions made by the Fund and to receive proceeds upon termination of the Fund, in each case based on the proportionate share of each class of Units (taking into account the agents fees incurred in connection with the issuance of such Units, as applicable). Class A and Class B Units are publicly offered; however, there is no market through which these Units may be sold or redeemed. Class B units differ from Class A units in that they have a minimum commitment by an investor of $20 (Canadian Dollars), include a reduced agents fee and there is no trailer fee payable in respect of the Class B Units. The Class C Units are offered by private placement and are designed for the Manager and certain institutional, high-net-worth and other investors. The Class C Units differ from Class A Units and Class B Units in that the costs associated with the private placement of the Class C Units are lower than the costs associated with the public offering of Class A and Class B Units and there is no trailer fee payable in respect of the Class C Units. The Fund is not required to redeem Units prior to the completion of the Term. Under IFRS, a financial liability arises from a contractual obligation to deliver cash or another financial asset to another party. The limited life of the Fund creates an obligation for the Fund to repay Unitholders at the end of the Term and, as a result, the Units meet the definition of a financial liability. Thus the Units are classified as liabilities attributable to Unitholders in the consolidated statements of financial position and are measured at their residual amount. The Unitholders liabilities of the Fund are denominated in Canadian dollars and are translated into U.S. dollars at each reporting date. As the Units are classified as liabilities, the distributions on these Units are recognized as part of finance costs. In addition, the issue costs incurred on the offerings are amortized to finance costs over the Term of the Fund. The Units outstanding are as follows: TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 15

17 Class A Units 3,345,096 3,345,096 Class B Units 66,500 66,500 Class C Units 2,736,275 2,736,275 General Partner Units ,148,522 6,148, INTERESTS IN OTHER STRUCTURED ENTITIES The Fund has interests in two structured entities, including a 99.99% ( %) interest in Timbercreek U.S. Multi-Residential Holding Partnership and its 88.5% interest ( %) in Operating LP. Although the Fund does not have substantive voting rights in these structured entities, the General Partner determined that the Fund should consolidate these entities as it receives the majority of the returns related to their operations. The interest attributable to U.S. Holding LP results from the issuance of Class A units of Operating LP to U.S. Holding LP. Substantially all of the assets, liabilities, revenue and expenses of the Fund are held within and earned from the operations of Operating LP. 10. RELATED PARTY TRANSACTIONS AND BALANCES Except as disclosed elsewhere in these consolidated financial statements, related party transactions and transactions with the Manager include the following transactions and balances. The Manager, the General Partner and the Fund are related by virtue of common management. In accordance with the Asset Management Agreement (note 13(a)), for the year ended 2016, $543, $608, and $303 ( 2015 $565, $951, and $601), was charged by the Manager to the Fund relating to asset management fees, property management fees, and acquisition fees, respectively. The acquisition fees are capitalized to the cost of investment properties. As at 2016, $32 ( 2015 $84) was payable to the Manager relating to management fees and other costs and is included in the accounts payable and accrued liabilities. As at 2016, $5,424 ( 2015 $6,841) was payable to the Manager relating to the carried interest fee. As at 2016, nil ( 2015 $110) was payable to the Initial Operator for shared expenses incurred. As at 2016, $5,424 ( 2015 $6,840) was payable to the Initial Operator relating to the carried interest fee and is included in carried interest fee liability. 11. OPERATING LEASES The Fund leases residential rental properties under operating leases generally with a term of not more than 12 months and, in many cases, tenants lease rental space on a month-to-month basis. As such, rental revenue represents all revenue earned from the Fund s operating leases and totaled $15,475 for the year ended 2016 ( 2015 $23,974). TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 16

18 12. INCOME TAXES The Fund is not subject to Canadian income taxes on income earned and gains realized by the Fund as those amounts will be included in the taxable income of its Unitholders. The Fund has a subsidiary that is subject to U.S. corporate taxes. The current income tax expense of the subsidiary is available as a tax credit to the Unitholders. The effective tax rate on income before taxes and distribution expenses of 0% ( %) differs from the statutory tax rate of 37% (December 31, %) as a portion of the Fund s income is not subject to U.S. income tax. The tax expense for the year ended 2016 of $832 ( 2015 $4,981) is comprised of $10,799 ( 2015 $949 expense) of deferred tax recovery and $11,631 ( 2015 $4,032) of current tax. As at 2016, the Fund has recorded a net deferred tax asset of $916 ( 2015 $9,883 liability) due to temporary differences between the book carrying amount and tax cost of properties net of losses available for carry forward. 13. COMMITMENTS (a) Asset Management Agreement The Fund has entered into an asset management agreement ( Asset Management Agreement ) with the Manager. Pursuant to the Asset Management Agreement, the Manager is responsible for strategic, advisory, asset management, property management, leasing, construction management and administration services necessary to manage the day-to-day operations of the Fund and its properties. The Manager is entitled to asset management fees, property management fees, acquisition fees and capital management fees. However, these shall not exceed, on an aggregate basis 1% per annum of the Fund s total assets, provided that if such fees exceed 1% per annum of the Fund s total assets, excluding carried interest fees, the excess amount shall be carried forward and paid in the first subsequent year in which the total fees paid do not exceed 1% per annum of the Fund s total assets, up to an amount that, together with the total fees paid in such year, is equal to 1% of the Fund s total assets for such year. Any excess carried forward at the end of the Term shall not be paid. The excess amount carried forward as at 2016 is $288 ( 2015 $581). The description of the individual fees is as follows: An asset management fee equal to 1% per annum of the gross subscription proceeds of any one or more subsequent offerings, plus applicable taxes, calculated and payable monthly in arrears; A property management fee equal to 4% per annum of the effective gross rental income of the Operating LP, plus applicable taxes, payable monthly in arrears; An acquisition fee equal to 1% of the gross purchase price of each property (or interest in a property), which shall also include, but is not limited to, due diligence costs, closing costs, legal fees and any additional capital costs incurred in connection with the acquisition of the property, plus applicable taxes, payable on the completion of each acquisition; and TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 17

19 A capital project management fee equal to 4% of the total costs of the applicable renovation and repositioning program, plus applicable taxes, with 50% of such fee payable at the beginning of the program and the remaining 50% at completion of the program. In addition, the Manager and the Initial Operator are entitled to a carried interest fee based on the performance of the Fund, as described in the Distributions section below. Effective January 20, 2016, the Manager replaced the Initial Operator by entering into a residential property management agreement with BH Management Services, LLC (BH), where BH became the new property manager of the investment properties portfolio. The Manager pays 3% of the monthly gross income from the investment properties to BH as property management fees. (b) Trailer fees The Fund pays an annual trailer fee equal to 0.5% of the gross subscription proceeds received for the Class A units to registered dealers from cash available for distribution to holders of Class A units based on the number of Class A units held by clients of such registered dealers at the end of the relevant quarter (calculated and paid at the end of each calendar quarter). The Fund incurred trailer fees of $129 for the year ended 2016 ( 2015 $136). (c) Distributions Distributions will be made by Operating LP indirectly to Unitholders and holders of U.S. Holding LP Units ( U.S. Unitholders ) in the following order of priority: First, 100% to the holders of Operating LP units (pro-rata), until they have received cumulative distributions equal to their aggregate contributed capital; Second, 100% to the holders of Operating LP units (pro-rata) until they have been paid an 8% annual preferred return on all amounts contributed by them; Third, 75% to the holders of Operating LP units (pro-rata) and 25% to the Manager and the Initial Operator (with each receiving 50% of such amount) for any distributions until the holders of Operating LP Units have been paid a cumulative 14% annual preferred return on all amounts contributed by them ( Carried Interest Fee ); and Thereafter, 65% to the holders of Operating LP Units (pro-rata) and 35% to the Manager and the Initial Operator (with each receiving 50% of such amount). The applicable preferred return thresholds shall be calculated on a pre-tax basis and in U.S. dollars. During the year, the General Partner assessed that it is probable that the Fund will achieve cumulative preferred returns over the thresholds outlined above and as a result has recorded a liability with respect to the Carried Interest Fee in the amount of $10,848 (2015 $13,681). This reflects the Manager s best estimate in light of the fair value of the investment properties. Subsequent to year-end, after the disposition of the remaining two investment properties, the Fund paid $8,000 of the Carried Interest Fee. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 18

20 The Fund intends to pay distributions to Unitholders on a quarterly basis within 15 days following the end of each quarter. The Fund also pays distributions from the proceeds of sale of investment properties. The Fund declared distributions as follows: Year ended 2016 Year ended 2015 Per Unit Total Per Unit Total Class A $ $ 23,655 $ $ 11,206 Class B Class C , ,272 U.S. Holding LP , ,363 Total $ 51,154 $ 24,066 The distributions paid to Unitholders are net of income taxes payable by the Fund s taxable subsidiary. The income taxes paid will generally be available to Unitholders as foreign tax credits. 14. CAPITAL MANAGEMENT The Fund defines its capital structure to include mortgages payable and net liabilities attributable to Unitholders and U.S. Holding LP. There have been no changes since the previous year. 15. RISK MANAGEMENT The General Partner of the Fund has the overall responsibility for the establishment and oversight of the Fund's risk management framework. The Fund's risk management policies are established to identify and analyze the risks faced by the Fund, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in response to the Fund's activities. In the normal course of operations, the Fund is exposed to various financial risks, including changes in interest rates and government regulatory controls. The following describes these financial risks and how they are managed by the Fund: (a) Risk management (i) Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of financial assets or financial liabilities will fluctuate because of changes in market interest rates. As of 2016, $11,964 of mortgages payable ( 2015 $25,823) bear interest at variable rates. However, the Fund has entered into an interest rate swap contract of $12,000, effective from December 10, 2014, which fixes the interest rates of variable interest rate mortgages at 4.27%. (ii) Credit risk Credit risk is the risk of financial loss to the Fund if a tenant or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Fund's receivables from tenants. Since the Fund is exposed to credit risk by the collection of accounts TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 19

21 receivable from tenants, the Property Manager routinely obtains credit history reports on prospective tenants before entering into a tenancy agreement. In addition, the Property Manager obtains security deposits from tenants in geographic regions where permitted by law. (iii) Liquidity risk Liquidity risk is the risk that the Fund will not be able to meets its financial obligations as they fall due. Real estate property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may tend to limit the Fund's ability to vary its portfolio promptly in response to changing economic or investment conditions. If the Fund were required to liquidate a real estate property investment, the proceeds to the Fund might be significantly less than the aggregate carrying value of such property. The Fund manages cash from operations and its capital structure to ensure that there are sufficient resources to operate the investment properties, make capital and development expenditures, meet its debt servicing obligations, fund general administrative costs and make distributions. The Fund intends to pay its financial liabilities as they become due. Carrying amount Contractual cash flow Within a year Mortgage payable $ 11,964 $ 11,964 $ 11,964 Liabilities related to assets held for sale 13,309 13,309 13,309 Accounts payable and other liabilities Distributions payable 8,780 8,780 8,780 Carried interest fee liability 10,848 10,848 10,848 Net liabilities attributable to Unitholders 12,548 12,548 12,548 Net liabilities attributable to U.S. Holding LP 1,044 1,044 1,044 $ 59,283 $ 59,283 $ 59,283 (iv) Currency risk Currency risk is the risk that the Fund faces from fluctuations in exchange rates. The revenues and expenses of the investment properties are denominated in U.S. dollars and distributions made to the Fund by the Operating LP are in U.S. dollars. The Fund converts such distribution amounts received into Canadian dollars prior to distributions to Unitholders. As a consequence, distributions of the Fund will be affected by fluctuations in the Canadian/U.S. dollar exchange rate. The Fund does not enter into any hedging arrangements to limit the impact of changes in the Canadian/U.S. dollar exchange rate. TIMBERCREEK U.S. MULTI-RESIDENTIAL OPPORTUNITY FUND #1 20