UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2013

or

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

For the transition period from                      to                     

Commission File Number 000-54295

INREIT Real Estate Investment Trust

(Exact name of registrant as specified in its charter)

North Dakota	90-0115411
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
1711 Gold Drive South, Suite 100 Fargo, North Dakota	58103
(Address of principal executive offices)	(Zip Code)

(701) 353-2720

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and formal fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Shares of Beneficial Interest

(Title of Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    ¨  Yes     x  No

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

Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

The aggregate market value of the common shares of beneficial interest held by non-affiliates as of June 30, 2013 was approximately $63,517,998, computed by reference to the price at which the common shares was last sold as of such date. The common shares of beneficial interest are not listed on any national exchange or over-the-counter market or quoted on any national securities market.

Indicate the number of shares outstanding of each of the issuer’s classes of common shares, as of the latest practicable date.

Class	Outstanding at March 24, 2014
Common Shares of Beneficial Interest, $0.01 par value per share	5,403,973.0153

Documents Incorporated by Reference: Portions of INREIT’s Proxy Statement for its 2014 Annual Meeting of Shareholders, which INREIT intends to file with the Securities and Exchange Commission within 120 days after the end of INREIT’s fiscal year ended December 31, 2013, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K to the extent described herein. If INREIT does not file its Proxy Statement on or before 120 days after the end of its 2013 fiscal year, INREIT will file the required information in an amendment to this Annual Report on Form 10-K.

INREIT Real Estate Investment Trust

INDEX

	PAGE
PART I
Item 1. Business		2
Item 1A. Risk Factors		7
Item 1B. Unresolved Staff Comments		29
Item 2. Properties		30
Item 3. Legal Proceedings		35
Item 4. Mine Safety Disclosures		35
PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		35
Item 6. Selected Financial Data		39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 7A. Quantitative and Qualitative Disclosures about Market Data		52
Item 8. Financial Statements and Supplementary Data		52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		52
Item 9A. Controls and Procedures		52
Item 9B. Other Information		53
PART III
Item 10. Trustees, Executive Officers and Corporate Governance		53
Item 11. Executive Compensation		53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		53
Item 13. Certain Relationships and Related Transactions, and Trustee Independence		53
Item 14. Principal Accountant Fees and Services		53
PART IV
Item 15. Exhibits and Financial Statement Schedules		54
Signatures		55
Reports of Independent Registered Public Accounting Firms and Financial Statements		F-2

NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements included in this Annual Report on Form 10-K and the documents incorporated into this document by reference contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include statements regarding our plans and objectives, including, among other things, our future financial condition, anticipated capital expenditures, anticipated dividends and other matters. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. These statements are only predictions and are not historical facts. Actual events or results may differ materially.

The forward-looking statements included herein are based on our current expectations, plans, estimates and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of the assumptions underlying the forward-looking statements contained herein could be inaccurate. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure readers that the forward-looking statements included in this filing will prove to be accurate. The accompanying information contained in this Annual Report on Form 10-K, including, without limitation, the information set forth under the section entitled “Risk Factors” in Item 1A, identifies important additional factors that could materially adversely affect actual results and performance. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

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PART I

ITEM 1. BUSINESS

GENERAL

INREIT Real Estate Investment Trust (“we,” “us,” “our,” “Company” or “INREIT”) is a real estate investment trust (“REIT”), formed in North Dakota as an unincorporated business trust on December 3, 2002. References in this Annual Report on Form 10-K to the “Company,” “INREIT,” “we,” “us,” or “our” include consolidated subsidiaries, unless the context indicates otherwise. We were formed for the purpose of investing in a diversified portfolio primarily of commercial properties (such as retail, office and medical) and multi-family dwellings (such as apartment buildings and senior assisted or independent living centers). As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our dividends and other factors. At December 31, 2013, we owned directly or through our operating partnership, 122 properties in eleven states.

UPREIT Structure

We operate as an Umbrella Partnership Real Estate Investment Trust, which is a REIT that holds all or substantially all of its assets through a partnership which the REIT controls as general partner. Therefore, we conduct substantially all of our investment activities and hold all or substantially all of our assets through our operating partnership INREIT Properties, LLLP. We control the operating partnership as the general partner and own approximately 28.7% of the operating partnership as of December 31, 2013. For purposes of satisfying the asset and income tests for qualification as a REIT for tax purposes, our proportionate shares of the assets and income of our operating partnership are deemed to be our assets and income.

Operating Partnership

Our operating partnership, INREIT Properties, LLLP, was formed as a North Dakota limited liability limited partnership on April 25, 2003 to acquire, own and operate properties on our behalf. The operating partnership holds a diversified portfolio of commercial properties and multi-family dwellings located principally in the upper and central Midwest United States.

Since our formation, our focus has consisted of owning and operating income-producing real estate properties. In 2006, we held 23 total properties approximating $56 million in total assets. Between 2007 and 2013, we focused extensively on strengthening the multifamily component of our portfolio, acquiring properties directly or through UPREIT transactions. A majority of these multifamily properties were located in North Dakota. By the end of 2013, our portfolio has grown to 122 properties, approximating $448.3 million in total assets, which includes assets held for sale, and book equity, including noncontrolling interests, of approximately $197.2 million as of December 31, 2013. As of December 31, 2013, our portfolio contained approximately 5,947 apartment units and 1,404,412 square feet of leasable commercial space.

As of December 31, 2013, approximately 63.1% of the properties were apartment communities located primarily in North Dakota with others located in Minnesota and Nebraska. Most multi-family dwelling properties are leased to a variety of tenants under short-term leases.

As of December 31, 2013, approximately 36.9% of the properties were comprised of office, retail and medical commercial properties located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Mississippi, Minnesota, Nebraska, Texas and Wisconsin. Most commercial properties are leased to a variety of tenants under long-term leases.

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OUR PEOPLE

We do not have any employees. Instead, we rely on our external Advisor to conduct our day-to-day affairs.

Our Advisor

Our external Advisor is INREIT Management, LLC, a North Dakota limited liability company formed on November 14, 2002. Our Advisor is responsible for managing our day-to-day affairs and for identifying, acquiring and disposing investments on our behalf. The Advisor is owned in part by Kenneth Regan, a trustee and our Chief Executive Officer, and by an entity controlled by James Wieland, also one of our trustees. In addition, Messrs. Regan and Wieland serve on the Board of Governors of the Advisor. From 2007 to 2013, our Advisor’s staff increased in number and expertise, growing from 4 to 9 full-time employees including a president, chief accounting officer, controller, accountant and finance manager.

Our Board of Trustees and Executive Officers

We operate under the direction of our Board of Trustees, the members of which are accountable to us and our shareholders as fiduciaries. In addition, the Board has a specific fiduciary duty to supervise our relationship with the Advisor, and evaluates the performance of and fees paid to the Advisor on an annual basis prior to renewing the Advisory Agreement with the Advisor. The Advisory Agreement was approved by the Board of Trustees (including all the independent trustees) on March 28, 2013, effective January 1, 2013. Our Board of Trustees has provided investment guidance for the Advisor to follow, and must approve each investment recommended by the Advisor. Currently, we have nine members on our board, seven of whom are independent of our Advisor. Our trustees are elected annually by our shareholders.

Although we have executive officers, we do not have any paid employees. Our President, Chief Executive Officer, Chief Accounting Officer, Treasurer and Secretary are also officers, employees, owners or governors of our Advisor. Among others, such executive officers oversee our Advisor’s day-to-day operations with respect to us. However, when doing so, such executive officers are acting on behalf of our Advisor in performing the Advisor’s obligations under the Advisory Agreement. Generally, the only services performed by our executive officers in their capacity as our executive officers are those required by law or regulation, such as executing documents as required by North Dakota law and providing certifications required by the federal securities laws. The Advisor is paid a management fee, acquisition fee, disposition fee, financing fee, and development fee, as applicable. For additional information regarding these fees see Note 15 to the financial statements.

Organizational Structure

The following chart shows our structure:

(1) The Advisor is owned in part by our Chief Executive Officer and Trustee Mr. Kenneth P. Regan (33.00%), by Wieland Investments, LLLP, an entity controlled by our Trustee Mr. James S. Wieland (33.00%) and by our President Bradley J. Swenson (5%). In addition, Mr. Regan serves as the Chief Executive Officer and Chairman of the Board of the Advisor, and Messrs. Wieland and Swenson serve on the Board of Governors of the Advisor.

(2) The Advisor serves as both our and our operating partnership’s advisor. The Advisor does not own any of our shares. Messrs. Regan and Wieland beneficially own approximately 2.4% and 1.6%, respectively, of our shares as of December 31, 2013.

(3) We control the operating partnership as the general partner, and own approximately 28.7% of the operating partnership as of December 31, 2013. Mr. Regan and Mr. Wieland beneficially owned and had voting power over approximately 12.5% and 9.8%, respectively, of the operating partnership as of December 31, 2013.

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OUR CORE INVESTMENT OBJECTIVES AND STRATEGY

Investment Objectives

Our primary investment objectives are to:

• acquire quality real estate properties or interests in real estate properties that can provide stable cash flow for distribution to our shareholders, preservation of capital and realization of long-term capital appreciation upon the sale of such properties;

• offer an investment option in which the value of the common shares is correlated to real estate as an asset class rather than traditional asset classes such as stocks and bonds; and

• provide a hedge against inflation through use of month-to-month rentals or short-term and long-term lease arrangements with rental properties tenants.

We may change our investment objectives only with the approval of holders of a majority of the outstanding common shares.

Investment Strategy

Our investment strategy is primarily to acquire and hold a diverse portfolio of:

• commercial real estate properties or portfolios or real estate properties in various sectors, including multi-family residential, senior housing, retail, office, medical and other commercial properties, including restaurants, primarily located in the central corridor of the contiguous 48 states; and

• ownership interests in real estate properties in various sectors, including multi-family residential, senior housing, retail, office, medical and other commercial properties located in these markets.

The majority of our acquisitions are located in or near metropolitan areas. However, there is no limitation on the geographic areas in which we may acquire targeted investments.

We may acquire portfolios of real estate properties held by individual owners and real estate properties held by funds, including hedge funds. We anticipate such property owners will primarily sell the properties in exchange for limited partnership interests of the operating partnership.

We may make investments alone or together with other investors, including with affiliates of the Advisor, through holding company structures or joint ventures, real estate partnerships, tenant-in-common deals, REITs or other collective investment vehicles.

Investment Guidance

Our Board of Trustees has provided investment guidance to the Advisor to direct our investment strategy. Changes to our investment guidance must be approved by our Board. The Advisor has been authorized to execute (1) commercial real estate property acquisitions and dispositions and (2) investments in other real estate related assets, in each case so long as such investments are approved by our Board. Our Board will at all times have ultimate oversight over our investments and may change from time to time the scope of authority delegated to our Advisor with respect to acquisition and disposition transactions.

Currently, our investment guidance is that our real estate investments be allocated approximately as follows:

• up to 50% in multi-family and apartment properties;

• up to 20% in commercial office properties;

• up to 10% in retail properties;

• up to 10% in medical properties;

• up to 10% in industrial properties; and

• up to 5% in restaurant properties.

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Despite our intentions, the actual percentage of our portfolio invested in each investment type may fluctuate above or below such levels due to factors such as a large inflow of capital (including from additional capital raises or sales of investments), lack of attractive investment opportunities in an investment type or an increase in anticipated cash requirements (including repayment of outstanding debt obligations or REIT dividend requirements).

Investments in Real Estate Properties

Our investment guidance provides we will primarily invest in existing or newly constructed real estate properties and interests in real estate properties in a multiple of sectors, including multi-family residential and senior housing properties, retail, office, medical, industrial, and restaurant properties by acquiring direct ownership or ownership interests through equity interests or other joint venture structures. We may also invest in other real estate property types, including undeveloped land or other development opportunities if the land is acquired for the purpose of producing rental or other operating income and either development or construction is in process or development or construction is planned to commence on the land within one year. We primarily invest in real estate properties with existing rent and expense schedules or newly constructed properties with predictable cash flows or in which a seller agrees to provide certain minimum income levels. We concentrate our efforts on real estate properties located primarily in North Dakota, the central corridor of the contiguous 48 states and in or near metropolitan areas.

Investments in Real Estate Related Assets

Our guidelines provide we may invest in real estate related assets. These assets include securities of other companies engaged in real estate activities, mortgage-backed securities and conventional mortgage loans. However, to date, our investment in such assets have been nominal. We may increase such investments in the future, but do not anticipate such investment amounts to be material.

Investments in Cash, Cash Equivalents and Other Short-Term Investments

We may invest in cash, cash equivalents and other short-term investments. Consistent with the rules applicable to qualification as a REIT, such investments may include investments in the following: money market instruments; short-term debt instruments, such as commercial paper, certificates of deposit, bankers’ acceptances, repurchase agreements, interest-bearing time deposits and corporate debt securities; corporate asset-backed securities; and U.S. government or government agency securities. However, to date, our investment in such assets have been nominal, and we do not expect to increase such investments in the near future.

SEGMENT DATA

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multi-family and assisted senior living properties. Our commercial properties include retail, office, industrial, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and other general and administrative expenses.

COMPETITION

Our properties are located in highly competitive real estate markets. The number of competitive properties in a particular area could have a material adverse effect on our ability to lease space and the amount of rent we can charge at our properties. We compete with many property owners, such as corporations, limited partnerships, individual owners, other real estate investment trusts, insurance companies and pension funds.

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Our competition also consists of other owners and developers of multifamily and commercial properties who are trying to attract tenants to their properties. We also compete with other real estate investors such as individuals, partnerships, corporations and other REITs to acquire properties that meet our investment objectives. This competition influences our ability to acquire properties and the prices that we may pay for those properties. We do not have a dominant position in any of the markets in which we operate and many of our competitors have greater financial and other resources than us and may have substantially more operating experience than either us or our Advisor. We believe, however, that the diversity of our investments, the experience and abilities of our management, the quality of our assets and the financial strength of many of our commercial tenants affords us some competitive advantages that have in the past, and should in the future, allow us to operate our business successfully despite the competitive nature of our business.

Generally, there are multi-family and other similar commercial properties within relatively close proximity to each of our properties. Regarding our retail properties, in addition to competitor retail properties, we and our tenants face increasing competition from outlet malls, internet shopping websites, discount shopping clubs, catalog companies, direct mail and telemarketing.

ENVIRONMENTAL MATTERS AND GOVERNMENT REGULATION

As an owner of real estate, we are subject to various environmental laws, rules and regulations adopted by various governmental bodies or agencies. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid hazardous materials, the remediation of contaminated property associated with the disposal of solid and hazardous materials and other health and safety-related concerns. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. We could be subject to liability in the form of fines or damages for noncompliance with these laws and regulations, and some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Some of these laws and regulations may impose joint and several liability on resident, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us.

In addition we are subject to many other laws and governmental regulations applicable to our properties, and changes in the laws and regulations, or in their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the “ADA”), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 (the “FHAA”) requires apartment communities first occupied after March 13, 1991, to be accessible to the handicapped and prohibits housing discrimination based upon familial status, which is commonly referred to as age-based discrimination. The Housing for Older Persons Act (HOPA) provides age-based discrimination exceptions for housing developments qualifying as housing for older persons. Non-compliance with ADA, FHAA or HOPA could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation. We believe our properties which are subject to ADA, FHAA and/or HOPA are substantially in compliance with their present requirements.

Compliance with these laws, rules and regulations has not had a material adverse effect on our business, assets, or results of operations, financial condition and ability to pay dividends. We do not believe our existing portfolio as of December 31, 2013 will require us to incur material expenditures to comply with these laws and regulations. However, we cannot assure that future laws, ordinances or regulations will not impose any material liability, or that the current environmental condition of our properties will not be affected by the operations of tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

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AVAILABLE INFORMATION

We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy and information statements and all amendments to these filings with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the operation of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.

We will make these reports available, free of charge, by responding to requests addressed to 1711 Gold Drive South, Suite 100, Fargo, North Dakota 58103. You may also request reports by calling the telephone number (701) 353-2720. Additionally, we maintain an internet site at www.inreit.com, which includes the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. This reference to our website is not intended to incorporate information found on the website into this filing.

ITEM 1A. RISK FACTORS

Risks Related to INREIT Real Estate Investment Trust

Common shares of beneficial interest represent an investment in equity only, and not a direct investment in our assets. Therefore, common shareholders will hold only an indirect interest in our assets.

The common shares of beneficial interest represent an equity interest only in us, not in any of our assets or the real estate or real estate related investments made by our operating partnership. We will have no substantial assets other than our equity interest in the operating partnership. Neither the Advisor nor any of its managers or affiliates have any obligation with respect to the payment of dividends to our shareholders or the return of capital investments made to us by the shareholders.

Income will be received primarily from the leasing and resale of investments, which is subject to market and economic changes. If income is insufficient to meet our capital needs, our ability to carry out our business plans could be adversely affected.

Our purpose is to acquire and hold our real estate investments as long-term investments before we resell the investments to maximize anticipated appreciation for our shareholders. The primary income that will be generated by us will be the profits, if any, from the operation or holding of the real estate and real estate related investments and upon the resale of the investments. If circumstances arise which cause an investment to remain at its current value or decrease in value, we may generate less income than anticipated.

We may raise additional funds in the future to fund our capital needs, which may not be available on acceptable terms if at all.

We may need to raise additional capital in the future in order to fulfill our business plans. The timing and amount of our future capital needs will depend on a number of factors, including the revenue generated by the operation of our real estate investments, when and if the properties will appreciate in value, the resale price of the properties and other real estate related investments, our future operating expenses and required capital outlays. There can be no assurance additional financing will be available when needed on terms favorable to us, if at all.

Further, we may be required to raise additional capital and sell additional securities in the future on terms which are more favorable to those investors than the terms under which our current shareholders purchased their common shares. If adequate funds are not available or are not available on acceptable terms, our ability to fund our current business plans and to acquire additional real estate and real estate related investments would be significantly limited. Such limitation could have a material adverse effect on our results.

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Our success is based on continuing to locate and hold suitable real estate investments, and failure of our Advisor to locate additional suitable properties or the unsuccessful operation of our existing real estate investments could adversely affect our operations and our ability to pay dividends.

Our ability to achieve our investment objectives and to pay dividends to our shareholders is dependent upon the performance of our Advisor in locating suitable investments and appropriate financing arrangements for us as well as on the successful management of our properties after acquisition. We currently own, through the operating partnership, the properties described under Item 2 – Properties.

We cannot be sure our Advisor will be successful in continuing to obtain suitable investments on financially attractive terms, or be certain that operation of the properties will avoid the risks attendant to real estate acquisitions, such as:

• The risk properties may not perform in accordance with expectations, including projected occupancy and rental rates;

• The risk we may have underestimated the cost of improvements required to bring an acquired property up to standards established for its intended use or its intended market position.

Our Board of Trustees may have to make expedited decisions on whether to invest in certain properties or real estate-related assets, including prior to receipt of detailed information on the investment.

In the current real estate market, our Board of Trustees may frequently be required to make expedited decisions in order to effectively compete for the acquisition of desirable properties and other real estate-related assets. In such cases, our Advisor and Board of Trustees may not have access to detailed information regarding investment properties, such as physical characteristics, environmental matters, zoning regulations or other local conditions affecting the investment property, at the time of making an investment decision to pay a non-refundable deposit and to proceed with an acquisition. In addition, the actual time period during which our Advisor will be allowed to conduct due diligence may be limited. Therefore, there can be no assurance our Advisor and Board of Trustees will have knowledge of all circumstances that may adversely affect an investment.

We face competition from other real estate investors for suitable properties, and may not be successful in our attempts to acquire desirable properties.

The commercial and multi-family real estate industries are highly competitive, and we face competition for investment opportunities. These competitors may be real estate developers, real estate financing entities, real estate investment trusts, mutual funds, hedge funds, investment banking firms, institutional investors and other entities or investors that acquire real estate and may have substantially greater financial resources than we do. These entities or investors may be able to accept more risk than our Board of Trustees believes is in our best interests. This competition may limit the number of suitable investment opportunities offered to us. This competition also may increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire properties or interests in properties. In addition, we believe competition from entities organized for purposes similar to ours may increase in the future.

We may change our investment and operational policies without shareholder consent, and such changes could increase our exposure to additional risks.

Generally, the Board of Trustees may change our investment and operational policies, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions, at any time without the consent of our shareholders, which could result in our making investments different from, and possibly riskier than, investments made in the past. A change in our investment policies may, among other things, increase our exposure to interest rate risk, default risk and commercial real estate market fluctuations, all of which could materially affect our ability to achieve our investment objectives.

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There can be no assurance dividends will be paid or increase over time.

There are many factors that can affect the availability and timing of cash dividends to our shareholders. Dividends will be based principally on cash available from our real estate and real estate related investments. The amount of cash available for dividends will be affected by many factors, such as our ability to acquire profitable real estate investments and successfully manage our real estate properties and our operating expenses. We can give no assurance we will be able to pay or maintain dividends or that dividends will increase over time. Our actual results may differ significantly from the assumptions used by our Board of Trustees in establishing the dividend rate to our shareholders.

We may pay dividends from sources other than our cash flow from operations, which could subject us to additional risks.

We are permitted to pay distributions from any source. If we fund dividends from cash flow from operations or working capital, we will have less funds available for investment in real estate and real estate related investments and our shareholders’ overall return may be reduced. Actual cash available for dividends may vary substantially from the estimates of our Board of Trustees. Because we may receive income from interest or rents at various times during our fiscal year, dividends paid may not reflect our income earned in that particular dividend period. In these instances, we may obtain third party financing to fund our dividends, causing us to incur additional interest expense. We may also fund such dividends from the sale of assets or additional securities. Any of these actions could potentially negatively affect future results of operations.

Dividends may include a return of capital, and shareholders may be required to recognize capital gain on distributions.

Dividends payable to shareholders may include a return of capital. To the extent dividends exceed cash flow from operations, a shareholder’s basis in our shares will be reduced and, to the extent dividends exceed a shareholder’s basis, the shareholder may recognize capital gain and be required to make tax payments.

We depend on certain executive officers and trustees, and the loss of such persons may delay or hinder our ability to carry out our investment strategies.

Our future success substantially depends on the active participation of James Wieland, one of our trustees, Kenneth Regan, our Chief Executive Officer and a trustee, and Bradley J. Swenson, our President. Messrs. Wieland and Regan are also governors and owners of the Advisor; and Mr. Swenson is also the President and a governor of the Advisor. Messrs. Wieland and Regan have over 30 years of extensive experience each in the commercial real estate industry, and have been instrumental in setting our strategic direction, operating our business and arranging necessary financing, and through the Advisor, in locating desirable real estate investments and where serving as property manager, managing our properties. Losing the services of Messrs. Wieland, Regan, or Swenson could have a material adverse effect on our ability to successfully carry out our investment strategies and achieve our investment objectives. There can be no guarantee they will remain affiliated with us.

Our systems may not be adequate to support our growth, and our failure to successfully oversee our portfolio of real estate investments could adversely affect our results of operation.

There can be no assurance we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient staff, to support any growth we may experience. Our failure to successfully oversee our current and future real estate investments or developments could have a material adverse effect on our results of operation and financial condition and our ability to pay dividends to our shareholders.

Risks Related to Our Structure

There are limitations on ownership of our common shares of beneficial interest, which could discourage a takeover transaction even if it is beneficial to our shareholders.

Our Amended Declaration of Trust provides no person may own more than 9.9% of our outstanding common shares of beneficial interest. Even if a shareholder did not acquire more than 9.9% of our shares, the shareholder may become subject to such restrictions if redemptions by other shareholders cause the holdings to exceed 9.9% of our outstanding shares. This limitation may have the effect of delaying, deferring or preventing a transaction or a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our shareholders, even if it would be in the best interest of our shareholders. The ownership limits and restrictions on transferability will continue to apply until our Board of Trustees determines it is no longer in our best interest to continue to qualify or seek to qualify as a REIT.

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Our shareholders may experience dilution if we or our operating partnership issues additional securities.

Our shareholders do not have preemptive rights to any shares issued by us in the future. If we sell additional shares in the future to raise capital, issue additional shares pursuant to a dividend reinvestment plan or issue shares in exchange for limited partnership units pursuant to our exchange rights under the LLLP Agreement of our operating partnership, our shareholders will experience dilution of their equity investment in us. In addition, if our operating partnership sells additional securities or issues additional securities in connection with a property acquisition transaction, we would, and indirectly our shareholders would, experience dilution in its equity position in the operating partnership.

Our shareholders have limited control over our operation, and the Board of Trustees has the sole power to appoint and terminate the Advisor.

Our Board of Trustees has the sole authority to determine our major policies, including our policies regarding financing, growth, investment strategies, debt capitalization, REIT qualification, distribution, and to take certain actions including acquiring or disposing of real estate and real estate related investments, dividend declaration and the election or removal of the Advisor. Our shareholders do not have the right to remove the Advisor, but have the right to elect and remove trustees. Under the Amended Declaration of Trust, our trustees may not do the following without the approval of the holders of a majority of the outstanding common shares of beneficial interest:

• Amend the Amended Declaration of Trust, except for amendments which do not adversely affect the rights, preference and privileges of shareholders;

• Sell all or substantially all of our assets other than in the ordinary course of business or in connection with a liquidation and dissolution;

• Conduct a merger or other reorganization of the trust; or

• Dissolve or liquidate us.

In addition, the shareholders have the right, without the concurrence of the Board of Trustees, to terminate the trust and liquidate our assets or amend the Amended Declaration of Trust.

Shareholders have no role in determining our investments and must rely on our Advisor and oversight by the Board of Trustees.

For future acquisitions identified by our Advisor, the Board of Trustees has the authority to approve such investment acquisitions without shareholder approval. Therefore, shareholders will not be able to evaluate the terms of future investment acquisitions, their economic merit or other relevant financial data before we acquire such investments. The shareholders must rely entirely on the oversight of our Board of Trustees, the management ability of our Advisor and the performance of the property managers.

We may issue common shares of beneficial interest with more favorable terms than the outstanding shares without shareholder approval.

Under our Amended Declaration of Trust, our Board of Trustees has the authority to establish more than one class or series of shares and to fix the relative preferences and rights regarding conversion, voting powers, restrictions, limitations as to dividends and other distributions, and terms or conditions of redemption of such different classes or series without shareholder approval. Thus, our Board could authorize the issuance of a class or series of shares with terms and conditions that could have priority as to dividends and amounts payable upon liquidation over the rights of the holders of our outstanding common shares of beneficial interest. Such class or series of shares could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide a premium price to holders of our shares, even if it would be in the best interest of our shareholders.

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Shareholders could incur current tax liability on dividends they elect to reinvest in our shares, and may have to use separate funds to pay their tax liability

Shareholders that participate in our dividend reinvestment plan will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares to the extent the amount reinvested was not a tax-free return of capital. In addition, our shareholders will be treated for tax purposes as having received an additional dividend to the extent the shares are purchased at a discount to fair market value. As a result, unless shareholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on the value of the shares received.

Our trustees, officers, Advisor and its affiliates have limited liability to us and our shareholders, and may have the right to be indemnified under certain conditions.

Our Amended Declaration of Trust provides that our trustees, officers, Advisor and its affiliates will not be held liable for any loss or liability suffered by us if: (1) the trustee, officer, Advisor or its affiliate determines in good faith its actions or inactions were in our best interest, (2) such actions were taken on behalf of us and (3) such liability or loss was not the result of: (a) negligence or misconduct by a trustee (other than an independent trustee), the Advisor or its affiliate or (b) gross negligence or willful misconduct by an independent trustee. Moreover, we are required to indemnify our trustees, officers, the Advisor and its affiliates, subject to limitations stated in the Amended Declaration of Trust. As a result, we and our shareholders have limited rights against our trustees, officers, the Advisor and its affiliates, which could reduce our and our shareholders’ recovery from these persons. In addition, we may be obligated to fund the defense costs incurred by such parties in some cases, which would decrease the cash otherwise available for dividends to our shareholders.

There may be conflicts of interest between us and our shareholders on one side and our operating partnership and its limited partners on the other side.

Our trustees and officers have duties to us and our shareholders in connection with their management of us. At the same time, we, as general partner will have fiduciary duties to our operating partnership and its limited partners in connection with the management of the operating partnership. Our duties as general partner of the operating partnership may come into conflict with the duties of our trustees and officers to us and our shareholders. The LLLP Agreement of our operating partnership expressly limits our liability for monetary damages by providing we will not be liable for losses sustained, liabilities incurred or benefits not derived if we acted in good faith. In addition, our operating partnership is required to indemnify us and our trustees and officers from and against any and all claims arising from operations of our operating partnership, unless it is established: (1) the act or omission was material and committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe the act or omission was unlawful. The LLLP Agreement also provides that we will not be held responsible for any misconduct or negligence on the part of any agent appointed by us in good faith.

If we are deemed to be an investment company under the Investment Company Act, our shareholders’ investment return may be reduced.

We are not registered as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”) based on exceptions we believe are available to us. If we were obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act. Registration as an investment company would be costly, would subject us to a host of complex regulations, and would divert the attention of management from the conduct of our business. If the SEC or a court of competent jurisdiction were to find we are required, but in violation of the Investment Company Act had failed, to register as an investment company, possible consequences include, but are not limited to, the following: (i) the SEC could apply to a district court to enjoin the violation; (ii) our shareholders could sue us and recover any damages caused by the violation; (iii) any contract to which we are party made in, or whose performance involves a violation of the Investment Company Act would be unenforceable by any party to the contract unless a court were to find that under the circumstances enforcement would produce a more equitable result than non-enforcement and would not be inconsistent with the purposes of the Investment Company Act; and (iv) criminal and civil actions could be brought against us. Should we be subjected to any or all of the foregoing, we would be materially and adversely affected.

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There is no public trading market for our shares, nor do we expect one to develop, which may negatively impact a shareholders ability to sell their shares and the price at which shares may be sold.

There is no public market for the shares and no assurance one may develop. In addition, the price shareholders may receive for the sale of their shares is likely to be less than the proportionate value of our investments. If our shareholders are able to find a buyer for their shares, they may have to sell them at a substantial discount from the price they purchased the shares. Consequently, shareholders may not be able to liquidate their investments in the event of emergency or for any other reason. Therefore, shareholders should consider our securities as illiquid and a long-term investment and should be prepared to hold their shares for an indefinite period of time.

The estimated value of our common stock is based on a number of assumptions and estimates that may not be accurate and is also subject to a number of limitations.

The current estimated value of our common stock equals $14.00 per share. The methodology used by our board to determine this value was based on estimates of the value of our real estate investments, cash and other assets and debt and other liabilities as of a date certain and no subsequent valuation has been undertaken by us. The valuation process involves a number of estimates, assumptions and subjective judgments that may not be accurate and complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated value per share may not represent current market values or fair values as determined in accordance with U.S. generally accepted accounting principles. The estimated value of our real estate assets used in the analysis may not necessarily represent the value we would receive or accept if the assets were marketed for sale. Further, acquisitions and dispositions of properties will have an effect on the value of our estimated price per share, which is not reflected in the current estimated price. Moreover, the estimated per share value of the common stock does not reflect a liquidity discount for the fact that the shares are not currently traded on a public market, a discount for the non-assumability or prepayment obligations associated with certain loans and other costs that may be incurred in connection with the sale of assets. As a result a shareholder should not rely on the estimated value per share as being an accurate measure of the then-current value of the shares of our common stock in making a decision to buy or sell shares of our common stock, including whether to reinvest dividends by participating in the dividend reinvestment plan and whether to request redemption pursuant to our share redemption program.

Shareholders may not be able to have their shares redeemed under the Share Redemption Plan, and if shareholders do redeem their shares, they will not receive the current value of the shares.

We have adopted a share redemption plan. However, our Board of Trustees can limit, suspend, terminate or amend the plan at any time without shareholder approval, and there is no assurance we will have sufficient funds available at the time of any request to honor a redemption request for cash. Shares redeemed under this plan may be purchased at a discount to the current price of the shares or to the price paid for such shares by the shareholder. Therefore, shareholders may not receive the amount they paid for the shares and may receive less by selling their shares back to us than they would receive if they were to sell their shares to other buyers.

There will be transfer restrictions on the shares, and we do not plan to register the shares for resale.

Other than shares issued under our dividend reinvestment plan, we have not registered our shares under federal or state securities laws, but rather we have sold the shares in reliance on exemptions under applicable federal and state securities laws Therefore, the shares may be “restricted securities” and may not be resold unless they are subsequently registered under the Securities Act and applicable state securities laws or pursuant to exemption from such registration requirements or may have other transfer restrictions based on the exemption relied on for the sale of the shares. We are not obligated to, nor do we currently plan to, register any shares for resale.

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Risks Related to Our Status as a REIT and Related Federal Income Tax Matters

If we fail to continue to qualify as a REIT, we would incur additional tax liabilities that would adversely affect our operations and our ability to make distributions and could result in a number of other negative consequences.

Although our management believes we are organized, have operated, and will be able to continue to be organized and to operate in such a manner to qualify as a real estate investment trust (REIT), as that term is defined under the Internal Revenue Code, we may not have been organized, may not have operated, or may not be able to continue to be organized or to operate in a manner to have qualified or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status.

The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control, regarding our organization and ownership, distributions of our income and the nature and diversification of our income and assets. The fact we hold substantially all of our assets through our operating partnership and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.

If we lose our REIT qualification, we will face income tax consequences that will reduce substantially our available cash for dividends and investments for each of the years involved because:

• We would be subject to federal corporate income taxation on our taxable income, including any applicable alternative minimum tax, and could be subject to increased state and local taxes;

• We would not be allowed a deduction for dividends paid to shareholders in computing our taxable income; and

• Unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

The increased taxes could reduce the value of the shares as well as cash available for dividends to shareholders and investments in additional assets. In addition, if we fail to continue to qualify as a REIT, we will not be required to pay dividends to shareholders. Our failure to continue to qualify as a REIT also could impair our ability to expand our business and to raise capital.

As a REIT, we may be subject to tax liabilities that reduce our cash flow.

Even if we continue to qualify as a REIT for federal income tax purposes, we may be subject to federal and state taxes on our income or property, including the following:

• To continue to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gains) to our shareholders. If we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on the undistributed income. In such situation, shareholders will be treated as having received the undistributed income and having paid the tax directly, but tax-exempt shareholders, such as charities or qualified pension plans, will receive no benefit from any deemed tax payments.

• We may be subject to state and local taxes on our income or property, either directly or indirectly, because of the taxation of our operating partnership or of other entities through which we indirectly own our assets.

• If we have net income from the sale of foreclosure property we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.

• If we sell a property, other than foreclosure property, we hold primarily for sale to customers in the ordinary course of business, our gain will be subject to the 100% “prohibited transaction” tax.

• We will be subject to a 4% nondeductible excise tax on the amount, if any, by which the distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income, and 100% of our undistributed income from prior years.

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We may be forced to borrow funds on a short-term basis, to sell assets or to issue securities to meet the REIT minimum distribution requirement or for working capital purposes.

To qualify as a REIT, in general, we must distribute to our shareholders at least 90% of our net taxable income each year, excluding capital gains. However, we could be required to include earnings in our net taxable income before we actually receive the related cash. If we do not have sufficient cash to make the necessary dividends to preserve our REIT status for any year or to avoid taxation, we may need to borrow funds, to sell assets or to issue additional securities even if the then-prevailing market conditions are not favorable for such actions.

To the extent dividends to our shareholders had been made in anticipation of qualifying as a REIT, we might be required to borrow funds, to sell assets or to issue additional securities to pay the applicable tax if we lose our REIT qualification and are subject to increased taxes.

In addition, we will require a minimum amount of cash to fund our daily operations. Due to the REIT distribution requirements, we may be forced to make distributions when we otherwise would use the cash to fund our working capital needs. Therefore, we may be forced to borrow funds, to sell assets or to issue additional securities at certain times for our working capital needs.

If our operating partnership does not qualify as a partnership, its income may be subject to taxation, and we would no longer qualify as a REIT.

The Internal Revenue Code classifies “publicly traded partnerships” as associations taxable as corporations (rather than as partnerships), unless substantially all of their taxable income consists of specified types of passive income. We structured our operating partnership to be classified as a partnership for federal income tax purposes. However, no assurance can be given the IRS will not challenge our position or will classify our operating partnership as a “publicly traded partnership” for federal income tax purposes. To minimize this risk, we have placed certain restrictions on the transfer and/or redemption of partnership units in the Agreement of Limited Liability Limited Partnership of our operating partnership (“LLLP Agreement”). If the IRS would assert successfully our operating partnership should be treated as a “publicly traded partnership” and substantially all of the operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat the operating partnership as an association taxable as a corporation. In such event, we would cease to qualify as a REIT. In addition, the imposition of a corporate tax on the operating partnership would reduce the amount of distributions the operating partnership could make to us and, in turn, reduce the amount of cash available to us to pay dividends to our shareholders.

We have transfer restrictions on our shares that may limit offers to acquire substantial amounts of the trust’s shares at a premium.

To qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Currently, our Amended Declaration of Trust prohibits transfers of our shares that would result in (1) our shares being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our shares, applying broad attribution rules imposed by the federal income tax laws, or (3) before our shares qualify as a class of publicly-offered securities, 25% or more of our shares being owned by ERISA investors. If a shareholder acquires shares in excess of the ownership limits or in violation of the restrictions on transfer, we:

• May consider the transfer to be void ab initio.

• May not reflect the transaction on our books.

• May institute legal action to enjoin the transaction.

• May redeem such excess shares.

• Automatically transfer any excess shares to a charitable trust for the benefit of a charitable beneficiary.

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If such excess shares are transferred to a trust for the benefit of a charitable beneficiary, the charitable trustee shall sell the excess shares and the shareholder will be paid the net proceeds from the sale equal to the lesser of: (1) the price paid by the shareholder or the “market price” of our shares if no value was paid or (2) the price per share received by the charitable trustee.

If shares are acquired in violation of the ownership limits or the restrictions on transfer described above:

• Transferee may lose its power to dispose of the shares; and

• Transferee may incur a loss from the sale of such shares if the fair market price decreases.

These limitations may have the effect of preventing a change of control or takeover of us by a third party, even if the change in control or takeover would be in the best interest of our shareholders.

Complying with REIT requirements may restrict our ability to operate in a way to maximize profits.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders, and the ownership of our common shares. For example, we may be required to pay dividends to our shareholders at disadvantageous times, including when we do not have readily available funds. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

Complying with REIT requirements may force us to forego or liquidate otherwise attractive investments which could negatively impact shareholder value.

To qualify as a REIT, at the end of each calendar quarter, at least 75% of our assets must consist of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets), in general, cannot include more than 10% of the voting securities of any one issuer or more than 10% of the value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries. Therefore, we may be required to liquidate otherwise attractive investments or may be forced to forego attractive investments to satisfy these requirements. Such action or inaction could be adverse to our shareholder interests.

Gains from asset sales may be subject to a 100% prohibited transaction tax, which tax could reduce the trust’s available assets and reduce shareholder value.

We may have to sell assets from time to time to satisfy our REIT distribution requirements and other REIT requirements or for other purposes. The IRS may posit one or more asset sales may be “prohibited transactions.” If we are deemed to have engaged in a “prohibited transaction,” our gain from such sale would be subject to a 100% tax. The Internal Revenue Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% tax, but we cannot assure you we will be able to qualify for the safe harbor. We will use reasonable efforts to avoid the 100% tax by (1) conducting activities that may otherwise be considered a prohibited transaction through a taxable REIT subsidiary, (2) conducting our operations in such a manner so no sale or other disposition of an asset we own, directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited transaction or (3) structuring certain sales of our assets to comply with a safe harbor available under the Internal Revenue Code. We do not intend to hold assets in a manner to cause their dispositions to be treated as “prohibited transactions,” but we cannot assure you the IRS will not challenge our position, especially if we make frequent sales or sales of assets in which we have short holding periods. Payment of a 100% tax would adversely affect our results of operations.

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Ordinary dividends payable by REITs generally are taxed at the higher ordinary income rate which could reduce the net cash received by shareholders as a result of an investment in the trust and may be detrimental to our ability to raise additional funds through the sale of our common shares.

The maximum U.S. federal income tax rate for “qualified dividends” payable by U.S. corporations to individual U.S. shareholders currently is 20%. In general, ordinary dividends payable by REITs to its shareholders, however, are generally not eligible for the reduced rates and generally are taxed at ordinary income rates (the maximum individual income tax rate currently is 39.6%). This result could reduce the net cash received by shareholders as a result of an investment in the trust and could be detrimental to our ability to raise additional funds through the sale of our common shares.

Changes in legislative or other actions affecting REITs may adversely affect our status as a REIT.

The rules dealing with U.S. federal income taxation are constantly under review by the legislative process, the IRS and the U.S. Treasury Department. Changes to tax laws (which changes may apply retroactively) could adversely affect us or our shareholders. Furthermore, new legislation, regulations, administrative interpretations or court decisions could change the federal income tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification. We cannot predict whether, when, in what forms, or with what effective dates, the laws applicable to us or our shareholders may be changed.

Our Board of Trustees may revoke our REIT election without shareholder approval, and we would no longer be required to make distributions of our net income.

Our Board of Trustees can revoke or otherwise terminate our REIT election without the approval of our shareholders if our Board determines it is not in our best interest to continue to qualify as a REIT. In such case, we would become subject to U.S. federal income tax on our taxable income, and we no longer would be required to distribute most of our net income to our shareholders, which may reduce the total return to our shareholders and affect the value of the shares.

Risks Related to Tax-Exempt Investors

Common shares may not be a suitable investment for tax-exempt investors.

There are special considerations that apply to investing in common shares on behalf of a trust, pension, profit sharing or 401(k) plans, health or welfare plans, trusts, individual retirement accounts (IRAs), or Keogh plans. If you are investing the assets of any of the above in common shares, you should satisfy yourself:

• Your investment is consistent with your fiduciary obligations under applicable law, including common law, ERISA and the Internal Revenue Code;

• Your investment is made in accordance with the documents and instruments that govern the trust, plan or IRA, including any investment policy;

• Your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;

• Your investment will not impair the liquidity of the trust, plan or IRA;

• Your investment will not produce “unrelated business taxable income” for the trust, plan or IRA;

• You will be able to value the assets of the trust, plan or IRA annually in accordance with ERISA requirements and applicable provisions of the trust, plan or IRA; and

• Your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

We have not evaluated, and will not evaluate, whether an investment in us is suitable for any particular trust, plan, or IRAs.

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Under certain circumstances, tax-exempt shareholders may be subject to unrelated business taxable income, which could adversely affect such shareholders.

Neither ordinary nor capital gain distributions with respect to our common shares nor gain from the sale of our common shares, in general, should constitute unrelated business taxable income to tax-exempt shareholders. The following, however, are some exceptions to this rule:

• Under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our common shares may be treated as unrelated business taxable income if our common shares are held predominately by qualified employee pension trusts (which we do not expect to be the case);

• Part of the income and gain recognized by a tax-exempt shareholder with respect to common shares would constitute unrelated business taxable income if the tax-exempt shareholder incurs debt to acquire the common shares; and

• Part or all of the income or gain recognized with respect to our common shares held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans that are exempt from federal income taxation under Sections 501(c)(7), (9), (17), or (20) of the Internal Revenue Code may be treated as unrelated business taxable income.

Therefore, tax-exempt shareholders are not assured all dividends received from the trust will be tax-exempt.

Risks Related to Our Relationship with the Advisor and Its Affiliates

We depend on our Advisor for the successful operations of the REIT, and if required, we may not be able to find a suitable replacement advisor.

Our ability to achieve our investment objectives is dependent upon the successful performance of our Advisor in locating attractive acquisitions, advising on dispositions of real estate properties and other real estate related assets, advising on any financing arrangements and other administrative tasks to operate our business. If the Advisor suffers or is distracted by adverse financial, operational problems in connection with its operations unrelated to us or for any reason, it may be unable to allocate a sufficient amount of time and resources to our operations. If this occurs, our ability to achieve our investment objectives or pay dividends to our shareholders may be adversely affected. Any adversity experienced by the Advisor or problems in our relationship with the Advisor could also adversely impact the operation of our properties and, consequently, our cash flow and ability to pay dividends to shareholders.

Either we or the Advisor can terminate the Advisory Agreement upon 60 days written notice to the other party for any reason, or we can terminate the Advisory Agreement immediately for cause or material breach of the Advisory Agreement. In addition, the Board of Trustees may determine not to renew the Advisory Agreement in any year. If this occurs, we would need to find another advisor to provide us with day-to-day management services or engage employees to provide these services directly to us, which would likely be difficult to do and may be costly. There can be no assurances we would be able to find a suitable replacement advisor or suitable employees or enter into agreements for such services on acceptable terms.

The termination or replacement of the Advisor could trigger a default or repayment event under financings.

Lenders providing financing for our acquired properties may include provisions in the mortgage loan documentation that state the termination or replacement of the Advisor is an event of default or an event triggering acceleration of the repayment of the loan in full. Even though we will attempt to have such provisions excluded from the loan documents, the lenders may still require them to be included. In addition, the termination or replacement of the Advisor could trigger an event of default under any credit agreement governing a line of credit we may obtain in the future. If an event of default or repayment event occurs with respect to any of our properties, our ability to achieve our investment objectives could be materially adversely affected.

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The Advisor may not be able to retain its key employees, which could adversely affect our ability to carry out our investment strategies.

We depend on the retention by the Advisor of its key officers, employees and governors. However, none of these individuals have an employment agreement with the Advisor. The loss of any or all of the services by the Advisor’s key officers, employees and governors and the Advisor’s inability to find, or any delay in finding, replacements with equivalent skills and experience, could adversely impact our ability to successfully carry out our investment strategies and achieve our investment objectives.

Our future success also depends on the Advisor’s and its affiliates’ ability to identify, hire, train and retain highly qualified real estate, managerial, financial, marketing and technical personnel to provide the services to us pursuant to the Advisory Agreement and any other written services agreement, including any property management agreements. Competition for such personnel is intense, and the Advisor or its affiliates may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary personnel could have a material adverse effect on our business and results of operations.

Payment of fees and expenses to the Advisor reduces the cash available for dividends.

The Advisor performs services for us in connection with the selection, acquisition and disposition of our investments; the management of our assets; and certain administrative services. We pay the Advisor an annual management fee, reimbursement for operating and acquisition expenses as well as acquisition, disposition, financing and development fees. Such fees and payments reduce the amount of cash available for further investments or dividends to our shareholders. Additionally, such fees increase the risk shareholders may receive a lower price when they resell their shares than the purchase price they initially paid for their shares.

There are conflicts of interest in our relationship with the Advisor and its affiliates and several trustees, which could adversely affect our operations and business operations.

We are subject to potential conflicts of interest arising out of our relationships with the trustees, Advisor and its affiliates. Conflicts of interest may arise among a trustee or the Advisor and its respective affiliates, on the one hand, and us and our shareholders, on the other hand. As a result of these conflicts, the trustee or Advisor may favor its own interests or the interests of its affiliates over the interest of our shareholders.

Allocation of time and effort

We rely on the personnel of the Advisor and its affiliates to manage our assets and daily operations. Two of our trustees are also governors and owners of the Advisor and the primary property manager of a number of our properties, and therefore have conflicts of interest in allocating their time, services and functions among us and other real estate programs or business ventures the Advisor or its affiliates organize or serve.

Division of loyalty

Several of our officers and/or trustees serve as officers, governors and owners of one or more entities affiliated with our Advisor or trustees, including property managers, tenants of our properties and brokerage companies. As a result, these individuals owe fiduciary duties to these other entities and their investors, which may conflict with the fiduciary duties that they owe to us and our shareholders. Their loyalties to these other entities and investors could result in action or inaction detrimental to our business, which could harm implementation of our business strategy and investment and leasing opportunities.

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Allocation of investment opportunities

The Advisor and its affiliates are or may become committed to the continuing management of other business ventures. Accordingly, there may be conflicts of interest between our investments and other investments or business ventures in which the Advisor and its affiliates are participants. In addition, the Advisor and its officers will advise other investment programs that invest in commercial real estate properties and real estate related assets in which we may be interested. Therefore, the Advisor could face conflicts of interest in allocating and determining which programs will have the opportunity to acquire and participate in such investments as they become available. As a result, other investment programs advised by the Advisor may compete with us with respect to certain investments we may want to acquire.

Investments owned by Advisor or its affiliates

Our Advisor identifies and selects potential investments in real estate properties and other real estate related assets in which we may be interested. Such investments could include property owned by the Advisor or its affiliates.

May profit even if investment is not profitable

The Advisor receives acquisition, disposition, management, financing, and development fees under the Advisory Agreement. The Advisor and its affiliates may also be appointed or utilized to provide other services to us and our assets and receive fees and compensation for providing such other services, such as property management fees and construction fees. Therefore, the Advisor and its affiliates may profit from real estate investments even where we lose all or a portion of our investment. In addition, the agreements and arrangements, including those relating to compensation, between us and the Advisor and its affiliates are not the result of arm’s-length negotiations and their terms may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

Fees received by the parties

The Advisor is paid an annual management fee for its services based on total assets as reflected on our consolidated financial statements. The Advisor may benefit by us retaining ownership of certain investments at times when our shareholders may be better served by the sale or disposition of such investments in order to avoid a reduction in the total assets and correspondingly to the Advisor’s annual management fee. In addition, the Advisor may recommend we purchase investments that increase the total assets and correspondingly the Advisor’s annual management fee but that is not necessarily the most suitable investments for our portfolio. Further, the book value of the assets may include property-related debt, which could influence the amount of leverage obtained on real estate investments and other real estate related investments.

Our Advisor and its affiliates (including some of our trustees) may also be entitled to additional fees for providing other services, including property management and assistance with investment acquisition and disposition. These fees could influence our Advisor’s advice to us as well as the judgment of their affiliates and our trustees performing services for us. These compensation arrangements could affect their judgment with respect to:

• the continuation, renewal or enforcement of our agreements with our Advisor and its affiliates, including the Advisory Agreement and any property management agreement;

• offerings of equity by us, which may result in property acquisitions entitling our Advisor to increased acquisition, management, financing and development fees, possibly entitling its affiliates to property management fees for new properties and possibly entitling trustees to brokerage commissions;

• property sales, which entitle our Advisor to disposition fees and possibly trustees to receive brokerage commissions;

• property acquisitions, which entitle our Advisor to acquisition, financing and development fees, possibly entitles affiliates to property management fees on new properties and possibly entitles trustees to receive brokerage commissions; and

• borrowings to acquire properties, which may increase the acquisition, financing and management fees payable to our Advisor, possibly entitles affiliates to property management fees on new properties and possibly entitles trustees to receive brokerage commissions.

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Risks Related to Investments in Real Estate

Our performance could be adversely affected by the general risks involved in real estate investments.

Our results of operation and financial condition, the value of our real estate assets, and the value of an investment in us are subject to the risks normally associated with the ownership and operation of real estate properties, including, among others:

• Fluctuations in occupancy rates, rent schedules and operating expenses, which can render the sale or refinancing of a real estate investment difficult or unattractive;

• The validity and enforceability of leases, financial resources of the tenants, tenant bankruptcies, rent levels and sales levels in the local areas of the investments;

• Perceptions of the safety, convenience and attractiveness of our properties and the neighborhoods where they are located;

• Ability to provide adequate management, maintenance and insurance on our properties;

• Adverse changes in local population trends, market conditions, neighborhood values, local economic and social conditions;

• Supply and demand for properties such as our real estate investments, competition from properties that could be used in the same manner as our real estate investments;

• Changes in interest rates and availability of permanent mortgage funds;

• Changes in real estate tax rates and other taxes;

• Changes in governmental rules, regulations and fiscal policies, including the effects of inflation and enactment of unfavorable real estate, rent control, environmental or zoning laws; and

• Hazardous material laws, uninsured losses and other risks.

All of these factors are beyond our control. Any negative changes in these factors could affect our ability to meet our obligations, pay dividends to shareholders or achieve our investment objectives.

Market disruptions may significantly and adversely affect our financial condition and results of operations.

Our results of operations may be sensitive to changes in overall economic conditions impacting tenant leasing practices, such as increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. Adverse economic conditions affecting tenant income, such as employment levels, business conditions, interest rates, tax rates, fuel and energy costs and other matters, could reduce overall tenant leasing or cause tenants to shift their leasing practices. In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. A general reduction in the level of tenant leasing could adversely affect our ability to maintain our current occupancy rates and gain new tenants, affecting our growth and profitability. Accordingly, difficult financial and macroeconomic conditions could have a significant adverse effect on our cash flows, profitability and results of operations.

Lack of geographic diversity of our real estate investments could adversely affect our operating results if economic changes impact those real estate markets.

Geographic concentration of our properties may expose us to economic downturns in those areas where our properties are located. A recession in any area where we own several properties or interests in properties could adversely affect our ability to generate or increase operating revenues, locate and retain financially sound tenants or dispose of unproductive properties. In addition, it could have an adverse impact on our tenant’s revenues, costs and results of operations and may adversely affect their ability to meet their obligations to us. Likewise, we may be required to lower our rental rates to attract desirable tenants in such an environment. Currently, the majority of our properties are located in North Dakota, and we hold several properties in Fargo, North Dakota. To the extent weak economic or real estate conditions affect North Dakota or other markets in which we own properties more severely than other areas of the country, our financial performance could be negatively impacted.

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We face numerous risks associated with property acquisitions which could adversely affect our operating results.

Through our operating partnership, we acquire properties and portfolios of properties. Our acquisition activities and their success are subject to the following risks typically encountered in real estate acquisitions:

• We may be unable, or decide it is not in our interests, to complete an acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs or purchasing an option to purchase;

• We may be unable to obtain financing for acquisitions on favorable terms or at all;

• Acquired properties may fail to perform as expected;

• The actual costs of repositioning or redeveloping acquired properties may be greater than our estimates;

• Acquired properties may be located in new markets in which we may face risks associated with a lack of market knowledge or understanding of the local economy, lack of business relationships in the area and unfamiliarity with local governmental and permitting procedures; and

• We may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations.

These risks could have an adverse effect on our results of operation, our financial condition and the amount available for payment of dividends to our shareholders.

We may invest in undeveloped real property, which requires us to pay expenses prior to receiving any income on the property.

We have the discretion to invest up to 10% of our total assets in undeveloped property. If we invest in undeveloped property, such property will not generate operating revenue while costs are incurred to develop the property and may generate other expenses including property taxes and insurance. In addition, construction may not be completed within budget or as scheduled and projected rental levels may not be achieved. In addition to the risks of real estate investments in general, an investment in undeveloped property is subject to additional risks, including the expense and delay which may be associated with rezoning the land for a higher use and the development and environmental concerns of governmental entities and/or community groups. Therefore, we will not generate income on such property until development is completed and we begin leasing the property.

We may acquire multiple properties in a single transaction, which may adversely affect our operations through the inclusion of less desirable investments or financing requirements greater than we would otherwise be willing to incur.

Periodically, we may acquire multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single property acquisitions, and the risk a multiple property acquisition does not close may be greater than in a single property acquisition. Portfolio acquisitions may also result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be required to operate or attempt to dispose of these properties. To acquire multiple properties in a single transaction we may be required to accumulate a large amount of cash. We would expect the returns we can earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for dividends. Any of the foregoing events may increase the risk of adverse business results and negatively affect our results of operations.

We may invest in co-ventures, where our co-venture partners, co-tenants or other partners in co-ownership arrangements could take actions that decrease the value of a real estate investment and lower our overall return.

We may enter into joint ventures, tenant-in-common investments or other co-ownership arrangements with our Advisor, its affiliates, our trustees, or third parties having investment objectives similar to ours in the acquisition of real estate investments. In such arrangements, we may be acquiring non-controlling interests in or sharing responsibility for managing the affairs of the joint venture. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present where another party is not involved, including the possibility partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives.

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Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our management and the Advisor from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers. Any of these risks could subject us to liabilities in excess of those contemplated and reduce our returns on that investment.

We could experience difficulties or delays renewing leases or re-leasing space, which will increase our costs to maintain such properties without receiving income.

We derive a significant portion of our net income from rent received from our tenants. Our properties include both residential as well as commercial properties. If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. If a significant number of tenants default on lease payments to us, it would cause us to lose the revenue associated with such leases and require us to find alternative sources of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. If lease defaults occur, we may experience delays in enforcing our rights as landlord. Also, if our tenants decide not to renew their leases, terminate early or default on their lease, we may not be able to re-let the space or may experience delays in finding suitable replacement tenants. Even if tenants decide to renew or lease new space, the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms. As a result, our net income and ability to pay dividends to shareholders could be materially adversely affected. Further, if one of our properties cannot be leased on terms and conditions favorable to us, the property may not be marketable at a suitable price without substantial capital improvements, alterations, or at all.

We could face potential adverse effects if a commercial tenant is unable to make timely rental payments, declares bankruptcy or become insolvent.

If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely rental payments. Delayed rental payments could adversely affect cash flow available for dividends. If a commercial tenant declares bankruptcy or becomes insolvent, it may adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. However, if a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy. If a court authorizes the commercial tenant to reject and terminate its lease with us, our claim against the tenant for unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In addition, it is unlikely a bankrupt tenant would pay in full amounts it owes us under a lease. Additionally, we may be required to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant, as well as lower our rental rates to reflect any decline in market rents. This shortfall could adversely affect our cash flow and results of operations.

If our reserves for making capital improvements on our real estate investments are insufficient, we may be required to defer necessary capital improvements which could negatively affect our revenues.

We establish capital reserves on a property-by-property basis, as we deem appropriate. If we do not have enough reserves to cover the costs of capital improvements throughout the life of the real estate property and there is insufficient cash available from our operations, we may have to borrow funds or defer necessary improvements to the property. If we delay or do not make necessary capital improvements when needed, there are risks the property may decline in value and may result in fewer tenants maintaining or renewing their leases and attracting new tenants to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.

Properties will face significant competition for tenants, which could limit our profitability.

We face significant competition from owners, operators and developers of similar real estate properties designed and dedicated to serve tenants with the same needs as the tenants that occupy or could occupy our properties in the same market. These competitors may have greater resources than we do, and may have other advantages resulting from lower cost of capital and enhanced operating efficiencies. This competition may affect our ability to attract and retain tenants and may reduce the rents we are able to charge. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lease available space at lower prices than the space in our properties. Due to such competition, the terms and conditions of any lease we enter into with our tenants may vary substantially from those we anticipate when we acquire a property. Our properties experience competition from existing and planned projects, as well as newer developments located within the market area. We cannot assure competitors will not develop similar properties in the area or not be able to negotiate better leases for existing or new properties which could adversely affect the profitability and viability of our properties.

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Increased affordability of single-family homes could limit our ability to retain residents, lease apartment units or increase or maintain rents.

The residential properties we own or may acquire can compete with numerous housing alternatives in attracting residents, including other apartment communities and single-family homes, as well as owner occupied single- and multi-family homes available to rent. Competitive housing in a particular area and the increasing affordability of owner occupied single- and multi-family homes available to rent or buy caused by declining mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.

Investments in real estate are illiquid, and we may not be able to resell a property on terms favorable to us.

We intend to hold real estate properties until such time as our Advisor determines a sale or other disposition appears to be advantageous to achieve our investment objectives or when our shareholders approve our termination and liquidation. Because real estate investments are relatively illiquid, it could be difficult for us to promptly sell one or more of our real estate properties on favorable terms. This may be a result of economic conditions, availability of financing, interest rates and other factors beyond our control. This may limit our ability to change our portfolio promptly in response to adverse changes in the performance of any such property or economic or market trends. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate investments by their nature are often difficult or time consuming to liquidate. In addition, federal tax laws imposing a 100% excise tax on gains from sales of certain types of property sales by a REIT (generally, property viewed as being purchased for resale, rather than investment) could limit our ability to sell properties and may affect our ability to sell properties without adversely affecting returns to our shareholders. These restrictions could adversely affect our ability to achieve our investment objectives.

Valuations and appraisals of our investments may not necessarily correspond to realizable value.

We value our real estate properties initially at cost, which we expect to represent fair value at that time. After acquisition, valuations may include appraisals of our properties periodically. The valuation methodologies used to value our real estate properties will involve subjective judgments regarding such factors as comparable sales, rental and operating expense data, the capitalization and/or discount rate and projections of future rent and expenses based on appropriate analysis. Our investments in real estate related assets will initially be valued at cost, and thereafter will be valued periodically, or in the case of liquid securities, daily, as applicable, at fair value as determined by the Advisor in good faith. Although our valuation procedures are designed to determine the accurate fair value of our assets, appraisals and valuations of our real estate properties and valuations of our investments in real estate related assets will be only estimates of fair value and therefore may not correspond to realizable value upon a sale of those assets.

Uninsured losses related to real estate investments may adversely affect our results of operation.

We purchase, and we may be required by lenders of mortgage loans or other financings to obtain, certain insurance coverage on our real estate investments. Either the property manager or the Advisor selects policy specifications and insured limits which it believes to be appropriate and adequate given the risk of loss, the cost of the coverage and industry practice. The nature of the tenants at the properties we hold may expose us and our operations to an increase in liability for personal injuries or other losses. There can be no assurance that such insurance will be sufficient to cover all liabilities. Some of our policies may be subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. Furthermore, insurance against certain risks, such as terrorism, flood and toxic mold, may be unavailable or available at commercially unreasonable rates or in amounts less than the full market value or replacement cost of the properties. There can be no assurance particular risks are currently insurable, will continue to be insurable on an economical basis or current levels of coverage will continue to be available. If a loss occurs that is partially or completely uninsured, we may lose all or part of our investment in a property as well as the anticipated future cash flows from such properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. We may also be liable for any uninsured or underinsured personal injury, death or property damage claims, which could result in decreased dividends to shareholders.

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Discovery of toxic mold on our properties may adversely affect our results of operation.

Litigation and concern about indoor exposure to certain types of toxic molds have been increasing as the public becomes aware exposure to mold can cause a variety of health effects and symptoms, including allergic reactions. Toxic molds can be found almost anywhere; they can grow on virtually any organic substance, as long as moisture and oxygen are present. There are molds that can grow on wood, paper, carpet, foods and insulation. When excessive moisture accumulates in buildings or on building materials, mold growth will often occur, particularly if the moisture problem remains undiscovered or unaddressed. It is impossible to eliminate all mold and mold spores in the indoor environment. The difficulty in discovering indoor toxic mold growth could lead to a risk of lawsuits by affected persons and the risk that the cost to remedy toxic mold could exceed the value of the property. We will attempt to acquire properties where there is no toxic mold or where there has not been any proceeding or litigation with respect to the presence of toxic mold. However, we cannot provide assurances toxic mold will not exist on any of our properties when we acquire the properties or will not subsequently develop on any of our properties.

We may acquire a property or properties “AS IS,” which increases the risk of an investment that requires us to remedy defects or costs without recourse to the prior owner.

We may acquire real estate properties “as is” with only limited representations and warranties from the property seller regarding matters affecting the condition, use and ownership of the property. As a result, if defects in the property (including any building on the property) or other matters adversely affecting the property are discovered, we may not be able to pursue a claim for any or all damage against the property seller. Such a situation could negatively affect our results of operations.

We may engage in leaseback transactions, which involve risks including a failure to qualify as a REIT.

From time to time we have purchased certain real estate properties and lease them back to the sellers of such properties. While we use our best efforts to structure any such leaseback transactions to be characterized as a “true lease” so we will be treated as the owner of the property for federal income tax purposes, we cannot assure you the IRS will not challenge such characterization. If any such re-characterization were successful, deductions for depreciation and cost recovery relating to such real property would be disallowed, interest and penalties could be assessed by the IRS and it is possible, under some circumstances, we could fail to qualify as a REIT as a result.

We rely on affiliated and outside property managers to properly manage and lease our properties.

The Advisor and an affiliate of the Advisor serve as our main property managers, and the Advisor has hired and intends to hire other affiliates and/or third parties to serve as additional property managers, to manage our properties and act as leasing agents to lease vacancies in our real estate properties. These property managers will have significant decision-making authority with respect to the management of our properties. Our ability to direct and control how our properties are managed may be limited. We will not, and the Advisor will not as to its affiliates and third party property managers, supervise any of the property managers or any of their respective personnel on a day-to-day basis. Thus, the success of our business may depend in large part on the ability of our property managers to manage the day-to-day operations and their ability to lease vacancies in our properties. Any adversity experienced by our property managers could adversely impact the operation and profitability of our properties and, consequently, our ability to achieve our investment objectives.

Risks Related with Our Indebtedness and Financing

Current market conditions could adversely affect our ability to obtain financing.

As a REIT, we are required to distribute at least 90% of our taxable income (excluding net capital gains) to our shareholders in each taxable year, and thus our ability to retain internally generated cash is limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties will depend on our ability to obtain debt or equity financing from third parties or the sellers of properties or to sell other properties. We have incurred mortgage debt and pledged some or all of our properties as security for debt in order to obtain funds to acquire additional properties or for working capital. We have also obtained a line of credit to provide a flexible borrowing source of funds.

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Market fluctuations and disruptions in the credit markets could significantly affect our ability to access capital. Reductions in our available borrowing capacity, or inability to establish a credit facility when required or when business conditions warrant, could then limit the number, size and quality of properties we could acquire or the amount of improvements we could make on acquired properties, which could materially affect our ability to achieve our investment objectives and may result in price or value decreases of our real estate assets.

We will incur mortgage indebtedness and other borrowings, which will increase our business risks.

We have obtained mortgage loans on many of our properties so we can use our capital to acquire additional real estate properties and make improvements on the properties. However, we may not incur indebtedness of more than 300% of our net assets, unless such excess is approved by a majority of our trustees. High debt levels will cause us to incur higher interest charges, which would result in higher debt service payments and could be accompanied by restrictive covenants. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on that property, then the amount available for dividends to shareholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan in default, thus reducing the value of our shareholders’ investment.

For tax purposes, a foreclosure on any of our properties will be treated as: (1) if the foreclosed debt is nonrecourse, a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage or (2) if the foreclosed debt is recourse, a sale of the property for a purchase price equal to its fair market value and as cancellation of debt income to the extent, if any, the outstanding debt balance exceeds the fair market value. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we will recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt on behalf of our operating partnership, whereby we will be responsible to the lender for satisfaction of the debt if it is not paid by our operating partnership. If any mortgage contains cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash dividends to our shareholders will be adversely affected.

We could face difficulties in refinancing loans involving balloon payment obligations.

Some of our mortgage loans require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity could be uncertain and may depend upon our ability to obtain additional financing, to refinance the debt or our ability to sell the particular property. If we try and refinance the debt, we may not be able to obtain terms as favorable as the original loan. Based on historical interest rates, current interest rates are low and, as a result, it is likely the interest rate that will be obtained upon refinancing in subsequent years may be higher than the original loan. If we are not able to refinance the debt, or obtain acceptable terms, we may be required to sell the mortgaged property at a time which may not permit realization of the maximum return on such property. The effect of a refinancing or sale could affect the rate of return to shareholders and the projected time of disposition of our assets.

Lenders may require restrictive covenants relating to our operations, which may adversely affect our flexibility and our ability to achieve our investment objectives.

Some of our mortgage loans impose restrictions on us that affect our distribution and operating policies, our ability to incur additional debt and our ability to resell interests in the property. Loan documents may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, replace the Advisor or the property manager, or terminate certain operating or lease agreements related to the property. Such restrictions may limit our ability to achieve our investment objectives.

Increases in interest rates on variable rate debt incurred by us will reduce cash available for dividends.

If we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flows and our ability to pay dividends to our shareholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

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Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

We have entered into two hedging transactions and may enter into additional such transactions. Hedging transactions could take a variety of forms, including interest rate swaps or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments. Any income from a hedging transaction to manage risk of interest rate, price changes, or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred by us to acquire or own real estate assets, which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into, including gain from the disposition of such a transaction, will be disregarded for purposes of the 75% and the 95% gross income tests. If applicable, there also are rules for disregarding income for purposes of the 75% and the 95% gross income tests with respect to hedges of certain foreign currency risks. To the extent we enter into other types of hedging transactions, the income from those transactions likely will be treated as non-qualifying income for purposes of both the 75% and the 95% gross income tests. We intend to structure any hedging transactions in a manner that does not jeopardize our ability to qualify as a REIT.

Complying with REIT requirements may limit our ability to hedge liabilities through tax-efficient means.

The REIT provisions of the Code substantially limit our ability to hedge liabilities. Because we conduct substantially all of our operations through our operating partnership, any income from a hedging transaction entered into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets will not constitute gross income to us for purposes of the 75% or 95% gross income test. To the extent our operating partnership enters into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income to us for purposes of the 75% and 95% gross income tests. As a result, we may be required to limit the operating partnership’s use of advantageous hedging techniques or to implement hedges through certain taxable corporations. This could increase the costs of hedging activities because any taxable corporation would be subject to tax on gains or expose the operating partnership to greater risks associated with changes in interest rates than is otherwise desirable. In addition, losses of a taxable corporation will generally not be deductible by the operating partnership and will generally only be available to offset future taxable income of such corporation.

We may structure acquisitions of property in exchange for limited partnership units in our operating partnership on terms that could limit our liquidity or our flexibility.

We may acquire properties by issuing limited partnership units in our operating partnership to contributors of property. If we enter into such transactions, in order to induce the property owners to accept limited partnership units rather than cash, it may be necessary for us to provide them with additional incentives. For instance, our operating partnership’s LLLP Agreement provides any holder of limited partnership units may, subject to certain conditions, request redemption of their units and we may purchase such units with our shares on a one-for-one exchange basis.

We may, however, enter into additional contractual arrangements with contributors of property under which we would agree to redeem a contributor’s units for our shares or cash, at the option of the contributor, at set times. If the contributor required us to redeem units for cash pursuant to such a provision, it would limit our liquidity and thus our ability to use cash to make other investments, satisfy other obligations or pay dividends. Moreover, if we were required to redeem units for cash at a time when we did not have sufficient cash to fund the redemption, we might be required to sell one or more properties to raise funds to satisfy this obligation or seek short-term financing. Furthermore, in order to allow a contributor of a property to defer taxable gain on the contribution of property to our operating partnership, we might agree not to sell a contributed property for a defined period of time or until the contributor exchanged the contributor’s units for cash or our shares. Such an agreement would prevent us from selling those properties, even if market conditions made such a sale favorable to us.

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Risks Related to Investments in Real Estate Related Assets

Currently, our investment portfolio contains a nominal amount of real estate related assets. The following risk factors apply to such assets.

Investments in real estate related equity assets could involve higher risks than other investments, which could adversely affect our operations and ability to make dividend payments.

We can invest in common and preferred stock of both publicly traded and private real estate companies, including REITs, which involve a higher degree of risk than debt securities due to a variety of factors, including subordination to creditors and lack of any security. Our investments in real estate related equity securities can involve special risks relating to the particular issuer of the equity securities, including the financial condition and business outlook of the issuer. Issuers of real estate related common equity securities generally invest in real estate or real estate related assets and are subject to the inherent risks associated with real estate discussed in this report, including risks relating to rising interest rates.

The value of real estate related securities may be volatile and could cause the value of our shares to fluctuate, adversely affect our business operations and our ability to make dividend payments.

The value of real estate related securities, including those of REITs, fluctuate in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Different parts of the market and different types of equity securities can react differently to these developments and they can affect a single issuer or multiple issuers within an industry or economic sector or geographic region or the market as a whole. The real estate industry is sensitive to economic downturns. The value of securities of companies engaged in real estate activities can be affected by changes in real estate values and rental income, property taxes, interest rates and tax and regulatory requirements. In addition, the value of a REIT’s equity securities can depend on the structure and amount of cash flow generated by the REIT. Fluctuations in value of our securities may cause the value of our shares to vary regardless of the performance of our real estate assets, adversely affect our business operations and our ability to pay dividends to our shareholders.

Investments in commercial mortgage-backed securities have similar risks to mortgage loans, and we could be adversely affected if the value of such investments decrease due to repayment changes or non-payment.

Commercial mortgage-backed securities are bonds which evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, any mortgage-backed securities we invest in will be subject to all the risks of the underlying mortgage loans, including the risks of prepayment or non-payment.

The value of commercial mortgage-backed securities may be adversely affected when repayments on underlying mortgage loans do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of commercial mortgage-backed securities also may change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets as a whole. In addition, commercial mortgage-backed securities are subject to the credit risk associated with the performance of the underlying mortgage properties.

Commercial mortgage-backed securities are also subject to several risks created through the securitization process. Certain subordinate commercial mortgage-backed securities are paid interest only to the extent there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk interest payments on subordinate commercial mortgage-backed securities will not be fully paid. Subordinate securities of commercial mortgage-backed securities are also subject to greater risk than more highly rated commercial mortgage-backed securities.

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Investments in mortgage instruments could adversely affect our business operations if the values of the underlying properties decrease or there are repayment defaults.

For any investments we make in mortgage loans, we will be at risk of loss on those investments, including losses as a result of defaults on mortgage loans. These losses may be caused by many conditions beyond our control, including general prevailing local, national and global economic conditions; economic conditions affecting real estate values; changes in specific industry segments; tenant defaults and lease expirations; financial condition of tenants; changes in use of property; shift of business processes and functions offshore; declines in regional or local real estate values, or rental or occupancy rates; increases in interest rates, real estate tax rates and other operating expenses; competition from comparable types of properties; and property management decisions.

If we acquire a property by foreclosure following defaults under any mortgage loan investments, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our ability to achieve our investment objectives. We do not know whether the values of the property securing any of our real estate securities investments will remain at the levels existing on the dates we initially make the related investment. If the values of the underlying properties drop, our risk will increase and the values of our interests may decrease. Further, seeking available remedies could be a time-consuming and expensive process and would increase the costs associated with holding such mortgage and reducing our cash available for shareholders.

If there are delays in liquidating defaulted mortgage loan investments, we could be required to incur additional expenses to pursue such remedies, which could adversely affect our operations.

If there are defaults under any mortgage loan investments we hold, we may not be able to foreclose on or obtain a suitable remedy with respect to such investments. Specifically, we may not be able to repossess and sell the underlying properties quickly, which could reduce the value of our investment. For example, an action to foreclose on a property securing a mortgage loan is regulated by state statutes and rules and is subject to many of the delays and expenses of lawsuits if the defendant raises defenses or counterclaims. Additionally, in the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the mortgage loan. Therefore, we may experience a delay in liquidating the investment and return of the funds to invest in new investments.

Investments in mezzanine loans may involve higher risks, and we may not be able to obtain full recourse if the investment becomes unsecured or the assets of the entity providing the pledge become insufficient to satisfy the loan.

We may invest in mezzanine loans taking the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior first-lien mortgage loans secured by income producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.

Investments subject to interest rate risks may decline in value due to changes in the market interest rates, which could adversely affect the value of our assets.

Interest rate risk is the risk fixed income securities such as preferred and debt securities, and to a lesser extent dividend paying common stocks, will decline in value due to changes in market interest rates. When market interest rates rise, the fair value of such securities tend to decline, and vice versa.

28

During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below-market interest rate, increase the security’s duration and reduce the value of the security. During periods of declining interest rates, an issuer may be able to exercise an option to prepay principal earlier than scheduled. If this occurs, we may be forced to reinvest in lower yielding securities. Preferred and debt securities frequently have call features allowing the issuer to repurchase the security prior to its stated maturity. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. These risks may reduce the value of any real estate related securities investments.

Investments in illiquid investments could adversely affect the value of our assets if we are unable to resell the investments when desired to protect ourselves from changes in market or economic conditions.

We may purchase real estate related securities in connection with privately negotiated transactions not registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited. Any mezzanine and bridge loans we may purchase will be particularly illiquid investments due to their short life, their unsuitability for securitization and the greater risk of our inability to recover loaned amounts in the event of a borrower’s default.

Liquidation prior to the maturity of any real estate securities investments could require us to sell on unfavorable terms and for a lower price than anticipated if held to maturity.

Our Board of Trustees may choose to liquidate assets, including any real estate related securities investments. If we liquidate those types of investments prior to their maturity, we may be forced to sell those investments on unfavorable terms or at a loss during a time when prevailing interest rates are higher than the interest rates of such mortgage loans, whereby we would sell such investments at a discount to their stated principal values.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

General

As of December 31, 2013, we owned 122 properties, containing approximately 5,947 apartments and 1,404,412 square feet of leasable commercial space. Many of our properties are located in the state of North Dakota.

It is our policy to acquire assets with an intention to hold these assets as long-term investments seeking income and capital appreciation through an increase in value of our real estate portfolio, as well as increased revenue as a result of higher rent. These types of investments are the core of our strategy of creating shareholder value. We seek to own and maintain a portfolio of real estate diversified by geographical location and by type and size. Our Advisor monitors industry trends and invests in property believed to provide the most favorable return balanced with risk. We attempt to manage our real estate portfolio by evaluating changes or trends in the industries in which our tenants operate, the creditworthiness of our tenants and changes or trends in the area demographics surrounding our properties for evidence that our properties will continue to meet our investment objectives of cash flow, preservation of capital and capital appreciation.

With the exception of single tenant buildings, the majority of our investment properties are managed by a third party. However, all decisions relating to purchase, sale, insurance coverage, capital improvements, approval of commercial leases, annual operating budgets, and major renovations are made by our Board, based on input from the Advisor. Property management firms usually receive between 3% and 5% of gross rent collection for their services. Substantially all of our revenues consist of base rents received under leases having terms ranging from month-to-month to over 25 years. Approximately half of our existing leases as of December 31, 2013 contain “step up” rental clauses providing for annual increases in the base rental payments of approximately 1.0% to 3.0% each year during the term of the lease.

Properties

As of December 31, 2013, we owned 122 properties in eleven states, primarily located in North Dakota with others located Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. This portfolio of properties includes a diversified mixture of multifamily, single tenant retail and office buildings. The majority of the properties are located in the largest cities in the states of North Dakota and Minnesota. We report our results in two reportable segments: residential and commercial properties. Please see Notes 2 and 3 to the consolidated financials included in this report for more information.

As of December 31, 2013, approximately 63.1% of the properties were apartment communities located primarily in North Dakota with others located in Minnesota and Nebraska. Most multi-family dwelling properties are leased to a variety of tenants under short-term leases.

As of December 31, 2013, approximately 36.9% of the properties were comprised of office, retail and medical commercial properties located primarily in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Mississippi, Minnesota, Nebraska, Texas and Wisconsin. Most commercial properties are leased to a variety of tenants under long-term leases. The following table sets forth information regarding each of our properties owned, including unconsolidated affiliates, as of December 31, 2013 (in thousands, except units or leasable sq. ft.).

			# of				Physical			Annualized
			Units or				Occupancy			Base
		Year	Leasable		Total		at December			Rental
Property	Location	Acquired	Sq Ft		Investment		31, 2013			Revenue (1)
32nd Avenue Office	Fargo, ND	2004		31,307	$	4,060		100.00	%	$	349
44th Street	Fargo, ND	2013		42		2,310		98.88	%		319
Aetna Building	Bismarck, ND	2006		75,000		8,896		100.00	%		881
Applebee’s Neighborhood Bar & Grill	Apple Valley, MN	2011		4,997		2,570		100.00	%		239
Applebee’s Neighborhood Bar & Grill	Bloomington, MN	2010		5,043		2,663		100.00	%		215
Applebee’s Neighborhood Bar & Grill	Coon Rapids, MN	2010		5,576		2,480		100.00	%		243
Applebee’s Neighborhood Bar & Grill	Savage, MN	2010		4,936		1,127		100.00	%		166
Arbor Apartments	Bismarck, ND	2013		12		636		97.88	%		93
Arbor II Apartments	Bismarck, ND	2013		12		672		100.00	%		70
Arbor III Apartments	Bismarck, ND	2013		12		668		100.00	%		74
Arneson (Auburn/Hunter’s Run I)	Fargo, ND	2007		36		1,538		96.79	%		277
Ashbury *	Fargo, ND	2013		61		3,660		100.00	%		2,894
Autumn Ridge	Grand Forks, ND	2004		144		10,404		97.89	%		1,529
Bayview	Fargo, ND	2007		100		4,677		97.47	%		811
Becker Furniture Building, St. Cloud	Waite Park, MN	2006		30,200		2,215		100.00	%		198
Berkshire	Fargo, ND	2008		12		475		100.00	%		88

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			# of				Physical			Annualized
			Units or				Occupancy			Base
		Year	Leasable		Total		at December			Rental
Property	Location	Acquired	Sq Ft		Investment		31, 2013			Revenue (1)
Biolife Plasma Center	Bismarck, ND	2008		11,671		2,551		100.00	%		242
Biolife Plasma Center	Eau Claire, WI	2008		11,900		2,058		100.00	%		184
Biolife Plasma Center	Grand Forks, ND	2008		13,190		2,919		100.00	%		253
Biolife Plasma Center	Janesville, WI	2008		12,225		2,107		100.00	%		193
Biolife Plasma Center	Mankato, MN	2008		13,181		3,352		100.00	%		340
Biolife Plasma Center	Marquette, MI	2008		11,737		3,006		100.00	%		260
Biolife Plasma Center	Onalaska, WI	2008		12,180		2,280		100.00	%		214
Biolife Plasma Center	Oshkosh, WI	2008		12,191		2,187		100.00	%		183
Biolife Plasma Center	Sheboygan, WI	2008		13,230		2,396		100.00	%		227
Biolife Plasma Center	Stevens Point, WI	2008		13,190		2,302		100.00	%		205
Brookfield	Fargo, ND	2008		72		2,402		99.90	%		465
Buffalo Wild Wings	Austin, TX	2010		7,296		2,587		100.00	%		122
Candlelight	Fargo, ND	2012		66		1,950		100.00	%		470
Carling Manor	Grand Forks, ND	2008		12		779		99.13	%		147
Carlton Place	Fargo, ND	2008		213		8,446		99.04	%		1,556
Chandler	Grand Forks, ND	2005		12		325		99.31	%		85
Columbia West	Grand Forks, ND	2008		70		4,003		98.39	%		673
Country Club	Fargo, ND	2011		40		1,637		100.00	%		306
Countryside	Fargo, ND	2011		24		877		95.51	%		157
Courtyard Apartments	St. Louis Park, MN	2013		151		8,758		96.62	%		1,501
Dairy Queen	Dickinson, ND	2012		2,811		1,330		100.00	%		122
Dairy Queen	Moorhead, MN	2011		2,712		1,200		100.00	%		129
Danbury	Fargo, ND	2007		135		6,875		97.79	%		1,147
Dellwood Estates	Anoka, MN	2013		132		11,500		95.82	%		1,379
Eagle Run**	West Fargo, ND	2010		144		6,874		97.78	%		1,127
Echelon Building	Fargo, ND	2006		17,000		2,008		100.00	%		145
Eide Bailly Building***	Fargo, ND	2007		75,000		5,919		100.00	%		933
Emerald Court	Fargo, ND	2008		24		1,010		100.00	%		172
Fairview	Bismarck, ND	2008		84		4,575		99.92	%		886
First International Bank & Trust	Moorhead, MN	2011		3,510		1,014		100.00	%		83
Flickertail	Fargo, ND	2008		180		6,519		96.53	%		1,304
Forest Avenue	Fargo, ND	2013		20		740		100.00	%		125
Four Points Office Building	Fargo, ND	2007		11,973		1,313		100.00	%		123
Galleria III	Fargo, ND	2010		18		862		100.00	%		170
Gate City Bank	Grand Forks, ND	2008		17,406		1,300		88.30	%		196
Glen Pond	Eagan, MN	2011		414		26,508		97.83	%		5,171
Goldmark Office Park	Fargo, ND	2007		124,306		18,189		100.00	%		1,516
Grand Forks Marketplace****	Grand Forks, ND	2003		182,522		9,963		100.00	%		1,965
Granger Court I	Fargo, ND	2013		59		3,127		100.00	%		440
Great American Insurance Building	Fargo, ND	2005		15,000		2,202		100.00	%		153
Guardian Building Products	Fargo, ND	2012		100,600		3,450		100.00	%		343
Hannifin Apartments	Bismarck, ND	2013		14		756		96.07	%		85
Highland Meadows*****	Bismarck, ND	2011		144		1,313		97.83	%		1,288
Hunter	Fargo, ND	2009		48		1,856		95.67	%		295
Hunter’s Run II	Fargo, ND	2008		12		517		100.00	%		98
Islander Apartments	Fargo, ND	2011		24		1,068		98.03	%		180
Kennedy	Fargo, ND	2013		12		714		100.00	%		417
Library Lane	Grand Forks, ND	2007		60		2,931		99.98	%		409
Mandan Family Dollar Store	Mandan, ND	2010		9,100		849		100.00	%		72
Mandan O’Reilly Auto Store	Mandan, ND	2010		6,300		679		100.00	%		66
Maple Ridge	Omaha, NE	2008		168		7,676		94.62	%		1,259
Maplewood Bend	Fargo, ND	2009 and 2010		182		7,195		99.19	%		1,299
Mayfair	Grand Forks, ND	2008		24		1,210		98.32	%		215
Midtown Plaza	Minot, ND	2004		15,010		1,256		100.00	%		184
Monticello Apartments	Fargo, ND	2013		18		864		100.00	%		128
Montreal Courts Apartments & Townhomes	Little Canada, MN	2013		444		27,084		95.72	%		4,237
Oak Court	Fargo, ND	2008		81		2,919		98.72	%		518
Pacific Park I	Fargo, ND	2013		30		957		98.67	%		178
Pacific Park II	Fargo, ND	2013		39		1,036		100.00	%		221
Pacific Park South	Fargo, ND	2013		15		550		100.00	%		106
Parkwood	Fargo, ND	2008		40		1,381		99.86	%		274
Pebble Creek	Bismarck, ND	2008		70		4,030		99.81	%		780
Prairiewood Court I & II (3)	Fargo, ND	2006 and 2007		60		2,369		99.28	%		422
Prairiewood Meadows	Fargo, ND	2012		85		3,450		99.96	%		795
Premiere Marketing	Norfolk, NE	2011		14,736		700		100.00	%		72
Regis Building	Edina, MN	2009		102,448		13,286		100.00	%		1,127
Richfield Harrison	Grand Forks, ND	2007		140		7,811		97.91	%		1,215
Rosegate	Fargo, ND	2008		90		3,488		100.00	%		563
Saddlebrook	West Fargo, ND	2008		60		1,503		99.64	%		288
Schrock Apartments	Fargo, ND	2013		18		756		100.00	%		127
Sheridan Pointe Apartments	Fargo, ND	2013		48		2,880		100.00	%		405
Sierra Ridge	Bismarck, ND	2006 and 2011		272		10,309		99.10	%		1,517
Social Security Building	St. Cloud, MN	2007		10,810		2,904		100.00	%		363
Somerset	Fargo, ND	2008		75		3,982		96.78	%		602
Southgate	Fargo, ND	2007		162		6,327		95.18	%		1,108
Southview III	Grand Forks, ND	2011		18		3,051		94.39	%		164
Southview Village	Fargo, ND	2007		72		701		100.00	%		501

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			# of				Physical			Annualized
			Units or				Occupancy			Base
		Year	Leasable		Total		at December			Rental
Property	Location	Acquired	Sq Ft		Investment		31, 2013			Revenue (1)
Spring	Fargo, ND	2013		25		950		100.00	%		169
Stanford Court	Grand Forks, ND	2013		96		4,416		99.81	%		744
Stony Brook	Omaha, NE	2009		148		10,595		93.28	%		1,534
Sunset Ridge	Bismarck, ND	2008/2010		180		13,917		99.92	%		1,850
Sunview	Grand Forks, ND	2008		36		1,903		96.81	%		344
Sunwood Estates	Fargo, ND	2007		81		4,160		99.94	%		877
Terrace on the Green	Moorhead, MN	2012		116		3,450		96.32	%		854
Titan Machinery	Dickinson, ND	2012		17,760		1,791		100.00	%		180
Titan Machinery	Fargo, ND	2012		29,800		2,820		100.00	%		283
Titan Machinery	Marshall, MN	2011		42,000		5,075		100.00	%		511
Titan Machinery	Minot, ND	2012		23,690		2,630		100.00	%		264
Titan Machinery	Redwood Falls, MN	2013		38,932		4,700		100.00	%		461
Titan Machinery	Sioux City, IA	2013		32,532		4,567		100.00	%		452
Twin Parks	Fargo, ND	2008		66		2,371		99.27	%		471
Village	Grand Forks, ND	2008		35		1,742		93.93	%		321
Village Park	Fargo, ND	2008		60		2,346		99.83	%		400
Village West	Fargo, ND	2008		80		2,818		99.59	%		536
Walgreens	Alexandria, LA	2009		14,560		4,358		100.00	%		297
Walgreens	Batesville, AR	2009		14,820		8,346		100.00	%		599
Walgreens	Denver, CO	2011		13,390		5,300		100.00	%		370
Walgreens	Fayetteville, AR	2009		14,550		5,368		100.00	%		467
Walgreens	Laurel, MS	2010		14,820		4,650		100.00	%		327
Wells Fargo Building	Duluth, MN	2007		95,961		8,390		100.00	%		100
West Pointe Center	Fargo, ND	2007		28,500		3,635		100.00	%		241
Westside	Hawley, MN	2010		14		449		69.44	%		104
Westwind	Fargo, ND	2008		18		613		100.00	%		123
Westwood Estates	Fargo, ND	2008		200		7,641		99.56	%		1,444
Willow Park	Fargo, ND	2008		102		5,938		93.55	%		931

* 82.50% ownership interest

** 81.25% ownership interest

*** 66.67% ownership interest

**** 50.00% ownership interest

***** 40.26% ownership interest

(1) Property’s 2013 base rent, except for properties acquired during the year. Base rent is annualized based on December 31, 2013 base rent and does not include CAM (common area maintenance) income. Rent concessions are not reflected in the calculation, as they are limited in nature and the effects are considered immaterial at less than 0.05%.

The following information applies to all of our operating properties:

• We believe all of our properties are adequately covered by insurance and suitable for their intended purposes

• We have no plans for any material renovations, improvements or development of our properties, except in accordance with planned budgets and our Bismarck, North Dakota apartment project;

• Our properties are located in markets where we are subject to competition in attracting new tenants and retaining current tenants; and

• Depreciation is provided on a straight-line basis over the estimated useful lives of the buildings.

Geography

Of our 122 properties, 86 are located in North Dakota, with 59 being located in the greater Fargo, North Dakota metropolitan statistical area. These 86 North Dakota properties generated approximately 66% of our rental revenue for the year ended December 31, 2013.

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The following table presents the total real estate investment amount by state and annual rental revenue by state, as of and for the year ended December 31, 2013 (in thousands):

	Real Estate					Rental
State	Investment		%			Revenue		%
North Dakota	$	261,884		58	%	$	38,235		66	%
Minnesota		121,346		27	%		13,009		22	%
Other		67,020		15	%		6,967		12	%
	$	450,250		100	%	$	58,211		100	%

Economy

The North Dakota workforce is concentrated in agricultural, energy, information technology, aerospace sciences and medical sciences. According to the U.S. Census Bureau, 2006-2010 American Community Survey, the estimated combined population of the Fargo, West Fargo and Moorhead metro area is 169,444 people. According to the Bureau of Labor Statistics December 2013 News Release, North Dakota registered the lowest jobless rate at 2.6 percent compared to the US rate of 6.7%. North Dakota also registered the lowest jobless rate in 2012.

The following chart depicts the difference in unemployment rates between North Dakota and the national average for 2013:

	Jan			Feb			Mar			Apr			May			Jun			Jul			Aug			Sep			Oct			Nov			Dec
National (1)		7.9	%		7.7	%		7.6	%		7.5	%		7.6	%		7.6	%		7.4	%		7.3	%		7.2	%		7.3	%		7.0	%		6.7	%
North Dakota (1)		3.3	%		3.3	%		3.2	%		3.3	%		3.2	%		3.1	%		3.0	%		3.0	%		2.8	%		2.7	%		2.6	%		2.6	%

⁽¹⁾  Seasonally adjusted

Source: Bureau of Labor Statistics

Tenants

Our tenants are varied and consist of national, regional, local businesses and individuals. Our commercial/retail properties generally attract a mix of tenants who provide basic staples, convenience items and services tailored to the specific cultures, needs and preferences of the surrounding community. In 2013 and 2012, no single tenant represented more than 10% of our revenues. We have investments in several types of real estate, including multifamily, retail, office, industrial, restaurant, and medical. Within our office, retail and industrial properties, we have over 70 tenants who operate in numerous industries, including restaurants, pharmacy, financing, banking, insurance, professional services, technology and wholesale and direct retail.

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Lease Expirations

The vast majority of residential leases are for one year periods. The following table lists a summary, as of December 31, 2013, of lease expirations on non-residential properties schedule to occur during each of the ten calendar years from 2014 to 2023 and thereafter, assuming that tenants exercise no renewal options or early termination rights. Base rents do not include CAM (common area maintenance). The table is based on leases at December 31, 2013 for our non-residential properties (in thousands, except leasable area data).

	# of Leases		Gross		% of Gross			Expiring		% of Total
Lease Expiration Year	Expiring		Leasable Area		Leasable Area			Base Rent		Base Rent
Month-to-Month		3		35,710		2.60	%	$	51		0.33	%
2014		11		23,351		1.70	%		136		0.87	%
2015		18		274,639		19.96	%		1,741		11.10	%
2016		18		238,068		17.30	%		877		5.59	%
2017		15		256,862		18.67	%		836		5.33	%
2018		7		31,180		2.27	%		102		0.65	%
2019		4		12,105		0.88	%		59		0.38	%
2020		3		32,382		2.35	%		52		0.33	%
2021		7		129,329		9.40	%		813		5.19	%
2022		1		13,230		0.96	%		193		1.23	%
2023		4		31,088		2.26	%		324		2.07	%
Thereafter		20		298,104		21.65	%		10,495		66.93	%
Leased Total		111		1,376,048		100.00	%	$	15,679		100.00	%

Mortgage Notes Secured by the Properties

At December 31, 2013, we had $239.0 million in mortgage notes payable with respect to our properties. Principal payments on these notes are payable as follows (in thousands):

Years ending December 31,	Amount
2014	$	7,793
2015		22,694
2016		34,948
2017		35,277
2018		8,353
Thereafter		129,943
	$	239,008

Acquisitions and Dispositions

We acquired twenty two properties and disposed of one property and one parcel of land during the year ended December 31, 2013. Capitalization rates are a key decision making item used by the Board. Capitalization rates for acquisitions are calculated using projected net operating income divided by the investment. Net operating income is calculated by taking GAAP net income and adding back depreciation, amortization and interest expense. Capitalization rate for dispositions are calculated in the same way with the exception of using historical, rather than projected, net operating income.

We use historical occupancy, rental income, and expenses to calculate projected net operating income for potential investment properties. For commercial properties, assumptions regarding rental income and expenses are based on the terms of the in-place leases and available historical financial information which is then used to generate projected net operating income. We require all commercial properties to have long-term leases in place before consideration is given for possible acquisition. The projected NOI calculation is based 100% on leases that are or will be in place prior to acquiring the property. While there may be estimates and assumptions regarding expenses based on historical information when available, there are no other assumptions for leasing income beyond the lease agreements in place prior to acquiring the property.

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For residential properties, we make various assumptions about future rents, occupancy levels, and expenses based on historical financial information and our assessment of the property’s future potential. The projected NOI for residential acquisitions is typically based 100% on historical occupancy and expenses over a three to five year period. When historical information is unavailable, market vacancy and credit loss factors are estimated. We normally do not assign a value to residential tenant leases already in place due to the short-term duration of twelve months or less of these leases and the uncertainty of retaining all tenants due to a change in ownership and in some cases property management companies.

Numerous estimates and assumptions are necessary to generate projected net operating income for potential commercial and residential acquisitions, and there is no guarantee actual net operating income will equal projected net operating income.

In making acquisitions, the Board targets capitalization rates between 8.0 to 10.0%, depending on the amount of risk involved. For those properties with greater risk, the Board demands greater capitalization rates (over 9.0%). For those properties exhibiting less risk, a lower capitalization risk is acceptable. For potential acquisitions, the Board also requires an adequate spread exists between the financing on the property and the capitalization rate.

Insurance

We believe we have adequate property damage, fire loss and liability insurance on all of our properties with reputable, commercially rated companies. We also believe our insurance policies contain commercially reasonable deductibles and limits, adequate to cover our properties. We expect to maintain this type of insurance coverage and to obtain similar coverage with respect to any additional properties we acquire in the near future. Further, we have title insurance relating to our properties in an aggregate amount we believe to be adequate.

Regulations

Our properties, as well as any other properties we may acquire in the future, are subject to various federal, state and local laws, ordinances and regulations. They include, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle activity. We believe we have all permits and approvals necessary under current law to operate our properties.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of our operations, we may become involved in litigation. Such matters may be generally covered by insurance. At this time, we are not aware of any material pending or threatened legal proceedings, or other proceedings contemplated by governmental authorities.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common shares of beneficial interest are not listed on any national exchange or over-the-counter market or quoted on any national securities market, and we currently do not have plans to list or have our common shares quoted.

Shareholders and Limited Unit Holders

As of March 24, 2014, we had 5,403,973.0153 common shares of beneficial interests outstanding, held by a total of 847 common shareholders and no outstanding options or warrants to purchase our common shares.

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In addition, as of March 24, 2014, there were approximately 13,884,257.1270 limited partnership units of our operating partnership outstanding held by approximately 494 limited partners. Pursuant to the exchange rights under the LLLP Agreement of the operating partnership, we have the option, upon redemption requests by the holders of the limited partnership units, to acquire the limited partnership units by paying the holders with our common shares of beneficial interest on a one-for-one exchange basis. The numbers of common shareholders and limited partners is based on the Company’s records.

Quarterly Dividend Data

We have declared and intend to continue to declare regular quarterly dividends to our common shareholders. Because all of our operations are conducted through our operating partnership, our ability to pay dividends depends on the operating partnership’s ability to make distributions to us and its other limited partners. We pay declared dividends quarterly, whereby the dividend attributable to a calendar quarter would be paid in during the first month of the next quarter. Dividends will be paid to common shareholders as of the record dates selected by the Board of Trustees. We intend to make dividends sufficiently to satisfy the requirements for qualification as a REIT for federal tax purposes.

The following tables show the dividends we have declared (including the total amount paid on a per share basis, paid in cash, reinvested in shares of our common stock pursuant to the Dividend Reinvestment Plan, and the total amount paid) during the last two fiscal years (in thousands, except per share data).

	Dividends Per				Reinvested
2013 Quarter Ended	Common Share		Cash		via DRP		Total Dividends
December 31	$	0.2100	$	394	$	751	$	1,145	(a)
September 30	$	0.2100	$	418	$	716	$	1,134
June 30	$	0.2100	$	452	$	671	$	1,123
March 31	$	0.2100	$	452	$	660	$	1,112
				1,716		2,798		4,514
	Dividends Per				Reinvested
2012 Quarter Ended	Common Share		Cash		via DRP		Total Dividends
December 31	$	0.2065	$	393	$	702	$	1,095	(a)
September 30	$	0.2065	$	393	$	657	$	1,050
June 30	$	0.2065	$	349	$	601	$	950
March 31	$	0.2065	$	342	$	586	$	928
				1,477		2,546		4,023

(a) Fourth quarter dividends paid on January 15^th of the following year.

We expect that future dividends will be maintained at least at the present rate, unless there are changes in our results of operations, our general financial condition, general economic conditions or the Board determines other action prudent.

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Sale of Securities

Neither INREIT nor the operating partnership issued any unregistered securities during the three month period ended December 31, 2013, except as described below:

In connection with the completion of the acquisition of certain contributed properties, the operating partnership issued units as a portion of the purchase price, at a price per unit, as applicable, of $14, as set forth in the table below, as of December 31, 2013 (in thousands, except per unit data) pursuant to Section 4(2) of Regulation D and Rule 506.

	Property
	Acquisition		Number of		Aggregate
Property	Date		Units		Consideration
Titan Machinery, Redwood Falls, MN (3 recipients)		01/31/13		188,105	$	2,633
44th Street Apartments (1 recipient)		02/08/13		165,000		2,310
Forest Avenue Apartments (1 recipient)		02/08/13		52,858		740
Kennedy Apartments (1 recipient)		02/08/13		33,665		471
Pacific Park I Apartments (1 recipient)		02/08/13		53,633		751
Pacific Park II Apartments (1 recipient)		02/08/13		70,337		985
Pacific Park South (1 recipient)		02/08/13		34,375		481
Spring Apartments (1 recipient)		02/08/13		55,125		772
Stanford Court Apartments (1 recipient)		02/08/13		315,429		4,416
Dellwood Estates (2 recipients)		05/31/13		21,368		299
Schrock Apartments (1 recipient)		06/04/13		48,400		678
Arbor 400 Apartments (1 recipient)		06/04/13		45,429		636
Granger Court Apartments (1 recipient)		06/04/13		170,212		2,383
Ashbury Apartments (1 recipient)		07/01/13		153,996		2,156
Courtyard Apartments (1 recipient)		09/03/13		385,594		5,398
Sheridan Pointe Apartments (1 recipient)		10/01/13		140,226		1,963
Montreal Courts Apartments & Townhomes (1 recipient)		10/03/13		401,073		5,615
Titan Machinery (5 recipients)		10/25/13		184,558		2,584
Monticello Apartments (2 recipients)		11/08/13		61,716		864
				2,581,099	$	36,135

Other Sales

During the three months ended December 31, 2013, we issued 21,207 common shares in exchange for limited partnership units of the operating partnership on a one-for-one basis pursuant to redemption requests made by accredited investors pursuant to Regulation D and Rule 506. The issuances during the three months ended December 31, 2013 were as set forth below:

	Total
	Number of Common
Period	Shares Exchanged
October 1-31, 2013		1,520
November 1-30, 2013		None
December 1-31, 2013		19,687
		21,207

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Repurchases of Securities

Set forth below is information regarding common shares and limited partnership units repurchased under the Company’s publicly announced Repurchase Plans during the three months ended December 31, 2013:

											Shares (and
											Maximum Number (or
					Average		Total Number of		Total Number of		Approximate Dollar Value) of
	Total Number		Total Number		Price		Shares Repurchased		Units Repurchased		Shares (or Units) that May
	of Common		of Limited		Paid per		as Part of		as Part of		Yet Be Purchased Under
	Shares		Partner Units		Common		Publicly Announced		Publicly Announced		Publicly Announced
Period	Repurchased		Repurchased		Share/Unit		Plans or Programs		Plans or Programs		the Plans or Programs
October 1-15, 2013		—		—	$	13.00		524,000		119,000	$	8,426,000
October 16-31, 2013		21,000		—	$	14.00		545,000		119,000	$	8,132,000
November 1-30, 2013		23,000		23,000	$	14.00		568,000		142,000	$	7,488,000
December 1-31, 2013		20,000		—	$	14.00		588,000		142,000	$	7,208,000
Total		64,000		23,000

For the year ended December 31, 2013, we repurchased all shares or units for which we received redemption requests. In addition, for the year ended December 31, 2013, all common shares and units repurchased were repurchased as part of the publicly announced plans.

On March 28, 2013, and September 26, 2013 our Board of Trustees revised the Share Repurchase Plan. The amended and restated Share Repurchase Plan permits us to repurchase common shares held by our shareholders and limited partnership units held by partners of our operating partnership, up to a maximum amount of $25.0 million worth of shares and units, upon request by the holders after they have held them for at least one year and subject to other conditions and limitations described in the plan. The repurchase price for such shares and units repurchased under the plan was fixed at $13.00 per share or unit, which was increased to $14.00 effective October 16, 2013. The repurchase plan will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the repurchase plan at any time if it determines to do so is in our best interest.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial information and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the notes thereto, both of which appear elsewhere in this Form 10-K.

	December 31,
	2009			2010			2011			2012			2013
	(in thousands, except per share data)
BALANCE SHEET DATA:
Total assets	$	326,150		$	343,982		$	381,268		$	385,095		$	448,300
Mortgage loans payable, net	$	190,965		$	192,172		$	217,480		$	208,961		$	239,008
Total liabilities	$	200,300		$	204,319		$	237,043		$	221,904		$	251,094
Stockholder’s equity	$	125,849		$	139,663		$	144,225		$	163,191		$	197,206
	Year Ended December 31,
	2009			2010			2011			2012			2013
STATEMENT OF OPERATIONS DATA:
Rental income	$	39,417		$	43,438		$	49,316		$	52,021		$	61,943
Operating expenses		33,309			36,674			40,578			41,453			47,260
Interest		10,354			11,628			12,031			10,925			11,222
Depreciation and amortization		7,718			9,014			10,247			10,516			12,219
Total expenses		35,066			38,577			43,217			44,255			52,866
Total other income (expense)		1,999			897			403			866			888
Loss on impairment of property		312			363			264			262			226
Discontinued operations		—			1,854			116			499			3,350
Net income		6,351			7,613			6,618			9,131			13,317
Noncontrolling interest in income		4,992			5,740			4,891			6,424			9,355
Net income attributable to INREIT	$	1,358		$	1,872		$	1,727		$	2,707		$	3,962
Net income per common share	$	0.51		$	0.59		$	0.46		$	0.57		$	0.75
Weighted average shares outstanding		2,660			3,191			3,771			4,733			5,384
STATEMENT OF CASH FLOWS DATA:
Cash flows provided by operating activities	$	11,274		$	14,700		$	15,400		$	20,093		$	23,873
Cash flows used in investing activities		(34,941	)		(17,448	)		(11,498	)		(9,507	)		(166	)
Cash flows provided by (used in) financing activities		20,284			4,057			(10,718	)		(9,223	)		(14,414	)
OTHER DATA
Dividends declared (a)	$	2,010		$	2,511		$	3,030		$	4,023		$	4,514
Dividends declared per share	$	0.7450		$	0.7700		$	0.8050		$	0.8260		$	0.8400

(a) Consists of dividends paid by the Trust on its common shares of beneficial interest.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this section and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Please see “Note Regarding Forward-Looking Statements” and “Risk Factors” for more information. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made and are not guarantees of future performance.

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Liquidity and Capital Resources

Our principal demands for funds will be for the (i) acquisition of real estate and real estate-related investments, (ii) payment of acquisition related expenses and operating expenses, (iii) payment of dividends and redemptions, and (iv) payment of principal and interest on current and any future outstanding indebtedness. Generally, we expect to meet cash needs for the payment of operating expenses and interest on outstanding indebtedness from our cash flow from operations.

We expect to pay dividends to our shareholders from our cash flow from operations; however, we may use other sources to fund dividends, as necessary. We expect to meet cash needs for acquisitions and other real-estate investments from net proceeds of stock offerings and debt proceeds.

We continually evaluate our liquidity and ability to fund future operations and debt obligations. As part of our analysis, we consider lease expirations, credit quality of tenants and debt maturity schedules among other factors.

Tenant Credit Quality

We are exposed to credit risk within our tenant portfolio, which can reduce our results of operations and cash flow from operations if our tenants are unable to pay their rent. Tenants experiencing financial difficulties may become delinquent on their rent or default on their leases and, if they file for bankruptcy protection, may reject our lease in bankruptcy court, resulting in reduced cash flow. This may negatively impact net asset values and require us to incur impairment charges. Even if a default has not occurred and a tenant is continuing to make the required lease payments, we may restructure or renew leases on less favorable terms, or the tenant’s credit profile may deteriorate, which could affect the value of the leased asset and could in turn require us to incur impairment charges.

Historically, the geographic location of our properties and credit-worthiness of our tenants have resulted in $226,000 and $262,000 property impairments and minimal write-offs on uncollectible rental revenues in 2013 and 2012, respectively. We anticipate the trend to continue through 2014. It is possible, however, tenants may file for bankruptcy or default on their leases in the future and that economic conditions could deteriorate.

To mitigate credit risk, we have historically looked to invest in assets we believe are critically important to our tenant’s operations and have attempted to diversify our portfolio by tenant, tenant industry and geography. We also monitor tenant performance through review of rent delinquencies as a precursor to a potential default, meetings with tenant management and review of tenants’ financial statements and compliance with financial covenants. When necessary, our asset management process includes restructuring transactions to meet the evolving needs of tenants, refinancing debt and selling properties, as well as protecting our rights when tenants default or enter into bankruptcy.

Lease Expirations and Occupancy

No significant leases are scheduled to expire or renew in the near term. Our Advisor actively manages our real estate portfolio and begins discussing options with tenants in advance of scheduled lease expirations. In certain cases, we may obtain lease renewals from our tenants; however, tenants may elect to move out at the end of their term. In the cases where tenants elect not to renew, we may seek replacement tenants or try to sell the property.

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Debt Maturity

One of our principal long-term liquidity requirements includes repayment of maturing debt. The following table provides information with respect to the maturities and scheduled principal payments of our indebtedness as of December 31, 2013 (in thousands). The table does not consider any extension options.

Years ending December 31,	Amount
2014	$	7,793
2015		22,694
2016		34,948
2017		35,277
2018		8,353
Thereafter		129,943
	$	239,008

Sources and Uses of Cash

Operating Activities

Our real estate properties generate cash flow in the form of rental revenues, which are reduced by interest payments, direct lease costs and property-level operating expenses. Property-level operating expenses consist primarily of property management fees including salaries and wages of property management personnel, utilities, cleaning, repairs, insurance, security and building maintenance costs, and property taxes. Additionally, we incur general and administrative expenses, advisory fees and acquisition, disposition, financing and development expenses.

Net cash provided by operating activities was $23.9 million and $20.1 million for the years ended December 31, 2013 and 2012, respectively, which consisted primarily of net income from property operations, adjusted for non-cash depreciation and amortization and gains on sales of investment properties. The funds generated for the years ended December 31, 2013 and 2012 were primarily from property operations of our real estate portfolio. The increase during the year ended December 31, 2013 to the same period in 2012 is due to the growth of our real estate portfolio.

Investing Activities

Our investing activities are generally comprised of real estate-related transactions (purchases and sales) and payments of capitalized property-related costs such as intangible assets and real estate tax and insurance escrows.

Net cash used in investing activities was $166,000 million and $9.5 million for the years ended December 31, 2013 and 2012, respectively. During the years ended December 31, 2013 and 2012, cash flows used in investing activities related primarily to the acquisition of properties and capital expenditures was $22.2 million and $13.1 million, respectively, and the change in restricted cash for real estate tax, insurance and replacement reserve escrows was $1.6 million and $120,000, respectively. This was offset by cash received as distributions from unconsolidated affiliates of $1.1 million and $1.0 million, respectively. During the years ended December 31, 2013 and 2012, we sold certain properties and received sales proceeds of $23.3 million and $933,000, respectively. In addition, during 2012, we received $1.8 million on the payment of a note receivable.

Financing Activities

Our financing activities generally consist of funding property purchases by raising proceeds and securing mortgage notes payable as well as paying dividends, paying syndication costs and making principal payments on mortgage notes payable.

Net cash used in financing activities was $14.4 million and $9.2 million for the years ended December 31, 2013 and 2012. During the years ended December 31, 2013 and 2012, cash flows used in financing activities related primarily to principal payments on mortgage notes payable of $36.5 million and $16.1 million, respectively, share repurchases of $4.3 million and $5.3 million, respectively and cash distributions in the amount of $12.0 million and $10.3 million, respectively. This was offset by cash received from borrowings on our mortgage notes payable of $40.3 million and $11.0 million, respectively.

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In addition, during 2012 we made $8.0 million of short-term note payments and this was offset by $21.8 million from share issuance proceeds.

Our objectives are to generate sufficient cash flow over time to provide shareholders and others with non-controlling interests in our operations with increasing dividends and to seek investments with potential for strong returns and capital appreciation throughout varying economic cycles. During 2012 and 2013, we funded 100% of the dividends from operating cash flows. In setting a dividend rate, we focus primarily on expected returns from those investments we have already made to assess the sustainability of a particular dividend rate over time.

Dividends

Common Stock

We declared cash dividends to our shareholders during the period from January 1, 2013 to December 31, 2013 totaling $4.5 million or $0.84 per share, including amounts reinvested through the dividend reinvestment plan. During the year ended December 31, 2013, we paid cash dividends of $1.7 million and dividends of $2.8 million were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $22.8 million from our cash flows from operations, $1.1 million provided by distributions from unconsolidated affiliates, as well as $2.6 million from gain on sales of properties.

We declared cash dividends to our shareholders during the period from January 1, 2012 to December 31, 2012 totaling $4.0 million or $0.826 per share, including amounts reinvested through the dividend reinvestment plan. During the year ended December 31, 2012, we paid cash dividends of $1.5 million and dividends of $2.5 million were reinvested under the dividend reinvestment plan. The cash dividends were paid with the $20.1 million from our cash flows from operations, $1.0 million provided by distributions from unconsolidated affiliates, as well as $114,000 from gain on sales of properties.

We continue to provide cash dividends to our shareholders from cash generated by our operations. The following chart summarizes the sources of our cash used to pay dividends. Our primary source of cash is cash flow provided by operating activities from our investments as presented in our cash flow statement. We also include distributions from unconsolidated affiliates to the extent that the underlying real estate operations in these entities generate these cash flows and the gain on sale of properties relates to net profits from the sale of certain properties. Our presentation is not intended to be an alternative to our consolidated statement of cash flows and does not present all sources and uses of our cash.

The following table presents certain information regarding our dividend coverage (in thousands):

	2013			2012
Cash flows provided by operations     (includes net income of $13.3 million and $9.1 million, respectively)	$	23,873		$	20,093
Distributions from unconsolidated affiliates		1,114			1,003
Gain on sales of properties		2,591			114
Dividends declared		(4,514	)		(4,023	)
Excess	$	23,064		$	17,187

Limited Partnership Units

The operating partnership agreement provides that our operating partnership will distribute to the partners (subject to certain limitations) cash from operations on a quarterly basis (or more frequently, if we so elect) in accordance with the percentage interests of the partners. We determine the amounts of such distributions in our sole discretion.

For the year ended December 31, 2013, we declared and paid distributions of $10.7 million to holders of limited partnership units in our operating partnership. Distributions were paid at a rate of $0.2100 per unit, which is equal to the per share distribution rate paid to the common shareholders. As of December 31, 2013, the limited partnership declared distributions of $2.8 million which represented distributions for the quarter ended December 31, 2013, and we paid such amount on January 15, 2014.

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For the year ended December 31, 2012, we declared and paid aggregate distributions of $9.0 million to holders of limited partnership units in our operating partnership. Distributions were paid at a rate of $0.2065 per unit, which is equal to the per share distribution rate paid to the common shareholders. As of December 31, 2012, the limited partnership declared distributions of $2.3 million which represented distributions for the quarter ended December 31, 2012, and we paid such amount on January 15, 2013.

Sources of Dividends

For the year ended December 31, 2013, we paid aggregate dividends of $4.5 million, which were paid 100% from cash flows provided by operating activities. Our funds from operations, or FFO, was $24.1 million while our modified funds from operations, or MFFO, as of December 31, 2013 was $27.3 million; therefore our management believes our distribution policy is sustainable over time. For the year ended December 31, 2012, we paid aggregate dividends of $4.0 million which were paid 100% from cash flows provided by operating activities. Our FFO was $21.0 million while our MFFO, as of December 31, 2012 was $21.7 million. For a further discussion of FFO and MFFO, including a reconciliation of FFO and MFFO to net income, see “Funds from Operations and Modified Funds from Operations” below.

If dividends made to our shareholders are in excess of our current and accumulated earning and profits, such dividends would be considered a return of capital to our shareholders for federal income tax purposes. Our dividends paid in excess of our current and accumulated earnings and profits have resulted in a return of capital to our shareholders. The income tax treatment for dividends per common share reportable for the years ended December 31, 2013 and 2012 was as follows:

	Tax Year Ended December 31,
	Dividend		%			Dividend		%
	2013		2013			2012		2012
Tax status
Ordinary income	$	0.67		79.76	%	$	0.68		82.39	%
Capital Gain		0.17		20.24	%		0.01		1.64	%
Return of capital		—		0.00	%		0.13		15.97	%
	$	0.84		100.00	%	$	0.82		100.00	%

For a further discussion of our dividends, see Item 5. “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities — Dividends”.

Cash Resources

At December 31, 2013, our cash resources consisted of cash and cash equivalents totaling approximately $13.8 million. In addition, we had unencumbered properties with a gross book value of $37.8 million, which could potentially be used as collateral to secure additional financing in future periods.

We also have four lines of credit: (i) a $15.0 million line of credit with Wells Fargo Bank (which expires in July 2015) secured by an office property in Duluth, Minnesota, four retail properties in Minnesota, one retail property in Texas, and four retail properties in North Dakota (ii) a $1.0 million unsecured line of credit (which expires in October 2014) (iii) a $3.0 million line of credit (which expires November 2014) with Bremer Bank secured by two commercial properties in Moorhead, Minnesota and an office property in St. Cloud, Minnesota and (iv) a $2.0 million line of credit with Bell State Bank and Trust secured by a multifamily property in Fargo, North Dakota, which expires in June 2014. As of December 31, 2013, there was no balance outstanding on the lines of credit, leaving $21.0 million available. As of December 31, 2012, there was no balance outstanding on the lines of credit.

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Our cash resources can be used for working capital needs and other commitments. Our lines of credit and certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of December 31, 2013, we were in compliance with all covenants.

The issuance of limited partnership units of the operating partnership in exchange for property acquisitions and sale of additional common or preferred shares is also expected to be a source of long-term capital for us. During the year ended December 31, 2013, we did not sell any common shares in private placements. During the year ended December 31, 2013, we issued 207,000 and 95,000 common shares under the dividend reinvestment plan, through dividends reinvested and the optional share purchases, respectively. The dividend reinvestment plan raised gross proceeds of $4.1 million. During the year ended December 31, 2012, we sold 1,584,000 common shares in private placements. The 2012 private placements raised gross proceeds of $21.8 million. During the year ended December 31, 2012, we issued 182,000 common shares under the dividend reinvestment plan and raised gross proceeds of $2.4 million.

During the year ended December 31, 2013, we issued limited partnership units valued at approximately $36.1 million in connection with the acquisition of twenty two properties.

During the year ended December 31, 2012, we issued limited partnership units valued at approximately $5.5 million in connection with the acquisitions of six properties and two parcels of land.

Cash Requirements

During the next twelve months, we expect cash payments will include paying dividends to our shareholders and to others who hold non-controlling interests in our operations, making scheduled mortgage loan principal payments, reimbursing the Advisor for costs incurred on our behalf and paying normal recurring operating expenses. We expect to continue to use excess funds to invest in new properties. We expect our cash resources will be adequate to cover our cash requirements over the next twelve months.

In connection with our construction in progress, the Company is in the process of obtaining an additional $10.0 million line of credit. We presently expect the terms of the line of credit to be for 24 months with variable interest rate based on 1-month LIBOR plus 2.5%, then subsequent to the initial period, rolling into a 5 year amortizing loan. The line will be used as needed to fund the construction of the $16 million residential project currently in process in Bismarck, North Dakota. As of December 31, 2013 we have expended approximately $4.0 million of operational funds for the project and we expect to expend an additional $9.3 million in the next twelve months funded by operational cash flows and the line of credit.

Critical Accounting Policies and Estimates

Preparation of our financial statements requires estimates and judgments to be made affecting the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances.

The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about inherently uncertain matters, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning actual results can and probably will be different from those currently estimated.

There have been no material changes in our Critical Accounting Policies as disclosed in note 2 to our financial statements for the year ended December 31, 2013 included elsewhere in this report.

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Results of Operations

Comparison of the Years ended December 31, 2013 and 2012:

The following table provides a general comparison of our results of operations for years ended December 31, 2013 and 2012:

	Year Ended December 31, 2013							Year Ended December 31, 2012
	Residential		Commercial		Total			Residential		Commercial		Total
	(unaudited)							(unaudited)
	(in thousands)							(in thousands)
Real Estate Revenues	$	43,060	$	18,883	$	61,943		$	35,310	$	16,711	$	52,021
Real Estate Expenses
Real Estate Taxes		3,330		2,347		5,677			3,279		2,301		5,580
Property Management Fees		4,938		303		5,241			4,048		268		4,316
Utilities		3,514		859		4,373			2,791		764		3,555
Repairs and Maintenance		5,952		899		6,851			4,613		787		5,400
Insurance		1,185		63		1,248			857		42		899
Total Real Estate Expenses		18,919		4,471		23,390			15,588		4,162		19,750
Net Operating Income	$	24,141	$	14,412	$	38,553		$	19,722	$	12,549	$	32,271
Interest						11,222							10,925
Depreciation and amortization						12,219							10,516
Administration of REIT						5,606							2,802
Gain on involuntary conversion						(2	)						—
Loss on lease terminations						203							—
Loss on impairment of property						226							262
Other (income)/expense						(888	)						(866	)
Income from continuing operations						9,967							8,632
Discontinued operations						3,350							499
Net Income					$	13,317						$	9,131
Net Income Attributed to:
Noncontrolling Interest					$	9,355						$	6,424
INREIT Real Estate Investment Trust					$	3,962						$	2,707
Dividends per share (1)					$	0.8400						$	0.8260
Earnings per share					$	0.75						$	0.57

⁽¹⁾  Does not take into consideration the amounts distributed by the operating partnership to limited partners.

Revenues

Property revenues of approximately $61.9 million increased approximately $9.9 million or 19.1% for the year-ended December 31, 2013 in comparison to the same period in 2012. Approximately $7.8 million of the increase in property revenues relates to increased residential property revenues and $2.1 of the increase in property revenues related to increased commercial property revenues.

The following table illustrates annual changes in rental occupancy for the periods indicated:

	2013			2012
Residential occupancy		97.6	%		98.8	%
Commercial occupancy		99.3	%		99.3	%

Residential revenues for the year ended December 31, 2013 increased $7.8 million. Approximately $4.9 million of the increase was due to residential properties acquired since January 1, 2013. Rental income from residential properties owned for more than one year increased approximately $2.9 million in comparison to the same period in 2012. Residential revenues comprised 69.5% of total revenues for the twelve month period ended December 31, 2013 compared to 67.9% of total revenues for the twelve month period ended December 31, 2012, as a result of residential acquisition activity.

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Commercial revenues for the year ended December 31, 2013 increased $2.1 million. Approximately $600,000 of the increase was due to commercial properties acquired since January 1, 2013. Rental income from commercial properties owned for more than one year increased approximately $829,000 in comparison to the same period in 2013. Commercial revenues comprised 30.5% of the total revenues for the twelve month period ended December 31, 2013 compared to 32.1% of total revenues for the twelve month period ended December 31, 2012, primarily because of the increase in residential properties.

Expenses

Residential expenses from operations of $18.9 million during the twelve month period ended December 31, 2013 increased $3.3 million or 21.4% in comparison to the same period in 2012. This increase corresponds with a 21.9% increase in residential rental revenues and is attributed to increases in property management fees, repairs and maintenance expense, utilities and insurance expense, all of which increased principally because of the increase in number of residential properties owned in 2013 versus 2012.

Commercial expenses from operations of $4.5 million during the twelve month period ended December 31, 2013 increased $309,000 or 7.4% in comparison to the same period in 2012. This increase reflects the increase in commercial rental revenues, and the purchase of two triple-net properties in the current year.

Interest expense of $11.2 million during the twelve month period ended December 31, 2013 increased $0.3 million in comparison to the same period in 2012. Interest expense was approximately 18.1% and 21.0% of rental income for the twelve month periods ended December 31, 2013 and 2012, respectively. The decrease of interest expense as a percentage of rental income during the twelve month period ended December 31, 2013 was a result of lower interest rates for mortgage notes payable during 2013 compared to 2012, and increased rental revenues from acquired properties unencumbered by mortgages. Even with fluctuations in interest rates during the year ended December 31, 2013, we were able to reduce our overall interest rates by refinancing existing loans that had higher interest rates.

Depreciation and amortization expense increased 16.2% from $10.5 million for the twelve months ended December 31, 2012 to approximately $12.2 million for the twelve months ended December 31, 2013. The $1.7 million increase was primarily a result of depreciation and amortization for the twenty two properties added to our portfolio during 2013. Depreciation and amortization expense as a percentage of rental income for the twelve month periods ended December 31, 2013 and 2012 was relatively consistent at 19.7% and 20.2%, respectively.

REIT administration expenses increased from $2.8 million for the twelve months ended December 31, 2012 to $5.6 million for the twelve month period ended December 31, 2013 due to an increase in advisory fees, acquisition and disposition expenses related to respective activity during 2013.

Net Operating Income

We measure the performance of our segments based on net operating income (“NOI”), which we define as total revenue from rental operations less expenses from rental operations and real estate taxes (excluding interest expense and depreciation and amortization related to real estate investments and impairment of real estate investments). We believe that NOI is an important supplemental measure of operating performance for a REIT because it provides a measure of core operations unaffected by depreciation, amortization, financing, and administration expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for non-controlling interests and shareholders or cash flow from operating activities as a measure of financial performance.

Residential NOI increased $4.4 million or 22.4% for the twelve month period ended December 31, 2013 in comparison to the same twelve month period in 2012 due primarily to acquisition activity in the residential segment. Commercial NOI increased $1.9 million or 14.8% for the twelve month period ended December 31, 2013 in comparison to the same twelve month period in 2012 due primarily to acquisition activity in the commercial segment.

2013 Property Acquisitions and Dispositions

In January 2013, the operating partnership purchased a 38,932 square foot implement dealership in Redwood Falls, Minnesota for approximately $4.7 million. The purchase was financed with a combination of a $1.8 million loan, the issuance of limited partnership units valued at approximately $2.6 million and cash.

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In February 2013, the operating partnership purchased a 42 unit apartment complex in Fargo, North Dakota for approximately $2.3 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.3 million. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $499,000.

In February 2013, the operating partnership purchased a 20 unit apartment complex in Fargo, North Dakota for approximately $740,000. The purchase was financed with the issuance of limited partnership units valued at approximately $740,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $129,000.

In February 2013, the operating partnership purchased a 12 unit apartment complex in Fargo, North Dakota for approximately $714,000. The purchase was financed with the combination of a $263,000 loan and the issuance of limited partnership units valued at approximately $471,000. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $100,000.

In February 2013, the operating partnership purchased a 30 unit apartment complex in Fargo, North Dakota for approximately $957,000. The purchase was financed with the combination of a $238,000 loan and the issuance of limited partnership units valued at approximately $751,000. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $229,000.

In February 2013, the operating partnership purchased a 39 unit apartment complex in Fargo, North Dakota for approximately $1.0 million. The purchase was financed with the issuance of limited partnership units valued at approximately $985,000 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received cash of $51,000 and limited partnership units valued at approximately $389,000, respectively.

In February 2013, the operating partnership purchased a 15 unit apartment complex in Fargo, North Dakota for approximately $550,000. The purchase was financed with the issuance of limited partnership units valued at approximately $481,000 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $69,000 and limited partnership units valued at approximately $110,000.

In February 2013, the operating partnership purchased a 25 unit apartment complex in Fargo, North Dakota for approximately $950,000. The purchase was financed with the combination of a $210,000 loan and the issuance of limited partnership units valued at approximately $772,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $43,000 and limited partnership units valued at approximately $236,000.

In February 2013, the operating partnership purchased a 96 unit apartment complex in Grand Forks, North Dakota for approximately $4.4 million. The purchase was financed with the issuance of limited partnership units valued at approximately $4.4 million. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $828,000.

In May 2013, the operating partnership purchased a 132 unit apartment complex in Anoka, Minnesota for approximately $11.5 million. The purchase was financed with the issuance of limited partnership units valued at approximately $302,000 and cash.

In June 2013, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $756,000. The purchase was financed with the issuance of limited partnership units valued at approximately $677,000 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $151,000.

In June 2013, the operating partnership purchased a 12 unit apartment complex in Bismarck, North Dakota for approximately $636,000. The purchase was financed with the issuance of limited partnership units valued at approximately $636,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $159,000.

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In June 2013, the operating partnership purchased a 59 unit apartment complex in Fargo, North Dakota for approximately $3.1 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.4 million and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $691,000 and $627,000, respectively.

In September 2013, the operating partnership purchased a 151 unit apartment complex in St. Louis Park, Minnesota for approximately $8.8 million. The purchase was financed with a combination of a $2.3 million loan, the issuance of limited partnership units valued at approximately $5.4 million and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland, and Furness, related parties, who received limited partnership units valued at approximately $1.3 million, $973,000 and $943,000, respectively.

In October 2013, the operating partnership purchased a 48 unit apartment complex in Fargo, North Dakota for approximately $2.9 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.0 million and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $491,000, respectively.

In October 2013, the operating partnership purchased a 444 unit apartment complex in Little Canada, Minnesota for approximately $27.1 million. The purchase was financed with a combination of a $20.0 million loan, the issuance of limited partnership units valued at approximately $5.6 million and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland, and Wolf, related parties, who received limited partnership units valued at approximately $995,000, $259,000 and $105,000, respectively.

In October 2013, the operating partnership purchased a 32,532 square foot implement dealership in Sioux City, Iowa for approximately $4.6 million. The purchase was financed with a combination of a $1.8 million loan, the issuance of limited partnership units valued at approximately $2.6 million, and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $182,000 and $57,000, respectively.

In November 2013, the operating partnership purchased a 38 unit apartment complex in Bismarck, North Dakota for approximately $2.0 million. The purchase was financed with cash.

In November 2013, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $900,000. The purchase was financed with the issuance of limited partnership units valued at approximately $900,000 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $432,000, respectively.

Total consideration given for acquisitions in 2013 was completed through issuing approximately 2.4 million limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $34.0 million, new loans of $26.3 million and cash of $18.2 million. In addition, consideration given for equity method investments in 2013 was completed through issuing 154,000 limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $2.2 million and cash of $955,000. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

During the second quarter of 2013, the operating partnership sold land in Fargo, North Dakota for approximately $276,000 and recognized a gain of approximately $42,000.

During the fourth quarter of 2013, the operating partnership sold a 193 unit senior living property in Bismarck, North Dakota for approximately $24.0 million and recognized a gain of approximately $2.5 million.

2012 Property Acquisitions and Dispositions

In January 2012, the operating partnership purchased a 2,811 square foot restaurant in Dickinson, North Dakota for approximately $1.3 million. The purchase was financed with the issuance of limited partnership units valued at approximately $1.3 million and cash.

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In March 2012, the operating partnership purchased a 17,760 square foot implement dealership in Dickinson, North Dakota for approximately $1.39 million. The purchase was financed through the issuance of limited partnership units valued at approximately $959,000, the assumption of $431,000 in mortgage debt and cash.

In August 2012, the operating partnership purchased a 23,690 square foot implement dealership in Minot, North Dakota for $2.6 million with cash.

In August 2012, the operating partnership purchased 2.5 acres of land adjacent to an implement dealership in Dickinson, North Dakota for $400,000 with cash.

In August 2012, the operating partnership purchased approximately 12 acres of development land in Bismarck, North Dakota for $2.4 million with cash.

In August 2012, the operating partnership purchased a 100,600 square foot commercial property in Fargo, North Dakota for $3.5 million. The purchase was financed with the issuance of limited partnership units valued at $965,000 and cash.

In September 2012, the operating partnership purchased an 85 unit apartment complex in Fargo, North Dakota for $3.5 million. The purchase was financed through assumption of $2.4 million in mortgage debt and cash.

In September 2012, the operating partnership purchased a 116 unit apartment complex in Moorhead, Minnesota for $3.5 million. The purchase was financed with the issuance of limited partnership units valued at $796,000, the assumption of $2.2 million in mortgage debt and cash.

In October 2012, the operating partnership purchased a 29,800 square foot implement dealership in Fargo, North Dakota for $2.8 million. The purchase was financed through the issuance of limited partnership units valued at approximately $1.5 million, assumption of $1.3 million in mortgage debt and cash.

In November 2012, the operating partnership purchased a 66 unit apartment complex in Fargo, North Dakota for $2.0 million. The purchase was financed through assumption of $1.3 million in mortgage debt and cash.

Total consideration given for acquisitions in 2012 was completed through issuing approximately 396,000 limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $5.5 million, assumed mortgages of $7.6 million and cash of $10.2 million. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

During the first quarter of 2012, we sold a 4,500 square foot retail property in Norfolk, Nebraska for approximately $350,000 and recognized a loss of approximately $88,000.

During the second quarter of 2012, we sold vacant land in Minot, North Dakota for approximately $583,000 and recognized a gain of approximately $114,000.

See Notes 19 and 20 of Notes to the Financial Statements included elsewhere in this report for more information regarding our acquisitions and dispositions during 2013 and 2012.

Funds From Operations and Modified Funds From Operations

Funds From Operations (FFO) applicable to common shares and limited partnership units means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.

Historical cost accounting for real estate assets implicitly assumes the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. The term Funds From Operations was created to address this problem. It was intended to be a standard supplemental measure of REIT operating performance that excluded historical cost depreciation from — or “added it back” to — GAAP net income.

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Our management believes this non-GAAP measure is useful to investors because it provides supplemental information that facilitates comparisons to prior periods and for the evaluation of financial results. Management uses this non-GAAP measure to evaluate our financial results, develop budgets and manage expenditures. The method used to produce non-GAAP results is not computed according to GAAP, is likely to differ from the methods used by other companies and should not be regarded as a replacement for corresponding GAAP measures. Management encourages the review of the reconciliation of this non-GAAP financial measure to the comparable GAAP results.

Since the introduction of the definition of FFO, the term has come to be widely used by REITs. In the view of National Association of Real Estate Investment Trusts “NAREIT”, the use of the definition of FFO (combined with the primary GAAP presentations required by the Securities and Exchange Commission) has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making it easier than before to compare the results of one REIT with another.

In addition to FFO, management also uses Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental performance measure. MFFO as defined by our management excludes from FFO acquisition related costs which are required to be expensed in accordance with GAAP. Prior to 2009, acquisition costs for business combinations were capitalized; however, beginning in 2009, acquisition costs related to business combinations are now expensed. Our definition of MFFO also excludes disposition costs related to sales of investment properties. Acquisition and disposition related expenses include those paid to our Advisor and third parties. Management believes that excluding acquisition and disposition related costs from MFFO provides useful supplemental performance information that is comparable over the long-term and this is consistent with management’s analysis of the operating performance of the REIT.

While FFO and MFFO applicable to common shares and limited partnership units are widely used by REITs as performance metrics, all REITs do not use the same definition of FFO and MFFO or calculate FFO and MFFO in the same way. The FFO and MFFO reconciliations presented here are not necessarily comparable to FFO and MFFO presented by other REITs. FFO and MFFO should also not be considered as an alternative to net income as determined in accordance with GAAP as a measure of a REIT’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO and MFFO applicable to common shares and limited partnership units do not represent cash generated from operating activities in accordance with GAAP, and are not necessarily indicative of sufficient cash flow to fund a REIT’s needs or its ability to service indebtedness or to make cash dividends to shareholders.

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The following table includes calculations of FFO and MFFO, and the reconciliations to net income for the years ended December 31, 2013 and 2012, respectively. We believe this calculation is the most comparable GAAP financial measure (in thousands):

Reconciliation of Net Income Attributable to INREIT Real Estate Investment Trust to FFO and MFFO Applicable to Common Shares and Limited Partnership Units

	Year Ended December 31,							Year Ended December 31,
				2013							2012
						Per							Per
				Weighted Avg		Share and					Weighted Avg		Share and
	Amount			Shares and Units(1)		Unit(2)		Amount			Shares and Units(1)		Unit(2)
	(in thousands, except per share data)
Net Income attributable to INREIT Real Estate
Investment Trust	$	3,962			5,384	$	0.75	$	2,707			4,733	$	0.57
Add back:
Noncontrolling Interest—OPU		9,314			12,527				6,392			11,032
Depreciation & Amortization from continuing operations		12,219							10,516
Depreciation & Amortization from discontinued operations		542							724
Pro rata share of unconsolidated affiliate depreciation & amortization		445							393
Loss on depreciable asset sales		—							88
Loss on impairment of property		226							262
Subtract:
(Gains) loss on land and depreciable asset sales		(2,591	)						(114	)
Funds from operations (FFO) applicable to common shares and limited partnership units		24,118			17,911	$	1.35		20,968			15,765	$	1.33
Add back:
Acquisition and disposition expenses		3,141							763
Modified Funds from operations (MFFO)	$	27,259			17,911	$	1.52	$	21,731			15,765	$	1.38

(1) Please see Note 11 to the consolidated financial statements included above for more information.

(2) Net Income is calculated on a per share basis. FFO is calculated on a per share and unit basis.

Off-Balance Sheet Arrangements

As of December 31, 2013, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Developments

Common Share Dividends. On January 15, 2014, we paid a dividend or distribution of $0.2100 per share on our common shares of beneficial interest, to common shareholders and limited unit holders of record on December 31, 2013. Subsequent to December 31, 2013, our Board of Trustees approved a plan to increase our quarterly dividend or distribution to $0.2250 from $0.2100 per common share and limited partnership unit, effective with the next quarterly dividend planned for April 15, 2014. All future dividends remain subject to the discretion of our Board of Trustees.

In January 2014, the operating partnership purchased a 24 unit apartment complex in Grand Forks, North Dakota for approximately $1.3 million. The purchase was financed with the issuance of limited partnership units and cash. The purchase price allocation is not yet complete.

In January 2014, the operating partnership purchased a 64 unit apartment complex in Fargo, North Dakota for approximately $3.5 million. The purchase was financed with the issuance of limited partnership units and cash. The interest was purchased from an entity affiliated with Mr. Wieland, a related party, who received limited partnership units valued at approximately $739,000. The purchase price allocation is not yet complete.

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In January 2014, the operating partnership purchased a 30 unit apartment complex in Hutchinson, Minnesota for approximately $1.1 million. The purchase was financed with the issuance of limited partnership units and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland and Furness, related parties, who received limited partnership units valued at approximately $216,000, $216,000 and $108,000, respectively. The purchase price allocation is not yet complete.

In January 2014, the operating partnership purchased a 24 unit apartment complex in Crookston, Minnesota for approximately $1.1 million. The purchase was financed with the issuance of limited partnership units and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland and Furness, related parties, who received limited partnership units valued at approximately $221,000, $221,000 and $109,000, respectively. The purchase price allocation is not yet complete.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET DATA

Not required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature pages.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based upon the evaluation, our Chief Executive Officer and Chief Accounting Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Report of Management on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our internal control system was designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements. The system of internal control over financial reporting provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The framework upon which management relied in evaluating the effectiveness of our internal control over financial reporting was set forth in Internal Controls – Integrated Framework published by the Committee of Sponsoring Organization of the Treadway Commission.

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Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and

(ii) disposition of our assets;

(iii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorization of our management and trustees; and

(iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. However, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our policies or procedures may deteriorate.

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the fourth quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

The information required in Item 10 (Directors, Executive Officers and Corporate Governance), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions, and Director Independence), and Item 14 (Principal Accountant Fees and Services) will be incorporated by reference to our definitive proxy statement for the 2014 Annual Meeting of Shareholders to be filed with the SEC or filed by amendment to this Annual Report on or before April 30, 2014.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) The financial statements listed below are included in this report

Reports of Independent Registered Public Accounting Firms

Consolidated Financial Statements

Consolidated Balance Sheets at December 31, 2013 and 2012

Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended December 31, 2013 and 2012

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013 and 2012

Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012

Notes to Consolidated Financial Statements

Real Estate and Accumulated Depreciation (Schedule III)

(a)(3) Exhibits

See the Exhibit Index filed as part of this Annual Report on Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 28, 2014

INREIT REAL ESTATE INVESTMENT TRUST
By:	/S/ KENNETH P. REGAN
	Kenneth P. Regan
	Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/ KENNETH P. REGAN	Chief Executive Officer and Trustee	March 28, 2014
(Kenneth P. Regan)	(principal executive officer)
/S/ ANGIE D. STOCK	Chief Accounting Officer and Treasurer	March 28, 2014
(Angie D. Stock)	(principal financial officer)
/S/ BRUCE W. FURNESS	Chairman of the Board of Trustees	March 28, 2014
(Bruce W. Furness)
/S/ CLIFFORD FEARING	Trustee	March 28, 2014
(Clifford Fearing)
/S/ JAMES R. HANSEN	Trustee	March 28, 2014
(James R. Hansen)
/S/ TIMOTHY HUNT	Trustee	March 28, 2014
(Timothy Hunt)
/S/ TIMOTHY HAUGEN	Trustee	March 28, 2014
(Timothy Haugen)
/S/ RICHARD SAVAGEAU	Trustee	March 28, 2014
(Richard Savageau)
/S/ JAMES S. WIELAND	Trustee	March 28, 2014
(James S. Wieland)
/S/ LANCE R. WOLF	Trustee	March 28, 2014
(Lance R. Wolf)

55

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

December 31, 2013 AND 2012,

CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING NOTES

and

REPORTS OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRMS

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

	PAGE
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS		F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets		F-4
Consolidated Statements of Operations and Other Comprehensive Income		F-5
Consolidated Statements of Shareholders’ Equity		F-7
Consolidated Statements of Cash Flows		F-9
Notes to Consolidated Financial Statements		F-11
Real Estate and Accumulated Depreciation (Schedule III)		F-38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders, Audit Committee and Board of Trustees

INREIT Real Estate Investment Trust

Fargo, North Dakota

We have audited the accompanying consolidated balance sheet of INREIT Real Estate Investment Trust as of December 31, 2013, and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for the year then ended. Our audit also included the consolidated financial statement schedule listed in the accompanying index to the consolidated financial statements. These consolidated financial statements and schedule are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of INREIT Real Estate Investment Trust as of December 31, 2013 and the results of its operations and cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Baker Tilly Virchow Krause, LLP

Chicago, Illinois

March 28, 2014

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

INREIT Real Estate Investment Trust

Fargo, North Dakota

We have audited the accompanying consolidated balance sheet of INREIT Real Estate Investment Trust as of December 31, 2012, and the related consolidated statements of operations and other comprehensive income, shareholders’ equity and cash flows for the year then ended. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of INREIT Real Estate Investment Trust as of December 31, 2012 and the results of its operations and cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Widmer Roel PC

Fargo, North Dakota

March 12, 2013 (March 28, 2014, as to the effects of discontinued operations discussed in Note 19)

F-3

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2013 AND 2012

	2013			2012
	(in thousands)
ASSETS
Real estate investments	$	403,192		$	355,966
Cash and cash equivalents		13,849			4,556
Restricted deposits and funded reserves		5,585			3,471
Investment in unconsolidated affiliates		7,366			4,338
Due from related party		64			337
Receivables		3,517			2,664
Prepaid expenses		1,209			860
Notes receivable		—			4
Financing and lease costs, less accumulated amortization of $2,240 in 2013 and $1,556 in 2012		2,950			2,436
Rent incentive, less accumulated amortization of $317 in 2012		—			1,183
Intangible assets, less accumulated amortization of $3,720 in 2013 and $2,606 in 2012		10,479			9,135
Other assets		89			145
Total Assets	$	448,300		$	385,095
LIABILITIES
Mortgage notes payable	$	239,008		$	208,961
Special assessments payable		784			1,644
Dividends payable		3,990			3,395
Due to related party		294			112
Tenant security deposits payable		2,305			1,759
Investment certificates		364			1,417
Unfavorable leases, less accumulated amortization of $432 in 2013 and $287 in 2012		953			1,191
Accounts payable—trade		403			114
Retainage payable		133			—
Fair value of interest rate swap		309			492
Deferred insurance proceeds		—			105
Accrued expenses and other liabilities		2,551			2,714
Total Liabilities		251,094			221,904
COMMITMENTS and CONTINGENCIES—Note 18
SHAREHOLDERS’ EQUITY
Noncontrolling interest in operating partnership		141,539			109,166
Beneficial interest		55,976			54,517
Accumulated comprehensive loss		(309	)		(492	)
Total Shareholders’ Equity		197,206			163,191
	$	448,300		$	385,095

See Notes to Consolidated Financial Statements

F-4

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

	2013		2012
	(in thousands)
Income from rental operations
Real estate rental income	$	58,211	$	48,609
Tenant reimbursements		3,732		3,412
		61,943		52,021
Expenses
Expenses from rental operations
Interest		11,222		10,925
Depreciation and amortization		12,219		10,516
Real estate taxes		5,677		5,580
Property management fees		5,241		4,316
Utilities		4,373		3,555
Repairs and maintenance		6,851		5,400
Insurance		1,248		899
Loss on lease terminations		203		—
Loss on impairment of property		226		262
		47,260		41,453
Administration of REIT
Administrative expenses		253		259
Advisory fees		1,633		1,313
Acquisition expenses		3,116		673
Trustee fees		51		64
Legal and accounting		553		493
		5,606		2,802
Total expenses		52,866		44,255
Income from operations	$	9,077	$	7,766

See Notes to Consolidated Financial Statements

F-5

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Continued)

	2013		2012
	(in thousands, except per share data)
Income from operations	$	9,077	$	7,766
Gain on involuntary conversion		2		—
Other income
Equity in income of unconsolidated affiliates		757		788
Interest income		31		78
Other income		100		—
		888		866
Income from continuing operations		9,967		8,632
Discontinued operations		3,350		499
Net income	$	13,317	$	9,131
Net income attributable to noncontrolling interest		9,355		6,424
Net income attributable to INREIT Real Estate Investment Trust	$	3,962	$	2,707
Earnings per common share, basic and diluted:
Continued operations		0.56	$	0.54
Discontinued operations		0.19		0.03
Net income per common share, basic and diluted	$	0.75	$	0.57
Comprehensive income:
Net income	$	13,317	$	9,131
Other comprehensive income (loss)—change in fair value of interest rate swap		183		(40	)
Comprehensive income		13,500		9,091
Comprehensive income attributable to noncontrolling interest		9,483		6,396
Comprehensive income attributable to INREIT Real Estate Investment Trust	$	4,017	$	2,695

See Notes to Consolidated Financial Statements

F-6

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2012

				Common			Accumulated			Total						Accumulated
	Common			Shares			Earnings			Beneficial			Noncontrolling			Comprehensive
	Shares			Amount			(Deficit)			Interest			Interest			Loss			Total
	(in thousands)
BALANCE, DECEMBER 31, 2011		3,797		$	45,009		$	(8,873	)	$	36,136		$	108,541		$	(452	)	$	144,225
Issuance of common shares		1,584			21,766						21,766									21,766
Contribution of assets in exchange for the issuance of noncontrolling interest shares														5,546						5,546
Repurchase of shares/units		(358	)		(3,936	)					(3,936	)		(1,324	)					(5,260	)
Dividends declared								(4,023	)		(4,023	)		(9,103	)					(13,126	)
Dividends reinvested—stock dividend		182			2,408						2,408									2,408
UPREIT units converted to REIT common shares		105			793						793			(793	)					—
Syndication costs								(1,334	)		(1,334	)		(125	)					(1,459	)
Decrease in fair value of interest rate swap																	(40	)		(40	)
Net income								2,707			2,707			6,424						9,131
BALANCE, DECEMBER 31, 2012		5,310		$	66,040		$	(11,523	)	$	54,517		$	109,166		$	(492	)	$	163,191

See Notes to Consolidated Financial Statements

F-7

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2013

				Common			Accumulated			Total						Accumulated
	Common			Shares			Earnings			Beneficial			Noncontrolling			Comprehensive
	Shares			Amount			(Deficit)			Interest			Interest			Loss			Total
	(in thousands)
BALANCE, DECEMBER 31, 2012		5,310		$	66,040		$	(11,523	)	$	54,517		$	109,166		$	(492	)	$	163,191
Contribution of assets in exchange for the issuance of noncontrolling interest shares														36,135						36,135
Repurchase of shares/units		(184	)		(2,437	)					(2,437	)		(1,863	)					(4,300	)
Dividends declared								(4,514	)		(4,514	)		(10,659	)					(15,173	)
Dividends reinvested—stock dividend		207			2,750						2,750									2,750
Issuance of shares under optional purchase plan		95			1,332						1,332									1,332
UPREIT units converted to REIT common shares		26			366						366			(366	)					—
Syndication costs								—			—			(83	)					(83	)
Increase in fair value of interest rate swap																	183			183
Distributions paid to consolidated real estate entity noncontrolling interests														(146	)					(146	)
Net income								3,962			3,962			9,355						13,317
BALANCE, DECEMBER 31, 2013		5,454		$	68,051		$	(12,075	)	$	55,976		$	141,539		$	(309	)	$	197,206

See Notes to Consolidated Financial Statements

F-8

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

	2013			2012
	(in thousands)
OPERATING ACTIVITIES
Net income	$	13,317		$	9,131
Adjustments to reconcile net income to net cash from operating activities
Gain on sale of real estate		(2,591	)		(114	)
Loss on lease terminations		203			—
Loss on sale of real estate investments		—			88
Gain on involuntary conversion		(2	)		—
Loss on impairment of property		226			262
Equity in income of unconsolidated affiliates		(757	)		(788	)
Depreciation		10,887			9,650
Amortization		1,900			1,590
Effects on operating cash flows due to changes in
Tenant security deposits		(535	)		(218	)
Due from related party		273			31
Receivables		620			(428	)
Prepaid expenses		(349	)		(161	)
Other assets		56			577
Due to related party		182			46
Tenant security deposits payable		546			229
Accounts payable		57			104
Accrued expenses		(160	)		94
NET CASH PROVIDED BY OPERATING ACTIVITIES		23,873			20,093
INVESTING ACTIVITIES
Purchase of real estate investment properties		(22,244	)		(13,102	)
Proceeds from sale of real estate investments		23,332			933
Proceeds from involuntary conversion		541			—
Investment in unconsolidated affiliates		(1,229	)		(81	)
Distributions received from unconsolidated affiliates		1,114			1,003
Real estate tax, insurance and replacement reserve escrows		(1,579	)		(120	)
Notes receivable payments received		4			1,804
Deferred insurance proceeds		(105	)		56
NET CASH USED IN INVESTING ACTIVITIES		(166	)		(9,507	)

See Notes to Consolidated Financial Statements

F-9

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Continued)

	2013			2012
	(in thousands)
FINANCING ACTIVITIES
Payments for financing costs		(958	)		(751	)
Payments on investment certificates		(1,053	)		(27	)
Principal payments on special assessments payable		(1,173	)		(161	)
Proceeds from issuance of mortgage notes payable		40,254			11,002
Principal payments on mortgage notes payable		(36,458	)		(16,062	)
Net change in short-term notes payable		—			(8,000	)
Proceeds from issuance of shares		—			21,766
Proceeds from issuance of shares under optional purchase plan		1,332			—
Repurchase of shares/units		(4,300	)		(5,260	)
Dividends/distributions paid		(11,975	)		(10,269	)
Payment of syndication costs		(83	)		(1,461	)
NET CASH USED IN FINANCING ACTIVITIES		(14,414	)		(9,223	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		9,293			1,363
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,556			3,193
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	13,849		$	4,556
SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of capitalized interest	$	11,556		$	11,877
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Dividends reinvested	$	2,750		$	2,408
Dividends declared and not paid		1,145			1,096
UPREIT distributions declared and not paid		2,845			2,299
UPREIT units converted to REIT common shares		366			793
Acquisition of assets in exchange for the issuance of noncontrolling interest shares in UPREIT		33,979			5,546
Acquisition of investment in unconsolidated affiliate in exchange for the issuance of noncontrolling interest shares in UPREIT		2,156			—
Increase in land improvements due to increase in special assessments payable		313			328
Unrealized (gain) loss on interest rate swap		(183	)		40
Acquisition of assets through assumption of debt and property purchased with financing		26,250			7,569
Acquisition of assets with accounts payable		365			—

See Notes to Consolidated Financial Statements

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION

INREIT Real Estate Investment Trust (“INREIT”) is a registered, but unincorporated business trust organized in North Dakota in November 2002. INREIT has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code, which requires that 75% of the assets of a REIT must consist of real estate assets and that 75% of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation.

INREIT previously established an operating partnership (“INREIT Properties, LLLP”) and transferred all of its assets and liabilities to the operating partnership in exchange for general partnership units. As the general partner, INREIT has management responsibility for all activities of the operating partnership. As of December 31, 2013 and 2012, INREIT owned approximately 28.7% and 32.3%, respectively, of the operating partnership. The operating partnership is the 100% owner of 38 single asset limited liability companies and the 81.25% owner in a single asset limited liability partnership.

NOTE 2—PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying consolidated financial statements include the accounts of INREIT and all subsidiaries for which we maintain a controlling interest.

The accompanying consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of INREIT, INREIT Properties, LLLP, 38 single asset limited liability companies and a single asset LLP in which the operating partnership owns an 81.25% interest. All significant intercompany transactions and balances have been eliminated in consolidation.

Additionally, we evaluate the need to consolidate affiliates based on standards set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”). In determining whether we have a requirement to consolidate the accounts of an entity, management considers factors such as our ownership interest, our authority to make decisions and contractual and substantive participating rights of the limited partners and shareholders, as well as whether the entity is a variable interest entity (“VIE”) for which we have both a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

Principal Business Activity

INREIT currently owns directly and indirectly 122 properties. The trust’s residential properties are located in North Dakota, Minnesota, and Nebraska and are principally multi-family apartment buildings. The trust owns 48 commercial properties primarily located in North Dakota with others located in Arkansas, Colorado, Iowa, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, Texas and Wisconsin. The commercial properties include retail, office, industrial, restaurant and medical properties. Presently, the trust’s mix of properties is 63.1% residential and 36.9% commercial (based on cost) and total $403.2 million in real estate investments at December 31, 2013.

Residential Property	Location	No. of Properties		Units
	North Dakota		66		4,360
	Minnesota		6		1,271
	Nebraska		2		316
			74		5,947

F-11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commercial Property	Location	No. of Properties		Sq Ft
	North Dakota		20		808,389
	Arkansas		2		29,370
	Colorado		1		13,390
	Iowa		1		32,532
	Louisiana		1		14,560
	Michigan		1		11,737
	Minnesota		13		382,666
	Mississippi		1		14,820
	Nebraska		1		14,736
	Texas		1		7,296
	Wisconsin		6		74,916
			48		1,404,412

Investment in Unconsolidated Affiliates

We account for unconsolidated affiliates using the equity method of accounting per guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”). The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for our share of equity in the affiliates’ earnings and distributions. We evaluate the carrying amount of the investments for impairment in accordance with ASC 323. Unconsolidated affiliates are reviewed for potential impairment if the carrying amount of the investment exceeds its fair value. An impairment charge is recorded when an impairment is deemed to be other-than-temporary. To determine whether impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until the carrying amount is fully recovered. The evaluation of an investment in an affiliate for potential impairment can require our management to exercise significant judgments. No impairment losses were recorded related to the unconsolidated affiliates for the years ended December 31, 2013 and 2012.

Investment in unconsolidated affiliates as of December 31, 2013 consists of the operating partnership’s 40.26% interest in a single asset limited liability company which owns a 144 unit residential, multi-tenant apartment complex in Bismarck, North Dakota; the operating partnership’s 100.00% interest in a single asset limited liability company which holds a 50.00% interest as tenants in common in a 183,000 square foot commercial space in Grand Forks, North Dakota; the operating partnership’s 66.67% interest as tenant in common in an office building with approximately 75,000 square feet of commercial space in Fargo, North Dakota, and the operating partnership’s 82.50% interest as tenant in common in a 61 unit residential, multi-tenant apartment complex in Fargo, North Dakota, which was purchased in July 2013 for approximately $3.0 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.2 million and cash. The interest was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $533,000.

These investments are not consolidated as the entities do not qualify as variable interest entities and do not meet the control requirements for consolidation, as defined in ASC 810. The operating partnership and the respective affiliate partners must approve significant decisions about the applicable entities activities. As of December 31, 2013 and 2012, the unconsolidated affiliates held total assets of $31.3 million and $29.0 million and mortgage notes payable of $21.2 million and $21.6 million, respectively.

Concentration of Credit Risk

Our cash balances are maintained in various bank deposit accounts. The bank deposit amounts in these accounts may exceed federally insured limits at various times throughout the year.

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Real Estate Investments

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include appraisals of the properties by a certified independent appraiser at the time of acquisition.

Furniture and fixtures purchased are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred.

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method over the following estimated useful lives:

Buildings and improvements	40 years
Furniture and fixtures	9 years

Depreciation expense for the years ended December 31, 2013 and 2012, totaled $10.9 million and $9.7 million, respectively.

The Company’s investment properties are reviewed for potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each reporting period, the Company separately determines whether impairment indicators exist for each property.

Examples of situations considered to be impairment indicators include, but are not limited to:

• a substantial decline or continued low occupancy rate;

• continued difficulty in leasing space;

• significant financial troubled tenants;

• a change in plan to sell a property prior to the end of its useful life or holding period;

• a significant decrease in market price not in line with general market trends; and

• any other quantitative or qualitative events or factors deemed significant by the Company’s management or board of trustees.

If the presence of one or more impairment indicators as described above is identified at the end of the reporting period or throughout the year with respect to an investment property, the asset is tested for recoverability by comparing its carrying value to the estimated future undiscounted cash flows. An investment property is considered to be impaired when the estimated future undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair value of an impaired investment property, the Company makes complex or subjective assumptions which include, but are not limited to:

• projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength, demographics, holding period and property location;

• projected capital expenditures and lease origination costs;

• projected cash flows from the eventual disposition of an operating property using a property specific capitalization rate;

• comparable selling prices; and

• property specific discount rates for fair value estimates as necessary.

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

To the extent impairment has occurred, the Company will record an impairment charge calculated as the excess of the carrying value of the asset over its fair value for impairment of investment properties. Based on evaluation, management recorded loss on impairment of property of $226,000 and $262,000 for the years ending December 31, 2013 and 2012, respectively.

Properties Held for Sale

We account for our properties held for sale in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), which addresses financial accounting and reporting in a period in which a component of an entity either has been disposed of or is classified as held for sale, and requires that the statements of operations for current and prior periods shall report the results of operations of the component as discontinued operations.

In accordance with ASC 360, at such time as a property is held for sale, such property is carried at the lower of (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as properties held for sale in the period in which all of the following criteria are met:

• management, having the authority to approve the action, commits to a plan to sell the asset;

• the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

• an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

• the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

• the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

• given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

There were no properties classified as held for sale at December 31, 2013 or 2012. See Note 19.

Cash and Cash Equivalents

We classify highly liquid investments with a maturity of three months or less when purchased as cash and cash equivalents.

Receivables

Receivables consist primarily of amounts due for rent and real estate taxes. The receivables are non-interest bearing. The carrying amount of receivables is reduced by an amount that reflects management’s best estimates of the amounts that will not be collected. As of December 31, 2013 and 2012, management determined that no allowance was necessary for uncollectible receivables.

Financing and Lease Costs

Financing costs incurred in connection with financing have been capitalized and are being amortized over the life of the financing using the effective interest method. Lease costs incurred in connection with new leases have been capitalized and are being amortized over the life of the lease using the straight-line method.

Rental Incentives

Rental incentives consist of up-front cash payments to lessees to sign the lease. Rental incentives are amortized against rental income over the term of the lease.

Intangible Assets

Lease intangibles are a purchase price allocation recorded on property acquisition. The lease intangibles represent the estimated value of in-place leases and the value of leases with above or below market lease terms. Lease intangibles are amortized over the term of the related lease.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying amount of intangible assets is regularly reviewed for indicators of impairments in value. Impairment is recognized only if the carrying amount of the intangible asset is considered to be unrecoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the estimated fair value of the asset. Based on the review, management determined that no impairment charges were necessary at December 31, 2013 or 2012.

Non-controlling Interest

Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnerships’ income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to non-controlling interests in accordance with the terms of the operating partnership agreement.

Syndication Costs

Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. These fees are paid based on management’s discretion. Syndication costs are recorded as a reduction to equity and non-controlling interest.

Federal Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code, as amended. A REIT calculates taxable income similar to other domestic corporations, with the major difference being that a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90% of its taxable income. If it chooses to retain the remaining 10% of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions.

	Tax Year Ended December 31,
	Dividend		%			Dividend		%
	2013		2013			2012		2012
Tax status
Ordinary income	$	0.67		79.76	%	$	0.68		82.39	%
Capital Gain		0.17		20.24	%		0.01		1.64	%
Return of capital		—		0.00	%		0.13		15.97	%
	$	0.84		100.00	%	$	0.82		100.00	%

We intend to continue to qualify as a REIT and, as such, will not be taxed on the portion of the income that is distributed to the shareholders. In addition, we intend to distribute all of our taxable income; therefore, no provisions or liabilities for income taxes have been recorded in the financial statements.

INREIT conducts its business activity as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”) through its Operating Partnership. The Operating Partnership is organized as a limited liability limited partnership. Income or loss is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(b) and 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for partnership interest. The conversion of partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner.

We follow ASC Topic 740, Income Taxes, to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of December 31, 2013 and 2012 we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We are no longer subject to Federal and State tax examinations by tax authorities for years before 2010.

The operating partnership has elected to record related interest and penalties, if any, as income tax expense on the consolidated statements of operations and other comprehensive income.

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). This newly issued accounting standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2012 and was effective for the Company on January 1, 2013. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s financial statements upon adoption.

Revenue Recognition

We recognize revenue in accordance with ASC Topic 605, Revenue Recognition, (“ASC Topic 605”). ASC Topic 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.

We derive over 95% of our revenues from tenant rents and other tenant-related activities. We lease multifamily residential apartments under operating leases and substantially all of our apartment leases are for a term of one year or less. Rental income and other property revenues are recorded when due from tenants and is recognized monthly as it is earned pursuant to the terms of the underlying leases. Other property revenues consist primarily of laundry, application and other fees charged to tenants.

We lease commercial space primarily under long-term lease agreements. Commercial tenant rents include base rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities), and straight-line rents. We record base rents on a straight-line basis. The monthly base rent income according to the terms of our leases is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The straight-line rent adjustment increased revenue by $429,000 and $313,000 for the years ended December 31, 2013 and 2012, respectively. The straight-line receivable balance included in receivables on the consolidated balance sheets as of December 31, 2013 and 2012 was $2.4 million and $1.9 million, respectively. We receive payments for expense reimbursements from substantially all our multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which generally are immaterial, are recognized in the subsequent year.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common shareholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. INREIT had no dilutive potential common shares as of December 31, 2013 or 2012, and therefore, basic earnings per common share was equal to diluted earnings per common share for both periods.

For the years ended December 31, 2013 and 2012, INREIT’s denominators for the basic and diluted earnings per common share were approximately 5.4 million and 4.7 million, respectively.

Reclassifications

Certain amounts previously reported in our annual report ended December 31, 2012 have been reclassified to conform to discontinued operations presentations in 2013. In addition, reclassifications to expand certain captions have been made to the 2012 consolidated statement of shareholders’ equity to conform to the 2013 presentation.

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3—SEGMENT REPORTING

We report our results in two reportable segments: residential and commercial properties. Our residential properties include multi-family and assisted senior living properties. Our commercial properties include retail, office, restaurant and medical properties. We assess and measure operating results based on net operating income (“NOI”), which we define as total real estate segment revenues less real estate expenses (which consist of real estate taxes, property management fees, utilities, repairs and maintenance, insurance and direct administrative costs). We believe NOI is an important measure of operating performance even though it should not be considered an alternative to net income or cash flow from operating activities. NOI is unaffected by financing, depreciation, amortization, legal and professional fees and other general and administrative expenses. The accounting policies of each segment are consistent with those described in Note 2 of this report.

Segment Revenues and Net Income

The revenues and net operating income for our reportable segments are summarized as follows for the years ended December 31, 2013 and 2012, along with reconciliations to the consolidated financial statements. Segment assets are also reconciled to total assets as reported in the consolidated financial statements.

Year ended December 31, 2013	Residential		Commercial		Total
	(in thousands)
Income from rental operations	$	43,060	$	18,883	$	61,943
Expenses from rental operations		18,919		4,471		23,390
Net operating income	$	24,141	$	14,412		38,553
Interest						11,222
Depreciation and amortization						12,219
Administration of REIT						5,606
Gain on involuntary conversion						(2	)
Other (income)/expense						(888	)
Loss on lease terminations						203
Loss on impairment of property						226
Income from continuing operations						9,967
Discontinued operations						3,350
Net income					$	13,317

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 2012	Residential		Commercial		Total
	(in thousands)
Income from rental operations	$	35,310	$	16,711	$	52,021
Expenses from rental operations		15,588		4,162		19,750
Net operating income	$	19,722	$	12,549		32,271
Interest						10,925
Depreciation and amortization						10,516
Administration of REIT						2,802
Loss on impairment of property						262
Other (income)/expense						(866	)
Income from continuing operations						8,632
Discontinued operations						499
Net income					$	9,131

Segment Assets and Accumulated Depreciation

As of December 31, 2013	Residential			Commercial			Total
	(in thousands)
Real estate investments	$	296,377		$	153,873		$	450,250
Accumulated depreciation		(30,075	)		(16,983	)		(47,058	)
	$	266,302		$	136,890			403,192
Cash and cash equivalents								13,849
Restricted deposits and funded reserves								5,585
Investment in unconsolidated affiliates								7,366
Receivables and other assets								4,879
Financing costs, less accumulated amortization								2,950
Intangible assets, less accumulated amortization								10,479
Total Assets							$	448,300
As of December 31, 2012	Residential			Commercial			Total
	(in thousands)
Real estate investments	$	245,494		$	149,252		$	394,746
Accumulated depreciation		(25,138	)		(13,642	)		(38,780	)
	$	220,356		$	135,610			355,966
Cash and cash equivalents								4,556
Restricted deposits and funded reserves								3,471
Investment in unconsolidated affiliates								4,338
Receivables and other assets								4,010
Financing costs, less accumulated amortization								2,436
Rent incentive, less accumulated amortization								1,183
Intangible assets, less accumulated amortization								9,135
Total Assets							$	385,095

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4—REAL ESTATE INVESTMENTS

	Residential			Commercial			Total
	(in thousands)
As of December 31, 2013
Land and land improvements	$	36,625		$	28,506		$	65,131
Building and improvements		240,343			123,900			364,243
Furniture and fixtures		17,372			1,467			18,839
Construction in progress		2,037			—			2,037
		296,377			153,873			450,250
Less accumulated depreciation		(30,075	)		(16,983	)		(47,058	)
	$	266,302		$	136,890		$	403,192
	Residential			Commercial			Total
	(in thousands)
As of December 31, 2012
Land and land improvements	$	25,187		$	30,524		$	55,711
Building and improvements		205,945			117,261			323,206
Furniture and fixtures		14,362			1,467			15,829
		245,494			149,252			394,746
Less accumulated depreciation		(25,138	)		(13,642	)		(38,780	)
	$	220,356		$	135,610		$	355,966

Construction in progress consists of costs associated with the development of a new 156 unit residential apartment community which includes four buildings, located in Bismarck, North Dakota. The project is estimated to cost $16.0 million and is expected to be substantially completed in June 2015. The Company is working with GOLDMARK Development Corporation, a related party, as the general contractor for the project. See Note 15 for additional information.

NOTE 5—RESTRICTED DEPOSITS AND FUNDED RESERVES

	2013		2012
	(in thousands)
Tenant security deposits	$	2,265	$	1,730
Real estate tax and insurance escrows		2,530		1,050
Replacement reserves		790		691
	$	5,585	$	3,471

Tenant Security Deposits

We have set aside funds to repay tenant security deposits upon tenant move-out.

Real Estate Tax and Insurance Escrows

Pursuant to the terms of certain mortgages and management policy, we have established and maintain real estate tax escrows and insurance escrows to pay real estate taxes and insurance. We are to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums.

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Replacement Reserves

Pursuant to the terms of certain mortgages and management policy, we have established and maintain several replacement reserve accounts. We make monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals.

NOTE 6—HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we use derivative instruments to minimize significant unanticipated earnings fluctuations that may arise from rising variable interest rate costs associated with existing borrowings. To meet these objectives, we have entered into interest rate swaps for the notional amount of $1.3 million and $2.4 million to provide a fixed rate of 7.25% and 2.57%, respectively. The swaps mature in April 2020 and December 2017, respectively. The swaps were issued at approximate market terms and thus no fair value adjustment was recorded at inception.

The carrying amount of the swaps have been adjusted to their fair values at the end of the quarter, which because of changes in forecasted levels of LIBOR resulted in reporting a liability for the fair value of the future net payments forecasted under the swaps. The interest rate swaps are accounted for as effective hedges in accordance with ASC 815-20 whereby they are recorded at fair value and changes in fair value are recorded to comprehensive income. As of December 31, 2013 and 2012, we have recorded a liability and other comprehensive loss of $309,000 and $492,000, respectively.

NOTE 7—LEASE INTANGIBLES

The following table summarizes the net value of other intangible assets and liabilities and the accumulated amortization for each class of intangible:

	Lease			Accumulated			Lease
	Intangibles			Amortization			Intangibles, net
	(in thousands)
As of December 31, 2013
In-place leases	$	11,733		$	(3,383	)	$	8,350
Above-market leases		2,466			(337	)		2,129
Below-market leases		(1,385	)		432			(953	)
	$	12,814		$	(3,288	)	$	9,526
	Lease			Accumulated			Lease
	Intangibles			Amortization			Intangibles, net
	(in thousands)
As of December 31, 2012
In-place leases	$	10,034		$	(2,375	)	$	7,659
Above-market leases		1,706			(230	)		1,476
Below-market leases		(1,478	)		287			(1,191	)
	$	10,262		$	(2,318	)	$	7,944

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:

Years ending December 31,	Amount
	(in thousands)
2014	$	1,076
2015		1,076
2016		1,076
2017		1,076
2018		1,076
Thereafter		4,146
	$	9,526

The weighted average amortization period for the intangible assets, in-place leases, above-market leases, and below-market leases acquired as of December 31, 2013 was 11.0 years.

NOTE 8—LINES OF CREDIT

We have a $15.0 million variable rate (1-month LIBOR plus 2.35%) line of credit agreement with Wells Fargo Bank, which expires in July 2015; a $1.0 million variable rate (the greater of the prime rate or 3.25%) unsecured line of credit agreement and a $3.0 million variable rate (prime rate less 0.5%) line of credit agreement with Bremer Bank, which expire in October and November 2014, respectively; and a $2.0 million variable rate (prime rate) line of credit agreement with Bell State Bank & Trust, which expires in June 2014. The lines of credit are secured by properties in Duluth, Minnesota; St. Cloud, Minnesota; Minneapolis/St. Paul, Minnesota, Moorhead, Minnesota and Fargo, North Dakota, respectively. At December 31, 2013, there was no balance outstanding on the lines of credit, leaving $21.0 million unused under the agreements. The line of credit agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to net worth ratios. As of December 31, 2013 and 2012, we were in compliance with all covenants.

NOTE 9—MORTGAGE NOTES PAYABLE

The following table summarizes the Company’s mortgage notes payable. As of December 31, 2013 all are fixed rate notes.

		Interest			Principal Balance At
		Rate Per			December 31,		December 31,
Maturity Date	Property Name	Annum			2013		2012
					(in thousands)
Residential Properties
October-2017	Auburn II (Arneson)		6.30	%	$	625	$	636
October-2017	Hunter’s Run I (Arneson)		6.30	%		300		306
July-2016	Autumn Ridge 3 &4		4.50	%		3,318		3,438
January-2016	Autumn Ridge 1 & 2		5.74	%		2,868		2,926
October-2013	Bayview		4.62	%		3,582		2,032
June-2018	Berkshire		3.75	%		311		327
September-2021	Brookfield		3.75	%		1,366		1,515
March-2014	Candlelight		5.67	%		—		1,245
September-2036	Carling Manor		4.40	%		538		552
December-2013	Carlton 1—3		5.60	%		—		2,189
June-2013	Carlton Place		6.96	%		—		1,920
February-2017	Colony Manor		3.63	%		822		853
September-2014	Columbia West		7.80	%		—		1,447
November-2024	Country Club		4.37	%		619		663

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Interest			Principal Balance At
		Rate Per			December 31,		December 31,
Maturity Date	Property Name	Annum			2013		2012
					(in thousands)
October-2033	Courtyard		3.92	%		4,475		—
October-2019	Danbury		5.03	%		3,037		3,112
October-2028	Dellwood		4.55	%		8,146		—
March-2017	Eagle Run		3.95	%		4,713		4,838
June-2015	EV-Bismarck		2.55	%		—		14,956
June-2018	Emerald Court		3.75	%		637		669
March-2017	Fairview		3.95	%		3,257		3,325
June-2023	Flickertail		3.75	%		5,947		2,823
September-2020	Forest		4.55	%		492		—
December-2017	Galleria III		4.75	%		630		646
August-2016	Glen Pond		6.30	%		16,096		16,405
March-2017	Hunter		3.95	%		1,203		1,236
September-2014	Islander		6.00	%		—		506
June-2020	Kennedy		4.55	%		537		—
December-2017	Library Lane		6.10	%		1,915		1,950
May-2021	Maple Ridge		5.69	%		4,353		4,413
October-2028	Maplewood Bend		4.58	%		5,580		3,513
October-2023	Montreal Courts		4.91	%		19,976		—
September-2017	Oak Court		5.98	%		1,863		1,892
June-2020	Pacific Park I		4.55	%		798		—
June-2020	Pacific Park II		4.55	%		683		—
June-2020	Pacific Park South		4.55	%		421		—
February-2017	Parkwood		3.63	%		1,208		1,254
December-2023	Pebble Creek		4.65	%		4,700		2,530
June-2018	Prairiewood Courts		3.75	%		1,539		1,616
October-2020	Prairiewood Meadows		6.17	%		2,386		2,429
November-2023	Richfield/Harrison		4.39	%		6,488		2,577
September-2017	Rosegate		5.93	%		2,373		2,411
September-2036	Saddlebrook		4.40	%		1,107		1,135
August-2019	Sierra Ridge Phase I		5.46	%		2,668		2,731
November-2019	Sierra Ridge Phase II		5.92	%		3,362		3,429
October-2022	Somerset		4.01	%		3,318		3,375
July-2021	Southgate		5.96	%		3,019		3,081
February-2020	Southview III		4.50	%		236		242
December-2017	Southview Villages		6.10	%		2,094		2,131
June-2020	Spring		4.55	%		651		—
April-2015	Stonybrook		5.40	%		5,574		5,684
January-2022	Sunset Ridge		4.44	%		9,146		9,300
May-2019	Sunview		5.75	%		1,230		1,261
April-2023	Sunwood Estates		4.37	%		3,032		—
June-2019	Terrace on the Green		6.53	%		2,163		2,192
October-2022	Twin Parks		4.01	%		2,359		2,400
May-2019	Village		5.75	%		1,085		1,112
July-2016	Village Park		6.15	%		884		911
June-2018	Westwind		3.75	%		354		372
June-2020	Westwood		4.55	%		5,041		5,231
April-2023	Willow Park		3.59	%		4,434		2,529

F-22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

		Interest			Principal Balance At
		Rate Per			December 31,		December 31,
Maturity Date	Property Name	Annum			2013		2012
					(in thousands)
Commercial Properties
September-2017	Guardian Building Products		3.45	%		2,318		2,404
October-2033	Titan Machinery—Dickinson, ND		4.50	%		996		420
December-2019	Titan Machinery—Fargo, ND		4.18	%		1,198		1,241
August-2033	Titan Machinery—Marshall, MN		4.50	%		2,304		2,366
August-2017	Titan Machinery—Minot, ND		3.29	%		1,750		1,816
February-2023	Titan Machinery—Redwood Falls, MN		4.25	%		1,754		—
October-2028	Titan Machinery—Sioux City, IA		4.50	%		1,736		—
March-2016	Bio-life Properties—ND, MN, WI (9 total)		7.56	%		8,800		9,938
December-2016	Bio-life Properties—Marquette, MI		7.06	%		1,258		1,421
August-2017	Aetna		5.93	%		6,945		7,066
December-2017	32nd Avenue Office		4.00	%		2,272		2,342
March-2019	Echelon		4.25	%		1,161		1,223
April-2018	Gate City		3.97	%		1,050		1,085
September-2020	Goldmark Office Park		5.33	%		4,664		5,224
April-2020	Great American Building		7.25	%		1,072		1,106
October-2015	Regis		5.68	%		9,527		9,740
April-2017	Dairy Queen—Dickinson, ND		3.63	%		709		749
April-2025	Walgreens-Alexandria		5.69	%		2,097		2,226
March-2034	Walgreens-Batesville		6.85	%		6,460		6,602
June-2021	Walgreens-Colorado		4.50	%		4,339		4,447
August-2033	Walgreens-Fayetteville		6.85	%		4,962		5,077
October-2024	Walgreens-Laurel		6.07	%		2,077		2,202
					$	239,008	$	208,961

Mortgages are secured by the respective properties, assignment of rents, business assets, deeds to secure debt, deeds of trust and/or cash deposits with lender.

Certain mortgage note agreements include covenants that, in part, impose maintenance of certain debt service coverage and debt to worth ratios. As of December 31, 2013 and 2012, we were in compliance with all covenants.

We are required to make the following principal payments on our outstanding mortgage notes payable for each of the five succeeding fiscal years and thereafter as follows:

Years ending December 31,	Amount
	(in thousands)
2014	$	7,793
2015		22,694
2016		34,948
2017		35,277
2018		8,353
Thereafter		129,943
Total payments	$	239,008

F-23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10—FAIR VALUE MEASUREMENT

The following table presents the carrying value and estimated fair value of the Company’s financial instruments:

	December 31, 2013				December 31, 2012
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
	(in thousands)
Financial liabilities:
Mortgage notes payable	$	239,008	$	240,486	$	208,961	$	221,570
Fair value of interest rate swaps	$	309	$	309	$	492	$	492

The carrying values shown in the table are included in the consolidated balance sheets under the indicated captions.

ASC 820-10 established a three-level valuation hierarchy for fair value measurement. Management uses these valuation techniques to establish the fair value of the assets at the measurement date. These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s assumptions. These two types of inputs create the following fair value hierarchy:

• Level 1 – Quoted prices for identical instruments in active markets;

• Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose significant inputs are observable;

• Level 3 – Instruments whose significant inputs are unobservable.

The guidance requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Recurring Fair Value Measurements

The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2013
Fair value of interest rate swap	$	—	$	309	$	—	$	309
December 31, 2012
Fair value of interest rate swap	$	—	$	492	$	—	$	492

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair value of interest rate swap: The fair value of the interest rate swap is determined using a discounted cash flow analysis on the expected future cash flows of the derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2013 and 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 6.

Nonrecurring Fair Value Measurements

As discussed in Note 2, the Company recorded an impairment charge to write the carrying value down to estimated fair value for certain investment properties after determining that their carrying value exceeded the projected undiscounted cash flows based upon the estimated holding period for such assets. Estimated fair value is determined by the Company utilizing discounted cash flow models, third-party broker valuation estimates, appraisals, bona fide purchase offers or the expected sales price from an executed sales agreement. Capitalization and discount rates utilized within discounted cash flows models are based upon observable rates that the Company believes to be within a reasonable range of current market rates for the property.

Investment properties measured at fair value on a nonrecurring basis at December 31, 2013 and 2012, respectively, aggregated by the level within the fair value hierarchy in which those measurements fall are as follows:

	Level 1		Level 2		Level 3		Total		Provision for Impairment of Investment Properties
	(in thousands)
December 31, 2013
Real estate investments (a)	$	—	$	—	$	1,615	$	—	$	226
December 31, 2012
Real estate investments (a)		—		—		2,942		—		262

(a) Includes an impairment charge recorded on certain investment properties during the years ended December 31, 2013 and 2012, both based upon a discounted cash flow model.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Disclosures

The following table presents the Company’s financial assets and liabilities, which are disclosed at fair value, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.

	Level 1		Level 2		Level 3		Total
	(in thousands)
December 31, 2013
Mortgage notes payable	$	—	$	—	$	240,486	$	240,486
December 31, 2012
Mortgage notes payable	$	—	$	—	$	221,570	$	221,570

Mortgage notes payable: The Company estimates the fair value of its mortgage notes payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s lenders. Judgment is used in determining the appropriate rate for each of the Company’s individual mortgages and notes payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 4.50% to 4.65% and from 4.01% to 4.18% at December 31, 2013 and 2012, respectively. The fair value of the Company’s matured mortgage notes payable were determined to be equal to the carrying value of the properties because there is no market for similar debt instruments and the properties’ carrying value was determined to be the best estimate of fair value as of December 31, 2013. The Company’s mortgage notes payable are further described in Note 9.

NOTE 11—NONCONTROLLING INTEREST OF UNITHOLDERS IN OPERATING PARTNERSHIP

As of December 31, 2013 and 2012, limited partnership units totaled 13.5 million and 11.1 million, respectively. As of December 31, 2013 and 2012, the limited partnership declared distributions of $2.8 million and $2.3 million, respectively, to limited partners. Distributions per unit were $0.8400 and $0.8260 for 2013 and 2012, respectively.

During 2013 and 2012, limited partners exchanged 26,000 and 105,000 limited partnership units for 26,000 and 105,000 INREIT common shares valued at $366,000 and $793,000, respectively, pursuant to exchange requests.

Limited partners in the operating partnership have the right to require the operating partnership to redeem their limited partnership units for cash. Upon such a redemption request, we have the right to purchase the limited partnership units in lieu of the operating partnership either with cash or INREIT common shares, in our discretion, on the basis of one limited partnership unit for one INREIT common share. However, payment will be in cash if the issuance of INREIT common shares will cause the shareholder to exceed the ownership limitations, among other reasons. No limited partner will be permitted more than two redemptions during any calendar year, and no redemptions may be made for less than 1,000 limited partnership units or, if such limited partner owns less than 1,000 limited partnership units, all of the limited partnership units held by such limited partner.

NOTE 12—REPURCHASE PLANS

On March 11, 2011, our Board of Trustees approved repurchase plans that enable our shareholders to sell their common shares and the partners of our operating partnership to sell their limited partnership units to us, after they have held the securities for at least one year and subject to other conditions and limitations described in the plans. Originally, the maximum amount of aggregate securities that could be repurchased under these plans was $5.0 million, and the repurchase price was fixed at $12.60 per share or unit under the plans.

On September 7, 2012 and December 20, 2012, our Board of Trustees amended and restated our repurchase plans to increase the maximum amount that can be repurchased under the plans to $15.0 million worth of securities and increased the fixed repurchase price to $12.75 per share or unit under the plans.

On March 28, 2013, our Board of Trustees amended our repurchase plans to increase the maximum amount that can be repurchased under the plan to $20.0 million worth of securities and increased the fixed repurchase price to $13.00 per share or unit under the plans effective May 16, 2013.

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On September 26, 2013, our Board of Trustees amended our repurchase plans to increase the maximum amount that can be repurchased under the plan to $25.0 million worth of securities and increased the fixed repurchase price to $14.00 per share or unit under the plans effective October 16, 2013.

We may repurchase securities under the plans if we have sufficient funds to do so. Repurchases may be made quarterly, on a pro rata basis, based on receipt of written repurchase requests. The plans will terminate in the event the shares become listed on any national securities exchange, the subject of bona fide quotes on any inter-dealer quotation system or electronic communications network or are the subject of bona fide quotes in the pink sheets. Additionally, the Board, in its sole discretion, may terminate, amend or suspend the repurchase plans, either or both of them, if it determines to do so is in our best interest.

During 2013 and 2012, the Company repurchased 184,000 and 358,000 common shares valued at $2.4 million and $3.9 million, respectively. In addition, during 2013 and 2012, the Company repurchased 142,000 and 105,000 units valued at $1.9 million and $1.3 million, respectively.

NOTE 13—BENEFICIAL INTEREST

We are authorized to issue 100.0 million common shares of beneficial interest with $.01 par value and 50.0 million preferred shares with $0.01 par value, which collectively represent the beneficial interest of INREIT. As of December 31, 2013 and 2012, there were 5.5 million and 5.3 million common shares outstanding, respectively. We had no preferred shares outstanding as of either date.

Dividends paid to holders of common shares were $0.8400 and $0.8260 per share for the years ending December 31, 2013 and 2012, respectively.

NOTE 14—DIVIDEND REINVESTMENT PLAN

Our Board of Trustees approved a dividend reinvestment plan to provide existing holders of our common shares with a convenient method to purchase additional common shares without payment of brokerage commissions, fees or service charges, except brokerage commissions and taxes, if any, when common shares are sold for a participant’s account. On July 20, 2012, we registered with the Securities Exchange Commission 2.0 million common shares to be issued under the plan on Form S-3D, which automatically became effective on July 20, 2012.

Under this plan, eligible shareholders may elect to have all or a portion (but not less than 25%) of the cash dividends they receive automatically reinvested in our common shares. If an eligible shareholder elects to reinvest cash dividends under the plan, the shareholder may also make additional automatic cash purchases of our common shares, not to exceed $5,000 per fiscal quarter or, with our prior approval, in excess of $5,000 per fiscal quarter. The purchase prices per common share under the plan equals 95% of the estimated value per common share for dividend reinvestments and equals 100% of the estimated value per common share for additional automatic cash purchases, as determined by our Board of Trustees. The estimated value per common share was $14.00 at December 31, 2013.

Therefore, the purchase price per common share for dividend reinvestments was $13.30 and for additional automatic cash purchases was $14.00 at December 31, 2013. The Board, in its sole discretion, may amend, suspend or terminate the plan at any time, without the consent of shareholders, upon a ten day notice to participants.

In the year ended December 31, 2013, 207,000 shares were issued pursuant to dividend reinvestments and 95,000 shares were issued pursuant to additional automatic cash purchases under the plan. In the year ended December 31, 2012, 49,000 shares were issued pursuant to dividend reinvestments and 7,000 shares were issued pursuant to additional automatic cash purchases under the plan.

During the first seven months of 2012, where permissible, shareholders and limited partners were given the option to receive dividends in the form of stock and 126,000 shares were issued when this option was in place.

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15—RELATED PARTY TRANSACTIONS

Property Management Fee

During 2013 and 2012, we paid property management fees to GOLDMARK Property Management in an amount equal to 5% of rents of the properties managed. The management team of GOLDMARK Property Management includes Kenneth Regan and James Wieland. For the years ended December 31, 2013 and 2012, we paid management fees of $5.1 million and $4.2 million, respectively, to GOLDMARK Property Management.

Board of Trustee Fees

We paid Trustee fees of $51,000 and $64,000 during the years ended December 31, 2013 and 2012, respectively. There is no cash retainer paid to Trustees. Instead, we pay Trustees specific amounts for meetings attended. In 2013 and 2012, we paid committee members $400 per meeting and board members $1,000 per meeting.

Advisory Agreement

We are an externally advised trust and as such, although we have a Board of Trustees and executive officers responsible for our management, we have no paid employees. The following is a brief description of the current fees and compensation that may be received by the Advisor under the Advisory Agreement, which must be renewed on an annual basis and approved by a majority of the independent trustees. The Advisory Agreement was approved by the Board of Trustees (including all the independent Trustees) on March 28, 2013, effective January 1, 2013.

Management Fee: 0.35% of our total assets, annually. Total assets are our gross assets as reflected on our consolidated financial statements, taken as of the end of the fiscal quarter last preceding the date of computation. The management fee will be payable monthly in cash or our common shares, at the option of the Advisor, not to exceed one-twelfth of 0.35% of the total assets as of the last day of the immediately preceding month. The management fee calculation is subject to quarterly and annual reconciliations. The management fee may be deferred at the option of the Advisor, without interest.

Acquisition Fee: For its services in investigating and negotiating acquisitions of investments for us, the Advisor receives an acquisition fee of 2.5% of the purchase price of each property acquired, capped at $375,000 per acquisition. The total of all acquisition fees and acquisition expenses cannot exceed 6% of the purchase price of the investment, unless approved by the majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

Disposition Fee: If the Advisor provides a substantial amount of services in the effort to sell any investment, the Advisor receives a disposition fee of 3% of the sales price of each investment. However, the disposition fee and other real estate commissions paid to unaffiliated parties cannot in the aggregate exceed the lesser of 6% of the sales price or a competitive real estate commission (which is reasonable, customary and competitive in light of the size, type and location of the property), unless approved by a majority of the trustees, including a majority of the independent trustees, if they determine the transaction to be commercially competitive, fair and reasonable to us.

Financing Fee: 0.25% of all amounts made available to us pursuant to any loan, refinance (excluding rate and/or term modifications of an existing loan with the same lender), line of credit or other credit facility.

Development Fee: Based on regressive sliding scale (starting at 5% and declining to 3%) of total project costs, excluding cost of land, for development services requested by us.

Management Fees

During 2013 and 2012, we incurred advisory management fees of $1.6 million and $1.3 million with INREIT Management, LLC, our Advisor, for advisory management fees. As of December 31, 2013 and 2012, we owed our Advisor $294,000 and $112,000, respectively, for unpaid advisory management fees. These fees cover the office facilities, equipment, supplies, and staff required to manage our day-to-day operations.

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquisition Fees

During 2013 and 2012, we incurred acquisition fees of $1.7 million and $582,000, respectively, with our Advisor. These fees are for performing due diligence on properties acquired. There were no acquisition fees owed to our Advisor as of December 31, 2013 and 2012, respectively.

Financing Fees

During 2013 and 2012, we incurred financing fees of $203,000 and $51,000, respectively, with our Advisor for loan financing and refinancing activities. There were no financing fees owed to our Advisor as of December 31, 2013 and 2012, respectively.

Disposition Fees

During 2013 and 2012, we incurred disposition fees of $25,000 and $28,000, respectively, with our Advisor. See Note 19. There were no disposition fees owed to our Advisor as of December 31, 2013 and 2012, respectively.

Development Fees

We did not incur any development fees during 2013 and 2012.

Commissions

During the year ended December 31, 2013, there were no brokerage fees incurred that were owed to a broker-dealer benefitting Dale Lian, a shareholder of INREIT and a member of our Advisor. During the year ended December 31, 2012, we incurred $943,000 of brokerage fees. Brokerage fees were based on 8% of the purchase price of INREIT common shares sold. As of December 31, 2013 and 2012, there were no outstanding brokerage fees owed to Dale Lian or entities benefitting Dale Lian.

During the year ended December 31, 2013 and 2012, we incurred brokerage fees of $83,000 and $144,000, respectively, to a broker-dealer benefitting Larry O’Callaghan, a member of the Board of Trustees until June 2013. Brokerage fees were based on 8% of the purchase price of INREIT common shares sold. As of December 31, 2013 and 2012, there were no outstanding brokerage fees owed to the broker-dealer.

During the year ended December 31, 2013 and 2012, we incurred real estate commissions of $1.4 million and $83,000, respectively, owed to GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc., which is controlled by Messrs. Regan and Wieland. There were no outstanding commissions owed as of December 31, 2013 and 2012.

Rental Income

During the years ended December 31, 2013 and 2012, we received rental income of $179,000 under an operating lease agreement with GOLDMARK Property Management.

During the year ended December 31, 2013, we received rental income of $40,000 under an operating lease agreement with GOLDMARK SCHLOSSMAN Commercial Real Estate Services, Inc. There was no rental income received for the year ended December 31, 2012.

During the year ended December 31, 2013 and 2012, we received rental income of $42,000 and $36,000, respectively, under operating lease agreements with our Advisor.

Construction Costs

During the year ended December 31, 2013, we incurred costs related to the construction of a 156 unit apartment complex in Bismarck, North Dakota of $2.0 million owed to GOLDMARK Development. We incurred no construction costs for the year ended December 31, 2012. As of December 31, 2013, we owed $102,000 for retainage and $365,000 for unpaid construction fees. There were no retainage or unpaid construction fees as of December 31, 2012.

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16—RENTALS UNDER OPERATING LEASES / RENTAL INCOME

Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $43.1 million and $35.3 million for 2013 and 2012, respectively.

Commercial properties are leased to tenants under terms expiring at various dates through 2036. Lease terms often include renewal options. For 2013 and 2012, gross revenues from commercial property rentals, including CAM (common area maintenance) income of $3.7 million and $3.4 million respectively, totaled $18.9 million and $16.7 million, respectively.

Commercial space is rented under long-term agreements. Minimum future rentals on non-cancelable operating leases as of December 31, 2013 are as follows:

Years ending December 31,	Amount
	(in thousands)
2014	$	14,382
2015		13,945
2016		11,089
2017		9,700
2018		8,659
Thereafter		73,433
	$	131,208

NOTE 17—PROPERTY MANAGEMENT FEES

We have entered into various property management agreements with unrelated management companies. The agreements provide for the payment of property management fees based on a percentage of rental income (generally 5%). During 2013 and 2012, we incurred property management fees of $96,000 and $85,000, respectively, to unrelated management companies.

During 2013 and 2012, we paid management fees of $5.1 million and $4.2 million, respectively, to GOLDMARK Property Management, a related party. The Company’s related party property management fees are further described in Note 15.

NOTE 18—COMMITMENTS AND CONTINGENCIES

Environmental Matters

Federal law (and the laws of some states in which we may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by us, we could incur liability for the removal of the substances and the cleanup of the property. There can be no assurance that we would have effective remedies against prior owners of the property. In addition, we may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup.

Risk of Uninsured Property Losses

We maintain property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature) which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) we might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) we may suffer a loss of profits which might be anticipated from one or more properties.

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investment in Unconsolidated Affiliates

The operating partnership owns a 40.26% interest in a single asset limited liability company which owns a 144 unit multi-tenant apartment complex in Bismarck, North Dakota. The property is encumbered by a first mortgage with a balance at December 31, 2013 and December 31, 2012 of $2.4 million and $2.4 million, respectively. We owed $960,000 and $983,000 for our respective share of the mortgage loan balance as of December 31, 2013 and 2012, respectively. However, the Company is jointly and severally liable for the full mortgage balance.

The operating partnership is a 50% owner as tenant in common of Grand Forks Marketplace Retail Center through 100% ownership in a limited liability company. Grand Forks Marketplace Retail Center has approximately 183,000 square feet of commercial space in Grand Forks, North Dakota. The property is encumbered by a non-recourse first mortgage with a balance at December 31, 2013 and 2012 of $11.4 million and $11.7 million, respectively. We owed $5.7 million and $5.8 million for our respective share of the mortgage loan balance as of December 31, 2013 and 2012, respectively. However, the Company is jointly and severally liable for the full mortgage balance.

The operating partnership owns a 66.67% interest as a tenant in common in a commercial building with approximately 75,000 square feet of rental space in Fargo, North Dakota. The property is encumbered by a first mortgage with a balance at December 31, 2013 and 2012 of $7.3 million and $7.5 million, respectively. We owed $4.9 million and $5.0 million for our respective share of the mortgage loan balance on December 31, 2013 and 2012, respectively. However, the Company is jointly and severally liable for the full mortgage balance.

The operating partnership purchased an 82.50% interest as a tenant in common in a 61 unit multi-tenant apartment complex in Fargo, North Dakota in July 2013. The property is unencumbered at December 31, 2013.

NOTE 19—DISCONTINUED OPERATIONS

We report in discontinued operations the results of operations for properties that have either been sold or are classified as held for sale. We also report any gains or losses from the sale of properties in discontinued operations.

2013

During the second quarter of 2013, the operating partnership sold land in Fargo, North Dakota for approximately $276,000 and recognized a gain of approximately $42,000.

During the fourth quarter of 2013, the operating partnership sold a 193 unit senior living property in Bismarck, North Dakota for approximately $24.0 million and recognized a gain of approximately $2.6 million.

2012

During the first quarter of 2012, we sold a 4,500 square foot retail property in Norfolk, Nebraska for approximately $350,000 and recognized a loss of approximately $88,000.

During the second quarter of 2012, we sold vacant land in Minot, North Dakota for approximately $583,000 and recognized a gain of approximately $114,000.

F-31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows the effect on net income and the gains or losses from the sale of properties classified as discontinued operations for the years ended 2013 and 2012:

	Discontinued Operations
	Year Ended December 31,
	2013		2012
	(in thousands)
Income from rental operations
Real estate rental income	$	1,626	$	2,160
Tenant reimbursements		205		267
		1,831		2,427
Expenses
Expenses from rental operations
Interest		299		886
Depreciation and amortization		542		724
Real estate taxes		206		256
Insurance		—		(1	)
		1,047		1,865
Administration of REIT
Acquisition and disposition expenses		25		90
Legal and accounting		—		2
		25		92
Total expenses		1,072		1,957
Income from operations		759		470
Other income
Interest income		—		3
		—		3
Income from discontinued operations before gain on sale		759		473
Gain on sale of discontinued operations		2,591		26
Gain from discontinued operations	$	3,350	$	499

NOTE 20—BUSINESS COMBINATIONS

We continue to implement our strategy of acquiring properties in desired markets. It is impractical for us to obtain historical financial information on acquired properties and accordingly, proforma statements have not been presented.

We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates of fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition. Significant factors included in the independent appraisal include items such as current rent schedules, occupancy levels, and discount factors. Property valuations are completed primarily using the income capitalization approach, which anticipated benefits are converted to an indication of current value.

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease, our overall relationship with that respective tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

F-32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The value allocable to the above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

We estimate the in-place lease value for each lease acquired. This fair value estimate is calculated using factors available in third party appraisals or cash flow estimates of the property prepared by our internal analysis. These estimates are based upon cash flow projections for the property, existing leases, and the current economic climate.

Our analysis results in three discrete financial items: assets for above market leases, liabilities for below market leases, and assets for the in-place lease value. The calculation of each of these components is performed in tandem to provide a complete intangible asset value.

Key factors considered in the calculation of fair value of both real property and intangible assets include the current market rent values, “dark” periods (building in vacant status), direct costs estimated with obtaining a new tenant, discount rates, escalation factors, standard lease terms, and tenant improvement costs.

2013 Property Acquisitions

In January 2013, the operating partnership purchased a 38,932 square foot implement dealership in Redwood Falls, Minnesota for approximately $4.7 million. The purchase was financed with a combination of a $1.8 million loan, the issuance of limited partnership units valued at approximately $2.6 million and cash.

In February 2013, the operating partnership purchased a 42 unit apartment complex in Fargo, North Dakota for approximately $2.3 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.3 million. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $499,000.

In February 2013, the operating partnership purchased a 20 unit apartment complex in Fargo, North Dakota for approximately $740,000. The purchase was financed with the issuance of limited partnership units valued at approximately $740,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $129,000.

In February 2013, the operating partnership purchased a 12 unit apartment complex in Fargo, North Dakota for approximately $714,000. The purchase was financed with the combination of a $263,000 loan and the issuance of limited partnership units valued at approximately $471,000. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $100,000.

In February 2013, the operating partnership purchased a 30 unit apartment complex in Fargo, North Dakota for approximately $957,000. The purchase was financed with the combination of a $238,000 loan and the issuance of limited partnership units valued at approximately $751,000. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $229,000.

In February 2013, the operating partnership purchased a 39 unit apartment complex in Fargo, North Dakota for approximately $1.0 million. The purchase was financed with the issuance of limited partnership units valued at approximately $985,000 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received cash of $51,000 and limited partnership units valued at approximately $389,000, respectively.

In February 2013, the operating partnership purchased a 15 unit apartment complex in Fargo, North Dakota for approximately $550,000. The purchase was financed with the issuance of limited partnership units valued at approximately $481,000 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $69,000 and limited partnership units valued at approximately $110,000.

In February 2013, the operating partnership purchased a 25 unit apartment complex in Fargo, North Dakota for approximately $950,000. The purchase was financed with the combination of a $210,000 loan and the issuance of limited partnership units valued at approximately $772,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received cash of $43,000 and limited partnership units valued at approximately $236,000.

F-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In February 2013, the operating partnership purchased a 96 unit apartment complex in Grand Forks, North Dakota for approximately $4.4 million. The purchase was financed with the issuance of limited partnership units valued at approximately $4.4 million. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $828,000.

In May 2013, the operating partnership purchased a 132 unit apartment complex in Anoka, Minnesota for approximately $11.5 million. The purchase was financed with the issuance of limited partnership units valued at approximately $302,000 and cash.

In June 2013, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $756,000. The purchase was financed with the issuance of limited partnership units valued at approximately $677,000 and cash. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $151,000.

In June 2013, the operating partnership purchased a 12 unit apartment complex in Bismarck, North Dakota for approximately $636,000. The purchase was financed with the issuance of limited partnership units valued at approximately $636,000. The property was purchased from an entity affiliated with Mr. Regan, a related party, who received limited partnership units valued at approximately $159,000.

In June 2013, the operating partnership purchased a 59 unit apartment complex in Fargo, North Dakota for approximately $3.1 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.4 million and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $691,000 and $627,000, respectively.

In September 2013, the operating partnership purchased a 151 unit apartment complex in St. Louis Park, Minnesota for approximately $8.8 million. The purchase was financed with a combination of a $2.3 million loan, the issuance of limited partnership units valued at approximately $5.4 million and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland, and Furness, related parties, who received limited partnership units valued at approximately $1.3 million, $973,000 and $943,000, respectively.

In October 2013, the operating partnership purchased a 48 unit apartment complex in Fargo, North Dakota for approximately $2.9 million. The purchase was financed with the issuance of limited partnership units valued at approximately $2.0 million and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $491,000, respectively.

In October 2013, the operating partnership purchased a 444 unit apartment complex in Little Canada, Minnesota for approximately $27.1 million. The purchase was financed with a combination of a $20.0 million loan, the issuance of limited partnership units valued at approximately $5.6 million and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland, and Wolf, related parties, who received limited partnership units valued at approximately $995,000, $459,000, and $105,000, respectively.

In October 2013, the operating partnership purchased a 32,532 square foot implement dealership in Sioux City, Iowa for approximately $4.6 million. The purchase was financed with a combination of a $1.8 million loan, the issuance of limited partnership units valued at approximately $2.6 million, and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who received limited partnership units valued at approximately $182,000 and $57,000, respectively.

In November 2013, the operating partnership purchased a 38 unit apartment complex in Bismarck, North Dakota for approximately $2.0 million. The purchase was financed with cash.

In November 2013, the operating partnership purchased an 18 unit apartment complex in Fargo, North Dakota for approximately $900,000. The purchase was financed with the issuance of limited partnership units valued at approximately $900,000 and cash. The property was purchased from entities affiliated with Messrs. Regan and Wieland, related parties, who each received limited partnership units valued at approximately $432,000, respectively.

F-34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the fair value of the assets acquired and liabilities assumed during 2013:

	Property and		In Place		Favorable		Unfavorable		Mortgages		Consideration
	Equipment		Leases		Lease Terms		Lease Terms		Assumed		Given
	(in thousands)
Titan Machinery, Redwood Falls, MN	$	3,902	$	745	$	11	$	—	$	—	$	4,658
44th Street, Fargo, ND		2,310		—		—		—		—		2,310
Forest Avenue, Fargo, ND		740		—		—		—		—		740
Kennedy, Fargo, ND		714		—		—		—		—		714
Pacific Park I, Fargo, ND		957		—		—		—		—		957
Pacific Park II, Fargo, ND		1,036		—		—		—		—		1,036
Pacific Park South, Fargo, ND		550		—		—		—		—		550
Spring, Fargo, ND		950		—		—		—		—		950
Stanford Court, Grand Forks, ND		4,416		—		—		—		—		4,416
Dellwood Estates, Anoka, MN		11,500		—		—		—		—		11,500
Arbor Apartments, Bismarck, ND		636		—		—		—		—		636
Granger Court I, Fargo, ND		3,127		—		—		—		—		3,127
Schrock Apartments, Fargo, ND		756		—		—		—		—		756
Courtyard Apartments, St. Louis Park, MN		8,758		—		—		—		—		8,758
Sheridan Pointe Apartments, Fargo, ND		2,880		—		—		—		—		2,880
Montreal Courts Apartments, Little Canada, MN		27,084		—		—		—		—		27,084
Titan Machinery, Sioux City, IA		2,787		1,031		749		—		—		4,567
Arbor Apartments II, Bismarck, ND		650		—		—		—		—		650
Arbor Apartments III, Bismarck, ND		646		—		—		—		—		646
Hannifin Apartments, Bismarck, ND		731		—		—		—		—		731
Monticello Apartments, Fargo, ND		864		—		—		—		—		864
	$	75,994	$	1,776	$	760	$	—	$	—	$	78,530

Total consideration given for acquisitions in 2013 was completed through issuing approximately 2.4 million limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $34.0 million, new loans of $26.3 million and cash of $18.2 million. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

2012 Purchases

In January 2012, the operating partnership purchased a 2,811 square foot restaurant in Dickinson, North Dakota for approximately $1.3 million. The purchase was financed with the issuance of limited partnership units valued at approximately $1.3 million and cash.

In March 2012, the operating partnership purchased a 17,760 square foot implement dealership in Dickinson, North Dakota for approximately $1.4 million. The purchase was financed through the issuance of limited partnership units valued at approximately $959,000, the $431,000 assumption of a mortgage and cash.

In August 2012, the operating partnership purchased a 23,690 square foot implement dealership in Minot, North Dakota for $2.6 million with cash.

In August 2012, the operating partnership purchased 2.5 acres of land adjacent to an implement dealership in Dickinson, North Dakota for $400,000 with cash.

In August 2012, the operating partnership purchased approximately 12 acres of development land in Bismarck, North Dakota for $2.4 million with cash.

In August 2012, the operating partnership purchased a 100,600 square foot commercial property in Fargo, North Dakota for $3.5 million. The purchase was financed with the issuance of limited partnership units valued at $965,000 and cash.

In September 2012, the operating partnership purchased an 85 unit apartment complex in Fargo, North Dakota for $3.5 million. The purchase was financed through assumption of $2.4 million in mortgage debt and cash.

F-35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In September 2012, the operating partnership purchased a 116 unit apartment complex in Moorhead, Minnesota for $3.45 million. The purchase was financed with the issuance of limited partnership units valued at $796,000, the assumption of $2.2 million in mortgage debt and cash.

In October 2012, the operating partnership purchased a 29,800 square foot implement dealership in Fargo, North Dakota for $2.8 million. The purchase was financed through the issuance of limited partnership units valued at approximately $1.5 million, assumption of $1.3 million in mortgage debt and cash.

In November 2012, the operating partnership purchased a 66 unit apartment complex in Fargo, North Dakota for $2.0 million. The purchase was financed through assumption of $1.3 million in mortgage debt and cash.

The following table summarizes the fair value of the assets acquired and liabilities assumed during 2012:

	Property and		In Place		Favorable		Unfavorable			Mortgages			Consideration
	Equipment		Leases		Lease Terms		Lease Terms			Assumed			Given
	(in thousands)
Dairy Queen, Dickinson, ND	$	986	$	226	$	118	$	—		$	—		$	1,330
Titan Machinery, Dickinson, ND		1,450		199		—		(259	)		(431	)		959
Titan Machinery, Minot, ND		2,272		358		—		—			—			2,630
Land, Dickinson, ND		400		—		—		—			—			400
Land, Bismarck, ND		2,420		—		—		—			—			2,420
Guardian Building, Fargo, ND		3,125		531		—		(206	)		—			3,450
Prairiewood Meadows Apts., Fargo, ND		3,450		—		—		—			(2,439	)		1,011
Terrace on the Green Apts., Moorhead, MN		3,450		—		—		—			(2,199	)		1,251
Titan Machinery—Fargo, ND		2,728		418		—		(325	)		(1,251	)		1,570
Candlelight Apartments—Fargo, ND		1,950		—		—		—			(1,249	)		701
	$	22,231	$	1,732	$	118	$	(790	)	$	(7,569	)	$	15,722

Total consideration given for acquisitions in 2012 was completed through issuing approximately 396,000 limited partnership units of the operating partnership valued at $14.00 per unit for an aggregate consideration of approximately $5.5 million, assumed mortgages of $7.6 million and cash of $10.2 million. Units issued in exchange for property are determined through a value established annually by our Board of Trustees, and reflects the fair value at the time of issuance.

NOTE 21—SUBSEQUENT EVENTS

On January 15, 2014, we paid a dividend or distribution of $0.2100 per share on our common shares of beneficial interest, to common shareholders and limited unit holders of record on December 31, 2013.

In January 2014, the operating partnership purchased a 24 unit apartment complex in Grand Forks, North Dakota for approximately $1.3 million. The purchase was financed with the issuance of limited partnership units and cash. The purchase price allocation is not yet complete.

In January 2014, the operating partnership purchased a 64 unit apartment complex in Fargo, North Dakota for approximately $3.5 million. The purchase was financed with the issuance of limited partnership units and cash. The interest was purchased from an entity affiliated with Mr. Wieland, a related party, who received limited partnership units valued at approximately $739,000. The purchase price allocation is not yet complete.

In January 2014, the operating partnership purchased a 30 unit apartment complex in Hutchinson, Minnesota for approximately $1.1 million. The purchase was financed with the issuance of limited partnership units and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland and Furness, related parties, who received limited partnership units valued at approximately $216,000, $216,000 and $108,000, respectively. The purchase price allocation is not yet complete.

F-36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In January 2014, the operating partnership purchased a 24 unit apartment complex in Crookston, Minnesota for approximately $1.1 million. The purchase was financed with the issuance of limited partnership units and cash. The property was purchased from entities affiliated with Messrs. Regan, Wieland and Furness, related parties, who received limited partnership units valued at approximately $221,000, $221,000 and $109,000, respectively. The purchase price allocation is not yet complete.

We have evaluated subsequent events through the date of this filing. We are not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.

F-37

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

SCHEDULE III—Real Estate and Accumulated Depreciation

December 31, 2013

(in thousands)

																							Life on which
								Costs capitalized					Gross Amount at which								Date of		depreciation on
				Initial cost to				subsequent to					carried at close								Construction		latest income
Industrial				company				acquisition(a)					of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Guardian Building Products	ND-Fargo	$	2,318	$	820	$	2,554	$	9	$	(94	)		829		2,460	$	3,289	$	88		08/29/2012		40
Titan Machinery	ND-Dickinson		996		354		1,096		400		—			754		1,096		1,850		50		12/31/2008		40
Titan Machinery	ND-Fargo		1,198		781		1,947		—		—			781		1,947		2,728		61		12/10/2008		40
Titan Machinery	ND-Marshall		2,304		300		3,648		81		—			381		3,648		4,029		205		11/01/2011		40
Titan Machinery	ND-Minot		1,750		618		1,654		—		—			618		1,654		2,272		59		08/01/2012		40
Titan Machinery	MN-Redwood Falls		1,754		333		3,568		—		—			333		3,568		3,901		82		01/31/2013		40
Titan Machinery	IA-Sioux City		1,736		315		2,472		—		—			315		2,472		2,787		15		10/25/2013		40
Total		$	12,056	$	3,521	$	16,939	$	490	$	(94	)	$	4,011	$	16,845	$	20,856	$	560
																							Life on which
								Costs capitalized					Gross Amount at which								Date of		depreciation on
				Initial cost to				subsequent to					carried at close								Construction		latest income
Land				company				acquisition(a)					of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Banner	ND-Fargo	$	—	$	929	$	—	$	41	$	—		$	970	$	—	$	970	$	—		07/03/2007
Stonefield	ND-Bismarck		—		2,483		—		150		—			2,633		—		2,633		—		08/01/2012
Taco Bell	CO-Denver		—		669		—		—		—			669		—		669		—		06/14/2011
Total		$	—	$	4,081	$	—	$	191	$	—		$	4,272	$	—	$	4,272	$	—
																							Life on which
								Costs capitalized					Gross Amount at which								Date of		depreciation on
				Initial cost to				subsequent to					carried at close								Construction		latest income
Medical				company				acquisition(a)					of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Bio-Life	ND-Bismarck & Grand Forks; MI-Marquette; MN-Mankato; WI-Eau Claire, Janesville, Onalaska, Oshkosh, Sheboygan, Stevens Point	$	10,058	$	3,212	$	20,612	$	12	$	2,027		$	3,224	$	22,639	$	25,863	$	3,370		01/03/2008		8.4 – 40
Total		$	10,058	$	3,212	$	20,612	$	12	$	2,027		$	3,224	$	22,639	$	25,863	$	3,370

F-38

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

SCHEDULE III – Real Estate and Accumulated Depreciation

December 31, 2013 (Continued)

(in thousands)

																								Life on which
								Costs																depreciation on
				Initial cost to				capitalized subsequent to						Gross Amount at which carried at								Date of Construction		latest income
Residential				company				acquisition (a)						close of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land			Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
44th Street	ND-Fargo	$	—	$	333	$	1,845	$	3		$	—		$	336	$	1,845	$	2,181	$	42		02/06/2013		40
Arbor I/400	ND-Bismarck		—		73		516		—			—			73		516		589		8		06/04/2013		40
Arbor II/404	ND-Bismarck		—		73		538		—			—			73		538		611		2		11/01/2013		40
Arbor III/406	ND-Bismarck		—		71		536		—			—			71		536		607		2		11/01/2013		40
Arneson	ND-Fargo		925		151		1,158		10			211			161		1,369		1,530		228		03/23/2007		10 – 40
Autumn Ridge	ND-Grand Forks		6,186		1,072		8,875		21			19			1,093		8,894		9,987		1,683		08/16/2004		9 – 40
Bayview	ND-Fargo		3,582		285		4,077		5			27			290		4,104		4,394		618		12/31/2007		20 – 40
Berkshire	ND-Fargo		311		31		406		4			6			35		412		447		60		03/31/2008		20 – 40
Brookfield	ND-Fargo		1,366		196		1,958		35			67			231		2,025		2,256		272		08/01/2008		20 – 40
Candlelight	ND-Fargo		—		613		1,221		(352	)		351			261		1,572		1,833		65		11/30/2012		27.5 – 40
Carling Manor	ND-Grand Forks		538		62		656		7			3			69		659		728		95		03/31/2008		40
Carlton Place	ND-Fargo		—		529		7,207		189			53			718		7,260		7,978		966		09/01/2008		20 – 40
Chandler	ND-Grand Forks		—		26		270		5			28			31		298		329		61		01/03/2005		20 – 40
Columbia West	ND-Grand Forks		—		283		3,406		13			118			296		3,524		3,820		464		09/01/2008		20 – 40
Country Club	ND-Fargo		310		252		1,252		—			70			252		1,322		1,574		86		05/02/2011		40
Countryside	ND-Fargo		310		135		677		—			9			135		686		821		45		05/02/2011		40
Courtyard	MN-St. Louis Park		4,474		2,270		5,681		—			6			2,270		5,687		7,957		47		09/3/2013		40
Danbury	ND-Fargo		3,037		252		6,008		138			76			390		6,084		6,474		913		12/31/2007		20 – 40
Dellwood Estates	MN-Anoka		8,146		843		9,966		—			(362	)		843		9,604		10,447		160		05/31/2013		40
Eagle Run	ND-West Fargo		4,713		562		5,798		51			—			613		5,798		6,411		495		08/12/2010		40
Emerald Court	ND-Fargo		637		63		830		4			66			67		896		963		126		03/31/2008		20 – 40
Fairview	ND-Bismarck		3,256		267		3,978		—			74			267		4,052		4,319		506		12/31/2008		20 – 40
Flickertail	ND-Fargo		5,947		428		5,650		5			107			433		5,757		6,190		713		12/31/2008		40
Forest Avenue	ND-Fargo		492		61		637		—			—			61		637		698		15		02/06/2013		40
Galleria III	ND-Fargo		630		118		681		—			—			118		681		799		54		11/09/2010		40
Glen Pond	MN-Eagan		16,096		3,761		20,833		—			94			3,761		20,927		24,688		1,088		12/02/2011		20 – 40
Granger Court I	ND-Fargo		—		284		2,619		(4	)		—			280		2,619		2,899		38		06/04/2013		40
Hannifin	ND-Bismarck		—		81		607		—			—			81		607		688		3		11/01/2013		40
Hunter Apts (Betty Ann & Martha Alice)	ND-Fargo		1,203		148		1,507		1			59			149		1,566		1,715		171		08/31/2009		20 – 40
Hunter’s Run II	ND-Fargo		—		44		441		2			—			46		441		487		61		07/01/2008		40
Islander	ND-Fargo		—		98		884		—			—			98		884		982		55		07/01/2011		40
Kennedy	ND-Fargo		536		84		588		1			3			85		591		676		10		2/6/2013		40
Library Lane	ND-Bismarck		1,915		279		2,401		23			121			302		2,522		2,824		382		10/01/2007		20 – 40
Maple Ridge	NE-Omaha		4,353		766		5,608		—			1,191			766		6,799		7,565		843		08/01/2008		20 – 40
Maplewood Bend I, II, III. IV, V, VI, VII, VIII & Royale	ND-Fargo		5,580		781		5,852		2			178			783		6,030		6,813		497		01/01/2009		20 – 40
Mayfair	ND-Grand Forks		822		73		1,043		8			20			81		1,063		1,144		145		07/01/2008		20 – 40
Monticello	ND-Fargo		—		60		752		—			—			60		752		812		3		11/08/2013		40
Montreal Courts	MN-Little Canada		19,976		5,808		19,687		—			—			5,808		19,687		25,495		123		10/02/2013		40
Oak Court	ND-Fargo		1,863		265		2,354		5			188			270		2,542		2,812		346		04/30/2008		27.5 – 40
Pacific Park I	ND-Fargo		798		95		772		—			32			95		804		899		18		02/06/2013		40
Pacific Park II	ND-Fargo		683		111		865		—			32			111		897		1,008		20		02/06/2013		40

F-39

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

SCHEDULE III—Real Estate and Accumulated Depreciation

December 31, 2013 (Continued)

(in thousands)

																								Life on which
								Costs																depreciation on
				Initial cost to				capitalized subsequent to						Gross Amount at which carried at								Date of Construction		latest income
Residential				company				acquisition (a)						close of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land			Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Pacific Park South	ND-Fargo		421		58		459		—			—			58		459		517		11		02/06/2013		40
Parkwood	ND-Fargo		1,208		124		1,145		8			5			132		1,150		1,282		155		08/01/2008		40
Pebble Creek	ND-Bismarck		4,700		234		3,372		26			32			260		3,404		3,664		497		03/19/2008		20 – 40
Prairiewood Courts	ND-Fargo		1,539		306		1,853		10			5			316		1,858		2,174		324		09/01/2006		20 – 40
Prairiewood Meadows	ND-Fargo		2,386		736		2,514		—			—			736		2,514		3,250		84		09/30/2012		20
Richfield/Harrison	ND-Grand Forks		6,488		688		6,346		72			256			760		6,602		7,362		1,056		07/01/2007		20 – 40
Rosegate	ND-Fargo		2,373		224		2,978		32			84			256		3,062		3,318		442		04/30/2008		20 – 40
Saddlebrook	ND-Fargo		1,107		148		1,262		13			(15	)		161		1,247		1,408		157		12/31/2008		40
Schrock	ND-Fargo		—		71		626		—			—			71		626		697		9		06/04/2013		40
Sheridan Pointe	ND-Fargo		—		292		2,424		—			—			292		2,424		2,716		15		10/01/2013		40
Sierra Ridge	ND-Bismarck		6,031		704		8,795		55			2			759		8,797		9,556		973		09/01/2006		40
Somerset	ND-Fargo		3,318		233		3,431		73			—			306		3,431		3,737		472		07/01/2008		40
Southgate	ND-Fargo		3,019		774		5,299		30			(112	)		804		5,187		5,991		842		07/01/2007		40
Southview III	ND-Grand Forks		236		99		554		—			35			99		589		688		34		08/01/2011		40
Southview Villages	ND-Fargo		2,094		254		2,519		13			122			267		2,641		2,908		403		10/01/2007		20 – 40
Spring	ND-Fargo		651		76		822		—			—			76		822		898		19		02/06/2013		40
Stanford Court	ND-Grand Forks		—		291		3,866		—			41			291		3,907		4,198		89		02/06/2013		20 – 40
Stonybrook	NE-Omaha		5,575		1,439		8,003		—			559			1,439		8,562		10,001		965		01/20/2009		20 – 40
Sunset Ridge	ND-Bismarck		9,146		1,561		11,015		233			11			1,794		11,026		12,820		1,265		06/06/2008		9 – 40
Sunview	ND-Grand Forks		1,230		144		1,614		1			42			145		1,656		1,801		206		12/31/2008		20 – 40
Sunwood	ND-Fargo		3,032		274		3,402		91			122			365		3,524		3,889		572		07/01/2007		20 – 40
Terrace on the Green	MN-Moorhead		2,163		697		2,588		—			—			697		2,588		3,285		86		09/30/2012		40
Twin Parks	ND-Fargo		2,359		125		2,072		11			56			136		2,128		2,264		275		10/01/2008		20 – 40
Village	ND-Grand Forks		1,085		166		1,435		8			53			174		1,488		1,662		189		11/01/2008		40
Village Park	ND-Fargo		884		225		1,958		16			7			241		1,965		2,206		276		04/30/2008		40
Village West	ND-Fargo		—		349		2,274		32			12			381		2,286		2,667		323		04/30/2008		40
Westside	MN-Hawley		—		59		360		—			—			59		360		419		35		02/01/2010		40
Westwind	ND-Fargo		354		43		508		6			22			49		530		579		73		04/30/2008		20 – 40
Westwood	ND-Fargo		5,041		528		6,455		82			118			610		6,573		7,183		917		06/05/2008		20 – 40
Willow Park	ND-Fargo		4,434		288		5,298		7			152			295		5,450		5,745		666		12/31/2008		40
Total		$	169,559	$	32,997	$	235,887	$	995		$	4,456		$	33,992	$	240,343	$	274,335	$	22,959
																								Life on which
								Costs																depreciation on
				Initial cost to				capitalized subsequent to						Gross Amount at which carried at								Date of Construction		latest income
Office				company				acquisition (a)						close of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land			Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Aetna	ND-Bismarck	$	6,945	$	1,265	$	7,372	$	25		$	358		$	1,290	$	7,730	$	9,020	$	1,287		12/06/2006		20 – 40
First International Bank & Trust	MN-Moorhead		—		212		712		1			88			213		800		1,013		55		05/13/2011		10 – 40
32nd Avenue	ND-Fargo		2,272		616		3,300		20			43			636		3,343		3,979		813		03/16/2004		3 – 40
Four Points	ND-Fargo		—		67		1,238		4			11			71		1,249		1,320		192		10/18/2007		40
Echelon	ND-Fargo		1,161		286		1,491		(6	)		1			280		1,492		1,772		248		05/15/2007		40
Gate City	ND-Grand Forks		1,050		375		917		8			35			383		952		1,335		133		03/31/2008		40
Goldmark Office Park	ND-Fargo		4,664		1,104		14,797		56			687			1,160		15,484		16,644		2,477		07/01/2007		4.75 – 40
Great American Bldg	ND-Fargo		1,072		502		1,626		9			27			511		1,653		2,164		309		02/01/2005		27.5 – 40
Midtown Plaza	ND-Minot		—		30		1,207		—			6			30		1,213		1,243		263		01/01/2004		40
Braun Research	NE-Norfolk		—		112		483		—			—			112		483		595		28		09/07/2011		40
Regis	MN-Edina		9,527		2,991		7,633		—			—			2,991		7,633		10,624		963		01/01/2009		40
SSA	MN-St Cloud		—		100		2,793		—			7			100		2,800		2,900		473		03/20/2007		20 – 40
Wells Fargo Center	MN-Duluth		—		600		7,270		—			1,493			600		8,763		9,363		1,251		07/11/2007		4 – 40
Total		$	26,691	$	8,260	$	50,839	$	117		$	2,756		$	8,377	$	53,595	$	61,972	$	8,492

F-40

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

SCHEDULE III—Real Estate and Accumulated Depreciation

December 31, 2013 (Continued)

(in thousands)

																							Life on which
								Costs															depreciation on
				Initial cost to				capitalized subsequent to					Gross Amount at which carried								Date of Construction		latest income
Retail				company				acquisition (a)					at close of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Applebee’s	MN-Apple Valley	$	—	$	560	$	1,235	$	—	$	—		$	560	$	1,235	$	1,795	$	93		01/27/2011		40
Applebee’s	MN-Bloomington		—		1,000		474		11		—			1,011		474		1,485		41		03/22/2010		40
Applebee’s	MN-Coon Rapids		—		750		875		—		—			750		875		1,625		84		03/09/2010		40
Applebee’s	MN-Savage		—		690		424		—		—			690		424		1,114		45		01/01/2010		40
Becker Furniture	MN-Waite Park		—		150		2,065		—		(226	)		150		1,839		1,989		387		07/12/2006		40
Buffalo Wild Wings	TX-Austin		—		575		1,663		—		1			575		1,664		2,239		146		07/30/2010		40
Dairy Queen	ND-Dickinson		709		329		658		—		—			329		658		987		33		01/19/2012		40
Dairy Queen	MN-Moorhead		—		243		787		1		—			244		787		1,031		52		05/13/2011		20
Family Dollar	ND-Mandan		—		117		649		—		—			117		649		766		50		12/14/2010		40
O’Reilly	ND-Mandan		—		165		449		—		—			165		449		614		35		12/14/2010		40
Walgreen’s	AR-Batesville		6,460		473		6,406		—		—			473		6,406		6,879		721		07/09/2009		40
Walgreen’s	AR-Fayetteville		4,962		636		4,733		—		—			636		4,733		5,369		532		07/09/2009		40
Walgreen’s	CO-Denver		4,339		2,349		2,358		—		—			2,349		2,358		4,707		152		06/14/2011		40
Walgreen’s	LA-Alexandria		2,097		1,090		2,972		—		1			1,090		2,973		4,063		298		12/18/2009		27.5 – 40
Walgreen’s	MS-Laurel		2,077		1,280		2,975		—		9			1,280		2,984		4,264		261		07/30/2010		40
Westpointe Center	ND-Fargo		—		695		2,372		141		(59	)		836		2,313		3,149		572		06/30/2006		5 – 40
Total		$	20,644	$	11,102	$	31,095	$	153	$	(274	)	$	11,255	$	30,821	$	42,076	$	3,502
Grand Totals		$	239,008	$	63,173	$	355,372	$	1,958	$	8,871		$	65,131	$	364,243	$	429,374	$	38,883
Investments in Unconsolidated Affiliates:
																							Life on which
								Costs															depreciation on
				Initial cost to				capitalized subsequent to					Gross Amount at which carried								Date of Construction		latest income
				company				acquisition (a)					at close of period						Accumulated		or		statement is
Property	Physical Location	Encumbrances		Land		Buildings		Land		Buildings			Land		Buildings		Total		Depreciation		Acquisition		computed
Banner	ND-Fargo	$	7,349	$	750	$	8,016	$	22	$	70		$	772	$	8,086	$	8,858	$	1,344		03/15/2007		40
GF Marketplace	ND-Grand Forks		11,432		4,259		15,801		135		9			4,394		15,810		20,204		3,764		07/01/2003		8.25 – 40
Highland Meadows	ND-Bismarck		2,384		624		2,591		224		109			848		2,700		3,548		811		07/31/2011
Ashbury	ND-Bismarck		—		308		2,517		—		—			308		2,517		2,825		31		07/01/2013		40

F-41

INREIT REAL ESTATE INVESTMENT TRUST AND SUBSIDIARIES

SCHEDULE III—Real Estate and Accumulated Depreciation

December 31, 2013 (Continued)

(in thousands)

Notes:

(a) The costs capitalized subsequent to acquisition is net of dispositions.

(b) The changes in total real estate investments for the years ended December 31, 2013 and 2012 are as follows (in thousands):

	2013			2012
Balance at January 1,	$	394,746		$	387,382
Purchase of real estate investments		80,294			24,432
Sale of investment property		(24,564	)		(958	)
Provision for asset impairment		(226	)		(262	)
Reclassification of equity method investments		—			(15,848	)
Balance at December 31,	$	450,250		$	394,746

(c) The changes in accumulated depreciation for the years ended December 31, 2013 and 2012 are as follows (in thousands):

	2013			2012
Balance at January 1,	$	38,780		$	31,281
Depreciation expense		10,887			9,650
Sale of investment property		(2,609	)		(52	)
Reclassification of equity method investments		—			(2,099	)
Balance at December 31,	$	47,058		$	38,780

(d) The aggregate cost of our real estate for federal income tax purposes is $397.0 million.

F-42

EXHIBIT INDEX

		Filed		Incorporated by reference
Exhibit number	Exhibit Description	here with		Form		Period ending		Exhibit		Filing date
3.1	Articles of Organization of INREIT Real Estate Investment Trust filed December 3, 2002				10-12G				3.1		03/10/11
3.2	Amended and Restated Bylaws dated June 23, 2011				10-12G				3.2		03/10/11
4.1	Declaration of Trust INREIT Real Estate Investment Trust dated July 21, 2004				10-12G				4.1		03/10/11
4.2	Addendum to Declaration of Trust dated July 25, 2007				10-12G				4.2		03/10/11
4.3	First Amended and Restated Declaration of Trust dated February 9, 2011				10-12G				4.3		03/10/11
4.4	Amended and Restated Share Purchase Plan December 20, 2012				8-K				10.2		12/27/12
4.5	Amended and Restated Share Repurchase Plan dated September 26, 2013				8-K				99.2		10/02/13
4.6	Amended and Restated Unit Repurchase Plan dated September 26, 2013				8-K				99.3		10/02/13
10.1	First Amended and Restated Advisory Agreement dated February 9, 2011				10-12G				10.1		03/10/11
10.2	First Amendment and Complete Restatement of Agreement of Limited Liability Limited Partnership of INREIT Properties, LLLP dated April 25, 2003				10-12G				10.2		03/10/11
10.3	Second Amendment to the Agreement of Limited Liability Limited Partnership of INREIT Properties, LLLP dated December 19, 2008				10-12G				10.3		03/10/11
10.4	Third Amendment to the Agreement of Limited Liability Limited Partnership of INREIT Properties, LLLP dated August 5, 2009				10-12G				10.4		03/10/11
10.5	Fourth Amendment to the Agreement of Limited Liability Limited Partnership of INREIT Properties, LLLP dated February 9, 2011				10-12G				10.5		03/10/11
10.6	Fifth Amendment to the Agreement of Limited Liability Limited Partnership of INREIT Properties, LLLP dated June 23, 2011				10-K		12/31/2011		10.6		03/30/12
10.7	Second Amended and Restated Advisory Agreement dated January 1, 2012				8-K				10.1		09/27/12
10.8	Second Amended and Restated Agreement of Limited Liability Limited Partnership of INREIT Properties, LLLP dated January 1, 2013				8-K				10.1		12/27/12
10.9	Dividend Reinvestment Plan dated July 20, 2012				S-3D				A		07/20/12
10.10	First Amendment to Dividend Reinvestment Plan dated September 26, 2013				8-K				99.1		10/02/13
10.11	Share Repurchase Plan dated June 7, 2012				10-Q		9/30/2012		4.1		11/13/12
21.1	Subsidiaries of Registrant		X
23.1	Consent of Independent Registered Public Accounting Firm - Baker Tilly Virchow Krause, LLP		X
23.2	Consent of Independent Registered Public Accounting Firm - Widmer Roel PC		X
31.1	Section 302 Certification of Chief Executive Officer		X
31.2	Section 302 Certification of Chief Accounting Officer		X
32.1	Section 906 Certification of Chief Executive Officer and Chief Accounting Officer		X
101	The following materials from INREIT Real Estate Investment Trust’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2013 and 2012; (ii) Consolidated Statements of Operations and Comprehensive Income for years ended December 31, 2013 and 2012; (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012, and; (v) Notes to Consolidated Financial Statements.		X