UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from to

Commission File No. 001-34995

Preferred Apartment Communities, Inc.

(Exact name of registrant as specified in its charter)

Maryland	27-1712193
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3284 Northside Parkway NW, Suite 150, Atlanta, GA 30327

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (770) 818-4100

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

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

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

The number of shares outstanding of the registrant’s Common Stock, as of October 28, 2016 was 24,697,128.

PART I - FINANCIAL INFORMATION
INDEX
Item 1.	Financial Statements	Page No.
	Consolidated Balance Sheets (unaudited) – as of September 30, 2016 and December 31, 2015	1
	Consolidated Statements of Operations (unaudited) – Three and Nine Months Ended September 30, 2016 and 2015	2
	Consolidated Statements of Stockholders' Equity (unaudited) – Nine Months Ended September 30, 2016 and 2015	3
	Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2016 and 2015	4
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79
Item 4.	Controls and Procedures	79
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	80
Item 1A.	Risk Factors	80
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults Upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	81
Item 6.	Exhibits	81
SIGNATURES		82
EXHIBIT INDEX		83

Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)
	September 30, 2016			December 31, 2015
Assets
Real estate
Land	$	260,222,888		$	141,729,264
Building and improvements	1,333,186,314			733,417,442
Tenant improvements	14,132,772			5,781,199
Furniture, fixtures, and equipment	125,292,571			86,092,408
Construction in progress	2,879,528			609,400
Gross real estate	1,735,714,073			967,629,713
Less: accumulated depreciation	(87,020,014		)	(48,155,874		)
Net real estate	1,648,694,059			919,473,839
Property held for sale (net of accumulated depreciation of $0 and $5,838,792)	—			33,817,081
Real estate loans, net of deferred fee income	195,971,159			180,688,293
Real estate loans to related parties, net	109,436,327			57,313,465
Total real estate and real estate loans, net	1,954,101,545			1,191,292,678
Cash and cash equivalents	10,462,384			2,439,605
Restricted cash	32,948,161			12,539,440
Notes receivable	14,341,875			18,489,247
Note receivable and revolving line of credit due from related party	20,986,537			19,454,486
Accrued interest receivable on real estate loans	17,669,121			14,294,648
Acquired intangible assets, net of amortization of $39,979,097 and $27,032,157	49,825,572			19,381,473
Deferred loan costs for revolving line of credit, net of amortization of $268,801 and $791,002	1,738,508			488,770
Deferred offering costs	3,809,014			5,834,304
Tenant receivables (net of allowance of $466,122 and $434,773) and other assets	17,654,353			11,314,382
Total assets	$	2,123,537,070		$	1,295,529,033
Liabilities and equity
Liabilities
Mortgage notes payable, principal amount	$	1,183,335,433		$	668,836,291
Less: deferred loan costs, net of amortization of $4,390,077 and $2,021,696	(19,317,090		)	(8,099,517		)
Mortgage notes payable, net of unamortized deferred loan costs	1,164,018,343			660,736,774
Mortgage note held for sale	—			28,109,000
Revolving line of credit	82,000,000			34,500,000
Term note payable	11,000,000			—
Less: deferred loan costs, net of amortization	(67,032		)	—
Term note payable, net of unamortized deferred loan costs	10,932,968			—
Real estate loan participation obligation	19,638,232			13,544,160
Accounts payable and accrued expenses	25,309,813			12,644,818
Accrued interest payable	3,490,151			1,803,389
Dividends and partnership distributions payable	9,056,611			6,647,507
Acquired below market lease intangibles, net of amortization of $2,933,811 and $1,578,205	19,180,354			9,253,450
Security deposits and other liabilities	5,161,358			2,836,145
Total liabilities	1,338,787,830			770,075,243
Commitments and contingencies (Note 12)
Equity
Stockholders' equity
Series A Redeemable Preferred Stock, $0.01 par value per share; 1,050,000
shares authorized; 809,460 and 486,182 shares issued; 802,032 and 482,964
shares outstanding at September 30, 2016 and December 31, 2015, respectively	8,020			4,830
Common Stock, $0.01 par value per share; 400,066,666 shares authorized; 24,658,034 and
22,761,551 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	246,580			227,616
Additional paid-in capital	802,559,257			536,450,877
Accumulated deficit	(19,384,106		)	(13,698,520		)
Total stockholders' equity	783,429,751			522,984,803
Non-controlling interest	1,319,489			2,468,987
Total equity	784,749,240			525,453,790
Total liabilities and equity	$	2,123,537,070		$	1,295,529,033

The accompanying notes are an integral part of these consolidated financial statements.

1

Preferred Apartment Communities, Inc.
Consolidated Statements of Operations
(Unaudited)
	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Revenues:
Rental revenues	$	37,319,207		$	19,442,628		$	96,541,544		$	47,304,230
Other property revenues	5,221,887			2,558,185			13,290,330			6,685,752
Interest income on loans and notes receivable	7,194,742			5,909,907			20,984,625			16,367,864
Interest income from related parties	3,801,501			2,044,973			10,310,563			5,031,189
Total revenues	53,537,337			29,955,693			141,127,062			75,389,035
Operating expenses:
Property operating and maintenance	5,504,848			3,097,080			13,883,133			7,722,017
Property salary and benefits reimbursement to related party	2,808,402			1,688,347			7,688,470			4,114,752
Property management fees (including $1,444,518, $751,817,
$3,656,209, and $1,795,435 to related parties)	1,724,411			857,294			4,308,841			2,082,839
Real estate taxes	4,789,085			2,506,885			15,457,134			6,911,034
General and administrative	1,144,256			632,164			3,255,728			1,553,666
Equity compensation to directors, executives and consultants	638,414			593,417			1,867,706			1,761,268
Depreciation and amortization	21,664,363			10,536,486			54,981,064			26,409,763
Acquisition and pursuit costs (including $89,631, $63,486, $141,548
and $148,127 to related party)	1,036,171			1,783,708			6,179,442			2,876,642
Acquisition fees to related parties	321,366			1,541,250			706,422			3,400,021
Asset management fees to related party	3,759,084			1,908,742			9,484,161			4,830,588
Insurance, professional fees and other expenses	1,338,343			1,062,687			4,216,838			2,412,441
Total operating expenses	44,728,743			26,208,060			122,028,939			64,075,031
Contingent asset management and general and administrative expense fees	(736,960		)	(373,360		)	(1,458,245		)	(1,528,479		)
Net operating expenses	43,991,783			25,834,700			120,570,694			62,546,552
Operating income	9,545,554			4,120,993			20,556,368			12,842,483
Interest expense	12,234,174			5,818,760			30,688,505			14,884,343
Net loss before gain on sale of real estate	(2,688,620		)	(1,697,767		)	(10,132,137		)	(2,041,860		)
Gain on sale of real estate, net of disposition expenses	—			—			4,271,506			—
Net loss	(2,688,620		)	(1,697,767		)	(5,860,631		)	(2,041,860		)
Consolidated net loss attributable to non-controlling interests	86,484			15,289			175,045			20,712
Net loss attributable to the Company	(2,602,136		)	(1,682,478		)	(5,685,586		)	(2,021,148		)
Dividends declared to Series A preferred stockholders	(11,015,706		)	(5,114,126		)	(28,341,723		)	(12,377,580		)
Earnings attributable to unvested restricted stock	(6,159		)	(4,068		)	(12,434		)	(16,355		)
Net loss attributable to common stockholders	$	(13,624,001	)	$	(6,800,672	)	$	(34,039,743	)	$	(14,415,083	)
Net loss per share of Common Stock available to
common stockholders, basic and diluted	$	(0.56	)	$	(0.31	)	$	(1.45	)	$	(0.65	)
Dividends per share declared on Common Stock	$	0.2025		$	0.18		$	0.5975		$	0.535
Weighted average number of shares of Common Stock outstanding,
basic and diluted	24,340,791			22,292,217			23,552,951			22,109,036

The accompanying notes are an integral part of these consolidated financial statements.

2

Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the nine months ended September 30, 2016 and 2015
(Unaudited)
	Series A Redeemable Preferred Stock			Common Stock			Additional Paid in Capital				Accumulated (Deficit)			Total Stockholders' Equity			Non-Controlling Interest			Total Equity
Balance at January 1, 2015	$	1,928		$	214,039		$	300,576,349			$	(11,297,852	)	$	289,494,464		$	2,087,410		$	291,581,874
Issuance of Units	1,936			—			193,447,355				—			193,449,291			—			193,449,291
Redemptions of Series A Preferred Stock	(23		)	599			(1,505,907		)		—			(1,505,331		)	—			(1,505,331		)
Issuance of Common Stock	—			5,479			5,487,829				—			5,493,308			—			5,493,308
Exercises of warrants	—			1,307			1,241,956				—			1,243,263			—			1,243,263
Syndication and offering costs	—			—			(22,027,008		)		—			(22,027,008		)	—			(22,027,008		)
Equity compensation to executives and directors	—			40			282,532				—			282,572			—			282,572
Vesting of restricted stock	—			468			(468		)		—			—			—			—
Conversion of Class A Units to Common Stock	—			1,080			717,583				—			718,663			(718,663		)	—
Current period amortization of Class B Units	—			—			—				—			—			1,478,696			1,478,696
Net loss	—			—			—				(2,021,148		)	(2,021,148		)	(20,712		)	(2,041,860		)
Reallocation adjustment to non-controlling interests	—			—			508,937				—			508,937			(508,937		)	—
Distributions to non-controlling interests	—			—			—				—			—			(149,307		)	(149,307		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—			—			(12,377,579		)		—			(12,377,579		)	—			(12,377,579		)
Dividends to common stockholders ($0.535 per share)	—			—			(11,881,325		)		—			(11,881,325		)	—			(11,881,325		)
Balance at September 30, 2015	$	3,841		$	223,012		$	454,470,254			$	(13,319,000	)	$	441,378,107		$	2,168,487		$	443,546,594
Balance at January 1, 2016	$	4,830		$	227,616		$	536,450,877			$	(13,698,520	)	$	522,984,803		$	2,468,987		$	525,453,790
Issuance of Units	3,233			—			322,937,157				—			322,940,390			—			322,940,390
Redemptions of Series A Preferred Stock	(43		)	588			(3,020,673		)		—			(3,020,128		)	—			(3,020,128		)
Issuance of Common Stock	—			1,973		—	2,858,311			—	—			2,860,284			—			2,860,284
Exercises of warrants	—			15,163			16,181,146				—			16,196,309			—			16,196,309
Syndication and offering costs	—			—			(38,220,013		)		—			(38,220,013		)	—			(38,220,013		)
Equity compensation to executives, directors and consultants	—			56			352,472				—			352,528			—			352,528
Vesting of restricted stock	—			228			(228		)		—			—			—			—
Conversion of Class A Units to Common Stock	—			956			647,642				—			648,598			(648,598		)	—
Current period amortization of Class B Units	—			—			—				—			—			1,542,182			1,542,182
Net loss	—			—			—				(5,685,586		)	(5,685,586		)	(175,045		)	(5,860,631		)
Class A Units issued for property acquisition	—			—			—				—			—			5,072,659			5,072,659
Minority interest in joint venture	—			—			—				—			—			450,000			450,000
Reallocation adjustment to non-controlling interests	—			—			6,914,403				—			6,914,403			(6,914,403		)	—
Distributions to non-controlling interests	—			—			—				—			—			(476,293		)	(476,293		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—			—			(28,341,723		)		—			(28,341,723		)	—			(28,341,723		)
Dividends to common stockholders ($0.5975 per share)	—			—			(14,200,114		)		—			(14,200,114		)	—			(14,200,114		)
Balance at September 30, 2016	$	8,020		$	246,580		$	802,559,257			$	(19,384,106	)	$	783,429,751		$	1,319,489		$	784,749,240

The accompanying notes are an integral part of these consolidated financial statements.

3

Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
	Nine months ended September 30,
	2016			2015
Operating activities:
Net loss	$	(5,860,631	)	$	(2,041,860	)
Reconciliation of net loss to net cash provided by operating activities:
Depreciation expense	39,387,351			19,052,639
Amortization expense	15,593,713			7,357,124
Amortization of above and below market leases	(1,118,329		)	(566,260		)
Deferred fee income amortization	(725,913		)	(580,996		)
Deferred loan cost amortization	2,431,809			1,069,961
(Increase) in accrued interest income on real estate loans	(3,374,473		)	(3,188,828		)
Equity compensation to executives, directors and consultants	1,867,706			1,761,268
Gain on sale of real estate	(4,271,506		)	—
Other	56,582			(14,807		)
Changes in operating assets and liabilities:
(Increase) in tenant receivables and other assets	(1,230,183		)	(539,565		)
Increase in accounts payable and accrued expenses	8,843,052			5,069,158
Increase in accrued interest payable	1,740,420			427,750
Increase in prepaid rents	235,035			237,613
Increase in security deposits and other liabilities	282,738			144,931
Net cash provided by operating activities	53,857,371			28,188,128
Investing activities:
Investments in real estate loans	(123,427,150		)	(83,800,145		)
Repayments of real estate loans	36,672,482			18,772,024
Notes receivable issued	(8,730,166		)	(5,805,972		)
Notes receivable repaid	12,895,101			9,897,319
Note receivable issued to and draws on line of credit by related party	(25,821,121		)	(12,869,093		)
Repayments of line of credit by related party	23,791,676			8,514,582
Acquisition fees received on real estate loans	2,695,961			2,126,913
Acquisition fees paid on real estate loans	(1,374,828		)	(1,063,456		)
Acquisition fees paid to real estate loan participants	—			(24,665		)
Acquisition of properties	(740,597,973		)	(311,936,810		)
Disposition of properties	10,606,386			—
Additions to real estate assets - improvements	(7,613,065		)	(3,007,537		)
Proceeds from sale of fixed assets	10,000			—
Payment of deposits for property acquisitions	(3,128,370		)	(1,519,269		)
Decrease in restricted cash	(9,070,073		)	(4,998,076		)
Net cash used in investing activities	(833,091,140		)	(385,714,185		)
Financing activities:
Proceeds from mortgage notes payable	479,494,000			204,555,500
Payments for mortgage notes payable	(7,748,011		)	(2,553,190		)
Payments for deposits and other mortgage loan costs	(15,400,974		)	(3,240,080		)
Proceeds from real estate loan participants	5,575,484			4,134,882
Proceeds from lines of credit	357,136,020			165,900,000
Payments on lines of credit	(309,636,020		)	(161,700,000		)
Proceeds from Term Loan	46,000,000			32,000,000
Repayment of the Term Loan	(35,000,000		)	(32,000,000		)
Proceeds from sales of Units, net of offering costs and redemptions	287,830,612			173,466,135
Proceeds from sales of Common Stock	2,810,156			5,381,848
Proceeds from exercises of warrants	19,831,294			1,236,437
Common Stock dividends paid	(13,523,075		)	(11,560,512		)
Series A Preferred Stock dividends paid	(26,735,870		)	(11,453,618		)
Distributions to non-controlling interests	(350,079		)	(124,905		)
Payments for deferred offering costs	(3,476,989		)	(1,582,886		)
Contribution from non-controlling interests	450,000			—
Net cash provided by financing activities	787,256,548			362,459,611
Net increase in cash and cash equivalents	8,022,779			4,933,554
Cash and cash equivalents, beginning of period	2,439,605			3,113,270
Cash and cash equivalents, end of period	$	10,462,384		$	8,046,824

The accompanying notes are an integral part of these consolidated financial statements.

4

Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
(Unaudited)
	Nine months ended September 30,
	2016		2015
Supplemental cash flow information:
Cash paid for interest	$	26,569,933	$	13,386,632
Supplemental disclosure of non-cash activities:
Accrued capital expenditures	$	1,125,774	$	641,627
Writeoff of fully depreciated or amortized assets and liabilities	$	149,288	$	290,009
Writeoff of fully amortized deferred loan costs	$	826,359	$	—
Dividends payable - Common Stock	$	4,992,038	$	4,018,249
Dividends payable - Series A Preferred Stock	$	3,885,123	$	1,824,395
Partnership distributions payable to non-controlling interests	$	179,449	$	49,781
Accrued and payable deferred offering costs	$	690,643	$	665,756
Reclass of offering costs from deferred asset to equity	$	6,080,235	$	2,584,073
Bridge loans converted to mezzanine loans	$	—	$	29,158,371
Fair value of OP Units issued for property	$	5,072,659	$	—
Mezzanine loan balance applied to purchase of property	$	12,500,000	$	10,000,000
Fair value issuances of equity compensation	$	3,152,312	$	2,309,569
Offering cost reimbursement to related party	$	482,871	$	670,579
Assumed mortgage debt	$	43,103,275	$	41,625,000

The accompanying notes are an integral part of these consolidated financial statements.

5

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements

September 30, 2016

1. Organization and Basis of Presentation

Preferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the context otherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company was formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and may make real estate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities and other properties. As a secondary strategy, the Company also may acquire or originate senior mortgage loans, subordinate loans or real estate loans secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest not more than 20% of its assets, subject to any temporary increase unanimously approved by its board of directors, in other real estate related investments such as grocery-anchored shopping centers, as determined by its Manager (as defined below) as appropriate for the Company. The Company is externally managed and advised by Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and related party (see Note 7).

As of September 30, 2016, the Company had 24,658,034 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 96.5% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 886,168 at September 30, 2016 and represented Class A OP Units of the Operating Partnership, or Class A OP Units. The Class A OP Units are convertible at any time at the option of the holder into the Company's choice of either cash or Common Stock. In the case of cash, the value is determined based upon the trailing 20-day volume weighted average price of the Company's Common Stock.

The Company controls the Operating Partnership through its sole general partner interest and conducts substantially all of its business through the Operating Partnership. The Company has determined the Operating Partnership is a variable interest entity, or VIE, of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the Operating Partnership. New Market Properties, LLC, a wholly-owned subsidiary of the Operating Partnership, owns and conducts the business of the Company's grocery-anchored shopping centers.

Basis of Presentation

These unaudited consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. All significant intercompany transactions have been eliminated in consolidation. Certain adjustments have been made consisting of normal recurring accruals, which, in the opinion of management, are necessary for the fair statement of the Company's financial condition. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The year end condensed balance sheet data was derived from audited financial statements, but does not include all the disclosures required by GAAP. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 14, 2016.

6

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

2. Summary of Significant Accounting Policies

Acquisitions and Impairments of Real Estate Assets

The Company records its initial investments in income-producing real estate at fair value at the acquisition date in accordance with ASC 805-10, Business Combinations, which requires that all consideration transferred be measured at its acquisition-date fair value. The aggregate purchase price of acquired properties is apportioned to the tangible and identifiable intangible assets and liabilities acquired at their estimated fair values. The value of acquired land, buildings and improvements is estimated by formal appraisals, observed comparable sales transactions, and information gathered during pre-acquisition due diligence activities and the valuation approach considers the value of the property as if it were vacant. The values of furniture, fixtures, and equipment are estimated by calculating their replacement cost and reducing that value by factors based upon estimates of their remaining useful lives. Intangible assets and liabilities for multifamily communities include the values of in-place leases and above-market or below-market leases. Additional intangible assets for retail properties also include costs to initiate leases such as commissions and legal costs.

In-place lease values for multifamily communities are estimated by calculating the estimated time to fill a hypothetically empty apartment complex to its stabilization level (estimated to be 92% occupancy) based on historical observed move-in rates for each property, and which approximate market rates. Carrying costs during these hypothetical expected lease-up periods are estimated, considering current market conditions and include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates. The intangible assets are calculated by estimating the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. The acquired in-place lease values are amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases. The amounts of above-market or below-market lease values are developed by comparing the Company's estimate of the average market rent to the average contract rent of the leases in place at the property acquisition date. This ratio is applied on a lease by lease basis to derive a total asset or liability amount for the property. The above-market or below-market lease values are recorded as a reduction or increase, respectively, to rental revenue over the remaining average non-cancelable term of the respective leases, plus any below market probable renewal options.

The fair values of in-place leases for retail shopping centers and office buildings represent the value of direct costs associated with leasing, including opportunity costs associated with lost rentals that are avoided by acquiring in-place leases. Direct costs associated with obtaining a new tenant include commissions, legal and marketing costs, incentives such as tenant improvement allowances and other direct costs. Such direct costs are estimated based on our consideration of current market costs to execute a similar lease. The value of opportunity costs is estimated using the estimated market lease rates and the estimated absorption period of the space. These direct costs and opportunity costs are included in the accompanying consolidated balance sheets as acquired intangible assets and are amortized to expense over the remaining term of the respective leases. The fair values of above-market and below-market in-place leases for retail shopping centers and office buildings are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the leases, taking into consideration the probability of renewals for any below-market leases. The capitalized above-market leases and in place leases are included in the acquired intangible assets line of the consolidated balance sheets. Both above-market and below-market lease values are amortized as adjustments to rental revenue over the remaining term of the respective leases for office buildings. The amortization period for retail shopping center leases is the remaining lease term plus any below market probable renewal options.

Estimating the fair values of the tangible and intangible assets requires us to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount and capitalization rates, market absorption periods, and the number of years the property is held for investment. The use of unreasonable estimates would result in an incorrect assessment of our purchase price allocations, which would impact the amount of our reported net income. Acquired intangible assets and liabilities have no residual value.

The Company evaluates its tangible and identifiable intangible real estate assets for impairment when events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. The total undiscounted cash flows of the asset group, including proceeds from disposition, are compared to the net book value of the asset group. If this test indicates that impairment exists, an impairment loss is recorded in earnings equal to the shortage of the book value to the discounted net cash flows of the asset group.

7

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

Loan Coordination Fees

Amendment Number One to the Fifth Amended and Restated Management Agreement, which was effective January 1, 2016, replaced the acquisition fees which were paid to the Manager upon the closing of the acquisition of a property with loan coordination fees, which are intended to reimburse the Manager for costs incurred related to negotiating and securing mortgage debt financing on acquired properties. Acquisition fees were recognized in full at the date of acquisition. In accordance with guidance provided by ASC 310-20-25, the portion of loan coordination fees to secure financing are recognized over the term of the associated loan using the effective interest method in cases where mortgage financing is obtained at the closing date of the property acquisition. The remaining portion of loan coordination fees are accounted for as acquisition costs and are expensed as incurred. If no debt financing is utilized in conjunction with a property acquisition, the loan coordination fee is recognized in full at the date of property acquisition in the acquisition fees to related parties line in the Consolidated Statements of Operations. If debt financing is obtained subsequent to the acquisition, any incremental deferred loan coordination fee earned is recognized over the term of the associated loan using the effective interest method.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with guidance provided by ASC 505-50, Equity-Based Payments to Non-Employees and ASC 718, Stock Compensation. We calculate the fair value of equity compensation instruments at the date of grant based upon estimates of their expected term, the expected volatility of and dividend yield on our Common Stock over this expected term period and the market risk-free rate of return. We also estimate forfeitures of these instruments and accrue the compensation expense, net of estimated forfeitures, over the vesting period(s). We record the fair value of restricted stock awards based upon the closing stock price on the trading day immediately preceding the date of grant. For awards of equity compensation which have market performance vesting conditions in addition to multiple tranches of service period requirements, the Company utilizes the straight-line expense attribution method.

Non-controlling interests

As of each reporting date, the outstanding Class A Units in the Operating Partnership and the proportionate amount of amortized but unvested Class B Units in the Operating Partnership are apportioned a pro-rata amount of the Company's equity attributable to Common Stockholders and Unitholders according to the period-end percentage of Class A Units to shares of Common Stock issued and outstanding. This equity allocation is adjusted for periodic consolidated net income/loss attributable to non-controlling interests and periodic amortization of unvested Class B Unit awards.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. ASU 2014-09 may be applied using either a full retrospective or a modified approach upon adoption. The Company is currently evaluating the impact this standard may have on its financial statements.

In August 2014, the FASB issued Accounting Standards Update 2014-15 ("ASU 2014-15"), Presentation of Financial Statements—Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This new guidance establishes a requirement that management evaluate the entity's ability to continue as a going concern and requires certain disclosures should substantial doubt exist about the entity's future viability. ASU 2014-15 is effective on January 1, 2017 and the Company expects to adopt the new guidance on that date. The Company does not expected the adoption of ASU 2014-15 to materially impact its consolidated financial statements. 

In February 2015, the FASB issued Accounting Standards Update 2015-02 ("ASU 2015-02"), Consolidation (Topic 810): Amendments to the Consolidation Analysis. This new guidance specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will be required to consolidate the limited partnership.

8

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

ASU 2015-02 is effective on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity/capital as of the beginning of the period of adoption or retrospectively to each period presented. The Company's adoption of ASU 2015-02 had no impact on its consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update 2016-01 ("ASU 2016-01"), Financial Instruments—Overall (Subtopic 825-10): Recognition and measurement of Financial Assets and Liabilities. The new standard's applicable provisions to the Company include an elimination of the disclosure requirement of the significant inputs and assumptions underlying the fair value calculations of its financial instruments which are carried at amortized cost. The standard is effective on January 1, 2018, and early adoption is not permitted for the applicable provision. The Company does not expect the adoption of ASU 2016-01 to materially impact the Company’s consolidated financial statements. 

In February 2016, the FASB issued Accounting Standards Update 2016-02 ("ASU 2016-02"), Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance but does not expected its adoption to materially impact the Company’s consolidated financial statements. 

In March 2016, the FASB issued Accounting Standards Update 2016-09 ("ASU 2016-09"), Compensation—Stock Compensation

(Topic 178): Improvements to Employee Share-Based Payment Accounting. The new standard's provisions applicable to the Company include allowing the entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures of equity compensation awards when they occur. Previous guidance required entities to estimate the number of awards that are expected to vest. The standard is effective on January 1, 2017, and the Company adopted ASU 2016-09 on January 1, 2016 pursuant to the allowed early adoption provision. The Company does not expect the adoption of ASU 2016-09 to materially impact the Company’s consolidated financial statements. 

In June 2016, the FASB issued Accounting Standards Update 2016-13 ("ASU 2016-13"), Financial Instruments—Credit Losses

(Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial instruments carried at amortized cost to be presented at the net amount expected to be collected, utilizing a valuation account which reflects the cumulative net adjustments from the gross amortized cost value. Under existing GAAP, entities would not record a valuation allowance until a loss was probable of occurring. The standard is effective for the Company on January 1, 2020. The Company is presently evaluating the impact the adoption of ASU 2016-13 will have on the Company’s consolidated financial statements. 

In August 2016, the FASB issued Accounting Standards Update 2016-15 ("ASU 2016-15"), Statement of Cash Flows—(Topic 326): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies or establishes guidance for the presentation of various cash transactions on the statement of cash flows. The portion of the guidance applicable to the Company's business activities include the requirement that cash payments for debt prepayment or debt extinguishment costs be presented as cash out flows for financing activities. The standard is effective for the Company on January 1, 2018. The Company does not expect the adoption of ASU 2016-15 to materially impact the Company’s consolidated financial statements. 

9

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

3. Real Estate Assets

The Company's real estate assets consisted of:

	As of:
	9/30/2016	12/31/2015
Multifamily communities (1)	25	19
Multifamily units	8,268	6,136
Retail shopping centers	30	14
Approximate square feet of retail gross leasable area (2)	2,913,000	1,279,000
Class A office building	1	—
(1) The acquired second phase of the Summit Crossing community is managed in combination with the initial phase of this community and the two are therefore considered a single property, as are the three assets that comprise the Lenox Portfolio. Includes one student housing community as of September 30, 2016.
(2) The Company also owns approximately 47,600 square feet of gross leasable area of ground floor retail space which is embedded within the Lenox Portfolio and not included in the totals above.

On September 8, 2015, pursuant to a recommendation by the Company's investment committee, the Company took action to market for sale both phases of its Trail Creek multifamily community located in Hampton, Virginia. On February 24, 2016, the Company reclassified the following real estate assets and the mortgage note payable for Trail Creek from its held and used multifamily segment to property held for sale on its consolidated balance sheets. On May 19, 2016, the Company closed on the sale of Trail Creek to an unrelated third party. The purchaser will not be considered a related party to the Company on an ongoing basis by virtue of its acquisition of Trail Creek. The carrying values of the significant assets and liabilities of Trail Creek reclassified at December 31, 2015 and at the date of disposition were:

	5/19/2016			12/31/2015
Real estate assets:
Land	$	4,200,000		$	4,200,000
Building and improvements	30,892,259			30,881,025
Furniture, fixtures and equipment	4,647,117			4,574,848
Accumulated depreciation	(6,034,171		)	(5,838,792		)
Property held for sale	$	33,705,205		$	33,817,081
Liabilities:
Mortgage note payable	$	28,109,000		$	28,109,000

10

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Company acquired the following multifamily communities during the nine months ended September 30, 2016 and 2015:

Acquisition date	Property	Location	Approximate purchase price (millions) (1)			Units
1/5/2016	Baldwin Park	Orlando, Florida	$	110.8		528
1/15/2016	Crosstown Walk	Tampa, Florida	$	45.8		342
2/1/2016	Overton Rise	Atlanta, Georgia	$	61.1		294
5/31/2016	Avalon Park	Orlando, Florida	$	92.5		487
6/1/2016	North by Northwest (2)	Tallahassee, Florida	$	46.1		219
7/1/2016	City Vista	Pittsburgh, Pennsylvania	(3		)	272
8/24/2016	Sorrel	Jacksonville, Florida	$	48.1		290
						2,432
2/13/2015	Avenues at Cypress	Houston, Texas	(4)			240
2/13/2015	Avenues at Northpointe	Houston, Texas	(4)			280
5/21/2015	Venue at Lakewood Ranch	Sarasota, Florida	$	47.4		237
6/24/2015	Aster at Lely	Naples, Florida	$	52.5		308
6/30/2015	CityPark View	Charlotte, North Carolina	$	32.7		284
7/31/2015	Avenues at Creekside	San Antonio, Texas	$	56.2		395
9/3/2015	Citi Lakes	Orlando, Florida	$	63.4		346
						2,090

⁽¹⁾ Purchase prices shown are exclusive of acquired escrows, security deposits, prepaids, and other miscellaneous assets and assumed liabilities.

⁽²⁾ A 679-bed student housing community located adjacent to the campus of Florida State University in Tallahassee, Florida.

⁽³⁾ The Companyconverted $12,500,000 of its City Vista real estate loan into an approximate 96% ownership interest in a joint venture which owns the underlying property.

⁽⁴⁾ Avenues at Cypress and Avenues at Northpointe are referred to collectively as the Houston Portfolio, which was acquired for approximately $76.0 million.

The purchase prices approximated the fair value of the acquired assets and assumed liabilities. The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. These purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities, but are preliminary and are subject to refinement for a period of up to one year from the closing date of each transaction.

11

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

	2016
	North by Northwest			Avalon Park			Overton Rise			Baldwin Park
Land	$	8,281,054		$	7,410,048		$	8,511,370		$	17,402,882
Buildings and improvements	34,355,922			80,558,636			44,710,034			87,105,757
Furniture, fixtures and equipment	2,623,916			1,790,256			6,286,105			3,358,589
Lease intangibles	799,109			2,741,060			1,611,314			2,882,772
Prepaids & other assets	79,626			99,297			73,754			229,972
Escrows	1,026,419			3,477,157			354,640			2,555,753
Accrued taxes	(321,437		)	(394,731		)	(66,422		)	(17,421		)
Security deposits, prepaid rents, and other liabilities	(159,462		)	(207,623		)	(90,213		)	(226,160		)
Net assets acquired	$	46,685,147		$	95,474,100		$	61,390,582		$	113,292,144
Cash paid	$	12,831,872		$	30,474,100		$	20,090,582		$	35,492,144
Mortgage debt	33,853,275			65,000,000			41,300,000			77,800,000
Total consideration	$	46,685,147		$	95,474,100		$	61,390,582		$	113,292,144
Three months ended September 30, 2016:
Revenue	$	1,480,000		$	2,059,000		$	1,328,000		$	2,288,000
Net loss	$	(601,000	)	$	(1,094,000	)	$	(593,000	)	$	(1,442,000	)
Nine months ended September 30, 2016:
Revenue	$	1,950,000		$	2,723,000		$	3,631,000		$	7,044,000
Net loss	$	(608,000	)	$	(1,750,000	)	$	(1,425,000	)	$	(4,180,000	)
Cumulative acquisition costs incurred by the Company	$	402,000		$	1,314,000		$	116,000		$	1,847,000
Remaining amortization period of intangible
assets and liabilities (months)	3			8			2			0

12

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

	2016
	Crosstown Walk			City Vista			Sorrel
Land	$	5,178,375		$	4,081,683		$	4,412,164
Buildings and improvements	33,605,831			36,084,007			35,512,257
Furniture, fixtures and equipment	5,726,583			5,402,228			6,705,040
Lease intangibles	1,323,511			2,100,866			1,495,539
Prepaids & other assets	125,706			167,797			—
Escrows	291,868			599,983			623,791
Accrued taxes	(25,983		)	(245,326		)	(437,510		)
Security deposits, prepaid rents, and other liabilities	(53,861		)	(141,238		)	(68,828		)
Net assets acquired	$	46,172,030		$	48,050,000		$	48,242,453
Cash paid	$	13,632,030		—			$	14,642,453
Real estate loan settled	—			12,500,000			—
Joint venture partner	—			(450,000		)	—
Mortgage debt	32,540,000			36,000,000			33,600,000
Total consideration	$	46,172,030		$	48,050,000		$	48,242,453
Three months ended September 30, 2016:
Revenue	$	1,286,000		$	1,202,000		$	478,000
Net loss	$	(461,000	)	$	(692,000	)	$	(294,000	)
Nine months ended September 30, 2016:
Revenue	$	3,625,000		$	1,202,000		$	478,000
Net loss	$	(1,429,000	)	$	(692,000	)	$	(294,000	)
Cumulative acquisition costs incurred by the Company	$	320,000		$	18,000		$	529,000
Remaining amortization period of intangible
assets and liabilities (months)	1			7			11

13

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

	2015
	CityPark View			Aster at Lely			Venue at Lakewood Ranch			Houston Portfolio			Avenues at Creekside			Citi Lakes
Land	$	3,558,793		$	7,675,409		$	3,791,050		$	7,162,226		$	5,983,724		$	5,558,033
Buildings and improvements	23,797,764			37,661,901			37,574,391			54,217,075			42,050,104			49,416,492
Furniture, fixtures and equipment	4,562,148			6,132,384			5,375,690			13,078,872			6,939,014			7,411,367
Lease intangibles	737,790			1,030,306			669,369			1,571,827			1,227,158			964,108
Prepaids & other assets	99,124			106,717			80,201			150,326			89,582			40,032
Escrows	211,428			—			401,294			362,332			1,058,468			280,863
Accrued taxes	(105,756		)	(23,413		)	(216,252		)	(212,601		)	(440,660		)	(187,792		)
Security deposits, prepaid rents, and other liabilities	(40,152		)	(64,689		)	(35,157		)	(99,181		)	(218,438		)	(80,629		)
Net assets acquired	$	32,821,139		$	52,518,615		$	47,640,586		$	76,230,876		$	56,688,952		$	63,402,474
Cash paid	$	721,139		$	18,518,615		$	16,830,586		$	25,452,876		$	15,063,952		$	18,952,474
Real estate loan settled	10,000,000			—			—			—			—			—
Mortgage debt	22,100,000			34,000,000			30,810,000			50,778,000			41,625,000			44,450,000
Total consideration	$	32,821,139		$	52,518,615		$	47,640,586		$	76,230,876		$	56,688,952		$	63,402,474
Three months ended September 30, 2016:
Revenue	$	971,000		$	1,311,000		$	1,170,000		$	2,185,000		$	1,435,000		$	1,398,000
Net income (loss)	$	58,000		$	(1,000	)	$	123,000		$	(246,000	)	$	137,000		$	(143,000	)
Nine months ended September 30, 2016:
Revenue	$	2,797,000		$	3,954,000		$	3,499,000		$	6,526,000		$	4,223,000		$	4,126,000
Net income (loss)	$	61,000		$	(74,000	)	$	27,000		$	(864,000	)	$	(157,000	)	$	(1,213,000	)
Cumulative acquisition costs incurred by
the Company	$	276,000		$	438,000		$	889,000		$	1,142,000		$	852,000		$	1,620,000
Remaining amortization period of intangible
assets and liabilities (months)	0			0			0			0			0			0

The Company acquired the following grocery-anchored shopping centers during the nine months ended September 30, 2016:

Acquisition date	Property	Location	Approximate purchase price (millions) (2)		Gross leasable area (square feet)
2/29/2016	Wade Green Village (1)	Atlanta, Georgia	$	11.0	74,978
4/29/2016	Anderson Central	Greenville-Anderson, South Carolina MSA	(3)		223,211
4/29/2016	East Gate Shopping Center	Augusta, Georgia MSA	(3)		75,716
4/29/2016	Fairview Market	Greenville, South Carolina	(3)		53,888
4/29/2016	Fury's Ferry	Augusta, Georgia	(3)		70,458
4/29/2016	Rosewood Shopping Center	Columbia, South Carolina	(3)		36,887
4/29/2016	Southgate Village	Birmingham, Alabama	(3)		75,092
5/16/2016	The Market at Victory Village	Nashville, Tennessee	$	15.6	71,300
7/15/2016	Lakeland Plaza	Atlanta, Georgia	$	45.3	301,711
8/8/2016	Thompson Bridge Commons	Atlanta, Georgia	(4)		92,587
8/8/2016	Cherokee Plaza	Atlanta, Georgia	(4)		102,864
8/8/2016	Sandy Plains Exchange	Atlanta, Georgia	(4)		72,784
8/8/2016	Shoppes of Parkland	Miami, Florida	(4)		145,720
8/8/2016	University Palms	Orlando, Florida	(4)		99,172
8/8/2016	Heritage Station	Raleigh, North Carolina	(4)		72,946
8/8/2016	Oak Park Village	San Antonio, Texas	(4)		64,287
					1,633,601

⁽¹⁾ See Note 7 - Related Party Transactions.

14

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

⁽²⁾ Purchase price shown is exclusive of acquired escrows, security deposits, prepaids, and other miscellaneous assets and assumed liabilities.

⁽³⁾ The six grocery-anchored shopping centers are referred to collectively as the Southeastern Six Portfolio, which was acquired for approximately $68.7 million.

⁽⁴⁾ The seven grocery-anchored shopping centers are referred to collectively as the Sunbelt Seven Portfolio, which was acquired for approximately $158.0 million.

The purchase prices approximated the fair value of the acquired assets and assumed liabilities. The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. These purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities, but are preliminary and are subject to refinement for a period of up to one year from the closing date of each transaction.

	Market at Victory Village				Southeastern Six Portfolio			Wade Green Village				Lakeland Plaza			Sunbelt 7 Portfolio
Land	$	2,271,224			$	14,081,647		$	1,840,284			$	7,079,408		$	36,198,658
Buildings and improvements	11,872,222				48,598,731			8,159,147				32,258,335			109,504,038
Tenant improvements	402,973				993,530			251,250				828,966			2,143,404
In-place leases	847,939				4,906,398			841,785				2,947,175			11,005,662
Above-market leases	100,216				86,234			107,074				1,349,624			458,353
Leasing costs	253,640				992,143			167,541				1,287,825			4,116,560
Below-market leases	(198,214		)		(1,069,877		)	—				(797,729		)	(7,617,485		)
Other assets	157,775				600,069			10,525				—			3,409,838
Other liabilities	(179,546		)		(437,008		)	(59,264		)		(180,331		)	(1,196,579		)
Net assets acquired	$	15,528,229			$	68,751,867		$	11,318,342			$	44,773,273		$	158,022,449
Cash paid	$	6,278,229			$	43,751,867		$	6,245,683		(1)	$	14,773,273		$	60,368,449
Class A OP Units granted	—				—			5,072,659			(2)	—			—
Mortgage debt	9,250,000			(3)	25,000,000			—			(4)	30,000,000			97,654,000
Total consideration	$	15,528,229			$	68,751,867		$	11,318,342			$	44,773,273		$	158,022,449
Three months ended September 30, 2016:
Revenue	$	331,000			$	1,569,000		$	297,000			$	728,000		$	1,787,000
Net loss	$	(38,000	)		$	(105,000	)	$	(103,000	)		$	(134,000	)	$	(164,000	)
Nine months ended September 30, 2016:
Revenue	$	491,000			$	2,660,000		$	634,000			$	728,000		$	1,787,000
Net loss	$	(56,000	)		$	(334,000	)	$	(255,000	)		$	(134,000	)	$	(164,000	)
Cumulative acquisition costs incurred by the Company	$	112,000			$	639,000		$	295,000			$	200,000		$	614,000
Remaining amortization period of intangible
assets and liabilities (years)	8.0				4.3			2.5				7.5			9.2

⁽¹⁾ The contributor had an outstanding $6.25 million bridge loan secured by the property issued by Madison Wade Green Lending, LLC, an indirect wholly owned entity of the Company. Upon contribution of the property, the Company assumed the loan and concurrently extinguished the obligation.

⁽²⁾ As partial consideration for the property contribution, the Company granted 419,228 Class A OP Units to the contributor, net of contribution adjustments at closing. The value and number of Class A OP Units to be granted at closing was determined during the contract process and remeasured at fair value as of the contribution date of February 29, 2016. Class A OP Units are exchangeable for shares of Common Stock on a one-for-one basis, or cash, at the election of the Operating Partnership. Therefore, the Company determined the fair value of the Units to be equivalent to the price of its common stock on the closing date of the acquisition.

⁽³⁾ The Company assumed the existing mortgage in conjunction with its acquisition of The Market at Victory Village. See note 10.

⁽⁴⁾ Subsequent to the closing of the acquisition, the Company closed on a mortgage loan on Wade Green Village in the amount of $8.2 million. See note 10.

15

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Company acquired the following grocery-anchored shopping centers during the nine months ended September 30, 2015:

Acquisition date	Property	Location	Approximate purchase price (millions)		Gross leasable area
9/4/2015	Royal Lakes Marketplace (1)	Atlanta, Georgia	$	16.6	119,493
7/1/2015	Independence Square	Dallas, Texas	$	18.0	140,218
					259,711

⁽¹⁾ See Note 7 - Related Party Transactions

The purchase prices approximated the fair value of the acquired assets and assumed liabilities. The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. These purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities, but are preliminary and are subject to refinement for a period of up to one year from the closing date of each transaction.

	Independence Square				Royal Lakes Marketplace
Land	$	4,114,574			$	4,874,078
Buildings and improvements	13,123,553				9,921,403
Tenant improvements	566,857				517,191
In-place leases	1,567,944				957,093
Above-market leases	35,127				198,238
Leasing costs	392,451				365,629
Below-market leases	(1,775,506		)		(315,837		)
Other assets	—				88,553
Security deposits, prepaid rents, and other liabilities	(226,599		)		(145,581		)
Net assets acquired	$	17,798,401			$	16,460,767
Cash paid	$	17,798,401			$	6,660,767
Mortgage debt	—			(1)	9,800,000
Total consideration	$	17,798,401			$	16,460,767

⁽¹⁾ On August 27, 2015, the Company entered into a mortgage note secured by the Independence Square property in the principal amount of $12,617,500.

	Independence Square			Royal Lakes Marketplace
Three months ended September 30, 2016:
Revenue	$	535,000		$	341,000
Net loss	$	(68,000	)	$	(5,000	)
Nine months ended September 30, 2016:
Revenue	$	1,580,000		$	1,016,000
Net loss	$	(256,000	)	$	(61,000	)
Cumulative acquisition costs incurred by the Company	$	573,000		$	245,000
Remaining amortization period of intangible
assets and liabilities (years)	6.3			9.9

On August 29, 2016, the Company acquired a nine-story, class A office building in Birmingham Alabama. The Company allocated the purchase price to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase

16

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

price allocation was based upon the Company's best estimates of the fair values of the acquired assets and liabilities, but are preliminary and are subject to refinement for a period of up to one year from the closing date of the transaction.

	Brookwood Office
Land	$	1,744,828
Buildings and improvements	39,099,395
Tenant improvements	3,561,805
In-place leases	3,728,049
Above-market leases	146,941
Leasing costs	2,402,958
Below-market leases	(1,737,158		)
Other assets	1,466,906
Other liabilities	(580,668		)
Net assets acquired	$	49,833,056
Cash paid	$	17,433,056
Mortgage debt	32,400,000
Total consideration	$	49,833,056
Three months ended September 30, 2016:
Revenue	$	513,000
Net income	$	74,000
Nine months ended September 30, 2016:
Revenue	$	513,000
Net income	$	74,000
Cumulative acquisition costs incurred by the Company	$	377,000
Remaining amortization period of intangible
assets and liabilities (years)	11.9

The Company recognizes depreciation and amortization expense over the estimated useful life of its tangible and intangible assets. The Company's consolidated amortization and depreciation expense consisted of:

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Depreciation:
Buildings and improvements	$	9,637,960	$	4,545,441	$	24,251,696	$	11,356,809
Furniture, fixtures, and equipment	5,775,856		2,999,399		15,135,655		7,695,830
	15,413,816		7,544,840		39,387,351		19,052,639
Amortization:
Acquired intangible assets	6,205,194		2,982,982		15,523,359		7,343,400
Deferred leasing costs	38,621		7,207		53,510		7,207
Website development costs	6,732		1,457		16,844		6,517
Total depreciation and amortization	$	21,664,363	$	10,536,486	$	54,981,064	$	26,409,763

17

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

4. Acquired Intangible Assets and Liabilities

The Company recorded the following acquired lease intangible assets and liabilities and related accumulated amortization, as of

September 30, 2016 and December 31, 2015:

	September 30, 2016
	Multifamily			Retail			Office building			Total
In-place leases	$	35,125,997		$	34,862,165		$	3,728,048		$	73,716,210
Above-market leases	—			3,474,370			146,941			3,621,311
Customer relationships	1,335,417			—			—			1,335,417
Lease origination costs	78,786			11,015,892			37,053			11,131,731
Acquired intangible assets	$	36,540,200		$	49,352,427		$	3,912,042		$	89,804,669
Less accumulated amortization of:
In-place leases	$	(29,493,437	)	$	(6,976,555	)	$	(44,016	)	$	(36,514,008	)
Above market leases	—			(580,489		)	(8,415		)	(588,904		)
Customer relationships	(1,335,417		)	—			—			(1,335,417		)
Lease origination costs	(31,330		)	(1,509,438		)	—			(1,540,768		)
Accumulated amortization	(30,860,184		)	(9,066,482		)	(52,431		)	(39,979,097		)
Acquired intangible assets, net	$	5,680,016		$	40,285,945		$	3,859,611		$	49,825,572
Below market lease liability	$	277,195		$	20,099,812		$	1,737,158		$	22,114,165
Less: accumulated amortization	(277,195		)	(2,641,572		)	(15,044		)	(2,933,811		)
Below market lease liability, net	$	—		$	17,458,240		$	1,722,114		$	19,180,354

	December 31, 2015
	Multifamily			Retail			Total
In-place leases	$	24,704,733		$	14,439,414		$	39,144,147
Above-market leases	—			1,386,254			1,386,254
Customer relationships	1,588,277			—			1,588,277
Lease origination costs	78,786			4,216,166			4,294,952
Acquired intangible assets	$	26,371,796		$	20,041,834		$	46,413,630
Less accumulated amortization of:
In-place leases	$	(21,608,833	)	$	(2,965,096	)	$	(24,573,929	)
Above market leases	—			(233,833		)	(233,833		)
Customer relationships	(1,588,277		)	—			(1,588,277		)
Lease origination costs	(1,466		)	(634,652		)	(636,118		)
Accumulated amortization	(23,198,576		)	(3,833,581		)	(27,032,157		)
Acquired intangible assets, net	$	3,173,220		$	16,208,253		$	19,381,473
Below market lease liability	$	383,593		$	10,448,062		$	10,831,655
Less: accumulated amortization	(383,593		)	(1,194,612		)	(1,578,205		)
Below market lease liability, net	$	—		$	9,253,450		$	9,253,450

18

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Company recognized amortization of acquired intangible assets and liabilities as follows:

	Three months ended September 30, 2016
Amortization expense	Multifamily		Retail		Office building		Total
Intangible assets:
Leases in place	$	3,859,901	$	1,877,026	$	44,016	$	5,780,943
Above-market leases (1)	—		173,347		8,416		181,763
Lease origination costs	11,131		413,120		—		424,251
	$	3,871,032	$	2,463,493	$	52,432	$	6,386,957
Intangible liabilities:
Below-market leases (1)	$	—	$	691,593	$	15,044	$	706,637
	Three months ended September 30, 2015
Amortization expense	Multifamily		Retail		Total
Intangible assets:
Leases in place	$	2,183,437	$	668,053	$	2,851,490
Above-market leases (1)	—		45,585		45,585
Lease origination costs	—		131,492		131,492
	$	2,183,437	$	845,130	$	3,028,567
Intangible liabilities:
Below-market leases (1)	$	—	$	270,517	$	270,517

	Nine months ended September 30, 2016
Amortization expense	Multifamily		Retail		Office building		Total
Intangible assets:
Leases in place	$	10,417,678	$	4,137,666	$	44,016	$	14,599,360
Above-market leases (1)	—		366,816		8,416		375,232
Lease origination costs	31,229		892,769		—		923,998
	$	10,448,907	$	5,397,251	$	52,432	$	15,898,590
Intangible liabilities:
Below-market leases (1)	$	—	$	1,478,517	$	15,044	$	1,493,561
	Nine months ended September 30, 2015
Amortization expense	Multifamily		Retail		Total
Intangible assets:
Leases in place	$	5,162,093	$	1,816,193	$	6,978,286
Above-market leases (1)	—		128,688		128,688
Lease origination costs	—		365,114		365,114
	$	5,162,093	$	2,309,995	$	7,472,088
Intangible liabilities:
Below-market leases (1)	$	—	$	694,948	$	694,948
(1) Amortization of above and below market lease intangibles is recorded as a decrease and an increase to rental revenue, respectively.

19

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

5.     Real Estate Loans, Notes Receivable, and Line of Credit

At September 30, 2016, our portfolio of real estate loans, including maximum potential loan amounts, consisted of:

	Project/Property		Location	Date of loan	Maturity date	Optional extension date	Total loan commitments		Senior loans held by unrelated third parties		Current / deferred interest % per annum
		(1)
	Haven West	(2)	Atlanta, GA	7/15/2013	12/15/2016	6/2/2018	6,940,795		$	16,195,189	8 / 6
	Haven 12	(3)	Starkville, MS	6/16/2014	6/16/2017	11/30/2020	6,116,384		$	18,615,081	8.5 / 6.5	(4)
	Founders' Village		Williamsburg, VA	8/29/2013	8/29/2018	N/A	10,346,000		$	26,936,000	8 / 7.5
	Encore		Atlanta, GA	10/9/2015	4/8/2019	10/8/2020	10,958,200		$	46,892,800	8.5 / 5	(4)
	Encore Capital		Atlanta, GA	10/9/2015	4/8/2019	10/8/2020	9,758,200		—		8.5 / 5
	Palisades		Northern VA	8/18/2014	2/18/2018	8/18/2019	17,270,000		$	38,000,000	8 / 5	(4)
	Fusion		Irvine, CA	7/1/2015	5/31/2018	5/31/2020	59,052,583		$	43,747,287	8.5 / 7.5	(4)
	Green Park		Atlanta, GA	12/1/2014	12/1/2017	12/1/2019	13,464,372		$	27,775,000	8.5 / 5.83	(4)
	Stadium Village	(5)	Atlanta, GA	6/27/2014	6/27/2017	N/A	13,424,995		$	34,825,000	8.5 / 5.83	(4)
	Summit Crossing III		Atlanta, GA	2/27/2015	2/26/2018	2/26/2020	7,246,400		$	16,822,000	8.5 / 7.5	(4)
	Overture		Tampa, FL	7/21/2015	7/21/2018	7/21/2020	6,920,000		$	17,080,000	8.5 / 7.5	(4)
	Aldridge at Town Village		Atlanta, GA	1/27/2015	12/27/2017	12/27/2019	10,975,000		$	28,338,937	8.5 / 6	(4)
	18 Nineteen	(6)	Lubbock, TX	4/9/2015	4/9/2018	4/9/2020	15,598,352		$	34,871,251	8.5 / 6	(4)
	Haven South	(7)	Waco, TX	5/1/2015	5/1/2018	5/1/2019	15,455,668		$	41,827,034	8.5 / 6	(4)
	Haven46	(8)	Tampa, FL	3/29/2016	3/29/2019	9/29/2020	9,819,662		$	29,885,928	8.5 / 5	(4)
	Bishop Street	(9)	Atlanta, GA	2/18/2016	2/18/2020	N/A	12,693,457		$	29,700,000	8.5 / 6.5	(4)
	Dawson Marketplace	(10)	Atlanta, GA	12/16/2015	11/15/2018	11/15/2020	12,857,005		$	36,740,430	8.5 / 5	(4)
	Hidden River		Tampa, FL	12/4/2015	12/3/2018	12/3/2020	4,734,960		$	27,620,600	8.5 / 6.5	(4)
	Hidden River Capital		Tampa, FL	12/4/2015	12/4/2018	12/4/2020	5,380,000		$	—	8.5 / 6.5
	CityPark II		Charlotte, NC	1/8/2016	1/7/2019	1/7/2021	3,364,800		$	19,628,000	8.5 / 6.5	(4)
	CityPark II Capital		Charlotte, NC	1/8/2016	1/8/2019	1/31/2021	3,916,000		$	—	8.5 / 6.5
	Crescent Avenue	(11)	Atlanta, GA	1/13/2016	7/13/2017	N/A	6,000,000		$	—	9 / 3
	Haven Northgate	(12)	College Station, TX	6/21/2016	6/20/2019	6/20/2020	64,678,549		$	—	6.6 / 1.5 (14)
	Lubbock II	(13)	Lubbock, TX	4/19/2016	4/20/2019	N/A	9,357,171		$	28,478,346	8.5 / 5	(4)
	Park 35 on Clairmont		Birmingham, AL	8/24/2016	6/26/2018	6/26/2020	21,000,000		$	35,000,000	8.5 / 2	(4)
	Fort Myers		Fort Myers, FL	9/26/2016	9/25/2017	N/A	4,000,000		$	—	12 / 0
							$	361,328,553
(1)	All loans pertain to developments of multifamily communities, except as otherwise indicated.
(2)	Real estate loan in support of a completed 160-unit, 568-bed student housing community adjacent to the campus of the University of West Georgia. On August 1, 2016, we terminated the purchase option on the community.
(3)	Real estate loan in support of a completed 152-unit, 536-bed student housing community adjacent to the campus of Mississippi State University.
(4)	The purchase price is to be calculated based upon market cap rates at the time of exercise of the purchase option, with discounts ranging from between 20 and 60 basis points, depending on the loan, plus adjustments, if any.
(5)	Real estate loan in support of a completed 198-unit, 792-bed student housing community adjacent to the campus of Kennesaw State University in Atlanta, Georgia.
(6)	Real estate loan of up to approximately $15.6 million in support of a planned 217-unit, 732-bed student housing community adjacent to the campus of Texas Tech University.
(7)	Real estate loan in support of a planned 250-unit, 840-bed student housing community adjacent to the campus of Baylor University.
(8)	On March 29, 2016, our bridge loan was converted to a real estate loan in support of a planned 158-unit, 542-bed student housing community adjacent to the campus of the University of South Florida.
(9)	On February 18, 2016, our bridge loan was converted to a real estate loan in support of a planned multifamily community in Atlanta, Georgia.
(10)	Real estate loan in support of a planned approximate 200,000 square foot retail center in the Atlanta, Georgia market.
(Table continued on next page)

20

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

(Table continued from previous page)
(11)	Bridge loan in support of a proposed multi-use property in Atlanta, Georgia.
(12)	Senior loan in support of a planned 427-unit, 808-bed student housing community adjacent to the campus of Texas A&M University, which accrues interest at 1 month LIBOR plus 600 basis points. See note 7 for related party disclosure.
(13)	Real estate loan of up to approximately $9.4 million in support of a planned 140-unit, 556-bed second phase student housing community adjacent to the campus of Texas Tech University.
(14)	Current interest is calculated as the sum of 6.0% plus 1 month LIBOR.

The Palisades, Green Park, Stadium Village, and Founders' Village loans are subject to a loan participation agreement with a syndicate of unaffiliated third parties, under which the syndicate is to fund 25% of the loan commitment amount and collectively receive 25% of interest payments and returns of principal. The Company's Encore loan is subject to a loan participation agreement of 49% of the loan commitment amount, interest payments, and return of principal. The aggregate amount of the Company's liability under the loan participation agreements at September 30, 2016 was $19,638,232.

The Company's real estate loans are collateralized by 100% of the membership interests of the underlying project entity, and, where considered necessary, by unconditional joint and several repayment guaranties and performance guaranties by the principal(s) of the borrowers. These guaranties generally remain in effect until the receipt of a final certificate of occupancy. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement. The Crescent Avenue, Haven Northgate, and Fort Myers loans are also collateralized by the acquired land. The Haven West loan is additionally collateralized by an assignment by the developer of security interests in unrelated projects. Prepayment of the real estate loans are permitted in whole, but not in part, without the Company's consent.

21

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

At September 30, 2016, the carrying values of our portfolio of real estate loans were:

	As of 9/30/2016										Carrying amount as of
	Amount drawn		Loan fee received from borrower - 2% (1)		Acquisition fee paid to Manager - 1% (1)			Unamortized deferred loan fee revenue			September 30, 2016		December 31, 2015
Project/Property
Crosstown Walk	$	—	$	—	$	—		$	—		$	—	$	10,950,040
City Vista	—		—		—			—			—		16,083,431
Overton Rise	—		—		—			—			—		16,572,959
Haven West	6,784,167		138,816		(69,408		)	—			6,784,167		6,775,835
Haven 12	5,815,849		122,328		(61,164		)	—			5,815,849		5,815,849
Founders' Village (1,2)	9,866,000		197,320		(98,660		)	(16,370		)	9,849,630		9,841,816
Encore (2)	10,958,200		539,695		(269,847		)	—			10,958,200		10,894,278
Encore Capital	6,564,124		—		—			—			6,564,124		6,036,465
Palisades (1,2)	16,070,000		321,400		(160,700		)	(3,809		)	16,066,191		16,063,817
Fusion	48,396,901		1,120,890		(560,445		)	(168,107		)	48,228,794		37,072,235
Green Park (1,2)	13,180,052		269,287		(134,644		)	(14,846		)	13,165,206		12,330,489
Stadium Village (1,2)	13,329,868		268,500		(134,250		)	(4,039		)	13,325,829		13,321,293
Summit Crossing III	7,246,400		144,928		(72,464		)	(24,903		)	7,221,497		7,205,894
Overture	5,992,592		138,400		(69,200		)	(25,218		)	5,967,374		4,481,446
Aldridge at Town Village	10,427,956		219,500		(109,750		)	(40,479		)	10,387,477		9,707,532
18 Nineteen	15,496,602		311,967		(155,984		)	(47,340		)	15,449,262		14,421,568
Haven South	15,186,370		309,113		(154,557		)	(72,277		)	15,114,093		14,087,852
Haven46	7,146,862		58,000		(29,000		)	(54,553		)	7,092,309		2,891,067
Bishop Street	10,906,611		62,140		(31,070		)	(77,010		)	10,829,601		3,086,778
Dawson Marketplace	12,343,718		257,140		(128,570		)	(7,817		)	12,335,901		11,563,352
Madison Wade Green	—		—		—			—			—		6,225,304
Hidden River Lending	4,734,960		94,700		(47,350		)	(38,889		)	4,696,071		(47,350		)
Hidden River Capital	4,527,161		107,600		(53,800		)	(36,382		)	4,490,779		2,619,808
Crescent Avenue	6,000,000		120,000		(60,000		)	(29,871		)	5,970,129		—
City Park Lending	3,364,800		67,296		(33,648		)	(25,001		)	3,339,799		—
City Park II Capital Lending	3,254,444		78,320		(39,160		)	(27,998		)	3,226,446		—
Haven Northgate	39,082,506		1,293,571		(646,786		)	(534,802		)	38,547,704		—
Lubbock II	7,382,840		187,143		(93,572		)	(75,726		)	7,307,114		—
Park 35 on Clairmont	19,371,924		421,203		(210,602		)	(197,502		)	19,174,422		—
Fort Myers	3,538,936		80,000		(40,000		)	(39,418		)	3,499,518		—
	$	306,969,843	$	6,929,257	$	(3,464,631	)	$	(1,562,357	)	$	305,407,486	$	238,001,758
(1) See note 7.
(2) 25% of the net amount collected by the Company as an acquisition fee was paid to the associated third party loan participant. The participant on our Encore loan was paid $53,695 as an acquisition fee.

22

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Company holds options, but not obligations, to purchase certain of the properties which are partially financed by its real estate loans, as shown in the table below. In the event the Company exercises the associated purchase option and acquires the property, any additional accrued interest, if not paid, will be treated as additional consideration for the acquired project. The option purchase prices are negotiated at the time of the loan closing.

		Purchase option window		Purchase option price		Total units upon completion	Total beds (student housing communities)
Project/Property		Begin	End
Haven 12	(1)	9/1/2017	11/30/2017	(2)		152	536
Founders' Village		2/1/2017	5/31/2017	$	44,266,000	247	—
Encore		1/8/2018	5/8/2018	(2)		340	—
Palisades		3/1/2017	7/31/2017	(2)		304	—
Fusion		1/1/2018	4/1/2018	(2)		280	—
Green Park		11/1/2017	2/28/2018	(2)		310	—
Stadium Village	(3)	9/1/2017	11/30/2017	(2)		198	792
Summit Crossing III		8/1/2017	11/30/2017	(2)		172	—
Overture		1/1/2018	5/1/2018	(2)		180	—
Aldridge at Town Village		11/1/2017	2/28/2018	(2)		300	—
18 Nineteen		10/1/2017	12/31/2017	(2)		217	732
Haven South		10/1/2017	12/31/2017	(2)		250	840
Haven46		11/1/2018	1/31/2019	(2)		158	542
Bishop Street		10/1/2018	12/31/2018	(2)		232	—
Dawson Marketplace		12/16/2017	12/15/2018	(2)		—	—
Hidden River		9/1/2018	12/31/2018	(2)		300	—
Crescent Avenue		N/A	N/A	N/A		—	—
City Park II		5/1/2018	8/31/2018	(2)		200	—
Haven Northgate		10/1/2018	12/31/2018	(2)		427	808
Lubbock II		11/1/2018	1/31/2019	(2)		140	556
Fort Myers		N/A	N/A	N/A		224	—
Park 35 on Clairmont		(4)	(4)	(2)		271	—
						4,902	4,806
(1) Effective August 31, 2016, the purchase option window dates were amended as shown.
(2) The purchase price is to be calculated based upon market cap rates at the time of exercise of the purchase option, with discounts ranging from between 20 and 60 basis points, depending on the loan, plus adjustments, if any.
(3) Effective July 1, 2016, the purchase option window dates were amended as shown.
(4) Purchase option begins on the first day of the month that is 90 days after the project achieves at least 93% occupancy and ends 60 days thereafter.

The Company extends loans for purposes such as to partially finance the development of multifamily residential communities, to acquire land in anticipation of developing and constructing multifamily residential communities, and for other real estate or real estate related projects. The Company's Founders' Village loan includes an exclusive option to purchase the project at a fixed price within a specific time window following project completion and stabilization and this and other loans provide the Company with the rights to incremental exit fees over and above the amount of periodic interest paid during the life of the loans. These characteristics can cause the loans to create variable interests to the Company and require further evaluation as to whether the variable interest creates a VIE which could necessitate consolidation of the project. The Company considers the facts and circumstances pertinent to each entity borrowing under the loan, including the relative amount of financing the Company is contributing to the overall project cost, decision making rights or control held by the Company, guarantees provided by third parties, and rights to expected residual gains or obligations to absorb expected residual losses that could be significant from the project. If the Company is deemed to be the primary beneficiary of a VIE, consolidation would be required.

23

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Company's real estate loans partially finance the development activities of the borrowers' associated legal entities. Each of these loans create variable interests in each of these entities, and according to the Company's analysis, are deemed to be VIEs, due to the combined factors of the sufficiency of the borrowers' investment at risk, the existence of payment and performance guaranties provided by the borrowers, and the existence of a purchase option at a discount to market. The Company has concluded that it is not the primary beneficiary of the borrowing entities. It has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on the projects. Therefore, since the Company has concluded it is not the primary beneficiary, it has not consolidated these entities in its consolidated financial statements. The Company's maximum exposure to loss from these loans is their drawn amount as of September 30, 2016 of approximately $290.6 million. The maximum aggregate amount of loans to be funded as of September 30, 2016 was approximately $344.4 million.

The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required by ASC 310. For each loan, the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.

The Company is also subject to a geographic concentration of risk that could be considered significant with regard to real estate investment loans which are partially supporting proposed multifamily communities, student housing projects, and a retail shopping center in or near Atlanta, Georgia. The drawn amount of these loans as of September 30, 2016 totaled approximately $97.7 million (with a total commitment amount of approximately $104.3 million) and in the event of a total failure to perform by the borrowers and guarantors, would subject the Company to a total possible loss of that amount.

At September 30, 2016, our portfolio of notes and lines of credit receivable consisted of:

Borrower	Date of loan	Maturity date	Total loan commitments		Outstanding balance as of:						Interest rate
					9/30/2016			12/31/2015
360 Residential, LLC	3/20/2013	6/30/2017	$	2,000,000	$	1,428,306		$	1,304,999		12	%	(1)
Preferred Capital Marketing Services, LLC (2)	1/24/2013	12/31/2016	1,500,000		1,140,647			1,305,550			10	%
Oxford Contracting LLC	8/27/2013	4/30/2017	1,500,000		1,475,000			1,475,000			8	%	(1)
Preferred Apartment Advisors, LLC (2,3)	8/21/2012	12/31/2016	15,000,000		12,539,917			12,793,440			8	%
Haven Campus Communities, LLC (2)	6/11/2014	12/31/2016	11,500,000		7,324,904			5,359,904			12	%	(1)
Oxford Capital Partners, LLC (4)	10/5/2015	3/31/2017	10,650,000		7,559,004			10,502,626			12	%
Newport Development Partners, LLC	6/17/2014	6/30/2017	3,000,000		—			806,318			12	%	(1)
360 Residential, LLC II	12/30/2015	12/31/2017	3,255,000		2,776,984			2,477,952			15	%	(1)
Hendon Properties, LLC	12/8/2015	3/31/2017	2,000,000		—			2,000,000			12	%
Mulberry Development Group, LLC	3/31/2016	5/31/2017	500,000		129,000			—			12	%
360 Capital Company, LLC	5/24/2016	12/31/2017	2,000,000		1,033,667			—			12	%	(1)
Unamortized loan fees					(79,017		)	(82,056		)
			$	52,905,000	$	35,328,412		$	37,943,733
(1) The amounts payable under the terms of these revolving credit lines are collateralized by a personal guaranty of repayment by the principals of the borrower.
(2) See related party disclosure in note 7.
(3) The amounts payable under this revolving credit line were collateralized by an assignment of the Manager's rights to fees due under the Fifth Amended and Restated Management Agreement between the Company and the Manager.
(4) The amounts payable under the terms of this revolving credit line, up to the lesser of 25% of the loan balance or $2,000,000 are collateralized by a personal guaranty of repayment by the principals of the borrower. On June 15, 2016, the loan commitment amount was temporarily raised to $10,650,000 until July 15, 2016, when it reverted back to the previous amount of $10,150,000.

24

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Company recorded interest income and other revenue from these instruments as follows:

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Real estate loans:
Current interest payments	$	5,902,915	$	4,077,298	$	16,913,037	$	11,263,071
Additional accrued interest	3,917,641		3,018,766		10,633,937		7,573,044
Deferred loan fee revenue	201,147		204,790		636,875		555,657
Total real estate loan revenue	10,021,703		7,300,854		28,183,849		19,391,772
Interest income on notes and lines of credit	974,540		654,026		3,111,339		2,007,281
Interest income on loans and notes receivable	$	10,996,243	$	7,954,880	$	31,295,188	$	21,399,053

6. Redeemable Preferred Stock and Equity Offerings

On August 16, 2012, the Company filed a registration statement on Form S-11 (333-183355), and later amended the registration statement onto Form S-3, for an offering of up to 900,000 Units consisting of 900,000 Series A Redeemable Preferred Stock and warrants to purchase 18,000,000 shares of Common Stock, or the Follow-on Offering. The Company's Follow-on Offering is being offered by International Assets Advisory, LLC, or the Dealer Manager, on a "reasonable best efforts" basis. Each share of Preferred Stock ranks senior to Common Stock and carries a cumulative annual 6% dividend of the stated per share value of $1,000, payable monthly as declared by the Company’s board of directors. Dividends begin accruing on the date of issuance. On June 26, 2014, the Company amended the redemption schedule of the Preferred Stock to allow redemptions at the option of the holder from the date of issuance of the Preferred Stock through the first year subject to a 13% redemption fee. After year one, the redemption fee decreases to 10%, after year three it decreases to 5%, after year four it decreases to 3%, and after year five there is no redemption fee. Any redeemed shares of Preferred Stock are entitled to any accrued but unpaid dividends at the time of redemption and any redemptions may be in cash or Common Stock, at the Company’s discretion. The Warrant is exercisable by the holder at an exercise price of 120% of the current market price per share of the Common Stock on the date of issuance of such warrant with a minimum exercise price of $9.00 per share. The current market price per share is determined using the volume weighted average closing market price for the 20 trading days prior to the date of issuance of the Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four years following the date of issuance. Warrant exercises resulted in the issuance of 1,516,320 shares of Common Stock for cash proceeds of approximately $16.2 million for the nine-month period ended September 30, 2016 and 130,720 shares of Common Stock for cash proceeds of approximately $1.2 million for the nine-month period ended September 30, 2015.

As of September 30, 2016, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $79.4 million. These costs are reflected as a reduction of stockholders' equity at the time of closing. In addition, the costs related to the offering not related to a specific closing transaction totaled approximately $13.5 million. As of September 30, 2016, the Company had issued 809,460 Units from which it realized net proceeds of approximately $729.4 million after commissions and other costs.  A total of 7,428 shares of Series A Preferred Stock were subsequently redeemed. The number of Units issued was approximately 81.8% of the maximum number of Units anticipated to be issued under the Primary Series A Offering and the Follow-On Offering. The Company cumulatively recognized approximately 81.8% of the approximate $13.5 million deferred to date, or approximately $11.1 million as a reduction of stockholders' equity.  The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $2.4 million, are reflected in the asset section of the consolidated balance sheet  as deferred offering costs at September 30, 2016.  The remainder of current and future deferred offering costs related to the Follow-on Offering will likewise be recognized as a reduction of stockholders' equity in the proportion of the number of Units issued to the maximum number of Units anticipated to be issued. Offering costs not related to a specific closing transaction are subject to an overall cap of 1.5% (discussed further below) of the total gross proceeds raised during the Unit offerings.

Aggregate offering expenses, including selling commissions and dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the Primary Series A Offering and the Follow-On Offering, of which the Company will reimburse its Manager up to 1.5% of the gross proceeds of these offerings for all organization and offering expenses incurred, excluding selling commissions and dealer manager fees; however, upon approval by the conflicts committee of the board of directors, the Company may reimburse its Manager for any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority.

25

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

On May 17, 2013, the Company filed a registration statement on Form S-3 (File No. 333-188677) for an offering up to $200 million of equity or debt securities, or Shelf Registration Statement, which was declared effective by the SEC on July 19, 2013. All amounts previously recorded as deferred offering costs related to this Shelf Registration Statement have been reflected as a reduction of stockholders' equity as of September 30, 2016. The Shelf Registration Statement expired on July 19, 2016.

On February 28, 2014, the Company filed a prospectus supplement to the Shelf Registration Statement to issue and sell up to $100 million of Common Stock from time to time in an "at the market" offering, or the ATM Offering, through MLV & Co. LLC as sales agent. Through September 30, 2016, the Company sold approximately 6.5 million shares of Common Stock through the ATM offering and collected net proceeds of approximately $54.4 million. The ATM Offering terminated in connection with the expiration of the Shelf Registration Statement.

On May 5, 2016, the Company filed a registration statement on Form S-3 (File No. 333-211178), or the New Shelf Registration Statement, for an offering of up to$300 millionof equity or debt securities, or the Shelf Offering, which was declared effective by the SEC on May 17, 2016.Deferred offering costs related to this Shelf Registration Statement totaled approximately $825,000 as of September 30, 2016, of which $13,000 has been reflected as a reduction of stockholders' equity. The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $812,000, are reflected in the asset section of the consolidated balance sheet as deferred offering costs at September 30, 2016.

On June 9, 2016, the Company filed a registration statement on Form S-3 (File No. 333-211924) for an offering of up to 2,000,000 Units consisting of 2,000,000 shares of Series A Redeemable Preferred Stock and Warrants to purchase 40,000,000 shares of Common Stock, or the New Follow-On Offering. Except as described in the prospectus, the terms of the New Follow-on Offering are substantially similar to those under the Follow-on Offering. Deferred offering costs related to the New Follow-On Offering reflected in the asset section of the consolidated balance sheet at September 30, 2016 were approximately $538,000.

On July 18, 2016, the Company filed a prospectus for its registration statement on Form S-3 (Registration No. 333-211178) to issue and sell up to $150 million of Common Stock from time to time in an "at the market" offering (the "2016 ATM Offering") through JonesTrading Institutional Services LLC, FBR Capital Markets & Co, and Canaccord Genuity Inc, as its sales agents. The Company intends to use any proceeds from the 2016 ATM Offering to repay outstanding amounts under our existing senior secured revolving credit facility and for other general corporate purposes, which includes making investments in accordance with the Company's investment objectives. Through September 30, 2016, the Company sold 197,256 shares of common stock through the ATM offering and collected net proceeds of approximately $2.8 million.

7. Related Party Transactions

John A. Williams, the Company's Chief Executive Officer and Chairman of the Board, and Leonard A. Silverstein, the Company's President and Chief Operating Officer and a member of the Board, are also executive officers and directors of NELL Partners, Inc., which controls the Manager. Mr. Williams is the Chief Executive Officer and Mr. Silverstein is the President and Chief Operating Officer of the Manager.

26

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The Sixth Amended and Restated Management Agreement, or Management Agreement, which was effective June 3, 2016, entitles the Manager to receive compensation for various services it performs related to acquiring assets and managing properties on the Company's behalf. The following table details Manager fees recognized, net of deferrals, as described below.

		Three months ended September 30,				Nine months ended September 30,
Type of Compensation	Basis of Compensation	2016		2015		2016		2015
Acquisition fees	1% of the gross purchase price of real estate assets acquired prior to January 1, 2016	$	—	$	2,035,350	$	—	$	4,438,813
Loan origination fees	1.0% of the maximum commitment of any real estate loan, note or line of credit receivable	250,602		494,100		1,374,828		1,063,457
Loan coordination fees	As of January 1, 2016, 1.6% of any assumed, new or supplemental debt incurred in connection with an acquired property (1)	3,493,227		—		8,178,836		—
Asset management fees	Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted	2,196,363		1,045,986		5,708,868		2,290,870
Property management fees	Monthly fee equal to 4% of the monthly gross revenues of the properties managed	1,438,569		743,775		3,629,322		1,652,034
General and administrative expense fees	Monthly fee equal to 2% of the monthly gross revenues of the Company	831,711		497,437		2,343,936		1,154,639
		$	8,210,472	$	4,816,648	$	21,235,790	$	10,599,813
(1) If an asset is acquired without debt financing, the loan coordination fee is calculated as 1.6% of 63% of the purchase price of the asset.

The Management Agreement also entitles the Manager to receive compensation for services rendered in connection with the construction, development or landscaping of the properties (Construction Management Fees), including the supervision of any third party vendors engaged by the Manager to provide such services; such fee is an amount equal to the customary and competitive market rates in light of the size, type and location of the property. The Company paid Construction Management Fees of $126,446 and $9,193 to the Manager for the nine-month periods ended September 30, 2016 and 2015, respectively which were capitalized as part of the related capital improvements.

The Manager, at its election, may elect to forego payment of certain of the asset management, property management, or general and administrative expense fees due to the Manager for properties owned by the Company. With this election, the future payment of those fees becomes contingent upon the occurrence of certain capital transactions, to the extent that the net sale proceeds from these transactions exceed the allocable capital contributions for the asset plus a 7% priority annual return on the asset. A total of $1,458,245 of combined asset management, general and administrative expense and property management fees related to certain properties and land loans during the nine-month period ended September 30, 2016 and $3,596,068 cumulatively are contingent upon these events. The Company will recognize these contingent fees, if any, in future periods to the extent it determines that it is probable that the estimated net sale proceeds would exceed the hurdles listed above. As of September 30, 2016, the Company determined that there was insufficient evidence to support recognition of these contingent fees; therefore, the Company has not recognized any expense for these contingent amounts.

27

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

In addition to property management fees, the Company incurred the following reimbursable on-site personnel salary and related benefits expenses at the properties, which are listed on the Consolidated Statements of Operations:

Three months ended September 30,				Nine months ended September 30,
2016		2015		2016		2015
$	2,808,402	$	1,688,347	$	7,688,470	$	4,114,752

The Manager utilizes its own and its affiliates' personnel to accomplish certain tasks related to raising capital that would typically be performed by third parties, including, but not limited to, legal and marketing functions. As permitted under the Management Agreement, the Manager was reimbursed $356,752 and $708,547 for the nine-month periods ended September 30, 2016 and 2015, respectively.

Preferred Capital Securities, LLC, a broker-dealer owned by NELL Partners, Inc., was reimbursed $768,869 for these same costs for the nine-month period ended September 30, 2016. These costs are recorded as deferred offering costs until such time as additional closings occur on the Follow-on Offering, the New Follow-on Series A Offering, or the Shelf Offering, at which time they are reclassified on a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.

The Company's Haven West, Haven 12, Stadium Village, 18 Nineteen, Haven South, Haven46, Haven Northgate and Lubbock II real estate loans and the Haven Campus Communities' line of credit are supported in part by guaranties of repayment and performance by John A. Williams, Jr., our Chief Executive Officer's son, a principal of the borrowers and a related party of the Company under GAAP.

In addition to the fees described above, the Management Agreement also entitles the Manager to other potential fees, including a disposition fee of 1% of the sale price of a real estate asset. The Manager earned a disposition fee of $390,000 on the sale of the Trail Creek property, which is included net in the Gain on sale of real estate, net of disposition expenses line on the Consolidated Statements of Operations. The Manager also receives leasing commission fees. Retail leasing commission fees (a) for new retail leases are equal to the greater of (i) $4.00 per square foot, and (ii) 4.0% of the aggregate base rental payments to be made by the tenant for the first 10 years of the original lease term; and (b) for lease renewals are equal to the greater of (i) $2.00 per square foot, and (ii) 2.0% of the aggregate base rental payments to be made by the tenant for the first 10 years of the newly renewed lease term. There are no commissions payable on retail lease renewals thereafter. Office leasing commission fees (a) for new office leases are equal to 50% of the first month’s gross rent plus 2% of the remaining fixed gross rent on the guaranteed lease term, (b) in the event of co-broker participation in a new lease, the leasing commission determined for a new lease are equal to 150% of the first month’s gross rent plus 6% of the remaining fixed gross rent of the guaranteed lease term, and (c) for lease renewals, are equal to 2% of the fixed gross rent of the guaranteed lease term or, in the event of a co-broker, 6% of the fixed gross rent of the guaranteed lease term. Office leasing commission fees may not exceed market rates for office leasing services. The Manager earned approximately $17,000 and $47,000 in leasing commission fees for the three-month and nine-month periods ended September 30, 2016, respectively. No leasing commission fees were earned by the Manager for the three-month and nine-month periods ended September 30, 2015.

The Company holds a promissory note in the amount of $1,140,647 due from Preferred Capital Marketing Services, LLC, which is a wholly-owned subsidiary of NELL Partners.

The Company has extended a revolving line of credit with a maximum borrowing amount of $15.0 million to its Manager.

8. Dividends and Distributions

The Company declares and pays monthly cash dividend distributions on its Series A Preferred Stock in the amount of $5.00 per share per month, prorated for partial months at issuance as necessary. The Company's cash distributions on its Series A Preferred Stock were:

28

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

2016				2015
Record date	Number of shares	Aggregate dividends declared		Record date	Number of shares	Aggregate dividends declared
January 30, 2016	482,774	$	2,481,086	January 30, 2015	192,607	$	984,217
February 27, 2016	516,017	2,630,601		February 27, 2015	206,007	1,047,189
March 31, 2016	544,129	2,770,048		March 31, 2015	223,699	1,141,491
April 29, 2016	582,720	2,979,196		April 30, 2015	243,570	1,244,249
May 31, 2016	617,994	3,143,567		May 29, 2015	267,273	1,366,207
June 30, 2016	651,439	3,321,519		June 30, 2015	288,392	1,480,101
July 29, 2016	682,392	3,458,513		July 31, 2015	311,944	1,588,310
August 31, 2016	721,143	3,671,020		August 31, 2015	334,013	1,701,019
September 30, 2016	765,185	3,886,173		September 30, 2015	358,687	1,824,797
	Total	$	28,341,723		Total	$	12,377,580

The Company's dividend activity on its Common Stock for the nine-month periods ended September 30, 2016 and 2015 was:

2016						2015
Record date	Number of shares	Dividend per share		Aggregate dividends paid		Record date	Number of shares	Dividend per share		Aggregate dividends paid
March 15, 2016	23,041,502	$	0.1925	$	4,435,489	March 13, 2015	22,004,309	$	0.175	$	3,850,754
June 15, 2016	23,568,328	0.2025		4,772,587		June 15, 2015	22,290,677	0.18		4,012,322
September 15, 2016	24,652,041	0.2025		4,992,038		September 15, 2015	22,323,604	0.18		4,018,249
		$	0.5975	$	14,200,114			$	0.535	$	11,881,325

The holders of Class A Units of the Operating Partnership are entitled to equivalent distributions as those declared on the Common Stock. At September 30, 2016, the Company had 886,168 Class A Units outstanding, which are exchangeable on a one-for-one basis for shares of Common Stock or the equivalent amount of cash. Distribution activity by the Operating Partnership was:

2016				2015
Declaration date	Payment date	Aggregate distributions		Declaration date	Payment date	Aggregate distributions
February 4, 2016	April 15, 2016	$	117,395	February 5, 2015	April 22, 2015	$	49,063
May 5, 2016	July 15, 2016	179,449		April 29, 2015	July 15, 2015	50,465
August 4, 2016	October 14, 2016	179,449		August 6, 2015	October 21, 2015	49,779
		$	476,293			$	149,307

9. Equity Compensation

Stock Incentive Plan

On February 25, 2011, the Company’s board of directors adopted, and the Company’s stockholders approved, the Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan to incentivize, compensate and retain eligible officers, consultants, and non-employee directors. On May 7, 2015, the Company's stockholders approved the third amendment to the Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan, or, as amended, the 2011 Plan, which amendment increased the aggregate number of shares of Common Stock authorized for issuance under the 2011 Plan from 1,317,500 to 2,617,500 and extended the expiration date of the 2011 Plan to December 31, 2019.

29

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

Equity compensation expense by award type for the Company was:

	Three months ended September 30,				Nine months ended September 30,				Unamortized expense as of September 30,
	2016		2015		2016		2015		2016
Quarterly board member committee fee grants	$	18,030	$	18,018	$	48,021	$	41,917	$	—
Class B Unit awards:
Executive officers - 2014	—		—		—		3,825		—
Executive officers - 2015	—		495,399		5,236		1,474,872		—
Executive officers - 2016	517,884		—		1,536,946		—		1,130,342
Restricted stock grants:
2014	—		—		—		107,321		—
2015	—		80,000		106,670		133,333		—
2016	102,500		—		170,833		—		239,166
Total	$	638,414	$	593,417	$	1,867,706	$	1,761,268	$	1,369,508

Restricted Stock Grants

On May 5, 2016, the Company granted a total of 30,990 shares of restricted Common Stock to its independent board members, in payment of their annual retainer fees. The per-share fair value was $13.23 and total compensation cost in the amount of $409,998 will be recognized over the four consecutive 90-day periods following the date of grant. The shares granted vested on a pro-rata basis over these same four periods.

On May 7, 2015, the Company granted a total of 30,133 shares of restricted Common Stock to its independent board members, in payment of their annual retainer fees. The per-share fair value was $10.62 and total compensation cost in the amount of $320,012 was recognized over the four consecutive 90-day periods following the date of grant. The shares granted vested on a pro-rata basis over these same four periods.

Directors’ Stock Grants

The Company grants shares of Common Stock to its independent board members in payment of their meeting fees. The total compensation cost of these immediate-vesting awards was recorded in full at the grant dates and the fair values were based upon the closing prices of the Common Stock on the trading days immediately preceding the dates of grant. Details concerning these grants were:

Grant date	Total number of shares granted	Fair value per share		Total fair value
8/4/2016	834	$	14.44	12,042
8/3/2016	417	$	14.36	$	5,988
5/4/2016	474	$	12.62	$	5,982
3/4/2016	474	$	12.68	$	6,010
2/4/2016	1,485	$	12.12	$	17,998
8/6/2015	1,647	$	10.94	$	18,018
5/7/2015	564	$	10.62	$	5,990
2/5/2015	1,782	$	10.05	$	17,909

30

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

Class B Units

On January 2, 2014, the Company granted 239,556 Class B Units for service to be rendered during 2014. On January 2, 2015, the Company granted 285,997 Class B Units for service to be rendered during 2015. On January 4, 2016, the Company granted 265,931 Class B Units for service to be rendered during 2016, 2017, and 2018.

Prior to January 4, 2016, the Class B Units became Vested Class B Units at the Initial Valuation Date, which was generally one year from the date of grant. Beginning with the 2016 grant, certain Class B Units vest in three equal consecutive one-year tranches from the date of grant. For each grant, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested Class B Units become earned Class B Units and automatically convert into Class A Units of the Operating Partnership (as long as the capital accounts have achieved economic equivalence), which are henceforth entitled to distributions from the Operating Partnership and become exchangeable for Common Stock on a one-to-one basis at the option of the holder. Vested Class B Units may become Earned Class B Units on a pro-rata basis should the result of the market capitalization test be an increase of less than the target market threshold. Any Vested Class B Units that do not become Earned Class B Units on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested Class B Units become Earned Class B Units or are forfeited due to termination of continuous service as an officer of the Company due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested Class B Units to qualify to become fully Earned Class B Units.

Because of the market condition vesting requirement that determines the transition of the Vested Class B Units to Earned Class B Units, a Monte Carlo simulation was utilized to calculate the total fair values, which will be amortized as compensation expense over the one-year periods beginning on the grant dates through the Initial Valuation Dates. On January 2, 2015, the 239,556 outstanding Class B Units for 2014 became fully vested and earned and automatically converted to Class A Units of the Operating Partnership. On January 2, 2016, the 285,997 outstanding Class B Units for 2015 became fully vested and earned and automatically converted to Class A Units of the Operating Partnership.

The underlying valuation assumptions and results for the Class B Unit awards were:

Grant dates	1/4/2016			1/2/2015
Stock price	$	12.88		$	9.21
Dividend yield	5.98		%	7.60		%
Expected volatility	26.10		%	30.13		%
Risk-free interest rate	2.81		%	2.55		%
Number of Units granted:
One year vesting period	176,835			285,997
Three year vesting period	89,096			—
	265,931			285,997
Calculated fair value per Unit	$	10.03		$	6.81
Total fair value of Units	$	2,667,288		$	1,947,640
Target market threshold increase	$	3,549,000		$	2,629,000

The expected dividend yield assumptions were derived from the Company’s closing prices of the Common Stock on the grant dates and the projected future quarterly dividend payments per share of $0.1925 for the 2016 awards, $0.1925 for the 2015 awards and $0.16 for the 2014 awards.

Since the Company had a limited amount of operating history in the public equity market, the expected volatility assumptions for the 2014 and 2015 awards were derived from the observed historical volatility of the common stock prices of a select group of peer companies within the REIT industry that most closely approximated the Company’s size, capitalization, leverage, line of business and geographic focus markets. For the 2016 awards, the Company's own stock price volatility was utilized as the basis for deriving this assumption.

31

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

The risk-free rate assumptions were obtained from the Federal Reserve yield table and were calculated as the interpolated rate between the 20 and 30 year yield percentages on U. S. Treasury securities on the grant dates.

Since the Class B Units have no expiration date, a derived service period of one year was utilized, which equals the period of time from the grant date to the initial valuation date.

10. Indebtedness

Mortgage Notes Payable

The following table presents certain details regarding our mortgage notes payable:

		Principal balance as of								Interest only through date (2)
	Acquisition/ refinancing date	September 30, 2016		December 31, 2015		Maturity date	Interest rate (1)
Trail Creek	6/25/2013	$	—	$	28,109,000	7/1/2020	4.22	%		7/1/2020
Stone Rise	7/3/2014	24,620,298		25,014,250		8/1/2019	2.89	%		8/31/2015
Summit Crossing	4/21/2011	20,120,677		20,366,748		5/1/2018	4.71	%		5/31/2014
Summit Crossing secondary financing	8/28/2014	5,080,441		5,145,250		9/1/2019	4.39	%		N/A
Summit II	3/20/2014	13,357,000		13,357,000		4/1/2021	4.49	%		4/30/2019
Ashford Park	1/24/2013	25,626,000		25,626,000		2/1/2020	3.13	%		2/28/2018
Ashford Park secondary financing	8/28/2014	6,434,397		6,520,564		2/1/2020	4.13	%		N/A
McNeil Ranch	1/24/2013	13,646,000		13,646,000		2/1/2020	3.13	%		2/28/2018
Lake Cameron	1/24/2013	19,773,000		19,773,000		2/1/2020	3.13	%		2/28/2018
Enclave	9/26/2014	24,862,000		24,862,000		10/1/2021	3.68	%		10/31/2017
Sandstone	9/26/2014	31,063,707		31,556,664		10/1/2019	3.18	%		N/A
Stoneridge	9/26/2014	26,876,044		27,302,546		10/1/2019	3.18	%		N/A
Vineyards	9/26/2014	34,775,000		34,775,000		10/1/2021	3.68	%		10/31/2017
Spring Hill Plaza	9/5/2014	9,721,902		9,868,025		10/1/2019	3.36	%		10/31/2015
Parkway Town Centre	9/5/2014	7,070,474		7,176,745		10/1/2019	3.36	%		10/31/2015
Woodstock Crossing	8/8/2014	3,054,374		3,090,953		9/1/2021	4.71	%		N/A
Deltona Landings	9/30/2014	6,965,841		7,074,722		10/1/2019	3.48	%		N/A
Powder Springs	9/30/2014	7,350,163		7,465,051		10/1/2019	3.48	%		N/A
Kingwood Glen	9/30/2014	11,654,573		11,836,741		10/1/2019	3.48	%		N/A
Barclay Crossing	9/30/2014	6,552,695		6,655,117		10/1/2019	3.48	%		N/A
Sweetgrass Corner	9/30/2014	7,941,564		8,063,653		10/1/2019	3.58	%		N/A
Parkway Centre	9/30/2014	4,563,827		4,635,162		10/1/2019	3.48	%		N/A
Salem Cove	10/6/2014	9,600,000		9,600,000		11/1/2024	4.21	%		11/30/2016
Avenues at Cypress	2/13/2015	22,249,173		22,578,863		9/1/2022	3.43	%		N/A
Avenues at Northpointe	2/13/2015	27,878,000		27,878,000		3/1/2022	3.16	%		3/31/2017
Lakewood Ranch	5/21/2015	30,098,400		30,528,618		12/1/2022	3.55	%		N/A
Aster Lely	6/24/2015	33,279,524		33,746,379		7/5/2022	3.84	%		N/A
CityPark View	6/30/2015	21,600,300		21,924,060		7/1/2022	3.27	%		N/A
Avenues at Creekside	7/31/2015	41,556,147		41,625,000		8/1/2024	2.13	%	(3)	8/31/2016
Citi Lakes	9/3/2015	43,553,746		44,282,826		4/1/2023	2.70	%	(4)	N/A
Independence Square	8/27/2015	12,267,378		12,617,500		9/1/2022	3.93	%		9/30/2016
Royal Lakes Marketplace	9/4/2015	9,800,000		9,800,000		9/4/2020	3.02	%	(5)	4/3/2017
Stone Creek	11/12/2015	16,572,690		16,792,850		10/1/2046	3.75	%		N/A
Lenox Village Town Center	12/21/2015	30,890,483		31,394,460		5/1/2019	3.82	%		N/A
Lenox Village III	12/21/2015	18,205,087		18,410,000		1/1/2023	4.04	%		N/A
The Overlook at Hamilton Place	12/22/2015	20,763,152		21,000,000		1/1/2026	4.19	%		N/A
Summit Point	10/30/2015	12,629,516		12,846,544		11/1/2022	3.57	%		N/A
(Table continued on next page)

32

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

(Continued from previous page)
		Principal balance as of								Interest only through date (2)
	Acquisition/ refinancing date	September 30, 2016		December 31, 2015		Maturity date	Interest rate (1)
Overton Rise	2/1/2016	40,891,434		—		8/1/2026	3.98	%		N/A
Baldwin Park	1/5/2016	73,910,000		—		1/5/2019	2.43	%	(6)	1/5/2019
Baldwin Park (second)	1/5/2016	3,890,000		—		1/5/2019	10.43	%	(7)	1/5/2019
Crosstown Walk	1/15/2016	32,213,176		—		2/1/2023	3.90	%		N/A
East Gate Shopping Center	4/29/2016	5,754,454		—		5/1/2026	3.97	%		N/A
Fury's Ferry	4/29/2016	6,647,386		—		5/1/2026	3.97	%		N/A
Rosewood Shopping Center	4/29/2016	4,464,662		—		5/1/2026	3.97	%		N/A
Southgate Village	4/29/2016	7,937,178		—		5/1/2026	3.97	%		N/A
The Market at Victory Village	5/16/2016	9,250,000		—		9/11/2024	4.40	%		10/10/2017
Avalon Park	5/31/2016	61,750,000		—		6/5/2019	2.53	%	(8)	N/A
Avalon Park B Note	5/31/2016	3,250,000		—		6/5/2019	11.53	%	(9)	N/A
Wade Green Village	4/7/2016	8,152,504		—		5/1/2026	4.00	%		N/A
North by Northwest	6/1/2016	33,679,285		—		9/1/2022	4.02	%		N/A
City Vista	7/1/2016	35,897,408		—		7/1/2026	3.68	%		N/A
Lakeland Plaza	7/15/2016	29,940,373		—		8/1/2026	3.85	%		N/A
Sorrel	8/24/2016	33,600,000		—		9/1/2023	3.44	%		N/A
Brookwood Office	8/29/2016	32,400,000		—		9/10/2031	3.52	%		9/10/17
University Palms	8/8/2016	13,600,000		—		9/1/2026	3.45	%		N/A
Cherokee Plaza	8/8/2016	26,200,000		—		9/1/2021	2.77	%	(10)	N/A
Sandy Plains Exchange	8/8/2016	9,500,000		—		9/1/2026	3.45	%		N/A
Thompson Bridge Commons	8/8/2016	12,700,000		—		9/1/2026	3.45	%		N/A
Heritage Station	8/8/2016	9,400,000		—		9/1/2026	3.45	%		N/A
Oak Park Village	8/8/2016	9,700,000		—		9/1/2026	3.45	%		N/A
Shoppes of Parkland	8/8/2016	16,554,000		—		9/1/2023	4.67	%		N/A
Total		$	1,183,335,433	$	696,945,291
(1) Interest accrues at a fixed rate, except where indicated.
(2) Following the indicated interest only period (where applicable), monthly payments of accrued interest and principal are based on a 25 to 30-year amortization period through the maturity date.
(3)  The mortgage instrument was assumed as part of the sales transaction; It accrues interest at a variable rate which consists of the one-month London Interbank Offered Rate, or 1 Month LIBOR, plus 160 basis points. The 1 Month LIBOR index is capped at 5.0%.
(4)  Variable rate which consists of 1 Month LIBOR plus 217 basis points. The 1 Month LIBOR index is capped at 4.33%.
(5) Variable rate which consisted of 1 Month LIBOR plus 250 basis points.
(6) Variable rate which consisted of 1 Month LIBOR plus 190 basis points.
(7) Variable rate which consisted of 1 Month LIBOR plus 990 basis points.
(8) Variable rate which consisted of 1 Month LIBOR plus 200 basis points.
(9) Variable rate which consisted of 1 Month LIBOR plus 1100 basis points.
(10) Variable rate which consisted of 1 Month LIBOR plus 225 basis points. The interest rate has a floor of 2.7%.

The mortgage note secured by our Independence Square property is a seven year term with an anticipated repayment date of September 1, 2022. If the Company elects not to pay its principal balance at the anticipated repayment date, the term will be extended for an additional five years, maturing on September 1, 2027. The interest rate from September 1, 2022 to September 1, 2027 will be the greater of (i) the Initial Interest Rate of 3.93% plus 200 basis points or (ii) the yield on the seven year U.S. treasury security rate plus approximately 400 basis points.

The mortgage note secured by our Royal Lakes Marketplace property has a maximum commitment of $11,050,000. As of September 30, 2016, the Company has an outstanding principal balance of $9.8 million on this loan. Additional advances of the mortgage commitment will be drawn as the Company achieves incremental leasing benchmarks specified under the loan agreement. This mortgage has a variable interest of LIBOR plus 250 basis points, which was 3.02% as of September 30, 2016.

The Company has placed interest rate caps on the variable rate mortgages on its Avenues at Creekside and Citi Lakes multifamily communities. Under guidance provided by ASC 815-10, these interest rate caps fall under the definition of derivatives, which are embedded in their debt hosts. Because these interest rate caps are deemed to be clearly and closely related to their debt hosts, bifurcation and fair value accounting treatment is not required.

33

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

As of September 30, 2016, the weighted-average remaining life of deferred loan costs related to the Company's mortgage indebtedness was approximately 6.3 years.

Credit Facility

The Company has a credit facility, or Credit Facility, with Key Bank National Association, or Key Bank, which defines a revolving line of credit, or Revolving Line of Credit, which is used to fund investments, capital expenditures, dividends (with consent of Key Bank), working capital and other general corporate purposes on an as needed basis. The maximum borrowing capacity on the Revolving Line of Credit was $70.0 million, pursuant to the Third Amended and Restated Credit Agreement and accrued interest at a rate equal to LIBOR plus 3.25% per annum. On August 5, 2016, the Company entered into a Fourth Amended and Restated Credit Agreement with Key Bank and the other lenders, or the Fourth Amended and Restated Credit Agreement, that (i) increased the borrowing capacity under our Revolving Line of Credit from $70.0 million to $135.0 million with the ability to further increase it to $300.0 million,subject to certain syndication and other requirements and (ii) extended the maturity date to August 5, 2019, with an option, subject to certain conditions described therein, to extend the maturity date to August 5, 2020.

Also on February 12, 2015, the Company entered into a $32.0 million term loan with Key Bank under the Credit Facility, or the Term Loan, to partially finance the acquisition of two multifamily communities in Houston, Texas. The Term Loan accrued interest at a rate of LIBOR plus 4.0% per annum until it was repaid in full on May 12, 2015.

On January 5, 2016, the Company entered into a $35.0 million term loan with Key Bank under the Credit Facility, or the 2016 Term Loan, to partially finance the acquisition of the Baldwin Park multifamily community. On August 5, 2016, the Company repaid the 2016 Term Loan. On May 26, 2016, the Company entered into a $11.0 million interim term loan with Key Bank, or the Interim Term Loan, to partially finance the acquisition of Anderson Central, a retail shopping center located in Anderson, South Carolina.  The Interim Term Loan accrues interest at a rate of LIBOR plus 2.5% per annum and the maturity date is May 25, 2017.

The Credit Facility contains certain affirmative and negative covenants, including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The amount of dividends that may be paid out by the Company is restricted to a maximum of 95% of Adjusted Funds From Operations, or AFFO, for the trailing rolling four quarters without the lender's consent; solely for purposes of this covenant, AFFO is calculated as earnings before interest, taxes, depreciation and amortization expense, plus reserves for capital expenditures, less normally recurring capital expenditures, less consolidated interest expense.

As of September 30, 2016, the Company was in compliance with all covenants related to the Credit Facility, as shown in the following table:

Covenant (1)	Requirement		Result
Net worth	Minimum $686,921,700	(2)	$	784,749,240
Debt yield	Minimum 8.0%		8.37		%
Payout ratio	Maximum 95%	(3)	81.9		%
Total leverage ratio	Maximum 65.0%		61.1		%
Debt service coverage ratio	Minimum 1.50x		2.25x

⁽¹⁾ All covenants are as defined in the current credit agreement for the Credit Facility.

⁽²⁾ Minimum $686.9 million plus 75% of the net proceeds of any equity offering, which totaled approximately $745.5 million as of September 30, 2016.

⁽³⁾Calculated on a trailing four-quarter basis. For the twelve-month period ended September 30, 2016, the maximum dividends and distributions allowed under this covenant was approximately $62.4 million.

Loan fees and closing costs for the establishment and subsequent amendments of the Revolving Line of Credit, the 2016 Term Loan, as well as the mortgage debt on the Company's multifamily communities, are amortized using the straight-line method, which approximates the effective interest method over the lives of the loans. At September 30, 2016, aggregate unamortized loan costs for the Revolving Line of Credit were $1.9 million, which will be amortized over the remaining life of the Revolving Line of Credit. The weighted average interest rate for the Credit Facility was approximately 4.0% for the nine-month period ended September 30, 2016. The Revolving Line of Credit also bears a commitment fee on the average daily unused portion of the Credit Facility of 0.20% or 0.30% per annum, based on the amount borrowed as a percentage of the total commitment.

34

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

Future Principal Payments

The Company’s estimated future principal payments due on its debt instruments as of September 30, 2016 were:

Period	Future principal payments
2016	$	97,231,643
2017	18,629,724
2018	41,224,611
2019	332,587,612
2020	89,708,642
thereafter	696,953,201
Total	$	1,276,335,433

11. Income Taxes

The Company elected to be taxed as a REIT effective with its tax year ended December 31, 2011, and therefore, the Company generally will not be subject to federal and state income taxes after this effective date, so long as it distributes 100% of the Company's annual REIT taxable income to its shareholders. For the period preceding this election date, the Company's operations resulted in a tax loss. As of December 31, 2010, the Company had deferred federal and state tax assets totaling approximately $298,100, none of which were based upon tax positions deemed to be uncertain. These deferred tax assets will most likely not be used since the Company elected REIT status; therefore, management has determined that a 100% valuation allowance is appropriate for the three-month and nine-month periods ended September 30, 2016 and 2015.

12. Commitments and Contingencies

On March 28, 2014, the Company entered into a payment guaranty in support of its Manager's new eleven-year office lease, which began on October 9, 2014. At September 30, 2016, the amount guarantied by the Company was $6.4 million. The amount of the guaranty is reduced by $555,000 per lease year over the term of the lease.

Certain officers and employees of the Manager have been assigned company credit cards. The Company has guarantied up to $405,000 on these credit cards. See note 17.

A total of approximately $3.6 million of combined asset management and general and administrative expense fees related to the acquired properties as of September 30, 2016 have been deemed contingent by the Manager. The Company will recognize any contingent fees in future periods to the extent, if any, it determines that it is probable that the estimated net sale proceeds would exceed the allocable capital contributions for the asset plus a 7% priority annualreturn on the asset.

At September 30, 2016, the Company had unfunded balances on its real estate loan portfolio of approximately $54.4 million.

The Company is otherwise currently subject to neither any known material commitments or contingencies from its business operations, nor any material known or threatened litigation.

13. Segment Information

The Company's Chief Operating Decision Maker, or CODM, evaluates the performance of the Company's business operations and allocates financial and other resources by assessing the financial results and outlook for future performance across four distinct segments: multifamily communities, real estate related financing, New Market Properties, and office building.

Multifamily Communities - consists of the Company's portfolio of owned residential multifamily communities, including its owned student housing community and the Lenox Portfolio, which includes 47,600 square feet of ground floor retail gross leasable area.

35

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

Financing - consists of the Company's investment portfolio of real estate loans, bridge loans, and other instruments deployed by the Company to partially finance the development, construction, and prestabilization carrying costs of new multifamily communities and other real estate and real estate related assets. Excluded from the financing segment are financial results of the Company's Dawson Marketplace real estate loan.

New Market Properties - consists of the Company's portfolio of owned grocery-anchored shopping centers, which are owned by New Market Properties, LLC, a wholly-owned subsidiary of the Company, as well as the financial results from the Company's Dawson Marketplace real estate loan.

Office Building - consists of the Company's Class A office building located in Birmingham, Alabama.

The CODM monitors net operating income (“NOI”) on a segment and a consolidated basis as a key performance measure for its operating segments. NOI is defined as rental and other property revenue from real estate assets plus interest income from its financing segment less total property operating and maintenance expenses, property management fees, real estate taxes, property insurance, and general and administrative expenses. The CODM uses NOI as a measure of operating performance because it provides a measure of the core operations, rather than factoring in depreciation and amortization, financing costs, acquisition expenses, and other expenses generally incurred at the corporate level.  

The following tables present the Company's assets, revenues, and NOI results by reportable segment, as well as a reconciliation from NOI to net income (loss). The assets attributable to 'Other' primarily consist of  deferred offering costs recorded but not yet reclassified as reductions of stockholders' equity and cash balances at the Company and Operating Partnership levels.

	September 30, 2016		December 31, 2015
Assets:
Multifamily communities	$	1,182,652,596	$	781,224,019
Financing	345,622,541		272,454,610
New Market Properties	533,156,727		229,461,573
Office building	52,187,657		—
Other	9,917,549		12,388,831
Consolidated assets	$	2,123,537,070	$	1,295,529,033

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Revenues
Multifamily communities	$	32,254,954	$	18,624,534	$	87,941,541	$	44,714,185
Financing	10,575,595		7,822,002		29,957,116		21,266,174
New Market Properties	10,193,843		3,509,157		22,715,460		9,408,676
Office building	512,945		—		512,945		—
Consolidated revenues	$	53,537,337	$	29,955,693	$	141,127,062	$	75,389,035
Capitalized expenditures (1)
Multifamily communities	$	2,674,743	$	1,156,136	$	6,762,650	$	2,737,108
New Market Properties	565,010		326,499		1,679,766		1,008,023
Total capitalized expenditures	$	3,239,753	$	1,482,635	$	8,442,416	$	3,745,131
(1) Excluding the purchase price of acquisitions and including construction in progress.

36

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Segment net operating income (Segment NOI)
Multifamily communities	$	18,413,797		$	10,517,036		$	48,169,241		$	24,585,670
Financing	10,575,595			7,822,002			29,957,116			21,266,174
New Market Properties	7,795,476			2,605,528			17,048,716			6,662,181
Office building	373,454			—			373,454			—
Consolidated segment net operating income	37,158,322			20,944,566			95,548,527			52,514,025
Interest expense:
Multifamily communities	7,852,145			4,253,524			21,006,486			10,403,085
New Market Properties	2,615,924			844,472			5,588,947			2,391,479
Financing	1,632,424			720,764			3,959,391			2,089,779
Office building	133,681			—			133,681			—
	12,234,174			5,818,760			30,688,505			14,884,343
Depreciation and amortization:
Multifamily communities	16,028,880			8,719,852			42,800,401			21,526,901
New Market Properties	5,452,490			1,816,634			11,997,670			4,882,862
Office building	182,993			—			182,993			—
	21,664,363			10,536,486			54,981,064			26,409,763
Professional fees	593,623			577,579			2,176,510			1,249,947
Management fees, net of deferrals	3,022,124			1,535,382			8,025,916			3,302,109
Acquisition costs:
Multifamily communities	601,033			2,543,159			4,645,530			5,335,149
New Market Properties	396,679			781,799			1,856,933			941,514
Office building	359,825			—			383,401			—
	1,357,537			3,324,958			6,885,864			6,276,663
Equity compensation to directors and executives:
New Market Properties	20,356			72,071			60,289			213,912
Other	618,058			521,346			1,807,417			1,547,356
	638,414			593,417			1,867,706			1,761,268
Gain on sale of real estate	—			—			4,271,506			—
Other	336,707			255,751			1,055,099			671,792
Net income (loss)	$	(2,688,620	)	$	(1,697,767	)	$	(5,860,631	)	$	(2,041,860	)

37

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

14. Income (Loss) Per Share

The following is a reconciliation of weighted average basic and diluted shares outstanding used in the calculation of income (loss) per share of Common Stock:

		Three months ended September 30,						Nine months ended September 30,
		2016			2015			2016			2015
Numerator:
	Net income (loss)	$	(2,688,620	)	$	(1,697,767	)	$	(5,860,631	)	$	(2,041,860	)
	Net (income) loss attributable to non-controlling interests	86,484			15,289			175,045			20,712
	Net income (loss) attributable to the Company	(2,602,136		)	(1,682,478		)	(5,685,586		)	(2,021,148		)
	Dividends declared to Series A preferred stockholders (A)	(11,015,706		)	(5,114,126		)	(28,341,723		)	(12,377,580		)
	Earnings attributable to unvested restricted stock (B)	(6,159		)	(4,068		)	(12,434		)	(16,355		)
	Net loss available to common stockholders	$	(13,624,001	)	$	(6,800,672	)	$	(34,039,743	)	$	(14,415,083	)
Denominator:
	Weighted average number of shares of Common Stock - basic	24,340,791			22,292,217			23,552,951			22,109,036
	Effect of dilutive securities: (C)
	Warrants	—			—			—			—
	Class B Units	—			—			—			—
	Unvested restricted stock	—			—			—			—
	Weighted average number of shares of Common Stock - diluted	24,340,791			22,292,217			23,552,951			22,109,036
	Net loss per share of Common Stock
	available to common stockholders:
	Basic and diluted	$	(0.56	)	$	(0.31	)	$	(1.45	)	$	(0.65	)

^(A) The Company’s shares of Series A Preferred Stock outstanding accrue dividends at an annual rate of 6% of the stated value of $1,000 per share, payable monthly. The Company had 802,032 and 384,112 outstanding shares of Series A Preferred Stock at September 30, 2016, and 2015, respectively.

^(B) The Company's outstanding unvested restricted share awards (23,247 and 22,602 shares of Common Stock at September 30, 2016, and 2015, respectively) contain non-forfeitable rights to distributions or distribution equivalents. The impact of the unvested restricted share awards on earnings per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted share awards based on dividends declared and the unvested restricted shares' participation rights in undistributed earnings. Given the Company incurred net losses attributable to common stockholders for each of the three-month and nine-month periods ended September 30, 2016 and 2015, the dividends declared for that period are adjusted in determining the calculation of loss per share of Common Stock since the unvested restricted share awards are defined as participating securities.

^(C) Potential dilution from warrants outstanding at September 30, 2016 and September 30, 2015 from issuances of Units that are potentially exercisable into 14,056,460 and 7,607,520 shares of Common Stock respectively, are excluded from the diluted shares calculations because the effect was antidilutive. Class A Units were excluded from the denominator because earnings were allocated to non-controlling interests in the calculation of the numerator.

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Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

15. Pro Forma Financial Information (unaudited)

The Company’s condensed pro forma financial results assume the following acquisitions were hypothetically completed on the following dates, as shown below:

	Hypothetical acquisition date
Lenox Portfolio	1/1/2014
Stone Creek	1/1/2014
Citi Lakes	12/1/2014
Avenues at Creekside	1/1/2014
CityPark View	1/1/2014
Aster at Lely	1/1/2014
Venue at Lakewood Ranch	9/1/2014
Houston Portfolio	2/1/2014
The Overlook at Hamilton Place	1/1/2014
Summit Point	1/1/2014
Royal Lakes Marketplace	1/1/2014
Independence Square	1/1/2014
Overton Rise	1/1/2015
Baldwin Park	1/1/2015
Crosstown Walk	1/1/2015
Wade Green Village	1/1/2015
Southeastern 6 Portfolio	1/1/2015
Avalon Park	1/1/2015
North by Northwest	1/1/2015
The Market at Victory Village	1/1/2015
City Vista	1/1/2015
Lakeland Plaza	1/1/2015
Sorrel	1/1/2015
Brookwood Office	1/1/2015
University Palms	1/1/2015
Cherokee Plaza	1/1/2015
Sandy Plains Exchange	1/1/2015
Thompson Bridge Commons	1/1/2015
Heritage Station	1/1/2015
Oak Park Village	1/1/2015
Shoppes of Parkland	1/1/2015

39

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

		Three months ended September 30,						Nine months ended September 30,
		2016			2015			2016			2015
Pro forma:
	Revenues	$	56,305,235		$	52,440,197		$	167,230,831		$	149,371,941
	Net income (loss)	$	2,634,574		$	(7,583,116	)	$	3,586,801		$	(31,388,770	)
	Net income (loss) attributable to the Company	$	2,536,343		$	(7,365,660	)	$	3,419,840		$	(30,309,018	)
	Net loss attributable to common stockholders	$	(8,485,522	)	$	(12,483,854	)	$	(24,934,317	)	$	(42,702,953	)
	Net loss per share of Common Stock
	attributable to common stockholders,
	Basic and diluted	$	(0.35	)	$	(0.56	)	$	(1.06	)	$	(1.89	)
	Weighted average number of shares of
	Common Stock outstanding, basic and diluted	24,340,791			22,292,217			23,552,951			22,570,222

These pro forma operating results include aggregate nonrecurring adjustments to combined acquisition costs and acquisition fees of reductions of approximately $1.7 million and $3.2 million for the three-month periods ended September 30, 2016 and 2015, respectively, and reductions of approximately $6.8 million and $5.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively.

These pro forma results are not necessarily indicative of what historical performance would have been had these business combinations been effective as of the hypothetical acquisition dates listed above, nor should they be interpreted as expectations of future results.

16. Fair Values of Financial Instruments

Fair value is defined as the price at which an asset or liability is exchanged between market participants in an orderly transaction at the reporting date. The Company’s cash equivalents, notes receivable, accounts receivable and payables and accrued expenses all approximate fair value due to their short term nature.

The following tables provide estimated fair values of the Company’s financial instruments. The carrying values of the Company's real estate loans include accrued interest receivable from additional interest or exit fee provisions and are presented net of deferred loan fee revenue, where applicable.

	As of September 30, 2016
	Carrying value				Fair value measurements using fair value hierarchy
			Fair Value		Level 1		Level 2		Level 3
Financial assets:
Real estate loans (1)	$	305,407,486	$	342,775,296	$	—	$	—	$	342,775,296
Notes and line of credit receivable	35,328,412		35,328,412		—		—		35,328,412
	$	340,735,898	$	378,103,708	$	—	$	—	$	378,103,708
Financial liabilities:
Mortgage notes payable (2)	$	1,183,335,433	$	1,197,997,866	$	—	$	—	$	1,197,997,866
Revolving credit facility	82,000,000		82,000,000		—		—		82,000,000
Term loan	11,000,000		11,000,000		—		—		11,000,000
Loan participation obligations	19,638,232		20,486,803		—		—		20,486,803
	$	1,295,973,665	$	1,311,484,669	$	—	$	—	$	1,311,484,669

40

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2016

	As of December 31, 2015
	Carrying value				Fair value measurements using fair value hierarchy
			Fair Value		Level 1		Level 2		Level 3
Financial assets:
Real estate loans (1)	$	252,296,406	$	267,383,427	$	—	$	—	$	267,383,427
Notes and line of credit receivable	37,943,733		37,943,733		—		—		37,943,733
	$	290,240,139	$	305,327,160	$	—	$	—	$	305,327,160
Financial liabilities:
Mortgage notes payable (2)	$	696,945,291	692,008,640		$	—	$	—	$	692,008,640
Revolving credit facility	34,500,000		34,500,000		—		—		34,500,000
Loan participation obligations	13,544,160		14,061,190		—		—		14,061,190
	$	744,989,451	$	740,569,830	$	—	$	—	$	740,569,830

⁽¹⁾ The carrying value of real estate assets includes the Company's balance of the Founders' Village, Palisades, Green Park, and Stadium Village real estate loans, as well as the amounts funded by unrelated participants. The loan participation obligations are the amounts due the participants under these arrangements. The carrying value of real estate loans includes accrued interest of approximately $17.7 million and $14.3 million as of September 30, 2016 and December 31, 2015, respectively.

⁽²⁾ The carrying value of mortgage notes payable consists of the principal amounts due reduced by any unamortized deferred loan issuance costs.

The fair value of the real estate loans within the level 3 hierarchy are comprised of estimates of the fair value of the notes, which were developed utilizing a discounted cash flow model over the remaining terms of the notes until their maturity dates and utilizing discount rates believed to approximate the market risk factor for notes of similar type and duration. The fair values also contain a separately-calculated estimate of any applicable exit fee or additional interest payment due the Company at the maturity date of the loan, based on the outstanding loan balances at September 30, 2016, discounted to the reporting date utilizing discount rates ranging between 10% and 12.5%.

The fair values of the fixed rate mortgages on the Company’s properties were developed using market quotes of the fixed rate yield index and spread for four, five, seven and 30 year notes as of the reporting date.The present values of the cash flows were calculated using the original interest rate in place on the fixed rate mortgages and again at the current market rate. The difference between the two results was applied as a fair market adjustment to the carrying value of the mortgages.

17. Subsequent Events

Between October 1, 2016 and October 31, 2016, the Company issued 29,419 Units and collected net proceeds of approximately $26.5 million after commissions and fees under its Follow-on Offering.

On October 18, 2016, the Company acquired a grocery-anchored shopping center with approximately 383,100 square feet of gross leasable area, located in the Houston, Texas market. The allocation of this transaction to the fair value of individual assets and liabilities is not presented as the calculations of the allocation were not complete at the date of filing of this Quarterly Report on Form 10-Q.

On October 25, 2016, Preferred Capital Securities, LLC issued certain of its employees credit cards which the Company has guarantied up to $200,000.

On November 3, 2016, the Company declared a Common Stock dividend of $0.22 per share for the fourth quarter 2016, which is payable on January 17, 2017, to common stockholders of record on December 15, 2016.

On November 4, 2016, the Company acquired an approximate 110,000 square foot office building in the Atlanta, Georgia area. The allocation of this transaction to the fair value of individual assets and liabilities is not presented as the calculations of the allocation were not complete at the date of filing of this Quarterly Report on Form 10-Q.

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Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

Significant Developments

During the first nine months of 2016, we acquired five multifamily communities located in Jacksonville, Orlando and Tampa, Florida and Atlanta, Georgia, representing 1,941 units and converted our City Vista real estate loan into an approximate 96% ownership interest in a joint venture which owns the underlying multifamily community located in Pittsburgh, Pennsylvania, adding another 272 units. We also acquired a 219-unit, 679-bed student housing community adjacent to the campus of Florida State University in Tallahassee, Florida. The aggregate purchase price of the acquired properties was approximately $416.9 million, including our investment in the joint venture of approximately $12.5 million. We also sold our Trail Creek multifamily community located in Hampton, Virginia. As of September 30, 2016, we owned 25 multifamily communities with 8,268 units, including one student housing community with 219 units.

In addition, we acquired a nine-story, 169,500 square foot class A office building located in Birmingham, Alabama and 16 grocery-anchored shopping centers located in throughout Texas and the Southeastern U.S., comprising approximately 1.6 million aggregate square feet of gross leasable area. As of September 30, 2016, we owned 30 grocery-anchored shopping centers with an approximate aggregate of 2,913,000 square feet of gross leasable area.

During the first nine months of 2016, we converted three bridge loans to real estate loans, with an aggregate loan commitment amount of approximately $87.2 million to partially finance a planned multifamily community to be located in Atlanta, Georgia and student housing projects located adjacent to the University of South Florida in Tampa, Florida and Texas A&M University in College Station, Texas. We also originated three new real estate investment loans and a member loan with an aggregate loan commitment amount of approximately $37.7 million in support of a planned second phase of our CityPark View multifamily community in Charlotte, North Carolina, a second phase of a student housing community adjacent to Texas Tech University in Lubbock, Texas and a multifamily community in Birmingham, Alabama. Also during the first nine months of 2016, we originated two land acquisition loans of an aggregate of $10.0 million in support of a mixed use project in Atlanta, Georgia and a multifamily community in Fort Myers, Florida.

As of September 30, 2016, our real estate loan portfolio consisted of 24 real estate loans and two bridge loan supporting 20 planned multifamily communities, including seven student housing projects and one planned retail center, with an aggregate commitment amount of approximately $361.4 million. There can be no assurance that we will acquire any of the assets under construction.

During the first nine months of 2016, we issued 323,278 Units and collected net proceeds of approximately $287.8 million from our Follow-On Offering.

Forward-looking Statements

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "goals," "guidance," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that 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. Such factors include, among others, the following:

•     our business and investment strategy;

•     our projected operating results;

• actions and initiatives of the U.S. Government and changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies;

•     the state of the U.S. economy generally or in specific geographic areas;

•     economic trends and economic recoveries;

• our ability to obtain and maintain financing arrangements, including through the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac;

•     financing and advance rates for our target assets;

•     our expected leverage;

•     changes in the values of our assets;

•     our expected portfolio of assets;

•     our expected investments;

•     interest rate mismatches between our target assets and our borrowings used to fund such investments;

•     changes in interest rates and the market value of our target assets;

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•     changes in prepayment rates on our target assets;

•     effects of hedging instruments on our target assets;

•     rates of default or decreased recovery rates on our target assets;

•     the degree to which our hedging strategies may or may not protect us from interest rate volatility;

•     impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

•     our ability to maintain our qualification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;

•     our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended;

•     availability of investment opportunities in mortgage-related and real estate-related investments and securities;

•     availability of qualified personnel;

•     estimates relating to our ability to make distributions to our stockholders in the future;

•     our understanding of our competition;

•     market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy;

• weakness in the national, regional and local economies, which could adversely impact consumer spending and retail sales and in turn tenant demand for space and could lead to increased store closings;

• changes in market rental rates;

• changes in demographics (including the number of households and average household income) surrounding our shopping centers;

• adverse financial conditions for grocery anchors and other retail, service, medical or restaurant tenants;

• continued consolidation in the retail and grocery sector;

• excess amount of retail space in our markets;

• reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;

• the growth of super-centers and warehouse club retailers, such as those operated by Wal-Mart and Costco, and their adverse effect on traditional grocery chains;

• our ability to aggregate a critical mass of grocery-anchored shopping centers or to spin-off, sell or distribute them;

• the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers; and

• consequences of any armed conflict involving, or terrorist attack against, the United States.

Forward-looking statements are found throughout "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, or SEC, we do not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The forward-looking statements should be read in light of the risk factors indicated in the section entitled "Risk Factors" in section 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and as may be supplemented by any amendments to our risk factors in our subsequent quarterly reports on Form 10-Q and other reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov.

General

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial position. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are an externally managed Maryland corporation formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States.As part of our business strategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make real estate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the construction of multifamily communities and other properties. As a secondary strategy, we may acquire or originate senior mortgage loans, subordinate loans or real estate loans secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest not more than 20% of our assets, subject to any temporary increase unanimously approved by our board of directors, in other real estate related investments such as grocery-anchored shopping centers, senior mortgage loans, subordinate loans or real estate loans secured by interests in grocery-anchored related assets, membership or partnership interests in grocery-anchored shopping centers and other grocery-anchored related assets as determined by our Manager as appropriate for us.

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We seek to generate returns for our stockholders by taking advantage of the current environment in the real estate market and the United States economy by acquiring multifamily assets and shopping centers in our targeted markets.  The current economic environment still provides many challenges for new development, which provides opportunity for current multifamily product to potentially enjoy stable occupancy rates and rising rental rates as the overall economy continues to grow.  As the real estate market and economy stabilize, we intend to employ efficient management techniques to grow income and create asset value.

As market conditions change over time, we intend to adjust our investment strategy to adapt to such changes as appropriate. We continue to believe there are abundant opportunities among our target assets that currently present attractive risk-return profiles. However, in order to capitalize on the investment opportunities that may be present in the various other points of an economic cycle, we may expand or change our investment strategy and target assets. We believe that the diversification of the portfolio of assets that we intend to acquire, our ability to acquire and manage our target assets, and the flexibility of our strategy will position us to generate attractive total returns for our stockholders in a variety of market conditions.

We elected to be taxed as a REIT under the Code effective with our tax year ended December 31, 2011. We also intend to operate our business in a manner that will permit us to maintain our status as a REIT and our exemption from registration under the Investment Company Act. We have and will continue to conduct substantially all of our operations through our Operating Partnership in which we owned an approximate 96.5% interest as of September 30, 2016. New Market Properties, LLC, a wholly-owned subsidiary of the Operating Partnership, owns and conducts the business of our grocery-anchored shopping center properties.

Properties

At September 30, 2016, we were the sole owner of the following 23 multifamily communities, one student housing community and the approximate 96% owner of one multifamily community joint venture, which comprise our multifamily segment:

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Property Name	Location	Year constructed	Number of units	Average Unit Size (sq. ft.)	Average Occupancy		Average Rent per Unit
Ashford Park	Atlanta, GA	1992	408	1,008	96.9	%	$	1,195
Lake Cameron	Raleigh, NC	1997	328	940	96.9	%	$	919
McNeil Ranch	Austin, TX	1999	192	1,071	92.6	%	$	1,240
Stone Rise	Philadelphia, PA	2008	216	1,079	94.7	%	$	1,448
Enclave at Vista Ridge	Dallas, TX	2003	300	1,079	94.8	%	$	1,146
Stoneridge Farms	Nashville, TN	2002	364	1,153	96.1	%	$	1,026
Vineyards	Houston, TX	2003	369	1,122	90.5	%	$	1,123
Avenues at Cypress	Houston, TX	2014	240	1,166	97.2	%	$	1,380
Avenues at Northpointe	Houston, TX	2013	280	1,154	93.7	%	$	1,359
Aster at Lely Resort	Naples, FL	2015	308	979	94.0	%	$	1,342
Venue at Lakewood Ranch	Sarasota, FL	2015	237	1,001	94.3	%	$	1,568
Total/Average Same Store			3,242		94.7	%
Summit Crossing	Atlanta, GA	2007	485	1,053	—	%	$	1,223
Sandstone Creek	Kansas City, KS	2000	364	1,135	—	%	$	1,035
CityPark View	Charlotte, NC	2014	284	948	—	%	$	1,063
Mansions at Creekside	San Antonio, TX	2014	395	974	94.9	%	$	1,155
Citi Lakes	Orlando, FL	2014	346	984	92.5	%	$	1,417
Lenox Portfolio	Nashville, TN	2009-2015	474	886	97.7	%	$	1,165
Stone Creek	Houston, TX	2009	246	852	—	%	$	1,001
Overton Rise	Atlanta, GA	2015	294	1,018	94.7	%	$	1,468
Baldwin Park	Orlando, FL	2008	528	1,069	—	%	$	1,423
Crosstown Walk	Tampa, FL	2014	342	980	92.2	%	$	1,181
Avalon Park	Orlando, FL	2008	487	1,394	—	%	$	1,319
Sorrel	Jacksonville, FL	2015	290	1,048	—	%	$	—
Total/Avg PAC Non-Same Store			4,535
Student housing community:
North by Northwest	Tallahassee, FL	2012	219	1,137	N/A		$	2,289
Joint Venture:
City Vista	Pittsburgh, PA	2014	272	1,023	94.9	%	$	—
Total all PAC units			8,268		94.6	%

For the three-month period ended September 30, 2016, our average occupancy was 94.6%. We define average occupancy as market rent reduced by vacancy losses, expressed as a percentage. All of our multifamily properties are included in this calculation except for properties which are not yet stabilized, which we define as properties having first achieved 93% physical occupancy, properties which are owned for less than the entire reporting period (Sorrel and City Vista), and properties which are undergoing significant capital projects or are adding additional phases (Summit Crossing, Stone Creek, Sandstone Creek, Baldwin Park, Avalon Park and City Park View).

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At September 30, 2016, we were the sole owner of the following 30 grocery-anchored shopping centers, which comprise our retail segment:

Property name	Metropolitan area	Year built	GLA (1)		Percent leased (2)		Anchor tenant
Woodstock Crossing	Atlanta, GA	1994	66,122		92.6	%	Kroger
Cherokee Plaza	Atlanta, GA	1958	102,864	102,864	100.0	%	Kroger
Lakeland Plaza	Atlanta, GA	1990	301,711		92.3	%	Sprouts/Belk
Powder Springs	Atlanta, GA	1999	77,853		92.8	%	Publix
Royal Lakes Marketplace	Atlanta, GA	2008	119,493		84.4	%	Kroger
Sandy Plains Exchange	Atlanta, GA	1997	72,784	72,784	100.0	%	Publix
Summit Point	Atlanta, GA	2004	111,970		80.4	%	Publix
Thompson Bridge Commons	Atlanta, GA	2001	92,587	92,587	97.3	%	Kroger
Wade Green Village	Atlanta, GA	1993	74,978		89.7	%	Publix
East Gate Shopping Center	Augusta, GA	1995	75,716		89.5	%	Publix
Fury's Ferry	Augusta, GA	1996	70,458		91.0	%	Publix
Parkway Centre	Columbus, GA	1999	53,088		97.4	%	Publix
Spring Hill Plaza	Nashville, TN	2005	61,570		100.0	%	Publix
Parkway Town Centre	Nashville, TN	2005	65,587		95.4	%	Publix
Salem Cove	Nashville, TN	2010	62,356		97.8	%	Publix
The Market at Victory Village	Nashville, TN	2007	71,300		98.5	%	Publix
The Overlook at Hamilton Place	Chattanooga, TN	1992	213,095		95.8	%	The Fresh Market
Sweetgrass Corner	Charleston, SC	1999	89,124		100.0	%	Bi-Lo
Anderson Central	Greenville Spartanburg, SC	1999	223,211		97.1	%	Walmart
Fairview Market	Greenville Spartanburg, SC	1998	53,888		96.8	%	Publix
Rosewood Shopping Center	Columbia, SC	2002	36,887		90.2	%	Publix
Heritage Station	Raleigh, NC	2004	72,946	72,946	100.0	%	Harris Teeter
Shoppes of Parkland	Miami, FL	2000	145,720	145,720	95.0	%	BJ's Wholesale Club
Barclay Crossing	Tampa, FL	1998	54,958		100.0	%	Publix
Deltona Landings	Orlando, FL	1999	59,966		95.5	%	Publix
University Palms	Orlando, FL	1993	99,172	99,172	98.4	%	Publix
Kingwood Glen	Houston, TX	1998	103,397		100.0	%	Kroger
Independence Square	Dallas, TX	1977	140,218		91.5	%	Tom Thumb
Oak Park Village	San Antonio, TX	1970	64,287	64,287	100.0	%	H.E.B.
Southgate Village	Birmingham, AL	1988	75,092		100.0	%	Publix
			2,912,398

⁽¹⁾ Gross leasable area, or GLA, represents the total amount of property square footage that can be leased to tenants.

⁽²⁾ As of September 30, 2016, our retail portfolio was 94.9% leased. Percent leased represents the percentage of GLA that is leased, including noncancelable lease agreements that have been signed which have not yet commenced.

At September 30, 2016, we were also the sole owner of a nine-story, approximate 169,500 square foot class A office building located in Birmingham, Alabama.

Industry Outlook

         We believe continued, albeit potentially sporadic, improvement in the United States' economy will continue for 2016, with continued job growth and improvements in consumer confidence. We believe a growing economy, improved job market and increased consumer confidence should help create favorable conditions for the multifamily sector. If the economy continues to improve, we expect current occupancy rates generally to remain stable, on an annual basis, as the current level of occupancy nationwide will be difficult to measurably improve upon. The pipeline of new multifamily construction, although increasing, has been relatively measured in most of our markets. Nationally, new multifamily construction is currently at or slightly above average historical levels in most markets. Even with the increase in new supply of multifamily properties, recent job growth and demographic trends have led to reasonable levels of absorption in most of our markets, which in many of our markets has offset or exceeded the new supply coming online. The absorption rate has led to generally stable occupancy rates with increases in rental rates in most of our markets. We believe the supply of new multifamily construction will not increase dramatically as the constraints in the market (including availability of quality sites and the difficult permitting and entitlement process) will contain further increases in multifamily supply. We believe that a potential reversal in the recent trend on declining cap rates in the multifamily sector may be in the offing. The rising cost of private capital, less debt capital available from traditional commercial banks for real estate loans

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and a softening of the market in some “Gateway” cities have all put pressure on the pricing dynamic in multifamily transactions.  This could lead to an increase in capitalization rates and a softening price environment, and if this were to occur, then our pipeline of candidate multifamily property acquisitions with returns meeting our investment objectives may expand.

                We believe that the grocery-anchored shopping center sector benefits from many of the same improving metrics as the multifamily sector, namely improved economy and job and wage growth. More specifically, the types of centers we own and plan to acquire are primarily occupied by grocery stores, service uses, medical providers and restaurants. We believe that these businesses are significantly less impacted by e-commerce than some other retail businesses, and that grocery anchors typically generate repeat trips to the center. We expect that improving macroeconomic conditions, coupled with continued population growth in the suburban markets where our retail properties are located, will create favorable conditions for grocery shopping and other uses provided by grocery-anchored shopping centers. With moderate supply growth following a period of historically low retail construction starts, we believe our centers that are all generally located in Sun Belt and Texas markets are well-positioned to have solid operating fundamentals. The debt market for our grocery anchored retail assets remains strong. Life insurance companies have continued to demonstrate a specific interest in our strategy and we continue to see new participants in the market. Spreads and rates are generally comparable to those for multifamily, however, the leverage levels on the retail assets may be slightly lower than the levels on our multifamily assets. 

                Favorable U.S. Treasury yields and competitive lender spreads have created a generally favorable borrowing environment for multifamily owners and developers.  Given the uncertainty around the world's financial markets, fueled in part by global instability and the recent “Brexit” vote in Britain, investors have been willing to accept lower yields on U.S. government backed securities, providing Freddie Mac and Fannie Mae (the GSEs) with excellent access to investor capital. Even with the recent volatility in U.S. Treasury rates, we expect the market to continue to remain favorable for financing multifamily communities, as the equity and debt markets have generally continued to view the U.S. multifamily sector as a desirable investment. Lending by GSEs could be limited by caps imposed by the Federal Housing and Finance Association, which could lead to higher lending costs, although we expect such higher costs to be offset by increased lending activity by other market participants; however, such other market participants may have increased costs and stricter underwriting criteria. 

                We believe the combination of continued high construction mortgage underwriting standards as compared to before the financial crisis, coupled with continued hesitance and reluctance among many prospective homebuyers to believe the net benefits of home ownership are greater than the benefit of the flexibility offered through renting will continue to work in the existing multifamily sector's favor, resulting in gradual increases in market rents, lower concessions and opportunities for increases in ancillary fee income. We also believe there will be a continued increase in demand for multifamily rental housing due to the ongoing entry of the “millennial” generation, the sons and daughters of the baby-boom generation, into the workforce, resulting in an increase in demand for rental housing. 

Critical Accounting Policies

Below is a discussion of the accounting policies that management believes are critical. We consider these policies critical because they involve significant management judgments, assumptions and estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

Real Estate

Cost Capitalization. Investments in real estate properties are carried at cost and depreciated using the straight-line method over the estimated useful lives of 30 to 50 years for buildings, 5 to 20 years for building and land improvements and 5 to 10 years for computers, furniture, fixtures and equipment. Acquisition costs are generally expensed as incurred for transactions that are deemed to be business combinations. Repairs, maintenance and resident turnover costs are charged to expense as incurred and significant replacements and betterments are capitalized and depreciated over the items' estimated useful lives. Repairs, maintenance and resident turnover costs include all costs that do not extend the useful life of the real estate property. We consider the period of future benefit of an asset to determine its appropriate useful life.

Real Estate Acquisition Valuation. We generally record the acquisition of income-producing real estate as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values.

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We assess the acquisition-date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

We record above-market and below-market in-place lease values for acquired properties based on the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining average non-cancelable term of the leases. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining average non-cancelable term of the respective leases.

Intangible assets include the value of in-place leases, which represents the estimated value of the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. These estimates include estimated carrying costs, such as real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the hypothetical expected lease-up periods. Acquired in-place lease values are amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases.

The fair values of in-place leases for retail shopping centers and office buildings represent the value of direct costs associated with leasing, including opportunity costs associated with lost rentals that are avoided by acquiring in-place leases. Direct costs associated with obtaining a new tenant include commissions, legal and marketing costs, incentives such as tenant improvement allowances and other direct costs. Such direct costs are estimated based on our consideration of current market costs to execute a similar lease. The value of opportunity costs is estimated using the estimated market lease rates and the estimated absorption period of the space. These direct costs and opportunity costs are included in the accompanying consolidated balance sheets as acquired intangible assets and are amortized to expense over the remaining term of the respective leases. The fair values of above-market and below-market in-place leases for retail shopping centers and office buildings are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the leases, taking into consideration the probability of renewals for any below-market leases. The capitalized above-market leases and in place leases are included in the acquired intangible assets line of the consolidated balance sheets. Both above-market and below-market lease values are amortized as adjustments to rental revenue over the remaining term of the respective leases for office buildings. The amortization period for retail shopping center leases is the remaining lease term plus any below market probable renewal options.

Intangible assets also include the value of customer relationships, which represent the value inherent in the relationships with existing lessees, quantified by management's estimate of the average likelihood of lease renewal. Customer relationships are amortized over the average remaining non-cancelable term of in place leases, plus an estimated renewal period.

Estimating the fair values of the tangible assets, identifiable intangibles and assumed liabilities requires us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, the number of years the property will be held for investment and market interest rates. The use of different assumptions would result in variations of the values of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact their subsequent amortization and ultimately our net income.

Impairment of Real Estate and Related Intangible Assets. We monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may not be recoverable or realized. When conditions suggest that an asset group may be impaired, we compare its carrying value to its estimated undiscounted future cash flows, including proceeds from its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of an asset group, we record an impairment to the extent that the carrying value exceeds the estimated fair value of the asset group. Fair market value is determined based on a discounted cash flow analysis. This analysis requires us to use future estimates of net operating income, expected hold period, capitalization rates and discount rates. The use of different assumptions would result in variations of the values of the assets which could impact the amount of our net income and our assets on our balance sheet.

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Real Estate Loans

We extend loans for purposes such as to provide partial financing for the development of multifamily residential communities, to acquire land in anticipation of developing and constructing multifamily residential communities and for other real estate or real estate related projects. Certain of these loans we extend include characteristics such as exclusive options to purchase the project within a specific time window following expected project completion and stabilization, the rights to incremental exit fees over and above the amount of periodic interest paid during the life of the loans, or both. These characteristics can cause the loans to fall under the definition of a variable interest entity, or VIE, and thus trigger consolidation consideration. We consider the facts and circumstances pertinent to each loan, including the relative amount of financing we are contributing to the overall project cost, decision making rights or control we hold and our rights to expected residual gains or our obligations to absorb expected residual losses from the project. If we are deemed to be the primary beneficiary of a VIE due to holding a controlling financial interest, the majority of decision making control, or by other means, consolidation of the VIE would be required. Arriving at these conclusions requires us to make significant assumptions and judgments concerning each project, especially with regard to our estimates of future market capitalization rates and property net operating income projections. Additionally, we analyze each loan arrangement and utilize these same assumptions and judgments for consideration of whether the loan qualifies for accounting as a loan or as an investment in a real estate development project.

Impairment of Loans and Notes Receivable. We monitor the progress of underlying real estate development projects which are partially financed by our real estate loans and certain of our notes receivable. Draws of interest included in these loans and notes are monitored versus the budgeted amounts, and the progress of projects are monitored versus the estimates in the project timeline. Changes in circumstances could indicate that the carrying amounts of our loans and notes receivable may not be recoverable or realized. Receivables are deemed to be impaired when conditions arise that cause the collection of all interest and principal amounts due according to the terms of the instrument to be improbable. If, based on this analysis, we do not believe that we will be able to collect the amounts due from a loan or note, we record a valuation allowance to the extent that the carrying value exceeds its estimated fair value. Fair market value is determined based on a discounted cash flow analysis and is substantiated by an independent appraisal of the collateral if necessary. This analysis requires us to use future estimates of progress of a project versus its budget, local and national economic conditions and discount rates. The use of different assumptions would result in variations of the values of the loans and notes which could impact the amount of our net income and our assets on our consolidated balance sheets.

Revenue Recognition

We generally lease apartment units under leases with terms of thirteen months or less. We generally lease retail properties for rental terms of several years. Rental revenue, net of concessions, is recognized on a straight-line basis over the term of the lease. Differences from the straight-line method, which recognize the effect of any up-front concessions and other adjustments ratably over the lease term, are recorded in the appropriate period, to the extent that adjustments to the straight-line method are material.

Revenue from reimbursements of retail tenants' share of real estate taxes, insurance and common area maintenance, or CAM, costs are recognized as the respective costs are incurred in accordance with the lease agreements.We estimate the collectability of the receivable related to rental and reimbursement billings due from tenants and straight-line rent receivables, which represent the cumulative amount of future adjustments necessary to present rental income on a straight-line basis, by taking into consideration our historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms.

We recognize gains on sales of real estate either in total or deferred for a period of time, depending on whether a sale has been consummated, the extent of the buyer’s investment in the property being sold, whether our receivable, if any, is subject to future subordination, and the degree of our continuing involvement with the property after the sale, if any. If the criteria for profit recognition under the full-accrual method are not met, we defer gain recognition and account for the continued operations of the property by applying the reduced profit, deposit, installment or cost recovery method, as appropriate, until the appropriate criteria are met.

Other income, including interest earned on our cash, is recognized as it is earned. We recognize interest income on real estate loans on an accrual basis over the life of the loan using the effective interest method. Loan origination fees received from borrowers as incentive to extend the real estate loans, (excluding the amounts paid to the Manager) are amortized over the life of the loan as an additive adjustment to interest income. We stop accruing interest on loans when circumstances indicate that it is probable that the ultimate collection of all principal and interest due according to the loan agreement will not be realized, which is generally a delinquency of 30 days in required payments of interest or principal. Any payments received on such non-accrual

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loans are recorded as interest income when the payments are received. Interest accrual on real estate loan investments is resumed once interest and principal payments become current.

Promotional fees received from service providers at our properties are deferred and recognized on a straight-line basis over the term of the agreement.

Equity Compensation

We calculate the fair value of equity compensation instruments such as warrants and stock options based upon estimates of their expected term, the expected volatility of and dividend yield on our shares of common stock, par value $.01 per share, or Common Stock, over this expected term period and the market risk-free rate of return. The compensation expense is accrued over the vesting period(s).

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. ASU 2014-09 may be applied using either a full retrospective or a modified approach upon adoption. The Company is currently evaluating the impact this standard may have on its financial statements.

In August 2014, the FASB issued Accounting Standards Update 2014-15 ("ASU 2014-15"), Presentation of Financial Statements—Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This new guidance establishes a requirement that management evaluate the entity's ability to continue as a going concern and requires certain disclosures should substantial doubt exist about the entity's viability. ASU 2014-15 is effective on January 1, 2017 and the Company expects to adopt the new guidance on that date and does not expected the adoption of ASU 2014-15 to materially impact the Company’s consolidated financial statements. 

In February 2015, the FASB issued Accounting Standards Update 2015-02 ("ASU 2015-02"), Consolidation (Topic 810): Amendments to the Consolidation Analysis. This new guidance specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will be required to consolidate the limited partnership. ASU 2015-02 is effective on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity/capital as of the beginning of the period of adoption or retrospectively to each period presented. The Company's adoption of ASU 2015-02 had no impact on its consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update 2016-01 ("ASU 2016-01"), Financial Instruments—Overall (Subtopic 825-10): Recognition and measurement of Financial Assets and Liabilities. The new standard's applicable provisions to the Company include an elimination of the disclosure requirement of the significant inputs and assumptions underlying the fair value calculations of its financial instruments which are carried at amortized cost. The standard is effective on January 1, 2018, and early adoption is not permitted for the applicable provision. The Company does not expect the adoption of ASU 2016-01 to impact the Company’s consolidated financial statements. 

In February 2016, the FASB issued Accounting Standards Update 2016-02 ("ASU 2016-02"), Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance but does not expect its adoption to materially impact the Company’s consolidated financial statements. 

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In March 2016, the FASB issued Accounting Standards Update 2016-09 ("ASU 2016-09"), Compensation—Stock Compensation (Topic 178): Improvements to Employee Share-Based Payment Accounting. The new standard's applicable provisions to the Company include allowing the entity to make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures of equity compensation awards when they occur. Previous guidance required entities to estimate the number of awards that are expected to vest. The standard is effective on January 1, 2017, and the Company adopted ASU 2016-09 on January 1, 2016 pursuant to the allowed early adoption provision. The Company does not expect the adoption of ASU 2016-09 to materially impact the Company’s consolidated financial statements. 

In June 2016, the FASB issued Accounting Standards Update 2016-13 ("ASU 2016-13"), Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial instruments carried at amortized cost to be presented at the net amount expected to be collected, utilizing a valuation account which reflects the cumulative net adjustments from the gross amortized cost value. Under existing GAAP, entities would not record a valuation allowance until a loss was probable of occurring. The standard is effective for the Company on January 1, 2020. We are presently evaluating the impact the adoption of ASU 2016-13 will have on our consolidated financial statements. 

In August 2016, the FASB issued Accounting Standards Update 2016-15 ("ASU 2016-15"), Statement of Cash Flows—(Topic 326): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies or establishes guidance for the presentation of various cash transactions on the statement of cash flows. The portion of the guidance applicable to the Company's business activities include the requirement that cash payments for debt prepayment or debt extinguishment costs be presented as cash out flows for financing activities. The standard is effective for the Company on January 1, 2018. The Company does not expect the adoption of ASU 2016-15 to materially impact the Company’s consolidated financial statements. 

Results of Operations

The highlights of our third quarter 2016 operating results included:

• During the third quarter 2016, we acquired a 290-unit multifamily community located in Jacksonville, Florida and converted our City Vista real estate loan into an approximate 96% ownership interest in a joint venture which owns the underlying 272-unit multifamily community located in Pittsburgh, Pennsylvania. We also acquired eight grocery-anchored shopping centers located in Georgia, Florida, Texas, and North Carolina, comprising approximately 952,000 aggregate square feet of gross leasable area and a nine-story, 169,500 square foot class A office building located in Birmingham, Alabama.

• During the third quarter 2016, we closed on a real estate investment loan of up to approximately $21.1 million in support of a proposed 271-unit multifamily community to be located in Birmingham, Alabama and a land loan of up to $4.0 million in partial support of a proposed 224-unit multifamily community to be located in Fort Myers, Florida.

• With the closing of the acquisitions referenced above, as of September 30, 2016 we owned 24 multifamily communities consisting of an aggregate of 8,049 units, one 219-unit student housing community, one class A office building comprising 169,500 square feet, and 30 grocery-anchored shopping centers comprising an aggregate of approximately 2,913,000 square feet of gross leasable area. Upon completion of all the projects partially financed by our real estate loan portfolio and if we were to acquire all of the underlying properties, we would own 20 additional multifamily communities, comprising an aggregate of 4,902 units, including seven student housing communities comprising an aggregate of 4,806 beds in 1,542 units and one additional retail shopping center comprising approximately 212,800 square feet of gross leasable area. We evaluate each project individually and we make no assurance that we will acquire any of the underlying properties.

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Financial Highlights

Our operating results are presented below. Core Funds From Operations Attributable to Common Stockholders and Unitholders("Core FFO"), which we previously referred to as Normalized Funds From Operations, excludes acquisition costs and certain other costs not representative of our ongoing operations.

	Three months ended September 30,								Nine months ended September 30,
	2016			2015			% change		2016			2015			% change
Revenues	$	53,537,337		$	29,955,693		78.7	%	$	141,127,062		$	75,389,035		87.2	%
Per share data:
Net loss (1)	$	(0.56	)	$	(0.31	)	(80.6	)%	$	(1.45	)	$	(0.65	)	(123.1	)%
FFO (2)	$	0.31		$	0.16		93.8	%	$	0.66		$	0.53		24.5	%
Core FFO (2)	$	0.38		$	0.32		18.8	%	$	0.99		$	0.82		20.7	%
Dividends (3)	$	0.2025		$	0.18		12.5	%	$	0.5975		$	0.535		11.7	%

⁽¹⁾ Per weighted average share of Common Stock outstanding for the periods indicated. See Definitions of Non-GAAP and Other Measures later within this "Results of Operations" section.

⁽²⁾ FFO and Core FFO are presented per weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated.

⁽³⁾ Per share of Common Stock and Class A Unit outstanding.

• For the third quarter 2016, our Core FFO payout ratio to our Common Stockholders and Unitholders was approximately 54.5% and our AFFO payout ratio to Common Stockholders and Unitholders was approximately 91.5%. ⁽¹⁾ 

• For the third quarter 2016, our Core FFO payout ratio (before the deduction of preferred dividends) to our Series A Preferred Stockholders was approximately 53.7% and our AFFO payout ratio (before the deduction of preferred dividends) to our Series A Preferred Stockholders was approximately 66.1%. ⁽¹⁾ 

• Adjusted Funds From Operations Attributable to Common Stockholders and Unitholders, or AFFO, was $0.90 per share for the nine months ended September 30, 2016, an increase of 21.6% from $0.74 per share for the same 2015 period. AFFO is calculated after deductions for all preferred dividends. AFFO was $0.22 per share for the third quarter 2016, no change from $0.22 per share for the third quarter 2015.

• At September 30, 2016, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 58.6%.

• Cash flow from operations for the third quarter 2016 was approximately $21.0 million, an increase of approximately $11.1

million, or 112.3%, compared to approximately $9.9 million for the third quarter 2015.

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During the nine months ended September 30, 2016, we acquired the following real estate assets:

Acquisition date	Multifamily communities	Location	Units
8/24/2016	Sorrel	Jacksonville, FL	290
7/1/2016	City Vista (1)	Pittsburgh, PA	272
6/1/2016	North by Northwest (2)	Tallahassee, FL	219
5/31/2016	Avalon Park	Orlando, FL	487
2/1/2016	Overton Rise	Atlanta, GA	294
1/15/2016	Crosstown Walk	Tampa, FL	342
1/5/2016	Baldwin Park	Orlando, FL	528
			2,432
(1) We own an approximate 96% equity interest in Oxford City Vista Development LLC, which owns the subject property.
(2) A student housing community located adjacent to the campus of Florida State University in Tallahassee, Florida.

Acquisition date	Grocery anchored shopping centers		Market	Gross leasable area (square feet)
8/8/2016	University Palms	(1)	Orlando, FL	99,172
8/8/2016	Cherokee Plaza	(1)	Atlanta, GA	102,864
8/8/2016	Sandy Plains Exchange	(1)	Atlanta, GA	72,784
8/8/2016	Thompson Bridge Commons	(1)	Atlanta, GA	92,587
8/8/2016	Heritage Station	(1)	Winston-Salem, NC	72,946
8/8/2016	Oak Park Village	(1)	San Antonio, TX	64,287
8/8/2016	Shoppes of Parkland	(1)	Fort Lauderdale, FL	145,720
7/15/2016	Lakeland Plaza		Atlanta, GA	301,711
5/16/2016	The Market at Victory Village		Nashville, TN	71,300
4/29/2016	Anderson Central	(2)	Greenville-Anderson, SC MSA	223,211
4/29/2016	East Gate Shopping Center	(2)	Augusta, Georgia MSA	75,716
4/29/2016	Fairview Market	(2)	Greenville, SC	53,888
4/29/2016	Fury's Ferry	(2)	Augusta, GA	70,458
4/29/2016	Rosewood Shopping Center	(2)	Columbia, SC	36,887
4/29/2016	Southgate Village	(2)	Birmingham, AL	75,092
2/29/2016	Wade Green Village		Atlanta, GA	74,978
				1,633,601
(1) Collectively referred to as the Sunbelt 7 Portfolio.
(2) Collectively referred to as the Southeastern 6 Portfolio.

In addition, on August 29, 2016, we acquired a 169,500 square foot class A office building located in Birmingham, Alabama.

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Three Months and Nine Months Ended September 30, 2016 compared to 2015

The following discussion and tabular presentations highlight the major drivers behind the line item changes by reportable segment in our results of operations for the three months and nine months ended September 30, 2016 versus 2015.

	Three months ended September 30,						Change inc (dec)
Preferred Apartment Communities, Inc.	2016			2015			Amount			Percentage
Revenues:
Rental revenues	$	37,319,207		$	19,442,628		$	17,876,579		91.9	%
Other property revenues	5,221,887			2,558,185			$	2,663,702		104.1	%
Interest income on loans and notes receivable	7,194,742			5,909,907			$	1,284,835		21.7	%
Interest income from related parties	3,801,501			2,044,973			$	1,756,528		85.9	%
Total revenues	53,537,337			29,955,693			$	23,581,644		78.7	%
Operating expenses:
Property operating and maintenance	5,504,848			3,097,080			$	2,407,768		77.7	%
Property salary and benefits reimbursement to related party	2,808,402			1,688,347			$	1,120,055		66.3	%
Property management fees to related parties	1,724,411			857,294			$	867,117		101.1	%
Real estate taxes	4,789,085			2,506,885			$	2,282,200		91.0	%
General and administrative	1,144,256			632,164			$	512,092		81.0	%
Equity compensation to directors and executives	638,414			593,417			$	44,997		7.6	%
Depreciation and amortization	21,664,363			10,536,486			$	11,127,877		105.6	%
Acquisition and pursuit costs	1,036,171			1,783,708			$	(747,537	)	(41.9	)%
Acquisition fees to related parties	321,366			1,541,250			$	(1,219,884	)	(79.1	)%
Asset management fees to related parties	3,759,084			1,908,742			$	1,850,342		96.9	%
Insurance, professional fees and other	1,338,343			1,062,687			$	275,656		25.9	%
Total operating expenses	44,728,743			26,208,060			$	18,520,683		70.7	%
Contingent asset management and general and
administrative expense fees	(736,960		)	(373,360		)	$	(363,600	)	97.4	%
Net operating expenses	43,991,783			25,834,700			$	18,157,083		70.3	%
Operating income	9,545,554			4,120,993			$	5,424,561		131.6	%
Less interest expense	12,234,174			5,818,760			$	6,415,414		110.3	%
Net loss	$	(2,688,620	)	$	(1,697,767	)	$	(990,853	)	58.4	%

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	Nine months ended September 30,						Change inc (dec)
Preferred Apartment Communities, Inc.	2016			2015			Amount			Percentage
Revenues:
Rental revenues	$	96,541,544		$	47,304,230		$	49,237,314		104.1	%
Other property revenues	13,290,330			6,685,752			$	6,604,578		98.8	%
Interest income on loans and notes receivable	20,984,625			16,367,864			$	4,616,761		28.2	%
Interest income from related parties	10,310,563			5,031,189			$	5,279,374		104.9	%
Total revenues	141,127,062			75,389,035			$	65,738,027		87.2	%
Operating expenses:
Property operating and maintenance	13,883,133			7,722,017			$	6,161,116		79.8	%
Property salary and benefits reimbursement to related party	7,688,470			4,114,752			$	3,573,718		86.9	%
Property management fees to related parties	4,308,841			2,082,839			$	2,226,002		106.9	%
Real estate taxes	15,457,134			6,911,034			$	8,546,100		123.7	%
General and administrative	3,255,728			1,553,666			$	1,702,062		109.6	%
Equity compensation to directors and executives	1,867,706			1,761,268			$	106,438		6.0	%
Depreciation and amortization	54,981,064			26,409,763			$	28,571,301		108.2	%
Acquisition and pursuit costs	6,179,442			2,876,642			$	3,302,800		114.8	%
Acquisition fees to related parties	706,422			3,400,021			$	(2,693,599	)	(79.2	)%
Asset management fees to related parties	9,484,161			4,830,588			$	4,653,573		96.3	%
Insurance, professional fees and other	4,216,838			2,412,441			$	1,804,397		74.8	%
Total operating expenses	122,028,939			64,075,031			$	57,953,908		90.4	%
Contingent asset management and general and
administrative expense fees	(1,458,245		)	(1,528,479		)	$	70,234		(4.6	)%
Net operating expenses	120,570,694			62,546,552			$	58,024,142		92.8	%
Operating income	20,556,368			12,842,483			$	7,713,885		60.1	%
Less interest expense	30,688,505			14,884,343			$	15,804,162		106.2	%
Gain on sale of real estate	4,271,506			—			$	4,271,506		—
Net loss	$	(5,860,631	)	$	(2,041,860	)	$	(3,818,771	)	187.0	%

55

New Market Properties, LLC

Our retail business consists of our portfolio of grocery-anchored shopping centers and our Dawson Marketplace real estate loan supporting a proposed shopping center in the Atlanta, Georgia market. These assets are owned by our wholly-owned subsidiary, New Market Properties, LLC, which we intend to spin off upon attainment of sufficient size and if warranted by market conditions. Comparative statements of operations of New Market Properties, LLC for the three-month and nine month periods ended September 30, 2016 and 2015 are presented below. These statements of operations include no allocations of corporate overhead or other expenses.

	Three months ended September 30,						Change inc (dec)
New Market Properties, LLC	2016			2015			Amount			Percentage
Revenues:
Rental revenues	$	7,767,052		$	2,662,113		$	5,104,939		191.8	%
Other property revenues	2,006,143			714,166			1,291,977			180.9	%
Interest income on loans and notes receivable	420,648			132,878			287,770			216.6	%
Interest income from related parties	—			—			—			—	%
Total revenues	10,193,843			3,509,157			6,684,686			190.5	%
Operating expenses:
Property operating and maintenance	904,877			373,215			531,662			142.5	%
Property management fees	332,869			118,613			214,256			180.6	%
Real estate taxes	950,444			304,997			645,447			211.6	%
General and administrative	150,039			48,667			101,372			208.3	%
Equity compensation executive	20,356			72,071			(51,715		)	(71.8	)%
Depreciation and amortization	5,452,491			1,816,634			3,635,857			200.1	%
Acquisition and pursuit costs	192,433			436,049			(243,616		)	(55.9	)%
Acquisition fees to related parties	204,246			345,750			(141,504		)	(40.9	)%
Asset management fees to related parties	775,794			251,972			523,822			207.9	%
Insurance, professional fees and other	148,656			86,512			62,144			71.8	%
Total operating expenses	9,132,205			3,854,480			5,277,725			136.9	%
Contingent asset management and general and
administrative expense fees	(88,097		)	(89,987		)	1,890			(2.1	)%
Net operating expenses	9,044,108			3,764,493			5,279,615			140.2	%
Operating income	1,149,735			(255,336		)	1,405,071			(550.3	)%
Less: interest expense	2,615,925			844,472			1,771,453			209.8	%
Net income	$	(1,466,190	)	$	(1,099,808	)	$	(366,382	)	33.3	%

56

	Nine months ended September 30,						Change inc (dec)
New Market Properties, LLC	2016			2015			Amount			Percentage
Revenues:
Rental revenues	$	16,718,701		$	7,122,580		$	9,596,121		134.7	%
Other property revenues	4,658,688			2,153,219			2,505,469			116.4	%
Interest income on loans and notes receivable	1,338,071			132,878			1,205,193			907.0	%
Total revenues	22,715,460			9,408,677			13,306,783			141.4	%
Operating expenses:
Property operating and maintenance	2,078,128			1,176,697			901,431			76.6	%
Property management fees	741,221			322,529			418,692			129.8	%
Real estate taxes	2,376,099			951,990			1,424,109			149.6	%
General and administrative	350,930			143,626			207,304			144.3	%
Equity compensation to executive	60,289			213,912			(153,623		)	(71.8	)%
Depreciation and amortization	11,997,671			4,882,862			7,114,809			145.7	%
Acquisition and pursuit costs	1,267,631			595,764			671,867			112.8	%
Acquisition fees to related parties	589,302			345,750			243,552			70.4	%
Asset management fees to related parties	1,689,601			678,622			1,010,979			149.0	%
Insurance, professional fees and other	353,835			236,777			117,058			49.4	%
Total operating expenses	21,504,707			9,548,529			11,956,178			125.2	%
Contingent asset management and general and
administrative expense fees	(255,281		)	(259,282		)	4,001			(1.5	)%
Net operating expenses	21,249,426			9,289,247			11,960,179			128.8	%
Operating income	1,466,034			119,430			1,346,604			1,127.5	%
Less: interest expense	5,588,947			2,391,479			3,197,468			133.7	%
Net income	$	(4,122,913	)	$	(2,272,049	)	$	(1,850,864	)	81.5	%

Rental and other property revenues and property operating expenses for the three-month and nine-month periods ended September 30, 2016 increased versus the corresponding prior year periods primarily due to property acquisitions completed since the end of the third quarter 2015, which are listed in the following table:

Property	Type	Date of acquisition
Stone Creek	Multifamily community	11/12/2015
Lenox Portfolio	Three multifamily communities	12/21/2015
Baldwin Park	Multifamily community	1/5/2016
Crosstown Walk	Multifamily community	1/15/2016
Overton Rise	Multifamily community	2/1/2016
Avalon Park	Multifamily community	5/31/2016
North by Northwest	Student housing project	6/1/2016
City Vista	Multifamily community	7/1/2016
Sorrell	Multifamily community	8/24/2016
Summit Point	Grocery-anchored shopping center	10/30/2015
Overlook at Hamilton Place	Grocery-anchored shopping center	12/22/2015
Wade Green Village	Grocery-anchored shopping center	2/29/2016
Southeastern Six Portfolio	Six grocery-anchored shopping centers	4/29/2016
The Market at Victory Village	Grocery-anchored shopping center	5/16/2016
Lakeland Plaza	Grocery-anchored shopping center	7/15/2016
Sunbelt 7 Portfolio	Seven grocery-anchored shopping centers	8/8/2016
Brookwood	Class A office building	8/29/2016

57

Revenues

Rental revenues increased for the three months and nine months ended September 30, 2016 from the comparable 2015 periods primarily due to acquisitions shown in the following table:

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
Rental revenues	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):		Percent of increase
Increases attributable to:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	4,460,000		24.9	%	$	13,065,000	26.5	%
Stone Creek and Lenox Portfolio	2,539,000			14.2	%	7,500,000		15.2	%
Avenues at Creekside and Citi Lakes	1,259,000			7.0	%	6,247,000		12.7	%
Lakewood Ranch, Aster at Lely, and CityPark View	66,000			0.4	%	5,864,000		11.9	%
North by Northwest and Avalon Park	3,287,000			18.4	%	4,386,000		8.9	%
City Vista and Sorrel	1,524,000			8.5	%	1,524,000		3.1	%
Other	(362,000		)	(2.0	)%	1,055,000		2.1	%
Total	12,773,000			71.4	%	39,641,000		80.5	%
New Market Properties	5,104,000			28.6	%	9,596,000		19.5	%
Total	$	17,877,000		100.0	%	$	49,237,000	100.0	%

Rental revenues are directly impacted by occupancy levels. Our average occupancy was 94.6% and 96.0% for the three-month periods ended September 30, 2016 and 2015, respectively. We define average occupancy as market rent reduced by vacancy losses expressed as a percentage within our multifamily communities segment.

Our New Market Properties portfolio of grocery-anchored shopping centers was 94.9% and 94.1% leased as of September 30, 2016 and 2015, respectively. We define percent leased as the percentage of gross leasable area that is leased, including lease agreements that have been signed which have not yet commenced.

Factors which we believe affect market rents include vacant unit inventory in local markets, local and national economic growth and resultant employment stability, income levels and growth, the ease of obtaining credit for home purchases, and changes in demand due to consumer confidence in the above factors.

We also collect revenue from residents for items such as utilities, application fees, lease termination fees, and late charges. Other revenues from our grocery-anchored shopping centers include tenant reimbursements to us for common area maintenance, real estate tax, property insurance and utility reimbursements. The increase in other property revenues for the nine-month period ended September 30, 2016 versus 2015 was also due primarily to the acquisitions listed above.

Interest income from our real estate loans increased substantially for the three-month and nine-month periods ended September 30, 2016 versus 2015, primarily due to the addition of 11 real estate loans and bridge loans since September 30, 2015, partially offset by the repayment or settlement of 6 loans in connection with the acquisition of the underlying properties. Also contributing to the increases in interest income were higher loan balances on real estate loans, from accumulating draws and loan balances as the underlying projects progressed toward completion. The principal amount outstanding on our portfolio of real estate investment loans, bridge loans, and lines of credit receivable was approximately $342.4 million at September 30, 2016 and $237.1 million at September 30, 2015.

58

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
	Amounts (rounded to 000s):				Amounts (rounded to 000s):
Real estate loan investments:
Current interest payments	$	5,903,000	$	4,119,000	$	16,913,000	$	14,749,000
Additional accrued interest received	3,918,000		3,182,000		10,634,000		4,642,000
Deferred loan fee revenue	201,000		—		637,000		—
Total real estate loan investment revenue	10,022,000		7,301,000		28,184,000		19,391,000
Interest income on notes and lines of credit	974,000		654,000		3,111,000		2,008,000
Interest income on loans and notes receivable	$	10,996,000	$	7,955,000	$	31,295,000	$	21,399,000

Property operating and maintenance expense

As shown in the following table, expenses for the operations and maintenance of our multifamily communities and retail assets rose primarily due to the incremental costs brought on by the multifamily and retail properties which were acquired since September 30, 2015. The primary components of operating and maintenance expense are utilities, property repairs, and landscaping costs. The expenses incurred for property repairs and, to a lesser extent, utilities could generally be expected to increase gradually over time as the buildings and properties age. Utility costs may generally be expected to increase in future periods as rate increases from providing carriers are passed on to our residents and tenants.

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
Property operating and maintenance expenses	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):		Percent of increase
Increases attributable to:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	576,000		23.9	%	$	1,561,000	25.3	%
Stone Creek and Lenox Portfolio	307,000			12.7	%	936,000		15.2	%
Avenues at Creekside and Citi Lakes	196,000			8.1	%	874,000		14.2	%
Lakewood Ranch, Aster at Lely, and CityPark View	40,000			1.7	%	750,000		12.2	%
North by Northwest and Avalon Park	638,000			26.5	%	765,000		12.4	%
City Vista and Sorrel	225,000			9.3	%	225,000		3.7	%
Other	(105,000		)	(4.4	)%	149,000		2.4	%
Total	1,877,000			77.9	%	5,260,000		85.4	%
New Market Properties	531,000			22.1	%	901,000		14.6	%
Total	$	2,408,000		100.0	%	$	6,161,000	100.0	%

Property Salary and Benefits Reimbursement to Related Party

We recorded expense reimbursements to our multifamily property manager for the salary and benefits expense for individuals who handle the on-site management, operations and maintenance of our multifamily communities. These costs increased primarily due to the incremental costs brought on by the multifamily properties acquired since September 30, 2015, as shown in the following table. The number of employees assigned by our property manager to our multifamily communities at September 30, 2016 is not expected to change materially over the foreseeable future.

59

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
	Increase					Increase
	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):		Percent of increase
Property salary and benefits reimbursement to related party:
Baldwin Park, Crosstown Walk, and Overton Rise	$	387,000		34.6	%	$	1,088,000	30.4	%
Stone Creek and Lenox Portfolio	258,000			23.0	%	795,000		22.2	%
Avenues at Creekside and Citi Lakes	120,000			10.7	%	629,000		17.6	%
Lakewood Ranch, Aster at Lely, and CityPark View	(19,000		)	(1.7	)%	479,000		13.4	%
North by Northwest and Avalon Park	299,000			26.7	%	410,000		11.5	%
City Vista and Sorrel	140,000			12.5	%	140,000		3.9	%
Other	(65,000		)	(5.8	)%	33,000		1.0	%
Total	$	1,120,000		100.0	%	$	3,574,000	100.0	%

Property management fees

We pay a fee for property management services to our Manager in an amount of 4% of gross property revenues as compensation for services such as rental, leasing, operation and management of our multifamily communities and the supervision of any subcontractors; for retail assets, property management fees are generally 4% of gross property revenues, of which generally 3.5% is paid to a third party management company. The increases were primarily due to properties acquired since September 30, 2015, as shown in the following table:

	Three months ended				Nine months ended
	September 30, 2016				September 30, 2016
	Increase				Increase
	Amount (rounded to 000s):		Percent of increase		Amount (rounded to 000s):		Percent of increase
Property management fees:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	195,000	22.5	%	$	555,000	24.9	%
Stone Creek and Lenox Portfolio	115,000		13.3	%	333,000		15.0	%
Avenues at Creekside and Citi Lakes	66,000		7.6	%	284,000		12.8	%
Lakewood Ranch, Aster at Lely, and CityPark View	16,000		1.8	%	277,000		12.4	%
North by Northwest and Avalon Park	180,000		20.8	%	181,000		8.1	%
City Vista and Sorrel	61,000		7.0	%	77,000		3.5	%
Other	20,000		2.2	%	100,000		4.5	%
	653,000		75.2	%	1,807,000		81.2	%
New Market Properties	214,000		24.8	%	419,000		18.8	%
Total	$	867,000	100.0	%	$	2,226,000	100.0	%

60

Real estate taxes

We are liable for property taxes due to the various counties and municipalities that levy such taxes on real property for each of our multifamily communities and retail assets. Real estate taxes rose primarily due to the incremental costs brought on by acquisitions made since September 30, 2015, as shown in the following table:

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
	Increase					Increase
	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):		Percent of increase
Real estate taxes:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	627,000		27.5	%	$	2,397,000	28.0	%
Stone Creek and Lenox Portfolio	218,000			9.6	%	1,150,000		13.5	%
Avenues at Creekside and Citi Lakes	182,000			8.0	%	1,338,000		15.7	%
Lakewood Ranch, Aster at Lely, and CityPark View	(60,000		)	(2.6	)%	633,000		7.4	%
North by Northwest and Avalon Park	470,000			20.6	%	618,000		7.2	%
City Vista and Sorrel	247,000			10.8	%	247,000		2.9	%
Other	(47,000		)	(2.1	)%	739,000		8.6	%
Total	1,637,000			71.8	%	7,122,000		83.3	%
New Market Properties	645,000			28.2	%	1,424,000		16.7	%
Total	$	2,282,000		100.0	%	$	8,546,000	100.0	%

We generally expect the assessed values of our multifamily communities and retail assets to rise over time, owing to our expectation of improving market conditions and the value of our multifamily communities and retail assets, as well as pressure on municipalities to raise revenues.  

General and Administrative

The increases in general and administrative expenses were primarily due to higher franchise and net worth taxes, and administrative expenses related to the properties acquired since September 30, 2015, as shown in the following table:

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
	Increase					Increase
	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):		Percent of increase
General and administrative expenses:
Taxes, licenses & fees	$	98,000		19.1	%	$	291,000	17.1	%
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	127,000			24.8	%	371,000		21.8	%
Stone Creek and Lenox Portfolio	79,000			15.4	%	252,000		14.8	%
Avenues at Creekside and Citi Lakes	(2,000		)	(0.4	)%	123,000		7.2	%
Lakewood Ranch, Aster at Lely, and CityPark View	24,000			4.7	%	218,000		12.8	%
North by Northwest and Avalon Park	70,000			13.7	%	90,000		5.3	%
City Vista and Sorrel	40,000			7.8	%	40,000		2.4	%
Other	(25,000		)	(4.8	)%	110,000		6.5	%
	—					—
	411,000			80.3	%	1,495,000		87.9	%
New Market Properties	101,000			19.7	%	207,000		12.1	%
Total	$	512,000		100.0	%	$	1,702,000	100.0	%

61

Equity compensation to directors and executives

Equity compensation expense by grant was as follows in the table below:

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Quarterly board member committee fee grants	$	18,030	$	18,018	$	48,021	$	41,917
Class B Unit awards:
Executive officers - 2014	—		—		—		3,825
Executive officers - 2015	—		495,399		5,236		1,474,872
Executive officers - 2016	517,884		—		1,536,946		—
Restricted stock grants:
2014	—		—		—		107,321
2015	—		80,000		106,670		133,333
2016	102,500		—		170,833		—
Total	$	638,414	$	593,417	$	1,867,706	$	1,761,268

Depreciation and amortization

The net increases in depreciation and amortization were driven primarily by the additional depreciable assets from the acquisitions made since September 30, 2015, as shown below:

	Three months ended				Nine months ended
	September 30, 2016				September 30, 2016
	Amount (rounded to 000s):		Percent of total		Amount (rounded to 000s):		Percent of total
Multifamily:
Baldwin Park, Crosstown Walk, and Overton Rise
Depreciation	$	2,059,000	9.5	%	$	5,581,000	10.2	%
Amortization of intangible assets	1,880,000		8.7	%	5,477,000		10.0	%
Stone Creek and Lenox Portfolio
Depreciation	1,138,000		5.3	%	3,474,000		6.3	%
Amortization of intangible assets	137,000		0.6	%	2,064,000		3.8	%
Creekside and Citi Lakes
Depreciation	1,225,000		5.7	%	3,656,000		6.6	%
Amortization of intangible assets	—		—	%	645,000		1.2	%
Lakewood Ranch, Aster at Lely, and CityPark View
Depreciation	1,355,000		6.3	%	4,061,000		7.4	%
Amortization of intangible assets	1,000		—	%	2,000		—	%
North by Northwest and Avalon Park
Depreciation	1,492,000		6.9	%	2,069,000		3.8	%
Amortization of intangible assets	1,086,000		5.0	%	1,495,000		2.7	%
City Vista and Sorrel
Depreciation	678,000		3.1	%	678,000		1.2	%
Amortization of intangible assets	771,000		3.6	%	771,000		1.4	%
Other	4,390,000		20.3	%	13,011,000		23.7	%
Total Multifamily	16,212,000		75.0	%	42,984,000		78.3	%
New Market Properties	5,452,000		25.0	%	11,997,000		21.7	%
Total	$	21,664,000	100.0	%	$	54,981,000	100.0	%

62

Acquisition and pursuit costs and fees to related parties

Acquisition and pursuit costs and acquisition fees consisted of:

	Three months ended September 30, 2016
Amount (rounded to 000s):	Acquisition fees		Other acquisition costs		Total acquisition costs
Multifamily communities:
City Vista and Sorrel	$	465,000	$	65,000	$	530,000
Other	72,000		—		72,000
Total	537,000		65,000		602,000
New Market Properties:
Sunbelt 7 Portfolio	138,000		156,000		294,000
Lakeland Plaza	55,000		48,000		103,000
Total	193,000		204,000		397,000
Brookwood	306,000		52,000		358,000
Total	$	1,036,000	$	321,000	$	1,357,000

	Three months ended September 30, 2015
Amount (rounded to 000s):	Acquisition fees		Other acquisition costs		Total acquisition costs
Multifamily communities:
Lakewood Ranch, Aster at Lely, and CityPark View	$	21,000	$	—	$	21,000
Houston Portfolio	5,000		—		5,000
Avenues at Creekside and Citi Lakes	1,215,000		1,196,000		2,411,000
Stone Creek and Lenox Portfolio	104,000		—		104,000
Other	2,000		—		2,000
Total	1,347,000		1,196,000		2,543,000
New Market Properties:					—
Royal Lakes Marketplace	32,000		165,000		197,000
Independence Square	283,000		180,000		463,000
Overlook at Hamilton and Summit Point	122,000		—		122,000
Total	437,000		345,000		782,000
Total	$	1,784,000	$	1,541,000	$	3,325,000

	Nine months ended September 30, 2016
Amount (rounded to 000s):	Acquisition fees		Other acquisition costs		Total acquisition costs
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	2,259,000	$	—	$	2,259,000
North by Northwest and Avalon Park	1,716,000		—		1,716,000
City Vista and Sorrel	481,000		65,000		546,000
Other	123,000		—		123,000
Total	4,579,000		65,000		4,644,000
New Market Properties:
Wade Green	183,000		111,000		294,000
Southeastern Six Portfolio	364,000		274,000		638,000
Sunbelt 7 Portfolio	457,000		156,000		613,000
The Market at Victory Village and Lakeland Plaza	264,000		48,000		312,000
	1,268,000		589,000		1,857,000
Brookwood	332,000		52,000		384,000
Total	$	6,179,000	$	706,000	$	6,885,000

63

	Nine months ended September 30, 2015
Amount (rounded to 000s):	Acquisition fees		Other acquisition costs		Total acquisition costs
Multifamily communities:
Lakewood Ranch, Aster at Lely, and CityPark View	$	504,000	$	1,098,000	$	1,602,000
Houston Portfolio	356,000		760,000		1,116,000
Avenues at Creekside and Citi Lakes	1,270,000		1,196,000		2,466,000
Stone Creek and Lenox Portfolio	109,000		—		109,000
Other	42,000		—		42,000
Total	2,281,000		3,054,000		5,335,000
New Market Properties:
Royal Lakes Marketplace	73,000		166,000		239,000
Independence Square	401,000		180,000		581,000
Other	122,000		—		122,000
Total	596,000		346,000		942,000
Total	$	2,877,000	$	3,400,000	$	6,277,000

Beginning January 1, 2016, the Company replaced the acquisition fees which were paid to the Manager upon the closing of a property with loan coordination fees. Loan coordination fees are calculated as 1.6% of any assumed, new or supplemental debt incurred in connection with an acquired property, or of 63.0% of the purchase price, if the asset is not leveraged, and are governed by the Management Agreement. If debt is employed to partially finance the acquisition of the property at the closing of the acquisition transaction, then the portion of loan coordination fees attributable to debt financing are treated as deferred loan costs and are amortized over the lives of the loans. If the property is not leveraged at the time of acquisition, then the full loan coordination fee is recognized as an acquisition expense. Such adjustments are included in the interest expense line on the consolidated statements of operations. Acquisition fees paid to our Manager were calculated as 1% of the gross purchase price of the multifamily community, the retail asset, or of the principal amount of the real estate loan. These costs also include similar expenditures for services provided by third parties.

Asset management fees and general and administrative fees to related party

Asset management fees are equal to one-twelfth of 0.50% of the total value of assets, as adjusted. The general and administrative expense fee is equal to 2% of the monthly gross revenues of the Company. Both are calculated as prescribed by the Management Agreement and are paid monthly to our Manager. These fees rose primarily due to the incremental assets and revenues brought on by acquisitions made since September 30, 2015, as shown in the following table:

	Three months ended				Nine months ended
	September 30, 2016				September 30, 2016
Revenues:	Amount (rounded to 000s):		Percent of increase		Amount (rounded to 000s):		Percent of increase
Increases attributable to:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	4,902,000	20.8	%	$	14,300,000	21.8	%
Stone Creek and Lenox Portfolio	2,828,000		12.0	%	8,351,000		12.7	%
Avenues at Creekside and Citilakes	1,420,000		6.0	%	6,937,000		10.6	%
North by Northwest and Avalon Park	3,539,000		15.0	%	4,673,000		7.1	%
City Vista and Sorrel	1,679,000		7.1	%	1,679,000		2.6	%
Mezzanine loans	2,433,000		10.3	%	7,587,000		11.5	%
Other	96,000		0.4	%	8,905,000		13.5	%
Total	16,897,000		71.7	%	52,432,000		79.8	%
New Market Properties	6,685,000		28.3	%	13,306,000		20.2	%
Total	$	23,582,000	100.0	%	$	65,738,000	100.0	%

64

	As of
	September 30, 2016
	Increase
	Amount (rounded to 000s):		Percent of increase
Gross real estate assets:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	213,900,000	24.3	%
Stone Creek and Lenox Portfolio	101,558,000		11.5	%
North by Northwest and Avalon Park	135,766,000		15.4	%
City Vista and Sorrel	92,255,000		10.5	%
Other	8,354,000		0.9	%
Total	551,833,000		62.7	%
New Market Properties	328,618,000		37.3	%
Total	$	880,451,000	100.0	%

Insurance, professional fees and other expenses

The increases consisted of:

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
	Increase					Increase
	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Insurance premiums:
Multifamily communities	$	173,000		62.7	%	$	726,000		40.2	%
New Market Properties	62,000			22.5	%	117,000			6.5	%
Other	84,000			30.4	%	167,000			9.3	%
Management agreement opinion	(128,000		)	(46.4	)%	293,000			16.2	%
Audit and tax fees	132,000			47.8	%	359,000			19.9	%
Accounting software	56,000			20.3	%	216,000			12.0	%
Legal fees	(88,000		)	(31.9	)%	(56,000		)	(3.1	)%
Other	(15,000		)	(5.4	)%	(18,000		)	(1.0	)%
Total	$	276,000		100.0	%	$	1,804,000		100.0	%

Contingent asset management and general and administrative expense fees

The Manager may, in its discretion, elect to forego some or all of the asset management, property management, or general and administrative expense fees for properties owned by us. Any such fees become due and payable to the extent that, in the event of any capital transaction, the net sale proceeds exceed the allocable capital contributions for the asset plus a 7% priority annual return on the asset. A total of $1,458,245 of combined asset management, general and administrative expense and property management fees attributable to the nine-month period ended September 30, 2016 and $3,596,068 cumulatively have been deemed contingent by the Manager. We will recognize any contingent fees in future periods to the extent, if any, we determine that it is probable that the estimated net sale proceeds would exceed the hurdles listed above. As of September 30, 2016, there was insufficient evidence to support recognition of these contingent fees; therefore, we have not recognized any expense for the contingent amounts.

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Interest expense

The increases consisted of:

	Three months ended					Nine months ended
	September 30, 2016					September 30, 2016
	Increase					Increase
Interest expense:	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):		Percent of increase
Increases attributable to:
Multifamily communities:
Baldwin Park, Crosstown Walk, and Overton Rise	$	1,498,000		23.4	%	$	4,166,000	26.4	%
Stone Creek and Lenox Portfolio	705,000			11.0	%	2,129,000		13.5	%
Avenues at Creekside and Citilakes	268,000			4.2	%	1,341,000		8.5	%
Lakewood Ranch, Aster at Lely, and CityPark View	(19,000		)	(0.3	)%	1,437,000		9.1	%
North by Northwest and Avalon Park	994,000			15.5	%	1,337,000		8.5	%
City Vista and Sorrel	497,000			7.7	%	498,000		3.2	%
KeyBank Operating LOC and Term Notes	826,000			12.9	%	1,603,000		10.1	%
Total	4,769,000			74.3	%	12,511,000		79.2	%
New Market Properties	1,772,000			27.6	%	3,197,000		20.2	%
Other	(126,000		)	(1.9	)%	96,000		0.6	%
Total	$	6,415,000		100.0	%	$	15,804,000	100.0	%

Funds From Operations Attributable to Common Stockholders and Unitholders (“FFO”)

Analysts, managers and investors make certain adjustments to reported net income amounts under U.S. GAAP in order to better assess these vehicles’ operating results. FFO is one of the most commonly utilized Non-GAAP measures currently in practice. In its 2002 “White Paper on Funds From Operations,” which was most recently revised in 2012,the National Association of Real Estate Investment Trusts, or NAREIT, standardized the definition of how Net income/loss should be adjusted to arrive at FFO, in the interests of uniformity and comparability.

The NAREIT definition of FFO (and the one reported by the Company) is:

Net income/loss:

• excluding impairment charges on and gains/losses from sales of depreciable property;

• plus depreciation and amortization of real estate assets and deferred leasing costs; and

• after adjustments for the Company's proportionate share of unconsolidated partnerships and joint ventures.

Not all companies necessarily utilize the standardized NAREIT definition of FFO, so caution should be taken in comparing the Company’s reported FFO results to those of other companies. The Company’s FFO results are comparable to the FFO results of other companies that follow the NAREIT definition of FFO and report these figures on that basis. The Company believes FFO is useful to investors as a supplemental gauge of our operating results. FFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders.

Core Funds From Operations Attributable to Common Stockholders and Unitholders (“Core FFO”)

Core FFO makes certain adjustments to FFO, which are either not likely to occur on a regular basis or are otherwise not representative of the Company’s ongoing operating performance. For example, the Company incurs substantial costs related to property acquisitions, which are required under GAAP to be recognized as expenses when they are incurred. The Company adds back any such acquisition and pursuit costs, including costs incurred in connection with obtaining short term debt financing for acquisitions and beginning January 1, 2016, amortization of loan coordination fees to FFO in its calculation of Core FFO since such costs are not representative of our operating results. The Company also adds back any costs incurred related to the extension of our management agreement with our Manager, realized losses on debt extinguishment and any non-cash dividends in this calculation. Core FFO figures reported by us may not be comparable to those Core FFO figures reported by other companies.

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We utilize Core FFO as a measure of the operating performance of our portfolio of real estate assets. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other real estate companies that are not as involved in ongoing acquisition activities. Core FFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders.

Adjusted Funds From Operations Attributable to Common Stockholders and Unitholders (“AFFO”)

AFFO makes further adjustments to Core FFO results in order to arrive at a more refined measure of operating and financial performance. There is no industry standard definition of AFFO and practice is divergent across the industry. The Company calculates AFFO as:

Core FFO, plus:

• non-cash equity compensation to directors and executives;

• amortization of loan closing costs, excluding costs incurred in connection with obtaining short term financing related to acquisitions;

• depreciation and amortization of non-real estate assets;

• net loan fees received; and

• deferred interest income received;

Less:

• non-cash loan interest income;

• cash paid for pursuit costs on abandoned acquisitions;

• cash paid for loan closing costs;

• amortization of acquired real estate intangible liabilities; and

• normally-recurring capital expenditures and capitalized retail direct leasing costs.

AFFO figures reported by us may not be comparable to those AFFO figures reported by other companies. We utilize AFFO as another measure of the operating performance of our portfolio of real estate assets. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other real estate companies. AFFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders.    FFO,Core FFO, and AFFO are not considered measures of liquidity and are not alternatives to measures calculated under GAAP.

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Reconciliation of FFO, Core FFO, and AFFO
to Net Loss Attributable to Common Stockholders (A)
		Three months ended:
		09/30/2016			09/30/2015
Net loss attributable to common stockholders (See note 1)		$	(13,624,001	)	$	(6,800,672	)
Less:	Loss attributable to non-controlling interests (See note 2)	(86,484		)	(15,289		)
Add:	Depreciation of real estate assets	15,283,505			7,510,851
	Amortization of acquired real estate intangible assets and deferred leasing costs	6,243,815			2,982,982
FFO		7,816,835			3,677,872
Add:	Acquisition and pursuit costs	1,357,537			3,324,958
	Loan cost amortization on acquisition term note (See note 3)	26,937			—
	Amortization of loan coordination fees paid to the Manager (See note 4)	288,127			—
	Costs incurred from extension of management agreement with advisor (See note 6)	—			129,279
Core FFO		9,489,436			7,132,109
Add:	Non-cash equity compensation to directors and executives	638,414			593,417
	Amortization of loan closing costs (See note 5)	723,426			369,128
	Depreciation/amortization of non-real estate assets	137,043			42,653
	Net loan fees received (See note 7)	250,602			494,100
	Deferred interest income received (See note 8)	—			282,620
Less:	Non-cash loan interest income (See note 7)	(3,950,676		)	(2,640,396		)
	Abandoned pursuit costs	—			(39,657		)
	Cash paid for loan closing costs	—			(433,195		)
	Amortization of acquired real estate intangible liabilities (See note 9)	(643,123		)	(304,608		)
	Normally recurring capital expenditures and leasing costs (See note 10)	(993,684		)	(462,638		)
AFFO		$	5,651,438		$	5,033,533
Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	$	4,992,038		$	4,018,249
	Distributions to Unitholders (See note 2)	179,449			49,781
	Total	$	5,171,487		$	4,068,030
Common Stock dividends and Unitholder distributions per share		$	0.2025		$	0.18
FFO per weighted average basic share of Common Stock and Unit Outstanding		$	0.31		$	0.16
Core FFO per weighted average basic share of Common Stock and Unit Outstanding		$	0.38		$	0.32
AFFO per weighted average basic share of Common Stock and Unit Outstanding		$	0.22		$	0.22
Weighted average shares of Common Stock and Units outstanding: (A)
	Basic:
	Common Stock	24,340,791			22,292,217
	Class A Units	886,168			278,006
	Common Stock and Class A Units	25,226,959			22,570,223
	Diluted: (B)
	Common Stock and Class A Units	27,032,093			22,953,854
Actual shares of Common Stock outstanding, including 23,247 and 22,602 unvested shares
of restricted Common Stock at September 30, 2016 and 2015, respectively		24,681,281			22,323,804
Actual Class A Units outstanding		886,168			276,560
	Total	25,567,449			22,600,364
(A) Units and Unitholders refer to Class A Units in our Operating Partnership, or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 3.66% weighted average non-controlling interest in the Operating Partnership for the three-month period ended September 30, 2016.
(B) Since our Core FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.

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Reconciliation of FFO, Core FFO, and AFFO
to Net Loss Attributable to Common Stockholders (A)
		Nine months ended:
		09/30/2016			09/30/2015
Net loss attributable to common stockholders (See note 1)		$	(34,039,743	)	$	(14,415,083	)
Add:	Loss attributable to non-controlling interests (See note 2)	(175,045		)	(20,712		)
	Depreciation of real estate assets	39,006,354			18,951,905
	Amortization of acquired real estate intangible assets and deferred leasing costs	15,576,868			7,343,400
Less:	Gain on sale of real estate	(4,271,506		)	—
FFO		16,096,928			11,859,510
Add:	Acquisition and pursuit costs	6,885,864			6,276,663
	Loan cost amortization on acquisition term note (See note 3)	139,744			96,658
	Amortization of loan coordination fees paid to the Manager (See note 4)	551,654			—
	Costs incurred from extension of management agreement with advisor (See note 6)	421,387			129,279
Core FFO		24,095,577			18,362,110
Add:	Non-cash equity compensation to directors and executives	1,867,706			1,761,268
	Amortization of loan closing costs (See note 5)	1,740,411			973,303
	Depreciation/amortization of non-real estate assets	397,843			114,458
	Net loan fees received (See note 7)	1,374,828			1,038,792
	Deferred interest income received (See note 8)	6,875,957			3,250,379
Less:	Non-cash loan interest income (See note 7)	(10,457,754		)	(6,596,366		)
	Abandoned pursuit costs	—			(39,657		)
	Cash paid for loan closing costs	(13,276		)	(529,853		)
	Amortization of acquired real estate intangible liabilities (See note 9)	(1,714,792		)	(695,177		)
	Normally recurring capital expenditures and leasing costs (See note 10)	(2,180,123		)	(1,012,440		)
AFFO
		$	21,986,377		$	16,626,817
Common Stock dividends and distributions to Unitholders declared:
Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	$	14,200,114		$	11,881,325
	Distributions to Unitholders (See note 2)	476,293			149,307
	Total	$	14,676,407		$	12,030,632
Common Stock dividends and Unitholder distributions per share		$	0.5975		$	0.535
FFO per weighted average basic share of Common Stock and Unit Outstanding		$	0.66		$	0.53
Core FFO per weighted average basic share of Common Stock and Unit Outstanding		$	0.99		$	0.82
AFFO per weighted average basic share of Common Stock and Unit Outstanding		$	0.90		$	0.74
Weighted average shares of Common Stock and Units outstanding: (A)
	Basic:
	Common Stock	23,552,951			22,109,036
	Class A Units	796,710			279,481
	Common Stock and Class A Units	24,349,661			22,388,517
	Diluted: (B)	25,854,478			22,783,909
	Common Stock and Class A Units
Actual shares of Common Stock outstanding, including 23,247 and 22,602 unvested shares
of restricted Common Stock at September 30, 2016 and 2015, respectively		24,681,281			22,323,804
Actual Class A Units outstanding		886,168			276,560
	Total	25,567,449			22,600,364
(A) Units and Unitholders refer to Class A Units in our Operating Partnership, or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 3.27% weighted average non-controlling interest in the Operating Partnership for the nine-month period ended September 30, 2016.
(B) Since our Core FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.

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Notes to Reconciliation of FFO, Core FFO and AFFO to Net Loss Attributable to Common Stockholders

1) Rental and other property revenues and expenses for the three-month period ended September 30, 2016 include activity for the two multifamily communities and eight grocery-anchored shopping centers acquired during the third quarter 2016 only from their respective dates of acquisition. In addition, the 2016 period includes a full quarter of activity for the six multifamily communities, ten grocery-anchored shopping centers and one student housing community acquired during the fourth quarters of 2015 and the first and second quarters 2016. Rental and other property revenues and expenses for the three-month period ended September 30, 2015 include activity for the two multifamily communities and two grocery-anchored shopping centers only from their respective dates of acquisition during the third quarter 2015.

2) Non-controlling interests in our Operating Partnership consisted of a total of 886,168 Class A Units as of September 30, 2016. Included in this total are 419,228 Class A Units which were granted as partial consideration to the seller in conjunction with theseller's contribution to us on February 29, 2016 of the Wade Green grocery-anchored shopping center. The remaining Class A units were awarded primarily to our key executive officers. The Class A Units are apportioned a percentage of our financial results as non-controlling interests. The weighted average ownership percentage of these holders of Class A Units was calculated to be 3.51% and 1.23% for the three-month periods ended September 30, 2016 and 2015, respectively and 3.27% and 1.25% for the nine-month periods ended September 30, 2016 and 2015, respectively.

3) We incurred loan closing costs for the acquisition of the Village at Baldwin Park multifamily community during the first quarter 2016 on our $35 million acquisition term loan facility with Key Bank National Association, or 2016 Term Loan and on our $11 million term note. These costs were deferred and are being amortized over the life of the 2016 Term Loan. We also incurred loan closing costs for the acquisition of the Avenues at Northpointe and Avenues at Cypress multifamily communities in 2015 on our $32 million acquisition term loan facility with Key Bank National Association, or 2015 Term Loan. These costs were deferred and were amortized over the life of the 2015 Term Loan until it was repaid in full on May 12, 2015. Since the amortization expense of these deferred costs is similar in character to acquisition costs, they are therefore an additive adjustment in the calculation of Core FFO.

4) We pay loan coordination fees to Preferred Apartment Advisors, LLC, our Manager, related to obtaining mortgage financing for acquired properties. The portion of the loan coordination fees attributable to the financing are amortized over the lives of the respective mortgage loans, and this non-cash amortization expense is an addition to FFO in the calculation of Core FFO. At September 30, 2016, aggregate unamortized loan costs were approximately $7.5 million, which will be amortized over a weighted average remaining loan life of approximately 7.1 years.

5) We incurred legal costs pertaining to the extension of our management agreement with our Manager. The three-year extension was effective as of June 3, 2016. Such costs are an additive adjustment to FFO in our calculation of Core FFO.

6) We incur loan closing costs on our existing mortgage loans, which are secured on a property-by-property basis by each of our acquired multifamily communities and retail assets, and also for occasional amendments to our $135 million syndicated revolving line of credit with Key Bank National Association, or our Revolving Line of Credit. These loan closing costs are also amortized over the lives of the respective loans and the Revolving Line of Credit, and this non-cash amortization expense is an addition to Core FFO in the calculation of AFFO. Neither we nor the Operating Partnership have any recourse liability in connection with any of the mortgage loans, nor do we have any cross-collateralization arrangements with respect to the assets securing the mortgage loans, other than security interests in 49% of the equity interests of the subsidiaries owning such assets, granted in connection with our Revolving Line of Credit, which provides for full recourse liability. At September 30, 2016, aggregate unamortized loan costs were approximately $18.3 million, which will be amortized over a weighted average remaining loan life of approximately 6.2 years.

7) We receive loan fees in conjunction with the origination of certain real estate loans. These fees are then recognized as revenue over the lives of the applicable loans as adjustments of yield using the effective interest method. The total fees received in excess of amortization income, after the payment of acquisition fees to our Manager are additive adjustments in the calculation of AFFO. Correspondingly, the non-cash income recognized under the effective interest method is a deduction in the calculation of AFFO. We also accrue over the lives of certain loans additional interest amounts that become due to us at the time of repayment of the loan or refinancing of the property, or when the property is sold to a third party. This non-cash income is deducted from Core FFO in the calculation of AFFO.

8) The Company records deferred interest revenue on certain of its real estate loans. These adjustments reflect the receipt during the periods presented of interest income which was earned and accrued prior to those periods presented on various real estate loans.

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9) This adjustment reflects straight-line rent adjustments and the reversal of the non-cash amortization of below-market and above-market lease intangibles, which were recognized in conjunction with the Company’s acquisitions and which are amortized over the estimated average remaining lease terms from the acquisition date for multifamily communities and over the remaining lease terms for retail assets. At September 30, 2016, the balance of unamortized below-market lease intangibles was approximately $19.2 million, which will be recognized over a weighted average remaining lease period of approximately 9.7 years.

10) We deduct from Core FFO normally recurring capital expenditures that are necessary to maintain our assets’ revenue streams in the calculation of AFFO. No adjustment is made in the calculation of AFFO for nonrecurring capital expenditures, which totaled $1,140,891 and $1,480,968 for the three-month periods ended September 30, 2016 and 2015, respectively and $4,260,073 and $2,140,381 for the nine-month periods ended September 30, 2016 and 2015, respectively. This adjustment also deducts from Core FFO capitalized amounts for third party costs during the period to originate or renew leases in our grocery-anchored shopping centers.

Liquidity and Capital Resources

Short-Term Liquidity

We believe our principal short-term liquidity needs are to fund:

• operating expenses directly related to our portfolio of multifamily communities and grocery-anchored shopping centers (including regular maintenance items);

• capital expenditures incurred to lease our multifamily communities and grocery-anchored shopping centers;

• interest expense on and upcoming maturities of our outstanding property level debt;

• amounts due on our Credit Facility;

• distributions that we pay to our preferred stockholders, common stockholders, and unitholders;

• cash redemptions that we may pay to our preferred stockholders, and

• committed investments.

We have a credit facility, or Credit Facility, with Key Bank National Association, or Key Bank, which defines a revolving line of credit, or Revolving Line of Credit, which is used to fund investments, capital expenditures, dividends (with consent of Key Bank), working capital and other general corporate purposes on an as needed basis. The maximum borrowing capacity on the Revolving Line of Credit was $70.0 million pursuant to the Third Amended and Restated Credit Agreement, which became effective August 28, 2015 and matures on August 27, 2018. The Revolving Line of Credit accrues interest at a rate of LIBOR plus 3.25% per annum.

On August 5, 2016, we entered into a Fourth Amended and Restated Credit Agreement with Key Bank and the other lenders, or the Fourth Amended and Restated Credit Agreement, that (i) increased the borrowing capacity under our Revolving Line of Credit from $70 million to $135 million with the ability to further increase it to $300 million,subject to certain syndication and other requirements and (ii) extended the maturity date to August 5, 2019, with an option to extend the maturity date to August 5, 2020, subject to certain conditions described therein.

On January 5, 2016, we entered into a $35.0 million term loan with Key Bank under the Credit Facility, or the 2016 Term Loan, to partially finance the acquisition of the Baldwin Park multifamily community. The Term Loan accrued interest at a rate of LIBOR plus 3.75% per annum. On August 5, 2016, the Company repaid the 2016 Term Loan in full.

On May 26, 2016, the Company entered into a $11.0 million interim term loan with Key Bank, or the Interim Term Loan, to partially finance the acquisition of Anderson Central, a retail shopping center located in Anderson, South Carolina. The Interim Term Loan accrues interest at a rate of LIBOR plus 2.5% per annum and the maturity date is May 25, 2017.

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The Credit Facility contains certain affirmative and negative covenants including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The material financial covenants include minimum net worth and debt service coverage ratios and maximum leverage and dividend payout ratios. As of September 30, 2016, we were in compliance with all covenants related to the Credit Facility, as shown in the table below.

Covenant (1)	Requirement		Result
Net worth	Minimum $686,921,700	(2)	$784,749,240
Debt yield	Minimum 8.0%		8.37%
Payout ratio	Maximum 95%	(3)	81.9%
Total leverage ratio	Maximum 65.0%		61.1%
Debt service coverage ratio	Minimum 1.50x		2.25x

⁽¹⁾ All covenants are as defined in the credit agreement for the Credit Facility.

⁽²⁾ Minimum $686.9 million, plus 75% of the net proceeds of any equity offering, which totaled $745 million as of September 30, 2016.

⁽³⁾Calculated on a trailing four-quarter basis. For the twelve-month period ended September 30, 2016, the maximum dividends and distributions allowed under this covenant was $62.4 million.

Interest expense for the Credit Facility was approximately $2.6 million (including deferred loan cost amortization of approximately $0.3 million) and the weighted average interest rate was 3.96% for the nine-month period ended September 30, 2016.

Our net cash provided by operating activities for the nine-month periods ended September 30, 2016 and 2015 was approximately $53.9 million and $28.2 million, respectively. The increase in net cash provided by operating activities was primarily due to the incremental cash generated by property income provided by the nine multifamily communities and 18 grocery-anchored shopping centers we acquired since September 30, 2015, and an increase in cash collections of interest income from our larger portfolio of real estate loans, which grew from an aggregate carrying value of approximately $238 million at September 30, 2015 to approximately $341 million at September 30, 2016.

The majority of our revenue is derived from residents and tenants under existing leases at our multifamily communities, retail shopping centers and office building. Therefore, our operating cash flow is principally dependent on: (1) the number of multifamily communities, retail shopping centers and office buildings in our portfolio; (2) rental rates; (3) occupancy rates; (4) operating expenses associated with these multifamily communities, retail projects and office building; and (5) the ability of our residents and tenants to make their rental payments. We believe we are well positioned to take advantage of the recent improvements in real estate fundamentals, such as higher occupancy rates, positive new and renewal rates over expiring leases, a declining home ownership rate and a decline in turnover, which we believe are all positive developments in the real estate industry.

We also earn interest revenue from the issuance of real estate-related loans and may receive fees at the inception of these loans for committing and originating them. Interest revenue we receive on these loans is influenced by (1) market interest rates on similar loans; (2) the availability of credit from alternative financing sources; (3) the desire of borrowers to finance new real estate projects; and (4) unique characteristics attached to these loans, such as exclusive purchase options.

Our net cash used in investing activities was approximately $833.1 million and $385.7 million for the nine-month periods ended September 30, 2016 and 2015, respectively. Disbursements for property acquisitions rose from approximately $311.9 million for the nine months ended September 30, 2015 to approximately $740.1 million for the nine months ended September 30, 2016. Net deployments of cash for real estate loans and notes receivable were approximately $108.4 million in 2016, versus net disbursements for loans and notes receivable in the 2015 period of approximately $73.8 million.

Cash used in investing activities is primarily driven by acquisitions and dispositions of multifamily properties and retail shopping centers and acquisitions and maturities or other dispositions of real estate loans and other real estate and real estate-related assets, and secondarily by capital expenditures related to our owned properties. We will seek to acquire more multifamily communities and retail shopping centers at costs that we expect will be accretive to our financial results. Capital expenditures may be nonrecurring and discretionary, as part of a strategic plan intended to increase a property’s value and corresponding revenue-generating power, or may be normally recurring and necessary to maintain the income streams and present value of a property. Certain capital expenditures may be budgeted and reserved for upon acquiring a property as initial expenditures necessary to bring

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a property up to our standards or to add features or amenities that we believe make the property a compelling value to prospective residents or tenants in its individual market. These budgeted nonrecurring capital expenditures in connection with acquisitions are funded from the capital sources for the acquisitions and are not dependent upon subsequent property operational cash flows for funding.

For the nine-month period ended September 30, 2016, our capital expenditures were:

	Nonrecurring capital expenditures						Recurring capital expenditures
	Budgeted at acquisition		Other		Total				Total
Multifamily:
Summit Crossing	$	—	$	96,109	$	96,109	$	98,571	$	194,680
Trail Creek	—		23,908		23,908		44,386		68,294
Stone Rise	—		60,737		60,737		56,003		116,740
Ashford Park	—		165,476		165,476		137,478		302,954
McNeil Ranch	—		10,554		10,554		63,220		73,774
Lake Cameron	—		71,845		71,845		83,241		155,086
Stoneridge	197,895		58,716		256,611		128,774		385,385
Vineyards	45,222		68,649		113,871		132,466		246,337
Enclave	159,576		18,320		177,896		111,351		289,247
Sandstone	89,857		70,300		160,157		137,320		297,477
Cypress	77,666		7,500		85,166		25,883		111,049
Northpointe	25,121		36,001		61,122		56,635		117,757
Lakewood Ranch	94,869		2,881		97,750		18,814		116,564
Aster at Lely	—		8,902		8,902		40,292		49,194
CityPark View	—		2,641		2,641		8,540		11,181
Mansions at Creekside	104,366		7,986		112,352		94,992		207,344
Citilakes	247,941		15,095		263,036		38,759		301,795
Stone Creek	118,923		3,675		122,598		41,975		164,573
Lenox Portfolio	28,246		3,049		31,295		82,954		114,249
Village at Baldwin Park	812,219		3,649		815,868		197,764		1,013,632
Crosstown Walk	—		24,053		24,053		42,134		66,187
Overton Rise	54,742		7,565		62,307		23,574		85,881
Avalon Park	29,572		7,221		36,793		83,366		120,159
City Vista	—		—		—		—		—
Sorrel	26,036		—		26,036		255		26,291
	2,112,251		774,832		2,887,083		1,748,747		4,635,830
Retail:
Woodstock Crossing	—		6,450		6,450		185		6,635
Parkway Town Centre	—		35,762		35,762		39,233		74,995
Spring Hill Plaza	—		—		—		2,743		2,743
Barclay Crossing	198,123		—		198,123		5,156		203,279
Deltona Landings	—		—		—		14,831		14,831
Kingwood Glen	—		40,977		40,977		23,520		64,497
Parkway Centre	—		25,032		25,032		71,391		96,423
Powder Springs	—		—		—		42,871		42,871
Sweetgrass Corner	—		—		—		40,189		40,189
Salem Cove	—		—		—		24,311		24,311
Independence Square	739,903		206,901		946,804		13,528		960,332
Royal Lakes Marketplace	—		—		—		24,445		24,445
Summit Point	24,465		36,983		61,448		10,300		71,748
The Overlook at Hamilton Place	—		—		—		11,478		11,478
Wade Green Village	58,397		—		58,397		7,434		65,831
East Gate Shopping Center	—		—		—		7,337		7,337
Fairview Market	—		—		—		2,800		2,800
Fury's Ferry	—		—		—		27,225		27,225
Southgate Village	—		—		—		40,554		40,554
	1,020,888		352,105		1,372,993		409,531		1,782,524
Student housing:
North by Northwest	—		—		—		22,609		22,609
	$	3,133,139	$	1,126,937	$	4,260,076	$	2,180,887	$	6,440,963

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For the nine-month period ended September 30, 2015, our capital expenditures were:

	Nonrecurring capital expenditures						Recurring capital expenditures
	Budgeted at acquisition		Other		Total				Total
Multifamily:
Summit Crossing	$	—	$	50,690	$	50,690	$	97,434	$	148,124
Trail Creek	—		85,988		85,988		88,945		174,933
Stone Rise	—		30,384		30,384		81,160		111,544
Ashford Park	—		209,015		209,015		127,725		336,740
McNeil Ranch	—		7,093		7,093		46,619		53,712
Lake Cameron	—		70,380		70,380		91,466		161,846
Stoneridge	103,510		12,294		115,804		121,494		237,298
Vineyards	28,264		8,230		36,494		63,177		99,671
Enclave	—		14,258		14,258		94,584		108,842
Sandstone	265,070		4,874		269,944		102,623		372,567
Cypress	30,675		3,573		34,248		15,112		49,360
Northpointe	43,959		—		43,959		14,559		58,518
Lakewood Ranch	119,222		17,256		136,478		—		136,478
Aster at Lely	—		—		—		12,229		12,229
CityPark View	—		—		—		2,794		2,794
Mansions at Creekside	19,576		—		19,576		21,109		40,685
Citilakes	19,197		—		19,197		—		19,197
	629,473		514,035		1,143,508		981,030		2,124,538
Retail:
Woodstock	264,930		15,648		280,578		735		281,313
Parkway Town Centre	319,121		—		319,121		4,704		323,825
Spring Hill Plaza	30,040		3,800		33,840		—		33,840
Deltona Landings	—		—		—		1,409		1,409
Salem Cove	29,820		—		29,820		—		29,820
Kingwood Glen	326,207		7,307		333,514		19,079		352,593
Powder Springs	—		—		—		371		371
Sweetgrass Corner	—		—		—		98		98
Independence Square	—		—		—		5,015		5,015
	970,118		26,755		996,873		31,411		1,028,284
Total	$	1,599,591	$	540,790	$	2,140,381	$	1,012,441	$	3,152,822

Net cash provided by financing activities was approximately $787.3 million and $362.5 million for the nine-month periods ended September 30, 2016 and 2015, respectively. Our receipts of funds from mortgage financing transactions of asset acquisitions were approximately $479.5 million in the nine-month period ended September 30, 2016, versus $204.6 million for the nine-month period ended September 30, 2015. Net proceeds from our Follow-on Offering rose from approximately $173.5 million to $287.8 million in the 2016 period. We collected net proceeds from the exercise of Warrants of approximately $19.8 million during the 2016 period versus $1.2 million for the 2015 period. We also collected net proceeds from our ATM Offering of approximately $5.4 million for the nine-month period ended September 30, 2015 and $2.8 million in the 2016 period.

We believe that our short-term liquidity needs are and will continue to be adequately funded.

Distributions

In order to maintain our status as a REIT for U.S. federal income tax purposes, we must comply with a number of organizational and operating requirements, including a requirement to distribute 90% of our annual REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income taxes on the taxable income we distribute to our stockholders. Generally, our objective is to meet our short-term liquidity requirement of funding the payment of our quarterly Common Stock dividends, as well as monthly dividends to holders of our Series A Preferred Stock, through net cash generated from operating results. In addition, our Series A Preferred Stock is redeemable by the holder at stated value commencing on the date of issuance, subject to a declining redemption fee.  Redemptions may be satisfied in cash or Common Stock, at our discretion. In the event we choose to redeem for cash but do not have available funds to do so, we intend to satisfy the request with shares of our Common Stock.

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For the nine-month period ended September 30, 2016, our aggregate dividends and distributions paid totaled approximately $40.6 million and our cash flows from operating activities of approximately $53.9 million were more than sufficient to fund our cash dividend distributions for the nine months ended September 30, 2016. We expect our cash flow from operations for future periods to be sufficient to fund our quarterly Common Stock dividends and distributions to Class A Unitholders, as well as our monthly Preferred Stock dividends, with the possible exceptions of periods in which we incur significant acquisition costs, or periods of significant debt extinguishment charges.

At September 30, 2016, we had 24,658,034 issued and outstanding shares of Common Stock, an additional 23,247 shares of unvested restricted stock, and 886,168 outstanding Class A Units in our Operating Partnership, all of which are entitled to quarterly dividends or distributions, when and if declared by our board of directors. Our third quarter dividend declaration of $0.2025 per share represents a 12.5% increase from the dividend of $0.18 for the third quarter 2015. The annualized rate of growth from our first dividend of $0.125 per share following our initial public offering in April 2011 to the third quarter 2016 was approximately 11.9%.

Our board of directors reviews the Series A Preferred Stock dividend monthly to determine whether we have funds legally available for payment of such dividends in cash. There can be no assurance that the Series A Preferred Stock dividends will consistently be paid in cash and dividends may be paid as a combination of cash and stock in order to satisfy the annual distribution requirements applicable to REITs. We expect the aggregate dollar amount of monthly Series A Preferred Stock dividend payments to increase at a rate that approximates the rate at which we issue new Units from our Follow-On Offering. At September 30, 2016, we had 802,032 outstanding shares of Series A Preferred Stock, which receive a monthly dividend of $5.00 per share.

Long-Term Liquidity Needs

We believe our principal long-term liquidity needs are to fund:

• the principal amount of our long-term debt as it becomes due or matures;

• capital expenditures needed for our multifamily communities and retail shopping centers;

• costs associated with current and future capital raising activities;

• costs to acquire additional multifamily communities, retail assets or other real estate and enter into new and fund existing lending opportunities; and

• our minimum distributions necessary to maintain our REIT status.

We intend to finance our future investments with the net proceeds from additional issuances of our securities, including our Follow-on Offering, Common Stock, and units of limited partnership interest in our Operating Partnership, and/or borrowings. The success of our acquisition strategy may depend, in part, on our ability to access further capital through issuances of additional securities, especially our Follow-on Offering. If we are unsuccessful in raising additional funds, we may not be able to obtain any assets in addition to those we have acquired.

On October 11, 2013, the SEC declared effective our Follow-On Offering Registration Statement for an offering of up to 900,000 Units to be offered from time to time on a “reasonable best efforts” basis. Except as described in the prospectus for the Follow-On Offering, the terms of the Follow-On Offering are substantially similar to the terms of the Primary Series A Offering. As of September 30, 2016, we had issued an aggregate of 809,460 Units from both our Primary Series A Offering which expired on December 31, 2013 and our Follow-On Offering. At September 30, 2016, we had 179,948 Units remaining available to be issued from our Follow-on Offering. For the nine-month period ended September 30, 2016, 1,516,320 shares of Common Stock were issued from the exercise of Warrants, which ultimately resulted in cash proceeds to us of approximately $16.2 million.

Aggregate offering expenses, including selling commissions and dealer manager fees, were approximately $93.5 million at September 30, 2016. These expenses will be capped at 11.5% of the aggregate gross proceeds of the Primary Series A Offering and the Follow-On Offering. We will reimburse our Manager up to 1.5% of the gross proceeds of these offerings for all organization and offering expenses incurred, excluding selling commissions and dealer manager fees; however, upon approval by the conflicts committee of our board of directors, we may reimburse our Manager for any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority. To clarify the prospectus for our Follow-On Offering, we will not pay selling commissions, but will pay dealer manager fees, in connection with the sale of Units through any participating broker-dealer that agrees to waive any or all of the selling commissions for such sale. The amount of selling commissions not paid will equal the amount of the selling commissions waived by the participating broker-dealer. The net proceeds to us will not be affected by reducing the commissions payable in connection with such sales.    

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On May 5, 2016, we filed a registration statement on Form S-3 (File No. 333-211178) for an offering up to $300 million of equity or debt securities, or the New Shelf Registration Statement, which was declared effective by the SEC on May 17, 2016. On July 18, 2016, we filed a prospectus to our New Shelf Registration Statement to issue and sell up to $150 million of our Common Stock from time to time in an “at the market” offering, or the New ATM Offering, through Jones Trading Institutional Services LLC, FBR Capital Markets & Co., and Canaccord Genuity Inc., as sales agents. We issued 197,256 shares of Common Stock for net proceeds of approximately $2.8 million under our New ATM Offering during the three-month period ended September 30, 2016.

On June 9, 2016, we filed a registration statement on Form S-3 (File No. 333-211924) for an offering of up to 2,000,000 Units consisting of 2,000,000 shares of Series A Redeemable Preferred Stock and warrants to purchase 40,000,000 shares of Common Stock, or the New Follow-On Series A Offering. Except as described in the prospectus, the terms of the New Follow-on Series A Offering are substantially similar to those under the Follow-on Offering.

Our ability to raise funds through the issuance of our securities is dependent on, among other things, general market conditions for REIT's, market perceptions about us, and the current trading price of our Common Stock. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity and credit markets may not consistently be available on terms that are attractive to us or at all.

The sources to fulfill our long-term liquidity in the future may include borrowings from a number of sources, including repurchase agreements, securitizations, resecuritizations, warehouse facilities and credit facilities (including term loans and revolving facilities), in addition to our Credit Facility. We have utilized, and we intend to continue to utilize, leverage in making our investments in multifamily communities and retail shopping centers. The number of different multifamily communities, retail shopping centers and other investments we will acquire will be affected by numerous factors, including the amount of funds available to us. By operating on a leveraged basis, we will have more funds available for our investments. This will allow us to make more investments than would otherwise be possible, resulting in a larger and more diversified portfolio.

We intend to target leverage levels (secured and unsecured) between 50% and 65% of the fair market value of our tangible assets (including our real estate assets, real estate loans, notes receivable, accounts receivable and cash and cash equivalents) on a portfolio basis. As of September 30, 2016, our outstanding debt (both secured and unsecured) was approximately 54.1% of the value of our tangible assets on a portfolio basis based on our estimates of fair market value at September 30, 2016. Neither our charter nor our by-laws contain any limitation on the amount of leverage we may use. Our investment guidelines, which can be amended by our board without stockholder approval, limit our borrowings (secured and unsecured) to 75% of the cost of our tangible assets at the time of any new borrowing. These targets, however, will not apply to individual real estate assets or investments. The amount of leverage we will place on particular investments will depend on our Manager's assessment of a variety of factors which may include the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in the portfolio, the availability and cost of financing the asset, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and the health of the commercial real estate market in general. In addition, factors such as our outlook on interest rates, changes in the yield curve slope, the level and volatility of interest rates and their associated credit spreads, the underlying collateral of our assets and our outlook on credit spreads relative to our outlook on interest rate and economic performance could all impact our decision and strategy for financing the target assets. At the date of acquisition of each asset, we anticipate that the investment cost for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. Finally, we intend to acquire all our real estate assets through separate single purpose entities and we intend to finance each of these assets using debt financing techniques for that asset alone without any cross-collateralization to our other real estate assets or any guarantees by us or our Operating Partnership. We intend to have no long-term unsecured debt at the Company or Operating Partnership levels, except for our Credit Facility.

Our secured and unsecured aggregate borrowings are intended by us to be reasonable in relation to our tangible assets and will be reviewed by our board of directors at least quarterly. In determining whether our borrowings are reasonable in relation to our tangible assets, we expect that our board of directors will consider many factors, including without limitation the lending standards of government-sponsored enterprises, such as Fannie Mae and Freddie Mac, for loans in connection with the financing of multifamily properties, the leverage ratios of publicly traded and non-traded REITs with similar investment strategies, and general market conditions. There is no limitation on the amount that we may borrow for any single investment.

Our ability to incur additional debt is dependent on a number of factors, including our credit ratings (if any), the value of our assets, our degree of leverage and borrowing restrictions imposed by lenders. We will continue to monitor the debt markets,

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including Fannie Mae and/or Freddie Mac (from both of whom we have obtained single asset secured financing on all of our multifamily communities), and as market conditions permit, access borrowings that are advantageous to us.

If we are unable to obtain financing on favorable terms or at all, we may have to curtail our investment activities, including acquisitions and improvements to real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and Investment Company Act exemption. Our ability to generate cash from asset sales is limited by market conditions and certain rules applicable to REITs. We may not be able to sell a property or properties as quickly as we would like or on terms as favorable as we would like.

Furthermore, if interest rates or other factors at the time of financing result in higher costs of financing, then the interest expense relating to that financed indebtedness would be higher. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could adversely affect our transaction and development activity, financial condition, results of operations, cash flow, our ability to pay principal and interest on our debt and our ability to pay distributions to our stockholders. Finally, sellers may be less inclined to offer to sell to us if they believe we may be unable to obtain financing.

As of September 30, 2016, we had long term mortgage indebtedness of approximately $1.2 billion, all of which was incurred by us in connection with the acquisition or refinancing of our multifamily communities, grocery-anchored shopping centers and office building. In addition, we held loan participation obligations of approximately $19.6 million and a principal amount owed on the 2016 Term Note of $11.0 millionat September 30, 2016.

As of September 30, 2016, we had approximately $10.5 million in unrestricted cash and cash equivalents available to meet our short-term and long-term liquidity needs. We believe that our long-term liquidity needs are and will continue to be adequately funded through the sources discussed above.

Off-Balance Sheet Arrangements

As of September 30, 2016, we had 702,823 Warrants outstanding from our sales of Units. The Warrants are exercisable by the holder at an exercise price of 120% of the current market price per share of the Common Stock on the date of issuance of such Warrant with a minimum exercise price of $9.00 per share. The current market price per share is determined using the volume weighted average closing market price for the 20 trading days prior to the date of issuance of the Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four years following the date of issuance. As of September 30, 2016, a total of 104,939 Warrants had been exercised for the purchase of 2,098,780 shares of Common Stock and 1,698 Warrants had expired. A remaining total of 280,325 Warrants had passed the initial exercise date and so became potentially exercisable into a total of 5,606,500 shares of Common Stock. The remainder of the Warrants outstanding at September 30, 2016 become potentially exercisable between October 15, 2016 and September 29, 2017 and have exercise prices that range between $13.10 and $17.96 per share. If all the Warrants outstanding at September 30, 2016 became exercisable and were exercised, gross proceeds to us would be approximately $196.1 million and we would as a result issue an additional 14,056,460 shares of Common Stock.

Contractual Obligations

As of September 30, 2016, our contractual obligations consisted of the mortgage notes secured by our acquired properties. At September 30, 2016, our estimated future required payments on these instruments were:

	Total		Less than one year		1-3 years		3-5 years		More than five years
Mortgage debt obligations:
Interest	$	237,163,947	$	41,167,032	$	76,384,643	$	51,984,480	$	67,627,792
Principal	1,276,335,433		110,814,068		262,348,728		257,627,200		645,545,437
Total	$	1,513,499,380	$	151,981,100	$	338,733,371	$	309,611,680	$	713,173,229

The principal amounts payable in the above chart include the principal amount due of $82.0 million on our Revolving Line of Credit at September 30, 2016, as well as $11.0 million principal amount outstanding on our Term Loan. Accrued interest as of September 30, 2016 on our debt instruments was $3,490,151. In addition to the amounts in the above table, we had unfunded real

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estate loan commitment amounts totaling approximately $54.4 million, including unfunded real estate loan participation obligations of approximately $0.5 million at September 30, 2016.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is interest rate risk. All our floating-rate debt is tied to the 30-day LIBOR. As of September 30, 2016, we have variable rate mortgages on our Avenues at Creekside, Citi Lakes, Avalon Park and Baldwin Park (Avalon Park and Baldwin Park both have two mortgages) multifamily communities, and on our Royal Lakes Marketplace and Cherokee Plaza grocery-anchored shopping centers, with an aggregate principal amount of approximately $263.9 million. Two of these mortgages have LIBOR effectively capped at 5.0% and 4.33% (all-in rates of 6.6% and 6.5%) under Freddie Mac's capped adjustable-rate mortgage program. Our Revolving Line of Credit accrues interest at a spread over LIBOR of 2.0% to 3.5%, depending upon our leverage ratio; this combined rate is uncapped.  As of September 30, 2016, the spread over LIBOR approximated 3.5%, for an all-in rate of approximately 3.9%. Because of the short term nature of this instrument, we believe our interest rate risk is minimal. We have no business operations which subject us to trading risk.

We have and will continue to manage interest rate risk as follows:

• maintain a reasonable ratio of fixed-rate, long-term debt to total debt so that floating-rate exposure is kept at an acceptable level;

• place interest rate caps on floating-rate debt where appropriate; and

• take advantage of favorable market conditions for long-term debt and/or equity financings.

We use various financial models and advisors to achieve our objectives.

If interest rates under our floating-rate LIBOR-based indebtedness fluctuated by 100 basis points, our interest costs, based on outstanding borrowings at September 30, 2016, would increase by approximately $2.5 million on an annualized basis, or decrease by approximately $1.2 million on an annualized basis. The difference between the interest expense amounts related to an increase or decrease in our floating-rate interest cost is because LIBOR was 0.53% at September 30, 2016, therefore we have limited the estimate of how much our interest costs may decrease because we use a floor of 0% for LIBOR.

Item  4. Controls and Procedures

Evaluation of disclosure controls and procedures.

Management of the Company evaluated, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Accounting Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of September 30, 2016, the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Accounting Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting.

As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Accounting Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such period.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

At the end of the period covered by this Quarterly Report on Form 10-Q, we and our subsidiaries were not a party currently subject to any material pending legal proceedings.

Item 1A.    Risk Factors

Our performance is subject to risks associated with our office properties and the office property industry.

Our economic performance from our office properties is subject to the risk that if our office properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our stockholders will be adversely affected. The following factors, among others, may adversely affect the income generated by our properties:

• downturns in the national, regional and local economic conditions (particularly increases in unemployment);

• competition from other office buildings;

• local real estate market conditions, such as oversupply or reduction in demand for office space;

• vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let office space;

• changes in space utilization by our office tenants due to technology, economic conditions and business culture;

• increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs; and

• declines in the financial condition of our office tenants and our ability to collect rents from our office tenants.

We face considerable competition in the office leasing market and may be unable to renew existing office leases or re-let office space on terms similar to the existing leases, or we may expend significant capital in our efforts to re-let office space, which may adversely affect our operating results.

Every year, we compete with a number of other developers, owners, and operators of office and office-oriented properties to renew office leases with our existing tenants and to attract new office tenants. To the extent that we are able to renew office leases that are scheduled to expire in the short-term or re-let such office space to new tenants, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenant improvements to a greater extent than we historically have. In addition, competition for credit worthy office tenants is intense and we may have difficulty competing with competitors, especially those who have purchased office properties at discounted prices allowing them to offer office space at reduced rental rates.

If our competitors offer office accommodations at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants upon expiration of their existing office leases. Even if our tenants renew their leases or we are able to re-let the office space, the terms and other costs of renewal or re-letting, including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates, and other potential concessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. If we are unable to renew office leases or re-let office space in a reasonable time, or if rental rates decline or tenant improvement, leasing commissions, or other costs increase, our financial condition, cash flows, ability to pay distributions to our stockholders, and ability to satisfy our debt service obligations could be adversely affected.

We face potential adverse effects from major office tenants’ bankruptcies or insolvencies.

The bankruptcy or insolvency of a major office tenant may adversely affect the income produced by our office properties. Our office tenants could file for bankruptcy protection or become insolvent in the future. We cannot evict an office tenant solely because of its bankruptcy. On the other hand, a bankrupt office tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt office tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the office lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could adversely affect our cash flow and results of operations.

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In order to maintain and/or increase the quality of our office properties and successfully compete against other office properties, we regularly must spend money to maintain, repair, renovate and improve our office properties, which could negatively impact our financial condition and results of operations.

If our office properties are not as attractive to customers due to physical condition as office properties owned by our competitors, we could lose customers or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain or enhance the competitiveness of our office properties. There can be no assurances that any such expenditures would result in higher occupancy or higher rental rates or deter existing customers from relocating to office properties owned by our competitors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.    

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item  6. Exhibits

See Exhibit Index.

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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 this report to be signed on its behalf by the undersigned, thereunto duly authorized.
		PREFERRED APARTMENT COMMUNITIES, INC.
Date: November 7, 2016	By:	/s/ John A. Williams
		John A. Williams
		Chief Executive Officer
Date: November 7, 2016	By:	/s/ Michael J. Cronin
		Michael J. Cronin
		Executive Vice President, Chief Accounting Officer and Treasurer

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EXHIBIT INDEX
Exhibit Number		Description
10.1	(1)	Fourth Amended and Restated Credit Agreement dated as of August 5, 2016 among Preferred Apartment Communities, Inc., Preferred Apartment Communities Operating Partnership, L.P., the lenders party thereto and KeyBank National Association
10.2	(1)	Fourth Amended and Restated Guaranty dated as of August 5, 2016 by and among Preferred Apartment Communities, Inc., each of the guarantors party thereto and KeyBank National Association
10.3	(1)	Fourth Amended and Restated Pledge and Security Agreement dated as of August 5, 2016 among Preferred Apartment Communities Operating Partnership, L.P., (the "Borrower"), each of the subsidiaries of the Borrower party thereto and KeyBank National Association
10.4	(2)	Form of Buy-Sell Agreement with KeyBank National Association
10.5	(3)	Amendment No. 1 to the Sixth Amended and Restated Management Agreement, effective as of August 29, 2016, and entered into as of October 5, 2016 among Preferred Apartment Communities, Inc., Preferred Apartment Communities Operating Partnership, L.P. and Preferred Apartment Advisors, LLC
10.6	(4)	First Amendment to Agreement of Sale and Purchase between HR Venture Properties I LLC and New Market Properties, LLC dated as of July 8, 2016 (TX)
10.7	(4)	Second Amendment to Agreement of Sale and Purchase between HR Venture Properties I LLC and New Market Properties, LLC dated as of July 11, 2016 (TX)
10.8	(4)	Third Amendment to Agreement of Sale and Purchase between HR Venture Properties I LLC and New Market Properties, LLC dated as of July 12, 2016 (TX)
12.1	*	Statements Re Computations of Ratios
31.1	*	Certification of John A. Williams, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification of Michael J. Cronin, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	*	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	*	XBRL (eXtensible Business Reporting Language). The following materials from Preferred Apartment Communities, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, formatted in XBRL: (i) Consolidated balance sheets at September 30, 2016 and December 31, 2015, (ii) consolidated statements of operations for the three months and nine months ended September 30, 2016 and 2015, (iii) consolidated statement of stockholders' equity, (iv) consolidated statement of cash flows and (v) notes to consolidated financial statements. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
	*	Filed herewith
	(1)	Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on August 10, 2016
	(2)	Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on February 17, 2015
	(3)	Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on October 5, 2016
	(4)	Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securities and Exchange Commission on July 15, 2016

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