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Related Party Arrangements
3 Months Ended
Mar. 31, 2014
Related Party Arrangements
11. Related Party Arrangements

In March 2013, the Company entered into the Advisor Expense Support Agreement, whereby commencing on April 1, 2013, the Advisor has agreed to provide expense support to the Company through forgoing the payment of fees in cash and acceptance of restricted stock for services rendered and specified expenses incurred in an amount equal to the positive excess, if any, of (a) aggregate stockholder cash distributions declared for the applicable quarter, over (b) the Company’s aggregate modified funds from operations (as defined in the Advisor Expense Support Agreement). The Advisor expense support amount is determined for each calendar quarter of the Company, on a non-cumulative basis, each quarter-end date (“Determination Date”). In August 2013, the Company entered into the Property Manager Expense Support Agreement, whereby commencing on July 1, 2013, the Property Manager agreed to provide expense support to the Company through forgoing the payment of fees in cash and accepting restricted stock for services in an amount equal to the positive excess, if any, of (a) aggregate stockholder cash distributions declared for the applicable quarter, over (b) the Company’s aggregate modified funds from operations (as defined in the Property Manager Expense Support Agreement). The Property Manager expense support amount shall be determined, on a non-cumulative basis, after the calculation of the Advisor expense support amount pursuant to the Property Manager Expense Support Agreement on each Determination Date. The terms of both the Advisor Expense Support Agreement and the Property Manager Expense Support Agreement (‘the Expense Support Agreements”) run through December 31, 2014, subject to the right of the Advisor or Property Manager to terminate their respective agreements upon 30 days’ written notice to the Company. No expense support agreements existed during the three months ended March 31, 2013. Since the vesting criteria is outside the control of the Advisor and Property Manager and involves both market conditions and counterparty performance conditions, the restricted stock shares will be treated as unissued for financial reporting purposes until the vesting criteria, as defined in the Expense Support Agreements, are met.

 

In exchange for services rendered and in consideration of the expense support provided, the Company will issue, within 45 days following each Determination Date, a number of shares of restricted stock equal to the quotient of the expense support amount provided by to the Advisor and Property Manager for the preceding quarter divided by the then-current public offering price per share of common stock, on the terms and conditions and subject to the restrictions set forth in the respective expense support agreements (“Expense Support Agreements”). Any amounts foregone, and for which restricted stock shares are issued, pursuant to the Expense Support Agreements will be permanently waived and the Company will have no obligation to pay such amounts to the Advisor or the Property Manager. The Restricted Stock is subordinated and forfeited to the extent that stockholders do not receive their original invested capital back with at least a 6% annualized return of investment upon ultimate liquidity of the company.

For the three months ended March 31, 2014, approximately $0.8 million in asset management fees were forgone in accordance with the terms of the Expense Support Agreements. In accordance therewith, the Company determined that approximately 0.08 million shares of restricted stock related to the three months ended March 31, 2014 were issuable to the Advisor (calculated as the $0.8 million in asset management fees divided by the $10.14 offering price per share of common stock). Since the vesting conditions were not met during the three months ended March 31, 2014, no fair value was assigned to the restricted stock shares accepted by the Advisor in exchange for providing asset management fees as the shares were valued at zero, which represents the lowest possible value estimated at vesting. As a result, for accounting purposes, asset management fees were reduced by $0.8 million as a result of the expense support provided under the Advisor Expense Support Agreement. As of March 31, 2014, the Company had issued 0.05 million shares and had issuable an additional 0.09 million shares of restricted stock to the Advisor for Advisor Expense Support received from April 1, 2013 through December 31, 2013. As of March 31, 2014, the 0.05 million shares, that had been previously issued, were treated as unissued for financial reporting purposes because the vesting criteria had not been met through March 31, 2014.

As of March 31, 2014, the Advisor had foregone a total of approximately $2.2 million in asset management fees under the terms of the Advisor expense support agreement and the Company had issued approximately 0.05 million restricted stock shares to the Advisor related to three months ended June 30, 2013 and had as issuable approximately 0.09 million and 0.08 million of additional shares of restricted stock related to three months ended December 31, 2013 and March 31, 2014, respectively, which will be issued during the second quarter of 2014.

For the three months ended March 31, 2014, the Advisor had received approximately $4,900 and 358 shares in the form of cash and stock distributions, respectively, related to previously issued restricted shares. These distributions have been recognized as compensation expense and included in general and administrative expense in the accompanying condensed consolidated statements of operations.

No property management fees or specified expenses were forgone for the three months ended March 31, 2014. As of March 31, 2014, no shares of restricted stock had been issued to the Property Manager nor was the Property Manager entitled to any dividends during the three months ended March 31, 2014.

 

For the three months ended March 31, 2014 and 2013, the Company incurred the following fees in connection with its Offering (in thousands):

 

     2014      2013  

Selling commissions (1)

   $ 2,453       $ 1,696   

Marketing support fees (1)

     2,584         2,171   
  

 

 

    

 

 

 
   $ 5,037       $ 3,867   
  

 

 

    

 

 

 

For the three months ended March 31, 2014 and 2013, the Company incurred the following fees and reimbursable expenses as follows (in thousands):

 

     2014      2013  

Reimbursable expense:

     

Offering costs (1)

   $ 826       $ 203   

Operating expenses (2)

     199         609   

Acquisition fees and expenses

     235         —     
  

 

 

    

 

 

 
     1,260         812   

Investment services fees (3)

     4,046         —     

Property management fees (4)

     460         308   

Asset management fees (5)

     2,666         1,001   
  

 

 

    

 

 

 
   $ 8,432       $ 2,121   
  

 

 

    

 

 

 

 

FOOTNOTES:

 

(1)  Amounts are recorded as stock issuance and offering costs in the accompanying condensed consolidated statements of stockholders’ equity.
(2)  Amounts are recorded as general and administrative expenses in the accompanying condensed consolidated statements of operations.
(3)  For the three months ended March 31, 2014, the Company incurred approximately $4.0 million in investment services fees of which approximately $0.5 million was capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet. For the three months ended March 31, 2013, the Company incurred approximately $0.4 million in investment service fees, which was capitalized and included in investments in unconsolidated entities in the accompanying condensed consolidated balance sheet. Investment service fees are recorded as acquisition fees and expenses in the accompanying condensed consolidated statements of operations.
(4)  For the three months ended March 31, 2014 and 2013, the Company incurred approximately $0.5 million and $0.3 million, respectively, in property and construction management fees payable to the Property Manager of which approximately $0.1 million and $0.07 million, respectively, in construction management fees were capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet.
(5)  For the three months ended March 31, 2014, the Company incurred approximately $2.7 million in asset management fees and specified expenses, of which approximately $0.8 million in asset management fees were forgone in accordance with the terms of the Advisor Expense Support Agreement and approximately $0.1 million that have been capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet. For the three months ended March 31, 2013, the Company incurred $1.0 million in asset management fees of which approximately $0.01 million in asset management fees was capitalized and included in real estate under development in the accompanying condensed consolidated balance sheet. No amounts for the three months ended March 31, 2013 were forgone in accordance with the terms of the Expense Support Agreements.

 

As of March 31, 2014 and December 31, 2013, amounts due to related parties for fees and reimbursable costs and expenses described above were as follows (in thousands):

 

     March 31,
2014
     December 31,
2013
 

Due to managing dealer:

     

Selling commissions

   $ 323       $ 71   

Marketing support fees

     282         70   
  

 

 

    

 

 

 
     605         141   
  

 

 

    

 

 

 

Due to property manager:

     

Property management fees

     426         322   
  

 

 

    

 

 

 
     426         322   
  

 

 

    

 

 

 

Due to the Advisor and its affiliates:

     

Reimbursable offering costs

     1,318         612   

Reimbursable operating expenses

     1,185         1,053   

Investment Services Fees

     897         —     

Asset management fees

     1,819         894   

Interest reserve account and other advances

     198         286   
  

 

 

    

 

 

 
     5,417         2,845   
  

 

 

    

 

 

 
   $ 6,448       $ 3,308   
  

 

 

    

 

 

 

The Company incurs operating expenses which, in general, relate to administration of the Company on an ongoing basis. Pursuant to the advisory agreement, the Advisor shall reimburse the Company the amount by which the total operating expenses paid or incurred by the Company exceed, in any four consecutive fiscal quarters (an “Expense Year”) commencing with the Expense Year ending June 30, 2013, the greater of 2% of average invested assets or 25% of net income (as defined in the advisory agreement) (the “Limitation”), unless a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors (the “Expense Cap Test”). In performing the Expense Cap Test, the Company uses operating expenses on a GAAP basis after making adjustments for the benefit of expense support under the Expense Support Agreements. For the Expense Year ended March 31, 2014, the Company did not incur operating expenses in excess of the Limitation.

Organizational and offering costs become a liability to the Company only to the extent selling commissions, the marketing support fees and other organizational and offering costs do not exceed 15% of the gross proceeds of the Offering as described in Note 14. “Stockholders’ Equity.” As of March 31, 2014, there were no organizational and offering costs in excess of the 15% limitation that have been billed to the Company.

The Company maintains accounts at a bank in which the Company’s chairman serves as a director. The Company had additional deposits at that bank totaling approximately $0.2 million and $0.4 million as of March 31, 2014 and December 31, 2013, respectively.

 

As of March 31, 2014, the Company has funded approximately $5.3 million of the total $6.2 million acquisition, development and construction loan (“ADC Loan”) to C4 Development, LLC (“Crosland Southeast”), a related party, for the development of an MOB in Rutland, Virginia.

Based on review and assessment of the transaction structure, the Company has determined that it holds a variable interest in Crosland Southeast through the ADC Loan; however, the Company further concluded that it is not the primary beneficiary of the HCA Rutland development as the Company does not have the power to direct the activities that most significantly impact economic performance of either Crosland Southeast or the HCA Rutland development. The Company’s maximum exposure to loss as a result of its involvement with this VIE is limited to the amounts funded under the ADC Loan, which totaled approximately $5.6 million as of March 31, 2014. The Company’s exposure is limited as a result of the Company’s collateralized interest in the HCA Rutland development.

The approximate $5.3 million of funding on the ADC Loan has been recorded as a note receivable from related party in the accompanying condensed consolidated balance sheets and is comprised of the following (in thousands):

 

Borrower (Description of Collateral Property)

   Origination
Date
   Maturity
Date 
(1)
   Interest
Rate 
(2)
    Loan Principal Balance as of  
           March 31,
2014
     December 31,
2013
 

Crosland Southeast (land development)

   6/27/2013    6/27/2014      16.0   $ 5,333       $ 3,741   

Loan origination costs, net

             20         84   

Accrued interest (3)

             225         124   
          

 

 

    

 

 

 

Total note receivable from related party

           $ 5,578       $ 3,949   
          

 

 

    

 

 

 

 

FOOTNOTES:

 

(1)  The initial term of the ADC Loan is one year with an extension option of up to six months.
(2)  The interest rate is comprised of an 8% component that is paid monthly and an 8% component that is paid upon maturity of the ADC Loan.
(3)  Approximately $0.03 million of accrued interest represents monthly interest payments and approximately $0.2 million represents amounts that are due at maturity. Accrued interest is included in interest income on note receivable from related party in the accompanying condensed consolidated statements of operations.

The fair value and carrying value of the Company’s note receivable from related party was approximately $5.3 million as of March 31, 2014 based on then-current rates and spreads that a market participant would expect to obtain for similar financings. Since this methodology includes inputs that are less observable by the public and are not necessarily reflected in active markets, the measurement of the estimated fair value related to the Company’s note receivable from related party is categorized as level 3 on the three-level fair value hierarchy.

The following is a schedule of future principal maturities for the note receivable from related party for the remainder of 2014, each of the next four years and thereafter, in the aggregate, as of March 31, 2014 (in thousands):

 

2014

   $ 5,578   

2015

     —     

2016

     —     

2017

     —     

2018

     —     

Thereafter

     —     
  

 

 

 

Total

   $ 5,578