Related Party Arrangements |
11. |
Related Party
Arrangements |
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
September 30, 2014, the Company did not incur operating
expenses in excess of the Limitation.
The Company maintains accounts totaling approximately $0.1 million
and $0.4 million as of September 30, 2014 and
December 31, 2013, respectively, at a bank in which the
Company’s chairman serves as a director.
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 and automatically renews for successive one-year periods
thereafter, subject to the right of the Advisor or Property Manager
to terminate their respective agreements upon 30 days’
written notice to the Company.
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. 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.
The fees incurred by and reimbursable to the Advisor in connection
with the Company’s Offering for the quarters and nine months
ended September 30, 2014 and 2013, and related amounts unpaid
as of September 30, 2014 and December 31, 2013 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended |
|
|
Nine Months
Ended |
|
|
Unpaid amounts as
of (1) |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Selling commissions (2)
|
|
$ |
6,689 |
|
|
$ |
3,247 |
|
|
$ |
12,285 |
|
|
$ |
7,165 |
|
|
$ |
170 |
|
|
$ |
71 |
|
Marketing support fees (2)
|
|
|
4,524 |
|
|
|
3,252 |
|
|
|
9,937 |
|
|
|
8,463 |
|
|
|
135 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,213 |
|
|
$ |
6,499 |
|
|
$ |
22,222 |
|
|
$ |
15,628 |
|
|
$ |
305 |
|
|
$ |
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expenses and fees incurred by and reimbursable to the
Company’s related parties for the quarters and nine months
ended September 30, 2014 and 2013, and related amounts unpaid
as of September 30, 2014 and December 31, 2013 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended |
|
|
Nine Months
Ended |
|
|
Unpaid amounts as
of (1) |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Reimbursable expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering costs (2)
|
|
$ |
1,075 |
|
|
$ |
692 |
|
|
$ |
3,442 |
|
|
$ |
2,714 |
|
|
$ |
345 |
|
|
$ |
612 |
|
Operating expenses (3)
|
|
|
918 |
|
|
|
667 |
|
|
|
2,402 |
|
|
|
1,776 |
|
|
|
594 |
|
|
|
915 |
|
Acquisition fees and expenses
|
|
|
130 |
|
|
|
97 |
|
|
|
463 |
|
|
|
336 |
|
|
|
— |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,123 |
|
|
|
1,456 |
|
|
|
6,307 |
|
|
|
4,826 |
|
|
|
939 |
|
|
|
1,665 |
|
Investment services fees (4)
|
|
|
3,651 |
|
|
|
4,584 |
|
|
|
11,875 |
|
|
|
6,450 |
|
|
|
523 |
|
|
|
— |
|
Disposition fee (5)
|
|
|
— |
|
|
|
608 |
|
|
|
— |
|
|
|
608 |
|
|
|
— |
|
|
|
— |
|
Financing coordination fees (6)
|
|
|
— |
|
|
|
— |
|
|
|
220 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Property management fees (7)
|
|
|
728 |
|
|
|
295 |
|
|
|
1,763 |
|
|
|
879 |
|
|
|
459 |
|
|
|
322 |
|
Asset management fees (8)
|
|
|
3,696 |
|
|
|
1,264 |
|
|
|
9,510 |
|
|
|
2,898 |
|
|
|
420 |
|
|
|
894 |
|
Interest reserve and other advances (9)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,198 |
|
|
$ |
8,207 |
|
|
$ |
29,675 |
|
|
$ |
15,661 |
|
|
$ |
2,349 |
|
|
$ |
3,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOTNOTES:
(1) |
Amounts are recorded as due to
related parties in the accompanying condensed consolidated balance
sheets. |
(2) |
Amounts are recorded as stock
issuance and offering costs in the accompanying condensed
consolidated statements of stockholders’ equity and
redeemable noncontrolling interest. |
(3) |
Amounts are recorded as general and
administrative expenses in the accompanying condensed consolidated
statements of operations. |
(4) |
For the quarter and nine months ended
September 30, 2014, the Company incurred approximately $3.7
million and $11.9 million, respectively, in investment services
fees of which approximately $0.4 million and $1.6 million,
respectively, was capitalized and included in real estate under
development in the accompanying condensed consolidated balance
sheet. For the quarter and nine months ended September 30,
2013, the Company incurred approximately $4.6 million and $6.4
million, respectively, in investment service fees, of which
approximately $0.5 million, was capitalized as part of its
investment in the Montecito Joint Venture and the additional
Windsor Manor II Communities, and included in investments in
unconsolidated entities in the accompanying condensed consolidated
balance sheet. Investment service fees, that are not capitalized,
are recorded as acquisition fees and expenses in the accompanying
condensed consolidated statements of operations. |
(5) |
Amounts are recorded as a reduction
to gain on sale of investment in unconsolidated entity in the
accompanying consolidated statements of operations. |
(6) |
For the nine months ended
September 30, 2014, the Company incurred approximately $0.2
million in financing coordination fees, which was capitalized and
included in its investment in the Windsor Manor Joint Venture.
There were no financing coordination fees for the quarter and nine
months ended September 30, 2013. |
(7) |
For the quarter and nine months ended
September 30, 2014, the Company incurred approximately $0.7
million and $1.8 million, respectively, in property and
construction management fees payable to the Property Manager of
which approximately $0.2 million and $0.3 million, respectively, in
construction management fees were capitalized and included in real
estate under development in the accompanying condensed consolidated
balance sheet. For the quarter and nine months ended
September 30, 2013, the Company incurred approximately $0.3
million and $0.9 million, respectively, in property and
construction management fees payable to the Property Manager of
which $0.07 million and $0.2 million, respectively, was capitalized
and included in real estate under development. |
(8) |
For the quarter and nine months ended
September 30, 2014, the Company incurred approximately $3.7
million and $9.5 million, respectively, in asset management fees
payable to the Advisor of which approximately $0.9 million and $3.8
million, respectively, was forgone in accordance with the terms of
the Advisor Expense Support Agreement and approximately $0.1
million and $0.2 million, respectively, was capitalized and
included in real estate under development in the accompanying
condensed consolidated balance sheet. For the quarter and nine
months ended September 30, 2013, the Company incurred
approximately $1.3 million and $3.4 million, respectively, in asset
management fees payable to the Advisor of which approximately $0.5
million for the nine months ended September 30, 2013 was
forgone in accordance with the terms of the Expense Support
Agreement and approximately $0.2 million and $0.2 million,
respectively, was capitalized and included in real estate under
development in the accompanying condensed consolidated balance
sheet. |
(9) |
Amounts primarily consists of an
interest reserve account related to the acquisition, development
and construction loan (“ADC Loan”) that the Company
originated in June 2013. |
The following fees were foregone in connection with the Expense
Support Agreements for the quarter and nine months ended
September 30, 2014 and 2013, and cumulatively as of
September 30, 2014 (in thousands, except offering price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
As of
September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
Asset management fees (1)
|
|
$ |
884 |
|
|
$ |
— |
|
|
$ |
3,764 |
|
|
$ |
474 |
|
|
$ |
5,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Then-current offering price
|
|
$ |
10.14 |
|
|
$ |
10.00 |
|
|
$ |
10.14 |
|
|
$ |
10.00 |
|
|
$ |
10.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock shares (2)
|
|
|
87 |
|
|
|
— |
|
|
|
371 |
|
|
|
47 |
|
|
|
510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions on Restricted Stock (3)
|
|
$ |
30 |
|
|
$ |
— |
|
|
$ |
48 |
|
|
$ |
— |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock distributions on Restricted Stock (4)
|
|
|
2 |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOOTNOTES:
(1) |
No other amounts have been forgone in
connection with the Expense Support Agreements for the quarter and
nine months ended September 30, 2014 and 2013, and
cumulatively as of September 30, 2014. |
(2) |
Restricted stock shares are comprised
of approximately 0.42 million issued to the Advisor and
approximately 0.09 million issuable to the Advisor as of
September 30, 2014. Since the vesting conditions were not met
through September 30, 2014, no fair value was assigned to the
restricted stock shares as the shares were valued at zero, which
represents the lowest possible value estimated at vesting. In
addition, the restricted stock shares were treated as unissued for
financial reporting purposes because the vesting criteria had not
been met through September 30, 2014. |
(3) |
The cash distributions have been
recognized as compensation expense as issued and included in
general and administrative expense in the accompanying condensed
consolidated statements of operations. |
(4) |
The par value of the stock
distributions has been recognized as compensation expense as issued
and included in general and administrative expense in the
accompanying condensed consolidated statements of operations. |
As of September 30, 2014, the Company’s ADC Loan of
approximately $6.0 million to C4 Development, LLC, a related party,
for the development of an MOB in Rutland, Virginia had been fully
repaid. The previous funding on the ADC Loan was recorded as a note
receivable from related party in the accompanying condensed
consolidated balance sheet as of December 31, 2013. In
addition, the Company recorded interest income for both the quarter
and nine months ended September 30, 2014 and 2013, which is
included in interest income on note receivable from related party
in the accompanying condensed consolidated statements of operations
for the respective periods.
|