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Related Party Arrangements
9 Months Ended
Sep. 30, 2014
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.