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Related Party Arrangements
12 Months Ended
Dec. 31, 2017
Related Party Transactions [Abstract]  
Related Party Arrangements

11.

Related Party Arrangements

The Company is externally advised and has no direct employees. Certain of the Company’s executive officers are executive officers of, or are on the board of managers of the Advisor.  In addition, certain directors and officers hold similar positions with CNL Securities Corp. (“Managing Dealer”), the Managing Dealer of the Offerings and a wholly owned subsidiary of CNL.  

In connection with services provided to the Company, affiliates are entitled to the following fees:

Managing Dealer — The Managing Dealer received selling commissions and marketing support fees of up to 7% and 3%, respectively, of gross offering proceeds for shares sold, excluding shares sold pursuant to the Company’s Reinvestment Plan, all or a portion of which may be paid to participating broker dealers by the Managing Dealer.

Advisor — The Advisor and certain affiliates are entitled to receive fees and compensation in connection with the acquisition, management and sale of the Company’s assets, as well as the refinancing of debt obligations of the Company or its subsidiaries. In addition, the Advisor and its affiliates are entitled to reimbursement of actual costs incurred on behalf of the Company in connection with the Company’s organizational, offering, acquisition and operating activities. Pursuant to the advisory agreement, as amended in 2013, the Advisor receives investment services fees equal to 1.85% of the purchase price of properties (including its proportionate share of properties acquired through joint ventures) for services rendered in connection with the selection, evaluation, structure and purchase of assets. In addition, the Advisor is entitled to receive a monthly asset management fee of 0.08334% of the average real estate asset value (as defined in the advisory agreement) of the Company’s properties, including its proportionate share of properties owned through joint ventures. The Advisor will also receive a financing coordination fee for services rendered with respect to refinancing of any debt obligations of the Company or its subsidiaries equal to 1.0% of the gross amount of the refinancing.

The Company will pay the Advisor a disposition fee in an amount equal to (i) in the case of the sale of real property, the lesser of (A) one-half of a competitive real estate commission, or (B) 1% of the sales price of such property, and (ii) in the case of the sale of any asset other than real property or securities, 1% of the sales price of such asset, if the Advisor, its affiliates or related parties provide a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of one or more assets (including a sale of all of its assets or the sale of it or a portion thereof). The Company will not pay its Advisor a disposition fee in connection with the sale of investments that are securities; however, a disposition fee in the form of a usual and customary brokerage fee may be paid to an affiliate or related party of the Advisor, if such affiliate is properly licensed.

Under the advisory agreement and the Company’s articles of incorporation, the Advisor will be entitled to receive certain subordinated incentive fees upon (a) sales of assets and/or (b) a listing (which would also include the receipt by the Company’s stockholders of securities that are approved for trading on a national securities exchange in exchange for shares of the Company’s common stock as a result of a merger, share acquisition or similar transaction). However, once a listing occurs, the Advisor will not be entitled to receive an incentive fee on subsequent sales of assets. The incentive fees are calculated pursuant to formulas set forth in both the advisory agreement and the Company’s articles of incorporation. All incentive fees payable to the Advisor are subordinated to the return to investors of their invested capital plus a 6% cumulative, noncompounded annual return on their invested capital. Upon termination or non-renewal of the advisory agreement by the Advisor for good reason (as defined in the advisory agreement) or by the Company other than for cause (as defined in the advisory agreement), a listing or sale of assets after such termination or non-renewal will entitle the Advisor to receive a pro-rated portion of the applicable subordinated incentive fee.

In addition, the Advisor or its affiliates may be entitled to receive fees that are usual and customary for comparable services in connection with the financing, development, construction or renovation of a property, subject to approval of the Company’s board of directors, including a majority of its independent directors.

11.

Related Party Arrangements (continued)

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 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) (“Limitation”), unless a majority of the Company’s independent directors determines that such excess expenses are justified based on unusual and non-recurring factors (“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 December 31, 2017, the Company did not incur operating expenses in excess of the Limitation.

Property Manager — Pursuant to a property management agreement, as amended in 2012, the Property Manager receives property management fees of (a) 2% of annual gross rental revenues from single tenant properties, and (b) 4% of annual gross rental revenues from multi-tenant properties. In the event that the Company contracts directly with a third-party property manager, the Company may pay the Property Manager an oversight fee of up to 1% of annual gross revenues of the property managed; however, in no event will the Company pay both a property management fee and an oversight fee with respect to the same property. The Company will pay to the Property Manager a construction management fee equal to 5% of hard and soft costs associated with the initial construction or renovation of a property, or with the management and oversight of expansion projects and other capital improvements, in those cases in which the value of the construction, renovation, expansion or improvements exceeds (i) 10% of the initial purchase price of the property, and (ii) $1.0 million, which fee will be due and payable upon completion of such projects.

Expense Support Agreements — Pursuant to the original expense support agreements, the Company’s Advisor and Property Manager agreed to forgo the payment of fees in cash and accept 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) aggregate modified funds from operations, as defined.  The Advisor expense support amount was determined for each calendar quarter, on a non-cumulative basis, on each quarter-end date ("Original Determination Date”).  The Property Manager expense support amount was determined for each calendar quarter, on a non-cumulative basis, after the calculation of the Advisor expense support amount pursuant to the Property Manager Expense Support Agreement on each quarter-end date.  The Restricted Stock is subordinated and forfeited to the extent that shareholders do not receive their invested capital plus a 6% cumulative noncompounded annual return upon ultimate liquidity of the Company.  Any amounts settled, and for which restricted stock shares were issued, pursuant to the Original Expense Support Agreements have been permanently settled and the Company has no further obligation to pay such amounts.  

In March 2016, the Company’s board of directors approved the third amended and restated expense support agreements with both the Advisor and Property Manager that were effective January 1, 2016.  These amendments changed the calculation and determination date of the respective affiliate’s expense support amounts from each calendar quarter on a non-cumulative basis, to each calendar year on a cumulative year-to-date basis ("Amended Determination Date”).  

In February 2017, the Company’s board of directors approved the fourth amended and restated expense support agreements with both the Advisor and Property Manager that were effective January 1, 2017.  These amendments limit the annual expense support amount, in the aggregate, to an annualized four percent of the weighted average of the Board’s most recent determination of NAV per share and change the calculation to exclude the impact of completed development properties for a specified period of time after the property is placed into service (as defined in the agreements).

11.

Related Party Arrangements (continued)

The aforementioned amendments, along with the original expense support agreements and previous amendments govern the fees and expenses charged by the Advisor and Property Manager to the Company.  For each quarter within a calendar expense support year, the Company records a proportional estimate of the cumulative year-to-date period based on an estimate of expense support amounts for the calendar expense support year.  Moreover, in exchange for services rendered and in consideration of the expense support provided, the Company shall issue, within 90 days following each Amended Determination Date, a number of shares of Restricted Stock equal to the quotient of the expense support amounts provided by the Advisor and Property Manager for the preceding calendar year divided by the then-current estimated NAV per share of common stock.  The terms of the expense support agreements automatically renew for consecutive one year periods, subject to the right of the Advisor or Property Manager to terminate their respective agreements upon 30 days’ written notice.

CNL Capital Markets Corp — CNL Capital Markets Corp., an affiliate of CNL, receives a sliding flat annual rate (payable monthly) based on the average number of investor accounts that will be open over the term of the agreement. For the years ended December 31, 2017, 2016 and 2015, the Company incurred approximately $0.9 million, $0.9 million and $0.6 million in such fees, respectively. These amounts are included in general and administrative expenses in the accompanying consolidated statements of operations.

Co-venture partners —The Company incurs operating expenses which, in general, relate to administration of the Company on an ongoing basis.  

The fees incurred by and reimbursable to the Managing Dealer in connection with the Company’s Offerings for the years ended December 31, 2017, 2016 and 2015, and related amounts unpaid as of December 31, 2017 and 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid amounts (1)

 

 

 

Years Ended December 31,

 

 

as of December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Selling commissions (2)

 

$

 

 

$

 

 

$

12,507

 

 

$

 

 

$

 

Marketing support fees (2)

 

 

 

 

 

 

16,242

 

 

 

 

 

 

 

$

 

 

$

 

 

$

28,749

 

 

$

 

 

$

 

 

The expenses and fees incurred by and reimbursable to the Company’s related parties for the years ended December 31, 2017, 2016 and 2015, and related amounts unpaid as of December 31, 2017 and 2016 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid amounts (1)

 

 

 

 

 

 

 

Years Ended December 31,

 

 

as of December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

 

2016

 

Reimbursable expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering costs (2)

 

$

 

 

$

 

 

$

3,446

 

 

$

 

 

$

 

Operating expenses (3)

 

 

5,791

 

 

 

5,966

 

 

 

5,214

 

 

 

1,042

 

 

 

1,072

 

Acquisition fees and expenses

 

 

6

 

 

 

104

 

 

 

613

 

 

 

2

 

 

 

3

 

 

 

 

5,797

 

 

 

6,070

 

 

 

9,273

 

 

 

1,044

 

 

 

1,075

 

Investment services fees  (4)

 

 

126

 

 

 

739

 

 

 

18,561

 

 

 

 

 

17

 

Disposition fee (5)

 

 

 

 

343

 

 

 

 

 

 

 

Financing coordination fees (6)

 

 

3,601

 

 

 

 

 

 

 

 

 

Property management fees  (7)

 

 

4,807

 

 

 

5,059

 

 

 

3,894

 

 

 

381

 

 

 

417

 

Asset management fees (8)

 

 

30,157

 

 

 

29,121

 

 

 

22,837

 

 

 

2,516

 

 

 

1,956

 

 

 

$

44,488

 

 

$

41,332

 

 

$

54,565

 

 

$

3,941

 

 

$

3,465

 

 

11.

Related Party Arrangements (continued)

 

FOOTNOTES:

 

(1)

Amounts are recorded as due to related parties in the accompanying consolidated balance sheets.

 

(2)

Amounts are recorded as stock issuance and offering costs in the accompanying consolidated statements of stockholders’ equity and redeemable noncontrolling interest.  Amounts include approximately $25,000 of reimbursement payments to the Advisor for services provided to the Company by its executive officers for the year ended December 31, 2015. The reimbursement payments include components of salaries, benefits and other overhead charges.

 

(3)

Amounts are recorded as general and administrative expenses in the accompanying consolidated statements of operations.  Amounts include approximately $0.1 million, $0.1 million and $0.1 million of reimbursement payments to the Advisor for services provided to the Company by its executive officers for the years ended December 31, 2017, 2016 and 2015, respectively. The reimbursement payments include components of salaries, benefits and other overhead charges.  

 

(4)

For the year ended December 31, 2017, the Company incurred approximately $0.1 million in investment services fees of which approximately $0.1 million, was capitalized and included in real estate assets, net in the accompanying consolidated balance sheets.  For the year ended December 31, 2016, the Company incurred approximately $0.7 million in investment service fees of which approximately $0.2 million was capitalized and included in real estate under development. For the year ended December 31, 2015, the Company incurred approximately $18.6 million in investment service fees of which approximately $2.3 million was capitalized and included in real estate under development. Investment service fees, that are not capitalized, are recorded as acquisition fees and expenses in the accompanying consolidated statements of operations.

 

(5)

Amounts are recorded as a reduction to gain on sale of real estate in the accompanying consolidated statements of operations.

 

(6)

For the year ended December 31, 2017, the Company incurred approximately $3.6 million in financing coordination fees related to the refinancing of the loans associated with certain operating properties of which approximately $0.9 million in financing coordination fees were capitalized as loan costs and reduced mortgages and other notes payable, net in the accompanying consolidated balance sheets. There were no financing coordination fees incurred for the years ended December 31, 2016 and 2015.  

 

(7)

For the years ended December 31, 2017, 2016 and 2015, the Company incurred approximately $4.8 million, $5.1 million and $3.9 million, respectively, in property and construction management fees payable to the Property Manager of which approximately $0.3 million, $0.9 million and $0.7 million, respectively, in construction management fees were capitalized and included in real estate under development in the accompanying consolidated balance sheets.

 

(8)

For the years ended December 31, 2017, 2016 and 2015, the Company incurred approximately $30.2 million, $29.1 million and $22.9 million, respectively, in asset management fees payable to the Advisor, of which approximately $2.9 million and $4.4 million for the years ended December 31, 2016 and 2015, respectively, were settled in accordance with the terms of the Advisor Expense Support Agreement.  No expense support was received for the year ended December 31, 2017. There was approximately $0.5 million, $0.8 million and $0.6 million, respectively, capitalized and included in real estate under development in the accompanying consolidated balance sheets.  

11.

Related Party Arrangements (continued)

The following fees have been or are expected to be settled and paid in the form of Restricted Stock in accordance with the expense support agreements for the years ended December 31, 2017 and 2016, and cumulatively as of December 31, 2017 (in thousands, except per share data):

 

 

 

Years Ended

 

 

As of

 

 

 

December 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2017

 

Asset management fees (1)

 

$

 

 

$

2,918

 

 

$

4,379

 

 

$

13,565

 

Then-current offering price or NAV (2)

 

$

10.32

 

 

$

10.04

 

 

$

10.19

 

 

$

10.32

 

Restricted stock shares (3)

 

 

 

 

291

 

 

 

423

 

 

 

1,332

 

Cash distributions on Restricted Stock (4)

 

$

571

 

 

$

427

 

 

$

281

 

 

$

1,381

 

Stock distributions on Restricted Stock (5)

 

 

 

 

 

 

14

 

 

 

21

 

_____________

FOOTNOTES:

 

(1)

No other amounts have been settled in connection with the expense support agreements for the years ended December 31, 2017, 2016 and 2015, and cumulatively as of December 31, 2017.

 

(2)

The number of restricted stock shares granted to the Advisor in lieu of payment in cash is determined by dividing the expense support amount for the respective determination date by the then-current public offering price or NAV per share.  

 

(3)

Restricted stock shares are comprised of approximately 1.3 million issued to the Advisor as of December 31, 2017.  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 as of December 31, 2017. 

 

(4)

The cash distributions have been recognized as compensation expense as issued and included in general and administrative expense in the accompanying consolidated statements of operations.

 

(5)

This represents the number of shares issued to the Advisor as stock distributions on its restricted stock shares.  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 consolidated statements of operations.