Summary of Significant Accounting Policies

Basis of Accounting

The consolidated financial statements of the Company presented herein include the accounts of the General Partner and its consolidated subsidiaries, including the OP. All intercompany transactions have been eliminated upon consolidation. The financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results for the entire year or any subsequent interim period.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2014 of the Company, which are included in the Company’s Annual Report on Form 10-K, as amended, filed March 30, 2015. There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2015, except as noted below regarding the early adoption of the U.S. Financial Accounting Standards Board (the “FASB”) Accounting Standards Update, (“ASU”) No. 2015-02, Consolidation. Information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries and consolidated joint venture arrangements. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests in VEREIT's and the OP’s consolidated balance sheets and statements of operations, consolidated statements of comprehensive income (loss) and consolidated statements of changes in equity. In addition, as described in Note 1 – Organization, certain third parties have been issued OP Units. Holders of OP Units are considered to be non-controlling interest holders in the OP and their ownership interest is reflected as equity in the consolidated balance sheets. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to common stock, any difference between the fair value of common shares issued and the carrying value of the OP Units converted is recorded as a component of equity. As of both September 30, 2015 and December 31, 2014, there were approximately 23.8 million Limited Partner OP Units outstanding.

During the three months ended September 30, 2015, the Company early adopted the U.S. FASB ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), as described in the Recent Accounting Pronouncements section below, which simplifies consolidation accounting by reducing the number of consolidation models and changing various aspects of current U.S. GAAP, including certain consolidation criteria for variable interest entities (“VIEs”). For legal entities being evaluated for consolidation, the Company must first determine whether the interests that it holds and fees it receives qualify as variable interests in the entity. A variable interest is an investment or other interest that will absorb portions of an entity’s expected losses or receive portions of the entity’s expected residual returns. The Company’s evaluation includes consideration of fees paid to the Company where the Company acts as a decision maker or service provider to the entity being evaluated. If the Company determines that it holds a variable interest in an entity, it evaluates whether that entity is a variable interest entity (“VIE”). VIEs are entities where investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or where equity investors, and as a group, lack one of the following characteristics: (a) the power to direct the activities that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of the entity, or (c) the right to receive the expected returns of the entity.

A VIE must be consolidated by its primary beneficiary, which is generally defined as the party who has a controlling financial interest in the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance and its obligation to absorb losses from or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company consolidates any VIEs when the Company is determined to be the primary beneficiary of the VIE and the difference between consolidating the VIE and accounting for it using the equity method would be material to the Company’s consolidated financial statements.

The Company continually evaluates the need to consolidate legal entities based on standards set forth in GAAP as described above.

Reclassification

As described below, certain items previously reported have been reclassified to conform with the current period’s presentation.

The other debt balance from prior year has been combined in the consolidated balance sheets and consolidated statements of cash flows into the captions mortgage notes payable and other debt, net and payments on mortgage notes payable and other debt, respectively. State property income and franchise taxes previously included in general and administrative expenses and federal and state income taxes previously included in other income, net have been combined into the caption (provision for) benefit from income and franchise taxes in the consolidated statements of operations. Additionally, the gain on forgiveness of debt previously included in other income, net has been combined into the caption extinguishment and forgiveness of debt, net.

Further, the designated derivatives, fair value adjustments line item from prior year has been disaggregated within the consolidated statements of other comprehensive loss into the captions unrealized loss on interest rate derivatives and amount of loss reclassified from accumulated other comprehensive loss into income as interest expense. These captions were previously included within the notes to consolidated financial statements.

Assets Held for Sale

The Company classifies real estate investments as held for sale in accordance with U.S. GAAP. Upon classifying an asset as held for sale, the Company will no longer recognize depreciation expense related to the depreciable assets of the property. Assets held for sale are recorded at the lower of carrying value or estimated fair value, less the estimated cost to dispose of the assets. As of September 30, 2015, five properties were classified as held for sale. As of December 31, 2014, two properties were classified as held for sale, which were sold during the first quarter of 2015.

If circumstances arise that the Company previously considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the Company will reclassify the property as held and used. The Company measures and records a property that is reclassified as held and used at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the property been continuously classified as held and used or (ii) the estimated fair value at the date of the subsequent decision not to sell.

Revenue Recognition

The Company’s revenues, which primarily consist of rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. When the Company acquires a property, the term of each existing lease is considered to commence as of the acquisition date for the purposes of this calculation. Since many of the leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Straight-line rent receivables are included in deferred costs and other assets, net, in the consolidated balance sheets. See Note 8 – Deferred Costs and Other Assets, Net. Cost recoveries from tenants are included within operating expense reimbursements in the consolidated statements of operations, in the period the related costs are incurred.The Company defers the revenue related to lease payments received from tenants in advance of their due dates. As of September 30, 2015 and December 31, 2014, the Company had $49.4 million and $57.8 million, respectively, of deferred rental income, which is included in deferred rent, derivative, and other liabilities in the consolidated balance sheets.

The Company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is uncertain, the Company will record an increase in the allowance for uncollectible accounts in the consolidated balance sheets or record a direct write-off of the receivable in the consolidated statements of operations. As of September 30, 2015 and December 31, 2014, the Company maintained an allowance for uncollectible accounts of $3.1 million and $2.5 million, respectively.

Acquisition Related Expenses and Merger and Other Non-routine Transaction Related Expenses

All direct costs incurred as a result of a business combination are classified as acquisition related costs or merger and other non-routine transaction costs and expensed as incurred. Acquisition related expenses include legal and other transaction related costs incurred in connection with self-originated acquisitions including purchases of portfolios. In addition, indirect costs, such as internal salaries, that are tracked and documented in a manner that clearly indicates that the activities driving the cost directly relate to activities necessary to complete, or effect, self-originating purchases are classified as acquisition related expenses.

Similar costs incurred in relation to mergers, which are not considered self-originating purchases, and other non-routine transaction related expenses are included in merger and other non-routine transactions in the consolidated statements of operations. Merger and other non-routine transaction related expenses include the following costs (amounts in thousands):



	Three Months Ended September 30,							Nine Months Ended September 30,
	2015					2014		2015				2014
Merger related costs:
Strategic advisory services	$	—				$	3,150	$	—			$	35,765
Transfer taxes	—					—		—				5,109
Legal fees and expenses	—					579		—				5,126
Personnel costs and other reimbursements	—					—		—				751
Multi-tenant spin off	—					2,270		—				7,450
Other fees and expenses	—					—		—				1,676
Other non-routine transaction related costs:
Post-transaction support services	—					—		—				14,251
Subordinated distribution fee	—					—		—				78,244
Audit Committee Investigation and related matters ⁽¹⁾	9,251					—		38,953				—
Furniture, fixtures and equipment	—					—		—				14,085
Legal fees and expenses	(294		)	⁽²	⁾	743		2,659		⁽²	⁾	2,569
Personnel costs and other reimbursements	—					—		—				2,718
Other fees and expenses	—					890		632				7,608
Total	$	8,957				$	7,632	$	42,244			$	175,352

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(1)	Includes all fees and costs associated with the Audit Committee Investigation and various litigations and investigations prompted by the results of the Audit Committee Investigation, including fees and costs incurred pursuant to the Company’s indemnification obligations.


(2)	For the three and nine months ended September 30, 2015, legal fees and expenses primarily relate to fees incurred in connection with a legal matter resolved in early 2014, which the Company received invoices for in 2015. The negative balance for the three months ended September 30, 2015 is a result of estimated costs accrued in prior periods that exceeded actual expenses incurred.

Income Taxes

The General Partner currently qualifies and has elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code. As a REIT, except as discussed below, the General Partner generally is not subject to federal income tax on taxable income that it distributes to its stockholders so long as it distributes at least 90% of its annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). REITs are subject to a number of other organizational and operational requirements. Even if the General Partner maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, federal income taxes on certain income and excise taxes on its undistributed income.

The OP is classified as a partnership for federal income tax purposes. As a partnership, the OP is not a taxable entity for federal income tax purposes. Instead, each partner in the OP is required to take into account its allocable share of the OP’s income, gains, losses, deductions and credits for each taxable year. However, the OP may be subject to certain state and local taxes on its income and property.

As of September 30, 2015, the OP and the General Partner had no material uncertain income tax positions. The tax years subsequent to and including the fiscal year ended December 31, 2011 remain open to examination by the major taxing jurisdictions to which the OP, the General Partner, American Realty Capital Trust III, Inc. (“ARCT III”), CapLease, Inc. (“CapLease”), American Realty Capital Trust IV, Inc., (“ARCT IV”), Cole Real Estate Investments, Inc. (“Cole”) and Cole Credit Property Trust, Inc. are subject.

Under the LPA, the OP is to conduct business in such a manner as to permit the General Partner at all times to qualify as a REIT.

The Company conducts substantially all of its Cole Capital segment through a TRS structure. A TRS is a subsidiary of a REIT that is subject to corporate federal, state and local income taxes, as applicable. The Company’s use of a TRS enables it to engage in certain business activities while complying with the REIT qualification requirements and to retain any income generated by these businesses for reinvestment without the requirement to distribute those earnings. The Company conducts all of its business in the United States and Canada and, as a result, it files income tax returns in the U.S. federal jurisdiction, Canadian federal jurisdiction and various state and local jurisdictions. Certain of the Company’s inter-company transactions that have been eliminated in consolidation for financial accounting purposes are also subject to taxation.

The Company provides for income taxes in accordance with current authoritative accounting and tax guidance. The tax provision or benefit related to significant or unusual items is recognized in the quarter in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the quarter in which the change occurs. The accounting estimates used to compute the provision for or benefit from income taxes may change as new events occur, additional information is obtained or the tax environment changes.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in Revenue Recognition, Accounting Standards Codification (“ASC”) (Topic 605) and requires an entity to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, an amendment to ASU 2014-09 was issued to defer the effective date for all entities by one year. For public business entities, certain not-for-profit entities, and certain employee benefit plans, the guidance should be applied to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of the new standard on its financial statements.

In February 2015, the FASB issued ASU No. 2015-02, which eliminates the deferral of Financial Accounting Standard (“FAS”) No.167, Amendments to FASB Interpretation No. 46(R), modifies the evaluation of whether limited partnerships and similar legal entities are variable or voting interest entities, eliminates the presumption that the general partner should consolidate a limited partnership, modifies the consolidation analysis for reporting entities that are involved with variable interest entities, particularly those that have fee arrangements and related party relationships, and provides a scope exception for reporting entities with interests in legal entities that operate as registered money market funds. These changes require re-evaluation of the consolidation conclusion for certain entities and require the Company to revise its analysis regarding the consolidation or deconsolidation of such entities. ASU 2015-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. As disclosed above, the Company has elected to early adopt ASU 2015-02 during the three months ended September 30, 2015. The adoption had no material impact on the interests in joint venture arrangements, Managed REITs and other arrangements and therefore had no impact on the previous or current reporting periods’ statements of financial position, results of operations, or retained earnings.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than presenting the costs as an asset, a deferred charge. The previous requirement to recognize debt issuance costs as deferred charges conflicts with the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. FASB Concepts Statement No. 6 further states that debt issuance costs cannot be an asset because they provide no future economic benefit. After the update is adopted, debt disclosures will include the face amount of the debt liability and the effective interest rate. For public companies, ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and is to be applied retrospectively, with early adoption permitted. The Company has evaluated the impact of the adoption of this new standard, which is expected to result in reclassifications of certain deferred costs on the Company’s balance sheets but will not have an impact on its results of operations or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The update eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. The ASU is applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company is currently evaluating the impact of the new standard on its financial statements.