pgre-ex992_2336.htm

We have audited the accompanying financial statements of Paramount Group Real Estate Fund VII, LP (the “Fund”), which comprise the statements of net assets, including the schedules of investments, as of December 31, 2018 and 2017, and the related statements of operations, changes in net assets, and cash flows for the years ended December 31, 2018, 2017 and 2016, and the related notes to the financial statements.

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Fund’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paramount Group Real Estate Fund VII, LP as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years ended December 31, 2018, 2017 and 2016 in accordance with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, on January 25, 2019, the property owned by Zero Bond Street was sold. Subsequent to the sale, the Fund will commence its dissolution of the Partnership in accordance with the terms of the limited partnership agreement. Our opinion is not modified with respect to this matter.

Paramount Group Real Estate Fund VII, LP
(A Delaware Limited Partnership)

STATEMENTS OF NET ASSETS


	December 31, 2018		December 31, 2017
ASSETS:
Investment, at fair value (cost of $53,032,248
and $48,089,150 in 2018 and 2017)	$	29,722,542	$	32,943,214
Cash and cash equivalents		2,827,912		138,375

Total assets		32,550,454		33,081,589

LIABILITIES:
Accounts payable and accrued expenses		1,007,895		1,023,872
Asset management fee payable		218,827		34,700

Total liabilities		1,226,722		1,058,572

NET ASSETS	$	31,323,732	$	32,023,017

Paramount Group Real Estate Fund VII, LP
(A Delaware Limited Partnership)

SCHEDULES OF INVESTMENT
AS OF DECEMBER 31, 2018 AND 2017


	Real Estate Investment Held in Partnership Interests
										Fair Value
						Investment		Investment		as a
	Ownership			Square		at		at		Percentage
Property	Percentage			Feet		Cost		Fair Value		of Net Assets

2018

New York Office Property:
Zero Bond Street		95.98	%		64,532	$	53,032,248	$	29,722,542		94.89%

2017

New York Office Property:
Zero Bond Street		95.98	%		64,390	$	48,089,150	$	32,943,214		102.87%

Paramount Group Real Estate Fund VII, LP
(A Delaware Limited Partnership)

STATEMENTS OF OPERATIONS


	For the Year Ended December 31,
	2018			2017			2016
INVESTMENT INCOME:
Distributions received from investment	$	-		$	1,349,210		$	1,232,423
Interest income		17,981			93,092			194

Total income		17,981			1,442,302			1,232,617

EXPENSES:
Asset management fees		184,127			1,079,429			1,900,453
Other expenses		47,965			157,559			99,298

Total expenses		232,092			1,236,988			1,999,751

NET INVESTMENT (LOSS) INCOME		(214,111	)		205,314			(767,134	)

NET REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS:
Net realized loss on investment sold:
Realized gain from sale		-			43,093,570			-
Previously recorded unrealized gain on sale		-			(47,955,958	)		-
Net realized loss on investment sold		-			(4,862,388	)		-

Unrealized (loss) gain on investment:
Change in unrealized (loss) gain on investment		(8,163,770	)		(9,507,372	)		13,123,226

NET REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS		(8,163,770	)		(14,369,760	)		13,123,226

CHANGE IN NET ASSETS RESULTING FROM OPERATIONS	$	(8,377,881	)	$	(14,164,446	)	$	12,356,092

Paramount Group Real Estate Fund VII, LP
(A Delaware Limited Partnership)

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016


	General			Limited
	Partner			Partners			Total

NET ASSETS, January 1, 2016	$	15,286,830		$	137,540,336		$	152,827,166

Distributions		(27,586	)		(342,141	)		(369,727	)
Net investment loss		(57,237	)		(709,897	)		(767,134	)
Net unrealized gain on investments		979,144			12,144,082			13,123,226
Carried interest allocation		1,474,562			(1,474,562	)		-

NET ASSETS, December 31, 2016		17,655,713			147,157,818			164,813,531

Distributions		(8,850,876	)		(109,775,192	)		(118,626,068	)
Net investment income		15,319			189,995			205,314
Net realized loss on investment sold		(362,790	)		(4,499,598	)		(4,862,388	)
Unrealized loss on investment		(709,360	)		(8,798,012	)		(9,507,372	)
Carried interest allocation		(5,358,720	)		5,358,720			-

NET ASSETS, December 31, 2017		2,389,286			29,633,731			32,023,017

Contributions		572,912			7,105,684			7,678,596
Net investment loss		(15,975	)		(198,136	)		(214,111	)
Unrealized loss on investment		(609,111	)		(7,554,659	)		(8,163,770	)

NET ASSETS, December 31, 2018	$	2,337,112		$	28,986,620		$	31,323,732

PARTNERSHIP INTEREST, December 31, 2018		7.46	%		92.54	%		100.00	%

Paramount Group Real Estate Fund VII, LP
(A Delaware Limited Partnership)

STATEMENTS OF CASH FLOWS

	For The Year Ended December 31,
	2018			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Change in net assets resulting from operations	$	(8,377,881	)	$	(14,164,446	)	$	12,356,092
Adjustments to reconcile change in net assets resulting from
operations to net cash provided by operating activities:
Realized loss on investment sold		-			4,862,388			-
Change in unrealized loss (gain) on investment		8,163,770			9,507,372			(13,123,226	)
Proceeds from sale of investment		-			118,242,990			-
Contribution to investment partnerships		(4,943,098	)		-			-
Changes in operating assets and liabilities:
(Decrease) increase in accounts payable and accrued expenses		(15,977	)		968,717			22,540
Increase (decrease) in asset management fee payable		184,127			(1,393,236	)		1,427,936
Net cash (used in) provided by operating activities		(4,989,059	)		118,023,785			683,342

CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' contributions		7,678,596			-			-
Partners' distributions		-			(118,626,068	)		(369,727	)
Net cash provided by (used in) financing activities		7,678,596			(118,626,068	)		(369,727	)

Net increase (decrease) in cash and cash equivalents		2,689,537			(602,283	)		313,615

CASH AND CASH EQUIVALENTS:
Beginning of year		138,375			740,658			427,043
End of year	$	2,827,912		$	138,375		$	740,658

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

Paramount Group Real Estate Fund VII, LP (a Delaware Limited Partnership) (the “Partnership” or “Fund”) was formed on February 24, 2012 to invest in real estate assets or equity interests in real estate assets, including debt. Operations of the Partnership commenced in December 2013.

Paramount GREF VII, L.L.C. (“PGREF VII” or the “General Partner”) holds a 7.46% general partnership interest in the Partnership. The remaining 92.54% limited partnership interest was held by various individuals and private financial institutions. The Fund had committed capital of $134,027,500, of which $16,856,535 and $9,177,900 were contributed as of December 31, 2018 and 2017, respectively.

On July 6, 2012, Paramount Group Real Estate Fund VII-H, LP (“Fund VII-H”) was formed as a parallel investment vehicle to co-invest with the Partnership. Operations for Fund VII-H commenced in August 2014. Fund VII-H had committed capital of $5,610,000, of which $1,445,241 and $1,123,800 were contributed as of December 31, 2018 and 2017, respectively.

On January 25, 2019, the property owned by Zero Bond Street was sold (see Note 9, Subsequent Events). Subsequent to the sale, the Partnership will commence its dissolution in accordance with the terms of the limited partnership agreement.

Basis of Presentation — The financial statements of the Partnership have been prepared under accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Partnership is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, as amended by the FASB issued Accounting Standards Update (“ASU”) No. 2013-08, Investment Companies.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and notes thereto. Actual results could differ from these estimates.

Fair Value of Financial Instruments — The Partnership accounts for its investment in accordance with the Fair Value Measurement Topic of ASC 820, Fair Value Measurement and Disclosures, which defines fair value and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that guidelines observable inputs used to measure fair value into three levels:

Level I — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level II — Observable prices that are based on inputs not quoted in active markets, but corroborated by market data.

Level III — Unobservable inputs that are used when little or no market data is available.

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

The fair value hierarchy gives the highest priority to Level I inputs and the lowest priority to Level III inputs. In determining fair value, the Partnership utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk in the assessment of fair value.

Partnership’s investment is reflected in the statement of net assets at fair value with changes in unrealized gains and losses resulting from changes in fair value, reflected in the statement of operations as change in unrealized appreciation or depreciation on investment. The investment fair value is predominantly based on the fair value of the underlying real estate and does not reflect transaction sales cost, which may be incurred by the Partnership upon disposition of the real estate investment.

The valuation of the investment requires the application of valuation principles to the specific facts and circumstances of the investment and may include the following methods:

The most weight is given to the income capitalization approach in the conclusions of value. For the December 31, 2018 valuation of Zero Bond Street, the General Partner also considered the value per the purchase and sale agreement of the property adjusted to take into account the factors and risks that exist prior to the closing of the sale.

The assumptions used in determining fair value of the underlying real estate include capitalization rates, discount rates, occupancy rates, rental rates, and interest and inflation rates, as applicable. These valuation methodologies involve a significant degree of judgment and may incorporate the General Partner’s own assumptions including leverage, ownership percentage, ownership rights, buy/sell agreements, guarantees, distribution provisions, capital call obligations and potential cash shortfalls of the investment. The General Partner also considers the terms of the existing loans, including maturity date, extension options, payment provisions and whether the loans are transferrable, as applicable. Due to the absence of readily determinable fair values and the inherent uncertainty of valuations, the estimated fair value may differ significantly from value that would have been used had a ready market for the property existed.

The carrying values of all other financial instruments approximate their fair values due to the short-term nature of these instruments.

Cash and Cash Equivalents — Cash and cash equivalents consists of cash on hand and short-term highly liquid investments with original maturities of three months or less.

Distributions received from investment – Distributions received from investment consists of distributions received as result of income generated from the investments’ operations. Distributions from investment that do not result from operations are considered a return of investment.

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

Realized gains and losses - The Partnership records realized gains and losses when there is a sale of the investment or the underlying assets of the investment, upon receipt of cash, or when the Partnership has abandoned its interest in the underlying investment.

Expense Recognition — Expenses are recognized when incurred and consists primarily of asset management fees and expenses of the Fund. Asset management fees are payable to the General Partner, under the Fund Management Agreement. See Note 6, Related Party Transactions.

Income Taxes — The Partnership, itself, directly or indirectly is not subject to Federal, state, or local income taxes. The taxable income or loss applicable to the operations of the Partnership is included in the income tax returns of the partners. Generally, New York City imposes an unincorporated business tax on partnerships engaged in a trade or business in New York City. However, there is an exemption from this tax for income generated by an entity that acquires, holds, and disposes of real estate assets for its own account. The Partnership should qualify for this exemption and will file the tax returns that reflect this exemption accordingly. Further, partners’ net assets reflected in the accompanying financial statements differ from amounts reported in the Partnership’s federal income tax return because of differences between U.S. GAAP and Federal income tax basis of accounting.

The Partnership files income tax returns on a Federal basis and for various state and local jurisdictions. The Partnership uses a more-likely-than-not threshold to determine whether or not a tax position should be recognized and reflected in a tax return. Tax filings, which are within the statute of limitations, can be chosen for examination by the tax authorities. The Partnership assessed its tax position(s) for all Federal, state and local tax years of 2015, 2016 and 2017, as these years are still open within the various statutes of limitations. There are no material uncertain tax liabilities as of December 31, 2018. The Partnership’s policy is, if necessary, to account for interest and penalties related to uncertain tax positions as a component of its income tax provision.

For tax years beginning on or after January 1, 2018, the Partnership is subject to partnership audit rules enacted as part of the Bipartisan Budget Act of 2015 (the “Centralized Partnership Audit Regime”). Under the Centralized Partnership Audit Regime, any IRS audit of the Partnership would be conducted at the Partnership level, and if the IRS determines an adjustment, the default rule is that the Partnership would pay an “imputed underpayment” including interest and penalties, if applicable. Our limited partnership agreement does not stipulate how the Partnership will address imputed underpayments. If the Partnership receives an imputed underpayment, a determination will be made based on the relevant facts and circumstances that exist at that time. Any payments that the Partnership ultimately makes on behalf of its current partners will be reflected as a distribution, rather than tax expense, at the time that such dividend is declared.

An investment of the Partnership operated through the date of sale, (see Note 3, Investments) so as to qualify as a real estate investment trust (“REIT”) under the requirements of the Internal Revenue Code. The requirements for qualification as a REIT include, but are not limited to, various restrictions on ownership of the Partnership’s interest, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders annually. Of this amount, 85% of the REIT’s ordinary income and 95% of the REIT’s capital gain net income for the calendar year plus any undistributed amounts from all prior years must be distributed by calendar year end in order to avoid the imposition of an excise tax. The remaining balance may extend until the timely filing the tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing its current year taxable income.

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

Recently Issued Accounting Pronouncements Not Materially Impacting Our Financial Statements — In May 2014, the FASB issued ASU 2014-09, an update to ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09, as amended, supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. This guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments made in applying the guidance. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years, and can be applied using a full retrospective or modified retrospective approach. We adopted the provisions of ASU 2014-09 on January 1, 2018. The adoption of ASU 2014-09 did not impact our financial statements.

In August 2018, the FASB issued ASU 2018-13, an update to ASC Topic 820, Fair Value Measurements. ASU 2018-13 modifies the disclosure requirements in ASC Topic 820, by (i) removing certain disclosure requirements related to transfers between Level 1 and Level 2 of the fair value hierarchy and the valuation processes for Level 3 fair value measurements, (ii) modifying existing disclosure requirements related to measurement uncertainty and (iii) adding new disclosure requirements related to changes in unrealized gains or losses for the periods included in other comprehensive income for recurring Level 3 fair value measurements and disclosures related to the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2019, with early adoption permitted. We are evaluating the impact of ASU 2018-13 but do not believe the adoption will have a material impact on our financial statements.

On June 29, 2015, the Partnership and Fund VII-H, formed 670 Broadway Holdco LP (a Delaware Limited Partnership) (“Zero Bond Street”). In 2015, the Partnership and Fund VII-H made a $48.0 million and $2.0 million, respectively, investment in Zero Bond Street, which acquired an office building along with its underlying land (the “Property”), located in New York City on October 29, 2015. The Partnership holds a 94.98% limited partnership interest and a 1.00% general partnership interest. The remaining 4.02% limited partnership interest is held by Fund VII-H. On January 25, 2019, the Property owned by Zero Bond Street was sold. See Note 9, Subsequent Events.

The Partnership, through its subsidiaries, made a $75.1 million investment in 50 Beale Holdco LP (a Delaware Limited Partnership), (“50 Beale Street”), giving the Partnership a 40.98% limited partnership interest and a 0.10% general partner interest. The remaining limited partnership interest in 50 Beale Street is held by Fund VII-H (1.72%), by co-investment of (8.20%) by a limited partner in the Partnership and an unaffiliated third party (49.00%). On September 9, 2014, 50 Beale Street purchased the common shares of 50 Beale, Inc., a Delaware corporation, operating as a Real Estate Investment Trust (“REIT”) and through subsidiaries owning an office building along with the underlying land.

On July 17, 2017, the Partnership completed the sale of its interest in 50 Beale Street in part to a wholly owned subsidiary of Paramount Group Operating Partnership (“PGOP”) and in part to a joint venture with a third-party investor, in which PGOP has a 36.6% ownership. The sale, which valued the property at $517,500,000, was approved on behalf of the Partnership by its Investor Advisory Committee, with the valuation achieved by utilizing the average

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

valuation of two appraisals conducted by two independent valuation firms. In connection therewith, the Partnership realized a net gain of approximately $43,100,000 from the sale of its interest in 50 Beale Street. The Partnership had previously recorded an unrealized gain of approximately $48,000,000; therefore the Partnership recorded a “net loss on investment sold” for the year ended December 31, 2017 of $4,900,000, which was due to transaction sales costs.

The following table summarizes the fair values of the Partnership’s financial instruments based on their levels in the fair value hierarchy.

	Beginning										Proceeds			Ending
	Balance —				Net Realized			Unrealized			from Sale			Balance —
	January 1,		Contributions		Loss			Loss			of Investment			December 31,

2018

Zero Bond Street	$	32,943,214	$	4,943,098	$	-		$	(8,163,770	)	$	-		$	29,722,542

Total	$	32,943,214	$	4,943,098	$	-		$	(8,163,770	)	$	-		$	29,722,542


2017

50 Beale Street	$	123,105,378	$	-	$	(4,862,388	)	$	-		$	(118,242,990	)	$	-
Zero Bond Street		42,450,586		-		-			(9,507,372	)		-			32,943,214

Total	$	165,555,964	$	-	$	(4,862,388	)	$	(9,507,372	)	$	(118,242,990	)	$	32,943,214

The following table reconciles the beginning and ending balances of investments measured at fair value for the periods set forth below.

Changes in net unrealized loss included in the change in net assets resulting from operations related to the investment held as of December 31, 2018 and 2017 were $8,163,770 and $9,507,372, respectively.

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

The following table summarizes quantitative information about significant unobservable inputs related to investment in real estate and a financial instrument measured at fair value using Level III inputs as of the dates set forth below:

	Valuation	Unobservable
Type	Technique(s)	Inputs	Range

December 31, 2018

Real Estate	Income Capitalization:
Office Property	Discounted Cash Flow	Discount Rate	6.00%
		Terminal Capitalization Rate	5.00%


December 31, 2017

Real Estate	Income Capitalization:
Office Property	Discounted Cash Flow	Discount Rate	6.50%
		Terminal Capitalization Rate	5.00%

Capital contributions will be made in proportion to respective committed capital amounts. Distributions, including proceeds from capital transactions, as defined in the partnership agreement, shall be distributed pro-rata until each partner has received cumulative distributions equal to each of their unreturned invested capital. Thereafter, distributions are made pro-rata of their funded commitments until each partner has received a cumulative return of 8%. Thereafter, incentive distributions will be first made to the General Partner equal to 50% and 50% to all partners, until the General Partner has received distribution equal to 15% of cumulative distributions in excess of returned capital. Thereafter, incentive distributions will be first made to the general partner equal of 15% and 85% to all partners until each limited partner has received a cumulative return of 12%. Further distributions in excess of returned capital are allocated at 20% to the General Partner and 80% to both the General and limited partners. Income or loss is allocated among the partners so as to conform to expected distributions in accordance with the partnership agreement.

The net asset balances as of December 31, 2018 and 2017, represent each partners’ share of cash, which would be distributed to the partners under a hypothetical liquidation of the Partnership at net asset value as of December 31, 2018 and 2017, pursuant to the above described distribution priorities.

Asset management fees for investment under management by the General Partner are charged annually based on 1.5% of the weighted average contributed capital. The General Partner may also earn other fees as set forth in or permitted by the limited partnership agreement, including without limitation, acquisition fees of 0.5% of the equity invested in each investment, structuring fees of 0.25% of amount financed, and disposition fees of 0.5% of the gross consideration received for a sale of an investment. The fees are typically paid by the underlying real estate investment and are reflected as additions to or deductions from, purchase or sale amounts listed. In the event the investment partnership

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

does not pay these fees, the Partnership is responsible for its proportionate share which is then reflected on the Statements of Operations. In accordance with the limited partnership agreement and the Fund’s investment advisor’s conflicts of interest, related party transactions and expense allocation policies, in any purchase and sale transaction between related parties, in light of the significant work needed to diligence and document the transaction for each side, General partner or its affiliates may charge fees to both the buyer and seller where permitted by law.

Pursuant to the second amended limited partnership agreement, the General Partner may, in its sole discretion elect to subject, either in whole or in part, the asset management fee to the contingency provisions contained therein effective January 31, 2013. While the General Partner may choose to reinstate, in whole or in part, the current payment of future fees at any time, the payment of any of the fees subject to the contingency provisions shall not be required until one of the events listed in the limited partnership agreement has occurred. As of December 31, 2018 and 2017, the General Partner did not elect to subject any asset management fees to the contingency provisions of the partnership agreement.

For the years ended December 31, 2018, 2017 and 2016, the Partnership incurred asset management fees totaling $184,127, $1,079,429 and $1,900,453, respectively. As of December 31, 2018 and 2017, asset management fees of $218,827 and $34,700, respectively, remain payable to the General Partner. The Partnership also incurred disposition fees in 2017 totaling $1,062,965, of which $469,768 remains payable as of December 31, 2018. The Partnership did not incur or pay any other fees to affiliates in 2018, 2017 and 2016.

On July 17, 2017, the Partnership sold its interest in 50 Beale Street to a wholly owned subsidiary of PGOP, a related party, and a joint venture, in which PGOP has a 36.6% ownership. See Note 3, Investments.

The following table summarizes the limited partners’ financial highlights as of the dates set forth below:

	As of December 31,
	2018	2017	2016
Internal rate of return (a):
From inception through December 31, 2018, 2017 and 2016	4.27%	6.78%	12.19%

Ratios to average net assets (b):
Expenses to average net assets (c)	0.72%	1.13%	1.31%
General Partners carried interest allocation to average net assets	0.00%	-5.27%	-0.50%
Expenses and carried interest to average net assets	0.72%	-4.14%	1.04%

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

The following table summarizes the financial information of Zero Bond Street as of December 31, 2018 and 2017, held in partnership interests:

	As of December 31,
	2018			2017

Real estate asset, at fair value	$	120,000,000		$	120,000,000
Mortgage note payable (a)		(90,000,000	)		(85,000,000	)
Other assets (liabilities), net		967,068			(677,453	)

Net assets	$	30,967,068		$	34,322,547

Investment, at fair value	$	29,722,542		$	32,943,214

Ownership percentage		95.98	%		95.98	%

	As of December 31, 2018				As of December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Zero Bond Street	$	90,000,000	$	90,379,024	$	85,000,000	$	85,186,654
Total	$	90,000,000	$	90,379,024	$	85,000,000	$	85,186,654

Financial liabilities that are not measured at fair value in the Partnership’s financial statements include secured debt. Estimates of the fair value of these instruments are determined by modeling the contractual cash flows required under the instrument and discounting such cash flows back to present value at the appropriate current risk adjusted interest rate, which is provided by a third-party specialist. For floating rate debt, the Partnership uses forward rates derived from observable market yield curves to project the expected cash flows the Partnership would be required to make under the instrument.

as of DECEMBER 31, 2018 AND 2017and for the YearS ended December 31, 2018, 2017 AND 2016

On January 25, 2019, the Property owned by Zero Bond Street was sold to a third party. The Partnership’s share of net proceeds from the sale of the Property, after the repayment of existing debt, transaction costs and closing credits was $28,999,000 and the Partnership realized a net loss of $24,034,000 from the sale of the Property. The Partnership had previously recorded an unrealized loss of $23,310,000, therefore upon sale of the Property the Partnership recorded a net loss on investment sold of $724,000.

Other than disclosed in the notes to the financial statements, the Partnership has evaluated all events and transactions occurring subsequent to December 31, 2018 and through February 13, 2019, the date the financial statements were available to be issued, and determined that no subsequent events had occurred that would require consideration as adjustments to, or additional disclosure in, the financial statements.

		Page
	Independent Auditors’ Report	1

	Statements of Net Assets as of December 31, 2018 and 2017	3

	Schedules of Investment as of December 31, 2018 and 2017	4

	Statements of Operations for the years ended December 31, 2018, 2017 and 2016	5

	Statements of Changes in Net Assets for the years ended December 31, 2018, 2017 and 2016	6

	Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016	7

	Notes to Financial Statements	8–16