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RELATED PARTY TRANSACTIONS AND FEES

12 Months Ended

Dec. 31, 2019

NOTE 9. RELATED PARTY TRANSACTIONS AND FEES

We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOR. As the contractual advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. TCI has no employees. Employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement

Effective January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties and provides brokerage services. Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Refer to Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. TCI engages third-party companies to lease and manage its apartment properties.

Below is a description of the related party transactions and fees between Pillar and Regis:

Fees, expenses and revenue paid to and/or received from our advisor:

	For the year ended December 31,
	2019			2018			2017
	(dollars in thousands)
Fees:
Advisory	$	5,806		$	10,663		$	9,995
Mortgage brokerage and equity refinancing		—			852			1,551
Net income fee		357			631			250
	$	6,163		$	12,146		$	11,796
Other Expense:
Cost reimbursements	$	6,687		$	4,398		$	2,895
Interest paid (received)		(8,475	)		(7,404	)		(4,859	)
	$	(1,788	)	$	(3,006	)	$	(1,964	)
Revenue:
Rental	$	1,311		$	1,178		$	783

Fees paid to Regis and related parties:

	For the year ended December 31,
	2019		2018		2017
	(dollars in thousands)
Fees:
Property Sales/Acquisition	$	318	$	43,856	$	9,819
Property management, construction management and leasing commissions		165		540		963
Real estate brokerage		71		2,068		1,369
	$	554	$	46,464	$	12,151

The Company received rental revenue of $1.3 million, $1.2 million, and $0.8 million in the years ended December 31, 2019, 2018, and 2017, respectively, from Pillar and its related parties for properties owned by the Company.

As of December 31, 2019, the Company had notes and interest receivable, net of allowances of $54.0 million and $3.2 million, respectively, due from UHF, a related party. During 2019, the Company recognized interest income of $6.9 million, originated $21.4 million, received $12.4 million in principal payments, and received interest payments of $7.6 million from these related party notes receivables.

On January 1, 2012, the Company entered into a development agreement with UHF, a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.

The Company is the primary guarantor, on a $25.0 million mezzanine loan between UHF and a lender. In addition, ARL, and an officer of the Company are limited recourse guarantors of the loan. As of December 31, 2019 UHF was in compliance with the covenants to the loan agreement.

The Company is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and IOR and their subsidiaries that was entered into in July of 2009. That agreement continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOR and MRHI for the remainder of 2012 and subsequent years. The expense (benefit) in each year was calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory tax rate of 21%.

In addition, SPC is part of a management service agreement with the controlling shareholder owned company in which SPC for an annual payment of 0.5% on the value of the investment properties receives from the Advisor office space, administrative and management services. During 2019, SPC paid management fees to Pillar in the amount of $2.2 million.

The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of December 31, 2019 (dollars in thousands):

	Pillar			ARL		Total

Related party receivable, beginning balance, December 31, 2018	$	—		$	133,642	$	133,642
Cash transfers		29,395			—		29,395
Advisory fees		(5,806	)		—		(5,806	)
Net income fee		(357	)		—		(357	)
Fees and commissions		(71	)		—		(71	)
Cost reimbursements		(6,687	)		—		(6,687	)
Interest income		—			8,475		8,475
Notes receivable purchased		(28,669	)		—		(28,669	)
Expenses (paid)/received by advisor		9,073			—		9,073
Financing (mortgage payments)		—			—		—
Sales/Purchases Commissions		(318	)		—		(318	)
Intercompany property transfers		2,864			—		2,864
Income tax expense		—			—		—
Deferred tax asset		—			—		—
Purchase of obligations		—					—
Related party receivable, ending balance, December 31, 2019	$	(576	)	$	142,117	$	141,541