Exhibit 99.1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

HC Government Realty Trust, Inc.

Sarasota, Florida

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of HC Government Reality Trust, Inc. and subsidiaries (collectively, “the Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Cherry Bekaert LLP

We have served as the Company’s auditor since 2016.

Richmond, VA

April 27, 2018

HC Government Realty Trust, Inc.

Consolidated Balance Sheets

December 31, 2017 and 2016

	December 31,			December 31,
	2017			2016
ASSETS
Investment in real estate, net	$	61,922,635		$	10,435,991
Cash and cash equivalents		695,719			247,137
Restricted cash		1,676,152			51,656
Rent and other tenant receivables, net		757,752			126,590
Related parties receivable, net		-			525,397
Leasehold intangibles, net		5,635,435			743,010
Prepaid expenses and other assets		365,840			182,376
Total Assets	$	71,053,533		$	12,312,157
LIABIILTIES
Mortgages payable, net of unamortized debt costs	$	49,573,683		$	7,068,067
Notes payable		1,179,610			2,103,961
Notes payable - related party		4,150,000			-
Declared dividends and distributions		344,842			-
Accrued interest payable		248,352			35,379
Accounts payable		267,232			138,998
Accrued expenses		357,981			239,686
Tenant improvement obligation		1,315,366			-
Acquisition fee payable - related party		274,345			-
Below-market leases, net		1,001,754			416,731
Related parties payable, net		461,858			-
Total Liabilities		59,175,023			10,002,822
STOCKHOLDERS' EQUITY
Preferred stock ($0.001 par value, 750,000,000 shares authorized and 144,500 shares issued and outstanding)		144			144
Common stock ($0.001 par value, 250,000,000 shares authorized, 895,307 and 200,000 common shares issued and outstanding at December 31, 2017 and 2016, respectively)		895			200
Additional paid-in capital		8,948,713			3,614,156
Offering costs		(1,459,479	)		(1,074,485	)
Accumulated deficit		(1,340,974	)		(126,044	)
Accumulated dividends and distributions		(690,963	)		(104,636	)
Total Stockholders' Equity		5,458,336			2,309,335
Noncontrolling interest in operating partnership		6,420,174			-
Total Equity		11,878,510			2,309,335
Total Liabilities and Stockholders' Equity	$	71,053,533		$	12,312,157

The accompanying notes are an integral part of the consolidated financial statements

HC Government Realty Trust, Inc.

Consolidated Balance Sheets (continued)

December 31, 2017 and 2016

The following table presents the assets and liabilities of the Company's consolidated variable interest entities as of December 31, 2017 which are included on the consolidated balance sheet above. The assets in the table below include those assets that can only be used to settle obligations of the consolidated variable interest entity. The Liabilities in the table below include third-party liabilities of the consolidated variable interest entity only, and for which creditors or beneficial interest holders do not have recourse to the Company, and exclude intercompany balances that eliminate in consolidation.

ASSETS OF CONSOLIDATED VARIABLE INTEREST ENTITIES THAT CAN ONLY BE USED TO SETTLE THE OBLIGATIONS OF CONSOLIDATED VARIABLE INTEREST ENTITIES:
Buildings and improvements, net	$	12,007,437
Intangible assets, net		530,626
Prepaids and other assets		457,096
Total Assets	$	12,995,159

LIABILITIES OF CONSOLIDATED VARIABLE INTEREST ENTITIES FOR WHICH CREDITORS OR BENEFICIAL INTEREST HOLDERS DO NOT HAVE RECOURSE TO THE COMPANY.
Mortgages payable	$	9,796,972
Intangible liabilities, net		168,733
Accounts payable and accrued expenses		242,284
Total liabilities	$	10,207,989

The accompanying notes are an integral part of the consolidated financial statements

HC Government Realty Trust, Inc.

Consolidated Statements of Operations

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

	For the year ended December 31, 2017			March 11, 2016 (date of inception) to December 31, 2016
Revenues
Rental revenues	$	4,595,560		$	720,850
Real estate tax reimbursments and other revenues		169,002			26,627
Total revenues		4,764,562			747,477
Operating expenses
Depreciation and amortization		1,675,079			302,484
General and administrative		405,824			71,522
Ground lease		45,954			-
Insurance		58,373			32,510
Janitorial		208,618			27,298
Management fees		303,482			57,309
Professional expenses		482,070			3,864
Real estate and other taxes		357,143			50,723
Repairs and maintenance		248,900			36,373
Equity-based compensation		181,031			-
Utilities		267,004			35,267
Total operating expenses		4,233,478			617,350
Interest expense		1,990,858			256,171
Net loss		(1,459,774	)		(126,044	)
Less: Net loss attributable to nonconrolling interest in operating partnership		(244,844	)		-
Net loss attributed to HC Government Realty Trust, Inc.		(1,214,930	)		(126,044	)
Preferred stock dividends		(316,095	)		(104,636	)
Net loss attributed to HC Government Realty Trust, Inc. available to common shareholders	$	(1,531,025	)	$	(230,680	)
Basic and diluted loss per share	$	(3.03	)	$	(1.44	)
Basic and diluted weighted-average common shares outstanding		504,486			160,000

The accompanying notes are an integral part of the consolidated financial statements

HC Government Realty Trust, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

																								Non-Controlling
									Additional									Cumulative			Total			Interest in
	Preferred Series A				Common Stock				Paid-in			Offering			Accumulated			Dividends and			Stockholders'			Operating			Total
	Shares		Par Value		Shares		Par Value		Capital			Costs			Deficit			Distributions			Equity			Partnership			Equity
Balance, March 11, 2016		-	$	-		-	$	-	$	-		$	-		$	-		$	-		$	-		$	-		$	-
Proceeds from issuance of stock		144,500		144		200,000		200		3,614,156			-			-			-			3,614,500			-			3,614,500
Offering costs		-		-		-		-		-			(1,074,485	)		-			-			(1,074,485	)		-			(1,074,485	)
Dividends and distributions		-		-		-		-		-			-			-			(104,636	)		(104,636	)		-			(104,636	)
Net loss		-		-		-		-		-			-			(126,044	)		-			(126,044	)		-			(126,044	)
Balance, December 31, 2016		144,500		144		200,000		200		3,614,156			(1,074,485	)		(126,044	)		(104,636	)		2,309,335			-			2,309,335
Proceeds from issuing common shares, net of issuances costs		-		-		679,307		679		6,141,247			-			-			-			6,141,926			-			6,141,926
Contribution of Holmwood Capital properties for common units		-		-		-		-		(1,316,740	)		-			-			-			(1,316,740	)		7,384,922			6,068,182
Grant of restricted stock		-		-		16,000		16		98,651			-			-			-			98,667			-			98,667
Grant of long-term incentive plan shares		-		-		-		-		-			-			-			-			-			82,364			82,364
Dividends and distributions		-		-		-		-		-			-			-			(586,327	)		(586,327	)		(390,869	)		(977,196	)
Offering costs		-		-		-		-		-			(384,994	)		-			-			(384,994	)		-			(384,994	)
Allocation of NCI in operating partnership		-		-		-		-		411,399			-			-			-			411,399			(411,399	)		-
Net loss		-		-		-		-		-			-			(1,214,930	)		-			(1,214,930	)		(244,844	)		(1,459,774	)
Balance, December 31, 2017		144,500	$	144		895,307	$	895	$	8,948,713		$	(1,459,479	)	$	(1,340,974	)	$	(690,963	)	$	5,458,336		$	6,420,174		$	11,878,510

The accompanying notes are an integral part of the consolidated financial statements

HC Government Realty Trust, Inc.

Consolidated Statements of Cash Flows

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

	For the Year Ended December 31, 2017			March 11, 2016 (date of inception) to  December 31, 2016
Cash flows from operating activities:
Net loss	$	(1,459,774	)	$	(126,044	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,299,191			244,029
Amortization of acquired lease-up costs		178,296			23,862
Amortization of in-place leases		197,592			34,593
Amortization of above/below-market leases		24,639			(14,158	)
Amortization of debt issuance costs		97,387			19,584
Amortization of long-term incentive plan units		82,364			-
Amortization of equity-based compensation		98,667			-
Change in assets and liabilities
Restricted cash		(174,271	)		(51,656	)
Rent and other tenant receivables, net		(482,217	)		(126,590	)
Prepaid expense and other assets		(130,470	)		(182,376	)
Related party receivables, net		525,397			(525,397	)
Accrued interest payable		212,973			35,379
Accounts payable and other accrued expenses		(90,454	)		378,684
Related party payable, net		461,858			-
Net cash provided (used) in operating activities		841,178			(290,090	)
Cash flows from investing activities:
Restricted cash		(1,315,366	)		-
Investment property acquisitions		(26,207,142	)		(11,050,596	)
Net cash used in investing activities		(27,522,508	)		(11,050,596	)
Cash flows from financing activities:
Debt issuance costs		(372,317	)		(105,072	)
Dividends paid		(632,354	)		(104,636	)
Mortgage principal payments		(3,673,038	)		(71,445	)
Mortgage proceeds		24,146,250			7,225,000
Notes principal repayments		(136,211	)		(39,828	)
Offering costs		(384,994	)		(1,074,485	)
Proceeds from notes payable		1,204,000			124,000
Proceeds from notes payable - related party		4,150,000			-
Proceeds from sale of common stock, net of issuance costs		6,141,926			2,000
Proceeds from sale of preferred stock		-			3,612,500
Proceeds from seller note payable		-			2,019,789
Repayment of assumed notes payable		(1,321,210	)		-
Repayment of seller note payable		(1,992,140	)		-
Net cash provided from financing activities		27,129,912			11,587,823
Net increase in cash and cash equivalents		448,582			247,137
Cash and cash equivalents, beginning of period		247,137			-
Cash and cash equivalents, end of period	$	695,719		$	247,137
Supplemental cash flow information:
Cash paid for interest	$	1,645,119		$	201,208
Cash paid for income taxes	$	-		$	-
Non cash investing and financing activities:
Contributed assets (See Note 3)	$	30,738,651		$	-
Assumed liabilities (See Note 3)	$	24,670,469		$	-
Common units issued in connection with contribution transaction	$	6,068,182		$	-

The accompanying notes are an integral part of the consolidated financial statements

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

1. Organization

HC Government Realty Trust, Inc. (the “REIT”), a Maryland corporation, was formed on March 11, 2016 to primarily source, acquire, own and manage built-to-suit and improved-to-suit, single-tenant properties leased by the United States of America through the U.S General Services Administration (“GSA Properties”). The REIT focuses primarily on GSA Properties across secondary and smaller markets, within size ranges of 5,000-50,000 rentable square feet, and in their first term after construction or retrofit to post-9/11 standards. Further, the REIT selects GSA Properties that fulfill mission critical or citizen service functions. Leases associated with the GSA Properties are full faith and credit obligations of the United States of America and are administered by the U.S. General Services Administration or directly through the occupying federal agencies, or collectively the GSA.

The REIT owns its properties through the REIT’s subsidiary, HC Government Realty Holdings, L.P., a Delaware limited partnership (“Operating Partnership”, and together with the REIT, the “Company”). The Operating Partnership invests through wholly-owned special purpose limited liability companies, or special purpose entities (“SPEs”), primarily in properties across secondary or smaller markets.

The consolidated financial statements include the accounts of its Operating Partnership subsidiary and related SPEs and the accounts of the Company. As of December 31, 2017, the financial statements reflect the operations of 13 properties representing 263,045 rentable square feet located in seven states. The properties are 100% leased to the government of the United States of America and based on net operating income, have a weighted average remaining lease term of 9.5 years if none of the early termination rights are exercised and 6.2 years if all of the early termination rights are exercised as of December 31, 2017. The Company and its assets are managed externally by Holmwood Capital Advisors, LLC and its subsidiary Holmwood Capital Management, LLC (collectively “HCA” or “Asset Manager”).  The owners of HCA, or their respective affiliates, principally own and control Holmwood Capital, LLC (“predecessor” or “Holmwood”). Holmwood and HCA collectively own 46% of the common shares of the Company outstanding, on a fully diluted basis as of December 31, 2017. The CEO of HCA and Holmwood serves as the CEO and board member of the Company. In addition, two other beneficial owners of HCA and Holmwood serve as board members of the Company. The Company operates as an UPREIT and has elect to be treated as a real estate investment trust, or REIT, for federal income tax purposes under the Internal Revenue Code of 1986, as amended, or the Code, beginning with the taxable year ended December 31, 2017.

2. Significant Accounting Policies

Basis of Accounting and Consolidation Basis - The accompanying consolidated financial statements include the accounts of the Operating Partnership and 13 SPEs as of December 31, 2017. Of the SPEs, ten are wholly-owned entities that are consolidated based upon the Company having a controlling financial interest, and three SPEs are consolidated variable interest entities based upon management’s determination that the Operating Partnership has a variable interest in the entities and is the primary beneficiary. All other significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

Cash and Cash Equivalents - Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less when purchased. At times, the Company’s cash and cash equivalents balance deposited with financial institutions may exceed federally insurable limits. The Company maintains separate cash balances at the operating partnership and SPE level. At December 31, 2017 one account had a $318,919 balance in excess of FDIC limits, all others were below the insurable limits. The Company mitigates this risk by depositing funds with major financial institutions. The Company has not experienced any losses in connection with such deposits.

Restricted Cash – Restricted cash consists of amounts escrowed for future real estate taxes, insurance, and capital expenditures, as required by certain of the Company’s mortgage debt agreements.

Purchase Accounting for Acquisitions of Real Estate Subject to a Lease - In accordance with the Financial Accounting Standards Board (“FASB”) guidance on business combinations, the Company determines the fair value of the real estate assets acquired on an “as if vacant” basis. The difference between the purchase price and the fair value of the real estate assets on an “as if vacant” basis is first allocated to the fair value of above- and below-market leases, and then allocated to in-place leases and lease-up costs.

Management estimates the “as if vacant” value considering a variety of factors, including the physical condition and quality of the buildings, estimated rental and absorption rates, estimated future cash flows, and valuation assumptions consistent with current market conditions. The “as if vacant” fair value is allocated to land and buildings and improvements based on relevant information obtained in connection with the acquisition of the property, including appraisals and property tax assessments. Above-market and below-market lease values are determined on a lease-by-lease basis based on the present value (using an interest rate that reflects the risk associated with the leases acquired) of the difference between (a) the contractual amounts to be paid under the lease and (b) management’s estimate of the fair market lease rate for the corresponding space over the remaining non-cancelable terms of the related leases. Above (below) market lease values are recorded as leasehold intangibles and are recognized as an increase or decrease in rental income over the remaining non-cancelable term of the lease.

Additionally, in-place leases are valued in consideration of the net rents earned that would have been foregone during an assumed lease-up period; and lease-up costs are valued based upon avoided brokerage fees. The Company has not recognized any value attributable to customer relationships. The difference between the total of the calculated values described above, and the actual purchase price plus acquisition costs, is allocated pro-ratably to each component of calculated value. In-place leases and lease-up costs are amortized over the remaining non-cancelable term of the leases. Real estate values were determined by independent accredited appraisers.

Depreciation of an asset begins when it is available for use and is calculated using the straight-line method over its estimated useful life. Range of useful lives for depreciable assets are as follows:

Category	Term
Buildings	40 years
Building improvements	5 - 40 years
Tenant improvements	Shorter of remaining life of the lease or useful life

Construction expenditures for building improvements and tenant improvements are capitalized and amortized over the terms of each specific lease.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

Maintenance and repair expenditures are charged to expense as incurred while expenditures that extend the useful life of the real estate investment are capitalized.

Tenant Improvements - As part of the leasing process, the Company may provide the lessee with an allowance for the construction of leasehold improvements. These leasehold improvements are capitalized and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvements or the remaining lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of minimum rent revenue. Factors considered during this evaluation include, among other things, who holds legal title to the improvements as well as other controlling rights provided by the lease agreement and provisions for substantiation of such costs (e.g. unilateral control of the tenant space during the build-out process). Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease.

Leases - The Company’s real estate is leased to tenants on a modified gross lease basis. The leases provide for a minimum rent which normally is flat during the firm term of the lease. The minimum rent payment may include payments to pay for lessee requests for tenant improvements or to cover the cost for extra security. The tenant is required to pay increases in property taxes over the first year and an increase in operating costs based on the consumer price index of the lease’s base year operating expenses. Operating costs includes repairs and maintenance, cleaning, utilities and other related costs. Generally, the leases provide the tenant with renewal options, subject to generally the same terms and conditions of the base term of the lease. The Company accounts for its leases using the operating method. Such method is described below:

Operating method – Properties with leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rentals are earned and expenses (including depreciation and amortization) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives. Leasehold interests are amortized on the straight-line method over the terms of their respective leases. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease.

Impairment – Real Estate - The Company reviews investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. To determine if impairment may exist, the Company reviews its properties and identifies those that have experienced either a change or an event or circumstance warranting further assessment of recoverability (such as a decrease in occupancy). If further assessment of recoverability is needed, the Company estimates the future net cash flows expected to result from the use of the property and its eventual disposition, on an individual property basis. If the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying amount of the property on an individual property basis, the Company will recognize an impairment loss based upon the estimated fair value of such property. For the year ended December 31, 2017 and the period from March 11, 2016 to December 31, 2016, the Company has not recorded any impairment charges.

Organizational, Offering and Related Costs - Organizational and offering costs of the Company are presented as a reduction of shareholders’ equity within the consolidated balance sheets and statements of changes in stockholders’ equity. Organizational and offering costs represent expenses incurred in connection with the formation of the Company and the filing of the Company’s securities offering pursuant to Regulation A. As of December 31, 2017 and December 31, 2016, organizational and offering costs totaled $1,459,479 and $1,074,485 respectively.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

Revenue Recognition - Minimum rents are recognized when due from tenants; however, minimum rent revenues under leases which provide for varying rents over their terms, if any, are straight lined over the term of the leases. In the case of expense reimbursements due from tenants, the revenue is recognized in the period in which the related expense is incurred.

Rents and Other Tenant Receivables net - Rents and other tenant receivables represent amounts billed and due from tenants. When a portion of the tenants’ receivable is estimated to be uncollectible, an allowance for doubtful accounts is recorded. Due to the high credit worthiness of the tenants, there were no allowances as of December 31, 2017 and December 31, 2016, respectively.

Income Taxes – The Company will elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification for its fiscal year ending December 31, 2017. In order to maintain this REIT status, the regulations require the Company to distribute at least 90% of its taxable income to shareholders and meet certain other asset and income tests, as well as other requirements. If the Company fails to qualify as a REIT, it will be subject to tax at regular corporate rates for the years in which it fails to qualify. If the Company loses its REIT status it could not elect to be taxed as a REIT for five years unless the Company’s failure to qualify was due to reasonable cause and certain other conditions were satisfied.

Management analyzes its tax filing positions in the U.S. federal, state and local jurisdictions where it is required to file income tax returns for all open tax years. If, based on this analysis, management determines that uncertainties in tax positions exist, a liability is established along with an estimate for interest and penalty. Management has determined that there were no uncertain tax positions, and accordingly no associated interest and penalties were required to be accrued at December 31, 2017 and December 31, 2016, respectively.

Noncontrolling Interest - Noncontrolling interest represents the portion of equity in the Company’s Operating Partnership not attributable to the Company. The value of the noncontrolling interest of the Operating Partnership is calculated by multiplying the noncontrolling interest ownership percentage at the balance sheet date by the Operating Partnership’s equity. The noncontrolling interest percentage is calculated by dividing the number of common units not owned by the Company by the total number of common units outstanding. The noncontrolling interest ownership percentage will change as additional common units are issued or as common units are exchanged for the Company’s common stock. Subsequent changes in the noncontrolling interest value are recorded to additional paid-in capital. Accordingly, the value of the noncontrolling interest is included in the equity section of the consolidated balance sheets but presented separately from the Company’s equity.

Debt Issuance Costs – Debt issuance costs incurred in connection with the Company’s mortgages payable have been deferred and are being amortized over the term of the respective loan agreements using the effective interest method. As applicable, the unamortized balance of debt issuance costs is presented under mortgages payable within the consolidated balance sheet.

Earnings (Loss) Per Share

Basic earnings (loss) per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares, if any, that would be issued assuming conversion of all potentially dilutive securities outstanding.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

The following securities were not included in the computation of the Company’s diluted net loss per share as their effect would be anti-dilutive.

	As of December 31,
	2017		2016
Potentially dilutive securities outstanding at end of period:
Convertible common units		1,078,416		-
Convertible long-term incentive plan units		74,450		-
Convertible preferred stock		433,500		433,500
Unvested restricted stock		16,000		-
Total potential dilutive securities		1,602,366		433,500

Reclassifications – Certain prior year amounts have been reclassified for consistency with the current year presentation. Accordingly, $416,731 has been reclassified from leasehold intangibles, net to below-market leases, net, on the consolidated balance sheets as of December 31, 2016, in order to present the below-market lease intangibles separately from the above-market lease intangibles. This reclassification has no effect on the reported total partners’ capital or results of operations as of and for the period ended December 31, 2016.

Recent Accounting Pronouncements - In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five-step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new standard will be effective for the Company for the year ending December 31, 2019 and can be applied either retrospectively to all periods presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted beginning for the year ending December 31, 2017. The Company is currently evaluating the impact of adoption of the new standard on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 is intended to improve financial reporting about leasing transactions.  The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the consolidated financial statements.  

The leasing standard will be effective for the year ended December 31, 2020. Early adoption will be permitted upon issuance of the standard and a modified retrospective approach must be applied. The Company is currently evaluating the impact of ASU 2016-02 on its financial statements.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 is intended to improve cash flow statement classification guidance. The standard will be effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-15 on its financial statements.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 is intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2017-01 on its financial statements.

The Company has adopted reporting standards and disclosure requirements as a “smaller reporting company” as defined in Securities Act rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K as amended September 13, 2017. This rule provides scaled disclosure accommodations, the purpose of which is to provide general regulatory relief to qualifying entities.

Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.

3. Contribution Transaction

On May 26, 2017, Holmwood and the Operating Partnership closed on a transaction that resulted in Holmwood contributing its entire membership interest in four SPEs to the Operating Partnership and assigning to the Operating Partnership all its rights, title and interest in and to any and all profits, losses and distributed cash flow for three other SPEs as well as all of the other benefits and burdens of ownership for federal income tax purposes (the “Contribution Transaction”). In exchange for the aforementioned, the Operating Partnership issued 1,078,416 of its common units (“OP Units”). The agreed upon value of the transaction between the parties was $10,784,161. However, the Company recognized value of $6,068,182 with respect to the issuance of the OP Units based upon the net identifiable assets received. This issuance was recorded as a non-cash transaction in the consolidated statement of changes in stockholders equity for the year ended December 31, 2017.

The Contribution Transaction was accounted for as a commonly controlled transaction whereby the contributed assets and assumed liabilities are acquired at their historical book values, rather than at the agreed upon value. The historical book value of the net identifiable assets contributed was $6,068,182.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

A summary of the Company’s contributed assets and assumed liabilities as of May 26, 2017 is as follows:

Assets contributed
Buildings and improvements, net	$	28,748,079
Intangible assets, net		1,653,771
Prepaid and other assets		336,801
Total assets contributed, net	$	30,738,651
Liabilities assumed
Mortgages payable	$	22,307,335
Notes payable		1,321,210
Intangible liabilities, net		704,941
Accounts payable and accrued expenses		336,983
Total liabilities assumed	$	24,670,469
Net identifiable assets contributed	$	6,068,182

As part of the Contribution Transaction, the Company and Holmwood entered into a tax protection agreement indemnifying Holmwood for any taxes resulting from a sale for a period of ten years after the date of the Contribution Transaction.

4. Variable Interest Entities

With respect to the three SPEs where Holmwood assigned to the Operating Partnership all its rights, title and interest in and to any and all profits, losses and distributed cash flow, management determined these SPEs to be variable interest entities (“VIE”) in which the Operating Partnership has a variable interest and that Holmwood equity holders lacked the characteristics of a controlling financial interest. The Company determined in accordance with ASC Topic 801 “Consolidation” to consolidate these SPEs.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

A summary of the VIE’s assets and liabilities that are included within the Company’s consolidated balance sheet at December 31, is as follows:

Assets:
Buildings and improvements, net	$	12,007,437
Intangible assets, net		530,626
Prepaids and other assets		457,096
Total assets	$	12,995,159
Liabilities:
Mortages payable	$	9,796,972
Intangible liabilities, net		168,733
Accounts payable and accrued expenses		242,284
Total liabilities	$	10,207,989
Net identifiable assets	$	2,787,170

5. Investment in Real Estate

The following is a summary of the Company’s investment in real estate, net as of December 31, 2017 and December 31, 2016, respectively:

	2017			2016
Land	$	6,065,137		$	841,155
Buildings and improvements		52,699,106			8,420,511
Tenant improvements		4,701,613			1,418,354
		63,465,856			10,680,020
Accumulated depreciation		(1,543,221	)		(244,029	)
Investments in real estate, net	$	61,922,635		$	10,435,991

Depreciation expense for the year ended December 31, 2017 and 2016 was $1,299,192 and $244,029, respectively.

The Company capitalized building improvements in the amount of $49,475 and $0 for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016, respectively.

During the year ended December 31, 2017 the Company acquired three properties located in Virginia, Alabama and Texas with rentable square footage of 53,917, 16,036 and 38,756 respectively. The acquisitions were financed with a combination of cash and first mortgage loans. All 3 properties were acquired with leases in place with the United States of America with remaining firm terms between 4.3 and 9.5 years at the time of acquisition. A summary of the allocated purchase price for each acquired property, based on estimated fair values, is as follows:

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

	Norfolk, VA			Montgomery, AL			San Antonio, TX
2017 Acquisitions:	March 31, 2017			July 25, 2017			November 21, 2017			Total
Land	$	1,542,290		$	549,664		$	273,588		$	2,365,542
Buildings and improvements		11,115,690			2,751,204			5,968,136			19,835,030
Tenant improvements		-			504,350			1,324,340			1,828,690
Acquired In-place leases		418,856			174,905			394,907			988,668
Acquired lease-up costs		562,611			167,501			193,487			923,599
Above market leases		1,078,490			649,448			118,891			1,846,829
Tenant improvement obligation		(1,315,366	)		-			-			(1,315,366	)
Acquisition fees payable		(145,000	)		(47,095	)		(82,250	)		(274,345	)
Capitalized costs, other		-			-			-			8,495
	$	13,257,571		$	4,749,977		$	8,191,099		$	26,207,142

In connection with the purchase of the Norfolk property and the assumption of its related lease agreement, the Company assumed an aggregate obligation in the amount of $1,315,366 relating to a build-out allowance and a building specific capital allowance. At closing, the seller provided the Company a credit of an equal amount. The credit was received in cash and is held in escrow until the capital projects begin. As of December 31, 2017, $1,315,366 remained in escrow and is classified as restricted cash on the consolidated balance sheet.

The Company during 2017 also capitalized certain costs in the amount of $8,495 related to its Lakewood Co. property.

During the period March 11, 2016 to December 31, 2016 the Company acquired three properties, two in Oklahoma and one in Colorado with rentable square footage of 15,445, 9,298 and 19,241 respectively. The acquisitions were financed with a combination of cash and first mortgage loans. All three properties were acquired with leases in place with the United States of America with remaining firm terms between 4.2 and 8.0 years at the time of acquisition. A summary of the allocated purchase price for each acquired property, based on estimated fair values, is as follows:

	Moore, OK		Lawton, OK			Lakewood, CO
2016 Acquisitions:	June 10, 2016		June 10, 2016			June 10, 2016			Total
Land	$	259,130	$	169,458		$	412,567		$	841,155
Buildings and improvements		3,936,562		1,731,446			2,752,503			8,420,511
Tenant improvements		382,588		276,317			759,449			1,418,354
Acquired In-place leases		150,020		81,066			135,081			366,167
Acquired lease-up costs		102,235		39,919			125,973			268,127
Above market leases		184,887		-			-			184,887
Below Market leases		-		(10,519	)		(438,086	)		(448,605	)
	$	5,015,422	$	2,287,687		$	3,747,487		$	11,050,596

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

6. Leasehold Intangibles, net

The following is a summary of the Company’s leasehold intangibles as of December 31, 2017 and December 31, 2016.

	December 31, 2017			December 31, 2016
Acquired in-place leases	$	2,171,435		$	366,167
Acquired lease-up costs		2,022,123			268,127
Acquired above-market leases		2,038,492			184,887
		6,232,050			819,181
Accumulated amortization		(596,615	)		(76,171	)
Leasehold intangibles, net	$	5,635,435		$	743,010

Amortization of in-place leases, lease-up costs and acquired above market leases was $520,444 and $76,171 for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016, respectively.

Future amortization of acquired in-place lease value, acquired lease-up costs and acquired above market leases (collectively “Intangible Lease Costs”) is as follows:

	Intangible
	Lease
Year Ended	Costs
2018	$	804,784
2019		804,784
2020		794,016
2021		743,345
2022		565,945
Thereafter		1,922,561
Total	$	5,635,435

7. Below-Market Leases, net

The Company’s intangible liabilities consist of acquired below-market leases. The following is a summary of the Company’s intangible liabilities, as of December 31, 2017 and 2016.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

	December 31, 2017			December 31, 2016
Acquired below-market leases	$	1,153,546		$	448,605
Accumulated amortization		(151,792	)		(31,874	)
Below-market leases, net	$	1,001,754		$	416,731

Amortization of below-market leases resulted in an increase in rental revenue of $119,918 and $31,874 for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016, respectively.

The future amortization of acquired below market leases is as follows:

	Below
	Market
Year Ended	Leases
2018	$	163,305
2019		163,305
2020		162,356
2021		144,363
2022		104,499
Thereafter		263,926
Total	$	1,001,754

8. Mortgages Payable

The following table outlines the mortgages payable as of December 31, 2017 and 2016:

							Outstanding Principal
Issuance Date	Initial Balance		Interest Rate			Maturity	December 31, 2017			December 31, 2016
August-2013	$	10,700,000		5.27	%	August-2023	$	9,976,722		$	-
April-2015		7,600,000		3.72	%	March-2018		6,874,169			-
June-2016		9,675,000		3.93	%	July-2019		9,343,234			7,153,556
July-2017		10,875,000		4.00	%	August-2022		10,789,967			-
July-2017		3,530,000		4.00	%	August-2022		3,502,398			-
September-2017		2,750,000		4.00	%	August-2022		2,734,311			-
November-2017		6,991,250		4.25	%	June-2019		6,991,250			-
Total principal								50,212,051			7,153,556
Debt issuance costs								(755,338	)		(105,072	)
Accumulated amortization								116,970			19,583
Mortgage payable net of unamortized debt cost							$	49,573,683		$	7,068,067

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

At December 31, 2017, and December 31, 2016, the Company had unamortized debt issuance costs of $638,368 and $85,489 net of $116,970, and $19,583 of accumulated amortization, respectively, in connection with its various mortgage payables.

Mortgage loan balances as of December 31, 2017 and 2016 totaled $50,212,051 and $7,153,556, respectively. Fixed rate loans before unamortized debt issuance costs totaled $43,337,882 and $7,153,556 as of December 31, 2017 and 2016, respectively. Variable rate loans before unamortized debt issuance costs totaled $6,874,169 and $0 for the same respective periods. The loans are payable to various financial institutions and are collateralized by specific properties.

The mortgage loan issued in August 2013 bears interest at a fixed rate of 5.27% per annum, has debt service payments based on principal amortization over 30 years, and matures in August 2023. This mortgage was assumed by the Company in connection with the Contribution Agreement. Outstanding principal balance as of December 31, 2017 was $9,976,722.

The mortgage loan issued in April 2015 has a variable interest rate equal to the one-month LIBOR rate plus 235 basis points. The interest rate was 3.72% for the year ended December 31, 2017. This mortgage was assumed by the Company in connection with the Contribution Agreement. The loan has required debt service payments based on principal amortization over 20 years and would have matured on March 25, 2017 in the event the predecessor had not exercised its option to extend the loan to March 25, 2018. The predecessor paid an extension fee in the amount of $11,400. The outstanding principal balance as of December 31, 2017 was $6,874,169. On or about March 25, 2018, management secured a 90-day extension to June 25, 2018 while negotiations were in process to procure a long-term refinance agreement. As a result of those negotiations, the Company entered into a loan modification agreement on April 27, 2018 which, among other things, extended the maturity date to April 27, 2020 (See Note 14 - Mortgage Payable for further discussion).

The mortgage loans issued in June 2016 bear interest at a fixed rate of 3.93% per annum with debt service payments based on principal amortization over 25 years and mature in July 2019. During the period from March 11, 2016 (date of inception) to December 31, 2016, there were three separate properties included in this financing, each with a separate mortgage payable. A fourth property financed on the same day with the same institution and with the same terms was acquired as a result of the Contribution Transaction. The aggregate original issue for the 4 loans outstanding at December 31, 2017, and the three loans outstanding at December 31, 2016 was $9,675,000 and $7,225,000, respectively. The outstanding principal balances were $9,343,234 and $7,153,566 as of December 31, 2017 and 2016, respectively.

The mortgage loan issued in July 2017, for a newly acquired property in Norfolk, VA., bears interest at a fixed rate of 4.00% per annum, has debt service payments based on principal amortization over 25 years, and matures in August 2022. The outstanding principal balance as of December 31, 2017 was $10,789,967.

The mortgage loan issued in July 2017, for a newly acquired property in Montgomery, AL., bears interest at a fixed rate of 4.00% per annum, has debt service payments based on principal amortization over 25 years, and matures in August 2022. The outstanding principal balance as of December 31, 2017 was $3,502,398.

The mortgage loan issued in September 2017, was to refinance a property acquired as a result of the Contribution Transaction. It bears interest at a fixed rate of 4.00% per annum, has debt service payments based on principal amortization over 25 years, and matures in August 2022. The outstanding principal balance as of December 31, 2017 was $2,734,311.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

The mortgage loan issued in November 2017, for a newly acquired property in San Antonio, TX, is an interest only note that bears a fixed rate of 4.25% per annum and matures in June 2019. The outstanding principal balance as of December 31, 2017 was $6,991,250.

The carrying amount of the Company’s variable rate debt approximates its fair value as of December 31, 2017.

9. Notes Payable

The following table outlines the notes payable as of December 31, 2017 and 2016:

							Outstanding Principal
	Initial		Interest				December 31		December 31
Issuance Date	Balance		Rate			Maturity	2017		2016
Related Parties
March-2017		3,070,000		12.00	%	March-2018	$	3,070,000	$	-
December-2017		330,000		3.25	%	February-2018		330,000		-
December-2017		750,000		8.00	%	June-2018		750,000		-
Total related parties notes payable							$	4,150,000	$	-
Third parties
June-2016		2,019,789		7.00	%	December-2017	$	-	$	1,992,140
December-2016		124,000		4.78	%	September-2017		-		111,821
March-2017		330,000		12.00	%	March-2018		330,000		-
November-2017		124,000		4.98	%	September-2018		99,610		-
December-2017		750,000		8.00	%	June-2018		750,000		-
Total third party notes payable							$	1,179,610	$	2,103,961
Total related and third party notes							$	5,329,610	$	2,103,961

March Notes

On March 31, 2017, the Company borrowed an aggregate amount of $3,400,000 pursuant to multiple promissory notes payable. The notes are unsecured, require monthly interest-only payments payable in arrears at an interest rate of 12% per annum. By agreement with the holders of these notes, the maturity date of such notes has been extended to May 1, 2019. The notes are pre-payable without penalty. Of these notes, $3,070,000 in aggregate principal were loaned by a director of the Company and by an affiliate of another Company director, all of whom or which also are affiliates of the Asset Manager and the Company’s predecessor. As of December 31, 2017, the outstanding principal balance of these notes was $3,400,000.

December Notes

On December 11, 2017, our company borrowed $330,000 from an affiliated entity of our Company’s CEO. The loan accrues interest at 3.25% per annum and both principal and accrued interest is payable on demand. This note was paid in full on February 26, 2018.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

On December 11, 2017, the Company borrowed $1,500,000 in aggregate principal amount pursuant to multiple promissory notes payable to accredited investors. The notes are unsecured, require monthly interest-only payments payable in arrears at an interest rate of 8% per annum. By agreement with the holders of these notes, the maturity date of such notes has been extended to May 1, 2019. With respect to these notes, $500,000 in principal amount was loaned by an affiliate of a director of the Company, the Asset Manager and the Company’s predecessor, and $250,000 was loaned by a member of the Company’s predecessor. As of December 31, 2017, the outstanding principal balance of these notes was $1,500,000.

Seller-Finance Note

On June 10, 2016, the Company entered into a note payable agreement in the amount of $2,019,789 with the seller of the Company’s 2016 acquired properties. The loan bears interest at a fixed annum rate of 7.0% and payments are based on monthly principal amortization over 20 years. The note matured on December 10, 2017. During December 2017, the Company paid the outstanding principal balance of the note plus accrued interest through the date of payment. The outstanding principal balance as of December 31, 2017 and 2016 was $0 and $1,992,140, respectively.

Premium Finance Agreement

On November 30, 2017, the Company entered into a note payable in the amount of $124,000 to finance certain insurance premiums. The loan bears interest at a fixed annum rate of 4.98% and requires ten payments, including principal and interest, of $12,685. As of December 31, 2017, the outstanding balance was $99,610.

On December 7, 2016, the Company entered into a note payable in the amount of $124,000 to finance certain insurance premiums. The loan bore interest at a fixed annum rate of 4.78% and required ten payments, including principal and interest, of $12,673. As of December 31, 2017 and 2016, the outstanding balance was $0 and $111,821, respectively.

10. Related Parties

Receivables/Payables

At December 31, 2017, the Company had a related party payable of $461,858 which consisted of a payable to Holmwood of $371,984, a payable to HCA of $74,874, and a payable to the Company’s CEO of $15,000. Subsequent to December 31, 2017, the Company has repaid $267,000 to Holmwood, $74,807 to HCA and $15,000 to the CEO.

During the period from March 11, 2016 (date of inception) to December 31, 2016, the Company advanced to Holmwood $410,861 and advanced $114,536 to the Asset Manager. At December 31, 2016, the unpaid balance of the advance to Holmwood and the advance to the Asset Manager was $410,861 and $114,536, respectively.

Management fees

The Asset Manager provides asset management, property management, acquisition and leasing services for the Company.

The Company pays the Asset Manager an asset management fee equal to 1.5% of the stockholders’ equity payable, subject to certain adjustments, in arrears and on a quarterly basis. The asset management fee incurred for the year ended December 31, 2017 and for the period March 11, 2016 to December 31, 2016 was $178,621 and $35,948, respectively. Accrued asset management fees at December 31, 2017 and 2016 were $74,807 and $0, respectively.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

The Company pays a property management fee to the Asset Manager with respect to all properties. The property management fee is payable on a monthly basis and in arrears. The Company incurred property management fees of $124,861 and $21,361 for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016, respectively.

The Company owes the Asset Manager 1% of the acquisition cost (“Acquisition Fee”) of each real estate investment made on behalf of the Company for services with respect to the identification of an investment, arrangement of the purchase, and coordination of closing. The Acquisition Fee shall be paid in common stock or other equity securities of the Company. The Acquisition Fee shall be accrued and unpaid until the earlier of the date on which the Company’s common stock is initially listed with a national securities exchange or on March 31, 2020. Unpaid acquisition fees as of December 31, 2017 and 2016 were $274,345 and $0, respectively.

The Company owes the Asset Manager a leasing fee for services in connection with leasing the Company’s real estate investments equal to 2.0% of all gross rent for any new lease or lease renewal entered into, excluding reimbursements by the tenant for operating expenses and taxes and similar pass-through obligations paid by the tenant. There were no leasing fees paid during the year ended December 31, 2017 nor during the period from March 11, 2016 (date of inception) to December 31, 2016. There were no leasing fees accrued at December 31, 2017 and 2016.

Notes payable

During the year ended December 31, 2017, the Company entered into various promissory notes with related parties (See Note 9 for further discussion). As of December 31, 2017, the unpaid principal balance of related party notes payable was $4,150,000. There were no related party notes payable issued during the period from March 11, 2016 (date of inception) to December 31, 2016 nor were there any outstanding as of December 31, 2016.

11. Leases and Tenants

Our rental properties are subject to generally non-cancelable operating leases generating future minimum contractual rent payments due from tenants. Occupancy of the operating properties was at 98.1% for the year ended December 31, 2017 and for the period from March 11, 2016 (date of inception) to December 31, 2016. Lease terms range from 3 to 12 years as of December 31, 2017. The future minimum rents for existing leases as of December 31, 2017 are as follows:

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

	Future
	Minimum
	Rents
2018	$	7,580,715
2019		7,580,715
2020		7,404,384
2021		6,942,197
2022		5,097,601
Thereafter		16,559,369
Total	$	51,164,980

The properties are 100% leased to the United States of America and administered by either the GSA or occupying agency. At December 31, 2017 the weighted average firm lease term is 6.2 years if GSA elects its early termination right and the total remaining weighted average contractual lease term including renewal options is 9.5 years. Lease maturities range from 2020 to 2029.

12. Stockholders’ Equity

Preferred Stock

During the period March 11, 2016 (date of inception) to December 31, 2016, the Company issued 144,500 shares of its 7.00% Series A Cumulative Convertible Preferred Stock (“the Series A Preferred Stock”) to various investors in exchange for a total of $3,612,500, or $25 per share. The Series A Preferred Stock is convertible, at shareholders’ request, on the earlier of (1) the Company’s listing on a national securities exchange or (2) on March 31, 2020. The shares are convertible into common shares at a 3:1 ratio.

Common Stock

On March 14, 2016, the Company issued 50,000 shares (200,000 shares, collectively) of common stock at a price of $0.01 per share to each of Messrs. Robert R. Kaplan, Robert R. Kaplan, Jr., Edwin M. Stanton and Philip Kurlander, founders of the Company. Total consideration was $500 per person.

On November 7, 2016, the Company’s offering statement (the “Offering”) filed pursuant to Regulation A was qualified by the SEC. The Offering’s minimum and maximum offering amounts are $3,000,000 and $30,000,000, respectively, at an offering price of $10 per share. The initial purchase of common stock with respect to the Offering occurred on May 18, 2017. During the year ended December 31, 2017, the Company sold 679,307 shares in connection with the Offering for net proceeds of $6,141,926.

Restricted Common Stock Issuance

Compensation for each independent board member includes an initial share grant of 4,000 restricted common shares with a one-year vesting term. On May 18, 2017, the Company issued 16,000 shares to its four independent board members, collectively. The shares, valued at $10 share, pay dividends on the number of shares issued without regard to the number of shares vested. For the year ended December 31, 2017, the Company recognized $98,667 related to equity-based compensation.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

OP Units Issued

On May 26, 2017, in connection with the closing on the Contribution Transaction, the Operating Partnership issued 1,078,416 OP Units to the Company’s predecessor. The recorded value of the OP Units was based upon the book value of the net identifiable assets contributed which was $6,068,182. After one year, the OP Units are exchangeable into the REIT’s common stock at a ratio of 1:1 or redeemable for cash, at the REIT’s discretion.

Long-Term Incentive Plan Shares

During the year ended December 31, 2017, the Operating Partnership issued the Asset Manager 74,450 long-term incentive plan shares (“LTIPs”) that vest over five-years. Each LTIP is convertible into OP Units at 1:1 which can then be further exchanged into the REIT’s common stock at 1:1. Pursuant to an agreement, the shares are issued concurrent with each sale of the REIT’s common stock. The vesting will accelerate if the Company terminates its management agreement with the Asset Manager. The LTIPs result in the Asset Manager consistently and beneficially owning 3% of the REIT’s issued and outstanding shares on a fully diluted basis. For the year ended December 31, 2017, the Company recognized $82,364 of equity-based compensation expense.

Dividends and Distributions

During the year ended December 31, 2017 and the period from March 11, 2016 (date of inception) to December 31, 2016, the REIT declared dividends on its Series A Preferred Stock of $316,095 and $104,636, respectively. As of December 31, 2017 and 2016, accrued, unpaid preferred stock dividends were $63,219 and $0, respectively.

During the year ended December 31, 2017 and the period from March 11, 2016 to December 31, 2016, the REIT declared dividends on its common stock of $270,232 and $0, respectively. As of December 31, 2017 and 2016, accrued, unpaid common stock dividends were $123,104 and $0, respectively.

During the year ended December 31, 2017, the Operating Partnership declared distributions of $390,869 with respect to its outstanding common units and LTIPs. As of December 31, 2017, accrued, unpaid distributions were $158,519.

13. Commitments and Contingencies

In connection with the contributed properties in 2017, the property, located in Port Canaveral, Florida, was purchased subject to ground leases. The ground lease has an extended term of 30 years to 2045 with one 10-year renewal option. The Company made ground lease payments of $43,903 during the year ended December 31, 2017. The future minimum rent payments for the ground lease as of December 31, 2017 are as follows:

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

	Future
	Minimum
Year Ended	Rents
2018*	$	73,568
2019		73,568
2020		73,568
2021		73,568
2022		73,568
Thereafter		1,692,057
Total	$	2,059,897

The Company can be party to or otherwise be involved in legal proceedings arising in the normal and ordinary course of business. We are not aware of any proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

14. Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, other than listed below.

Dividends and Distributions

On January 1, 2018, the Company and Operating Partnership paid the accrued dividends and distributions of $186,323 and $158,519, respectively.

On March 28, 2018, the Company declared a dividend on its Series A Preferred Stock and common stock of $0.4375 and $0.1375 per share for shareholders of record on March 31, 2018. The aggregate dividend of $200,364 was paid on April 5, 2018.

On March 28, 2018, the Operating Partnership declared an aggregate distribution of $158,954 with respect to its OP Units and LTIPs, representing $0.1375 per share for holders of record on March 31, 2018.

Securities Issuances

Through April 27, 2018 the REIT had sold and issued 180,284 additional shares of common stock under its Offering for $1,690,488, net of issuance costs during fiscal 2018.

Through April 27, 2018, the Operating Partnership had issued 5,576 LTIPs to the Asset Manager in connection with the above common stock sold in fiscal 2018. The value of the LTIPs issued were estimated at $55,760 and vest over 5 years.

HC Government Realty Trust, Inc.

Notes to the Consolidated Financial Statements

For the year ended December 31, 2017 and from

March 11, 2016 (date of inception) to December 31, 2016

Notes Payable

On February 26, 2018, the Company satisfied the note payable to an affiliated entity of the Company’s Chief Executive Officer in the amount of $332,263, which included accrued interest of $2,263.

Effective April 16, 2018, the Company and investors agreed to extend the maturity date of the $3,400,000 notes payable issued March 31, 2017 to May 1, 2019.

Effective April 16, 2018, the Company and investors agreed to extend the maturity date of the $1,500,000 notes payable issued December 11, 2017 to May 1, 2019.

Mortgage Payable

On April 17, 2018, the Company received a commitment from a lending institution to modify the variable rate mortgage that was previously extended to June 25, 2018. The terms of the commitment specify interest is based on the one-month LIBOR plus 235 basis points, principal payments are based on a 17 year amortization period and matures two years from date of closing. The financing contains other terms and conditions customarily associated with mortgage lending. On April 27, 2018, the Company entered into a loan modification agreement substantially upon the terms of the commitment.

Future Acquisitions

The Company has entered into separate purchase and sale agreements to acquire three properties currently leased to the United States of America for the combined price of $21,655,000, excluding acquisition costs. The acquisitions will be financed by senior debt financing and equity. The Company has acquisition deposits outstanding in the amount of $150,000. The properties are expected to close between late April, 2018 and late July 2018.

Report of Independent Registered Public Accounting Firm

To the Management of

Holmwood Capital, LLC

Sarasota, Florida

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Holmwood Capital, LLC and subsidiaries (collectively, “Holmwood Capital) as of May 26, 2017 and December 31, 2016, the related consolidated statements of operations, changes in Partners’ capital, and cash flows for the period from January 1, 2017 to May 26, 2017 and the year ended December 31, 2016, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Holmwood Capital as of May 26, 2017 and December 31, 2016, and the results of their operations and their cash flows for the period from January 1, 2017 to May 26, 2017 and the year ended Decemer 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of Holmwood Capital's management. Our responsibility is to express an opinion on Holmwood Capital's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Cherry Bekart LLP

We have served as Holmwood Capital’s auditor since 2016.

Richmond, Virginia

April 27, 2018

Holmwood Capital, LLC

Consolidated Balance Sheets

May 26, 2017 and December 31, 2016

	May 26, 2017			December 31, 2016
ASSETS
Investment in real estate, net	$	28,748,106		$	29,107,886
Cash and cash equivalents		186,005			258,840
Restricted cash		134,865			239,221
Rent and other tenant receivables, net		166,264			336,464
Leasehold intangibles, net		1,653,770			1,766,835
Prepaids and other assets		75,944			52,579
Total Assets	$	30,964,954		$	31,761,825
LIABILITIES
Mortgages payable, net of unamortized issuance costs	$	22,307,340		$	22,455,942
Notes payable, net of unamortized issuance costs		1,120,718			1,387,901
Accrued interest payable		91,616			94,942
Accounts payable		127,651			160,596
Accrued expenses		254,128			245,205
Below-market leases, net		704,941			746,865
Related party payable		121,848			410,861
Total Liabilities		24,728,242			25,502,312
PARTNERS' CAPITAL
Partners' contributions, net		6,804,872			6,804,872
Accumulated deficit		(568,160	)		(545,359	)
Total Partners' Capital		6,236,712			6,259,513
Total Liabilities and Partners' Capital	$	30,964,954		$	31,761,825

The accompanying notes are an integral part of the consolidated financial statements

Holmwood Capital, LLC

Consolidated Statements of Operations

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

	Period from January 1, 2017 to May 26, 2017			For the Year Ended December 31, 2016
Revenues
Rental revenues	$	1,430,291		$	3,564,278
Real estate tax reimbursments and other revenues		3,146			146,890
Total revenues		1,433,437			3,711,168
Operating expenses
Depreciation and amortization		478,377			1,228,064
General and administrative		9,379			15,731
Ground lease		27,924			71,094
Insurance		22,530			54,149
Janitorial		67,144			169,172
Management fees		79,005			192,652
Professional expenses		16,392			54,125
Real estate and other taxes		125,279			237,959
Repairs and maintenance		88,502			210,693
Utilities		67,235			161,048
Total operating expenses		981,767			2,394,687
Other expense
Interest expense		474,471			1,224,717
Net (loss) income	$	(22,801	)	$	91,764

The accompanying notes are an integral part of the consolidated financial statements

Holmwood Capital, LLC

Consolidated Statements of Changes in Partners’ Capital

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

	Contributions			Accumulated			Total Partners'
	(Distributions)			Deficit			Capital
Balance, December 31, 2015	$	7,179,761		$	(637,123	)	$	6,542,638
Distributions		(374,889	)		-			(374,889	)
Net income		-			91,764			91,764
Balance, December 31, 2016		6,804,872			(545,359	)		6,259,513
Distributions		-			-			-
Net loss		-			(22,801	)		(22,801	)
Balance, May 26, 2017	$	6,804,872		$	(568,160	)	$	6,236,712

The accompanying notes are an integral part of the consolidated financial statements

Holmwood Capital, LLC

Consolidated Statements of Cash Flows

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

	Period from January 1, 2017 to May 26, 2017			For the Year Ended December 31, 2016
Cash flows from operating activities:
Net (loss) income	$	(22,801	)	$	91,764
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation		365,850			946,751
Amortization of acquired lease-up costs		54,495			136,234
Amortization of in-place leases		58,032			145,079
Amortization of above/below-market leases		(41,386	)		(103,429	)
Amortization of debt costs		35,980			138,095
Change in assets and liabilities
Restricted cash		104,356			(116,370	)
Rent and other tenant receivables, net		170,200			(90,837	)
Prepaid expense and other assets		(23,365	)		113,770
Accounts payable and accrued expenses		(24,022	)		16,297
Accrued interest payable		(3,326	)		13,664
Related party payable		(289,013	)		410,861
Net cash provided by operating activities		385,000			1,701,879
Cash flows from investing activities:
Improvements to investment properties		(6,070	)		(13,745	)
Net cash provided (used) in investing activities		(6,070	)		(13,745	)
Cash flows from financing activities:
Distributions to partners		-			(374,889	)
Notes payable proceeds		-			1,000,000
Mortgage proceeds		-			2,450,000
Mortgage principal payments		(184,582	)		(4,198,676	)
Notes payable principal repayments		(267,183	)		(465,036	)
Debt issuance costs		-			(132,793	)
Net cash used in financing activities		(451,765	)		(1,721,394	)
Net decrease in cash and cash equivalents		(72,835	)		(33,260	)
Cash and cash equivalents, beginning of year		258,840			292,100
Cash and cash equivalents, end of period for May 26, 2017 and end of year 2016	$	186,005		$	258,840
Supplemental cash flow information:
Interest paid	$	430,417		$	1,084,704

The accompanying notes are an integral part of the consolidated financial statements

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

1. Organization

Holmwood Capital, LLC (“Holmwood” or the “Company”), a Delaware limited liability company, was organized for the primary purpose of acquiring, owning, leasing and disposing of commercial real estate properties leased by the United States of America and administered by General Services Administration (GSA) or occupying agency. The Company invests through wholly-owned, special purpose limited liability companies, or special purpose entities (“SPE”), primarily in properties across secondary or smaller markets.

There were seven (7) SPEs as of May 26, 2017 representing 110,352 rentable square feet located in five states. The properties are 100% leased to the United States of America. Since 2015, the Company and its assets have been managed externally by Holmwood Capital Advisors, LLC and its subsidiary, Holmwood Capital Management, LLC, (collectively “HCA” or “Asset Manager”). The principal owners of HCA or their respective affiliates are also the majority owners of Holmwood.

On May 26, 2017, Holmwood and HC Government Realty Holdings, LP (“HC Gov Realty”) closed on a transaction (the “Contribution Transaction”) whereby all of the membership interests in four of the Company’s subsidiaries were contributed to HC Gov Realty in exchange for common units (“OP Units”). Additionally, in exchange for all the profits, losses, and distributed cash flow and all of the other benefits and burdens of ownership for federal income tax purposes for three of the Company’s SPEs, HC Gov Realty issued OP units. `The Contribution Transaction resulted in the contribution of all of Holmwood’s property-related operations, assets and liabilities to HC Gov Realty.

2. Basis of Presentation

Holmwood’s consolidated balance sheet as of May 26, 2017 and the related consolidated statement of operations, consolidated statement of changes in partners’ capital and consolidated statements of cash flows for the period from January 1, 2017 to May 26, 2017 have been presented immediately prior to the effects of the Contribution Transaction.

3. Significant Accounting Policies

Basis of Accounting and Consolidation - The accompanying consolidated financial statements include the accounts of the subsidiary and the seven wholly-owned SPEs including transactions whereby the Company has been determined to have majority voting interest, control and is the primary beneficiary in accordance with the Financial Accounting Standards Board (“FASB”) guidance. All other significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Cash and Cash Equivalents - Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less when purchased. At times, the Company’s cash and cash equivalents balance deposited with financial institutions may exceed federally insurable limits. The Company mitigates this risk by depositing funds with major financial institutions.

The Company has not experienced any losses in connection with such deposits.

Restricted Cash – Restricted cash consists of amounts escrowed for future real estate taxes, insurance and repairs, as required by certain of the Company’s mortgage debt agreements.

Purchase Accounting for Acquisitions of Real Estate Subject to a Lease - In accordance with the FASB guidance on business combinations, Holmwood determines the fair value of the real estate assets acquired on an “as if vacant” basis. The difference between the purchase price and the fair value of the real estate assets on an “as if vacant” basis is first allocated to the fair value of above- and below-market leases, and then allocated to in-place leases and lease-up costs.

Management estimates the “as if vacant” value considering a variety of factors, including the physical condition and quality of the buildings, estimated rental and absorption rates, estimated future cash flows, and valuation assumptions consistent with current market conditions. The “as if vacant” fair value is allocated to land and buildings and improvements based on relevant information obtained in connection with the acquisition of the property, including appraisals and property tax assessments. Above-market and below-market lease values are determined on a lease-by-lease basis based on the present value (using an interest rate that reflects the risk associated with the leases acquired) of the difference between (a) the contractual amounts to be paid under the lease and (b) management’s estimate of the fair market lease rate for the corresponding space over the remaining non-cancelable terms of the related leases. Above (below) market lease values are recorded as leasehold intangibles and are recognized as an increase or decrease in rental income over the remaining non-cancelable term of the lease.

Additionally, in-place leases are valued in consideration of the net rents earned that would have been foregone during an assumed lease-up period; and lease-up costs are valued based upon avoided brokerage fees. Holmwood has not recognized any value attributable to customer relationships. The difference between the total of the calculated values described above, and the actual purchase price plus acquisition costs, is allocated pro-ratably to each component of calculated value. In-place leases and lease-up costs are amortized over the remaining non-cancelable term of the leases. Real estate values were determined by independent accredited appraisers.

Depreciation of an asset begins when it is available for use and is calculated using the straight-line method over its estimated useful life. Range of useful lives for depreciable assets are as follows:

Category	Term
Buildings	40 years
Building improvements	5 - 40 years
Tenant improvements	Shorter of remaining life of the lease or useful life

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Construction expenditures for building improvements and tenant improvements are capitalized and amortized over the terms of each specific lease.

Maintenance and repair expenditures are charged to expense as incurred while expenditures that extend the useful life of the real estate investment are capitalized.

Leases - Holmwood’s real estate is leased to tenants on a modified gross lease basis. The leases provide for a minimum rent which normally is flat during the firm term of the lease. The minimum rent payment may include payments to pay for lessee requests for tenant improvement or to cover the cost for extra security. The tenant is required to pay increases in property taxes over the first year and an increase in operating costs based on the consumer price index of the lease’s base year operating expenses. Operating costs includes repairs and maintenance, cleaning, utilities and other related costs. Generally, the leases provide the tenant with renewal options, subject to generally the same terms and conditions of the base term of the lease. Holmwood accounts for its leases using the operating method. Such method is described below:

Operating method – Properties with leases accounted for using the operating method are recorded at the cost of the real estate. Revenue is recognized as rents are earned and expenses (including depreciation and amortization) are charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives. Leasehold intangibles are amortized on the straight-line method over the terms of their respective leases. When scheduled rents vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease.

Impairment – Real Estate - The Company reviews investments in real estate for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. To determine if impairment may exist, the Company reviews its properties and identifies those that have had either an event of change or an event of circumstances warranting further assessment of recoverability (such as a decrease in occupancy). If further assessment of recoverability is needed, the Company estimates the future net cash flows expected to result from the use of the property and its eventual disposition, on an individual property basis. If the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying amount of the property on an individual property basis, the Company will recognize an impairment loss based upon the estimated fair value of such property. For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016, the Company has not recorded any impairment charges.

Revenue Recognition - Minimum rents are recognized when due from tenants; however, minimum rent revenues under leases which provide for varying rents over their terms, if any, are straight lined over the term of the leases. In the case of expense reimbursements due from tenants, the revenue is recognized in the period in which the related expense is incurred.

Rents and Other Tenant Accounts Receivables, net - Rents and other tenant accounts receivables represent amounts billed and due from tenants. When a portion of the tenants’ receivable is estimated to be uncollectible, an allowance for doubtful accounts is recorded. Due to the high credited worthiness of the tenants, there were no allowances as of May 26, 2017 and December 31, 2016.

Income and Other Taxes - No provision for income taxes is made because Holmwood and its operating subsidiaries are not subject to income tax. Management has evaluated tax positions that could have a significant effect on the financial statements and determined that the Company has a franchise and excise state tax liability of $5,997 to reflect its share of the annual costs for the period from January 1, 2017 to May 26, 2017. The franchise and excise state tax liability as of December 31, 2016 was $12,249.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Debt Issuance Costs – Debt issuance costs incurred in connection with Holmwood’s mortgages payable and note payable were deferred and amortized as interest expense over the term of the respective loan agreement using the effective interest method. As applicable, the unamortized balance of debt issuance costs is presented within in mortgages payable and notes payable within the consolidated balance sheets.

Reclassifications – Certain prior year amounts have been reclassified for consistency with the current year presentation. Accordingly, $746,865 has been reclassified from leasehold intangibles, net to below-market leases, net, on the consolidated balance sheets as of December 31, 2016, in order to present the below-market lease intangibles separately from the above-market lease intangibles. This reclassification has no effect on the reported total partners’ capital or results of operations as of and for the year ended December 31, 2016.

Recent Accounting Pronouncements - In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements of Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five-step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new standard will be effective for the Company for the year ending December 31, 2019 and can be applied either retrospectively to all periods presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted beginning for the year ending December 31, 2017. The Company has determined that there will be no impact in adopting the new standard on its consolidated financial statements since there will be no future revenue after May 26, 2017.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". ASU 2016-02 is intended to improve financial reporting about leasing transactions.  The ASU will require organizations that lease assets referred to as “Lessees” to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than 12 months. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the consolidated financial Statements.

The leasing standard will be effective for the year ended December 31, 2020. Early adoption will be permitted upon issuance of the standard and a modified retrospective approach must be applied. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification

of Certain Cash Receipts and Cash Payments”. ASU 2016-15 is intended to improve cash flow statement classification guidance. The standard will be effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-15 on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 is intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2017-01 on its financial statements.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Other accounting standards that have been issued or proposed by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a significant impact on the Company’s financial position, results of operations and cash flows.

4. Investment in Real Estate, net

The following is a summary of the Company’s investment in real estate as of May 26, 2017 and December 31, 2016.

	May 26, 2017			December 31, 2016
Land, buidings and improvements	$	29,555,372		$	29,549,302
Tenant improvements		2,278,862			2,278,862
		31,834,234			31,828,164
Accumulated depreciation		(3,086,128	)		(2,720,278	)
Investments in real estate	$	28,748,106		$	29,107,886

Depreciation expense for the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016 was $365,850 and $946,751, respectively.

The Company capitalized building improvements in the amount of $6,070 and $13,745 for the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016, respectively.

5. Leasehold Intangibles, net

The following is a summary of the Company’s leasehold intangibles, as of May 26, 2017 and December 31, 2016.

	May 26, 2017			December 31, 2016
Acquired in-place leases	$	1,320,305		$	1,320,305
Acquired lease-up costs		1,285,251			1,285,251
Acqiured above market leases		12,642			12,642
Accumulated amortization		(964,428	)		(851,363	)
Leasehold intangibles, net	$	1,653,770		$	1,766,835

Amortization of in-place leases, lease-up costs and acquired above market leases was $113,065 and $281,313 for the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016, respectively.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Future amortization of acquired in-place lease value and acquired lease-up costs (collectively “Intangible Lease Costs”) is as follows:

	Intangible
	Lease
Year Ended	Costs
2017*
2018
2019
2020
2021
Thereafter		380,992
Total	$	1,653,770

* Represents period from May 27, 2017 to December 31, 2017.

6. Below-Market Leases, net

The following is a summary of the Company’s acquired below-market leases as of May 26, 2017 and December 31, 2016.

	May 26, 2017			December 31, 2016
Acquired below-market leases	$	1,070,051		$	1,070,051
Accumulated amortization		(365,110	)		(323,186	)
Below-market leases, net	$	704,941		$	746,865

Amortization of below-market leases resulted in an increase in rental revenue of $41,924 for the period from January 1, 2017 to May 26, 2017 and $103,429 for the year ended December 31, 2016, respectively.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

The future amortization of acquired below-market leases is as follows:

	Below
	Market
Year Ended	Leases
2017*	$	(62,888	)
2018		(104,812	)
2019		(104,812	)
2020		(104,812	)
2021		(92,223	)
Thereafter		(235,394	)
Total	$	(704,941	)

* Represents period from May 27, 2017 to December 31, 2017.

7. Mortgages and Notes Payable

Mortgages Payable

The following table outlines the mortgages payable as of May 26, 2017 and as of December 31, 2016:

							Outstanding Principal
	Initial		Interest				May 26,			December 31,
Issuance Date	Balance		Rate			Maturity	2017			2016
July 2013	$	10,700,000		5.27	%	August 2023	$	10,082,759		$	10,159,209
April 2015		7,600,000		3.84	%	March 2018		7,031,647			7,115,152
December 2015		3,080,000		4.00	%	June 2017		3,069,733			3,069,733
June 2016		2,450,000		3.93	%	June 2019		2,401,146			2,425,773
Total principal								22,585,285			22,769,867
Debt issuance costs								(540,812	)		(540,812	)
Accumulated amortization								262,867			226,887
Mortgage payable net of unamortized debt costs							$	22,307,340		$	22,455,942

At May 26, 2017 and December 31, 2016, the Company had unamortized debt issuance costs of $277,945, and $313,925 net of $262,867, and $226,887 of accumulated amortization, respectively in connection with its various mortgage payables.

Gross mortgage loan balances as of May 26, 2017 and as of December 31, 2016 totaled $22,585,285 and $22,769,867, respectively. Of these amounts, fixed rate loans before unamortized debt issuance costs totaled $12,483,905 and $12,584,982 as of May 26, 2017 and December 31, 2016, respectively. The remaining amounts comprise variable rate loans before unamortized debt issuance costs totaled $10,101,380 and $10,184,885 for the same respective periods. The loans are payable to various financial institutions and are collateralized by specific properties.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

The mortgage loan issued in July 2013 bears interest at a fixed annum rate of 5.27%, has debt service payments based on principal amortization over 30 years, and matures in August 2023. The outstanding principal balance as of May 26, 2017 and December 31, 2016 was $10,082,759 and $10,159,209, respectively.

The mortgage loan issued in April 2015 has a variable interest rate equal to the one-month LIBOR rate plus 235 basis points. For the period from January 1, 2017 to May 26, 2017, the average interest rate was 3.84% and for the year ended December 31, 2016 the average interest rate was 2.89%. The loan has required debt service payments based on principal amortization over 20 years and would have matured on March 27, 2017 in the event the Company had not exercised its option to extend the loan for one year. The Company paid an extension fee in the amount of $11,400. The outstanding principal balance as of May 26, 2017 and December 31, 2016 was $7,031,647 and $7,115,152, respectively.

The mortgage loan issued in December 2015 bears a variable interest rate of Prime or 4%, whichever is greater, and matures in June 2017. The outstanding principal balance as of May 26, 2017 and December 31, 2016 was $3,069,733.

On June 10, 2016, the Company refinanced its $3.7 million mortgage payable. The $3.7 million loan was replaced with a new mortgage loan. The new mortgage loan bears interest as a fixed annum rate of 3.93%, has debt service payments based on principal amortization over 25 years, and matures in June 2019. The outstanding principal balance as of May 26, 2017 and December 31, 2016 was $2,401,146 and $2,425,773, respectively.

The carrying amount of the Company’s variable rate debt approximates its fair value as of May 26, and as of December 31, 2016.

Notes Payable

The following table summarizes the notes payable as of May 26, 2017 and as of December 31, 2016:

							Outstanding Principal
Issuance Date	Initial Balance		Interest Rate			Maturity Date	May 26, 2017			December 31, 2016
July 2013	$	1,500,000		7.25	%	August 2018	$	428,864		$	563,299
June 2016		338,091		5.50	%	June 2019		338,091			338,091
June 2016		661,909		5.50	%	June 2018		367,199			502,602
Total outstanding principal								1,134,154			1,403,992
Debt issuance costs								(19,750	)		(19,750	)
Accumulated amortization								6,314			3,659
Notes payable net of unamortized debt costs							$	1,120,718		$	1,387,901

Notes payable as of May 26, 2017 and December 31, 2016 were $1,134,154 and $1,403,992, respectively. The loans have fixed interest rates ranging from 5.5% to 7.25% and mature during the period between June 2018 and June 2019. The weighted average interest rate on the notes during the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016 was 6.16% and 6.20%, respectively.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

On June 10, 2016, the Company received $1 million in loan proceeds from a financial institution. The loan was pursuant to two promissory notes, one in the original principal amount of $338,091, and one in the original principal amount of $661,909. The notes bear interest at 5.5% per annum.  The $338,091 note matures in June 2019, requires interest only payments for the first 24 months and then monthly payments will increase in order to fully amortize the loan over the remaining 12 months of its term.  The $661,909 note’s debt service payment is based on principal amortization over 2 years. At May 26, 2017, the Company had unamortized debt issuance costs relating to these loans of $13,436, net of $6,314 of accumulated amortization.

In July, 2013, the Company entered into a $1.5 million promissory note and related collateral pledge and security agreement to finance certain reserves and closing costs related to closing a $10.7 million mortgage loan. The promissory note’s outstanding balance as of May 26, 2017 and December 31, 2016 was $428,864 and $563,299, respectively. The promissory note bears interest at 7.25% and the monthly debt service payment is $30,008 based on the principal fully amortizing over a five-year term. The promissory note is secured by the Company’s membership interests in three of its properties. There were no debt issuance costs in connection with this promissory note.

Future Principal Payments

The following is a schedule of the future principal payments on the Company’s mortgages and notes payable at May 26, 2017.

	Mortgages		Notes
Year Ended	Payable		Payable
2017	$	3,391,427	$	522,409
2018		7,113,452		439,986
2019		2,512,561		171,759
2020		221,910		-
2021		233,879		-
Thereafter		9,112,056		-
	$	22,585,285	$	1,134,154

* Represents period from May 27, 2017 to December 31, 2017. 

8. Related Parties

HC Government Realty has advanced Holmwood funds to meet certain equity requirements needed for a property refinancing and to fund other working capital needs. As of May 26, 2017 and December, 31, 2016, the net funds outstanding totaled $121,848 and $410,861. During the period from January 1, 2017 and May 26, 2017, the Company made payments totaling $289,013.

Property management fees are charged by the Asset Manager to Holmwood through an informal agreement between the two parties. Under the terms of the property management agreements, Holmwood pays the Asset Manager a monthly management fee of 3% of all gross receipts from each property or $1,000 a month, whichever is greater. In connection with this agreement, Holmwood paid the Asset Manager property management fees of $41,924 during the period from January 1, 2017 to May 26, 2017 and $100,706 for the year ended December 31, 2016.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Asset management fees are charged by the Asset Manager to Holmwood through an informal agreement between the two parties. Holmwood pays the Asset Manager a monthly asset management fee equal to 2.4% of each property’s gross revenues or $1,000 per month, whichever is greater. Asset management fees totaled $37,081 during the period from January 1, 2017 and May 26, 2017 and $91,946 for the year ended December 31, 2016.

9. Contributions and Distributions

No contributions were made by the Company’s owners during the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016.

The Company made distributions during the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016 in the aggregate of $0 and $374,889, respectively.

10. Operating Leases

Our rental properties are subject to generally non-cancelable operating leases generating future minimum contractual rent payments due from tenants. Occupancy of the operating properties was at 100% at May 26, 2017 and lease terms ranged from 3 to 12 years. As of May 26, 2017, the future minimum rents for existing leases are as follows:

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

	Future
	Minimum
Year Ended	Rents
2017	$	2,079,504
2018		3,465,839
2019		3,465,839
2020		3,465,839
2021		3,111,833
Thereafter		5,203,403
Total	$	20,792,257

* Represents period from May 27, 2017 to December 31, 2017

On May 26, 2017, all operating leases were transferred to HC Gov Realty in connection with the Contribution Transaction.

11. Commitments and Contingencies

In connection with a property acquisition in 2015, the property, located in Port Canaveral, Florida, was purchased subject to a ground lease. The ground lease has an extended term of 30 years to 2045 with one 10-year renewal option. The Company made ground lease payments of $27,923 during the period from January 1, 2017 to May 26, 2017 and $71,094 for the year ended December 31, 2016.

The Company can be party to or otherwise be involved in legal proceedings arising in the normal and ordinary course of business. We are not aware of any proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

12. Subsequent Events

Mortgage Payable

The mortgages entered into in July 2013, June 2016 and April 2015 were assumed by HC Gov Realty in connection with the Contribution Transaction.

The mortgage loan issued in December 2015 was assumed by HC Gov Realty in connection with the Contribution Transaction and subsequently refinanced with another bank.

The mortgage loan issued in April 2015 with an original maturity date of March 25, 2018, was assumed by HC Gov Realty in connection with the Contribution Transaction and was subsequently extended to June 25, 2018. In addition, on April 17, 2018, HC Gov Realty received a loan commitment from a lending institution to refinance this mortgage loan. The terms of the commitment specify interest is based on the 1-month LIBOR plus 235 basis points, principal payments are based on a 17 year amortization period and matures 2 years from date of closing. The financing contains other terms and conditions customarily associated with mortgage lending. The HC Gov Realty refinancing is expected to close on or before April 27, 2018.

Holmwood Capital, LLC

Notes to the Consolidated Financial Statements

For the period from January 1, 2017 to May 26, 2017 and for the year ended December 31, 2016

Notes Payable

Concurrent with the May 26, 2017 closing of the Contribution Transaction all outstanding notes payable were assumed by HC Gov Realty and paid off.

Other

Since May 26, 2017, the Company has received $366,628 of distributions with respect to the OP Units received as part of the Contribution Transaction.

The Company evaluated subsequent events through April 26, 2018, the date the consolidated financial statements were available to be issued. The Company concluded no additional material events subsequent to May 26, 2017 were required to be reflected in the Company’s consolidated financial statements or notes as required by standards for accounting disclosures of subsequent events.