NOTE 6 • COMMITMENTS AND CONTINGENCIES

Litigation. The Company is not a party to any legal proceedings which are expected to have a material effect on the Company's liquidity, financial position, cash flows or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material effect on the Company's liquidity, financial position, cash flows or results of operations.

Insurance. IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties and are sufficient to achieve IRET's risk management objectives.

Purchase Options. The Company has granted options to purchase certain IRET properties to tenants in these properties, under lease agreements. In general, the options grant the tenant the right to purchase the property at the greater of such property's appraised value or an annual compounded increase of a specified percentage of the initial cost of the property to IRET. As of July 31, 2014, the total property cost of the 15 properties subject to purchase options was $120.5 million, and the total gross rental revenue from these properties was $2.6 million for the three months ended July 31, 2014. The tenant in the Company's Nebraska Orthopaedic Hospital property has exercised its option to purchase the property. The Company and its tenant are currently engaged in an arbitration proceeding pursuant to the lease agreement to determine the purchase price. The Company currently can give no assurance that the sale of the property pursuant to the purchase option will be completed.

Environmental Matters. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around or under the property. While IRET currently has no knowledge of any material violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company's properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to the Company.

Restrictions on Taxable Dispositions. Approximately 110 of IRET's properties, consisting of 5.3 million square feet of the Company's combined commercial segments' properties and 5,106 apartment units, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties. The real estate investment amount of these properties (net of accumulated depreciation) was $827.5 million at July 31, 2014. The restrictions on taxable dispositions are effective for varying periods. The terms of these agreements generally prevent the Company from selling the properties in taxable transactions. The Company does not believe that the agreements materially affect the conduct of the Company's business or decisions whether to dispose of restricted properties during the restriction period because the Company generally holds these and the Company's other properties for investment purposes, rather than for sale. Historically, however, where IRET has deemed it to be in the shareholders' best interests to dispose of restricted properties, it has done so through transactions structured as tax-deferred transactions under Section 1031 of the Internal Revenue Code.

Redemption Value of UPREIT Units. The limited partnership units ("UPREIT Units") of the Company's operating partnership, IRET Properties, are redeemable at the option of the holder for cash, or, at our option, for the Company's common shares of beneficial interest on a one-for-one basis, after a minimum one-year holding period. All UPREIT Units receive the same cash distributions as those paid on common shares. UPREIT Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of an IRET common share for the ten consecutive trading days immediately preceding the date of valuation of the Unit. As of July 31, 2014 and 2013, the aggregate redemption value of the then-outstanding UPREIT Units of the operating partnership owned by limited partners was approximately $154.4 million and $197.7 million, respectively.

Joint Venture Buy/Sell Options. Certain of IRET's joint venture agreements contain buy/sell options in which each party under certain circumstances has the option to acquire the interest of the other party, but do not generally require that the Company buy its partners' interests. The Company currently has one joint venture, the Company's Southgate apartment project in Minot, North Dakota, in which the Company's joint venture partner can, for a four-year period beginning twelve months after the last certificate of occupancy is received for the project, compel the Company to acquire the partner's interest, for a price to be determined in accordance with the provisions of the joint venture agreement. The joint venture partner's interest is reflected as a redeemable noncontrolling interest on the condensed consolidated balance sheets.

Tenant Improvements. In entering into leases with tenants, IRET may commit itself to fund improvements or build-outs of the rented space to suit tenant requirements. These tenant improvements are typically funded at the beginning of the lease term, and IRET is accordingly exposed to some risk of loss if a tenant defaults prior to the expiration of the lease term, and the rental income that was expected to cover the cost of the tenant improvements is not received. As of July 31, 2014, the Company is committed to fund $8.7 million in tenant improvements, within approximately the next 12 months.

Development, Expansion and Renovation Projects. As of July 31, 2014, the Company had several development, expansion and renovation projects underway or recently completed, the costs for which have been capitalized, as follows:

			(in thousands)
Project Name and Location	Planned Segment	Square Feet or Number of Units	Anticipated Total Cost		Costs as of July 31, 2014⁽¹⁾		Loans Closed or Committed		Anticipated Construction Completion
Commons at Southgate - Minot, ND⁽²⁾	Multi-Family Residential	233 units	$	37,201	$	33,218	$	24,480	FY2015 Q2
Minot Wells Fargo Bank - Minot, ND	Commercial Office	4,998 sq ft		3,288		1,550		0	FY2015 Q2
Cypress Court II – St. Cloud, MN⁽³⁾	Multi-Family Residential	66 units		7,028		3,168		4,200	FY2015 Q3
Arcata - Golden Valley, MN	Multi-Family Residential	165 units		33,448		19,048		24,250	FY2015 Q3
Red 20 - Minneapolis, MN⁽⁴⁾	Multi-Family Residential and Commercial	130 units and 10,625 sq ft		29,462		20,399		21,726	FY2015 Q3
Renaissance Heights I - Williston, ND⁽⁵⁾	Multi-Family Residential	288 units		62,362		44,251		43,672	FY2015 Q4
Roseville 3075 Long Lake Rd - Roseville, MN	Commercial Industrial	202,807 sq ft		13,915		2,578		11,000	FY2015 Q4
Chateau II - Minot, ND⁽⁶⁾	Multi-Family Residential	72 units		14,711		5,681		0	FY2016 Q1
Cardinal Point - Grand Forks, ND	Multi-Family Residential	251 units		40,042		9,333		24,500	FY2016 Q1
71 France Phase I - Edina, MN⁽⁷⁾	Multi-Family Residential	109 units		29,660		4,255		20,365	FY2016 Q1
Edina 6565 France SMC III - Edina, MN	Commercial Medical	72,012 sq ft		34,665		4,204		0	FY2016 Q2
PrairieCare Medical - Brooklyn Park, MN	Commercial Medical	75,000 sq ft		24,251		4,486		15,000	FY2016 Q2
Deer Ridge – Jamestown, ND	Multi-Family Residential	163 units		24,519		1,793		0	FY2016 Q2
Other	n/a	n/a		n/a		874		n/a	n/a
			$	354,552	$	154,838	$	189,193

(1)	Includes costs related to development projects that are placed in service in phases (Renaissance Heights I - $23.0 million).

(2)	The Company is currently an approximately 52.9% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.

(3)	The Company is an approximately 86.1% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.

(4)	The Company is an approximately 58.6% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.

(5)	The Company is an approximately 70% partner in the joint venture entity constructing this project; the anticipated total cost amount given is the total cost to the joint venture entity.

(6)	On December 5, 2013, this development project was destroyed by fire. As of July 31, 2014, $4.0 million of expected insurance proceeds were included in accounts receivable on the Company's consolidated balance sheet. See Note 2 for additional information.

(7)

The Company is currently an approximately 55.3% partner in the joint venture entity constructing this project. The project will be constructed in three phases, and at the conclusion of construction of the third phase, the Company will have an approximately 50.5% interest in the project. The anticipated total cost amount given in the table above is the total cost to the joint venture entity of the project's first phase. The expected total project cost for all three phases is approximately $69.9 million for a total of approximately 241 residential units and approximately 21,772 square feet of commercial retail space.

These development projects are subject to various contingencies, and no assurances can be given that they will be completed within the time frames or on the terms currently expected.

Construction interest capitalized for the three month periods ended July 31, 2014 and 2013, respectively, was $1.0 million and approximately $580,000 for development projects completed and in progress.

Pending Acquisitions. As of July 31, 2014, the Company had signed purchase agreements for the acquisition of the following properties. These pending acquisitions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:

·	a 68-unit multi-family residential property in Bismarck, North Dakota, for a purchase price of $8.5 million, of which approximately $8.4 million is to be paid in cash with the remainder in limited partnership units of the Operating Partnership valued at approximately $100,000;

·	an approximately 12.7-acre parcel of vacant land in Monticello, Minnesota, for a purchase price of $1.7 million, to be paid in cash;

·	a 119-unit multi-family residential property in Bismarck, North Dakota, for a purchase price of $15.0 million, of which approximately $14.3 million is to be paid in cash with the remainder in limited partnership units of the Operating Partnership valued at approximately $700,000; and

·	a 74-unit multi-family residential property in Grand Forks, North Dakota, for a purchase price of $9.3 million, of which approximately $8.9 million is to be paid in cash with the remainder in limited partnership units of the Operating Partnership valued at approximately $400,000.

Pending Dispositions. As of July 31, 2014, the Company had signed sales agreements for the disposition of the following properties. These pending dispositions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:

·	a commercial office property in Maple Grove, Minnesota, for a sales price of $7.2 million;

·	a commercial retail property in Fargo, North Dakota, for a sales price of $2.8 million; and

·	a multi-family residential property in St. Cloud, Minnesota, for a sales price of $4.5 million.