NOTE 3: Management Internalization

As previously discussed in Note 1, on December 20, 2016, we completed our management internalization, which consisted of two parts: (i) our acquisition of our external advisor, which was a subsidiary of RAIT, and (ii) our acquisition of substantially all of its assets and the assumption of certain liabilities relating to the multifamily property management business of RAIT, including property management contracts relating to apartment properties owned by us, RAIT and third parties.

In accounting for the management internalization transaction, we first evaluated the net assets that were acquired. The assets that were acquired included $118 of customer list intangible assets related to third party property management contracts and $25 of other assets. There were no liabilities that were required to be recognized. We also considered pre-existing relationships that were settled as part of the transaction, which included the advisory agreement and our properties’ property management agreements. In evaluating the amount by which these contracts were favorable or unfavorable to us, we compared the actual amounts historically paid and that would be owed under these agreements to a range of potential market arrangements and then applying a discount rate to the two sets of cash flows. The most significant difference between our agreements and the potential markets arrangements observed was our inability to terminate the advisory agreement until October 1, 2020 as well as the advisory agreement’s termination fee. The impact of this difference led to the conclusion that these agreements were unfavorable to us, on a present value basis, by more than $43,000, which was the purchase price for the management internalization.

Accordingly, the difference between estimated fair value of the net assets acquired of $143 and the consideration transferred of $43,000 represents the settlement of pre-existing relationships between us and RAIT. Accordingly, the difference of $42,857 was recognized as a loss in our income statement as management internalization expense.

As part of our management internalization, we incurred $2,119 of acquisition-related expenses. These acquisition-related expenses were recognized in earnings immediately and are included within management internalization expense.

The table below presents the revenue, net income, and earnings per share effect of the business combination on a pro forma basis as if the combination occurred on January 1, 2015. The pro forma results are not necessarily indicative of the results which actually would have occurred if the business combination had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.

Description	For the Year Ended December 31, 2016		For the Year Ended December 31, 2015
Pro forma total revenue (unaudited)	$	154,482	$	110,541
Pro forma net income (loss) allocable to common shares (unaudited)		36,850		(14,126	)
Earnings (loss) per share attributable to common shareholders:
Basic-pro forma (unaudited)	$	0.71	$	(0.39	)
Diluted-pro forma (unaudited)	$	0.71	$	(0.39	)