3. Related-Party Transactions

Property Management Agreement

The Corporation and the Operating Company have entered into a property management agreement (the Property Management Agreement) with the Manager, a related party in which certain directors of the Corporation have either a direct or indirect ownership interest. Under the terms of the Property Management Agreement, the Manager manages and coordinates certain aspects of the leasing of the Corporation’s rental property.

In exchange for services provided under the Property Management Agreement, the Manager is compensated as follows:

(a)

3% of gross rentals collected each month from the rental property for property management services (other than one property, which has a separate agreement for 5% of gross rentals); and

(b)

Re-leasing fees for existing rental property equal to one month’s rent for a new lease with an existing tenant and two months’ rent for a new lease with a new tenant.

In June 2015, the Property Management Agreement was amended to exclude the fees related to the coordination of acquisitions and sales of the Corporation’s rental property. These fees, as detailed below, and related activities were amended to be included within the Asset Management Agreement (as defined below).

(a)

1% of the gross purchase price paid for each rental property acquired (other than acquisitions described in (b) below), including any property contributed in exchange for membership interests in the Operating Company;

(b)

2% of the gross purchase price paid for each rental property acquired in the event that the acquisition of a rental property requires a new lease (as opposed to the assumption of an existing lease), such as a sale-leaseback transaction; and

(c)

1% of the gross sale price received for each rental property disposition.

In addition, the Manager may also provide, but is not obligated to provide, short-term financing to, or guarantees for, the Operating Company. In exchange for these services, the Manager is entitled to receive an interest rate of up to the prime rate plus 1.00% in exchange for any advances to the Operating Company, and 0.05% for guaranteeing recourse carve-outs on financing arrangements. No such advances or guarantees were made during years ended December 31, 2017, 2016, and 2015.

The initial term of the Property Management Agreement was effective through December 31, 2017, after which it automatically renews for successive one-year periods, unless either party provides written notice of termination in accordance with the Property Management Agreement. The Corporation’s Independent Directors Committee (“IDC”) has approved the renewal of the agreement through December 31, 2018. If the Corporation terminates the agreement prior to any renewal term or the Corporation’s IDC terminates the agreement within 30 days following a change in control of the Manager as defined, the Corporation will be subject to a termination fee equal to three times the Management Fees, as defined in the Property Management Agreement, to which the Manager was entitled during the 12-month period immediately preceding the date of such termination. Although not terminable as of December 31, 2017, if the Property Management Agreement had been terminated at December 31, 2017, subject to the conditions noted above, the termination fee would have been $14,965.

Asset Management Agreement

The Corporation and the Operating Company have entered into an asset management agreement (the “Asset Management Agreement”) with the Asset Manager, a single member LLC with the Manager as the single member, and therefore a related party in which certain directors of the Company have an indirect ownership interest. Under the terms of the Asset Management Agreement, the Asset Manager is responsible for, among other things, the Corporation’s acquisition, initial leasing, and disposition strategies, financing activities, and providing support to the Corporation’s IDC for its valuation functions and other duties. The Asset Manager also designates two individuals to serve on the Board of Directors of the Corporation.

Under the terms of the Asset Management Agreement, the Asset Manager receives an annual asset management fee equal to 1% of the aggregate value of common stock, based on the per share value as determined by the Corporation’s IDC each quarter, on a fully diluted basis as if all interests in the Operating Company had been converted into shares of common stock. Through December 31, 2017, compensation to the Asset Manager for any quarter was deferred in whole or in part at any time during a rolling 12-month period when cumulative distributions were below $3.50 per share. Any deferred compensation under the Asset Management Agreement would have accrued interest at the rate of 7% per annum until paid and would be paid from available funds after cumulative 12-month distributions equal $3.50. No compensation to the Asset Manager was deferred during the years ended December 31, 2017, 2016, and 2015. In addition, the Company pays the Asset Manager, or its designee, 0.5% of the proceeds from future equity closings as reimbursement for offering, marketing, and brokerage expenses. The Asset Manager has the responsibility to cover offering, marketing, and brokerage expenses associated with investor related matters of the Corporation and Operating Company.

In June 2015, the Asset Management Agreement was amended to include the following fees paid to the Asset Manager for services provided under the Agreement:

(a)

(b)

(c)

1% of the gross sale price received for each rental property disposition.

The initial term of the Asset Management Agreement was effective through December 31, 2017, after which it automatically renews for successive one-year periods, unless either party provides written notice of termination in accordance with the Asset Management Agreement. The IDC has approved the renewal of the agreement through December 31, 2018. If the Corporation terminates the agreement prior to any renewal term or the IDC terminates the agreement within thirty days following a change in control of the Asset Manager (as defined in the Asset Management Agreement), the Corporation will be required to pay to the Asset Manager a termination fee equal to three times the Asset Management Fee to which the Asset Manager was entitled during the 12-month period immediately preceding the date of such termination. Although not terminable as of December 31, 2017, if the Asset Management Agreement had been terminated at December 31, 2017, subject to the conditions noted above, the termination fee would have been $44,263.

Total fees incurred under the Property Management Agreement and Asset Management Agreement for the years ended December 31, 2017, 2016, and 2015 are as follows:

(in thousands)		For the years ended December 31,
Type of Fee	Financial Statement Presentation	2017		2016		2015
Asset management fee	Asset management fees	$	14,754	$	10,955	$	7,042
Property management fee	Property management fees		4,988		3,939		2,697
Total management fee expense			19,742		14,894		9,739
Marketing fee (offering costs)	Additional paid-in capital		1,380		1,310		1,796
Acquisition fee	Capitalized as a component of assets acquired in 2017 (See Note 4) and included as acquisition expenses in 2016 and 2015		6,580		5,203		5,501
Leasing fee	Leasing fees, net		3,339		2,932		4,411
Disposition fee	Gain (loss) on sale of real estate		605		133		179
Total management fees		$	31,646	$	24,472	$	21,626

Included in management fees are $722 and $364 of unpaid fees recorded in Due to related parties on the Consolidated Balance Sheets at December 31, 2017 and 2016, respectively. All fees related to the Property Management Agreement and the Asset Management Agreement are paid for in cash within the Company’s normal payment cycle for vendors.

Investment in Related Party

On June 30, 2015, the Company issued 139 shares with a value of $10,000 to the Manager in exchange for 100 non-voting convertible preferred units, which represented a 6.4% ownership interest in the Manager at the time of the transaction. The Company has the right to convert the preferred units to non-voting common units between January 1, 2018 and December 31, 2019. Subsequent to the conversion period, the Manager has the option to redeem the convertible preferred units at their original value of $10,000, plus any accrued and unpaid preferred return. At December 31, 2017 and 2016, the carrying amount of the investment was $10,000. There is no market for the preferred units of the Manager and, accordingly, no quoted market price is available. The preferred units provide a stated preferred return of 7.0% with 0.25% increases every June 30^th. Preferred distributions related to the investment in the Manager amounted to $737, $713 and $350 for the years ended December 31, 2017, 2016 and 2015, respectively.

Legal Services

The Company retains the legal services of Vaisey Nicholson & Nearpass, PLLC (“VNN”), formerly a related party. One former minority partner of VNN is an immediate family member to a member of the management of the Company and an indirect minority owner of the Manager. Beginning January 2017, the family member was no longer an owner or partner of VNN and therefore, prospectively, VNN is no longer deemed a related party. Legal services obtained from VNN are mainly for acquisition and disposition of real estate and related matters, as well as general counsel regarding property management and financing. The Company utilizes the services of other outside legal counsel as well. These fees are paid for in cash within the Company’s normal payment cycle for vendor payments. Included in these related party expenses are $350 of unpaid fees recorded in Accounts payable and other liabilities at December 31, 2016. The following table details the type of legal fees incurred from VNN as a related party for the years ended December 31:

(in thousands)		December 31,
Type of Fee	Financial Statement Presentation	2016		2015
Legal services – general	General and administrative	$	324	$	577
Organization costs	General and administrative		22		27
			346		604
Finance related costs	Debt issuance costs^(a)		122		31
Acquisition related fees	Acquisition expenses		2,520		2,383
Legal services - tenant related	Property and operating expenses		40		121
Property disposition related fees	Gain (loss) on sale of real estate		47		42
Total related party legal expenses		$	3,075	$	3,181

^(a)	Amounts are recorded within Debt issuance costs – unsecured revolver, net, Mortgage and notes payable, net, and Unsecured term notes, net, on the accompanying Consolidated Balance Sheets.