Related-Party Transactions

12 Months Ended

Dec. 31, 2019

3. Related-Party Transactions

As discussed in Note 19, on February 7, 2020, the Company completed three mergers providing for the internalization of the external management functions previously performed by BRE and the Asset Manager (the “Internalization”). Prior to the Internalization, BRE, a related party in which certain directors of the Corporation had either a direct or indirect ownership interest, and the Asset Manager were considered to be related parties, including during all periods covered by these Consolidated Financial Statements.

Property Management Agreement

The Corporation and the OP were parties to a property management agreement (as amended, the “Property Management Agreement”) with BRE. Under the terms of the Property Management Agreement, BRE managed and coordinated certain aspects of the leasing of the Corporation’s rental property.

In exchange for services provided under the Property Management Agreement, BRE received certain fees and other compensation as follows:

(i)

3% of gross rentals collected each month from the rental property for property management services (other than one property, which called for 5% of gross rentals under the Property Management Agreement); and

(ii)

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 addition, prior to January 1, 2018, BRE was able to provide, but was not obligated to provide, short-term financing to, or guarantees for, the OP. In exchange for these services, BRE was entitled to receive an interest rate of up to the prime rate plus 1.00% in exchange for any advances to the OP, and 0.05% for guaranteeing recourse carve-outs on financing arrangements. No such advances or guarantees were made during the year ended December 31, 2017.

Upon completion of the Internalization, the Property Management Agreement was terminated and there will be no future property management fees payable to BRE. The Internalization was not considered a termination event under the Property Management Agreement. No fees were payable to BRE as a result of the Internalization.

Asset Management Agreement

The Corporation and the OP were parties to an asset management agreement (as amended the “Asset Management Agreement”) with the Asset Manager, a single member limited liability company with BRE as the single member, and therefore a related party in which certain directors of the Corporation had an indirect ownership interest. Under the terms of the Asset Management Agreement, the Asset Manager was responsible for, among other things, the Corporation’s acquisition, initial leasing, and disposition strategies, financing activities, and providing support to the Corporation’s Independent Directors Committee (“IDC”) for its valuation functions and other duties. The Asset Manager also nominated two individuals to serve on the Board of Directors of the Corporation.

Under the terms of the Asset Management Agreement, the Asset Manager was compensated as follows:

(i)

a quarterly asset management fee equal to 0.25% of the aggregate value of common stock, based on the per share value as determined by the IDC each quarter, on a fully diluted basis as if all interests in the OP had been converted into shares of the Corporation’s common stock;

(ii)

0.5% of the proceeds from future equity closings as reimbursement for offering, marketing, and brokerage expenses;

(iii)

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

(iv)

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

(v)

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

for the years ended December 31, 2019 and 2018,

(vi)

1% of the Aggregate Consideration, as defined in the Asset Management Agreement, received in connection with a Disposition Event. The Asset Management Agreement defined a Disposition Event in the same manner as a Termination Event was defined in the Property Management Agreement discussed above.

Upon completion of the Internalization, the Asset Management Agreement was terminated and there will be no future asset management fees payable to the Asset Manager. The Internalization was not considered a termination event under the Asset Management Agreement. No fees were payable to the Asset Manager as a result of the Internalization.

Total fees incurred under the Property Management Agreement and Asset Management Agreement are as follows:

(in thousands)	Financial Statement	For the years ended December 31,
Type of Fee	Presentation	2019		2018		2017
Asset management fee	Asset management fees	$	21,863	$	18,173	$	14,754
Property management fee	Property management fees		8,256		6,529		4,988
Total management fee expense			30,119		24,702		19,742

Marketing fee (offering costs)	Additional paid-in capital		1,649		1,158		1,380
Acquisition fee	Capitalized as a component of assets acquired		10,319		5,907		6,580
Leasing and re-leasing fees	Leasing fees, net		843		1,399		3,339
Disposition fee	Gain on sale of real estate		1,765		573		605
Total management fees		$	44,695	$	33,739	$	31,646

Included in Due to related parties on the Consolidated Balance Sheets at December 31, 2018, are $114 of unpaid management fees. There were no unpaid management fees at December 31, 2019. 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 BRE in exchange for 100 non-voting convertible preferred units of BRE, which represented a 6.4% ownership interest in BRE at the time of the transaction on a fully-diluted basis. The Company had the right to convert the preferred units to non-voting common units of BRE between January 1, 2018 and December 31, 2019. Subsequent to the conversion period, BRE had the option to redeem the convertible preferred units at their original value of $10,000, plus any accrued and unpaid preferred return. On July 31, 2018, the Company sold its investment to an existing owner of BRE. The preferred units were sold for an aggregate sales price of $18,500 and had a carrying value of $10,000 at the time of sale. The transaction was approved by the Board of Directors and IDC. The preferred units provided a stated preferred return at inception of 7.0% with 0.25% increases every June 30^th. Preferred distributions related to the investment in BRE for the years ended December 31, 2018 and 2017 amounted to $440 and $737, respectively.

Redemption of Shares from Related Party

In accordance with the definitive merger agreement (the “Merger Agreement”) entered into as part of Internalization, during December 2019, the Company redeemed 235 shares of its common stock from BRE, representing BRE’s entire ownership interest in the Company. The shares were redeemed at $85 per share, the current Determined Share Value, for total consideration of $20,000.