Note 6 — Variable Interest Entities, Contingent Liabilities and Consolidated Joint Ventures

Unconsolidated Variable Interest Entities

In June 2014, the Company purchased land for $6,510,000 in Sandy Springs, Georgia improved with a 196 unit apartment complex and in March 2015, the Company purchased land for $9,300,000 in Lakemoor, Illinois improved with a 496 unit apartment complex. With each purchase, the Company simultaneously entered into a long-term triple net ground lease with the owner/operator of each complex.

The Company determined that it has a variable interest through its ground leases and the owner/operators are VIEs because their equity investment at risk is not sufficient to finance its activities without additional subordinated financial support. Simultaneously with the closing of each acquisition, the owner/operator obtained a mortgage from a third party ($16,230,000 for Sandy Springs and $43,824,000 for Lakemoor) which, together with the Company’s purchase of the land, provided substantially all of the aggregate funds to acquire the complex. The Company provided its land as collateral for the respective owner/ operator’s mortgage loans; accordingly each land position is subordinated to the applicable mortgage.

The Company further determined that for each acquisition it is not the primary beneficiary because the Company does not have the power to direct the activities that most significantly impact the owner/operator’s economic performance such as management, operational budgets and other rights, including leasing of the units and therefore, does not consolidate the VIEs for financial statement purposes. Accordingly, the Company accounts for its investments as land and the revenues from the ground leases as Rental income, net.

The following is a summary of the Company’s variable interests in identified VIEs, in which it is not the primary beneficiary, and the aggregate carrying amount and maximum exposure to loss as of March 31, 2015 (amounts in thousands):

Property	Type of Exposure	Carrying Amount		Maximum Exposure to Loss
River Crossing Apartments, Sandy Springs, Georgia	Land	$	6,528	$	6,528
	Unbilled rent receivable	281		281
The Meadows Apartments, Lakemoor, Illinois	Land	9,528		9,528
Total		$	16,337	$	16,337

The Company accounts for its investments as land and the revenues from the ground leases as Rental income, net, which amounted to $252,000 for the three months ended March 31, 2015. There was no such revenue in the three months ended March 31, 2014.

Pursuant to the terms of the ground lease for the property in Sandy Springs, Georgia, the owner/operator is obligated to make certain unit renovations as and when units become vacant. A cash reserve with a balance of $1,335,000 at March 31, 2015 is held on behalf of the owner/operator to cover renovation work and other reserve requirements and is classified as Restricted cash on the consolidated balance sheet.

Consolidated Variable Interest Entity

In June 2014, the Company entered into a joint venture, in which the Company has a 95% equity interest, and acquired a property located in Joppa, Maryland. The Company also made a senior preferred equity investment in the joint venture. The Company determined that this joint venture is a VIE as the Company’s voting rights are not proportional to its economic interests and substantially all of the joint venture’s activities are conducted by the Company. The Company further determined that it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact the joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits from the VIE. Accordingly, the Company consolidates the operations of this joint venture for financial statement purposes. At March 31, 2015, the carrying amounts and classification in the Company’s consolidated balance sheets were assets (none of which are restricted) consisting of land of $3,815,000, building and improvements (net of depreciation) of $8,016,000, cash of $451,000, prepaid expenses and receivables of $43,000, accrued expenses and other liabilities of $181,000 and non-controlling interest in joint venture of $323,000. The joint venture’s creditors do not have recourse to the assets of the Company other than those held by the joint venture.

Non-VIE Consolidated Joint Ventures

With respect to six consolidated joint ventures in which the Company has between an 85% to 95% interest, the Company has determined that (i) such ventures are not VIE’s and (ii) the Company exercises substantial operating control and accordingly, such ventures are consolidated for financial statement purposes.

MCB Real Estate, LLC and its affiliates are the Company’s joint venture partner in five consolidated joint ventures (including the Joppa, Maryland joint venture described above). At March 31, 2015, the Company has aggregate equity investments of approximately $19,000,000 in such ventures.

Distributions by Consolidated Joint Ventures

The distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro rata to the equity interest each partner has in the applicable venture.