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

Variable Interest Entities — Ground Leases

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 the applicable 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 insufficient 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 this land as collateral for the respective owner/operator’s mortgage loans; accordingly, each land position is subordinated to the applicable mortgage. Other than as described above, no other financial support has been provided by the Company.

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 these investments as land and the revenues from the ground leases as Rental income, net. Such rental income amounted to $460,000 and $1,166,000 for the three and nine months ended September 30, 2015, respectively, and $232,000 and $299,000 for each of the three and nine months ended September 30, 2014.

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 September 30, 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	441		441
The Meadows Apartments, Lakemoor, Illinois	Land	9,563		9,563

Total		$	16,532	$	16,532

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. Cash reserves totaling $1,894,000 were received by the Company in conjunction with the purchase of the property in June 2014 to cover such renovation work and other reserve requirements. An additional $39,000 of reserves was received by the Company during the three and nine months ended September 30, 2015. These cash reserves are held by the Company and disbursed once the renovations have been completed. For the nine months ended September 30, 2015 and September 30, 2014, the Company disbursed approximately $538,000 and $0, respectively, for renovation costs to the owner/operator. The cash reserve balance at September 30, 2015 and December 31, 2014 was $1,108,000 and $1,607,000, respectively, and is classified as Restricted cash on the consolidated balance sheets.

Consolidated Variable Interest Entity

In June 2014, a joint venture in which the Company has a 95% equity interest and a senior preferred equity interest, acquired a property located in Joppa, Maryland. The Company determined that this joint venture is a VIE as the Company’s voting rights are not proportional to its economic interests, substantially all of the joint venture’s activities are conducted on behalf of the Company and 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. Accordingly, the Company consolidates the operations of this joint venture for financial statement purposes. The joint venture’s creditors do not have recourse to the assets of the Company other than those held by the joint venture.

The following is a summary of the carrying amounts and classification in the Company’s consolidated balance sheets of the VIE’s accounts, none of which are restricted (amounts in thousands):

	September 30,		December 31,
	2015		2014
Land	$	3,815	$	3,805
Building and improvements, net of depreciation of $275 and $17, respectively	7,909		8,069
Cash	824		527
Prepaid expenses and receivables	56		42
Accrued expenses and other liabilities	120		152
Non-controlling interest in joint venture	323		312

Non-VIE Consolidated Joint Ventures

With respect to six of the 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 (“MCB”) are the Company’s joint venture partner in five consolidated joint ventures (including the Joppa, Maryland VIE). At September 30, 2015, the Company has aggregate equity investments of approximately $19,240,000 in such ventures.

A joint venture investment with MCB of $3.1 million owns a property operated as a Pathmark supermarket in Philadelphia, Pennsylvania. In July 2015, this tenant filed for Chapter 11 bankruptcy protection, rejected the lease, and in late September 2015, vacated the property. As a result, the Company wrote off (i) $89,000 of straight line rent and $124,000 of intangible lease liabilies, the net effect of which was an increase in rental income of $35,000, and (ii) $380,000 of tenant origination costs, which is included in depreciation expense. This tenant accounted for approximately 1.3% of the Company’s rental income for the nine months ended September 30, 2015 and at September 30, 2015, the mortgage debt on such property is $4,500,000. The Company has determined that no impairment charge is required currently with respect to this property.

Distributions by Consolidated Joint Ventures

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.