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

Variable Interest Entities — Ground Leases

The following chart details the Company’s variable interest entities through its ground leases at September 30, 2016 (dollars in thousands):

				Improved by
		Contract		# Units in	Owner/Operator
		Purchase		Apartment	Mortgage from
Description of Property	Date Acquired	Price		Complex (a)	Third Party (b)
Land - The Meadows Apartments, Lakemoor, Illinois	March 24, 2015	$	9,300	496	$	43,824
Land - The Briarbrook Village Apartments, Wheaton, Illinois	August 2, 2016	10,530		342	39,411
Land - The Vue Apartments, Beachwood, Ohio	August 16, 2016	13,896		348	67,444

Totals		$	33,726	1,186	$	150,679

(a)

With each purchase, the Company simultaneously entered into a triple net ground lease with the owner/operator of the applicable complex. Affiliates of Strategic Properties of North America are the owner/operators of these properties.

(b)

Simultaneously with the closing of each acquisition, the owner/operator obtained a mortgage from a third party 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. Other than as described above, no other financial support has been provided by the Company to the owner/operator.

Pursuant to the terms of the ground lease for the Wheaton, Illinois property, the owner/operator is obligated to make certain unit renovations as and when units become vacant. The cash reserve balance for the property was $836,000 at September 30, 2016 and is classified as Restricted cash on the consolidated balance sheet. The cash reserve balance for a similarly structured transaction in Sandy Springs, Georgia was $1,074,000 at December 31, 2015 and such balance was disbursed to the owner/operator in connection with the sale of the property in June 2016. See Note 5.

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. The Company further determined that for each acquisition it is not the primary beneficiary because the Company has shared power over the activities that most significantly impact the owner/operator’s economic performance (i.e., shared rights on the sale of the property) 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 $663,000 and $1,525,000 for the three and nine months ended September 30, 2016, respectively, and $454,000 and $1,166,000 for the three and nine months ended September 30, 2015, respectively. Included in these amounts is rental income from the Sandy Springs, Georgia property, amounting to $0 and $308,000 for the three and nine months ended September 30, 2016, respectively, and $232,000 and $697,000 for the three and nine months ended September 30, 2015, respectively.

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, 2016 (amounts in thousands):

		Carrying Amount and
Property	Type of Exposure	Maximum Exposure to Loss
The Meadows Apartments, Lakemoor, Illinois	Land	$	9,592
The Briarbrook Village Apartments, Wheaton, Illinois	Land	10,536
The Vue Apartments, Beachwood, Ohio	Land	13,901

Total		$	34,029

Variable Interest Entity — Consolidated Joint Ventures

A joint venture in which the Company has a 95% equity interest, acquired a property located in Joppa, Maryland. The Company also had a senior preferred equity interest until May 2016 when the joint venture obtained a mortgage on its property and a portion of such mortgage proceeds was used to repay the $6,280,000 preferred interest to the Company, including accrued interest of $455,000. The Company had historically determined that this joint venture was a VIE. As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation and determined this venture remains a VIE as the non-controlling interest does not hold substantive kick-out or participating rights.

With respect to the six other consolidated joint ventures in which the Company holds between an 85% to 95% interest, the Company had historically determined that such ventures were not VIEs. As a result of the adoption of ASU 2015-02, the Company re-assessed its evaluation of these investments and determined such ventures are VIEs because the non-controlling interests do not hold substantive kick-out or participating rights.

In each of these seven joint ventures, the Company has determined it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact each joint venture’s performance including management, approval of expenditures, and the obligation to absorb the losses or rights to receive benefits. Accordingly, the Company has continued to consolidate the operations of these joint ventures for financial statement purposes. The joint ventures’ creditors do not have recourse to the assets of the Company other than those held by these joint ventures.

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

	September 30,			December 31,
	2016			2015
Land	$	18,400		$	18,400
Buildings and improvements, net of depreciation of $2,907 and $2,076, respectively	34,349			34,287
Cash	1,869			1,960
Unbilled rent receivable	935			330
Unamortized intangible lease assets, net	1,694			1,996
Escrow, deposits and other assets and receivables	1,596			752
Mortgages payable, net of deferred financing costs of $640 and $438, respectively	36,062			25,926
Accrued expenses and other liabilities	1,274			793
Unamortized intangible lease liabilities, net	2,247			2,392
Accumulated other comprehensive loss	(282		)	(126		)
Non-controlling interests in consolidated joint ventures	1,750			1,931

MCB Real Estate, LLC and its affiliates (“MCB”) are the Company’s joint venture partner in five consolidated joint ventures. At September 30, 2016, the Company has aggregate equity investments of approximately $10,313,000 in such ventures.

A joint venture with MCB, in which the Company has a net equity investment of $2,768,000, owns a property formerly 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. This tenant accounted for approximately 1.3% of the Company’s rental income for each of the three and nine months ended September 30, 2015. At September 30, 2016, the mortgage debt on, and the net book value of, such property is $4,426,000 and $7,205,000, respectively. The Company has determined that no impairment charge is required currently with respect to this property.

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.