NOTE 6. INTEREST RATE SWAP DERIVATIVES

The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.

The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate mortgage notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the applicable instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero.

During June 2017, the Company (or wholly owned limited liability company subsidiaries) entered into interest rate swap agreements with amortizing notional amounts relating to two of its mortgage notes payable. The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of September 30, 2017. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks:

September 30, 2017

Derivative

Number of

Notional Amount

Reference Rate as

Weighted Average

Instruments

(i)

of 6/30/2016

Fixed Pay Rate

Remaining Term

Interest Rate

10,665,000

One-month LIBOR + applicable spread/Fixed at 4.05%-4.34%

4.21

7.5 years

Swap Derivatives

(i)

The notional amount of the Company’s swaps decrease each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amount (outstanding principal balance at the maturity date) as of September 30, 2017 was $9,083,700.

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification in the Condensed Consolidated Balance Sheets as of September 30, 2017.

		September 30, 2017
		Number of
Derivative Instrument	Balance Sheet Location	Instruments		Fair Value
Interest Rate Swaps	Liability – Interest rate swap derivatives, at fair value		2	$	(100,006)

The change in fair value of a derivative instrument that is not designated as a cash flow hedge is recorded as interest expense in the accompanying Condensed Consolidated Statements of Operations. None of the Company’s derivatives at September 30, 2017 were designated as hedging instruments; therefore the net realized loss recognized on interest rate swaps of $100,006 was recorded as an increase in interest expense for both the three and nine months ended September 30, 2017.