NOTE 6. DEBT

Mortgage Notes Payable

As of March 31, 2018 and December 31, 2017, the Company’s mortgage notes payable consisted of the following:

	March 31, 2018						December 31, 2017
Collateral	Principal Amount		Deferred Loan Costs, Net		Net Balance		Principal Amount		Deferred Loan Costs, Net		Net Balance		Contractual Interest Rate (1)			Effective Interest Rate (1)			Loan Maturity
Accredo/Walgreen properties	$	7,100,098	$	(115,763)	$	6,984,335	$	7,133,966	$	(124,763)	$	7,009,203		3.95	%		3.95	%	7/1/2021
Dana property		4,690,114		(119,136)		4,570,978		4,709,889		(125,132)		4,584,757		4.56	%		4.56	%	4/1/2023
Six Dollar General properties		3,930,530		(145,156)		3,785,374		3,951,846		(153,290)		3,798,556		4.69	%		4.69	%	4/1/2022
Wyndham property (2)		5,896,200		(107,016)		5,789,184		5,920,800		(109,936)		5,810,864		One-month LIBOR+2.05	%		4.34	%	6/5/2027
Williams Sonoma property (2)		4,678,800		(81,992)		4,596,808		4,699,200		(85,227)		4,613,973		One-month LIBOR+2.05	%		4.05	%	6/5/2022
Omnicare property		4,404,812		(164,264)		4,240,548		4,423,574		(169,372)		4,254,202		4.36	%		4.36	%	5/1/2026
Harley property		6,954,071		(193,235)		6,760,836		6,983,418		(200,811)		6,782,607		4.25	%		4.25	%	9/1/2024
Northrop Grumman property		5,911,255		(200,404)		5,710,851		5,945,655		(217,584)		5,728,071		4.40	%		4.40	%	3/2/2021
EMCOR property		2,946,563		(80,713)		2,865,850		2,955,000		(83,743)		2,871,257		4.35	%		4.35	%	12/1/2024
exp US Services property		3,490,143		(137,093)		3,353,050		3,505,061		(140,382)		3,364,679		Initial 4.25%; 3.25% + T-Bill index starting 11/18/2022			4.25	%	11/17/2024
Husqvarna property		6,380,000		(205,462)		6,174,538		—		—		—		4.60% for 1st 5-years; greater of 4.60% or 5-yr. Treasury Constant Maturity + 2.5 % for the 2^nd 5-years			4.60%		2/20/2028
AvAir property (3)		14,575,000		(355,710)		14,219,290		12,000,000		(330,866)		11,669,134		4.84% for 1st 5-years; greater of 4.60% or 5-yr. Treasury Constant Maturity + 2.5 % for the 2^nd 5-years			4.84%		3/27/2028
3M property		8,360,000		(145,571)		8,214,429		—		—		—		One-month LIBOR+2.25	%		4.13	%	3/29/2023
	$	79,317,586	$	(2,051,515)	$	77,266,071	$	62,228,409	$	(1,741,106)	$	60,487,303

(1)

Contractual interest rate represents the interest rate in effect under the mortgage note payable as of March 31, 2018. Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2018 (consisting of the contractual interest rate and the effect of the interest rate swap, if applicable). For further information regarding the Company’s derivative instruments (see Note 7).

(2)

The loans on each of the Williams Sonoma and Wyndham properties (collectively, the “Property”) located in Summerlin, Nevada were originated by Nevada State Bank (“Bank”). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing. In addition, the individual loans are subject to a cross collateralization and cross default agreement whereby any default under, or failure to comply with the terms of any one or both of the loans is an event of default under the terms of both loans. The value of the Property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%.

(3)

On March 27, 2018, the Company refinanced the mortgage loan for $14,575,000 through a nonaffiliated lender with interest rate based on: 4.84% for the first five years and the greater of 4.60% or 5-Year Treasury Constant Maturity plus 2.5 % for the second five years. The loan is secured by the AvAir property and it matures on March 27, 2028.

Unsecured Credit Facility

On February 28, 2018, the Company, together with the Operating Partnership and Rich Uncles NNN LP, LLC (“Borrowers”), entered into a Business Loan Agreement and Promissory Note (the “New Credit Facility”) with Pacific Mercantile Bank (“Lender”). The New Credit Facility replaced the $12,000,000 unsecured line of credit with Lender, which expired on January 26, 2018 (the “Former Credit Facility”). The New Credit Facility is a revolving unsecured line of credit for a maximum principal amount of $9,000,000 and matures on January 26, 2019, unless earlier terminated. Under the terms of the New Credit Facility, Borrowers pay a variable rate of interest on outstanding amounts equal to one (1) percentage point over an independent index published in The Wall Street Journal based on the highest rate on corporate loans posted by at least 75% of the largest banks (the “Index”). Based upon the Index as of the date of the New Credit Facility, the initial interest rate under the New Credit Facility was 5.50% and is currently 5.75%.

The New Credit Facility contains customary representations, warranties and covenants, which are substantially similar to those in the Former Credit Facility. The Company’s ability to borrow under the New Credit Facility will be subject to its ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, dividends, corporate existence and financial reporting obligations.

The New Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, Lender may accelerate the repayment of amounts outstanding under the New Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period.

The New Credit Facility is secured by guaranties executed by Raymond E. Wirta, Chairman of the Board of the Company, a trust belonging to Mr. Wirta, Harold C. Hofer, President and Chief Executive Officer of the Company, and a trust belonging to Mr. Hofer, each in the amount of $9,000,000. Such guaranties become effective upon certain triggering events, including an event of default under the New Credit Facility and the failure by Borrowers to pay one or more subsequent advances within 90 days of disbursement.

As of March 31, 2018, the New Credit Facility has total outstanding borrowings of $9,000,000. As of December 31, 2017, the Former Credit Facility had total outstanding borrowings of $12,000,000.

All Debt Agreements

Pursuant to the terms of mortgage notes payable on certain of the Company’s properties and the New Credit Facility, the Company and/or the Borrowers are subject to certain financial loan covenants. The Company and/or the Borrowers were in compliance with all terms and conditions of the applicable loan agreements as of March 31, 2018.

The following summarizes the future principal repayment of the Company’s mortgage notes payable and New Credit Facility as of March 31, 2018:

	Mortgage Notes Payable		Unsecured Credit Facility		Total
April 2018 through December 2018	$	672,562	$	9,000,000	$	9,672,562
2019		1,028,465		—		1,028,465
2020		1,239,009		—		1,239,009
2021		7,922,500		—		7,922,500
2022		14,288,741		—		14,288,741
2023		12,982,910		—		12,982,910
Thereafter		41,183,399		—		41,183,399
Total principal		79,317,586		9,000,000		88,317,586
Deferred financing costs, net		(2,051,515)		(27,714)		(2,079,229)
Total	$	77,266,071	$	8,972,286	$	86,238,357

Interest Expense

The following is a reconciliation of the components of interest expense:

	Three Months Ended March 31,
	2018		2017
Mortgage notes payable
Interest expense	$	823,260	$	81,658
Amortization of deferred financing costs		406,887		10,388
Unrealized gain on interest rate swaps (see Note 7)		(226,806)		—
Unsecured credit facility
Interest expense		82,989		39,154
Amortization of deferred financing costs		4,286		637
Total interest expense	$	1,090,616	$	131,837